18-19 September 2008: Phnom Penh

I.  Cambodia is at a far earlier stage in its economic renaissance.
If one believes that Vietnam's current woes result from too much investment, too quickly, then one may be tempted to examine Cambodia's ongoing economic renaissance in a cautious light. However, Cambodia is at a far earlier stage of the investment cycle than Vietnam, with still a low debt to GDP ratio (20%). Cambodia's recent land boom has been driven by cash rather than leverage as in Vietnam, and land prices in Cambodia remain a fraction of Vietnam's prices even after Vietnam has corrected. Cambodia's banking system is structurally sounder than Vietnam's as in Cambodia there are no state-owned banks, no bubble-bursted stock or bond markets, and hardly any interbank market to transmit individual banks' risks. On any available yardstick of economic development, Cambodia is still at a very low base, few investors or observers in Cambodia see over-investment or excess capacity as a concern. On the contrary, Cambodia needs more of almost everything!

II. The Cambodian system is a free market with few subsidies.
The free-market nature of Cambodia's economy provides better pricing signals; for example, Cambodia does not heavily subsidize fuel as does China, Malaysia and Indonesia. Residents pay fair market prices for most expenses as public transportation and public services are either meager or non-existant. The authorities do not intervene to control commodity prices as does Thailand and Vietnam. Thus, Cambodia faces no budgetary crisis or looming inflationary shock from eventually being forced to float fuel or commodity prices. With the majority of Cambodia's population engaging in unmechanized farming using minimal oil or fertilizer, Cambodia produces food surpluses and enjoys some net benefits from the recent rise in global food prices.

III. Despite rising inflation, the currency is under no apparent risk of weakening. Cambodia's balance of payments is sound, buttressed by long term inflows of capital, foreign aid and FDI.
Inflation is indeed a problem for Cambodians, especially for urban dwellers whose manufactured goods and major food items are mostly imported. Rising fuel prices and costly food and raw material prices are quickly passed onto consumers and businesses alike. However, the case for a weakening of the Cambodian Riel, which is used maninly by people at the very bottom of the economic "pyramid," is more difficult to see than in its neighbour, for two reasons.

Firstly, the Cambodian balance of payments has been improving alongside a robust stream of long term inflows. The trade deficit worsened to 18% of GDP in 2007 (compared to an average deficit of 14% over the previous five years). However, foreign currency reserves strengthened to four months of imports at year end 2007 driven by strong performance by the services account and the capital account. Our observations from being on the ground and frequent interaction with both the private sector and government (both Cambodian and foreign) foresee that the steady stream of  inflows will continue. We have seen no warning signs that the taps are going to be turned down for tourism, FDI, foreign aid or personal remittances from abroad.  

Secondly, the Cambodian economy is also largely dollarized, so there is little threat of a sudden, painful devaluation as many suspect is possible in Vietnam.

IV.  The Cambodian authorities are vigilant and have the will to act.
The Cambodian authorities have the strength and moral conviction to act vigilantly and decisively. This is partly because both the economy and the government is small and manageable (few state enterprises exist and the network of bureaucrats is limited). As inflation began to worsen and hectic loan growth showed no signs of abating, the National Bank of Cambodia aggressively hiked the reserve requirement of commercial banks from 8% to 16%. The move was a clear signal to commercial banks to cool their rapid loan growth, which rose over 80% YoY in 2007. The bulk of this lending is to non-speculative sources and the move will merely defer loan demand until a later date. Total private sector lending is a mere US$140 per capita in Cambodia, so lending is still on a very low base and the prospects for loan growth are very strong over the long term.
 

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