Cambodia Overview (Cambodia Capital) June 2011

8/6/2019 Cambodia Overview (Cambodia Capital) June 2011

1/111

Gradually Gaining TractionOverview of the Cambodian Economy

Cambodia CapitalInvestment Research

June 2011

Graeme Cunningham, CFA

[email protected]

+855 77 990 769
mailto:[email protected]:[email protected]


2/111


3/111

Contents Page

Garments: Over concentration 71

Tourism: Shift to Regional arrivals 75

Energy, Utilities: Powering up 79

i) Electricity production: Defragmenting 79

ii) Oil and Gas: Offshore and onshore potential 84

iii) Water Utilities: Urban success, rural challenge 88

Mining, Materials: Early days 89

Transport Infrastructure: Connecting 93

TMET: Energetic competition 97

i) Telecoms: Sustained intense competition 97

ii) Media and Advertising: Strong competitive landscape 101

iii) Gaming: Phnom Penh monopoly, rural competition 102

Manufacturing: Hints of diversification 104

Consumer: Early signs of modern retail 106

Property: Oversupplied 108

Overview of the Cambodian Economy June 2011

Cambodia Capital Research 3


4/111

EXECUTIVE SUMMARY: Gradually Gaining GroundCambodia has made impressive strides over the last 13 years, since the lastarmed battle in the capital city Phnom Penh in 1997, marking the onset of thefirst extended period of political stability after nearly 40 years of civil war. Onalmost all measures, political, economic and social welfare, the country hasseen dramatic improvements.

Viewed through the lens of an idealized model of a Westernized liberaldemocracy, there is still, of course, a wide margin for improvement in terms ofsocial welfare, the legal system, and reliance on foreign financial assistance.However, given the countrys history, we believe that this model may simplynot be a realistic frame of comparison at this juncture in Cambodiasdevelopment.

We would rather focus on the continued incremental improvements thecountry has made since 1980, or the even more rapid improvements that havebeen made since the period of relative stability that began in 1997. If we lookfor signs of gradual, sustained progress we find them in nearly every area.

Open for businessCambodia has a pro-foreign business environment, with 100% foreignownership of businesses permitted, in contrast to other regional countries,where there are significant limits on foreign ownership. The country also offerslow labour cost and factor inputs and has an advantageous geographic locationfor manufacturers and other businesses at the center of ASEAN. The countryplays a key role in both regional infrastructure plans and political organizationswhich continues to improve its links with the rest of the region. Although still

relatively early in its development, Cambodia is also seeing an increasinglytransparent legal and regulatory regime.

Political stabilization under Hun SenFrom the low point of the destructive totalitarian rule of the Khmer Rougefrom 1975-1979, the country shifted to Vietnamese influenced rule throughthe 1980s under the State of Cambodia, but there was still factional politicalinfighting. By 1993, the country had a new constitution and electionssupported by the United Nations Transitional Authority Cambodia (UNTAC).

An uneasy truce between Hun Sens party and the Royalists existed until 1997

when a military conflict between the two parties led to Hun Sen taking fullcontrol of the country and effectively ended the civil war (around this timethe Khmer Rouge was also officially disbanded). Since then the politicalsituation has stabilized, with the Cambodian Peoples Party continuing to gaininfluence, now having majority control of the government. Hun Sen is arelatively young 58, and we do not expect to see his power wane significantlyin the near to medium term.




5/111

Economic rebound accelerating since early 2000sThe Khmer Rouge completely destroyed the physical and human capital of thecountry, and with some nations refusing to offer financial assistance to thecountry in the decade following, economic progress in the 1980s was grinding.Political stabilization in the early 1990s helped draw back overseasCambodians who had fled the Khmer Rouge, as well as foreign businesses,

while foreign financial assistance from some key developed nations resumed,giving a needed push to domestic businesses.

By the early 2000s, the country was enjoying an extended period of strongeconomic growth, with; 1) a significant garment/textile manufacturing basehaving developed, 2) massive growth in the tourist industry, and 3) agricultureexports starting to reach critical mass, especially rice, rubber and timberproducts. Meanwhile, the financial system had strengthened, with 35 bankscurrently operating, and a vibrant microfinance industry.

Social issues persist, but still huge gains since the 1970s-1980sAfter the devastation of the Khmer Rouge and the political and legal confusionof the 1980s, it was only post-1993 that any clearly identifiable and globallyrecognized government emerged in Cambodia. Myriad social issues stillremain.

However, for the average Cambodian citizen, the current social system is aclear improvement on the tragedy of the late 1970s, the relative chaos of the1980s and the shaky new beginnings of the 1990s. Although access toeducation and healthcare are still far from universal, a system for both is inplace, and it improves every year.

Risk factors: Political, economic, social, legalAlthough our outlook on Cambodia is bullish in the medium term, progresswill certainly not be without political, economic, legal and social risks:

Political Risk: Effectively a one party stateWe view near to medium term political risk as moderate. The country iseffectively a one party state, given the ruling Cambodia Peoples Party (CPP)strong majority in both the national assembly and the senate. Election resultshave shown the CPP consolidating power over the last 10 years and there hasbeen no significant strengthening of any second party. CPP leader Hun Sen is

also a relatively young 58 years old and appears to be in good health.However, transition risk does remain.

Economic Risk (1): Heavy gearing to tourism and garmentsThe economy is still heavily geared to agriculture, but we do not view relianceon this sector to be a risk; if anything, it acts as a social buffer (we saw asimilar situation in Thailand during the 1997 Asian financial crisis where theagriculture sector was able to reabsorb workers laid off from manufacturing).The risk lies more on the heavy weighting on the garment/textiles and tourismsectors, leaving the economy heavily geared to the fortunes of the

international clothing manufacturers and the whims of global tourists.




6/111

However, as we outline in this report, there is potential to expand agricultureand dramatically increase agricultural exports. It could be within a short fiveyears where Cambodia has reached a much higher proportion of agriculturalexports in the economy, adding stability and sustainability to the export base.Somewhat longer term are the possibilities for the development of mining andextraction, oil and gas, non-textile/garment manufacturing, and a modern

consumer sector. However as all these developments are in nascent stages, aheavy hit to the garment or tourism sector in the short term coulddramatically slow progress.

Economic Risk (2): Heavy reliance on foreign assistanceThe country is also heavily reliant on foreign assistance, which accounted forthe majority of the governments budget deficit financing in 2009. Although wefind it unlikely that developed nations would abruptly withdraw financialassistance to Cambodia given that it is so small in absolute terms, manycountries are facing severe fiscal crises of their own which could feasiblyreduce their willingness to assist other nations. However, even with a pullbackfrom Western or Japanese donors, the Chinese government is taking a greaterinterest in Cambodia in both economic and political terms (although we dorecognize that China is also facing some growing macroeconomic imbalancesof its own).

Economic Risk (3): Currency, reserves, inflation, trade deficitsCambodia is a dollarized economy, with around 90% of transactions takingplace in the US currency, and therefore the country does not have recourse tomonetary policy and is very exposed to any depreciation in the US$.However, the country intends to eventually shift to the Riel, which brings the

risk of doing so prematurely, or ineffectively executing the transition.

The country has adequate, but not abundant foreign reserves, at 5 months ofimports and 8x the level of short term external debt. Inflation is currentlyrelatively benign, but advancing, reaching just above 5% as of April 2011.However, compared to Vietnam, where inflation is already running at anannualized rate of 20%, price increases are moderate. The country alsocontinues to run large trade deficits, which will remain a medium term riskalthough we expect that these will contract as the country expandsagricultural and other exports over the long term.

Legal RiskThe legal risk of investment in Cambodia remains significant. We believe thereis especially risk for the smaller investor, where the larger institutional investormay have more clout when dealing with the government and business groups.Although most of the major laws are in place, including commercial, contract,tax and property laws, many are yet to be tested in the court system.

Social RiskRapid economic progress has led to a degree of social upheaval for manyCambodians. One of the most pressing issues is when developments, be theyin the energy, agricultural, property or infrastructure, encroach on land anddisplace citizens, which in many cases are not properly compensated for therelocation.




7/111

With 70% of the population still engaged in subsistence farming, relocation isnot simply a matter of finding new employment, but a total disruption of thecurrent rural way of life. In this way economic growth imposes an uneven taxon those unlucky enough to be residing in areas of heavy redevelopment. TheCambodia government could improve its position in both the eyes of itsconstituents as well as international investors by ensuring that residents

affected by the inherent growing pains of rapid economic development areproperly compensated for the adjustment.

Cambodia must also carefully manage the economys transition, ensuringcontinued investment in the economy, both domestic and foreign, createssufficient employment opportunities for the newly developing educated middleclass. Failure to do so could lead to instability.

Avenues for investmentThere are currently only a few avenues to gain equity exposure to Cambodia.

They include listed gaming and mining names in Hong Kong and Australia with100% Cambodia exposure, and a handful of private equity funds that investdirectly into Cambodia companies.

Stock market could start trading by Q4/11However, with the planned opening of the Cambodian Stock Exchange slatedfor July 2011, with three state owned enterprises to be listed, investors may beable to get exposure to Cambodia more easily by the second half of this year.There are three state owned enterprises currently considering listing, TelecomCambodia, a fixed line telecom, Sihanoukville Port, the countrys onlydeepwater port, and Phnom Penh Water Supply Authority, PPWSA, the capital

citys water utility. There are also other large names considering listing,including a bank, a conglomerate and an insurance company. As we show inthis report, with most sectors of the economy seeing continued rapiddevelopment over the next five years, we would expect more firms to cometo the market to raise capital to fund growth.

A note on data sources in Cambodia: We rely on various data sources in this reportincluding international organisations, but also Cambodian government ministries, as well as other

domestic public and private organisations. Data collection in Cambodia is sti ll developing and we havefound there to be some discrepancies between sources.




8/111

Economics: Gaining Momentum

i) Recovery: A short history of the Cambodia economy

More than a decade of stability after 38 years of civil warOver the last decade, Cambodia has finally emerged from a nearly 40 yearperiod of instability and civil war that clouded its history from 1970 until1997-1998. From the time of independence from the French in 1953 until1970, Cambodia had enjoyed a peaceful period of Cold War neutrality, led byPrince Sihanouk. However, the spillover of the Vietnam war across Cambodias

borders dragged the nation into the conflict.

In 1970, the military-backed Lon Nol government led a coup to oust thePrince, who subsequently sided with an opposition Communist movementbased mainly in rural Cambodia, the Khmer Rouge. Bombing raids intoCambodia related to the Vietnam conflict disrupted rural Cambodian life anddramatically strengthened the Khmer Rouge movement. The weakening LonNol government fell to the Khmer Rouge, which took over Phnom Penh inApril of 1975.

Cambodia hits economic ground zero in 1978The Khmer Rouge brought about a totalitarian agrarian regime, emptying thecities and forcing the population to the countryside. The regime alsospecifically targeted the educated classes, virtually eliminating the education,health and business professions as well as any modern agriculture. Of areported 1975 population of over 7MM, between 1MM-2MM people wereeither executed by the Khmer Rouge, or died in the rural work camps fromoverwork, disease or starvation. The economy was destroyed.



The hopeful generation: Sixty percent of the Cambodian population areunder 30, increasingly well educated, have no living memory of Khmer Rougerule, and have seen a continuous gradual improvement in the country throughouttheir lifetime

Impressive economic rebound since 1993: Cambodias real GDP has grown at an average CAGR of 7.5% since 1993, the second highest in ASEANafter Myanmar

Potential to improve current structural imbalance: Cambodiaseconomy is overly concentrated in the garment and tourism sectors currently,continues to run large fiscal and trade deficits and is heavily reliant on foreignassistance. However, there are significant prospects for a rebalancing of theeconomy towards higher agriculture exports and increased manufacturing

medium term, and oil and gas, mining and other sectors longer term


9/111

This regime finally fell when the Vietnamese army, in conjunction with exKhmer Rouge soldiers (including current Prime Minister Hun Sen) invadedCambodia in January 1979. From 1979 until 1992, the country was barelygoverned through a loose coalition of warring factions (figuratively andliterally), with the military weight of Vietnam a key factor in maintainingstability.

First signs of the new Cambodia by 1993With the end of the cold war in 1989, political tensions in the region eased,and by 1991 the United Nations became more heavily involved in stabilizingCambodia politically. In 1993, the United Nations Transitional AuthorityCambodia (UNTAC) held elections, which gave rise to a ConstitutionalMonarchy with a coalition government between current Prime Minister HunSens Cambodia Peoples Party (CPP), with a strong provincial voter backingand a Prince Norodom Ranariddh-led party FUNCINPEC, run mainly byFrench-educated royalists.

This uneasy coalition held until 1997, when armed conflict erupted betweenarmed factions of the two parties in the ruling coalition which ended with theexile of Prince Ranariddh, and the consolidation of power by Hun Sen. Thislead to the political situation that Cambodia has broadly maintained over thelast 13 years; stability through an increasingly dominant Cambodia PeoplesParty and opposition parties with some small share of power (we give moredetail on the parties in the Politics section.)

ii) Demographics: The hopeful generation

Slow grind to build human capital through the 1980sThis meant that Cambodias leaders today, assuming an average age range from30 to 60 years old, would have gone through their early to middle careers inthe mid 1980s and 1990s facing an extremely limited pool of older,experienced professionals, teachers or mentors in any sector other than intraditional agriculture, to help them begin to redevelop the economy. Thisoccurred at the same time that there was a marked lack of capital available,with some major Western nations not offering financial assistance over theperiod (largely because of their resistance to Vietnamese influence inCambodia.)

Economic progress was therefore understandably gradual from 1980 to themid-1990s, especially compared to the other industrializing regionaleconomies like Thailand, Malaysia and Indonesia which saw rapid growth duringthis period. Regardless, both through grinding domestic effort, the return ofeducated overseas Cambodians that had fled the Khmer Rouge, internationalassistance, and the eventual arrival of foreign businesses, Cambodia was able toslowly rebuild its economy through the 1980s and 1990s.




10/111

First generation in decades to enjoy stabilityThe current generation that is now just turning twenty has no living memoryof the Khmer Rouge period, and has grown up with a gradually stabilizingpolitical system and dramatically improving economy. They are also be the firstgeneration since the 1970s in any significant proportion to have the chance ofachieving an education up to at least secondary school, and probably the

largest generation ever to have the possibility to reach tertiary education.Building on the very heavy lifting of the generation coming of age in the1980s-1990s, we believe that the current generation now entering theworkforce will be the one to propel the country to new economic heights,with the government planning to grow beyond Least DevelopedCountry (LDC)-status by 2020.

A young and growing populationThe most recent detailed population records are available only from 1998,when the first major modern census was undertaken. A second census wastaken in 2008. We also have IMF estimates of total population, which is shownin Figure 1. The population has nearly doubled from just 7.5MM in 1986 (or

just above the estimated population of the mid-1970s) to just over 14.0MM in2010. Figure 1 shows that the promise of increased political stability afterUNTAC seems to have had an effect on birth rates, with a minor baby boomoccurring, with the population jumping from 9.3MM in 1993 to 11.1 MM in1994.

Figure 1: Cambodian Population(MM persons)

Source: Cambodia National Statistics Office, IMF

The Cambodia population is very young, as shown in Figure 2, with 65% under30 years of age and 87% under 50 as of the 2008 census. The population is alsoheavily rural, but there is a high urbanization rate, with 20% of the populationin urban areas in 2008, up from just 16% in 1998 (Figures 3, 4). The populationis heavily concentrated in the Southeast of the country with 36.3% of thepopulation (with 9.9% in Phnom Penh, the capital city) and 24.3% in theNorthwest, as shown in the map in Figure 5.

0

4

8

12

16

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012E




11/111

1) First generation to be widely educated from childhoodPolitical stability since 1993 and the associated increase in educationalopportunities is driving the development of an increasingly skilled workforce,and creating a pool of more advanced human capital that industries can drawfrom. Figure 6 shows the significant increases in education made just between1998 and 2008.

There has been a 10% decline in the population with no education from 34%in 2008 to 24% in 2008, and the population completing lower secondaryschool has risen 200% from 0.50MM to 1.46MM. Perhaps most interesting interms of developing a new generation of technocrats to drive the economy,Cambodia had only 4,448 post secondary graduates as of 1998, but now has196,758, increasing by a factor of 44x over the decade.

2) Rising proportion of young families drives consumptionA rising proportion of young families in an economy has historically oftendriven economic growth, as they leave their parents homes to start newfamilies and purchase houses, vehicles and consumer goods.

3) The new urban generationThe population is already becoming increasingly urban, and we expect that thistrend will continue as expanding employment and educational opportunitiesand access to a wider range of goods and services draw people into the cities.This will in turn drive; 1) further development of industrialization, as labourbecomes more concentrated in a given area, and is accessible to firms andgovernment entities looking to employ workers, and 2) the growth of amodern consumer economy, as a rising standard of living leads to increased

demand for consumer goods.

Figure 2: Population by age group (MM persons)

Source: Cambodia National Institute of Statistics

0

0.9

1.8

2.6

3.5

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80-89 90+

1998 2008




12/111

Figure 3,4: Cambodian rural and urban population (%)

Source: Cambodia National Institute of Statistics

Figure 5: Cambodia population by region

Preah Vihear

Stung Treng

Oddar Meanchay

Ratanakiri

Kampong Thom

Battambang

Svay Rieng

Bantay Meanchey

Pailin

Kampot

Kampong Cham

Mondolkiri

Koh Kong

Pursat

KampongChhnang

Takeo

Kratie

Siem Reap

Kampong Speu

Kandal

Prey Veng

PhnomPenh

KampongSom

Northwest2.52MM

(24.3%)

Northeast2.32 MM(17.3%)

Southwest1.68MM

(12.5%)

Southeast4.86MM(36.3%)includes:

Phnom Penh1.33MM (9.9%)

North1.10MM(9.5%)

Source: Government Census 2008, Cambodia Capital Estimates



84%

16%

1998

% Urban population % Rural population

81%

20%

2008


13/111

Figure 6: Highest level of schooling completed

Source: Government Census 1998, 2008

iii) Rebound: Macroeconomic growth in Cambodia

Second fastest real GDP growth in ASEAN since 1993These strong demographic trends, backed by foreign investment and financialassistance, have already been translating into vibrant economic growth. RealGDP has grown at a CAGR of 7.5% since 1993, and only seen a single year ofbelow 5% annual GDP growth during the financial crisis in 2009, when adecline in the key garment/textiles exports segment and the collapse of anunsustainable real estate boom hit growth. However, the economy hasreturned to rapid growth in 2010 and 2011.

The IMF estimates GDP growth of 6.0% and 6.5% in 2010 and 2011,respectively, for Cambodia, while the World Bank estimates 6.7% for 2010 and6.5% for 2011 (Figure 8). Cambodia has seen the second highest growth inASEAN since 1993, with only Myanmar growing more quickly, as shown inFigure 9.

Figure 7: Real GDP (Riel TRN)

Source: International Monetary Fund

No Education

Primary (Not Completed)

Primary School

Lower Secondary

Secondary

Beyond Secondary

0% 10% 20% 30% 40%

1998 2008

0

8.8

17.5

26.3

35.0

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011E-5%

0%

5%

10%

15%

GDP (LS) % chg (RS)




14/111

Figure 8: Real GDP forecasts

Source: International Monetary Fund, World Bank

Figure 9: Cambodia average real GDP CAGR versus the region, 1993-2009


Room for improved living standards versus ASEANAlthough growth has been rapid, it has been off a low base, especially whencompared to the region. As shown in Figures 11 and 12, the country has thesecond lowest nominal GDP (US$10.8BN) and nominal GDP/capita (US$795)versus the larger ASEAN nations plus China in 2009. Figure 10 shows nominalGDP since 1993, with Cambodias nominal GDP in the middle of the pack fordeveloping Indochina, tracking Laos reasonably tightly until 2005 when its

smaller neighbour began to speed ahead. Laos was apparently more insulatedfrom the financial crisis, while average living standards in Cambodia decreasedin 2008.

We believe that this gap between the newly industrialised countries of ASEAN(Malaysia and Thailand) and the developing economies of ASEAN (Vietnam,Cambodia, Laos) shows more where living standards for the latter could beheaded in the future, rather than pointing to an insurmountable gap. As weshow throughout later sections of this report, we see little reason whyCambodia, Vietnam and Laos cannot eventually become as economically strongas Thailand, Malaysia and Indonesia, relative to the size of their populations.

IMF

World Bank

0% 1.8% 3.5% 5.3% 7.0%

2010 2011

ChinaMyanmar

CambodiaVietnam

LaosMalaysia

PhilippinesIndonesiaThailand

0% 3% 6% 8% 11%




15/111

Figure 10: Cambodia Nominal GDP/capita versus region (US$)


Figure 11: Nominal GDP/Capita (US$), 2009


Figure 12: Nominal GDP (US$MM), 2009


0

300

600

900

1,200

1993 1995 1997 1999 2001 2003 2005 2007 2009

Cambodia Laos Myanmar Vietnam

0

1,750

3,500

5,250

7,000

Malaysia Thailand China Indonesia Vietnam Laos Cambodia Myanmar

0

75

150

225

300

Thailand Malaysia Philippines Vietnam Myanmar Cambodia Laos




16/111

iv) Imbalance: The structure of the Cambodia economy

Structural imbalances, but not insurmountable over timeWe believe that we will see a significant shift in the composition of theCambodian economy over the coming years; currently there are clearly somesignificant imbalances, but none are insurmountable over time in our view. In

the following sections we address each of these issues:

1) 70% of population are subsistence farmers: Currently 70% of thepopulation are still involved in subsistence agriculture, and modern farming isonly beginning to take root;2) Over concentration in garment/textiles sector: There is aheavy dependence on garment/textiles exports to Western countries and thetourism sector, which leaves Cambodia overexposed to a decline in thesesectors;3) Tax revenues low: Tax revenues are still a small contributor to GDPversus other countries in the region, and the government continues to runlarge fiscal deficits and is heavily reliant on foreign assistance;4) Dollarised economy: The country is effectively dollarised andtherefore does not have direct recourse to monetary policy as a tool to steerthe economy;5) Country runs large trade deficits: The country continues to runlarge trade deficits, at 9.0% of GDP in 2008, although this declined to 5.5% in2009.

Bulk of the economy is still subsistence agricultureSubsistence agriculture is the economic life of 70% of the Cambodia

population, which offers both challenges and opportunities for the country.Challenges in that a large proportion of the population will not have theschooling or skills required for many positions that will need to be filled in thisnewly developing economy both in the private and public sectors (although weexpect this to improve over time). Opportunities exist to introduce modernagricultural methods to farmers that will raise incomes, and there is also thepotential to develop human capital over time given the young population. Aswe see in both Thailand and Vietnam, we expect that even as Cambodiaseconomy modernises, agriculture will remain the primary source of incomefor the majority of the population.

Heavy dependence on garment exports, tourismFigures 13 and 14 show the split in the Cambodia economy by major sectorfor the years 2000 and 2009; the composition of the economy has been stableover the last decade, with agriculture comprising 34% of the economy in both2000 and 2009, manufacturing around 22% in 2000 and 21% in 2009 andservices 38% in 2000 and 39% in 2009. Although this chart suggests at firstglance a relatively balanced economy, it hides the fact that the manufacturingsegment is heavily dominated by one sub-segment (garment/textiles andfootwear) and that service industry is heavily dependent on tourism.




17/111

Figures 13, 14: Cambodia Economy composition by sector

Source: Ministry of Economy and Finance

Figure 15 shows garments/textiles and footwear as a percentage of totalmanufacturing in Cambodia; it represented by far the largest component, at63% in 2009. Figure 16 shows garment/textiles/footwear exports, tourism andagriculture as a proportion of GDP; just the two former sectors combinedaccounted for 38% of 2009 GDP.

Cambodias garment/textile exports are not particularly well diversifiedgeographically (although Asia is slowly accounting for more of the mix), being90% concentrated in EU and North America. This leaves Cambodia overlyexposed to the revenue movements and manufacturing location decisions ofthe major global clothing retailers.

However, we do acknowledge that Cambodia maintains a comparativeadvantage in textiles and tourism, and that continuing to expand in thesesectors is not necessarily the problem. It is rather the heavy concentration inthese sectors that creates the risk to the economy. However, we expect thatthe growth of other sectors of the economy may outpace these sectorsleading to a gradual rebalancing.



5%

38%

22%

34%

2001

Agriculture Manufacturing Service Other

6%

39%

21%

34%

2009


18/111

Figure 15: Cambodia Manufacturing GDP by segment (US$ MM)

Source: Cambodian Ministry of Economics and Finance

Figure 16: Key sectors as percentage of economy

Source: Cambodia Ministry of Economics of Finance

C high, I stable, G low and X-M continues in deficitFigure 17 shows the breakdown of the economy in terms of consumption,investment, government spending and net exports. Consumption has

represented over 80% of the economy for the five years to 2009. Investmenthas remained stable at around 19%. Government spending is low, at just 5%-6%percent of the economy on average from 2005-2009, largely a function of verylow tax intake versus the region. We believe that this is the area where we willsee the largest structural shift in this data, with government increasinglygaining a role in providing public goods, especially roads and bridges, but alsoexpanding its presence in public utilities, like rural electricity and waterprovision.

0

425

850

1,275

1,700

2001 2002 2003 2004 2005 2006 2007 2008 2009

Food & Beverages & Tobacco Garment/Textiles/FootwearWood Paper & Publishing Rubber ManufacturingOther Manufacturing

0%

10%

20%

30%

40%

2007 2008 2009

Garment/Footwear Exports Tourism Agriculture




19/111

Figure 17: Nominal Gross Domestic Expenditure (US$MM)

BN Riels 2005 2006 2007 2008 2009

Consumption 5,391 5,969 6,843 8,822 9,684

as % total 84.3% 81.0% 77.3% 84.6% 94.3%

Investment 1,208 1,427 1,695 2,023 1,962

as % total 18.9% 19.3% 19.1% 19.4% 19.1%

Government 1,494 1,575 2,008 2,191 2,705

as % total 23.4% 21.4% 22.7% 21.0% 26.4%

Inventory Changes -27 89 125 151 148

as % total -0.4% 1.2% 1.4% 1.4% 1.4%

Net Exports -554 -548 -567 -940 -561

as % total -8.7% -7.4% -6.4% -9.0% -5.5%

Other 7 47 258 -171 -1,619

as % total 0.1% 0.6% 2.9% -1.6% -15.8%

GDP 6,395 7,373 8,855 10,430 10,265

Source: Cambodia Ministry of Economy and Finance

Large trade deficits with Asia not offset by garment exportsCambodia continues to run large trade deficits, although the deficit fell to a

five year low in 2009 of 5.5%. This is mainly because the country continues torely heavily on imports for many industries, and runs large trade deficits withits Asian trading partners. This is not offset by the large trade surpluses it runswith the United States and the European Union, mainly related to the garmentindustry. We believe that the trade deficit may be reduced in the medium termas the country increases agricultural exports and improves infrastructure tofacilitate these exports. Longer term there is the possibility of both oil andgas, and mineral exports, which could help further ease this deficit.

The government sector still relatively small and in deficitIn addition to the trade deficit, the government continues to run large budget

deficits. As shown in Figure 18, although government revenue more thantripled from 2001 to 2009, expenditure has steadily outpaced it. The deficitwidened significantly in 2009 to 6.3% of GDP from 2.9% in 2008 as thefinancial crisis cut tax revenue at the same time as the government increasedspending. However, the deficit is estimated to have contracted in 2010.

The government continues to generate very low tax revenues in a regionalcontext; at only 4.8% of GDP, it is well below Thailand, Vietnam and Laos(Figure 20). It is reported that improved tax collection methods should boosttax revenues in the medium term, and in the long term, an increasing numberof workers leaving the informal economy for the formal economy should alsoraise this figure.




20/111

Figure 18: Cambodia government revenue and expenditure (US$MM)


Figure 19: Cambodia government deficit(US$MM)


Figure 20: Government revenue as a % of GDP


0

500

1,000

1,500

2,000

2001 2002 2003 2004 2005 2006 2007 2008 2009

Revenue Expenditure

-700

-525

-350

-175

0

2001 2002 2003 2004 2005 2006 2007 2008 20090%

2.0%

4.0%

6.0%

8.0%

Deficit (LS) as % GDP (RS)

Laos

Thailand

Vietnam

Cambodia

0% 2% 4% 6% 8%




21/111

Room to grow education and public health spendingFigure 21 shows three of the major categories of government expenditure,with defense spending at 17% of total expenditure in 2009, public health at7%, and education, youth and sport at 9%. For the current year, the budget fordefense spending is lower as a percentage of total spending, and a higherweight has been given to the public health and education categories, which

been lauded as a good sign for overall improved social welfare. However,following the continued conflict on the Thai border this year, we believe theremay be the potential to see the defense proportion of expenditure rise in2012.

Figure 21: Key areas of government expenditure as % total expenditure


Still heavily reliant on foreign financial assistanceThe Cambodian government is still heavily reliant on foreign financialassistance to fund its budget deficit, as shown in Figure 22. From 2004 until2008, foreign financial assistance covered more than 100% of the totalgovernment deficit.

Figure 22: Financing of government budget deficit (US$MM)


0

0.05

0.10

0.15

0.20

2001 2002 2003 2004 2005 2006 2007 2008 2009

Defense Public Health Education, Youth, Sport

-400

-208

-17

175

367

558

750

2001 2002 2003 2004 2005 2006 2007 2008 2009

Foreign Financing Domestic Financing Errors/Omissions




22/111

Unemployment: Low from widespread subsistence farmingUnemployment overall is a low 2% in Cambodia, with 70% of the populationstill employed in subsistence farming (Figure 22). However, in Phnom Penh, themost economically advanced area of the country, unemployment is 5.5%, whichis higher than the just over 5.0% seen in urban Vietnam (this figure may haveincreased since, given recent difficulties in the Vietnamese economy).

The heavy weighting to agricultural employment offers a buffer against layoffsin the manufacturing and service sectors. In the 1997 crisis, in Thailand,increases in unemployment were not as severe as expected, as migrantworkers returned to family farms. We expect that Cambodia will have a similareconomic cushion in the medium term.

Figure 23: Regional unemployment rate (2008)

Source: Cambodia Capital Research

v: External pressure: Debt, reserves, currency, inflation

External debt to GDP and exports decliningCambodia currently owes US$4.36BN in external debt according to WorldBank estimates, and is classified as a low income, moderately indebtedcountry. Although still high, external debt to GDP has been declining over thelast decade, from 0.64 in 2001 to 0.42 as of 2009. External debt to exports, ameasure of how quickly the country could cover its foreign debt with itsforeign earnings, has also declined; from 1.67 in 2001 to 1.12 as of 2009(Figure 24).

Vietnam (Total)

Vietnam (Urban)Vietnam (Rural)

Cambodia (Total)

Cambodia (Phnom Penh)

Thailand

Laos

Malaysia

0% 2% 3% 5% 6%




23/111

Figure 24: Key external debt ratios

Source: World Bank

Debt of long duration, and some may not need to be repaidThe composition of Cambodias external debt makes it less onerous that itmay initially appear. First, 26% is legacy debt owed to the US mainly from the1970s Lon Nol government and the Russian Federation mainly from the 1980s(Figure 25). Neither of these debts is being serviced, and Cambodia isnegotiating with both countries; it is still unclear when or if Cambodia will berequired to pay back these loans.

Second, only 7.7% of the debt is short term, so there is no medium term issuewith the current debt, and by the time of principal repayment, the Cambodianeconomy may be much larger, better structured, and more readily able to

handle repayment than it is currently (Figure 26). Third, the effective interestrate that Cambodia has been paying on the debt is a low 0.5%.

Figure 25: Composition of Cambodia external debt by country


0%

50%

100%

150%

200%

2001 2002 2003 2004 2005 2006 2007 2008 2009

External Debt/GDP External Debt/Exports

7%

22%

26%17%

28%

ADBWorld Bank IDAUS, Russian Federation DebtOther bilateralOther multilateral




24/111

Figure 26: Composition of Cambodia external debt by duration


Foreign reserves adequate, but not abundantCambodias key foreign reserves ratios have been improving over the last fewyears. The National Bank of Cambodia reported US$2.6BN in foreign reservesas of end 2009, down from a peak of US$2.8BN in 2008, but still well up onUS$1.9BN in 2006. Reserves to months of imports has risen from 4 in 2001to near 5 as of 2008, which leaves the country with an adequate, but notparticularly robust financial cushion (Figure 27). As shown in Figure 25, shortterm external debt is a low 7.7% of total debt, and therefore the reserves toshort term external debt ratio is strong at 12.4x in 2009, up from just 3.1x in2001.

Figure 27: Key foreign reserve ratios

Source: World Bank, Ministry of Economy and Finance

92.3%

7.7%

Short termLong term

0

3.3

6.5

9.8

13.0

2001 2002 2003 2004 2005 2006 2007 2008 2009

Reserves/Month of Imports Reserves/Short Term External Debt




25/111

Figure 28: National Bank of Cambodias Foreign reserves (US$MM)

Source: World Bank

Currency considerations: 90% of transactions still in the dollarCambodias official currency is the Riel, but the economy is effectivelydollarized, with the Riel pegged to the dollar, and an estimated 90% oftransactions taking place in the dollar. As shown in Figure 29, the NationalBank of Cambodia has kept the Riel trading within a relatively tight tradingband versus the US$ (at an average rate of KHR4,108/US$ since 2006, with atrough of KHR4,000/US$ and peak of KHR4,241/US$). There tends to besome seasonality also in the movement of the exchange rate related to theagricultural growing season. Movements in the dollar have a mixed effect onthe economy:

Textile exports: Garment/textile exports are priced in dollars, but themajority are purchased in US$, so dollar depreciation does not give

Cambodian exports an advantage here. However, the second largest purchaserof textile exports is the European Union (EU), so a depreciation of the US$versus the Euro could potentially make Cambodia garments/textiles moreattractive to EU buyers.

Imports: A large proportion of Cambodian imports are from Thailand,Vietnam and China. The Thai baht has appreciated versus the dollar, theVietnamese Dong has depreciated significantly over the last year and China isgradually allowing its currency to appreciate versus the dollar. On net weexpect the currency effect on imports to be relatively neutral in the shortterm.

Figure 29: USD to Cambodia Riel

Source: National Bank of Cambodia

0

900

1,800

2,700

3,600

2001 2002 2003 2004 2005 2006 2007 2008 2009

3,900

4,013

4,125

4,238

4,350

Jan 06 Oct 06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11




26/111

Figure 30: Money Supply (US$MM)


Inflation remains benign (for now)Inflation has generally been benign in Cambodia of late, averaging 4.8% overthe decade from 2000 to 2010, and the latest reported April 2011 figuresshow inflation at 5.2%. There was a significant spike in inflation just prior thethe onset of the 2008 crisis to 25%, which pulled up the average for thedecade, mainly driven by the spike in global commodities prices (largely theresult of rising food and oil prices). However, the global financial crisis cutcommodity prices and inflation subsequently subsided.

Figure 31: Cambodian inflation, yoy % chg in CPI

Source:National Bank of Cambodia

Although global governments are increasingly hawkish on inflation, prices stillappear to be rising gradually. Cambodian food price changes are especiallycorrelated with Vietnam and Thailand, given the large amount of trading withthe two economies. In Vietnam there has been the mixed effect of a currencydepreciation offset by rapidly rising inflation. In Thailand, the central bank israising rates to curb inflation and its currency is still strengthening long termversus the dollar. On net, we do not expect to see a major transmission offood inflation to Cambodia from these neighbouring countries in the short

term. Meanwhile, there have been hints lately that the current commoditiesbubble may be nearing its end. Increasing domestic production of foodproducts should also help alleviate this risk over time.

0

1,000

2,000

3,000

4,000

2003 2004 2005 2006 2007 2008 2009

Currency outside banks Demand deposits Time savings depositsForeign currency deposits

-10%

0%

10%

20%

30%

1995 1998 2001 2004 2007 2010




27/111

In a regional context, average Cambodian inflation from 2004-2009 has been inthe middle of the pack, with inflation especially high in neighbouring Vietnam(which also saw an inflation spike in 2008 and may have transmitted some ofthat inflation to Cambodia through trade) but much lower in Thailand,Cambodias other major regional trading partner.

Figure 32: Inflation in a regional context


Figure 33: Cambodia CPI Index by category

Source: Cambodian National Institute of Statistics

vi) Trade and FDI: Advancing regional, global integration

Trade surging, but deficits persistCambodias overall trade has surged by over 200% since 2001, although exportgrowth continues to lag import growth and the country ran a trade deficit of5.5% in 2009. Cambodias exports are still comprised mainly of garments/textiles and footwear exports to the United States and Europe, whichcomprised 49% and 27%, respectively, accounting for a combined 76% share ofthe countrys exports. Vietnam is a distant third, comprising just under 5% ofexports in 2009, but growing rapidly from just 1.5% in 2001.

0%

5%

10%

15%

20%

Myanmar Vietnam Indonesia Cambodia Laos Thailand Malaysia

-10%

-5%

0%

5%

10%

15%

Jan 10 Mar 10 May 10 Jul 10 Sept 10 Nov 10 Jan 11 Mar 11

CPI Food beverages Housing, Energy HealthTransport Communication




28/111

Figure 34: Cambodia imports and exports (US$MM)


Exports mainly to US, EU, imports largely from East Asia

The largest proportion of Cambodias imports are from Thailand and Vietnam,which have soared to 29% and 21% of total imports, respectively, for acombined 50% of imports in 2009 from just 29% in 2001. Imports from China,which comprised 14% of the total in 2009 and South Korea, at 5% of the total,are also significant. The country runs large trade deficits with these regionalcountries which is not offset by exports to the US and EU. However, weexpect that as the country increases its agricultural exports, especially rice,that demand from the region will be high for these products and we may seethese trade deficits contract. China, for example, has already stated itsintentions to increase its imports of Cambodian rice.

Figure 35: % of Cambodias exports by key trading partners

Source: US Census Bureau, General Statistics Office of Vietnam (GSOV), Europa

0

1,875

3,750

5,625

7,500

2001 2002 2003 2004 2005 2006 2007 2008 20090%

2.8%

5.5%

8.3%

11.0%

Imports (LS) Exports (LS) Trade deficit as % GDP (RS)

0%

25%

50%

75%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US EU Vietnam




29/111

Figure 36: % of Cambodias imports by key trading partners

Source: Thai Customs Department, GSOV, Cambodia MEC, KITA

Increasingly integrated into regional and global trade

It has only been relatively recently that Cambodia has become moreintegrated into the regional and global trading blocks. Although the countrydid join ASEAN in 1999, it was only in October 2004 that it joined the WorldTrade Organisation. Since then, it has also been more active within the region,1) joining the first Ayeyawady Chao Phraya Mekong economic cooperationstrategy (ACMECs) at its first meeting in November 2003, 2) becoming partof the Cambodia Laos Vietnam Myanmar cooperation framework (CLMV) inNovember 2004, and 3) being part of the Cambodia-Laos-Vietnamdevelopment triangle, which comprises 13 provinces in these three countries.In November 2010, the country simultaneously held the CLV, CLMV andACMECs summits in Phnom Penh, for the first time, further raising its regional

profile.

Figure 37: Cambodias joining date of regional/global organisations

Trade Organisation or Agreement Date joined

Association of Southeast Asian Nations (ASEAN) April 1999

World Trade Organisation (WTO) October 2004

Ayeyawady-Chao Phraya Mekong economic cooperation strategy(ACMECS)

November 2003

Cambodia-Laos-Vietnam development triangle (CLV) 2004

Cambodia-Laos-Vietnam-Myanmar cooperation framework(CMLV)

November 2004

Source: ACMECS, WTO, CLV, CMLV

Opening to trade appears to have been beneficial so farOn net, we believe that Cambodia has generally benefited from itsinvolvement in the various trade organizations. Although the country isclassified as a Least Developed Country (LDC), and thus is offered someadvantages in terms of trade because of this, it has proved that it can compete

reasonably well even where it does not have significant trade advantage.

0%

10%

20%

30%

40%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Thailand Vietnam China Korea




30/111

Benefits from EUs Everything-But-Arms for LDCsCambodia currently benefits from a lack of restrictions on its exports to theEuropean Union (EU), which are mainly textiles/garments and footwear. This isunder the EUs Everything But Arms (EBA) initiative to promote imports fromLeast Developed Countries. This is the strongest version of the EUGeneralized System of Preferences (GSP), which offers lower trade tariffs to

many developing countries. EBA is a version of the GSP that offers LDCs areduction of import duties to the EU to zero on all products except forarmaments.

While Cambodia currently exports mainly textiles/garments to the EU underthis system, agricultural exports are also growing, but from a comparativelylow base. The EBA program currently has no fixed end date, and only ascountries reach high income status for three consecutive years and havesufficiently diversified their export base are they no longer eligible for thebenefits. We expect therefore that Cambodia will benefit from this programfor the next decade at least.

Accession to WTO offset 2005 end of textile quotasCambodia is not a country considered by the US for preferential exports,although the US remains Cambodias largest single customer for exports,comprising mainly garments/textiles and footwear. However, the country hasgained somewhat easier access to the US market from its accession to theWTO. This is because as of January 1, 2005, a regulation that had previouslyallowed countries to apply quantitive restrictions of imports of clothingbetween WTO countries was abolished. At the time there were limitingquotas, especially for garment/textiles. The ending of this regulation allowednations within the WTO to export garments/textiles freely, without facing

quotas.

With Cambodia already in the WTO, although it did face increasedcompetition from other WTO members also enjoying quota-free garment/textile exports within the organization, the country benefited from theabsence of non-WTO competition, especially to the US. The last five yearshave shown that concerns that Cambodia might have severe difficultycompeting were unfounded, with the country expanding its textile exports tothe US rapidly since 2005. However, Cambodia has lost some market share,but this has been offset by the overall growth in the market for textiles/garments exports to the US.

The other benefit of WTO accession is that Cambodia has needed to expandand strengthen its laws to meet the requirements. This external lever seemsto have prompted more rapid development of the legal structure thanotherwise might have been the case.

AFTA to be fully implemented by 2015: It is still unclear as to thefull effect that the ASEAN Free Trade Agreement (AFTA) will have onCambodia over the next five years as the country aims to reduce all tariffs onimports from ASEAN to between 0%-5%. Currently, 90% of Cambodiasexports are to non-ASEAN nations, so the reduced tariffs within ASEAN over

the last ten years have not really been a significant boon for the country.




31/111

The question is whether reducing tariffs on some imports from ASEAN,notably agriculture products, could slow the growth of some newly developingagricultural sectors. However, the majority of agricultural sectors in Cambodiaappear to be showing both a high increase in production as well as risingexports. We do not expect that reduced agricultural tariffs will lead to largeimports in the sector sufficient to squeeze out local producers and expect

that global food demand will be sufficient to allow Cambodia to grow in thisarea.

We believe a larger issue for Cambodia than domestic industry protection, isa potential reduction in government revenue. The government generated 21%of its revenue from international trade taxes in 2009 (Figure 38), and thegradual reduction in tariffs over the next four years could reduce revenuefurther. And as we have shown above, government revenue is already low inCambodia relative to the region.

Figure 38: Cambodia International Trade Taxes (US$MM)


Foreign direct investment returning to sustainable levelForeign direct investment surged in 2007 and 2008, mainly led by investmentin an overheating property market, with FDI as a percentage of GDP peakingat 10% in 2007 from a low of just 1.6% in 2003 (Figure 39). FDI has sincereturned to what we view as a more sustainable level, and is directed more to

sectors like infrastructure and agriculture that should improve the structuralbalance of the economy in the longer term.

0

375

750

1,125

1,500

2005 2006 2007 2008 20090%

8%

15%

23%

30%

International Trade Taxes (LS)Total Government Revenue (LS)International Trade Taxes to Total Government Revenue (RS)




32/111

Figure 39: Approved FDI (US$MM)

Source: Cambodia Ministry of Economy and Finance

Figure 40: Aggregate investment by country 1994-2009 (US$MM)

Source: Council for the Development of Cambodia

China is largest source of FDI since 1993Figure 40 shows aggregate investment (as reported by the Council for theDevelopment of Cambodia), which shows that China is far and away thelargest investor in Cambodia over the past fifteen years, with most of the

major investment coming in recent years. Regional investment tends todominate the profile for Cambodia, with Korea and Malaysia the next largest.Relative to their economic size, EU and US direct investment in Cambodia hasbeen relatively muted over the period.

Figure 41 shows the investment breakdown by sector for 2009 and 2010.Tourism investment was the largest category for both years, if we considerthat the transportation category in 2010 consisted mainly of South Koreaninvestment to build a new airport in Siem Reap (although the funding source isstill unclear), which is catering mainly to tourists for Angkor Wat. Energy andagricultural investment have been the second and third largest investment

categories over the last two years.

0

225

450

675

900

2001 2002 2003 2004 2005 2006 2007 2008 2009 20100%

8%

15%

23%

30%

FDI (LS) % growth (RS)

China

Korea

Malaysia

EU

US

Thailand

Taiwan

Singapore

Vietnam

Hong Kong

Japan

0 1,500 3,000 4,500 6,000 7,500




33/111

Figure 41: Investment by sector

2009 2010

Tourism centres 3,901 Transportation 1,059*

Energy 665 Energy 589

Agro-Industry 457 Agro-Industry 353

Telecommunication 235 Rubber 190

Tourism 146 Garments/textiles 129

Other 456 Other 379

Total 5,859 Total 2,698

Source:

* Nearly US$1BN of this is related to a planned new airport in Siem Reap, and thus could be

considered tourism related. Also, it is unclear whether this has been funded yet.

vii) Empirical Global Ranking: Corruption, Prosperity

Prosperity index gains, but not for corruption perceptionTwo global surveys give some independent and empirical judgement on whereCambodia stands in terms of both prosperity and transparency of the businessenvironment. The Legatum Prosperity Index ranked 110 countries in terms ofoverall prosperity, with a value of one being the most prosperous (the 2009and 2008 surveys rated just 104 countries and so may not be perfectlycomparable, but we include them for comparison in Chart 42).

At 95 in 2010, Cambodia remains well down on the list, as would be expectedfor a Least Developed Country. What is interesting, however, is that althoughCambodia ranks low in many categories, the subjective opinion of manyCambodians often do not match their objective ranking globally. We believethis supports our view of the hopeful generation which is less concernedwith absolute conditions and more with relative gains given the countryshistory. Chart 43 shows the eight categories used in the index, and the findingsof the survey for each.




34/111

Figure 42: Legatum Prosperity Index

2008 2009 2010

Singapore 4 23 17

Thailand 35 44 52

Malaysia 29 39 43

Indonesia 71 61 70

Vietnam 80 77 61

Cambodia 98 93 95

Source: Legatum Properity Index (www.prosperity.com)

Figure 43: Cambodia results - Legatum Prosperity Index 2010

Rank Detail

Economy 92 Over half of Cambodians are satisfied with theirstandard of living, employment rates are high

Entrepreneurship,Opportunity

100 Cambodia ranks low in terms of bus inessinfrastructure, and high in terms of start up costs, butCambodians still view their country as offering a goodenvironment for entrepreneurs

Governance 72 4 out of 5 Cambodians are satisfied with the nationalgovernment, although corruption is perceived aswidespread

Education 90 Although the ranking relative to other nations is low,

Cambodians are extremely satisfied with theireducation system

Health 80 Cambodians report low health services satisfaction,which would be expected given the low ranking

Safety and security 66 Personal safety is perceived as high by Cambodians, butpolitical repression and human flight are also high

Personal freedom 98 Although civil liberties are rated low in Cambodia,94% of citizens report satisfaction with their freedomof choice

Social capital 97 In a 2009 survey only 12% of Cambodians thought

others could be trusted, although this could indicateothers outside the family unit, where ties seems strong

Source: Legatum Properity Index 2010

Transparency International Corruption Perceptions Index gives a ranking from1 (most corrupt) to 10 (least corrupt) for the perception of the public sector.As shown in Figure 44, Cambodia does not fare well on this scale, and hasshown little improvement, ranking a 2.1 in 2010, back up at its 2006-2007rating, after actually worsening slightly in 2008 and 2009.




35/111

Figure 44: Transparency International Corruption Perceptions Index Rating

2006 2007 2008 2009 2010

Singapore 9.4 9.4 9.2 9.2 9.3

Malaysia 5.0 5.0 5.1 4.5 4.4

Thailand 3.6 3.6 3.5 3.4 3.5

Indonesia 2.4 2.4 2.6 2.8 2.8

Vietnam 2.6 2.6 2.7 2.7 2.7

Laos 2.6 2.6 2.0 2.0 2.1

Cambodia 2.1 2.1 1.8 2.0 2.1

Myanmar 1.9 1.9 1.3 1.4 1.4

Source: Transparency International Corruption Perceptions Index




36/111

Politics: Stabilizing

Period of increasing political stability since 1998The first hints of political stabilisation started to appear in Cambodia by 1998;as shown in Figure 45, prior to that, the country was embroiled in 38 years ofconflict. We would emphasise that before 1998, there was little in the way ofsubstantial law or a solid system holding the country together and thereforelittle capacity for the country to develop human or technological capital.

From 1998 to the early 2000s, there followed a period of uncertainty as towhether the new government would hold, and some factional infighting. Wewould estimate that it was only really since around 2005 that the countrycould be said to fully stabilised politically, as the Cambodian Peoples Partyincreasingly strengthened its hold on political power.

A constitutional monarchyThe Cambodian system of government is officially a constitutional monarchy,with the Prime Minister, Hun Sen, the head of government, and the Monarch,Norodom Sihamoni, the head of state. The king has limited political power,with it declared that he shall reign, but not rule. The system has a bicameralparliament, with a National Assembly and Senate. The 123 National Assemblymembers are elected for 5 years under proportional voting. Two of the senate

members are chosen by the King, another two by the National Assembly, andthe rest are chosen by voting in Cambodias 24 provinces.

Improving political stability: The country has shown improving politicalstability since the Cambodia Peoples Party led by Hun Sen took power in 1997and have continued to consolidate their leading position since

Increasingly integrated into world system: Cambodia has becomeincreasingly integrated politically both globally and regionally, having joined theWTO in 2004, and becoming more involved in ASEAN and other regional groups

Relations with Thailand strained: Cambodia and Thailand haveundergone two military conflicts at two disputed border areas since the beginningof 2011. Currently the countries are trying to negotiate, but where Thailand prefersa bilateral solution, Cambodia has gone to both ASEAN and the United Nationswith the issue. This issue goes back as far as 1,000 years, and there is a highprobability that it will cloud bilateral relations for some time




37/111

Figure 45: An overview of modern Cambodian political history

Year(s) Key Events

1953 Cambodia gains independence from France

1954-1970 Ruled under Prince Sihanouk, the country initially sees economic progress,and maintains neutrality over US/Vietnam conflict. Political split widens in

1960s between the Prince, Paris-educated leftists (eventual Khmer Rouge)and rightwing Lon Nol government

1970 Military coup installs Lon Nol government, allied with the United States.Prince Sihanouk leaves for exile in Beijing, and then North Korea. US armymoves into Cambodia, bombing raids in rural Cambodia lead to growth inKhmer Rouge movement

1970-1975 Khmer Rouge, at first heavily backed by Vietnamese forces, begin battleswith Lon Nol forces. Eventually Khmer Rouge strengthens and wins battleswith less Vietnamese support

1975 Khmer Rouge overtake Phnom Penh

1975-1979 Khmer Rouge implement a totalitarian agrarian regime; economy isdestroyed and an estimated 15% or more of population perish

1979 Vietnam army enters Cambodia with help of ex-Khmer Rouge soldiers andtopples the regime

1979-1989 Cambodia is barely governed by a loose coalition dubbed The State ofCambodia. Khmer Rouge resurgence is still a threat, with the UN stillofficially recognizing the party as ruling the country from 1979 to 1982.The government is a pseudo-communist regime based roughly on theVietnamese system

1990-1992 The end of the cold war changes the political dynamics in SE Asia. The Paris

Agreement is signed 1991, which allows the UN to oversee a ceasefire,repatriate Khmer citizens that had fled to Thailand, disarm the militaryoperations of the four political factions, and establish free and fair elections

1993 The United Nations Transitional Authority Cambodia (UNTAC) arrives,and holds elections. Hun Sens Cambodia Peoples Party wins, but PrinceRannariddh led FUNCINPEC also does well; both leaders are elected asco-prime ministers

1994-1998 A uneasy alliance exists between the two ruling parties. Khmer Rougeremains a danger. By 1997, Hun Sen is established as sole Prime Ministerafter a battle in Phnom Penh between FUNCINPEC and CPP forces leadsto exile of Prince Ranariddh

1999-2010 Cambodia enjoys its first decade of politic and economic stability in nearly40 years. Massive improvements made in developing the legal, economicand educational system

2004 King Sihanouk leaves the throne and his son Norodom Sihamoni becomesKing


Cambodia Peoples Party dominates governmentAs shown in Figures 46 and Figure 47, Hun Sens Cambodia Peoples Party(CPP) is far and away the dominant political force in the country. In the last

National Assembly election on July 27, 2008, it won 90 of 123 seats, with theopposition Sam Rainsy Party winning 26 seats. The other smaller partiesgained a combined 7 seats.




38/111

The CPP also dominates the Senate, winning 43 of 58 available seats in the2006 senate election. In the senate, FUNCINPEC is the next largest, with nineseats. Since these elections, we have seen little to suggest that the CPPsdominance is waning significantly; the country was able to weather thefinancial crisis without massive social upheaval, and economic growthcontinues to be strong. Also, we have not seen strong political moves from

either the Sam Rainsy Party or FUNCINCPEC that would suggest that theseparties are gaining popularity versus the CPP.

Figure 46: National Assembly

Source:Cambodian National Election Committee

Figure 47: Senate seats

Source: Cambodian National Election Committee

Cambodia Peoples Party (CPP): Cambodias dominant political party,

led by Hun Sen, has a broad base of support, but is especially strong in ruralareas. The party was formed from the Kampuchean Peoples RevolutionaryParty which was the only legally recognized party within Cambodia from1981-1991, with its platform originally based on a Marxist-Leninist single partysystem. However, during the State of Cambodia period of 1989-1991 the partybegan to shift its ideology to adopt more free market principles, especiallywith the arrival of UNTAC, and the establishment of constitutional monarchy.

Sam Rainsy Party (SRP): Founded in 1995 (originally the KhmerNational Party from 1995-1998), the partys leader, Sam Rainsy, is in exile inFrance after being convicted in absentia of defamation charges after accusingthe government of corruption. It is unclear if there is a similarly charismaticsecond in charge to lead the party without the eponymous founder.

0

23

45

68

90

CPP SRP HRP NRP Funcinpec

0

13

25

38

50

CPP Funcinpec SRP Royal Appointees NAC




39/111

Human Rights Party (HRP): Is a relatively new party, formed in in 2007.Leader Kem Sokha has a history of humans rights activism, including land andcivil rights, and involvement in anti-corruption law. The partys popularity inrural areas, generally the stronghold of the CPP, has been growing.

Norodom Ranariddh Party (NRP): Another relatively new party, it was

formed in November 2006 when the second son of previous king NorodomSihanouk was elected by members of the Khmer National Front Party, whochanged their name to incorporate the new leader. The party appears to be aright leaning centrist party. Ranaridhh retired from politics in October 2008,and the party was renamed the Nationalist Party until the Prince announced areturn to politics in December 2010, and the party again took his name. Thepartys current leader is Chhim Siek Leng.

Funcinpec: FUNCINPEC is a French acronym for National United Front foran Independent, Neutral, Peaceful and Cooperative Cambodia. The party isgenerally considered a Royalist party, originally established in 1981 byNorodom Sihanouk as a counterbalance to then Vietnamese occupation of thecountry, and the still threatening Khmer Rouge.

FUNCINPEC played an important part in government throughout the 1990s,and won 43 of 123 seats in the 1998 elections. However, its popularity appearsto have waned over the next ten years, as it won only 2 seats of 123 in theNational Assembly in the 2008 election, in which CPP won decisively and theSRP became the second largest party. It has relatively more sway in thesenate, having won 9 out of 58 seats in the most recent 2006 senate election.

Khmer Rouge: The Khmer Rouge orchestrated the complete economiccollapse of the country from 1975 to 1979. They remained strong militarilythroughout the 1980s, were a perpetual threat to stability and wererecognized as the official Cambodian government by the United Nations aslate as 1982. However, by refusing to participate in the 1993 elections, theKhmer Rouge began to lose power and any remaining credibility, and by 1996saw a mass defection of over half the remaining soldiers. In 1998 party leaderPol Pot died and by 1999 the remaining Khmer Rouge had surrendered orbeen captured and the party effectively ceased to exist.

Bilateral relations with two largest neighbors

Cambodias diplomatic relations with two of its closest neighbors, Vietnam andThailand, tend to be fraught with border issues, with the two much largercountries possessing both expansive military and economic might relative tomuch smaller Cambodia. Cambodia tends to thus view both Vietnam andThailand with some degree of suspicion. If we were to characterize theserelationships we would say that Vietnam has both a strong political andbusiness influence in the country, while Thailands influence tends more to justthe business sphere. Informal border trading is widespread with bothcountries.




40/111

Vietnam appears to have political influenceThe early incarnations of Hun Sens CPP was effectively installed withVietnamese help, and the party appears to still maintain close ties with theVietnamese officials. However, opposition to Vietnams influence issue stillremains, with some parties opposing what they view as encroachment on bothCambodias territory and sovereignty.

Relations with Thailand sour after border conflictIf the border issues with Vietnam are more of a cold war, with Thailand theybecame a hot war in February 2011 and then again in April 2011. In the northof Cambodia in Preah Vihear is a temple complex that was granted toCambodia in 1962, a decision that has been disputed by Thailand ever since.The ruling remains unclear especially on a 4.6 sq km area that is the center ofthe conflict. The complex was declared a World Heritage Site in 2008 byUNESCO, and officially part of Cambodia, but it was stated that Thailandwould play an important role also in overseeing the temples. Thailand initiallyagreed, but later reversed course and rejected the UNESCO plan.

Fighting erupts in February 2011 near Preah VihearThis led to the placement of troops on either side of the border frommid-2008, but it was only in February 2011 that fighting erupted. This wasshortly after some Thai activists had been jailed in Cambodia for reportedlyillegally entering the country without visas at another area of border dispute,unrelated to Preah Vihear, in far Northwestern Banteay Meanchey province.This event appears to be the trigger point.

Second battle occurs in April 2011 at Oddar Meanchey

In late April 2011, fighting broke out at a second disputed area along the Thai-Cambodian border in Oddar Meanchey province, and lasted for several dayswith military casualties on both sides. Following this battle, a meeting wasbrokered between the two countries mediated by ASEAN, which has led to acease fire. A deal was reached where Cambodia has agreed to talks throughThailands preferred channel, the bilateral border committees, but Cambodiawould also have its preferred solution of the presence of ASEAN observers atthe border.

However, strong words on both sides suggest to us that this agreement is stillvery tentative. We expect that this issue will continue to weigh on Thai-

Cambodian political relations. Although there has been some minordisruptions to border trade in the conflict areas and a marked decline in Thaitourism to Cambodia, on the whole, trade between the two countriescontinues to grow strongly.

By comparison relations between Cambodia and its smaller neighbor Laostend to be less conflictual; since 1979 there have generally been cordialrelations between the two nations. The key current issue that could causefuture discord between the two countries is the building of major dams on theMekong in Laos which could have serious environmental effects downriver inCambodia.




41/111

Increasingly integrated into the regional and world systemCambodia had been completely isolated from the world from 1975 to 1979,and infighting between various factions meant that there was no globallyrecognized government in Cambodia until after the Cold War ended, settingthe stage for eventual UNTAC-sponsored elections by 1993. Since then thecountry has progressively integrated itself into the world system; 1) it joined

ASEAN in 1999, 2) the World Trade Organisation in 2004, 3) the countryaccepts guidance and funding from the Asian Development Bank, IMF andWorld Bank, 4) with special privileges for least developed countries, and itsWTO accession, it makes the bulk of its exports to the EU and the US, 5) itheld the Cambodia Vietnam Laos (CLV) and Cambodia Vietnam Laos Myanmar(CLVM) as well as the ACMECS (CLVM plus Thailand) summits in November2010.




42/111

Legal System: Framework in place

Foreign-investment friendly, gradually improving legal system

Cambodia has a basic legal system in place, with the major business laws nowwritten. However, as many of the laws were promulgated over the last tenyears, many have not been thoroughly tested in the courts. The legal system issupportive of foreign investment, with 100% foreign ownership of businessespermitted. We believe that an improving and increasingly transparent legal andregulatory regime will further encourage future foreign investment.

Basis of current legal system is the 1993 constitutionWe date the current legal system in Cambodia to the 1993 creation of thecurrent constitution under the guidance of UNTAC, although some key pre-existing laws are still in use. This constitution led to the establishment ofseparate executive, legislative and judiciary branches; from 1979 to 1992, therehad been no split between these three bodies. However, this document itself,and Cambodias current set of laws, is somewhat of a hybrid from the variousperiods of the countrys history since independence from France in 1953.

A series of constitutions since the 1950sCambodia has been through a series of constitutions since the 1950s, with themost recent a version of the 1993 document with some amendments made in1998 (Figure 48). Prior to the Khmer Rouge, from 1953-1975 the Cambodialegal system was based on the French system under rule by Prince Norodom

Sihanouk.With the overthrow by the Lon Nol government, a new constitutionwas adopted from 1970-1975. The Khmer Rouge adopted their ownconstitution, which was ostensibly peasant rule but effectively totalitarianagrarianism.

This was replaced by the 1979 constitution when the Vietnamese overthrewthe Khmer Rouge, which was based on the Vietnamese system, with powerentirely concentrated in the National Assembly. Liberalization of this systemoccurred as early 1989, but it was not until the current constitution wasadopted in 1993 that a clear separation between the legislative, executive and

judicial functions of government was stipulated.

Basic legal system in place: Cambodia has slowly developed its currentlegal system since the introduction of the 1993 constitution, and now has afunctioning legal framework. However, many important laws were promulgatedonly in the last 10 years, so have not been well tested in the courts

Major business laws promulgated: The country has the key legislation forbusiness in place, including banking (1999), insurance (2000), tax (2003)commercial (2005), and bond and equity market (2007) laws

System open to foreign businesses: Cambodia is open to foreigninvestment compared to other countries in the region, with 100% foreignownership of businesses permitted




43/111

Figure 48: Constitutions adopted through Cambodian history

Constitution Details

1953-1970 The king held all power, with all legislative, executive andjudicial power coming from the monarch

1970-1975 All power derived from the people, with parliament

making laws, an independent judiciary, and a SupremeCourt

1976-1978 A state of the people, workers, peasants and all otherlabourers. The peoples representative assemblydetermines legislation, appoints peoples courts toadminister justice

1979-1993 All power resides at the National Assembly

1993 A Constitutional Monarchy is established where thelegislative, executive and judicial branches are to beseparate, but this is not really brought into effect until

around 1998. The King is head of state for life, and shallreign, but not govern

1998-1999 Amendments are made to the 1993 constitution,increasing the National Assembly seats to 122 andallowing for the creation of a 61-seat appointed senate.


Current legal system takes shape in 1993With the constitution in place by 1993, the country began to further developits legal structure. There was existing contract law, promulgated in 1988,which has largely remained intact to the present. Tax and property/land laws

were also in place prior to the current constitution in 1993, but wereeventually superseded by new laws in 1997, and 2001, respectively.

By the mid to late 1990s important laws for business were written, with theLaw on commercial rules and commercial register coming into effect in 1995,with an amendment written in 1999 (Figure 50). The tax law was issued in1997, the law on banking and financial institutions promulgated in 1999 and aninsurance law written in 2000. The establishment of this legal frameworkcoincides with the start of rapid growth in the Cambodian economy.Continued improvement in the legal framework coupled with increased

testing of the same, should, in our view, serve to support ongoing growth andinvestment.




44/111

Figure 49: History of legal systems in Cambodia

Date/System Details

1953-1975French Civil

Cambodia adopted the French legal system. Althoughthis system was abolished by the Khmer Rouge, itsinfluence re-emerges in the drafting of the 1993constitution

1975-1979Khmer Rouge

Complete elimination of any modern legal system.Almost no legal professionals remaining in the countryby the end of this period. All power commanded bytotalitarian Khmer Rouge officials

1979-1989Communist (Vietnameseinfluenced)

Country adopts a Communist system under theVietnamese model after the Vietnamese overthrow theKhmer Rouge from 1979-1989. Current contract law ofCambodia promulgated during this period

1989-1993Liberalized Communism

From 1989-1993, the country shifted to a moreliberalised form of Communism, which included

property rights

1993-PresentConstitutional Monarchy

A constitutional monarchy was established by theconstitution of 1993, and is the basis of the presentsystem. The new constitution was again based largely onthe French system. It also allowed for any lawspreviously written that did not contradict new laws toremain, and therefore integrated the influence of all thepreceding systems

World Trade Organisation In 2005 the country joined the World TradeOrganisation, and had to adopt (or commit to adopt)many laws to meet WTO requirements


Stock market laws promulgated in 2007Stock market legislation was only promulgated in the form of the Law on theIssuance and Trading of Non-Government Securities as recently as 2007. Giventhe current target of a 2011 opening, and given that the key business lawswere established only as of the late 1990s, we view getting the capital marketsup and running in just a decade as a reasonably quick turn around.




45/111

Figure 50: Major Cambodian Laws

Laws Details

Commercial Law on commercial rules and commercial register(1995) and amendment (1999), Law on commercialenterprises (2005)

Tax Law on tax (1997), amendment (2003)

Financial System Law on banking and financial institutions (1999),Insurance law (2000), Law on negotiable instrumentsand payment transactions (2005), Law on securedtransactions (2007), Law on issuance and trading of non-government securities (2007), Law on financial leases(2009)

Property Land law (2001), supersedes 1992 Land law

Contract Law 1988

Trade Cambodia adopted has adopted the regulations of themajor trade bodies it has joined; the ASEAN Free TradeArea (1999) and the World Trade Organisation (2004)

Labour Labour law 1997 replaces 1992 Labour law

Intellectual property Law concerning marks, trade names and acts of unfaircompetition (2002)

Source: DFDL Mekong




46/111

Capital markets: Nascent

Banks loans currently the key source of capitalThe main source of capital in Cambodia is bank lending, through 35 banks(including specialised banks*). For rural lending, and especially to smallagricultural businesses, there are 13 microfinance institutions that are a keysource of capital, but they represent a small proportion of total lending. Thetight lending standards of Cambodian banks (which we view as prudent, giventhe market risk) limits the growth of many riskier ventures that couldpotentially be funded by more risk tolerant equity investors.

Foreign lending in the country increasing

The longest running international lending to Cambodia has been frommultilateral institutions such as the World Bank and the Asian DevelopmentBank and national institutions such as the Japan International CooperationAgency. These institutions support many projects that cross borders in theGreater Mekong Sub Region. However, there is also growing internationalinterest in lending to Cambodia from private and policy banks, particularlyfrom China.

Public equity market to open this year, private equity growingThe public equity market is very near opening, and we expect to see trading

by late 2011. We give more detail on the progress with regards to the stockexchange below. In addition, private equity investment in Cambodia isgrowing, given the presence of a handful of domestically based funds, as well asinterest from regional funds.

Bond law written but no market yetAlthough the Law on the Iss

Date post:	07-Apr-2018
Category:	Documents
Upload:	james-willard
View:	223 times
Download:	0 times

Cambodia Overview (Cambodia Capital) June 2011

Documents