Cambodian Business Year Filled Its Glass—by Half

It was the year that Cambodia’s economy bounced back, albeit modestly.

Though economic growth in 2010 reached between 4 and 5 percent, many areas of the economy have failed to bounce back to pre-crisis levels, in large part due to Cambodia’s lack of ability to open up new markets and widen its export base beyond garments.

Yet the general perception 12 months ago was that the economic woes of 2009 should be considered an opportunity to tackle those issues affecting the economy.

To some degree that has happened even as the recurrent problems of corruption, high energy costs and a weak judicial system—to name but a few of the flaws in Cambodia’s business en­vironment—continue to blemish its reputation abroad.

“Some critics say that we are not back to where we were before the crisis, but that is normal,” said Bretton Sciaroni, a partner at the legal consultancy Sciaroni & Associates. “What is important is that we are showing good growth in the areas important to the Cam­bodian economy.”

Foreign direct investment is projected to bounce back by 20 percent to about $620 million in 2010, according to the World Bank. But that amount is still way below 2007 levels, when FDI hit $866 million.

The garment sector saw exports jump by 23.6 percent in the first 10 months of year compared to the same period in 2009. But high cotton prices coupled with the lower cost of apparel abroad have meant that employment in the sector is still not back to pre-crisis levels.

There are currently about 300,000 workers employed in Cambodia’s garment sector compared to around 330,000 in 2008, said Tuomo Poutiainen, chief technical adviser for the International Labor Organization in Cambodia.

“The indicators for the market seem to be quite good,” he said, adding that a further relaxation to trade rules with Europe starting Jan 1 should help boost exports further.

Uncertainty continues to hang over both the construction and property sectors.

The proof: Property prices have failed to bounce back from the financial crisis and several projects including Gold Tower 42, a high-rise building being built in Phnom Penh by South Korea’s Hanil Engineering & Construction, have stopped construction all together.

Nonetheless, as 2010 entered into the third and fourth quarter, parts of the economy started to appear more bright-eyed and bushy-tailed.

The banking sector, which at the beginning of the year reported squeezed profits from large interest payments on growing deposits, finished the year strongly.

Deposits increased by 27 percent to $4 billion and lending rose by 17 percent to $3.5 billion, Hang Chuon Naron, secretary of state at the Ministry of Finance, wrote in an e-mail this week.

In the tourism sector, visitor arrivals bounced back as did optimism in the airline industry.

According to the latest government data visitor arrivals jumped 17 percent to 2.26 million in the first 11 months of the year compared to the same period last year. The growth in air passengers entering Cambodia attracted interest from a bundle of airline companies.

Not only will Air France start flying to Phnom Penh from Paris in March, but the government has also given out licenses to two more domestic airlines, Tonle Sap Airlines from Taiwan and Skywings Asia Airlines from Greece.

Still, calls to bring flights to Cambodia’s coast fell on deaf ears, even as pressure mounted on the national carrier, Cambodia Angkor Air, to do so.

“The one failure that I can identify is the lack of regularly scheduled flights to Sihanoukville,” said Mr Sciaroni. “The airport there is ready to receive daily traffic. And the southern coast is poised to take off. But major hotels and resorts are not going to invest there unless there is a reliable means to get customers to Kompong Som.”

2010 was the year that the telecommunication and banking sectors showed themselves to be moving into a new phase of development.

With a plethora of different firms fighting over a small domestic market, the strongest players started to push out the weakest.

In December, telephone operators Smart Mobile and Star-Cell announced they had agreed to merge in order to combat fledging profits. And new rules on minimum capital requirements for banks are likely to weed out those without enough financial clout to deposit the necessary $37.5 million with the central bank by today, analysts say.

With economic growth estimated to have reach 8.9 percent in the East Asia and Pacific region this year, Cambodia is also starting to reap some of the benefits associated with its geographical location.

In November, China said it had agreed to finance the construction of a railroad between Phnom Penh and the Vietnamese border at the cost of $600 million. The pledge was part of nearly $2 billion in loans, grants and infrastructure deals that China has done with Cambodia this year.

Optimism at times even reached dizzy heights. In September Prime Minister Hun Sen announced that the Overseas Cambodian Investment Corporation had plans to build a 555-meter tall building on Koh Pich island in Phnom Penh, enough to make it the world’s second highest.

There were other pro-business matters addressed by the government. In April, the National Assembly passed the foreign ownership law, which allows foreigners to own up to 70 percent of condominium buildings above the ground floor. And a new rice initiative was launched in August with aims to up rice exports from around 40,000 tons a year at present to one million tons by 2015.

But 2010 also saw many of the problems that have been affecting Cambodia’s business environment for years remain an issue.

Trade procedures are tedious and time-consuming. Informal fees impeded the profitability of small and medium sized enterprises and access to credit stayed tight.

The government’s dealings with firms in the extractive industries also drew attention. In April Australian miner BHP Billiton announced it was being investigated for violating anticorruption laws in the US for activities reportedly conducted here. The news resulted in a string of question marks over the amount of transparency within the extractive industries.

Cambodia enters 2011 in the hope that next year will see exports from the agricultural sector increase. Many are also eagerly awaiting the launch of the stock market, which after several delays, is tentatively scheduled to open in July.

Yet a modern addition to the economy like the bourse is juxtaposed against a mountain of issues that only highlight Cambodia’s status as a developing country.

The government still does not properly audit its national budget and no social safety net program exists for the nation’s poorest. Corruption continues to plague the business environment.

“The government should keep improving the investment climate by reducing obstacles to business entry, imports and exports,” said Chan Sophal, president of the Cambodian Economic Association. “In particular, making rice export corruption free will attract many more investors to build capacity to purchase process and export rice from Cambodia.”

 

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