Cambodian economy fights to heal wounds

Cambodian economy fights to heal wounds

By Robert Birsel

PHNOM PENH (Reuter): Cambodia's once buoyant economy has been stopped in its tracks by July's violent coup and its aftermath, economists say.

A recovery is seen as unlikely until badly-bruised confidence, both at home and abroad, begins to heal.

Business has been in the doldrums ever since strongman Hun Sen snatched power from First Prime Minister Norodom Rannarridh on July 6. The coup sparked violent clashes in the capital and later in the west of the country.

But while the political dust has begun to settle, the economy is still gasping in the wake of the turmoil. Amid July's chaos consumers cut back spending, tourists stayed clear and investors and aid donors tried to take stock of where the strife-torn country was going.

Work on some construction sites in Phnom Penh has ground to a halt while long lines of idle taxis wait outside near-empty hotels. Thousands of jobs are thought to have disappeared.

Economists say Cambodia's recovery is only a matter of time but the task ahead has been made much more difficult by financial turmoil elsewhere in Southeast Asia.

"There has been a definite shock to the economy, a stunning shock, but I would not categorize it as a crippling shock yet," said an economist at an international organization.

"A stunning shock will take some time to recover from but the economy will not be crippled completely," said the economist, who declined to be identified.

Two days of fighting and a third of looting in Phnom Penh as Second Prime Minister Hun Sen ousted his coalition partner and co-premier Ranariddh caused some $70 million in damage, according to government estimates. It also sparked an exodus of thousands of frightened foreign tourists, business people and aid workers.

Before the coup, growth this year was expected to hit about 7 percent after four years of similar expansion and moderate inflation. Nominal per capita income doubled from $150 to $300 over the same period, according to World Bank figures.

But growth this year is now expected to be around 2 percent, and then only if there is a good rice harvest.

"It's a sort of malaise after the event in July," said Cambodia's Asian Development Bank representative, Someth Suos.

Business people and economists say there has been a sharp drop in consumption due to the political violence and subsequent uncertainty, and small businesses are now suffering.

"There's been a contraction of demand due to reduction in disposable incomes and people are perhaps trying to keep more money for a rainy day than they did when everything was rosey," said the economist.

An economist at the Cambodia Development Resource Institute (CDRI) said many market vendors and small traders were now threatened with bankruptcy.

"A lot of people complain that if the current situation continues then they may have to close their shops because they cannot even pay rent or tax to keep their shops open," said the CDRI economist who declined to be identified.

Many thousands of people, especially in the service sector, are thought to have lost their jobs since July but economists said it was very difficult to get an accurate picture of unemployment especially when many Cambodians have two or more jobs.

The fall in consumption has hit imports, which is particularly bad news for a government that depends on customs revenues for about 70 percent of its total tax revenue.

"People aren't going out and spending much money," said the executive director of International Management and Investment Consultants, Craig Martin. "Traders aren't importing so much stock. They're drawing down stock across the board."

"In the past traders liked to hold stock but now it's more important to have cash in hand," Martin said. "If people aren't importing they're not paying customs revenues so government income is down."

Minister of Finance Keat Chhon has ordered all ministries to cut operating costs, including expenses on gasoline, electricity and telephones to make up for the expected revenue shortfall. But as well as the sharp contraction in consumption Cambodia is also facing lower inflows of foreign funds in the aftermath of the July upheaval.

Aid makes up half of Cambodia's annual budget, but Hun Sen's bloody grab for power has led the United States to suspend all but humanitarian help and Germany to cut all assistance, reducing total foreign aid by 10 percent.

Other donors are keeping existing projects going but many are not putting money into new projects for the time being.

In addition, an International Monetary Fund (IMF) loan to Cambodia was suspended at the end of August. The government's failure to meet conditions concerning the leakage of its revenues in the forestry sector led the IMF to cancel a $20 million tranche of the loan last year.

Restoring confidence in the country was key to Cambodia's recovery, analysts said.

"It all depends on the government," said Someth Suos. "Donors can help support government efforts but the government must increase revenue, provide employment opportunities and create a climate for further private investment."

"That depends on political stability and law and order."

But Cambodia is also likely to feel the chill wind of financial turmoil elsewhere in the region.

"A large number of investors come here from Malaysia, Indonesia and Thailand," said the economist at the international organization. "They invest money borrowed from their financial institutions but now they don't have that access to lending."

"People aren't going to be ready with cash to invest here."