US Secretary of State John Kerry traveled to Cambodia and Laos in late January in a rare high-level bilateral visit to prepare for California’s hosting of the ASEAN summit later this month. But he failed to draw Cambodian Prime Minister Hun Sen into taking sides on the South China Sea territorial dispute with his heavy reliance on mainland aid and economic ties.
A Chinese import and tourism slowdown could keep GDP growth below 7% for the first time in years, and inject exchange rate and banking system instability as the central bank tries to manage riel fluctuations and 30% annual credit expansion, according to the World Bank’s 2016 forecast. The garment sector, which employs 650,00 workers, has been under wage and labor condition pressure and the gambling industry may be facing a Macau-like pause with Beijing’s official campaign against money laundering and wealth displays.
Politics has also turned messy again after disputed elections in 2013, as the ruling party recently revoked opposition head Sam Rainsy’s parliamentary immunity, and moved to arrest him for defamation. Protests continue to erupt over land grabs and a Washington-based watchdog group, the Center for Global Financial Integrity, ranked Cambodia as a top trade fraudulent invoicing offender spurring $4 billion in illicit outflows in 2013. At the upcoming Sunnylands meeting in the US, the Prime Minister may appeal for more aid after calling Western nations “stingy,” but his own miserly democratic and competiveness record after 30 years in charge will also invite condemnation.
With almost $1 billion in annual donor assistance, poverty has been cut to one-quarter the rate a decade ago to 15%. However, pervasive bureaucracy and corruption have frozen the country’s score the past five years on the Heritage Foundation’s Index of Economic Freedom. The lowest readings were on rule of law and property rights, as the report found that increased tourism, construction and manufacturing FDI, often in special zones around the capital Phnom Penh and temple hub Siem Riep, were offset by the absence of basic business liberties.
These inflows are needed to bridge the current account deficit over 10% of GDP and infrastructure gap the government puts at $1.5 billion through 2018. It joined China’s AIIB as a founding member to access energy, water, road, and telecoms funds it has been unable to attract through official and private channels to date, and the Greater Mekong sub-region development was cited as a priority. The main casino operator, Hong Kong-based NagaCorp is also betting on these improvements to boost domestic and cross-border traffic, from Thailand and Vietnam in particular.
Naga is publicly-listed in Hong Kong and has served as a proxy Cambodian play with only three listed stocks on the local exchange launched in 2011 with Korean help. The Phnom Penh state-run port was the latest addition in December after offering a 20% stake. The other shares, the water utility and a Taiwanese-owned textile firm, have under performed and investors would shy away from bank candidates after years of double-digit credit growth. Regulators are trying to unwind high dollar-denominated and property and construction portfolio concentrations as the loan-to-deposit ratios at a dozen banks exceed 200% and “pose stability risks,” according to the IMF. Reserve requirements were raised and other macro-prudential measures are under consideration, including a crackdown on micro-finance providers often larger than mid-size commercial banks as highlighted with a January $150 million Thai takeover of a leading house as a springboard also into Laos.
Building surges in Laotian capital
Vientiane is on a building spree to welcome another ASEAN gathering later this year, with its own state banks in trouble with the non-performing loan ratio at almost 10%. Public debt/GDP is in the 60% distressed zone, with foreign reserves down to one month import cover, the IMF notes. Another 75-year old war veteran was just elevated to Communist Party chief with an economic policy aim to graduate from least developed status by 2020. However “Asia’s battery,” which relies on hydropower and mining exports to China and Thailand, like Cambodia is ratcheting back breakneck growth that can only recharge with new generation leadership and financial sector restructuring jolts.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.