By Douglas Clayton, Published in Dr. Marc Faber's Gloom Boom & Doom Report | January 2008
As deleveraging decimates the world economy, the least damaged are the least developed countries like Cambodia that were left off the guest list of the global liquidity party. Cambodia now stands out by not standing on the brink of financial ruin or a looming “lost decade”. The government’s finances remain sound with just US$4 billion debt, mostly long-term concessionary loans from donors without rollover risk. Private sector borrowings reached only 20% of GDP last year; this is still a cash economy. The small, under-geared banking system continues to function normally and expects record profits this year. Phnom Penh’s feared building boom bubble was artfully pinpricked before most planned projects broke ground, and Cambodia must be one of very few countries now with an undersupply of prime office and retail space.
The mood in Cambodia today is wary but not despondent. Local newspaper readers must turn to the international section to find any stories of fiscal stimulus packages or monetary easing or corporate bailouts. Cambodians have not suffered stock market losses, as almost no one invests in overseas markets and the local market’s launch is still at least a year away. Cambodians with money hold their savings in super-strong US dollars, or in land that they mostly acquired years ago when it was dirt cheap. As for the broader population, 70% of Cambodians are subsistence farmers who worry more about rainfall patterns than far-away economic events; this year, a good harvest is expected. Nonetheless, while Cambodia dodged the credit bullet it can’t avoid the aftershocks of global recession. Its GDP growth will likely halve from 10% to 5% over the next two years as:
is tightening, especially from past leader Korea. China, Japan, and the Middle East are being targeted as replacement sources, but at best this may take some time.
• Land prices are tumbling, particularly in prime Phnom Penh areas, which tripled unreasonably in the last two years. Fortunately, the land speculation game was largely funded through cash and sellerfinancing, so the needed correction will punish the participants without burdening the banks.
• Construction is contracting as Korean developers lose Korean funding, and local presales dry up.
• Garment exports are stagnating, as most head for the battered US market. Some factories have closed.
• Tourism growth has slowed to around 8% in 2008 after 18.5% growth in 2007, and will underperform again in 2009. The border spat with Thailand, followed by the one-week closure of Thailand’s international airport, have added insult to injury
• Rice, rubber, and cassava export prices have corrected from their recent spikes, overshadowing output volume gains. But in contrast to many countries, Cambodia’s slowdown is unlikely to be protracted. The glaring gaps and overlooked opportunities in its preemerging economy will continue to attract venture investors, with incoming enterprises helping to offset the consolidation of incumbents. Note that the investment flows needed to jolt a US$8 billion economy are miniature even in subregional terms, and notwithstanding the global crisis, we continue to see overseas businessmen coming to scout Phnom Penh for opportunities. Stimulus will come organically from the private sector, rather than in sugar-coated form from the government. In the meantime, while pain will be felt by existing Cambodian businesses, a period of slower growth does have some positive aspects, especially for newcomers with cash.
• Inflation, which climaxed alarmingly at 25–30% in June 2008, is now “yesterday’s problem” as prices of oil, rice, building materials, and most other commodities have plunged. The IMF expects Cambodia’s CPI to drop to 15% by year-end 2008 and to 7.5% in 2009.
• Oil price weakness reduces power generation and transportation costs.
• Land and construction materials price adjustments benefit incoming developers.
• Forced exits by some of Cambodia’s existing foreign investors will create opportunities for new investors to acquire quality assets at distressed valuations.
• Reduced competition increases investors’ negotiating leverage.
• Cambodia’s government may feel pressured by the slowdown to try harder to improve its governance, efficiency, and regulations. By the next general election in 2013, over 12% of Cambodia’s population will have reached working and voting age; new jobs must be created to maintain the government’s popular support. In the worsening global recession, Cambodia remains one of the world’s few compelling investment stories, offering that now rarest of combinations, growth and value. As longtime Asia watchers, we have learned the risks of buying bombedout mature economies lacking return routes to growth; Japan, whose stock market is hitting 26-year lows, provides a grim reminder that it takes more medicine than zero interest rates, stimulus packages, and bank bailouts to revive a comatose patient. Likewise Thailand, with its SET Index down 84% in US dollar terms over 15 years, reminds us to beware the value trap; cheap can always get much, much cheaper if the growth engine has missing parts. For us, the game now is about locating pockets of growth reacceleration. We expect that Cambodia’s unleveraged, underdeveloped, and continued “free-market” status will make it one of the first economies to bottom out and then climb back to double-digit growth. Remember that Cambodia has already passed through a three-decade bear market, a catastrophic socio-economic collapse far more severe than what any Western country is now facing. Having finally emerged from that devastating experience, Cambodia is now equipped with some unique growth propellers to help it motor against the global current:
• Diminishing risks Political risk erased Cambodia from the investment map for a generation; elimination of excess risk initiates a one-off catch-up trade. After delivering a decade of political stability and policy continuity, the Hun Sen government in July 2008 won yet another decisive re-election victory in a peaceful, internationally monitored election. Today, Cambodia is rated as less risky than India, Thailand, Malaysia, Indonesia, or the Philippines by the experts at Political and Economic Risk Consultancy Ltd. And confidence in Cambodia’s future seems strongest among the Cambodians themselves, who for the past few years have been steadily repatriating overseas funds to purchase Cambodian property, an illiquid long-term investment.
• Development help Cambodia’s recent annual meeting with donors saw pledges of 2009 Official Development Assistance not fall as expected, but actually rise 35% to US$950 million, representing a whopping 11% of Cambodia’s GDP. China has now become the biggest supporter, which makes it tough for other donors to reduce their contributions without ceding influence.
• Breathtaking demographics Cambodia’s labour pool expands by 4% each year — forcing growth as dependents convert into breadwinners. Think of the vast productivity and income growth that lies ahead for a country whose population has an average age of 21
• Talent transfer Well-educated overseas Cambodians (2 million live overseas) are coming back, joined by growing numbers of resident expat entrepreneurs, while foreign companies ranging from multinational corporations such as General Electric to private equity firms like ours are setting up shop in Phnom Penh. These steroid-like injections of experience and money into Cambodia’s small economy are helping it to “leapfrog” from the 19th to the 21st century in some aspects, e.g. people going from no phone to 3G, or from candles to solar-powered lights.
• “Nation-building” progress Remarkable progress has been made towards rebuilding Cambodia from its “Back to Year Zero” devastation into a normal country with functional institutions and a regionally comparable economy. The gap has narrowed between Cambodia and its ASEAN peers in fundamental areas such as legal framework, nationwide financial services, wireless communications, rural electrification, natural resource extraction, irrigated agriculture, primary commodity processing, import substitution industries, and the launch of local brands, products, and services. The progress is not even across categories, and much vital work remains to be done, but this catch-up stage is the “low hanging fruit” of a country’s economic development and creates a virtuous cycle.
• Transport connectivity A number of important road and rail projects are being undertaken to link Cambodian population centres to neighbouring Vietnam, Thailand, Laos, and ultimately China. Cambodia represents a small missing segment in the continental Asian Highway Network and Trans-Asia Railway projects intended to link Singapore, Malaysia, and Thailand to Southern Vietnam and then China, so it attracts donor financing for these projects from the Asian Development Bank and various governments, including China. Improving connectivity stimulates cross-border trade, investment, and immigration to utilise Cambodia’s untapped natural resources, lower land and labour costs, and greater economic freedom.
• Coastal transformation The recent expansion of Cambodia’s third international airport, in Sihanoukville, is opening the country’s 440 kilometres of beaches and 60 tropical islands to the world, potentially doubling Cambodia’s tourism appeal and construction focus. Meanwhile, Japan has been upgrading Sihanoukville’s seaport and building a nearby industrial estate, while Chevron continues to drill in the offshore oil and gas field. Sihanoukville will follow the example of Thailand’s transformative Eastern Seaboard region, combining shipping, manufacturing, petrorelated industries, and luxury resort hotels, spas, marinas, holiday villas, and retirement homes. These growth catalysts will continue to keep Cambodia’s economy moving forward, generating across-the-board opportunities for committed foreign investors over the years ahead. Basic industries such as agriculture, commodities processing, banking, power, and building materials offer attractive opportunities with relative safety, even more so if one takes a portfolio approach. Yes, global markets have collapsed and everywhere in the world now looks cheap. But, as usual, the best returns may be made in the places mainstream investors have yet to discover. See you in Phnom Penh.
As deleveraging decimates the world economy, the least damaged are the least developed countries like Cambodia that were left off the guest list of the global liquidity party. Cambodia now stands out by not standing on the brink of financial ruin or a looming “lost decade”. The government’s finances remain sound with just US$4 billion debt, mostly long-term concessionary loans from donors without rollover risk. Private sector borrowings reached only 20% of GDP last year; this is still a cash economy. The small, under-geared banking system continues to function normally and expects record profits this year. Phnom Penh’s feared building boom bubble was artfully pinpricked before most planned projects broke ground, and Cambodia must be one of very few countries now with an undersupply of prime office and retail space.
The mood in Cambodia today is wary but not despondent. Local newspaper readers must turn to the international section to find any stories of fiscal stimulus packages or monetary easing or corporate bailouts. Cambodians have not suffered stock market losses, as almost no one invests in overseas markets and the local market’s launch is still at least a year away. Cambodians with money hold their savings in super-strong US dollars, or in land that they mostly acquired years ago when it was dirt cheap. As for the broader population, 70% of Cambodians are subsistence farmers who worry more about rainfall patterns than far-away economic events; this year, a good harvest is expected. Nonetheless, while Cambodia dodged the credit bullet it can’t avoid the aftershocks of global recession. Its GDP growth will likely halve from 10% to 5% over the next two years as:
is tightening, especially from past leader Korea. China, Japan, and the Middle East are being targeted as replacement sources, but at best this may take some time.
• Land prices are tumbling, particularly in prime Phnom Penh areas, which tripled unreasonably in the last two years. Fortunately, the land speculation game was largely funded through cash and sellerfinancing, so the needed correction will punish the participants without burdening the banks.
• Construction is contracting as Korean developers lose Korean funding, and local presales dry up.
• Garment exports are stagnating, as most head for the battered US market. Some factories have closed.
• Tourism growth has slowed to around 8% in 2008 after 18.5% growth in 2007, and will underperform again in 2009. The border spat with Thailand, followed by the one-week closure of Thailand’s international airport, have added insult to injury
• Rice, rubber, and cassava export prices have corrected from their recent spikes, overshadowing output volume gains. But in contrast to many countries, Cambodia’s slowdown is unlikely to be protracted. The glaring gaps and overlooked opportunities in its preemerging economy will continue to attract venture investors, with incoming enterprises helping to offset the consolidation of incumbents. Note that the investment flows needed to jolt a US$8 billion economy are miniature even in subregional terms, and notwithstanding the global crisis, we continue to see overseas businessmen coming to scout Phnom Penh for opportunities. Stimulus will come organically from the private sector, rather than in sugar-coated form from the government. In the meantime, while pain will be felt by existing Cambodian businesses, a period of slower growth does have some positive aspects, especially for newcomers with cash.
• Inflation, which climaxed alarmingly at 25–30% in June 2008, is now “yesterday’s problem” as prices of oil, rice, building materials, and most other commodities have plunged. The IMF expects Cambodia’s CPI to drop to 15% by year-end 2008 and to 7.5% in 2009.
• Oil price weakness reduces power generation and transportation costs.
• Land and construction materials price adjustments benefit incoming developers.
• Forced exits by some of Cambodia’s existing foreign investors will create opportunities for new investors to acquire quality assets at distressed valuations.
• Reduced competition increases investors’ negotiating leverage.
• Cambodia’s government may feel pressured by the slowdown to try harder to improve its governance, efficiency, and regulations. By the next general election in 2013, over 12% of Cambodia’s population will have reached working and voting age; new jobs must be created to maintain the government’s popular support. In the worsening global recession, Cambodia remains one of the world’s few compelling investment stories, offering that now rarest of combinations, growth and value. As longtime Asia watchers, we have learned the risks of buying bombedout mature economies lacking return routes to growth; Japan, whose stock market is hitting 26-year lows, provides a grim reminder that it takes more medicine than zero interest rates, stimulus packages, and bank bailouts to revive a comatose patient. Likewise Thailand, with its SET Index down 84% in US dollar terms over 15 years, reminds us to beware the value trap; cheap can always get much, much cheaper if the growth engine has missing parts. For us, the game now is about locating pockets of growth reacceleration. We expect that Cambodia’s unleveraged, underdeveloped, and continued “free-market” status will make it one of the first economies to bottom out and then climb back to double-digit growth. Remember that Cambodia has already passed through a three-decade bear market, a catastrophic socio-economic collapse far more severe than what any Western country is now facing. Having finally emerged from that devastating experience, Cambodia is now equipped with some unique growth propellers to help it motor against the global current:
• Diminishing risks Political risk erased Cambodia from the investment map for a generation; elimination of excess risk initiates a one-off catch-up trade. After delivering a decade of political stability and policy continuity, the Hun Sen government in July 2008 won yet another decisive re-election victory in a peaceful, internationally monitored election. Today, Cambodia is rated as less risky than India, Thailand, Malaysia, Indonesia, or the Philippines by the experts at Political and Economic Risk Consultancy Ltd. And confidence in Cambodia’s future seems strongest among the Cambodians themselves, who for the past few years have been steadily repatriating overseas funds to purchase Cambodian property, an illiquid long-term investment.
• Development help Cambodia’s recent annual meeting with donors saw pledges of 2009 Official Development Assistance not fall as expected, but actually rise 35% to US$950 million, representing a whopping 11% of Cambodia’s GDP. China has now become the biggest supporter, which makes it tough for other donors to reduce their contributions without ceding influence.
• Breathtaking demographics Cambodia’s labour pool expands by 4% each year — forcing growth as dependents convert into breadwinners. Think of the vast productivity and income growth that lies ahead for a country whose population has an average age of 21
• Talent transfer Well-educated overseas Cambodians (2 million live overseas) are coming back, joined by growing numbers of resident expat entrepreneurs, while foreign companies ranging from multinational corporations such as General Electric to private equity firms like ours are setting up shop in Phnom Penh. These steroid-like injections of experience and money into Cambodia’s small economy are helping it to “leapfrog” from the 19th to the 21st century in some aspects, e.g. people going from no phone to 3G, or from candles to solar-powered lights.
• “Nation-building” progress Remarkable progress has been made towards rebuilding Cambodia from its “Back to Year Zero” devastation into a normal country with functional institutions and a regionally comparable economy. The gap has narrowed between Cambodia and its ASEAN peers in fundamental areas such as legal framework, nationwide financial services, wireless communications, rural electrification, natural resource extraction, irrigated agriculture, primary commodity processing, import substitution industries, and the launch of local brands, products, and services. The progress is not even across categories, and much vital work remains to be done, but this catch-up stage is the “low hanging fruit” of a country’s economic development and creates a virtuous cycle.
• Transport connectivity A number of important road and rail projects are being undertaken to link Cambodian population centres to neighbouring Vietnam, Thailand, Laos, and ultimately China. Cambodia represents a small missing segment in the continental Asian Highway Network and Trans-Asia Railway projects intended to link Singapore, Malaysia, and Thailand to Southern Vietnam and then China, so it attracts donor financing for these projects from the Asian Development Bank and various governments, including China. Improving connectivity stimulates cross-border trade, investment, and immigration to utilise Cambodia’s untapped natural resources, lower land and labour costs, and greater economic freedom.
• Coastal transformation The recent expansion of Cambodia’s third international airport, in Sihanoukville, is opening the country’s 440 kilometres of beaches and 60 tropical islands to the world, potentially doubling Cambodia’s tourism appeal and construction focus. Meanwhile, Japan has been upgrading Sihanoukville’s seaport and building a nearby industrial estate, while Chevron continues to drill in the offshore oil and gas field. Sihanoukville will follow the example of Thailand’s transformative Eastern Seaboard region, combining shipping, manufacturing, petrorelated industries, and luxury resort hotels, spas, marinas, holiday villas, and retirement homes. These growth catalysts will continue to keep Cambodia’s economy moving forward, generating across-the-board opportunities for committed foreign investors over the years ahead. Basic industries such as agriculture, commodities processing, banking, power, and building materials offer attractive opportunities with relative safety, even more so if one takes a portfolio approach. Yes, global markets have collapsed and everywhere in the world now looks cheap. But, as usual, the best returns may be made in the places mainstream investors have yet to discover. See you in Phnom Penh.
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