Cablegate: Steady As She Goes: Cambodia's Continued Economic

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DE RUEHPF #1156/01 2540930
ZNR UUUUU ZZH
P 110930Z SEP 07
FM AMEMBASSY PHNOM PENH
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E.O. 12958: N/A
TAGS: ECON ELAB KTEX EAIR ELTN EAGR EFIN CB
SUBJECT: STEADY AS SHE GOES: CAMBODIA'S CONTINUED ECONOMIC
GROWTH HIGHLIGHTED AT GOVERNMENT-PRIVATE SECTOR FORUM

1. Summary. Business leaders and government officials
gathered to tout economic reforms already made and highlight
areas needing further attention during the 12th
Government-Private Sector Forum, held September 5.
Cambodia's economic growth and stability remain impressive,
as the country expects GDP growth to top 9% this year while
inflation should remain near 5%. Tourist arrivals are up
20%, and the government plans to create a new national
airline. Bankers highlighted key prerequisites to the
successful opening of a stock market, optimistically slated
for 2009. Garment industry representatives lamented their
labor woes, including the proliferation of unions and
frequent illegal strikes. The Prime Minister ordered Defense
Minister Tea Banh to put an end to the practice of military
officials misappropriating military vehicles for transporting
paying civilian customers. Hun Sen reminded the audience
that, in Cambodia, the military is firmly under government
control--and not above the law. End Summary.

2. The biannual Private Sector Forum is a plenary cabinet
meeting open to the business community and broadcast live on
all Cambodian television stations. Private sector co-chairs
of eight working groups gave presentations on progress made
on issues affecting the business environment and seized the
opportunity of the Prime Minister's undivided attention to
ask him to intervene on a variety of issues, from the
proliferation of trade unions to the construction of a
national highway.

Cambodia Maintains High Growth and Low Inflation
--------------------------------------------- ---

3. Finance Minister Keat Chhon opened the forum by
highlighting Cambodia's continued macroeconomic success.
After growing at 13.5% in 2005 and 10.8% in 2006, Cambodia's
GDP growth is expected to remain strong at 9.1% for 2007.
Low inflation levels--averaging less than 5% per year--steady
exchange rates, and consistently growing international
reserves all contribute to Cambodia's rosy economic picture,
Chhon noted.

Tourism Up 20% as New Roads and Airline Aim to Push Tourism
Even Higher
--------------------------------------------- --------------

4. Cambodia received nearly 1 million visitors in the first
six months of 2007, a nearly 20% increase over the previous
year, Ho Vandy, President of the Cambodia Association of
Travel Agents, said in his speech on behalf of the Tourism
Working Group. Tourism from the EU is growing particularly
quickly this year, he noted. Vandy called for the PM to push
the delayed construction of a highway from Poipet to Siem
Reap, a road that would open a direct overland route from
Thailand to Angkor Wat.

5. Hun Sen encouraged progress on the draft Law on Tourism,
directing the Ministry of Tourism to submit a draft of the
law to the Ministry of Commerce by the end of September. He
also criticized the National Assembly for being slow to pass
legislation, and at two different points during the forum,
called on the parliament to work longer hours and pass
legislation more quickly. Ho Vandy publicized a recent
decision by the Ministry of Tourism to re-establish a
national airline. The PM was lukewarm on the proposal,
noting that if the new airline would only lose money like
Cambodia's previous flag carrier, Royal Air Cambodge, it
would be better to build a new road instead.

Foreigners' Property Rights Broadened
-------------------------------------

6. Speaking on behalf the working group on law, tax, and
good governance, Amcit lawyer Brett Sciaroni praised the PM's
recent signing of a sub-decree on mortgages, long-term
leases, and concessions. Sciaroni, who also has Cambodian
citizenship, noted that the Law on Investment was amended in
2005 to allow foreigners--who are constitutionally forbidden
from owning land--to own buildings and other fixed assets.
However, implementing regulations had not been issued until
recently, and thus the amendment had not been
operationalized. In addition to welcoming the new
sub-decree, Sciaroni urged the government to take the issue
one step further by allowing foreigners to own apartments in
buildings, something that is permitted in many other Asian
countries, he noted. The PM referred the issue to the

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Constitutional Council.

Access to Finance a Key Stumbling Block
---------------------------------------

7. Both agriculture tycoon Mong Reththy and construction and
automotive magnate Te Taing Por highlighted lack of access to
finance as a key impediment to development in their sectors.
Speaking on behalf of the agriculture working group, Rethy
said that commercial banks are reluctant to lend for
agricultural or agro-industrial investments because of
confusion regarding agricultural licensing procedures, the
relatively high risk of non-perfomance, and poor National
Bank provisions for non-payment. Taing Por, who represented
the manufacturing and small and medium enterprises (SME)
working group, urged the government to establish a credit
guarantee fund especially for SMEs.

8. Both men also called for greater progress on land
registration. Taing Por noted that land is so widely used as
collateral in Cambodia that speeding the land registration
system is critical to making credit accessible to more
entrepreneurs. Reththy referred to recent cases where
government officials had approved land transactions when the
seller did not have clear rights to the land, and called on
the government to continue efforts to provide transparency in
land transactions. In response, the PM noted that lack of
transparency in land dealings can have expensive
consequences, recalling that he recently ordered a private
company to demolish newly constructed buildings and restore a
partially drained lake. He indicated a desire to tackle the
frequent land disputes in Cambodia, saying, "The Cambodian
government is starting its offensive on land issues because a
good offense is the best defense."

Bankers Urge Syndicated Lending, More Regulation
--------------------------------------------- ---

9. New investment in Cambodia is driving several new
financial sector initiatives, Charles Vann, Deputy General
Manager of Cambodia's largest bank, reported. The banking
industry and the National Bank support the introduction of
syndicated loans, large loans in which a group of banks work
together to provide funds, thereby sharing the risk of
exposure. Vann highlighted the many foundational
institutions and practices that should be in place before the
country's stock market is launched: an interbank market, a
strong and well-trusted regulatory environment, human
capacity in the banking industry and among financial
regulators, and passage of laws on accounting and auditing.
(Note: The government's plans to open a stock market in 2009
strike many in the financial sector as premature and somewhat
risky. End Note.) The Prime Minister noted the remarkable
transformation of Cambodia's financial sector, saying, "The
country which abolished cash (during the Khmer Rouge) will
soon have a modern banking and stock market system."

PM Orders Military to Stop Using Vehicles for Private
Transport
--------------------------------------------- ---------------

10. In response to an appeal from transportation working
group chair So Nguon, the PM sternly ordered Defense Minister
Tea Banh to put an end to the practice of military officers
using official vehicles for private transport. Nguon had
complained that private bus lines couldn't compete with the
misappropriated military vehicles. The PM seemed frustrated
as he noted that the government had recently spent more than
USD 4 million to buy new trucks and other equipment for the
military. Several times he firmly stated that while in other
countries the military may control the government, in
Cambodia, the military was under his control.

Too Many Unions, Too Many Illegal Strikes
-----------------------------------------

11. Members of the trade facilitation and industrial
relations working groups were unanimous in their views that
the proliferation of trade unions and lack of legal penalties
for illegal strikes are harming the garment industry. Van
Sou Ieng, chairman of the Garment Manufacturers Association
of Cambodia, noted that the Cambodian garment sector grew by
17% in the first seven months of 2007 and now employs more
than 350,000 workers. Cambodia is the 9th largest exporter
of apparel to the U.S. Yet labor problems threaten the

PHNOM PENH 00001156 003 OF 003

sector's competitiveness. There are more than 1,100
registered unions for just 300 factories. The competition of
unions within factories fuels labor unrest and forces factory
managers to spend an inordinate amount of time negotiating
with multiple unions. Sou Ieng also decried the lack of
legal reprisal for workers who strike illegally, and called
for the government to protect workers who want to work from
harassment by striking colleagues. (Note: Cambodian labor
law provides for a fine of 61 to 90 times the daily base wage
for union leaders who engage in "activities extraneous to
their exclusive objective," presumably covering illegal
actions such as harassment, intimidation, and illegal
strikes. End Note.)

12. Industrial relations working group co-chair Nang Sothy
noted that the working group had agreed to recommend
clarifying legal requirements for short term contracts via an
amendment to the law rather than a sub-decree. (Comment:
The garment industry would like to be able to hire workers on
one short-term contract after another for an indefinite
period of time. The Arbitration Council has ruled that a
legal provision limiting short term contracts to two years
applies to serial short term contracts as well as to a single
contract. Labor observers feared that issuing a sub-decree
to overturn this ruling would not only open the door to more
labor abuses generated by the job insecurity of endless short
term contracts, but would also set a dangerous precedent of a
mere sub-decree overturning an Arbitration Council ruling.
End comment.)

13. The Prime Minister, who is often sympathetic to the
labor woes of the garment industry, seemed to take special
care not to offend workers in his response. "Respect for
worker's rights is part of human rights," he said. He
thanked the workers and unions who supported a recent
amendment to the Labor Law which established a night shift
wage of 130% of normal daily wages. He appealed to workers
and employers to resolve problems without resorting to
strikes. However, he seemed a bit confused by the proposal
to implement legal procedures for certifying one factory as
"most representative"--part of the effort to reduce
competition among multiple unions at one factory--incorrectly
stating that this would be unconstitutional.

Comment
-------

14. This Private Sector Forum was perhaps more notable for
what it lacked than what it contained. Absent from this
year's meeting were Hun Sen's histrionics and grand gestures.
In past years the PM has seized on the opportunity of having
a captive audience and a live TV broadcast to go on the
attack about unrelated issues, such as UN Human Rights
representative Yash Ghai, the World Bank's corruption
allegations, or criticism of the border treaty with Vietnam.
The Private Sector Forum has also historically been a moment
for the PM to grant big favors, such as extending the garment
sector's tax holiday by two years. Last week's event saw
none of these theatrical moments, and instead was refreshing
as the PM, possibly with an eye toward upcoming national
elections, took reasonable stances on all manner of private
sector issues.
MUSSOMELI

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