Cambodian Country Risk Analysis

1. Cambodian CountryRiskAnalysis Supervisor:Dr. M.H. BOUCHET Student:Socheat EUNG CERAM Sophia-Antipolis European School of Business Nice, France August 2006

2. Content ►Cambodia’s History ►Country Overview ►Country Risk Analysis  Economic Risk Analysis  Financial Risk Analysis  Polititcal Risk Analysis  Legal & Judicial Risk Analysis  External Related Risk Analysis ►Doing Business in Cambodia ►Conclusion & Recommendation

3. Introduction • Official name: Kingdom of Cambodia • Form of State: Democratic with multi-parties • Population: 13.9 million • Land area: 181 035 sq km • Climate: Tropical • Location: Southeast Asia • Currency: Khmer Riel (KHR) • Capital: Phnom Penh

4. Cambodia’s History • During AD: Indianized states of Funan and Chenla • 9th to 13th century: Khmer civilisation • By 15th century: Cambodia was a center of the Khmer Empire, capital Angkor • 1863-1953: Protectorate of France (Independence day on Nov. 9th) • 1941-1945: Under Japanese occupation • 1950s & 1960s: under the rule of King Norodom Sihanouk • 1969-73: Bombing of US on Cambodia due to Vietnam • 1970s: Civil wars, esp. Genocide regime(1975-79, >3million killed) • 1980s: Vietnames evasion • 1993: The first election under US’s administration • 1998 & 2003: Hun Sen was elected as Prime Minister

5. Cambodian Map

6. Country Overview

7. Power structure The king has no power Hun Sen is the most powerful • King is the top of the country, but no power in politics • All decision in government made by Prime Minister Hun Sen • Legislative consists of National Assembly and Senate • Judicial power is namely independent institution, but in fact, it tends to be dependent on executive power

8. People & Culture

9. Country’s Resources • Natural Resources: • Metals & mineral • Hydroelectric Power • Petroleum • Forestry • Timber and firewood • Infrastructure: • Two International airports(Phnom penh & Siem Reap) • Roadway (12 323km) • Railway (602km) not upgraded • Waterway (2 400km)

10. Economic Outlook 2005 • Expected growth: 7% • Main drivers: textile, tourism, construction, & agriculture • International trade expansion • Stable fiscal and monetary performance • Inflation: 6.7% • GDP per capita: 441US$

11. Country Risk Analysis

12. Econmic Risk Analysis • Economic growth →Keep growing by 2004, at comparable rates to neighbors → Expected to lower due to oil price increase, low speed of critical reforms, external factor(VN membership into WTO, etc.)

13. Economic Risk Analysis • Inflation Low inflation rate though increase in oil price, Not problematic to the country

14. Economic Risk Analysis • Interest rates ►Rates in Riel more than in US$ due to risk from Riel depreciation ►High interest rates discourage private sector

15. Banking and Financial Sector ▲NBC, established in 1980, is autonomous central bank. Its roles are: off-site inspection & on-site inspection of commercial banks Supervision and licensing of commercial banks, specialized banks and (MFIs). ►However, it is very difficult to access credits

16. Government Budget • Large budget deficit still problematic even reaching target of revenue collection • Poor public services deliveries Strongly depending on foreign aids and loans to finance budget deficits

17. Financial Risk AnalysisBOP Analysis • Increasing in export due to US & EU restrictions on China’s export • Increasing in import due to hug increase in oil price • CAD generated by • Inflation • Strong economic performane • Government restrictions • So, it will worsen foreign reserve

18. Debt Analysis • Largly depending on foreign boorowing to reconstruct the country • Needing proper debt management to ensure viability of the country • Debt forgiveness and rescheduling (US & Russia) • Cambodia starting to pay debt services on last decade loan • More funds needed for debt services • So, scarcity of funds for development unless domestic revenue is substantially strengthened

19. Financial Ratio AnalysisSolvency Ratios • Debt/GDP ratio was relatively quite high • Estimated to go down in 2005 & 06 due to IMF’s debt relief • OR/Debt used to ensure the country’s solvability toward creditors in the future • OR is in range of 26% & 29% • In overall, debt/export ratio >100% • Decreasing gradually year after year • But large debt make Cambodia insolvent toward creditors

20. Liquidity Ratios • Nagatively, the ratio decreasing slighly due to much increase in import • It’d not have enough reserves to compensate a large amount of imports in the future • From 2003, debt service to export ratio decreasing slighly due to more increase in export than in debt service

21. Monetary & Fiscal Policy • adoption of tight monetary policy and managed floating exchange rate • Economic growth lead expansion in money suppy & demand • Money suppy largely stems from foreign currency deposit • Largely, private sector need credit to finance business investment • Hovewer, difficult to acess credits • Monetary policy

22. Monetary & Fiscal Policy Fiscal policy • Objective: to maintain a sustainable fiscal balance with gradual increases in budget allocation to maintain price stability in Cambodia's highly dollarized economy to ensure a level of spending that is consistent with macroeconomic stability • Result in 2004 & 2005: slightly increased domestic revenue collection public expenditure restraint stability of low inflation rate However, there are distortion in domestic revenue collection and public expenditure due to inadequate operational funds and low salaries of public servants

23. Foreign Exchange Risk Analysis •  Dollarization of econmy ►Official use of Dollar in economy • Riel is less volatile against US$, comparing to Thai Bath and VN dong • Depreciation in Riel against US$ due to economic slowdown in rural area where Riel is mostly used, versus in urban • Even depreciation in Riel, current account deficit is wider and wider

24. Political Risk Analysis Positive influence Prince Model (ADB/IMF/WB) King Norodom Sihanouk King Norodom Sihamoni • Prime Minister Hun Sen • Opposition leader Prince Norodom Ranaridh Negative Influence

25. Political Situation • Negative points • Political conflicts: e.g. Government stripped opposition leader Sam Rainsy of his parliamentary immunity • Sporadic civil unrest which can result in damage to business, e.g. Anti-Thai rioting in January 2003 • Positive points • Strong protection agiant expropriation • In overall, political stability • Open and liberal investment regime with national treatment of foreign investors

26. Legal & Judicial Risk Analysis • Based on civil law where the rule of law is set as the country’s basis • Seperation of powers: Executive, Legislative, & Judicial • Negative points: • Judicial tend to be dependent on government • Khmer civil system is ramnent of communist legal theory and under-resouced • Opacity of regulatory system and incomplete legal framework for market economy • Corruption is widespread in this sector • Positive points: • Significant reforms in the sector • Laws is conformed to international standard due to TWO accession • No pattern of discrimination against foreign investors

27. Corruption Domestic firms paid unofficially on business licensen authorities, followed by standard & safety inspection Mostly, foreign firms paid unofficially on custom/trade license services

28. Cambodian Governance Indicators Cambodia’s governance is relatively poor, comparing to Thailand, while Laos is the worst. Comparing with Vietnam, Cambodia is better in terms of regulatory quality and voice and accountability

29. Corruption Perception Index (CPI) Source: International Transparency (IT) (CPI score: 10=highly clean, 0=highly corrupt) Cambodia is ranked at 130th out of 158 countries with the 2005 CPI score of 2.3  Cambodia is one of the worst countries in team of corruption

30. External Related Risk Analysis • Regional Intergration (ASEAN) Cambodia has become ASEAN member on April 30, 1999 with purposes: • Political cooperation • Economic & functional cooperation • External relations • However, Cambodia might face with the regional contamination risks, e.g. Asian crisis in 1997 • In overall, the regional integration gives much more advantages and opportunities to develop country

31. Cambodia’s WTO membership Cambodia has been a member of WTO since 13 October 2004 with: • Advantages: • Access to international markets • Capacity building • Good governance building • Disadvantages: • Difficilt to compete with competitors in local & international markets

32. Doing business in Cambodia

33. Strengths Inflation stability Low currency volatility Low labor cost Low tax payable Independent Central Bank Good recent macroeconomic performance High economic growth Dollarization of economy Macroeconomic stability Prosperous natural resources Hard work willingness of people Favorable culture for business management Liberalized economy and business Weaknesses Poor banking and financial system High corruption Inadequate government bureaucracy Low educated workforce Difficult to access credit Inadequate physical and financial infrastructure Weak legal and judicial institutions Country SWOT Analysis

34. Opportunities WTO membership Regional integration (ASEAN) Emerging market Democratic country Many reforms in many sectors Tourist destination (Angkor Wat...) Strong partnership with many international organizations Large proportion of active population (61%) Recent political stability Threats Political conflicts Hug external debts Crime and theft Large government budget deficit Border conflict with neighboring countries Country SWOT analysis

35. Growth Competitveness Index (GCI) Source: World Economic Forum (score: 1 = the least competitive, 7 = the most competitive) Cambodia was ranked at 112th position among 117 countries with a relatively low score (2.82 out of 7), assessed in 2005 by World Economic Forum (WEF)

36. Business Competitiveness Ranking Source: World Economic Forum

37. 10 elements for doing Business ►The most difficult: getting credits, closing business, dealing with licenses, starting business, enforcing contracts and trading across border. ►The easiest: paying taxes, protecting investors, employing & firing workers and registering properties  In overall, ease of doing business in Cambodia is ranked at 133thout of 154 countries

38. The Most Problematic Factors • The most problematic: • Corruption • Inefficient government bureaucracy • Inadequate educated workfoces • Inadequate supply of infrastructure • Access to credits • Policy instability

39. Credit Rating • COFACE gives credit rating « D » to Cambodia • The high risk profile of a country’s economic and political environment with further worsen further a generally very bad payment record

40. Conclusion & Recommendations

41. Conclusion • Good macro economic performance after peace establishment • Good short-term performance, but not sure for long-run • Some issues remaining: political conflicts, poor legal & judicial framework, corruption, poor infrastructures, poor financial & banking system, large debt etc. • However, many strengths & opportunities to invest in Cambodia even poor international ranking

42. Recommendations • Cambodian government itself is the key to improve all sectors of the country with supports of strong willingness of Cambodian people, along with the great international aids & assistance • Local & foreign investors should take a look on to invest in because Cambodia would be profitable business place

43. References • Books: Country Risk Assessment – A Guide to Global Investment Strategy – by M.H. Bouchet, B.Groslambert and E. Clark, published by Wiley • Websides: • International Monetary Fund: www.imf.org • World Bank: www.worldbank.org • Global Finance: www.globalfinance.org • Asian Development Bank: www.adb.org • COFACE: www.coface.org • World Economic Forum: www.weforum.org • Transparency International: www.transparency.org

44. Thanks for your attention