Cambodian CountryCambodian Country RiskRisk AnalysisAnalysis

Supervisor:Supervisor: Dr. M.H. BOUCHETDr. M.H. BOUCHET

Student:Student: Socheat EUNGSocheat EUNG

CERAM Sophia-Antipolis

European School of Business

Nice, France

August 2006

ContentContent►►Cambodia’s HistoryCambodia’s History

►► Country OverviewCountry Overview

►► Country Risk AnalysisCountry Risk Analysis Economic Risk AnalysisEconomic Risk Analysis Financial Risk AnalysisFinancial Risk Analysis Polititcal Risk AnalysisPolititcal Risk Analysis Legal & Judicial Risk AnalysisLegal & Judicial Risk Analysis External Related Risk AnalysisExternal Related Risk Analysis

►► Doing Business in CambodiaDoing Business in Cambodia

►► Conclusion & RecommendationConclusion & Recommendation

IntroductionIntroduction Official name:Official name: Kingdom of Cambodia Kingdom of Cambodia Form of State:Form of State: Democratic with multi- Democratic with multi-

partiesparties Population:Population: 13.9 million 13.9 million Land area:Land area: 181 035 sq km 181 035 sq km Climate:Climate: Tropical Tropical LocationLocation: Southeast Asia: Southeast Asia Currency:Currency: Khmer Riel (KHR) Khmer Riel (KHR) Capital:Capital: Phnom Penh Phnom Penh

Cambodia’s HistoryCambodia’s History During AD: Indianized states of Funan and ChenlaDuring AD: Indianized states of Funan and Chenla 9th to 13th century: Khmer civilisation9th to 13th century: Khmer civilisation By 15th century: Cambodia was a center of the Khmer By 15th century: Cambodia was a center of the Khmer

Empire, capital AngkorEmpire, capital Angkor 1863-1953: Protectorate of France (Independence day on 1863-1953: Protectorate of France (Independence day on

Nov. 9th)Nov. 9th) 1941-1945: Under Japanese occupation1941-1945: Under Japanese occupation 1950s & 1960s: under the rule of King Norodom Sihanouk1950s & 1960s: under the rule of King Norodom Sihanouk 1969-73: Bombing of US on Cambodia due to Vietnam1969-73: Bombing of US on Cambodia due to Vietnam 1970s: Civil wars, esp. Genocide regime(1975-79, >3million 1970s: Civil wars, esp. Genocide regime(1975-79, >3million

killed)killed) 1980s: Vietnames evasion 1980s: Vietnames evasion 1993: The first election under US’s administration1993: The first election under US’s administration 1998 & 2003: Hun Sen was elected as Prime Minister 1998 & 2003: Hun Sen was elected as Prime Minister

Cambodian MapCambodian Map

Country OverviewCountry Overview

Power structurePower structure

The king has no powerThe king has no power

Hun Sen is the most powerfulHun Sen is the most powerful King Norodom Sihamoni

Executive PowerP.M. Hun Sen

Legislative PowerPrince Norodom Ranaridh

Judicial PowerSupremeCouncil of Magistracy

• 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

People & CulturePeople & Culture

Ethnic Group Khmer

90%

Other4%Vietnamese

5%

Chinese1%

Age Structure

More than 64 years old 3%

Betw een 15 and 64 years old 61%

Less than 15 years old 36%

Literacy Rate

74%85%

64%

0%20%40%60%80%

100%

Population literacy rate Male among total male Female among total female

Country’s ResourcesCountry’s Resources

Infrastructure:Infrastructure: Two International Two International

airports(Phnom penh & airports(Phnom penh & Siem Reap)Siem Reap)

Roadway (12 323km)Roadway (12 323km) Railway (602km) not Railway (602km) not

upgradedupgraded Waterway (2 400km)Waterway (2 400km)

• Natural Resources:• Metals & mineral

• Hydroelectric Power

• Petroleum

• Forestry

• Timber and firewood

Economic Outlook 2005Economic Outlook 2005

Expected growth: Expected growth: 7%7% Main drivers: Main drivers: textile, tourism, textile, tourism,

constructionconstruction, & agriculture, & agriculture International trade expansionInternational trade expansion Stable fiscal and monetary Stable fiscal and monetary

performanceperformance Inflation: Inflation: 6.7%6.7% GDP per capita: GDP per capita: 441441US$US$

Country Risk AnalysisCountry Risk Analysis

Econmic Risk AnalysisEconmic Risk Analysis

Economic growthEconomic growth

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

2002 2003 2004 2005(pr) 2006(p)

Cambodia

Laos PDR

Thailand

Vietnam

→ 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.)

Economic Risk AnalysisEconomic Risk Analysis

InflationInflation

3.70%

0.50%

6.70%

3.50%

5.60%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

2002 2003 2004 2005(pr) 2006(p)

Low inflation rate though increase in oil price,

Not problematic to the country

Economic Risk AnalysisEconomic Risk Analysis

Interest ratesInterest rates

21.10%

17.30%

7.20% 7.00% 6.60%6.60%

18.60%18.70%21%

18.20% 16.70%16.70%

3.70%

4.20%

3.70%

4.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2002 2003 2004 2005(June)

3.40%

3.50%

3.60%

3.70%

3.80%

3.90%

4.00%

4.10%

4.20%

4.30%

Riel 12-months Deposits Rates Riel 12-months Lending Rates

US$ 12-months Lending Rates US$ 12-months Deposit Rates

►Rates in Riel more than in US$ due to risk from Riel depreciation

►High interest rates discourage private sector

Banking and Financial SectorBanking and Financial Sector

National Bank of Cambodia (NBC) Central Bank

Commercial Banks Specialized Banks Microfinance Institutions

▲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

Government BudgetGovernment Budget

11%

17%

-6%

10%

16%

-6%

11%

15%

-4%

11%

15%

-4%

11%

15%

-4%

-10%

-5%

0%

5%

10%

15%

20%

2002 2003 2004 2005€ 2006(p)

Government Budget

Revenue/GDP Expenditure/GDP Deficit/GDP 100%

0%

89.30%

10.70%

100%

0%

100%

0%

100%

0%

0%

20%

40%

60%

80%

100%

2002 2003 2004 2005(e) 2006(p)

Government Budget Financing

Foreign_Financing Domestic_Financing

• 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

Financial Risk AnalysisFinancial Risk AnalysisBOP AnalysisBOP Analysis

-616

1,659

2,275

-609

1,970

2,579

-712

2,454

3,166

-1,049

2,773

3,822

-1500

-1000

-500

0

500

1000

1500

2000

2500

3000

3500

4000

2002 2003 2004 2005(p)

Cambodia's International Trade (in US$ million)

Trade Deficit Exports Imports

-2.5%

-3.8%

-2.4%

-4.4% -4.1%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

2002 2003 2004 2005(p) 2006(p)

Current Account Deficit to GDP ratio

• 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

Debt AnalysisDebt Analysis

2,492

21

2,740

26

2,976

28

3,180

29

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2002 2003 2004 2005(est.)

Cambodia's Public external Debts (in million US$)

Public External Debt Public Debt Service

• 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

Financial Ratio AnalysisFinancial Ratio AnalysisSolvency RatiosSolvency Ratios

60%62%

58%

52%

45%

50%

55%

60%

65%

2002 2003 2004 2005(est.)

Debt to GDP Ratio

150%139%

121% 115%

0%

50%

100%

150%

200%

2002 2003 2004 2005(est.)

Debt to Export Ratio

27%27% 27%

29%

26%

26%

27%

27%

28%

28%

29%

29%

2002 2003 2004 2005(est.)

Official Reserve to Debt Ratio

• 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

Liquidity RatiosLiquidity Ratios2.9 2.8

2.62.4

0

0.5

1

1.5

2

2.5

3

2002 2003 2004 2005(est.)

Official Reserves (in months of Imports)

0.90%1.00%

0.80%0.70%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

2002 2003 2004 2005(est.)

Debt service to Export Ratio

• 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

Monetary & Fiscal PolicyMonetary & Fiscal Policy

Monetary policyMonetary policy

766

2,001

122

908

2,310

111

1,115

3,079

135

1,205

3,643

162

1,349

4,188

192

0

1000

2000

3000

4000

5000

2002 2003 2004 2005(est.) 2006(p)

Money Supply in Billion Riel

Local currency in circulation Foreign currency deposit Other money supply

1,059

-117

1,947

1,337

-128

2,1201,817

-209

2,722

1,970

-192

3,232

2,141

-176

3,763

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2002 2003 2004 2005(est.) 2006(p)

Money Demand in Billion Riel

Credit to private sector Credit to public sector Other(*)

• 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 & Fiscal PolicyMonetary & Fiscal Policy

Fiscal policyFiscal policy Objective:Objective:to maintain a sustainable fiscal balance with gradual increases in budget allocationto maintain a sustainable fiscal balance with gradual increases in budget allocation

to maintain price stability in Cambodia's highly dollarized economyto maintain price stability in Cambodia's highly dollarized economy

to ensure a level of spending that is consistent with macroeconomic stabilityto ensure a level of spending that is consistent with macroeconomic stability

Result in 2004 & 2005:Result in 2004 & 2005:

However, there are distortion in domestic revenue collection and public expenditure due to inadequate operational funds and low salaries of public servants

slightly increased domestic revenue collection public expenditure restraint stability of low inflation rate

Foreign Exchange Risk AnalysisForeign Exchange Risk Analysis

3,9353,980

4,031

4,116

3,800

3,850

3,900

3,950

4,000

4,050

4,100

4,150

2002 2003 2004 2005(est.)

Foreign Exchange (Riel/US$) 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

Political Risk AnalysisPolitical Risk AnalysisPrince ModelPrince Model

Positive influence

King Norodom Sihanouk

Prime Minister Hun Sen

Opposition leader

Prince Norodom Ranaridh

(ADB/IMF/WB)

Negative Influence

King Norodom Sihamoni

Political SituationPolitical Situation Negative pointsNegative points

Political conflicts: e.g. Government stripped Political conflicts: e.g. Government stripped opposition leader Sam Rainsy of his opposition leader Sam Rainsy of his parliamentary immunityparliamentary immunity

Sporadic civil unrest which can result in Sporadic civil unrest which can result in damage to business, e.g. Anti-Thai rioting in damage to business, e.g. Anti-Thai rioting in January 2003January 2003

Positive pointsPositive points Strong protection agiant expropriationStrong protection agiant expropriation In overall, political stability In overall, political stability Open and liberal investment regime with Open and liberal investment regime with

national treatment of foreign investorsnational treatment of foreign investors

Legal & Judicial Risk Legal & Judicial Risk AnalysisAnalysis

Based on civil law where the rule of law is set as Based on civil law where the rule of law is set as the country’s basis the country’s basis

Seperation of powers: Executive, Legislative, & Seperation of powers: Executive, Legislative, & JudicialJudicial

Negative points:Negative points: Judicial tend to be dependent on governmentJudicial tend to be dependent on government Khmer civil system is ramnent of communist legal Khmer civil system is ramnent of communist legal

theory and under-resoucedtheory and under-resouced Opacity of regulatory system and incomplete legal Opacity of regulatory system and incomplete legal

framework for market economy framework for market economy Corruption is widespread in this sectorCorruption is widespread in this sector

Positive points:Positive points: Significant reforms in the sectorSignificant reforms in the sector Laws is conformed to international standard due to TWO Laws is conformed to international standard due to TWO

accessionaccession No pattern of discrimination against foreign investorsNo pattern of discrimination against foreign investors

CorruptionCorruptionBribes Paid by Domestic Firms to Public Services

39%

15%13%

11%

6%

4%

12%

Business License Authorities Standard and safety Inspection

Custom/Trade License Services Trade Agency/Inspectors

Other Police Traffic PoliceOther

Bribes Paid by Foreign Firms to Public Services

67%

19%

11% 3%

Custom/Trade License Services Business License Authorities Other Police Other

Domestic firms paid unofficially on business licensen authorities, followed by standard & safety inspection

Mostly, foreign firms paid unofficially on custom/trade license services

Cambodian Governance IndicatorsCambodian Governance Indicators

24.86.8

52.47.3

30.624.8 41.7

51.9

18.814.4

65.444.2

44.39.9

51.227.6

17.48.2

51.735.7

13.36.9

49.327.1

0 10 20 30 40 50 60 70

Percentile Rankings in 2004

Voice and Accountability

Political Stability

Government Effectiveness

Regulatory Quality

Rule of Law

Control of Corruption

Aggregate Governance Indicators

Cambodia Laos Thailand Vietnam

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

Corruption Perception Index Corruption Perception Index (CPI)(CPI)

7.97.6 7.5

3.8

3.3

2.62.3 2.2

1.7

0

1

2

3

4

5

6

7

8

Iceland USA France Thailand Laos Vietnam Cambodia Indonesia Chad

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

External Related Risk External Related Risk AnalysisAnalysis

Regional Intergration (ASEAN)Regional Intergration (ASEAN)Cambodia has become ASEAN member on April 30, Cambodia has become ASEAN member on April 30,

1999 with purposes:1999 with purposes: Political cooperationPolitical cooperation Economic & functional cooperationEconomic & functional cooperation External relationsExternal relations

However, Cambodia might face with the However, Cambodia might face with the regional contamination risks, e.g. regional contamination risks, e.g. Asian Asian crisis in 1997crisis in 1997

In overall, In overall, the regional integration gives the regional integration gives much more advantages and opportunitiesmuch more advantages and opportunities to to develop country develop country

Cambodia’s WTO Cambodia’s WTO membershipmembership

Cambodia has been a member of WTO Cambodia has been a member of WTO since 13 October 2004since 13 October 2004 with: with:

Advantages:Advantages: Access to international marketsAccess to international markets Capacity buildingCapacity building Good governance buildingGood governance building

Disadvantages:Disadvantages: Difficilt to compete with competitors in Difficilt to compete with competitors in

local & international marketslocal & international markets

Doing business in CambodiaDoing business in Cambodia

Country SWOT Analysis Country SWOT Analysis StrengthsStrengths

Inflation stabilityInflation stability Low currency volatilityLow currency volatility Low labor costLow labor cost Low tax payableLow tax payable Independent Central BankIndependent Central Bank Good recent macroeconomic Good recent macroeconomic

performanceperformance High economic growthHigh economic growth Dollarization of economyDollarization of economy Macroeconomic stabilityMacroeconomic stability Prosperous natural resourcesProsperous natural resources Hard work willingness of Hard work willingness of

peoplepeople Favorable culture for business Favorable culture for business

managementmanagement Liberalized economy and Liberalized economy and

businessbusiness

WeaknessesWeaknesses Poor banking and financial Poor banking and financial

systemsystem High corruption High corruption Inadequate government Inadequate government

bureaucracybureaucracy Low educated workforceLow educated workforce Difficult to access creditDifficult to access credit Inadequate physical and Inadequate physical and

financial infrastructurefinancial infrastructure Weak legal and judicial Weak legal and judicial

institutionsinstitutions

Country SWOT analysisCountry SWOT analysis OpportunitiesOpportunities

WTO membershipWTO membership Regional integration (ASEAN)Regional integration (ASEAN) Emerging marketEmerging market Democratic countryDemocratic country Many reforms in many Many reforms in many

sectorssectors Tourist destination (Angkor Tourist destination (Angkor

Wat...)Wat...) Strong partnership with Strong partnership with

many international many international organizationsorganizations

Large proportion of active Large proportion of active population (61%)population (61%)

Recent political stabilityRecent political stability

ThreatsThreats Political conflictsPolitical conflicts Hug external debtsHug external debts Crime and theft Crime and theft Large government budget Large government budget

deficitdeficit Border conflict with Border conflict with

neighboring countriesneighboring countries

Growth Competitveness Index Growth Competitveness Index (GCI)(GCI)

5.945.81

4.49

4.784.5

3.533.37

2.82 2.8 2.74 2.73

2.37

0

1

2

3

4

5

6

Iceland USA Malaysia France Thailand Indonesia Vietnam Cambodia Paraguay Bernin Guyana Chad

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)

Business Competitiveness Business Competitiveness RankingRanking

CountryCountry BCI rankingBCI ranking

Company Company operations operations

and and strategy strategy rankingranking

Quality of Quality of the national the national

business business environmenenvironment rankingt ranking

USAUSA 11 11 22

SingaporeSingapore 55 1414 55

FranceFrance 1111 1010 1111

MalaysiaMalaysia 2323 2424 3131

ThailandThailand 3737 3030 3737

IndonesiaIndonesia 5959 5050 5959

VietnamVietnam 8080 8181 7777

CambodiaCambodia 109109 103103 108108

BoliviaBolivia 113113 115115 112112

ChadChad 116116 116116 116116

Source: World Economic Forum

10 elements for doing 10 elements for doing Business Business

133

137

140

7984

15455

24

117

127

144

0 20 40 60 80 100 120 140

Rank out of 154 Countries

Ease of doing business

Ease of starting a business

Ease of dealing w ith licenses

Ease of employing and f iring w orkers

Ease of registering properties

Ease of getting credit

Ease of protecting investors

Ease of paying taxes

Ease of trading across border

Ease of enforcing contracts

Ease of closing business

Ranking by Each Element of Doing Business in Cambodia

►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 133th out of 154 countries

The Most Problematic The Most Problematic FactorsFactors

10%

11%

14%

17%

18%

26%

27%

30%

34%

41%

46%

46%

55%

80%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Percentage of Respodents

Inflation

Foreign currency regulation

Tax rates

Restrictive labor regulations

Crime and theft

Tax regulations

Poor w ork ethic in national labor

Government instability/coups

Policy instability

Access to f inancing

Inadequate supply of infrastructure

Inadequately educated w orkforce

Inefficient government bureaucracy

Corruption

The Most Problematic Factors for Doing Business in Cambodia

The most problematic:

•Corruption

•Inefficient government bureaucracy

•Inadequate educated workfoces

•Inadequate supply of infrastructure

•Access to credits

•Policy instability

Credit RatingCredit Rating

COFACE gives credit rating «COFACE gives credit rating « D  D » to » to Cambodia Cambodia

The high risk profile of a country’s The high risk profile of a country’s economic and political environment economic and political environment with further worsen further a with further worsen further a generally very bad payment recordgenerally very bad payment record

ConclusionConclusion & &

RecommendationsRecommendations

ConclusionConclusion

Good macro economic performance after Good macro economic performance after peace establishmentpeace establishment

Good short-term performance, but not Good short-term performance, but not sure for long-runsure for long-run

Some issues remaining: political conflicts, Some issues remaining: political conflicts, poor legal & judicial framework, poor legal & judicial framework, corruption, poor infrastructures, poor corruption, poor infrastructures, poor financial & banking system, large debt etc.financial & banking system, large debt etc.

However, many strengths & opportunities However, many strengths & opportunities to invest in Cambodia even poor to invest in Cambodia even poor international ranking international ranking

RecommendationsRecommendations Cambodian government itself is the key Cambodian government itself is the key

to improve all sectors of the country to improve all sectors of the country with supports of strong willingness of with supports of strong willingness of Cambodian people, along with the great Cambodian people, along with the great international aids & assistanceinternational aids & assistance

Local & foreign investors should take a Local & foreign investors should take a look on to invest in because Cambodia look on to invest in because Cambodia would be profitable business place would be profitable business place

ReferencesReferences Books:Books:

Country Risk AssessmentCountry Risk Assessment – – A Guide to Global A Guide to Global Investment StrategyInvestment Strategy – by M.H. Bouchet, B.Groslambert – by M.H. Bouchet, B.Groslambert and E. Clark, published by Wileyand E. Clark, published by Wiley

Websides:Websides:1.1. International Monetary Fund: www.imf.orgInternational Monetary Fund: www.imf.org2.2. World Bank: www.worldbank.orgWorld Bank: www.worldbank.org3.3. Global Finance: www.globalfinance.org Global Finance: www.globalfinance.org 4.4. Asian Development Bank: www.adb.orgAsian Development Bank: www.adb.org5.5. COFACE: www.coface.orgCOFACE: www.coface.org6.6. World Economic Forum: www.weforum.orgWorld Economic Forum: www.weforum.org7.7. Transparency International: www.transparency.org Transparency International: www.transparency.org

Thanks for your attentionThanks for your attention