Outlook for 2011-12

• The ruling Cambodian People's Party (CPP), led by the prime minister, Hun Sen, will remain politically dominant in 2011-12. The CPP controls more than two-thirds of the seats in the National Assembly (the lower house).
• The apparatus of the state will continue to be used against the government's opponents, such as the opposition leader, Sam Rainsy, who remains in self-imposed exile after being sentenced in absentia to a total of 12 years in prison.
• Cambodia's economy is recovering, but growth will not return to the highs of around 10% that were recorded in the years preceding the 2008-09 global recession. Real GDP will expand by 5.1% in 2011 and by 6.3% in 2012.
• Monetary policy will have to be tightened as inflationary pressures re-emerge in 2011, but the National Bank of Cambodia (NBC, the central bank) will not rush into raising the banking sector's reserve requirement.
• Although the NBC will continue to intervene in the currency markets to support the riel, the currency will depreciate against the US dollar by an average of 0.5% a year in the forecast period.
• The current-account deficit will remain substantial as a proportion of GDP in 2011­12, but Cambodia will avoid financing difficulties owing to its healthy foreign-exchange reserves and a recovery in foreign direct investment.

Monthly review

• The stand-off on the Cambodian-Thai border escalated in February as the two sides exchanged heavy artillery fire, and as a result thousands of civilians were displaced and an uncertain number of soldiers were killed or injured.
• Hun Sen's attempts to "internationalise" the border dispute have met with some success. Cambodia may benefit from foreign mediation as the International Court of Justice has previously ruled in its favour.
• In early February, the IMF said in a report on its recent Article IV consultations with Cambodia that the country's macroeconomic stability "continues to critically depend on prudent fiscal policies".
• The economic impact of the crossborder clashes has so far been limited, but trade between Cambodia and Thailand has been affected, with Thai exports to Cambodia down by about Bt110m (US$3.6m) each day during the fighting.
• Several major firms from Canada took part in that country's first trade and investment mission to Cambodia on February 14th-15th.
• Mining in Cambodia remains the main draw for Canadian investors. In late December a small Canadian mining company, Shamika Resources, acquired a gold and ruby concession in Cambodia.

The Cambodian People's Party (CPP) will remain politically dominant in the forecast period. At the July 2008 general election the CPP tightened its grip on power, winning 90 of the 123 seats in the National Assembly (the lower house of parliament). The CPP's poll victories, coupled with the authoritarian tendencies of the prime minister, Hun Sen, and the ruling party's harsh treatment of its opponents, have increased concerns that Cambodia is becoming a de facto one-party state with few checks on executive power. In recent years the courts have upheld several convictions against prominent opposition figures, such as Sam Rainsy, the leader of the main opposition Sam Rainsy Party (SRP), who has been sentenced in absentia to a total of 12 years in prison. Sam Rainsy, who returned from a year of self-imposed exile in 2006 after being pardoned for defaming Hun Sen and Prince Norodom Sihanouk, has chosen to remain abroad rather than return home to a prison cell.

The state apparatus will continue to be used against the government's opponents. In October 2009 the lower house approved laws restricting freedom of assembly and expression. The authorities in the capital, Phnom Penh, have since outlawed demonstrations except at an officially designated "freedom park" located some distance from government buildings and parliament. Reforms aimed at improving governance will be assigned a lower priority than efforts to entrench CPP rule, as seen in March 2010, when the lower house approved an anti-corruption law under which an anti-corruption council and other bodies are answerable to the very officials whom they are meant to hold to account. A proposed law on trade unions, as it is currently drafted, would impose new restrictions on organised labour. Meanwhile, Hun Sen has ordered leading companies to sponsor units of the armed forces-a move that will make the military even less accountable.

Social tensions will persist during the forecast period. The economy has begun to recover following the 2009 domestic recession, which saw a collapse in garment exports and tens of thousands of job losses among factory workers. However, as the threat of redundancy has receded amid a recovery in export orders from the US and Europe, trade unions in the garment sector have staged a series of strikes, including a walk-out by tens of thousands of factory workers in mid-September 2010 to demand a rise in the minimum wage. Meanwhile, land grabs by agricultural companies and property developers, often with close links to senior members of the CPP, have driven entire communities from their homes. The SRP-led opposition will seek to exploit such tensions for its own political ends, but Hun Sen is now so entrenched in power that any electoral challenge to his rule seems set to fail.

The result of the next general election, which is due in mid-2013, appears to be a foregone conclusion, with Hun Sen's CPP expected to record another convincing victory. In 2009 the SRP and another opposition party, the Human Rights Party (HRP), led by Kem Sokha, formed an alliance, the Democratic Movement for Change, to contest indirect elections to provincial and district councils. However, the move proved ineffective. A formal merger between the two parties is possible ahead of the next general election. At the 2008 election they won a combined 29 seats in the lower house (26 for the SRP and three for the HRP), a modest improvement on their performance in the 2003 poll. However, their gains came at the expense of the two royalist parties, the National United Front for an Independent, Neutral, Peaceful and Co-operative Cambodia (FUNCINPEC) and the Norodom Ranariddh Party, rather than hurting the CPP. Direct elections to commune councils that are to be held in early 2012 may provide an early indication of the likely scale of the CPP's victory at the 2013 general election.

Relations between Cambodia and Thailand remain problematic. The Thai authorities continue to suspect Hun Sen of supporting a self-exiled former Thai prime minister, Thaksin Shinawatra, and the dispute over the territory surrounding the Preah Vihear temple on the Cambodian-Thai border has yet to be resolved. The stand-off at the temple in early February escalated into the most serious fighting yet as Cambodia and Thailand exchanged heavy artillery fire, and as a result thousands of civilians were displaced and an uncertain number of soldiers were killed or injured. The two countries also have yet to resolve the disputed sovereignty of resource-rich maritime areas in the Gulf of Thailand.

Rivalry between China and the US for influence in Cambodia is set to intensify in 2011-12. China has become an important partner for Hun Sen's government. It recently cancelled Cambodia's debt repayments falling due in 2010, in a move worth US$4.2m, as well as financing large-scale infrastructure projects. Unlike US assistance, which is typically conditional on greater respect for human rights, China's assistance has come without such strings attached. Cambodia's relations with Vietnam will be close while Hun Sen remains in power.

As economic growth accelerates in 2011-12, the government will begin to withdraw the monetary and fiscal stimulus that it introduced in response to the 2008-09 global recession. However, fiscal policy will remain broadly expansionary. According to the 2011 budget, which was approved by the lower house in November 2010, government expenditure in US dollar terms is set to rise by around 20% from its 2010 level, to US$2.4bn. As inflationary pressures return, the National Bank of Cambodia (NBC, the central bank) will seek to restrain growth in the money supply, but the effectiveness of monetary policy will be hampered by the fact that the economy is highly dollarised. The 2008-09 global recession exposed Cambodia's structural economic vulnerabilities, notably a dependence on garment exports, and Hun Sen's government has responded by seeking to develop other sources of economic growth, particularly in the agricultural sector. As part of its plans to become a major rice exporter, the government has set a target of raising rice exports to 1m tonnes by 2015, from around 850,000 tonnes in 2009.

Despite an improvement in tax collection and plans to impose a new tax on properties valued over CR100m (US$24,000), government revenue will remain low relative to GDP in the forecast period. The government will therefore continue to depend on foreign grants and loans to finance its deficit, which the Economist Intelligence Unit estimates reached 5.7% of GDP in 2010. At a meeting in June the country's donors, known collectively as the Cambodia Development Co-operation Forum, pledged to provide US$1.1bn in assistance in 2010, up from US$951.5m in 2009. However, donor support is set to fall to US$958m in 2011 and US$751m in 2012. The government had hoped that oil production from fields in the Gulf of Thailand would provide new revenue in the form of taxes and royalties, but oil is now not expected to begin flowing until at least 2012. Weak revenue growth, combined with rises in expenditure (especially on defence and wages), will ensure that the budget remains in the red. The government does not issue Treasury bills or other securities, and it would therefore meet any financing shortfall by drawing on its deposits at the NBC, which stood at CR2.1trn (US$500m) in October 2010, down by 30.3% from a high of CR3trn in April 2009.

The effectiveness of monetary policy will remain limited, owing to extensive dollarisation of the economy. The NBC will begin to tighten monetary policy in 2011, but the authorities do not appear to be in a rush to raise the banking sector's reserve requirement, which currently stands at 12%. Money supply growth remains strong, with broad money (M2) expanding by 21.3% in 2010. Bank lending to the private sector has followed a similar pattern, with claims on the private sector rising by 22.5% in 2010, up from 7.5% in 2009. However, with year-on-year growth in bank lending to the private sector still far below the highs of over 100% that were recorded in early 2008, it will be some time before the reserve requirement is returned to its pre-crisis peak of 16%.

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Cambodia's economy is recovering, but annual growth will not return to the highs of around 10% seen in the years preceding the 2008-09 global recession. We estimate real GDP growth in 2010 at just 4.1% year on year. The economy is forecast to expand by 5.1% in 2011 and by 6.3% in 2012. The garment sector remains particularly exposed to the US economy, which was Cambodia's main export market, accounting for almost one-half of its export earnings, until 2009 when garment exports to the US slumped amid the global recession. Garment sector-led economic growth will remain fragile, with global growth expected to slow again in 2011, but garment shipments to Europe may improve following a recent change to the Everything But Arms initiative, a 2001 agreement that provides the world's least developed countries with duty- and quota-free access to the EU's 27 member states. We estimate that growth in construction resumed in 2010, but at least two major property projects in Phnom Penh have been suspended recently, suggesting that the sector is some way from returning to pre-crisis levels of activity. Agriculture will become an increasingly important source of growth, while the tourism sector will attract more visitors in the forecast period.

We estimate that consumer prices rose by an annual average of 4.1% in 2010. As economic growth recovers and demand-side price pressures re-emerge in 2011, the rate of inflation will accelerate to an average of 6.1%. A sharp rise in global commodity prices-notably for oil (dated Brent Blend), which we expect to average US$90/barrel in 2011, up from US$79.6/b in 2010-will also contribute to price pressures this year. The expected weakening of the riel against the US dollar will also add to price pressures in 2011 by raising prices for imported goods and services in local-currency terms. Inflation will remain high in 2012, at 5.7%.

Although the riel regained some ground against the US dollar towards the end of 2010, the Cambodian currency depreciated by 1.1% on an annual average basis. The riel will generally remain under downward pressure in 2011-12, owing to the large deficit on the current account. The NBC will intervene periodically to support the currency by selling foreign-exchange reserves, but this will do no more than slow the riel's rate of depreciation, and we expect the currency to weaken by an average of 0.5% a year during the next two years. Given the continuing lack of confidence in the riel, the US dollar will remain the currency of choice in Cambodia for trade and investment.

The merchandise trade deficit will remain substantial in the forecast period, owing to Cambodia's reliance on imported capital goods. Even after economic growth recovers in the US, Cambodia's leading export market until 2009, garment manufacturers will struggle to compete with more efficient producers. Although export growth will accelerate in volume terms in 2011-12, a deterioration in the terms of trade means that growth in the value of exports will slow in 2012. The services surplus will grow in the forecast period as tourism recovers, following a drop in the number of high-spending visitors to the country in 2009. However, there will be an increase in demand for imported trade-related services, such as insurance and freight. The income deficit will narrow during the forecast period, owing to increased returns on Cambodia's holdings of foreign reserves. After expanding to an estimated 8.5% of GDP in 2010, we expect the current-account deficit to narrow to 6.7% in 2011, before widening to 7.7% of GDP in 2012.

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The tense stand-off at the Preah Vihear temple on the Cambodian-Thai border escalated into the most serious fighting between the two countries yet in early February. Thousands of civilians were displaced and an uncertain number of soldiers were killed or injured as Cambodia and Thailand exchanged artillery fire across the border. The temple is at the centre of a long-running territorial dispute, and although Thailand no longer makes any official claim to the historical site itself, some Thais believe that the land around the temple belongs to Thailand, a claim vehemently denied by Cambodia.

The crossborder clash came soon after the February 1st sentencing of two Thai activists for espionage, entering Cambodia illegally and unlawfully entering a military base. Veera Somkwamkid, a leader of the Thailand Patriot Network (an offshoot of the royalist-nationalist yellow-shirted protest movement, the People's Alliance for Democracy), and one of his aides, Ratree Pipatanapaiboon, received eight- and six-year prison terms respectively, after having been arrested in Cambodia's northern Banteay Meanchey province in January. The prime minister of Thailand, Ahbisit Vejjajiva, had also recently objected to Cambodian flags at Wat Keo Sikha Kiri Svara, a relatively modern Buddhist pagoda situated close to the 11th-century Hindu sanctuary of Preah Vihear.

According to the Cambodian information minister, Khieu Kanharith, the first clashes began on February 4th when Cambodian troops fired warning shots to discourage Thai troops from entering Cambodia to destroy Wat Keo Sikha Kiri Svara. The Thai soldiers responded with shelling after a two-hour firefight, the minister said. Troops from the two sides again exchanged fire on the morning of February 5th using heavy weapons including rockets, machine guns, mortars and artillery for more than an hour. Despite a ceasefire having been declared the day before, further clashes took place on the evening of February 6th, with initial gun, mortar and rocket fire giving way to artillery barrages. Cambodia claimed that Thai artillery shells had landed deep within Cambodian territory. Thousands of civilians on both sides of the border were evacuated, but refugees began trickling back slowly after a ceasefire was declared on February 20th.

As was the case during previous periods of tension with Thailand, Cambodia's prime minister, Hun Sen, has positioned himself to benefit from an upsurge in Cambodian nationalism, appointing his son, Hun Manet, as commander of the forces at Preah Vihear. Hun Sen denounced Thailand's "armed aggression" and claimed that Preah Vihear temple, a UN Education, Scientific and Cultural Organisation (UNESCO) World Heritage Site, had been damaged by Thai artillery. A Cambodian army source claimed that an entire wing of the temple had collapsed during the bombardment, although other reports suggested that damage was mostly confined to shrapnel pockmarks.

While Thailand has steadfastly opposed anything but a bilateral solution, Cambodia has appealed to the Association of South-East Asian Nations (ASEAN), the UN Security Council and UNESCO to mediate the dispute. Cambodia's increasingly successful attempts to move the row into the international arena are likely to benefit that country, as the border surrounding Preah Vihear had previously been established in a 1962 International Court of Justice (ICJ) ruling, which found that the temple and its immediate surroundings were Cambodian territory. On February 24th the Cambodian government officially asked the ICJ to clarify its 1962 verdict. After a February 22nd meeting of ASEAN foreign ministers in Indonesia, Thailand and Cambodia agreed to allow Indonesian observers to monitor the area around Preah Vihear.

Both sides have blamed the other for provoking the clashes, but at least part of the blame lies with the fractious nature of Thai politics. Abhisit did not give the order to the Thai troops to open fire, perhaps a sign that he lacks control over the military. Some have questioned whether the ratcheting up of tensions over territorial issues may be a Thai military ploy to stall Abhisit's plans for an early election. If the Thai prime minister's Democrat Party wins a poll that Abhisit has claimed may take place in April (eight months earlier than is constitutionally required), then the prime minister's reliance on the Thai military will be likely to be lessened.

Although Cambodia's economy is showing signs of recovery, the country's macroeconomic stability "continues to critically depend on prudent fiscal policies," the IMF has said. In a report on its Article IV consultations with Cambodia, the Fund also said that the National Bank of Cambodia (NBC, the central bank) cannot meet its oversight responsibilities and advised a temporary halt on licensing new banks. Even though the IMF commended Cambodia's tripling of the minimum amount of registered capital for banks to CR150bn (US$37m) at the end of 2010, the NBC's human resources, crisis management and enforcement were cited as concerns. The 2008-09 global economic and financial crisis has exposed Cambodia's long-standing structural vulnerabilities, according to the IMF, which cited the country's chief weaknesses as its narrow export base, limited room for fiscal policy manoeuvres and effectiveness, as well as a small and highly dollarised financial system.

Nevertheless, the IMF said that signs of a recovery are evident. Garment exports and tourist arrivals, notably by air, have bounced back, with both growing by 10-20% year on year in the second quarter of 2010, although construction activity appears to remain sluggish and a late start to the rainy season may have dented agricultural growth. Near-term risks tend towards the downside, the Fund said, but in the medium term better-than-expected returns on investments in the power sector and in rural infrastructure could offer significant upside growth potential. Under the IMF's baseline scenario, real GDP growth is expected to gradually return to around 6-7% a year during the medium term.

In consultations with Cambodian ministers, central bank managers, senior officials, and representatives from the private sector and donor community, IMF staff have emphasised the need for fiscal adjustment beyond 2010. The Fund estimates that Cambodia's tax/GDP ratio is around 5-7 percentage points below its potential. Smuggling, tax arrears and weak administration are significant causes of revenue loss, according to the IMF. Cambodia's status as Asia's most dollarised economy was also remarked upon, with the Fund's warning that high levels of dollarisation mean that the NBC loses its ability to act as the lender of last resort. The IMF noted that seigniorage revenue is also lost.

While the crossborder fighting near the Preah Vihear temple has had serious diplomatic consequences for Cambodia and Thailand, the economic impact of the clashes appears to be less severe. Thailand's official exports to Cambodia were down by around Bt110m (US$3.6m) from previous levels each day during the four-day fighting period, according to Thailand's Ministry of Commerce. That country's exports to the western provinces of Cambodia were most affected, falling by 20-25% (around Bt30m-40m per day). Meanwhile, the ministry has estimated losses of Bt75m owing to an indefinite postponement of a trade fair, the Thailand Exhibition 2011. (The exhibition had been scheduled to be held in the Cambodian capital, Phnom Penh, on February 17th-20th.) The Thai ministry expected the clashes to have only had a short-term impact, estimating damage to bilateral trade at no more than 5% of existing volumes-provided that the situation does not intensify. According to the Thai deputy commerce minister, Alongkorn Ponlaboot, damage to bilateral trade could climb to 10% if the fighting is prolonged.

Solidarity between Thai and Cambodian speakers at the first 2011 Cambodia-Thai Business Summit, which was held on February 17th in Phnom Penh, was another positive sign. At the event, business representatives discussed measures to improve commercial relations, such as opening more international border-crossing points, improved logistics and the easing of vehicle restrictions at borders.

Thai trade and investment, especially in Cambodia's eastern provinces, have been important since the waning of communism in Cambodia. Many Cambodian farmers in those provinces sell their crops to Thai buyers who travel across the border, and Thai investors (who sometimes assume a Cambodian name and nationality, as in the case of a prominent Cambodian senator and tycoon, Ly Yong Phat, also known as Phat Suphapha) have been instrumental in setting up Cambodia's burgeoning sugar-cane industry. Thailand is an important export market for Cambodia: according to the Bank of Thailand (the central bank), Thailand's imports from Cambodia (a proxy for Cambodia's exports to that country) stood at US$214.7m in 2010, representing a rise of 176.4%. Meanwhile, Thailand's exports to Cambodia totalled US$2.3bn, representing a rise of 48.2%.

Most recent private investment in Cambodia has come from Asian countries, most notably China, Korea, Japan, and neighbouring Vietnam and Thailand. However, Cambodia is now on the radar of other countries, with two recent trade fairs adding Canada and Turkey to the list of countries looking to invest. There is hope that more engagement from non-Asian investors could improve the business climate and erode some of Cambodia's endemic graft.

Although the February 21st Cambodia-Turkey Business Forum resulted in little more than a few hours of optimistic speeches, major Canadian firms, including Research in Motion, the producer of Blackberry mobile phones, and an aircraft manufacturer, Bombardier, took part in Canada's first two-day trade and investment mission to Cambodia on February 14th-15th. Canadian investment in Thailand has tripled in the past 18 months, according to Canada's ambassador to Cambodia and Thailand, Ron Hoffmann, leading to greater interest in Cambodia's potential.

Mr Hoffman has said that Canadian companies have a better sense of public responsibility and environmental awareness than other investors in Cambodia. He has also stressed that Canadian companies value healthy working conditions and a strong legal system. However, no promises of major commitments have been made. Bombardier has stated that it had been looking at opportunities to sell corporate jets in Cambodia, although the firm has conceded that sales in that country are likely to lag far behind Asian economic powerhouses such as China and India. Agricultural trade, such as Canadian cattle exports, also appears to be under consideration. Mining, however, currently seems to be the biggest investment incentive for Canadian companies.

In late December a small Canadian mining company, Shamika Resources, acquired a gold and ruby concession in Cambodia. The firm, which operates internationally under the name Shamika2Gold, is looking to mine about 409 sq km of Battambang province's Samlot district. The concession is adjacent to the Pailin ruby fields, an area where artisanal mining previously provided income for the Khmer Rouge. Shamika has claimed that a geological survey found potential resources of 1.5m oz of gold and 9,000 kg of rubies in its concession area.

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Land area

181,035 sq km

Population

14.4m (IMF estimate for mid-2007)

Main towns

Population in '000 (1998 census)

Phnom Penh (capital): 999.8

Battambang: 793.1

Climate

Tropical; rainy season, May-October; dry season, November-April

Weather in Phnom Penh (39 ft above sea level)

Hottest months, March-April, average daily temperature 27°C (daily maximum 32-40°C); coldest month, January, average daily temperature 25°C; wettest month, October, 256 mm average rainfall; driest month, January, 8 mm average rainfall

Language

Khmer

Measures

Metric system. Local measures include:

1 tao = 15 kg

1 thang = 40 litres (20-22 kg paddy)

1 hap = 60 kg

1 king (or ray) = 0.16 ha

1 chi = 3.75 g

1 damloeng = 37.5 g

Currency

Riel (CR). Average exchange rate in 2010: CR4,185:US$1

Fiscal year

January 1st-December 31st

Time

7 hours ahead of GMT

Public holidays

January 1st (International New Year's Day); January 7th (Liberation Day); February 18th (Meakkha Bochea); March 8th (International Women's Day); April 14th-16th (Cambodia New Year); May 1st (Labour Day); May 13th-15th (King Norodom Sihamoni's birthday); May 17th (Visaka Bochea); May 21st (Royal Ploughing Ceremony); June 18th (king's mother's birthday); September 24th (Constitution Day); September 26th-28th (Pchum Ben); October 29th (King's Coronation Day); October 31st (king's father's birthday); November 9th (Independence Day); November 10th-12th (Water Festival); December 10th (International Human Rights Day)

Official name

Cambodia

Form of government

Constitutional monarchy

The executive

The cabinet is constitutionally responsible to the National Assembly (the lower house of parliament)

Head of state

King Norodom Sihamoni. The Throne Council selects the king

National legislature

The 123-seat National Assembly sits for a term of five years. The term of the 61-member Senate (the upper house) is also five years

National elections

The most recent National Assembly election was held on July 27th 2008. The inaugural (indirect) election to the Senate took place in 2006. The next upper house election is due in January 2011 and the next lower house election will take place in July 2013

National government

Following the 2008 election, the Cambodian People's Party (CPP), which secured 90 seats in the lower house, formed a government, with the National United Front for an Independent, Neutral, Peaceful and Co-operative Cambodia (FUNCINPEC) as its junior partner

Main political organisations and groups

CPP; FUNCINPEC; Sam Rainsy Party (SRP); Norodom Ranariddh Party (NRP); Human Rights Party (HRP)

Main government ministers

Prime minister: Hun Sen (CPP)

Deputy prime ministers:

;Sar Kheng (CPP)

;Hor Nam Hong (CPP)

;Bin Chhin (CPP)

;Sok An (CPP)

;Tea Banh (CPP)

;Nhiek Bun Chhay (FUNCINPEC)

;Men Sam An (CPP)

;Keat Chhon (CPP)

;Yim Chhay Ly (CPP)

Key ministers

Agriculture, forestry & fisheries: Chan Sarun (CPP)

Commerce: Cham Prasidh (CPP)

Economy & finance: Keat Chhon (CPP)

Foreign affairs: Hor Nam Hong (CPP)

Health: Mam Bunheng (CPP)

Industry, energy & mines: Suy Sem (CPP)

Information: Khieu Kanharith (CPP)

Interior: Sar Kheng (CPP)

Justice: Ang Vong Vattana (CPP)

National defence: Tea Banh (CPP)

Rural development: Chea Sophara (CPP)

Tourism: Thong Khon (CPP)

Central bank governor

Chea Chanto