Cambodian Country Risk
Analysis
Supervisor: Dr. M.H. BOUCHET
Student: Socheat EUNG
CERAM Sophia-Antipolis
European School of Business
Nice, France
August 2006
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
Introduction
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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
Cambodia’s History
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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
Cambodian Map
Country Overview
Power structure
The king has no power
Hun Sen is the most powerful
Executive Power
P.M. Hun Sen
King Norodom Sihamoni
Legislative Power
Prince Norodom Ranaridh
Judicial Power
SupremeCouncil 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 & Culture
Age Structure
Chinese Other
Vietnamese 1% 4%
5%
Betw een 15 and 64
years old 61%
Less than 15 years old
36%
More than 64 years old
3%
Literacy Rate
Ethnic Group
Khmer
90%
100%
80%
60%
40%
20%
0%
74%
Population literacy rate
85%
64%
Male among total male
Female among total female
Country’s Resources
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Infrastructure:
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Two International
airports(Phnom penh &
Siem Reap)
Roadway (12 323km)
Railway (602km) not
upgraded
Waterway (2 400km)
• Natural Resources:
• Metals & mineral
• Hydroelectric Power
• Petroleum
• Forestry
• Timber and firewood
Economic Outlook 2005
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Expected growth: 7%
Main drivers: textile, tourism,
construction, & agriculture
International trade expansion
Stable fiscal and monetary performance
Inflation: 6.7%
GDP per capita: 441US$
Country Risk Analysis
Econmic Risk Analysis
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Economic growth
9.00%
8.00%
7.00%
6.00%
Cambodia
5.00%
Laos PDR
4.00%
Thailand
3.00%
Vietnam
2.00%
1.00%
0.00%
2002
2003
2004
2005(pr)
2006(p)
→ 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 Analysis
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Inflation
8.00%
7.00%
5.60%
6.00%
6.70%
5.00%
4.00%
3.70%
3.50%
3.00%
2.00%
1.00%
0.50%
0.00%
2002
2003
2004
2005(pr)
Low inflation rate though increase in oil price,
Not problematic to the country
2006(p)
Economic Risk Analysis
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Interest rates
25.00%
20.00%
15.00%
4.30%
4.20%
21.10%
21%
18.20%
18.70%
18.60%
17.30%
4.00%
16.70%
7.20%
7.00%
6.60%
3.90%
3.80%
3.70%
5.00%
4.10%
4.00%
16.70%
3.70%
10.00%
4.20%
6.60%
0.00%
3.70%
3.60%
3.50%
3.40%
2002
2003
2004
2005(June)
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 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 Budget
Government Budget
20%
17%
16%
15%
15%
• Large budget deficit
still problematic even
reaching target of
revenue collection
15%
15%
11%
11%
10%
11%
11%
10%
5%
• Poor public services
deliveries
0%
-5%
-4%
-6%
-6%
-4%
-4%
-10%
2002
2003
2004
2005€
2006(p)
Government Budget Financing
Revenue/GDP
Expenditure/GDP
Deficit/GDP
100%
100%
89.30%
100%
100%
100%
80%
60%
Strongly depending on
foreign aids and loans to
finance budget deficits
40%
20%
10.70%
0%
0%
0%
0%
0%
2002
2003
2004
2005(e)
Foreign_Financing Domestic_Financing
2006(p)
Financial Risk Analysis
BOP Analysis
• Increasing in export
due to US & EU
restrictions on China’s
export
Cambodia's International Trade (in US$ million)
3,822
4000
3500
3,166
3000
2,773
2,579
2500
2,454
2,275
1,970
2000
1,659
1500
• Increasing in import
due to hug increase in
oil price
1000
500
0
-500
-1000
-616
-609
-712
-1,049
-1500
2002
2003
Trade Deficit
2004
Exports
2005(p)
Imports
CAD generated by
0.0%
• Inflation
-1.0%
• Strong economic performane
• Government restrictions
-2.0%
Current Account Deficit to GDP ratio
-2.4%
-2.5%
-3.0%
-3.8%
-4.0%
-4.4%
-4.1%
-5.0%
So, it will worsen foreign reserve
2002
2003
2004
2005(p)
2006(p)
Debt Analysis
Cambodia's Public external Debts (in million US$)
3,500
3,000
2,500
2,740
2,492
• Largly depending on
foreign boorowing to
reconstruct the country
3,180
2,976
2,000
1,500
1,000
21
500
28
26
29
0
2002
2003
Public External Debt
2004
2005(est.)
Public Debt Service
• 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 Analysis
Solvency Ratios
Debt to GDP Ratio
65%
60%
• Debt/GDP ratio was relatively
quite high
62%
60%
58%
55%
• Estimated to go down in 2005 &
06 due to IMF’s debt relief
52%
50%
45%
2002
2003
2004
2005(est.)
Official Reserve to Debt Ratio
29%
29%
• OR/Debt used to ensure the
country’s solvability toward
creditors in the future
29%
28%
28%
27%
27%
27%
27%
27%
• OR is in range of 26% & 29%
26%
26%
2002
2003
2004
2005(est.)
Debt to Export Ratio
• In overall, debt/export ratio >100%
200%
150%
150%
139%
121%
115%
100%
50%
0%
2002
2003
2004
2005(est.)
• Decreasing gradually year after year
• But large debt make Cambodia
insolvent toward creditors
Liquidity Ratios
Official Reserves (in months of Imports)
3
2.9
2.8
2.6
2.5
2.4
2
1.5
1
0.5
0
2002
2003
2004
2005(est.)
• 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
Debt service to Export Ratio
1.00%
1.00%
0.90%
0.80%
0.80%
0.70%
0.60%
0.40%
0.20%
0.00%
2002
2003
2004
2005(est.)
• From 2003, debt service to
export ratio decreasing slighly
due to more increase in export
than in debt service
Monetary & Fiscal Policy
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Monetary 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
Money Supply in Billion Riel
4,188
5000
3,643
4000
3,079
3000
2000
2,310
2,001
766
1000
122
1,349
1,205
1,115
908
111
192
162
135
0
2002
2003
2004
Local currency in circulation
2005(est.)
Foreign currency deposit
2006(p)
Other money supply
Money Demand in Billion Riel
4,000
3,763
3,500
3,232
3,000
2,722
2,500
1,500
1,000
2,120
1,947
2,000
1,059
1,817
2,141
1,970
1,337
500
0
-500
-117
-128
2002
2003
Credit to private sector
-209
2004
-192
2005(est.)
Credit to public sector
Other(*)
-176
2006(p)
Monetary & Fiscal Policy
Fiscal policy
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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
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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
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
Foreign Exchange (Riel/US$)
4,116
4,150
4,100
4,031
4,050
3,980
4,000
3,950
3,935
3,900
3,850
3,800
2002
2003
2004
2005(est.)
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
Political Situation
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Negative points
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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
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Strong protection agiant expropriation
In overall, political stability
Open and liberal investment regime with national
treatment of foreign investors
Legal & Judicial Risk Analysis
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Based on civil law where the rule of law is set as the
country’s basis
Seperation of powers: Executive, Legislative, & Judicial
Negative points:
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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:
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Significant reforms in the sector
Laws is conformed to international standard due to TWO
accession
No pattern of discrimination against foreign investors
Corruption
Bribes Paid by Domestic Firms to Public Services
12%
Domestic firms paid unofficially
on business licensen authorities,
followed by standard & safety
inspection
4%
6%
39%
11%
13%
15%
Business License Authorities
Custom/Trade License Services
Other Police
Other
Standard and safety Inspection
Trade Agency/Inspectors
Traffic Police
Bribes Paid by Foreign Firms to Public Services
11%
3%
Mostly, foreign firms paid
unofficially on custom/trade license
services
19%
67%
Custom/Trade License Services
Business License Authorities
Other Police
Other
Cambodian Governance Indicators
Aggregate Governance Indicators
27.1
Control of Corruption
6.9
49.3
13.3
35.7
Rule of Law
8.2
51.7
17.4
27.6
Regulatory Quality
51.2
9.9
44.3
44.2
65.4
Government Ef f ectiveness
14.4
18.8
51.9
Political Stability
41.7
24.8
30.6
7.3
Voice and Accountability
52.4
6.8
24.8
0
10
20
30
40
50
60
70
Percentile Rankings in 2004
Cam bodia
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 (CPI)
8
7.9
7.6
7.5
7
6
5
4
3.8
3.3
3
2.6
2.3
2.2
2
1.7
1
0
Iceland
USA
France
Thailand
Laos
Vietnam
Cam bodia
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 Analysis
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Regional Intergration (ASEAN)
Cambodia has become ASEAN member on April 30,
1999 with purposes:
 Political cooperation
 Economic & functional cooperation
 External relations
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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
Cambodia’s WTO membership
Cambodia has been a member of WTO since
13 October 2004 with:
 Advantages:
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Access to international markets
Capacity building
Good governance building
Disadvantages:
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Difficilt to compete with competitors in local &
international markets
Doing business in Cambodia
Country SWOT Analysis
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Strengths
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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
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Weaknesses
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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
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Opportunities
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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
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Threats
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Political conflicts
Hug external debts
Crime and theft
Large government budget
deficit
Border conflict with
neighboring countries
Growth Competitveness Index
(GCI)
6
5.94
5.81
5
4.78
4.5
4.49
4
3.53
3.37
3
2.82
2.8
2.74
2.73
2.37
2
1
0
Iceland
USA
Malaysia
France
Thailand
Indonesia
Vietnam
Cam bodia 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 Ranking
Quality of the
national
business
environment
ranking
Country
BCI ranking
Company
operations
and strategy
ranking
USA
1
1
2
Singapore
5
14
5
France
11
10
11
Malaysia
23
24
31
Thailand
37
30
37
Indonesia
59
50
59
Vietnam
80
81
77
Cambodia
109
103
108
Bolivia
113
115
112
Chad
116
116
116
Source: World Economic Forum
10 elements for doing Business
Ranking by Each Element of Doing Business in Cambodia
144
Ease of closing business
127
Ease of enforcing contracts
117
Ease of trading across border
24
Ease of paying taxes
55
Ease of protecting investors
154
Ease of getting credit
84
79
Ease of registering properties
Ease of employing and firing w orkers
140
137
Ease of dealing w ith licenses
Ease of starting a business
133
Ease of doing business
0
20
40
60
80
100
120
140
Rank out of 154 Countries
►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 Factors
The Most Problematic Factors for Doing Business in
Cambodia
Corruption
80%
•Corruption
55%
Inefficient government bureaucracy
Inadequately educated w orkforce
46%
Inadequate supply of infrastructure
46%
•Inefficient government
bureaucracy
41%
Access to financing
Policy instability
•Inadequate educated
workfoces
34%
30%
Government instability/coups
27%
Poor w ork ethic in national labor
•Inadequate supply of
infrastructure
26%
Tax regulations
18%
Crime and theft
Restrictive labor regulations
•Access to credits
17%
Tax rates
The most problematic:
14%
•Policy instability
11%
Foreign currency regulation
10%
Inflation
0%
10%
20%
30%
40%
50%
Percentage of Respodents
60%
70%
80%
Credit Rating
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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
Conclusion
&
Recommendations
Conclusion
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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
Recommendations
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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
References
Books:

Country Risk Assessment – A Guide to Global Investment
Strategy – by M.H. Bouchet, B.Groslambert and E. Clark,
published by Wiley
Websides:

1.
2.
3.
4.
5.
6.
7.
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
Thanks for your attention