How Will The Financial Crisis Affect Cambodia?

The expat community in Cambodia has been heatedly debating this topic over beers and elsewhere for the past few months. After all, it might affect them as well. Apart from NGO and diplomatic personnel many expats come here for the lower cost of living. Inflationary pressure and the strengthening dollar, ironically a consequence because of falling oil prices due to expectations of lower demand, will wipe out part of their purchasing power if they are from Euro-countries. But they usually find a consensus that the boom years for Cambodia are over. A sure first sign of that will be when the real estate bubble pops.

Now, if we take a closer look at that crisis and the underlying factors we may find that the dangers and risks are not nearly as big as they appear at first glance.

The informed reader knows by now what caused that crisis in the U. S. Worthless or nearly worthless mortgages were packaged into negotiable securities, which mortgage banks sold to other financial institutions, which in turn used them as collateral to raise money to infuse into the (mostly real estate) market or to resell them themselves. When it became apparent that a great number of those mortgages would no longer be serviced by defaulting home-owners and the real estate market crashed (mainly in the U. S. and Britain) those securities had to be revalued to a fraction of their nominal value. As a consequence the collateral they were put up as wasn’t worth what it was supposed to secure. When loans that were backed by those securities were called in those big banks didn’t have the cash to pay them back, resulting in the bankruptcy of Lehman Bros, for one, and bailouts or sale of others. Banks throughout the world participated in this speculation and consequently had to write down billions of dollars on their balance sheets. Stock markets reacted accordingly and sent share prices into a nose-dive first, followed by an ongoing roller-coaster depending on what the latest news is.

Another factor not mentioned as often is the amount of speculation in the financial and futures markets. Oil is a prime example of what speculators can do to prices. Even though oil demand has gone up sharply over the past 4 years that demand would not have produced a spike that eventually saw prices at $150 a barrel, five times higher than in 2004 and double the increase in oil consumption caused by such countries as China and India. For the average observer it is very hard to follow the reasoning of speculators when they claim that a brief border skirmish between Kurds and Turkish forces on the Iraqi border might have an impact on oil production in Iraq thus sending the price up by $10/barrel.

Short selling, a very nefarious practice of the stock market, is another speculative factor that contributed to the current crises. For those of you who still haven’t understood this scheme, as I have for the longest time, it works like this. You borrow stocks at the today’s price and sell it at today’s price. You are betting on the declining value of that stock. When you think the stock will bottom out you buy it back and return it to the owner who is usually represented by a broker. You can determine the time or the value when you want to buy that stock back at the time of the original sale. Fortunately for the stock owner, you have to deposit the money of the sale with the broker. When you return the stock you get your money back, less a commission for the broker. The difference between the sale price and the buy-back price is your profit. These transactions have been suspended in both the U. S. and the EU until the end of the year. They should be outlawed along with a lot of other highly speculative instruments altogether, if you ask me.

And we are not even talking about things like swaps, junk bonds, and all other kinds of deals in intangibles going on Wall Street, not to mention the futures market.

The bad thing about all this is that financial institutions will be severely hampered in the ability to loan money to businesses that need it to finance their day-to-day operations, inventory, etc. The banks, as mentioned above, aren’t able to raise that money themselves. That is the real danger affecting the U. S. and other economies around the world that are closely linked to it.

Businesses will cut jobs, consumers will cut spending, demand will decrease, prices will drop – it is a vicious cycle. There is no escaping it. One good example is automakers in the U. S. Those pricey, gas-guzzling SUVs - sales are down by 75% at Ford, and more than 50% at GM.

Now, what does all that have to do with Cambodia? On the surface, nothing, but because of its dependence on garment exports and tourism, foreign money inflows, whether as FDI or loans, will slow down.

Garment exports to the U. S. have declined already. Tourism is still up over last year but it will most likely be only a matter of time when those numbers start leveling off. This could put a serious dent in Cambodia’s economy.

But what about the real estate bubble or the construction sector that has largely fueled those incredible growth rates over the last few years? Land was sold left and right with everybody betting on further increases and hoping to make a profit when re-selling it, in other words, pure speculation. There was no real purpose behind most of those deals, like building a house, factory, condos, etc. on it. Builders from South Korea who obviously see Cambodia as a playground for their ventures came in by the droves starting new projects, whether it was Cambodian flats or mega-projects like Camko City, the 42-story tower, etc. Both speculators and builders contributed to the growth. Quite a few people all of a sudden had a lot of money buying all those luxury items, and workers in the construction industry had money to spend on motorcycles, small cars, clothing, etc. What both overlooked, it seems, is that they should have done some market research first. Cambodia is a small country with only 14 million people and a very thin capital base. 35% are below poverty level, the vast majority is employed in the family business generating only the bare minimum income, and the garment and tourism sectors pay only minimum wage, like $75 a month. This, of course, means there is a natural limit for the demand in new houses and condos. No doubt, those luxury apartments will find their buyers. But compared to the huge oversupply of Cambodian flats this number is minuscule. Once the Koreans find out they are building for a non-existent buyer they will abruptly stop, putting a lot of those construction workers on the street. If the projects are financed by banks, as they must, simply based on the magnitude of the investment, we will all of a sudden see a lot of quiet and desolate construction sites. There are no numbers available on the number of Korean banks that speculated in those toxic securities, but it would be a safe assumption that most of them did. They will most certainly also feel the crunch, maybe not as much as U. S. banks, and maybe they can cover it with a broader equity base, but they will surely be a little more cautious with their lending.

The land speculators have already begun to realize that the party may be over. They adopted their traditional wait-and-see attitude before and after the election but there are no signs on hand that the market is awakening from its pre- and post-election nap. For all intents and purposes, it is dead right now. This has already led to a price drop of between 5% and 10% in Phnom Penh, and up to 40% in rural areas. Now the people who loaned money for their speculation are in for a rude awakening when the banks start calling in their loans. The ones that used their own savings will have to sell their nice Landcruisers or Lexuses as nothing is coming in to support them as there is no job market for them to speak of.

The Cambodian banks who worked along traditional, conservative lines usually loaned money only for real housing or other projects, not for land speculation. They may find themselves with a lot of real estate assets on their balance sheet when they have to repossess all those empty flats. But, of course, they will be short of cash unless they can generate more money inflows, which is traditionally done by issuing bonds. But initially at least, there will be a tightening credit market. But the upside for Cambodian banks is that none of them speculated in foreign stocks or participated in those imaginative U. S. securities. They made money the original banking way - deposits paid up to 6% and loans cost around 18%. In all likelihood, they will weather the storms that might come their way.

So what does that all boil down to? It would be sort of presumptuous to know an accurate answer to that question. But here is what I think.

The garment sector will not suffer too much as the garments produced are for the most part low-end items that will have a market even in bad times. Wal-Mart is the best example. They posted an increase in sales in the first quarter of 2008 despite the bad economic news and with many people losing their homes and jobs.

Tourism will stagnate in 2009, perhaps starting in the last quarter of 2008 already. Many Europeans are already staying home or opting for less expensive destinations in the Mediterranean (due to shorter flights). On the other hand, Cambodia is still an attractive destination as both accommodations and meal prices are despite a 23% rate of inflation still very reasonable compared to Thailand or Indonesia, for instance.

The real estate bubble will deflate but not burst. The reason for that is that only an estimated 20% is leveraged, mostly by larger companies. In the U.S. that rate is nearly 100%. People who bought and now own unusable land will not be able to sell it, no matter how low they will go with their prices. So they will just have to keep it. Will speculators resort to fire-sales? If they desperately need money, yes. If they have something to fall back on, most definitely no. One shouldn’t forget the Cambodian mentality either. They can be pretty stubborn. They will just wait it out, or go back to farming temporarily, or turn to agriculture altogether. Rubber and cassava plantations are viable alternatives to earn an income. I would be very surprised to see a real estate melt-down like in Vietnam. And most importantly, Cambodia is a cash-based economy. People usually don't spend money they don't have, like in the U. S. where credit card spending is rampant and virtually everything is purchased on credit.

In that sense, I personally believe that the adjustment of the growth rate to around 6%-7% is probably still a little too optimistic, but the economy most certainly won’t crash – at least I hope not.

There wasn't a whole lot to talk about this past month except for the following article. In addition I am currenty in the U. S. and compared to Cambodia there is a much higher drama playing out there. Hopefully, it won't affect Cambodia too much, as I don't think any of the many banks in Cambodia purchased any of those imaginative financial instruments those gurus on Wall Street keep coming up with in order to make huge profits on imaginary transactions. But that is an article for another day.

The Cambodian Flip-Flop

Between the election and the flip-flop Sam Rainsy was busy accusing the ruling CPP of rigging the election. They claimed more than 2 million voters were denied their right to vote, sometimes it was only 1 million voters, but details were not so important here.

The rest of the world, at least the part that observed the election, commented slightly differently, some in guarded tones, some in a somewhat more critical tenor, but all agreed that the elections were for the most part free and fair, albeit with deficiencies.

The opposition, consisting of 4 parties, united in calling the whole election a fraud. But only a few days later two parties changed their position and said they now recognized the results. Needless to say that both parties were to be rewarded for their about-face.

Two parties, the Sam Rainsy Party and the Human Rights Party, continued their campaign to get the election results overturned. Initially, they appealed to the National Election Council which promptly denied the appeal as unsubstantiated as the opposition had not submitted concrete evidence. The next instance in such appeals is the Constitutional Council, which turned it down as well. No surprise there. Neutral observers would have wished that they would at least have gone through the motions by holding public hearings or formed a special committee to investigate these allegations in depth and come up with an equitable judgment of the facts. But that is probably asking too much in this country where opponents of the ruling party are more or less openly persecuted.

On the other hand, though, the opposition conceded that the CPP had won the election by all counts, but the SRP would have gotten 10 more seats or so in the assembly. Maybe they have a point there but with the evidence they made public piecemeal they could not have made a strong case in a court of law in stable democracies of the West. Sure enough, the published material did show forgeries of voter rolls but the sticking point was whether or not these were singular incidents or widespread abuses. It is very doubtful that they could have produced evidence showing the disenfranchisement of 1 million people, let alone 2 million.

Not making any headway in their efforts the opposition then proclaimed a boycott of the opening session of the assembly and vowed to stay away from the swearing-in of deputies. The thinking was that the assembly needed all members to be present in its constituting session. They cited chapter 76 of the constitution, which, however, only states that the Assembly consists of a minimum of 120 members. The original Khmer version uses the word ‘mien’, which normally translates as ‘to have’ or ‘there is/are’. In no section of the constitution does it say a minimum of 120 members need to be present for the constituting or swearing-in session.

The Prime Minister then threatened to assign those seats to the other parties, which would have meant the CPP would have gotten around 114 seats of the 123. Whether or not that would have been legal has been rendered a moot point by the ensuing developments. Just for the sake of argument, however, it is clear that this would have been illegal. Any seat lost by a party through resignation, death, or other causes, results in the appointing of another deputy by the party that held the seat as a result of the election.

The opposition proceeded to publish their materials and started a public relations campaign involving signatories of the Paris Accords, the U. N., and the E. U. Both party presidents traveled abroad to make their case to the E. U. Apparently, they did not attain what they had hoped for - full-blown support from the E. U. or an outright condemnation of the election. None of the addressees of their correspondence gave a reply. They came back from their trip rather quietly. It was obvious officials had paid some lip service but wouldn’t go any further. One mustn’t forget that there were more pressing problems on their minds, too, like the Russia-Georgia conflict and the financial melt-down.

But they staunchly upheld their position that they would boycott the assembly as late as Sept. 23. Now everybody was waiting for September 24 to see whether or not the opposition would make good on their promise or not. Ardent followers of the political scene in Cambodia found this quite suspenseful. Most bets were that they would show up. After all, this is politics and nothing is ever written in stone in politics, is it?

Then on the morning of the 24th Cambodians sort of uttered a collective sigh of relief when they saw Sam Rainsy and other 23 deputies marching into the Assembly to participate in the opening session. On emerging from that session no interviews were given by Sam Rainsy, only Son Chhay his party spokesman said a compromise had been reached with the ruling party. But the suspense lasted a little while longer because maybe they wouldn’t show up for the swearing-in, although that was rather unlikely seeing that they had flip-flopped already. But sure enough they were all there, only the HRP stuck to their promise and stayed away.

Now what had happened? Accounts of this vary, but according to the SRP spokesman they had asked for some kind of recognition of the opposition’s role in the assembly which the Prime Minister promised to consider. That was all it took?

Before Sam Rainsy and Kem Sokha left for Europe Sam Rainsy had spoken to the Prime Minister, according to the latter. Sam Rainsy had asked for concessions in order for him to not boycott the opening session and thus render the assembly paralyzed. Hun Sen refused to give in so Sam Rainsy flew off to Europe.

Now, everybody knows there are internal problems within the SRP. Many high-level members are not happy with Sam Rainsy’s autocratic style of leadership. One would also assume that most of them are not as well off as Sam Rainsy who obviously has something to fall back on in case he lost his seat in the assembly. Others may be dependent on that seat not for the salary it pays but for the influence they get in certain business circles. So one theory says that the second-tier members pressured Sam Rainsy to negotiate a deal with Hun Sen so they could participate and be sworn in without losing too much face. Seemingly, this was an all-night session taking place on the eve of the 24th. So in the end they contacted a prominent businessman with close ties to the Prime Minister early morning of the 24th laying out their proposal, which was promptly accepted.

Why the Human Rights Party was left out of that deal remains a mystery. What became clear is that Sam Rainsy’s hold over his own party seems to have weakened. In the West the press would be all over him – not here. Not giving any interviews doesn’t bode well either. Even the most ignorant voter knew that he had run on a campaign of empty promises on which he would never have been able to deliver. This flip-flop will cost him dearly in the eyes of his followers. From now on he surely will not be seen as the stand-up guy he purports to be. He is just another politician who jockeys for a good spot in public life – a true flip-flopper.

Would it appear as if he had come to his senses after all? Not really. He would have gained a lot of stature if he had just sat down with the Prime Minister putting forth his grievances but then negotiate an agreement that would have given the opposition a more active and visible role, thus ensuring a more prominent public image that would have served them well in the next election. His hard-headed stance was ill-conceived and counter-productive. Time will tell how this is seen. In the short run Sam Rainsy is a non-entity in Cambodian politics. Who will listen to him after this? In the long run, he might not even survive as a leading voice in Cambodian affairs.

Another Look at the Election

I recently read an article on the disproportion of the number of votes cast for the ruling party and the number of seats they will get. Let’s look at the rough numbers. About 58% voted for the CPP and 42% voted for the opposition parties. The CPP will get an estimated 90 seats or 73% of the assembly seats, only 33 or 27% of all seats will go to four other parties. There seems to be a glaring imbalance as the author of that piece I read seemed to imply (if I remember correctly).

But that opinion would leave out any consideration of the electoral system in place. Cambodia uses the proportionate system for allocating assembly seats by party lists. In that system the number of seats won may not correspond to the share of the overall vote. Here is why: each voting district is allocated a certain number of seats, a few even with only one seat although that district has only a small population, say a hundred. In this case the party with the majority of votes gets the seat. Fortunately, there are only a handful of those districts.

In very populous districts such as Kompong Cham the parties will be allocated seats in line with their share of the popular vote. In many cases there will be a small number of seats left over (‘overhangs’) that will be allocated by the system of the highest average a party received.

Let's take Kompong Cham:

CPP : 409 766 / 51,28%
SRP : 211 934 / 26,52%
HRP : 72 725 / 9,10

There are 18 seats for the district, 9 of which will go to the CPP, 4 will go to the SRP, and 1 will go to the HRP, which is a total of 14 with 4 seats to be assigned according the principle of the highest average (d’Hondt system).

CPP quotient = 40,977
SRP quotient = 42,387
HRP quotient = 36,362

So the next seat will go to the SRP. The following quotients will look like this:

CPP = 40.977
SRP = 35,322
HRP = 36,362

Accordingly, the following seat will go to the CPP.

CPP = 37, 251
SRP = 35,322
HRP = 36,362

The next seat will go to the CPP.

CPP = 34, 148
SRP = 35,322
HRP = 36,322

So this last seat will go to the HRP, which brings the total seats won by each party in Kompong Cham to:

CPP = 11 seats = 61.1% of the seats
SRP = 5 seats = 27.8% of the seats
HRP = 2 seats = 11.1% of the seats

The more votes a party gets the greater will be the highest average, in other words, this system favors the bigger parties.

This is an electoral system used in many democracies in one form or another, either as a stand-alone system or in combination with another system.

The U. S. has a two-party system with a clear winner-takes-it-all formula, so it is straight-forward but can also lead to results which do not reflect the popular vote, especially with their Electoral College in the presidential elections. People vote for candidates, not for parties.

The British have the same system (without the Electoral College) but basically a three-party system. The winning candidate might actually have only won a minority of the votes. People also vote only for candidates and not parties

The French have, in my view, the best system, albeit very expensive. There a candidate must reach a clear absolute majority, that is 50%+1, to win. France boasts of a multitude of parties, all of them fielding candidates. If no candidate reaches the 50%+1, there are run-off elections between the first and second candidates.

Germany has a very complicated mix of systems where people vote for both a direct candidate by majority vote and a party list, which is then allocated seats according to the d’Hondt system. So people actually have two votes.

So if you want to go to the trouble of figuring out how the CPP won more seats than their share of the votes you can do this by following the formula:

Seats by share of vote + overhanging seats assigned by formula below

Total votes for the party / ( number of original seats assigned according to share of votes + 1 ) = quotient.

But you can rest assured there is nothing wrong with the distribution of the seats per party according to the published election results.

That does not, however, in any way say anything about the claim of the opposition that the election as such was fraudulent. The fact that the NEC did not publish its reasons for their clear and very quick dismissal of the SRP’s complaints is very troublesome and might lead neutral observers to believe that there actually weren’t any real legal arguments but that the whole affair will be resolved behind closed doors. That, of course, leaves a very bitter taste and reflects very badly on the CPP.

Opposition Parties’ Complaints to the UN and EU

Now this strikes me as somewhat weird. Why would the opposition front lodge their complaints with the UN and the EU?

Sure, both the UN and the EU sent observers to see whether the electoral process went according to democratic norms and standards; but that’s all they were – observers. And it is absolute news to me that they would have some jurisdiction over Cambodian elections.

We read that the NEC roundly dismissed all complaints, which doesn’t seem to be too much in compliance with their charter. One would believe an investigation would at least take a couple of months. So something is foul in the state Denmark, to paraphrase Shakespeare.

It appears as though the whole state apparatus now deals with Sam Rainsy and his followers as bothersome gnats rather than serious opponents, which must enrage someone like Sam Rainsy who thinks of himself as the only person capable of building a new Cambodia and far superior to anybody else in the country. This most likely only strengthens his determination to boycott the opening session of the National Assembly. And this probably also accounts for his reaching actions such as the complaint to the UN and EU. He is only making a nuisance of himself, nothing else. It is rather sad, really. If he believes this is publicity in the Western world, he is greatly mistaken. Just read the world press. There is hardly ever any mention of Cambodia to begin with, let alone his complaints about rigged elections, whether substantive or not. Look how much press coverage the far more serious Zimbabwan situation got. This is yesterday’s news.

If he wants to achieve at least some progress with his agenda, Sam Rainsy must learn to work within the system.