thaicables – It's Your Right to know the Truth!

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 BANGKOK 002137

 

SIPDIS

 

SENSITIVE

 

STATE FOR EAP/BCLTV AND EB

STATE PASS TO USTR FOR WEISEL AND COEN

TREASURY FOR OASIA

COMMERCE FOR 4430/EAP/MAC/OKSA

 

E.O. 12958: N/A

TAGS: ECON EFIN ETRD PREL TH

SUBJECT: MEGAPROJECTS: WE KNOW WHY, NOBODY KNOWS HOW

 

REF: BANGKOK 1266

 

1.(SBU) Summary. The economic centerpiece of Prime Minister

Thaksin’s second term is a series of major infrastructure

projects estimated to cost US$57.5 billion over five years.

It remains unclear how the RTG will finance these projects

given self-imposed fiscal constraints, previous projects that

disadvantaged private investors and an illiquid bond market.

Given the importance Thaksin attaches to these projects, we

expect he will engineer a formula to try and attract

financing without any government guarantee of repayment.

Whether he actually convinces enough investors to put their

money where the PM’s mouth is must await specifics. End

Summary.

 

“COMMITTED PROJECTS” NOT A PROBLEM

———————————-

 

2.(SBU) As reported previously (reftel), the Thaksin

government has announced plans to undertake massive

infrastructure expansion and modernization projects estimated

to cost Bt2.35 trillion (US$57.5 billion) over the next five

years. The total RTG budget for FY2005 is about Bt1.2

trillion (US$30.8 billion) and 2004 GDP was Bt6.6 trillion

(US$169.3 billion). Projects the RTG describes as “committed”

include the purchase of new aircraft by parastatal Thai

Airways, rail links to the new Bangkok international airport

and industrial development in the area around the airport,

expansion of the existing Skytrain and subway lines,

expansion of the highway system, expansion of the gas

pipeline system and low-income housing development. Projects

that are planned but “non-committed” include expansion of the

railroad network, expansion and modernization of the water

grid and development of a refinery and oil pipeline

associated with the “land bridge” project across the Thai

isthmus between the Andaman Sea and Gulf of T

hailand.

 

WHY THE SUDDEN URGE TO SPLURGE

——————————

 

3.(SBU) The RTG has several goals in pursuing these ambitious

“megaprojects.” First, is to stimulate investment as the new

driver to the Thai economy now that domestic consumption and

export growth are leveling off. The second goal is to upgrade

Thailand’s infrastructure so that the country is better able

to compete internationally. The stated intention is to reduce

the cost of logistics in Thailand to less than 10 percent of

GDP from its current level of about 19 percent (U.S. and

Japan figures are 10 and 11 percent respectively). It is also

intended to improve worker productivity by reducing the

amount of time Bangkokians spend commuting. In the aftermath

of the 1997-1998 financial crisis, little new public

infrastructure investment has been made. Finally, in keeping

with Thaksin’s self-image as Thailand’s CEO, he views the

on-going excess liquidity in the banking sector (estimated to

be Bt200-300 billion -US$5.1-7.7 billion) as an

under-utilized asset that should be mobilized.

 

FISCAL POLICY TO REMAIN CONSERVATIVE

————————————

 

4.(SBU) The RTG does not intend to pay for these projects out

of current budget expenditures or by increasing the net debt

on the government’s balance sheet. “Fiscal sustainability”

is the government’s watchword: defined, in part, as a maximum

public debt/GDP ratio of less than 50 percent (currently

about 47.9 percent – down from 52.9 percent in January 2002 -

with an RTG goal of reducing this number to 40 percent by

2009), a balanced budget and debt service comprising less

than 15 percent of the yearly RTG budget. With additional

calls on the budget ranging from increasing the salaries of

low-paid civil servants to tsunami and drought relief efforts

to expenditures related to quelling the separatist movement

in the south, there is little room in the RTG budget to

finance the megaprojects and within the defined fiscal limits

even if the economy continues to grow at 6 percent each year.

 

 

SO HOW TO PAY FOR IT ALL?

————————-

 

5.(SBU) The official capital-raising framework outlined by

the Ministry Of Finance plans for 26 percent of the required

capital to come from the government budget, 35 percent from

State-owned enterprises (SOEs) and 39 percent from “other

means such as securitisation or property development of areas

adjacent to the projects.” In fact, to bridge the apparent

gap between fiscal rectitude and an investment binge, the

Thaksin administration is studying a variety of approaches to

keep these projects off the government books. First, many of

the ‘committed’ projects will be undertaken by SOEs (Thai

Airways, Airports of Thailand, PTT) that will finance the

projects themselves either on the strength of their own

balance sheets, through asset-backed financing or by forming

joint ventures with private sector companies and/or financial

institutions. Market observers seem confident that these

established organizations can use the cash to be generated by

the projects, backed by their other substantial assets, to

secure proj

ect financing.

 

6.(SBU) For the mass transit expansion projects – extensions

of the Skytrain, subway and toll roads – the RTG would like

follow its previously successful method of granting long-term

concessions (typically 25 years) to Special Purpose Vehicles

- companies created specifically to build and operate these

concessions. Existing examples of such entities are Bangkok

Metro PCL – subways, Bangkok Expressway PCL – toll roads, and

Bangkok Mass Transit PCL – Skytrain. These companies are

typically joint ventures between leading Thai companies with

the key foreign infrastructure suppliers (e.g. Siemens,

Obiyashi) often taking an equity stake. The problem is that

the equity investors in these projects have not done well.

The RTG has limited the amounts the ventures may charge for

their services (fares and tolls) and is currently trying to

force operators of the Skytrain and subway to sell out to the

mass transit regulatory authority at what the companies

consider a low price. This history will make it very

difficult to

convince new private investors to commit to any equity

positions in the proposed projects.

 

7.(SBU) The most likely structure will be for the RTG to

create “Public-Private partnerships”, not-for-profit limited

liability companies with initial capital provided by the

government and granted a concession to built and operate a

subway line or toll road or some other potential asset. These

entities will issue bonds backed by the value of the

anticipated future cash flow from its concession. There would

be no RTG guarantee backing the debt.

 

BOND MARKET PROBLEMS

——————–

 

8.(SBU) There are several problems with this model. First,

given the inherent risk of construction delays and over-runs,

the debt will have to be very attractively priced (i.e. offer

a high yield) in order to attract investors, especially in

the absence of RTG backing. Second, if Bt2.3 trillion in new

projects actually start-up over the next five years, in a

domestic bond market which currently has severe liquidity

problems and rising interest rates, the effect on corporate

borrowing rates and crowding out effect could be severe.

There is considerable skepticism among Thai market

participants whether the domestic market has sufficient depth

to absorb this much new paper. In November 2004, the total

value of all outstanding bonds in Thailand was Bt2.74

trillion (US$70.3 billion) of which Bt2.51 trillion (US$64.4

billion) was either issued or backed by the RTG.

 

9.(SBU) Some observers posit that the RTG will provide the

necessary capital to the PPPs with no effect on the RTG net

debt level through the proceeds from IPOs of State-Owned

Enterprises EGAT (electricity) and CAT and TOT (telecom)

while also removing the government guarantee from the debt of

these entities (thereby making room for new RTG debt to be

issued under the debt/GDP cap). While this would be a start,

the total of all RTG-guaranteed SOE bonds outstanding is only

about Bt322 billion (US$8.3 billion); not enough even with

the IPO proceeds to fund everything anticipated. Others

point to the Asian Bond market initiative as a source of

funds. There is no indication, however, that ASEAN central

banks are interested in funding Thai infrastructure

development, or even having more than a nominal exposure to

Baht. This nascent effort for a pan-Asian debt market would

have to develop much more quickly than it has to date in

order to be a source of funds for the mega-projects

 

10.(SBU) COMMENT. We have spoken to money managers, bond

market senior officials, academics and RTG officials

responsible for managing government debt and designing some

of the projects. None have been able to explain how the

government will follow through on its seemingly contradictory

promises of expanding investment while reducing debt. Most

are dubious it can be done, with some arguing that the entire

exercise is designed to channel funds to Thaksin family and

cronies (septel will examine the issue of corruption in

Thailand – anecdotally it appears that large scale corruption

may be getting worse while petty corruption may have

marginally improved).

 

11.(SBU) The mega-projects are the single most important new

plank in Thaksin’s economic strategy for his second term. As

an economist who helped design the “dual track” economic

policy of Thaksin’s first term told us, “Keynesian demand-led

recovery is played out. We must move on to the next level for

the economy to continue to grow.” He continued: “In creating

economic value, Thailand is ahead of China and about ten

years behind Taiwan and Korea. We must maintain our pace to

stay ahead of fast-moving China. We can’t do that without

significant new investment in infrastructure and improving

human resources. I just don’t know how we will pay for it.”

Although many here believe the PM’s program is mostly talk

and the majority of projects won’t get off the ground, the

Prime Minister’s penchant for financial engineering means we

cannot rule out a scheme that, at least on its face, gets the

mega-projects underway. We suspect that Thaksin will be

aggressively marketing portfolio investment in Thailand to

foreigners

beginning with a planned visit to New York in June.

 

 

BOYCE

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS BANGKOK 001899

 

SIPDIS

 

DEPARTMENT PASS FOR U.S. INTERNATIONAL TRADE COMMISSION

DEPARTMENT PASS FOR USTR/AUSTR WEISEL

 

E.O. 12958: N/A

TAGS: ETRD TH

SUBJECT: THAI SHRIMP INDUSTRY ASKS FOR AD RELIEF

 

¶1. On March 15, the Embassy received a delegation

representing the Thai shrimp industry. The delegation,

comprised of the heads of several regional shrimp farmers

associations, the Thai Shrimp Association, and the Thai

Marine Shrimp Farmers Association, presented to the Economic

Counselor a 2-page letter addressed to the “U.S.

International Trade Commission via His Excellency the U.S.

Ambassador to Thailand,” requesting the “elimination of

antidumping suit against Thai shrimp.” The letter expresses

the Thai peoples’ gratitude to the U.S. for its “lending

hands and support” to tsunami victims, and summarizes the

damage caused to the shrimp industry by the December 26, 2004

tsunami.

 

SIPDIS

 

¶2. Economic Counselor extended the Embassy’s condolences to

all who lost their loved ones or livelihoods in the tsunami

disaster. We then outlined the responsibilities and

independent status of the U.S. ITC, and the basic procedures

and general prospective timeline of a changed circumstances

review. Given the ITC’s independent status and role in any

possible future changed circumstances review of the Thai

shrimp injury and AD determination, we noted that the

delegation’s letter should properly be sent to the ITC

directly. To this end, we promised to provide the delegation

with technical instructions on how to do this (basically,

those stated in the relevant Federal Register notice and

those published in the Commission’s procedural regulations,

especially 19 C.F.R. sec 201.8).

 

¶3. Separately, we understand that the Royal Thai Government

has submitted, or will soon submit, its comments to the U.S.

ITC in connection with the Commission’s current examination

of whether the tsunami’s impact on the Thai industry warrants

a changed circumstances review.

BOYCE

BOYCE

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 07 BANGKOK 008485

 

SIPDIS

 

SENSITIVE

 

STATE PASS TO USTR FOR A/USTR BWEISEL

 

E.O. 12958: N/A

TAGS: ETRD ECON PREL TH US FTA

SUBJECT: U.S.-THAILAND FTA: STATUS AND PROSPECTS

 

SUMMARY

 

¶1. (SBU) The November 22 announcement by the Thai lead

negotiator that the RTG was seeking a postponement of the

December 2004 FTA round was the culmination of several

complex crosscurrents within the RTG and Thai society. The

ostensible reason for the postponement, the upcoming

(February 6) elections, is genuinely believed by some senior

officials, as is the need for additional time for

preparation, but is probably the least important element of

the whole story. Key elements within the RTG are

dissatisfied with the comprehensiveness of the U.S.

negotiating framework, particularly its inclusion of labor,

environment, and financial services, as well as the emphasis

on negative lists in services and investment. Key private

sector organizations, notably the Thai Bankers Association,

also have voiced their objections to U.S. requests. The

prospective U.S. offer has disappointed some here, especially

in areas such as temporary entry. The RTG currently is split

into two camps on how to proceed: the first, led by Finance

Minister Somkid and Chief Economic Adviser Pansak, argues for

a go-slow, narrowly focused market access agenda; the second,

led by lead FTA negotiator Nitya (who is allied with Foreign

Minister Surakiart), favors a faster, more comprehensive

approach, arguing that such an FTA would transform and

modernize the Thai economy. They also stress the high costs

of non-participation as other countries pursue FTAs with the

U.S.

 

¶2. (SBU) Resolution of this debate awaits the February

elections. Our opportunity for input is limited, although we

may be able to make our negotiating framework more attractive

here by emphasizing benefits to small and medium sized

enterprises, a politically favored sector of the Thai

economy. In spite of the delay and internal RTG

soul-searching, we remain basically optimistic about the

FTA’s prospects because we don’t see how either side’s

fundamental interests in having an FTA have changed. For the

U.S., it is our best chance to maintain a favored trading and

investment position with Thailand that is jeopardized by

several imminent developments. Equally important, an FTA

will be transformational for Thailand, effecting a shift in

many of its governmental institutions towards a more

rules-based economy. That will be good for Thailand, good

for the U.S., and will serve as a positive precedent for the

many other developing economies which are weighing economic

development and trade policy options. In asking for a

comprehensive, transformational FTA with the U.S., we are

asking Thailand to do something unprecedented, something that

it will find very hard. Negotiations are likely to take some

time. Progress could prove non-linear, with periods of rapid

movement forward, followed by some regression, a hiatus, and

repetitions of this cycle. It will require patience,

determination, and judgment, with no guarantee of success.

But we believe it is worth the considerable effort likely to

be required. End Summary.

 

FTA TALKS PUT ON HOLD

 

¶3. (SBU) On November 22, the RTG’s chief negotiator announced

that his government was proposing to the USG that the FTA

negotiating round scheduled for the week of December 13 be

postponed. The reasons he cited for the request were the

upcoming Thai national elections (currently scheduled for

February 6, 2005), and the need for additional time to

prepare for further talks with the U.S. This announcement

was pursuant to a decision made the previous day by the RTG’s

newly created FTA Oversight Committee. In addition to the

postponement request, the Committee ordered the relevant

agencies to further study the major issues in the FTA and

provide recommendations on a future course of action.

 

¶4. (SBU) While the explanations publicly provided by the lead

RTG negotiator are undoubtedly genuine, no one here believes

they represent the complete story — or even the primary

story — behind the postponement request. Rather, the

postponement was the culmination of several complex

crosscurrents within the RTG and Thai society.

 

THE ELECTIONS

 

¶5. (SBU) Prime Minister Thaksin’s Thai Rak Thai Party and its

allies have gone into full campaign mode for the February 6

national elections, and all other issues are being viewed

through the election prism. It is an unfortunate fact that

public sentiment concerning Thailand’s several free trade

initiatives is almost entirely negative. Perhaps the most

talked about trade deal is Thailand’s “early harvest” tranche

of the ongoing FTA talks with China. While the early harvest

provisions contain significant benefits for prospective Thai

exporters to China, press coverage has centered almost

entirely on increased imports of Chinese onions and garlic,

and resulting depressed prices for Thai farmers in this

sector. (We have yet to see a mass media article that

mentions any increase in consumer welfare due to lower food

prices.)

 

¶6. (SBU) Against this backdrop, the U.S.-Thai FTA talks are

regarded by the RTG as a potential political liability best

avoided in an election campaign. From the perspective of the

RTG, the only way the FTA talks with the U.S. could have been

a useful campaign tool would have been an early harvest

component which contained some attractive market access

improvements for Thai exporters. The U.S. preference for a

single undertaking that addresses substantially all trade and

investment barriers meant that there would be no pre-election

“presents” for Thailand (and the Thai Rak Thai party). Once

that fact was recognized by PM Thaksin and the relevant RTG

ministries, support for a pre-election negotiating round

largely evaporated.

 

¶7. (SBU) But we don’t accept the claim that the postponement

request is all about — or even primarily about — an

exogenous factor like the elections. For one thing, trade

policy, while recently controversial and a political

negative, is not a big vote-mover here. Many issues

overshadow it. For another, Thailand’s FTA talks with Japan

are about as controversial here as those with the U.S., and

yet the previously scheduled FTA talks with that country,

scheduled for the week of December 6 in Bangkok, have gone

ahead (and with very little media scrutiny). We doubt the

December 13 FTA talks with the U.S. in remote Hawaii would

have generated much in the way of media attention here.

 

NEED FOR ADDITIONAL PREPARATION TIME

 

¶8. (SBU) There is no question that the RTG has found itself

ill prepared for negotiations with the U.S. The belated

formation (in early November, five months after the start of

negotiations) of the RTG’s FTA Oversight Committee (chaired

by Finance Minister Somkid) is, in part, a belated

recognition that more work on positions has to be done,

especially in (but not limited to) labor, environment, and

financial services (the Committee’s creation is also partly

motivated by internal power struggles within the RTG — para

15). One of our working level contacts in the Ministry of

Commerce said, “If you look at the guys on our (the RTG’s)

labor and environment teams, you can see right away that they

are not prepared to negotiate anything.” A Labor Ministry

source said that as of late November, his ministry had yet to

complete translating into Thai the text presented by the U.S.

in the October FTA round.

 

¶9. (SBU) But like the elections, we don’t accept that the

need for greater preparation time is the major reason for the

postponement. Only a minority of the negotiating groups were

faced with serious preparation related obstacles that would,

arguably, delay further meetings. Preparation for 90 percent

of the negotiating groups would have been advanced by the

December talks, since the talks would have provided

opportunities for information exchange, clarification of

positions, and so forth. It is evident that factors other

than the need for additional time for preparation played a

role in the postponement.

 

“REQUEST SHOCK”

 

¶10. (SBU) While the RTG thought that it had done its

homework in preparation for the FTA talks with the U.S., it

has found out that much more remains to be done. The RTG –

or at least many of its key officials — were seemingly

caught off guard by the scope and depth of U.S. requests in

many areas. These areas include labor; environment;

financial services. When we express our astonishment to RTG

officials at their surprise at the U.S. agenda (after all,

the U.S. must rank as the most transparent country in the

world in terms of negotiating goals in our trade relations –

our complete negotiating agenda has been available on the

Internet for several months prior to the start of

negotiations), they respond that 1) the full impact and

ramifications of the U.S. requests had not been fully

appreciated; and 2) not all RTG officials had been fully

briefed in advance on the U.S. negotiating position. A

prominent official that probably falls into this category is

the Prime Minister; while he is a supporter of an FTA with

the U.S. — indeed, he claims authorship of the idea — he is

probably unaware of what its contents are likely to be. All

indications are that he has been caught off guard by the

overall U.S. request list, and is disappointed that the U.S.

is unwilling to negotiate a quick and politically attractive

“early harvest” package. (Note: We believe the RTG’s “early

harvest” plan for the FTA with the U.S. largely involved

formally renewing key provisions (Articles 4 and 10) of the

U.S.-Thailand Treat of Amity and Economic Relations.)

 

“LITTLE DEALS WITH BIG COUNTRIES”

 

¶11. (SBU) Seen through Thai eyes, the U.S. requests suffer

from comparison with the other recent trade deals Thailand

has concluded. Many of these deals lack (at least for now)

comprehensive market opening substance, opting instead for

relatively easy “early harvests.” This is the case for both

China and India. Even the FTA with Australia is fairly

slow-pitch: aside from reductions in goods tariffs, very

little was accomplished. By comparison, the breadth of the

FTA with the U.S. is wildly ambitious — maybe too ambitious

for some. One knowledgeable local observer said, “Thaksin

wants little deals with big countries; they make good

headlines without causing too much trouble.”

 

 

“OFFER SHOCK”

 

¶12. (SBU) The RTG has also had to review its strong desire

for a temporary entry chapter (or at least strong temporary

entry provisions as part of a services chapter) in the FTA.

The desire for a U.S. visa is strong in Thailand (the U.S.

has long been the country of choice for education, for

example); one of the strongest appeals of the U.S.-Thailand

Treaty of Amity and Economic relations are the reciprocal

preferential visa provisions. We believe the RTG has been

counting on reaffirming and perhaps upgrading this provision

as a big part of its public sales campaign for the FTA.

Adding insult to injury is the inclusion of temporary entry

chapters in the Chile and — most importantly — Singapore

FTAs. Thailand’s rivalry with the latter country is an

important reason behind the RTG’s persistence in asking for

temporary entry provisions. Lead Thai negotiator Nitya

recently cited the temporary entry provisions negotiated in

the U.S. FTA with Singapore in wondering aloud to the

Ambassador whether an FTA without temporary entry provisions

would be acceptable to the RTG. He said, “Of course, it

isn’t my call, but you know what the Old Colonel (PM Thaksin)

thinks about Singapore.” We believe the RTG’s basic position

on somehow addressing temporary entry is inflexible, and as

such is probably one of a handful of issues that falls

outside the normal give and take of the negotiating process.

In the absence of some treatment of temporary entry in some

context (not necessarily within the FTA), we question whether

the RTG will agree to an FTA.

 

¶13. (SBU) The RTG hopes that the post-U.S. election climate

will be more amenable to the discussion of temporary entry.

In noting that the President’s party has strengthened its

majority in Congress, some officials here are hopeful that

the U.S. may re-think its position on temporary entry and

trade agreements. In arguing for a delay in further FTA

talks, the Prime Minister’s chief economic adviser, Dr.

Pansak Vanyaratyn, asked the Embassy’s Economic Counselor,

“Why don’t we wait until both of our governments have a

mandate?” The “mandate” Pansak probably was referring to in

the case of the U.S. was a reconsideration of our position on

excluding temporary entry from trade agreements.

 

PRIVATE SECTOR OPPOSITION

 

¶14. (SBU) The corporate elites of Thai society are viewed by

many here as highly insecure. “They don’t see any

opportunities in liberalization, only the loss of privilege,”

one source told us. While there is considerable truth in

this statement, we think it is somewhat exaggerated; in

reality, private views are mixed. In general, the Federation

of Thai Industry (which accounts for much of the

manufacturing sector here) generally is supportive of the

FTA. Opposition to the FTA is centered in the Thai Bankers

Association and large swathes of the Thai Chamber of

Commerce. These are powerful organizations, and they no

doubt have made their voices heard.

 

INTER-MINISTERIAL CONFLICT

 

¶15. (SBU) Long simmering differences over policy and

jurisdiction boiled over in the November 21 FTA Oversight

Committee meeting that called for the December round’s

postponement. Far from being resolved, these differences

could become sharper in the coming months. Normally (and by

law), trade negotiations are led by the Ministry of Commerce.

For the U.S. FTA, the Foreign Ministry has the lead. Lead

Thai FTA negotiator Nitya has the title of Adviser to the

Foreign Minister. This is not a very powerful position. The

Chair of the FTA Oversight Committee is Finance Minister

Somkid. Somkid is a politically powerful Cabinet minister (a

coterie of MPs owe him allegiance); he is thought to be a

leading proponent of the skeptical, “go-slow” school

regarding the FTA with the U.S., favoring a narrow agenda

that focuses on traditional market access issues. His major

ally on the FTA Oversight Committee is Dr. Pansak. This pair

have found common cause in blocking Nitya’s plans for the

FTA, which included the December negotiating round. Nitya

(allied with FM Surakiart) favors a full speed ahead,

comprehensive FTA agenda. In terms of both institutional and

personal political power, this pair easily outguns Nitya.

This intra-governmental conflict could continue — and even

worsen — beyond the February elections.

 

¶16. (SBU) At the inaugural November 22 meeting of the RTG’s

newly created FTA Oversight Committee, the various themes of

the several dissenting factions — those concerned over the

elections, inadequate preparations, “request shock”, or

“offer shock,” — came together, finding common cause in a

call to stop forward progress on the FTA pending a

reassessment of the entire FTA exercise. Most observers here

think the FTA talks will be re-started after the elections,

but such an eventuality awaits a formal decision to that

effect by the FTA Oversight Committee.

 

POSSIBLE FUTURE DEVELOPMENTS

 

¶17. (SBU) Frustrated by the proliferation of ill-informed

FTA oversight committees (we currently count four that play

some role in the FTA) and his inability to chart the course

of the FTA talks, Nitya is lobbying to be given the title of

Thai Trade Representative. This can be designated a Cabinet

level position, and would give him a fighting chance of

regaining control over the FTA agenda. We understand a

decision regarding this is not likely until after the

elections. Everyone here thinks that Thaksin’s Thai Rak Thai

party and its allies will win handily, probably increasing

their majority in the lower house of parliament. If the

post-election Minister of Commerce is a politically powerful

figure, it is possible that Commerce may seek to assert its

leadership in the U.S.-Thai FTA talks. In that case,

Commerce probably would resist increasing Nitya’s power, and

the latter could find his position untenable. But, while a

Commerce takeover of the talks could spell trouble for Nitya,

it might not be all bad for the FTA; what is needed to drive

negotiations forward is 1) strong commitment 2) from a

powerful figure. A new Commerce Minister might prove just

the ticket. In this regard, we find it significant that the

Commerce-led FTA talks with both India and China continue to

move forward, while the MFA-led FTA talks with the U.S. and

Japan have been delayed.

 

¶18. (SBU) Somkid and Pansak are thought to be dissatisfied

with both the U.S. negotiating framework and (derivatively)

proposed pace of the FTA negotiations. Somkid (seconded by

Pansak) has described the negotiating mandate set forth in

U.S. Trade Promotion Authority legislation as negotiating

“pre-conditions,” (they count 17 such TPA pre-conditions in

total) and as such undermine the RTG’s desire for both sides

to negotiate from a clean slate. They also object (in

varying degrees) to various U.S. positions (as cited in paras

10-12). Their initial response has been to halt the talks,

albeit temporarily. Somkid and Pansak surely have the

support of PM Thaksin, at least for now. Said one long time

Thai observer, “This is a classic Thai response to being

pushed faster or farther than they want to go; they step

back.”

 

¶19. (SBU) But the temporary delay is only a tactical move; we

think major strategic decisions have been deferred until

after the February elections. Foreign Minister Surakiart

recently told the Ambassador, “We have a mandate to pursue

these talks after the elections,” and vowed to resume talks

once “the necessary parliamentary and legal processes are

complete.” Surakiart added that he had made these points to

U.S. Trade Representative Zoellick during the recent APEC

meeting in Santiago, Chile. The full speed ahead school,

which includes FM Surakiart, have been arguing that with the

proliferation of FTAs, the costs of non-participation are

likely to be very high.

 

¶20. (SBU) In a separate meeting with the Ambassador, Finance

Minister Somkid was somewhat less encouraging, telling the

Ambassador, “We will not do anything we cannot explain to the

Thai people. After the elections, we will meet with our

entire FTA team and look at every position; I think we can

handle everything.” He then made an indirect pitch for an

“early harvest” approach: he described a meeting he had with

the lead Japanese FTA negotiator, where he had urged the

Japanese to consider immediate FTA concessions, leaving other

areas for later. He concluded by saying, “We need to be

careful. Many in Thai society are ready to be opposed to an

FTA with the U.S. We don’t want to let that happen.” While

he didn’t spell out exactly how he proposed to avoid such an

eventuality, the overall message seemed to be, “Go slow, be

moderate in your requests.”

 

¶21. (SBU) We find it significant that no RTG official has

told us they are opposed to the FTA per se. The opposition

for now seems mostly short term and tactical. We think there

is a good chance that even hard core opponents of Nitya, such

as Pansak, may change their tune after the elections; in

Pansak’s economic writings, he touts the modernizing effect

of FTAs. Whatever its short term political advantages may

be, a narrow market access type of FTA will not yield much in

the way of economic modernization.

 

WHAT WE SHOULD DO

 

¶22. (SBU) While it is easy to be discouraged by some of the

attitudes toward the FTA that are prevalent here, we see the

current hiatus as a temporary setback that in no way alters

the overall situation. A Free Trade Agreement with Thailand

clearly remains in our interest. Usually, an FTA is designed

to take bilateral relations to a new level. In the case of

Thailand, however, much of our motivation is the preservation

of our current position. The U.S. currently is Thailand’s

largest trading partner. In investment, U.S. firms have

privileged access to the Thai market under the Treaty of

Amity and Economic Relations (AER). But our status is

imminently threatened by current trends. In view of GATS MFN

issues, we doubt the AER has much of a future as a

stand-alone document. The relentless rise of China’s

economic profile in this region represents a challenge to the

U.S.’s trade and investment leadership. Additionally,

Thailand is negotiating a number or other FTAs, which

probably will create some trade diversion that disadvantages

U.S. exporters. Given these developments, without a new

framework for our commercial relationship we will find it a

challenge to maintain our current position.

 

¶23. (SBU) We also think pursuing an FTA is the right thing

to do for reasons that go beyond maintaining our position

here. A close precedent to what we are trying to accomplish

with our FTA with Thailand is the Mexico component of NAFTA.

Like Mexico, Thailand is a medium-sized developing economy.

Like Mexico, Thailand is essentially not a rules-based

economy, relying, instead, to a great extent on personal,

informal arrangements. As envisioned by the U.S., our FTA

with Thailand will effect a transformation within the Thai

economy, by moving it towards a more rules-based, transparent

way of conducting commerce. Such a transformation will be

hard to achieve; it will be much harder than anything

Thailand is likely to ask the U.S. to do. It is also a safe

bet that, similar to the case with Mexico, that a

comprehensive FTA will see Thailand make the vast majority of

the concessions, since the vast majority of the existing

trade and investment barriers are on the Thai side. Leading

RTG policy makers are aware of the transformational,

modernizing potential of the FTA and, in their more visionary

moments, cite that potential as the FTA’s chief attraction.

But, it is an open question whether the Thai Government or

people are willing and capable of effecting such a

transformation. The chief architect of PM Thaksin’s economic

plan (“Thaksinomics”), Pansak Vanyaratyn, wrote, “I am not

sure we have the iron will to stay the course. I am not

certain that we, meaning, the Thai State or the Thai private

sector, have the will or the stamina to complete the change

that we have set in motion.” We share Dr. Pansak’s

uncertainty.

 

¶24. (SBU) While posing great challenges, the

transformational potential of an FTA with Thailand is what

makes it worthy of great effort on our part. By helping

Thailand move toward more rules-based, transparent, and

efficient governance, an FTA with the U.S. will be the

catalyst for much higher output and living standards in

Thailand. It will be a world showcase, serving as a positive

precedent for the many other developing economies which are

weighing economic development and trade policy options.

 

¶25. (SBU) Deciding on the future course of the FTA is

largely a Thai question which eventually will be resolved by

a debate within the Thai Government and society. Our

opportunity for input is limited. As far as the U.S.

management of the FTA negotiations goes, we don’t have a lot

of fine tuning to recommend since there are few, if any,

complaints in this area. On the contrary, Amb. Nitya has on

several occasions publicly expressed his appreciation for the

professionalism of the lead USTR negotiator.

 

EMPHASIS ON SMEs COULD HELP

 

¶26. (SBU) The Thaksin Government has placed a heavy emphasis

on small and medium sized businesses. Following the 1997

economic crisis, the RTG believed that the potential in SMEs

and the traditional sector, given its great flexibility,

diversity, and low import content, would provide a new source

of economic growth and income. The RTG has introduced a host

of economic programs aimed at boosting this sector of the

Thai economy, which already accounts for almost 40 percent of

Thailand’s GDP. This sector also represents a core

constituency of Thaksin’s Thai Rak Thai party.

 

¶26. (SBU) Our FTA framework could be more attractive to the

RTG if there was a greater emphasis on SMEs across the

various negotiating groups. This would mainly involve

changes in formatting and emphasis, not new concessions. RTG

officials point out that an FTA that could be marketed in

Thailand as an “SME FTA” would be a much easier sell to Thai

public opinion (and would be much more attractive to PM

Thaksin, whose exact position on the RTG’s internal FTA

debate remains uncertain). Our nascent “Group on Small and

Medium Enterprises and Other Cooperation” represents a good

start; it is possible that other opportunities to emphasize

SMEs could be identified and exploited in other negotiating

areas. For example, in the government procurement chapter it

might be possible to highlight the small business set-aside

provisions, and gear our efforts in trade capacity building

toward this area. It might be possible to enlist the aid of

the U.S. Small Business Administration on this project.

 

¶27. (SBU) In spite of the delay and internal RTG

soul-searching, we remain basically optimistic about the

FTA’s prospects because we don’t see how anyone’s fundamental

interests in having an FTA have changed. It is

overwhelmingly in Thailand’s interest to have an FTA with the

U.S., whether one argues on the grounds of its

transformational, modernizing effect; the high costs of

non-participation; market access; strategic alliances; or

some combination of these. An FTA with Thailand remains

overwhelmingly in our interest, whether one argues on the

grounds of maintaining our strong position here; the hugely

beneficial transformational effects in the Thai economy

likely to accrue from the FTA; or the demonstration effect on

other developing economies. In asking for a comprehensive,

transformational FTA with the U.S., we are asking Thailand to

do something unprecedented, something that it will find very

hard. Negotiations are likely to take some time. Progress

might be non-linear, with periods of rapid movement forward,

followed by some regression, a hiatus, and a repetition of

this cycle. It will require patience, determination, and

judgment, with no guarantee of success. But we believe it is

worth the considerable effort likely to be required.

JOHNSON

UNCLAS BANGKOK 006994

 

SIPDIS

 

STATE/EB/TPP/ABT EDWARD HEARTNEY

COMMERCE/ITA/OTEXA MARIA D’ANDREA

 

E.O. 12958: N/A

TAGS: ECON ETRD EAGR TH

SUBJECT: TRACKING CHANGES IN TEXTILE AND APPAREL: AMEMBASSY

BANGKOK RESPONSE

 

REF: STATE 184238

 

¶1. This report responds to information requests contained in

reftel on “Tracking changes in textiles and apparel

employment and production after quota elimination.”

 

¶2. Total textile and apparel production in USD value: 14.34

billion USD (down 3% from 2002).

 

¶4. Share of textiles and apparel of total Thai exports:

2001 — 8%

2002 — 7.5%

2003 — 6.8%

2004 (Jan to August) — 6.6%

 

¶5. Total manufacturing employment in Thailand is estimated to

be 1.1 million.

 

¶6. Total textile-related employment in Thailand is estimated

to be 773,337. Textile employment is usually 70-80% of total

manufacturing employment.

 

¶7. As one of the largest sources of manufacturing employment

in Thailand, the textiles and apparel sector is important.

There are reportedly 4570 textile and apparel factories in

Thailand, most of which are SMEs. However, several big

factories account for 80% of total production. While most

factories are engaged in garment assembly, there are 8-10

large spinning mills relying on imported yarn.

 

¶8. The RTG collects information on an annual basis.

 

¶9. The RTG is generally able to collect accurate figures on

formal sector employment. However, measuring informal sector

employment — where significant numbers of textiles and

apparel workers may be found — is a challenge.

JOHNSON

“248568″,”2/12/2010 10:19″,”10PHNOMPENH103″,

“Embassy Phnom Penh”,”CONFIDENTIAL”,

“09PHNOMPENH960|10PHNOMPENH89″,”VZCZCXRO2311

PP RUEHCHI RUEHDT RUEHHM RUEHNH

DE RUEHPF #0103/01 0431019

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RHHMUNA/USPACOM HONOLULU HI PRIORITY”,

“C O N F I D E N T I A L SECTION 01 OF 04

PHNOM PENH 000103

 

SIPDIS

 

STATE FOR EAP/MLS

 

E.O. 12958: DECL: 02/10/2020

TAGS: PREL, PGOV, PBTS, MARR, TH, CB

SUBJECT: DAS MARCIEL REVIEWS U.S. POLICY WITH GOVERNMENT,

OPPOSITION, CIVIL SOCIETY

 

REF: A. PHNOM PENH 89 (ICC)

B. 09 PHNOM PENH 960 (UIGHURS)

 

Classified By: AMBASSADOR CAROL A. RODLEY FOR REASONS 1.4 (B, D)

 

1. (SBU) SUMMARY. In a wide range of meetings with Cambodian

officials, opposition party members, NGOs and civil society,

Deputy Assistant Secretary for East Asian and Pacific Affairs

Scot Marciel spotlighted stepped-up engagement by the United

States in Cambodia while highlighting specific issues such as

the Uighur deportation, bilateral debt, Preah Vihear, the

Anti-Corruption Law, and resolution of the Cambodian-Thai

border dispute. Both DPM Sok An and FM Hor Namhong renewed

the Cambodian commitment to settle the dispute with Thailand

peacefully. Sok An detailed Cambodian claims to the Preah

Vihear temple area, and Hor Namhong expressed appreciation

for increased U.S. participation in the region, including the

Lower Mekong Initiative. He also extended an invitation for

the Secretary to visit on the occasion of the 60th

anniversary of diplomatic relations in July. Economic

experts highlighted concerns about sustainable economic

growth and macroeconomic stability, particularly in light of

the expected closure of the IMF office in Cambodia this year.

Opposition parliamentarians were less downbeat about

identified deficiencies in Cambodia\’s tighter political

space, and more deliberate in identifying actions they could

take to improve the situation. In meetings with civil

society, the Uighurs, Sam Rainsy\’s conviction, and a proposed

NGO law figured prominently. DAS Marciel spoke on U.S.

foreign policy in the region to 400 university students, who,

in a spirited exchange, demonstrated that Cambodia\’s youth is

a vibrant reminder of the promise of Cambodia\’s future. END

SUMMARY.

 

Debt and Impact of Uighur Decision

———————————-

 

2. (C) Deputy Prime Minister and Minister of Foreign Affairs

Hor Namhong reiterated his request to Secretary Clinton to

reschedule bilateral debt, suggesting now that 70% of the

debt be diverted to development assistance and that 30% would

be repaid. DAS Marciel outlined the legal obstacles to debt

forgiveness, and indicated that the process was complicated

further by Cambodia\’s recent decision to deport 20 Uighur

asylum seekers to China (Ref B). Stating that there was

great concern in the administration and Congress regarding

the decision, DAS Marciel maintained that the question of

debt relief for Cambodia had become much more difficult as a

result, since the deportation raised questions about how

Cambodia will handle future asylum seekers. Hor Namhong

responded by stating that \”many factors\” were considered

prior to returning the Uighurs, but in the end, it was

determined that they were \”not refugees because there is no

war in China.\” Additionally, he claimed that the Uighurs\’

passage from China to Cambodia was orchestrated by an

organization in the U.S. and that if they were allowed to

stay, more would follow, creating a situation that Cambodia

is not equipped to handle.

 

ASEAN and the UN

—————-

 

3. (SBU) Stating that the U.S. is committed to building a

strong relationship with ASEAN, DAS Marciel noted that a

Resident Representative of the U.S. Ambassador for ASEAN

Affairs recently arrived in Jakarta to establish a Permanent

Mission. Hor Namhong stated that ASEAN is pleased about the

United State\’s increased interest in the region and declared

that there are only two alternatives for the next ASEAN-U.S.

summit – Vietnam or the United States. Noting that Asia is

moving in the right direction with closer cooperation,

increased trade, and enhanced security, Hor Namhong expressed

frustration that initiatives such as Australia\’s Asia Pacific

Community (APC) result in duplication of existing frameworks

such as that of APEC, ARF, EAS, and ASEAN. Hor Namhong

stated that Cambodia is supportive of U.S. participation in

existing communities, such as EAS, but indicated the timing

of the APC is not right nor is its role in the region clear.

(NOTE: Hor Namhong\’s comments on the APC echo similar public

statements made by Prime Minister Hun Sen in January. END

NOTE.)

 

4. (SBU) Hor Namhong then appealed to the U.S. for support of

Cambodia\’s 2012 bid to become a non-permanent member of the

UN Security Council in 2013, which has ASEAN\’s support.

Given its history of UN involvement, Cambodia is well placed

to sit on the Council and share knowledge with other members,

he urged. DAS Marciel responded that Cambodia\’s experiences

 

PHNOM PENH 00000103 002 OF 004

 

would certainly bring an important perspective to UNSC

deliberations.

 

Burma Elections in May?

———————–

 

5. (C) Expressing his appreciation of the new U.S. policy on

Burma, Hor Namhong indicated that Burma is interested in

working with the United States. and would like to join the

Lower Mekong Initiative. He stated that the Burmese FM told

the Cambodian Ambassador recently that elections will be held

in May 2010, and that ten political parties, including Aung

San Suu Kyi\’s, would be allowed to participate.

Additionally, the Burmese government has requested that ASEAN

send election observers. According to Hor Namhong, during a

closed-door meeting at the ASEAN summit, member nations urged

Burmese officials to hold credible and democratic elections.

Agreeing that the election would indeed be an opportunity for

progress, DAS Marciel expressed concern that opposition

leaders are unable to campaign and much work is required

before a truly free and fair election can be held.

 

Thailand and Image

——————–

 

6. (C) Given the recent verbal exchanges between Prime

Minister Hun Sen and Thai Prime Minister Abhist Vejjajiva,

DAS Marciel expressed concern that in addition to raising

tensions in the region, such combative public comments are

hurting both countries\’ international images and could

negatively impact tourism and investment. Hor Namhong stated

that Cambodia is committed to normalizing relations with

Thailand, that the \”Thaksin issue\” should be set aside, and

focus should instead be on solving the border dispute. He

further stated that \”Cambodia cannot accept Thailand\’s claim

to Cambodian territory, and Thailand won\’t withdraw the

claim, so the only way to settle is through legal means.\”

(Note: In recent speeches, PM Hun Sen has indicated a desire

to take the issue to the ICJ and the UNSC. End Note.)

 

Improved Bilateral Relations

—————————–

 

7. (SBU) The FM expressed appreciation for improved

U.S.-Cambodian relations during the last few years. He

specifically thanked the U.S. for support in the areas of

health, education, demining, economic development, and local

administration reforms. Hor Namhong also discussed the work

of a joint commission which is planning events to commemorate

the 60th anniversary of diplomatic relations between the U.S.

and Cambodia to include bilateral agreements, MOUs and

cultural programs. In that context, he extended an

invitation to Secretary of State Clinton to visit Cambodia in

July, when a series of bilateral agreements could be signed.

DAS Marciel credited the Cambodian government for increased

development of the country, thanked Cambodia for its support

in recent UNGA votes which were appreciated by the United

States, and congratulated the FM on his initiative to

position Cambodia as one of the first countries to associate

itself with the Copenhagen Accord.

 

Sok An: Up on Preah Vihear, Down on Thai \”Invasion\”

——————————————— ——

 

8. (SBU) Deputy Prime Minister and Minister of the Council

of Ministers Sok An highlighted recent successes with the

Khmer Rouge Tribunal (septel) and the extension of a Chevron

agreement to exploit oil and gas resources in the offshore

Block A in Cambodian territorial waters. On the

Cambodian-Vietnamese border demarcation process, Sok An noted

that it is possible the border line that is being drawn in

principle according to maps and agreed rules may cut through

the rice fields of both Cambodians and Vietnamese, who then

find themselves theoretically on the wrong side of the

border. \”We are seeking an appropriate solution,\” he stated.

Turning to the Thai border and drawing on a six-inch pile of

maps, documents, and brochures, Sok An gave a blow-by-blow

account of the inviolability of Cambodian claims to Preah

Vihear and the surrounding territory based on the 1962 ICJ

decision, the irreversibility of the 2008 UNESCO inscription

of Preah Vihear as a World Heritage Site, and the

indisputably uncooperative attitudes of the Thai by, among

other acts of arrogance and slights to Cambodia, invading

Cambodian sovereign territory on July 15, 2008.

 

9. (SBU) Sok An reviewed recent Cambodian achievements with

the Preah Vihear world heritage site development plan, noting

the construction of new access roads and an East-facing

 

PHNOM PENH 00000103 003 OF 004

 

staircase up the escarpment to the mountain temple. An

eco-village for 300 families who had been re-located was

already far along and a market at the foot of the temple

entrance re-designed. The RGC had already spent $99 million

in the area of Preah Vihear and around the border, he stated.

As an International Coordinating Committee (ICC) is formed

(Ref A), Cambodia is inviting the United States to join and

perhaps even co-chair the ICC, he said. When asked about the

UNESCO requirement that Thailand be invited to join the Preah

Vihear ICC, Sok An said that he was \”very reluctant\” to

include them. He noted first that this condition had been

imposed in early July, before the \”Thai invasion\” and,

secondly, the Thai behavior at a recent Angkor Wat ICC –

when a delegation packed with Thai MFA members did not want

to join in the technical preservation discussion but wanted

to raise political issues — had shown that the Thai could

not be trusted to make a positive contribution. DAS Marciel

said that the U.S. would look seriously at playing a role in

the Preah Vihear ICC, but urged the RGC to continue to work

together with Thailand to ease bilateral tensions.

 

Anti-Corruption Law

——————-

 

10. (SBU) DPM Sok An confirmed that the Council of Ministers

had recently transmitted to the National Assembly the draft

Anti-Corruption Law (ACL) for its consideration. Now that

the four basic laws related to civil and penal codes and

procedures were in place, and given an influx of a younger

cadre of judges capable of understanding these

inter-dependent laws, Sok An was confident that the

government was ready to work on an Anti-Corruption Law. He

said the RGC would build three pillars of support for a new

law: education, law enforcement, and mass support. The RGC

now realized the importance of mass support because, when a

case of corruption is brought against individuals, they \”do

everything to fight\” it, he said. He cited Hong Kong and

Singapore as the best models for Cambodia and noted that the

former RCAF headquarters compound would be transformed into

an Anti-Corruption Institute. Noting continued U.S. support

for an ACL, and remarking that any effort to tackle the

difficult issue of corruption must have the strong support of

the leadership, DAS Marciel noted the United States looked

forward to its passage.

 

Opposition Politics

——————-

 

11. (SBU) In a meeting with Sam Rainsy Party parliamentarians

Mu Sochua and Son Chhay and Human Rights Party MP Ou

Chanrith, DAS Marciel emphasized U.S. commitment to stepping

up its engagement with the Cambodian government to support

democracy, good governance, and the rule of law. While

initially predicting a dire future for democracy and a

diminished role for the opposition, the MPs still held out a

vision for their own role to reform institutions in Cambodia.

All three had clear proposals for future activities funded

by U.S. assistance: organize more voter forums at the local

level; assist with reform measures such as implementation of

an impending Anti-Corruption Law; support fair coverage of

the opposition in the mainstream media; and strengthen USG

support for \”alternative media\” such as RFA and VOA, which

give the opposition more balanced radio air time. Son Chhay

urged the USG to use its position of influence not just to

\”sweet talk\” the RGC but to advocate that it take more

seriously its human rights obligations. SRP Mu Sochua urged

the U.S. to review the \”quality of assistance\” in the

maternal health area so that aid dollars resulted in the

desired reduction of maternal mortality. (NOTE: At about 470

per 100,000 live births, Cambodia\’s maternal mortality rate

is among the highest in the region. END NOTE.) DAS Marciel

assured the opposition leaders that, in addition to paying

attention to issues they raised, the U.S. was concerned about

the political space in Cambodia and had bluntly raised those

concerns with the government.

 

The NGO Perspective

——————-

 

12. (SBU) Speculation about a proposed NGO Law dominated DAS

Marciel\’s discussion with civil society representatives about

the overall health of civil society in Cambodia. One

representative captured attention with his claim that \”there

is no civil society in Cambodia anymore,\” predicting that

Cambodia will soon become like Vietnam, where he believed the

government allowed NGOs to work on economic and development

issues, but prohibited advocacy. Most agreed that while

there are many NGOs providing services in Cambodia, the other

 

PHNOM PENH 00000103 004 OF 004

 

elements of civil society, particularly those that advocate

for government change — such as unions, journalists,

opposition parties, and advocacy organizations — are

operating in an increasingly challenging environment. They

voiced deep concern about a proposed NGO Law, and speculated

that the new law will require all NGOs currently operating in

Cambodia to re-register, presenting an opportunity for the

RGC to disapprove particular organizations it dislikes. The

independence and credibility of the judiciary also came under

attack when DAS Marciel raised the issue of Sam Rainsy\’s

conviction for incitement and property destruction.

Representatives criticized the government for using the

courts to settle its political scores, with once noting that

independent of the politics and legal questions involved, he

believed the court acted \”inappropriately\” in intervening in

the situation, and that courts \”should not be used as a tool

for silencing debate.\”

 

13. (SBU) Civil society representatives were also sharply

critical of the government\’s decision to deport 20 Uighurs in

December. Christophe Peschoux, the Representative of the UN

Office of the High Commissioner for Human Rights (UNOHCHR),

stated that mid-level officials in the RGC wanted to and were

prepared to adhere to Cambodia\’s commitments under the 1951

Refugee Convention, but were overruled by officials at the

highest level at the last minute. Peschoux noted that the

past system of refugee protection in Cambodia had been

effective, albeit with its \”ups and downs,\” but that the

Uighur deportation \”shattered\” this perception of efficacy

and credibility. He remarked that the Ministry of Interior

will have to take specific corrective actions in order to

regain the confidence of civil society. Other

representatives expressed disappointment in the role played

by the UN High Commission for Refugees (UNHCR), and agreed

that the presence and capability of UNHCR also needed review

and augmentation.

 

Cambodian Youth Inquisitive of U.S. Policy

——————————————

 

14. (SBU) DAS Marciel summarized U.S. foreign policy in the

ASEAN region and in Cambodia to a packed auditorium of 400

students at Pannasastra University. His remarks prompted a

slew of questions, with students curious to learn more about

the U.S. government\’s decision to enhance its engagement with

ASEAN and the U.S. role in addressing the challenges of

climate change. Several students sought DAS Marciel\’s candid

assessment of politics and democracy in Cambodia, revealing a

sophisticated understanding of the challenges to

strengthening democratic institutions in Cambodia and a

proactive style in addressing the issues of the day.

 

Economic Challenges Ahead

————————-

 

15. (SBU) Economic experts, including country directors from

the World Bank, IMF, and Asia Development Bank, explained

that Cambodia\’s narrowly-based economy contracted by

approximately 2 percent in 2009 as a result of the global

economic crisis, declining significantly from the remarkable

near 10 percent growth of the past decade. They described

Cambodia at a crossroads, with the path leading to

sustainable growth dependent on the leadership\’s ability to

make the right decisions on key policies affecting public

financial management and responsible use of its natural

resources. While acknowledging that investment in

infrastructure development and the agriculture sector is

necessary to diversify the economic base, they expressed

concern about the long-term cost of some development

assistance in these sectors. In particular, the IMF

representative stated that the terms of financing for the USD

1.3 billion in loans provided by China in 2008 and 2009,

primary for infrastructure development, are unclear, raising

significant concerns about Cambodia\’s debt sustainability.

The experts all agreed that the timing of the closure of the

IMF office in Cambodia (expected in April of this year) is

unfortunate, coinciding with significant macroeconomic

challenges facing the country, such as balance of payments

and sustainability of the debt, and urged the U.S. to

encourage the IMF to review its decision.

 

16. DAS Marciel did not have an opportunity to clear this

cable.

RODLEY

“

“244036″,”1/19/2010 0:41″,”10PHNOMPENH29″,

“Embassy Phnom Penh”,”UNCLASSIFIED”,

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STATE FOR EAP/MLS, EB/IFD/OIA, EB/TPP/ABT, EEB/TPP/MTA, EEB/TPP/BTA

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SIPDIS

 

E.O. 12958:N/A

TAGS: ECON, EFIN, EINV, ELAB, ETRD, KIPR, OPIC, KTDB, USTR, CB

SUBJECT: 2010 INVESTMENT CLIMATE STATEMENT – CAMBODIA

 

REF: 09 STATE 124006

 

PHNOM PENH 00000029 001.12 OF 017

 

1. Cambodia, a developing country, began the transformation from a

command economy to the free market in the late 1980s. It is now

integrating into the regional and world trading framework. In 1999,

Cambodia joined the Association of Southeast Asian Nations (ASEAN)

and in September 2004, became a member of the World Trade

Organization (WTO). On December 15, 2008 the entry into force of

the ASEAN Charter brought Cambodia and other member states into a

new regional legal framework. Cambodia has shown interest in

participating in other international trading arrangements, including

the Asia-Pacific Economic Cooperation forum (APEC).

 

2. As part of its WTO commitments to strengthen the investment

climate for both foreign and domestic businesses, Cambodia committed

to enact 47 laws or regulations to address areas where existing law

did not meet WTO requirements. Cambodia has been behind schedule in

fulfilling its WTO commitments to pass necessary business

legislation concerning the general business environment, trade in

goods, trade in services, and the protection of intellectual

property rights. However, the country has made progress recently,

passing several significant laws in 2008, including a Law on Plant

Breeder Rights and Law on Civil Aviation, and in 2009, the

government promulgated a Law on Tourism, a Law on Insolvency, and a

sub-decree establishing a national commercial arbitration body. The

government has either completed drafts of most of the remaining

required laws or is waiting for their approval by the legislature.

 

3. Since the re-establishment of a constitutional monarchy in 1993,

the economy has grown steadily. From 2004 to 2008, the economy grew

at an average of approximately 10 percent per year, driven largely

by an expansion in the garment, construction, agriculture, and

tourism sectors. In 2005, exploitable oil and natural gas deposits

were found beneath Cambodia\’s territorial waters, representing a new

revenue stream for the government if commercial extraction begins.

Mining also is attracting significant investor interest,

particularly in the northern parts of the country. However, the

global economic crisis has adversely affected the economy\’s key

pillars and economic growth was expected to contract in 2009.

 

4. Inflation decreased from its sharp rise in 2008, which peaked at

25.7 percent in May 2008 driven largely by the global surge in oil

and food prices. Because the economy is heavily dollarized, a

depreciation of the Cambodian riel and the U.S. dollar against

trading partner currencies contributed to imported inflation, while

rising domestic demand contributed to domestically generated

pressures. However, these pressures lessened in 2009 and Cambodia

recorded an average inflation rate of an estimated 4.5 percent and a

7.5 percent year-on-year inflation rate.

 

5. Foreign Direct Investment (FDI) approved by the Council for the

Development of Cambodia (CDC), Cambodia\’s investment approval body,

has dramatically increased in recent years, with approved proposals

peaking at nearly USD 11 billion in 2008, compared with USD 201

million in 2004. However, figures for the first 10 months of 2009

reveal that investment has slowed significantly to only USD 1.6

billion, an 82 percent decrease compared to total investments in

2008. The CDC does not have a functional mechanism to monitor

implementation of projects, so it is not clear how many proposed

projects are fully implemented. Corruption has been singled out as

one of the most serious deterrents to private investment.

 

6. Since early 1999, the Cambodian government has intensified its

economic reform program, a process the international financial

institutions and donors encourage, participate in, and monitor

closely. In recent years the government has publicly committed

itself on numerous occasions to fighting corruption, pursuing good

governance, and increasing transparency and predictability. This

strategy is set out in phase II of the government\’s latest public

reform effort called the \”Rectangular Strategy for Growth,

Employment, Equity, and Efficiency.\”

 

7. The government has initiated specific measures to promote

business, especially small and medium-sized businesses, by reducing

costs and the time required for business registration and by

establishing a number of committees for business promotion and trade

facilitation.

 

PHNOM PENH 00000029 002.8 OF 017

 

Openness to Foreign Investment

——————————

 

8. Cambodia officially welcomes foreign direct investment.

Cambodia\’s 1994 Law on Investment established an open and liberal

foreign investment regime. All sectors of the economy are open to

foreign investment and 100 percent foreign ownership is permitted in

most sectors. Article 44 of the Constitution provides that only

Cambodian citizens and legal entities have the right to own land.

However, a new law allowing foreign ownership of properties located

above the ground floor is expected to be passed in 2010. Aside from

this, there is little or no discrimination against foreign investors

either at the time of initial investment or after investment.

However, some foreign businesses have reported that they are at a

disadvantage vis-a-vis Cambodian or other foreign rivals, who engage

in acts of corruption or tax evasion, or take advantage of

Cambodia\’s poor enforcement of legal regulations.

 

9. In addition, there are a few sectors open to foreign investors

which are subject to conditions, local equity participation, or

prior authorization from relevant authorities. These sectors

include manufacture of cigarettes, movie production, rice milling,

exploitation of gemstones, publishing and printing, radio and

television, manufacturing wood and stone carvings, and silk weaving.

The government has issued a sub-decree restricting foreign

ownership of hospitals and clinics and forbidding the employment of

non-Cambodian doctors in any specialty in which the Ministry of

Health considers there to be an adequate number of Cambodian

practitioners.

 

10. Under a sub-decree dated September 2005, Cambodia prohibits

certain investment activities, including investment in production or

processing of psychotropic and narcotic substances, poisonous

chemicals, agricultural pesticides and insecticides, and other goods

that use chemical substances prohibited by international regulations

or the World Health Organization that affect public health and the

environment. Production of electric power by using waste imported

from foreign countries is prohibited, as is forestry exploitation.

 

11. The privatization of state enterprises and transactions

involving state property has not always been carried out in a

transparent manner. In several instances, the public learned that

enterprises were for sale or swap only after the government

announced a sale or deal to a particular buyer.

 

12. Investor rights (investment guarantees) provided for in the Law

on Investment include:

– Foreign investors shall not be treated in a discriminatory

manner by reason of being a foreign entity, except in respect to

land ownership as provided for in the Constitution of the Kingdom of

Cambodia.

– The Royal Government of Cambodia shall not undertake a

nationalization policy that adversely affects the private property

of investors.

– The Royal Government of Cambodia shall not fix the price of

products or fees for services.

– The Royal Government of Cambodia, in accordance with relevant

laws and regulations, shall permit investors to purchase foreign

currencies through the banking system and to remit abroad those

currencies as payments for imports, repayments on loans, payments of

royalties and management fees, profit remittances and repatriation

of capital.

 

13. The following is a summary of Cambodia\’s rankings in

international indexes and the Millennium Challenge Corporation score

card.

 

Measure Year Index/Ranking

TI Corruption Index 2009 2/158

Heritage Economic Freedom 2009 56.6/106

World Bank Doing Business 2010 145/145

MCC Govnt Effectiveness 2009 0.00/05 percent

MCC Rule of Law 2009 -0.20/33 percent

MCC Control Corruption 2009 -0.30/12

MCC Fiscal Policy 2009 -2.4/35 percent

MCC Trade Policy 2009 63.4/36 percent

MCC Regulatory Quality 2009 0.21/65 percent

 

PHNOM PENH 00000029 003.8 OF 017

 

MCC Business Start Up 2009 0.765/16 percent

MCC Land Rights Access 2009 0.769/88 percent

MCC Natural Resource Mgmt 2009 68.75/61 percent

 

Conversion and Transfer Policies

——————————–

 

14. There are no restrictions on the conversion of capital for

investors. The Foreign Exchange Law allows the National Bank of

Cambodia (the central bank) to implement exchange controls in the

event of a crisis; the law does not define what would constitute a

crisis. The U.S. Embassy is not aware of any cases in which

investors have encountered obstacles in converting local to foreign

currency or in sending capital out of the country.

 

15. The U.S. dollar is widely used and circulated in the economy.

The 2009 exchange rate was stable, although slightly depreciated

compared to 2008. As of December 2009, the exchange rate was USD 1

= 4,164 riel. The government is committed to maintaining exchange

rate stability.

 

Expropriation and Compensation

——————————

 

16. Article 44 of the Cambodian Constitution, which restricts land

ownership to Cambodian nationals, also states that \”the (state\’s)

right to confiscate properties from any person shall be exercised

only in the public interest as provided for under the law and shall

require fair and just compensation in advance.\” Article 58 states

that \”the control and use of state properties shall be determined by

law.\” The Law on Investment provides that \”the Royal Government of

Cambodia shall not undertake a nationalization policy which

adversely affects the private property of investors.\”

 

17. In late 2009, the National Assembly approved the Law on

Expropriation which sets broad guidelines on land-taking procedures

for public interest purposes and defines public interest activities

such as construction of infrastructure projects, development of

buildings for national protection and civil security, construction

of facilities for research and exploitation of natural resources,

and construction of oil pipeline and gas networks.

 

18. In spite of various legal protections, protection of immovable

property rights is complicated by the fact that most property

holders do not have legal documentation of their ownership rights.

Numerous cases have been reported of influential individuals or

groups acquiring property through means not entirely in keeping with

the Constitution or laws. This murky property holding environment

may adversely affect long-term leases and /or corporate social

responsibility goals unless proper due diligence is conducted. Cases

of inhabitants being forced to relocate continued to occur when

officials or businesspersons colluded with local authorities,

although the numbers reported dropped significantly from the

previous year. Human rights NGO ADHOC reported receiving 186 land

related cases during the year. During the same period, another NGO

received 115 land related cases in Phnom Penh and 14 provinces,

affecting a total of 8,806 families. Some of those expelled

successfully contested these actions in court, but the majority of

the cases in the courts were still being processed.

 

19. To date, there are no known investment disputes involving

government expropriation of property belonging to U.S. citizens. Up

to 17 Thai businesses sustained varying degrees of damage during

anti-Thai rioting in Phnom Penh on January 29, 2003. The Cambodian

government pledged to compensate Thai business owners, and all of

claims have been resolved.

 

Dispute Settlement

——————

 

20. Cambodia\’s legal system is a mosaic of pre-1975 statutes

modeled on French law, communist-era legislation dating from

1979-1991, statutes put in place by the UN Transitional Authority in

Cambodia (UNTAC) during the period 1991-93, and legislation passed

by the Royal Government of Cambodia since 1993.

 

21. Cambodian culture and its legal system have traditionally

favored negotiation and conciliation over adversarial conflict and

 

PHNOM PENH 00000029 004.10 OF 017

 

adjudication. Thus, compromise solutions are the norm, even in

cases where the law clearly favors one party in a dispute. In civil

cases, courts will often try conciliation before proceeding with a

trial.

 

22. Cambodia\’s court system is generally seen as non-transparent

and subject to outside influence. Judges, who have been trained

either for a short period in Cambodia or under other systems of law,

have little access to published Cambodian statutes. Judges can be

inexperienced and courts are often understaffed with little

experience, particularly in adjudicating commercial disputes. The

local and foreign business community reports frequent problems with

inconsistent judicial rulings as well as outright corruption, and

difficulty enforcing judgments. For these reasons, U.S. investors

are reluctant to resort to the courts to resolve commercial

disputes.

 

23. The Cambodian judiciary system is beginning to undergo reform.

To provide the necessary background knowledge, judges and court

staff from around the country are being trained by the Royal Academy

for Judges and Prosecutors, which was created in 2002. In an effort

to clean up the court system, the Prime Minister has announced ad

hoc anti-corruption measures, including the dismissal, replacement,

and transfer of judges and prosecutors. The Supreme Council of

Magistracy, comprised of a president (the King) and eight other

members, is responsible for the appointment and conduct of judges

and prosecutors.

 

24. To address the perception of many Cambodian and foreign

business representatives that the court system is unreliable and

susceptible to external political and commercial influence, the

Cambodian government is finalizing draft legislation to create a

Commercial Court. In July 2009, the government passed a sub-decree

creating a commercial arbitration body, the National Arbitration

Center in the Ministry of Commerce. When the National Arbitration

Center is operational, parties involved in a commercial dispute that

have a written arbitration agreement will be able to settle

commercial disputes by means of quasi-judicial methods without

involvement of the Cambodian courts. Parties will be able to select

arbitrators without direct government interference. The Law on

Commercial Arbitration also allows the Cambodia Chamber of Commerce

to establish its own arbitration center for disputes between members

or between members and third parties. The law also mandates

recognition of arbitral awards made outside of Cambodia.

Arbitration awards can be appealed to the Appellate and Supreme

Court of Cambodia based on limited grounds.

 

25. To handle specific disputes with regard to labor, the Ministry

of Labor and Vocational Training established an Arbitration Council

in May 2003. Basing its decision on the provisions of the Labor

Law, the Council has 30 arbitrators. The Council is an independent

body whose function is to resolve collective labor disputes that the

Ministry is unable to solve by conciliation. The Council\’s

decisions are non-binding but it has been very successful in

reducing the number of industrial actions in the garment sector.

The Council plays a vital role in contributing to the development of

healthy industrial relations in Cambodia. The Council\’s success in

the garment industry has prompted unions in other sectors, e.g., the

hospitality and tourism sectors, to seek the Council\’s arbitration

and mediation services.

 

26. Cambodia became a party to the Convention for the Settlement of

Investment Disputes between States and Nationals of Other States in

2005. In 2009, the International Center for the Settlement of

Investment Disputes (ICSID) approved a U.S. investor\’s Request for

Arbitration in a case against the Kingdom of Cambodia.

 

Performance Requirements and Incentives

—————————————

 

27. The Council for the Development of Cambodia (CDC), Cambodia\’s

foreign investment approval body, administers a package of

investment incentives. The CDC was created as a one-stop shop to

facilitate foreign direct investment.

 

28. Seeking to increase government revenue, the international

financial institutions recommended that the Cambodian government

scale back its investment incentives. Consequently, the Cambodian

 

PHNOM PENH 00000029 005.8 OF 017

 

government amended the Law on Investment in 2003. The law creates

regimes for profit (20 percent), salary (5 to 20 percent),

withholding (4 to 15 percent), value-added (10 percent) and excise

taxes (rates vary). While some incentives have been eliminated, the

law provides a simplified, more transparent, and faster mechanism

for investment approval.

 

29. Under the amended Law on Investment, the profit tax exemption

is allocated automatically on the basis of activity and minimum

investment amounts as set out in the sub-decree. To maintain the

incentives under the law, qualified investment projects (QIP) are

required to obtain an annual Certificate of Compliance from the CDC

and file this with the annual tax return.

 

30. The amended Law on Investment includes the following

provisions, which include the exemption, in whole or in part, of

customs duties and taxes, for QIPs:

– An exemption from the tax on profit imposed under the Law on

Taxation for a set period. The tax exemption period is composed of

a trigger period + three years + n years (a number of years

determined according to the Financial Management Law and depending

on the economic sector). The maximum allowable trigger period is to

be the first year of profit or three years after the QIP earns its

first revenue, whichever is sooner.

– 100 percent exemption from import duties for construction

material, production equipment and production input materials for

export QIPs and supporting industry QIPs in accordance with the

provisions of the sub-decree on the Implementation of the Amendment

to the Law on Investment

– Transfer of incentives by merger or acquisition.

– Renewable land leases of up to 99 years on concession land for

agricultural purposes and land ownership permitted to joint ventures

with over 50 percent equity owned by Cambodians.

– No price controls on goods produced or services rendered by

investors.

– No discrimination between foreign and local investors.

– 100 percent exemption from export tax or duty, except for

activities specifically mentioned in the Law on Customs.

– Employment of foreign expatriates where no qualified Cambodians

are available. QIPs are entitled to obtain visas and work permits.

– A QIP that is located in a designated special economic zone

(SEZ) is entitled to the same incentives and privileges as other

QIPs as stipulated in the law.

 

31. The September 2005 sub-decree on the Implementation of the

Amendment to the Law on Investment also details investment

activities that are excluded from incentives, although investment is

permitted. They include the following sectors: retail, wholesale,

and duty-free stores; entertainment (including restaurants, bars,

nightclubs, massage parlors, and casinos); tourism service

providers; currency and financial services; press and media related

activities; professional services; and production and processing of

tobacco and wood products.

 

32. Incentives are also excluded in the production of certain

products with an investment of less than USD 500,000 such as food

and beverages; textiles, garments and footwear; and plastic, rubber,

and paper products. Investors are encouraged to refer to the

sub-decree for details of other investment activities that are

excluded from incentives.

 

33. Investment activities that are eligible for customs duty

exemption, but not eligible for the profit tax exemption, are

telecommunication basic services; exploration of gas and oil,

including supply bases for gas and oil activities; and mining.

 

34. Cambodia allows foreign lawyers to supply legal services with

regard to foreign law and international law, and allows them to

supply certain legal services with regard to Cambodian law in

\”commercial association\” with Cambodian law firms. Cambodia\’s WTO

General Agreement on Trade in Services (GATS) commitment defines

\”commercial association\” as any type of commercial arrangement,

without any requirement as to corporate form. Thus, there are no

equity limitations on the practice of foreign and international law

by foreign enterprises and there are no equity limitations on the

formation of \”commercial associations\” under which foreigners may

practice certain legal services with regard to Cambodian law.

 

PHNOM PENH 00000029 006.8 OF 017

 

35. Investors who wish to take advantage of investment incentives

must submit an application to the Cambodian Investment Board (CIB),

the division of the CDC charged with reviewing investment

applications. Investors not wishing to apply for investment

incentives, or who are ineligible, may establish their company

simply by registering corporate documents with the Department of

Legal Affairs of the Ministry of Commerce. Once an investor\’s

application is submitted, the CDC will issue to the applicant either

a Conditional Registration Certificate or a Letter of Non-Compliance

within three workdays. The Conditional Registration Certificate

will set out the terms, such as approvals, authorization,

clearances, permits or registrations required. If the CDC fails to

issue the Conditional Registration Certificate or Letter of

Non-Compliance within three workdays, then the Conditional

Registration Certificate will be considered approved.

 

36. The CDC has the responsibility to obtain all of the licenses

from relevant government agencies on behalf of investor applicants.

The relevant government agencies must issue the required documents

no later than 28 workdays from the date of the Conditional

Registration Certificate. At the end of the 28 days, the CDC will

issue a Final Registration Certificate.

 

37. The Sub-decree on the Implementation of the Amendment of the

Law on Investment adopted on September 27, 2005 does not require

investors to place a deposit guaranteeing their investment except in

cases in which the deposit is required in a concession contract or

real estate development project. Investors who wish to apply are

required to pay an application fee of seven million riel (approx.

USD 1,750) representing the administration fees for securing the

approvals, authorizations, licenses, or registrations from all

relevant ministries and entities including stamp duty.

 

38. Under a 2008 sub-decree, the CDC is required to submit to the

Council of Ministers for approval investment proposals with an

investment capital of USD 50 million or more; involve politically

sensitive issues; involve the exploration and the exploitation of

mineral or natural resources; may have a negative impact on the

environment; have long-term strategy; or, involve infrastructure

concessions.

 

Right to Private Ownership and Establishment

——————————————–

 

39. There are no limits on the rights of foreign and domestic

entities to establish and own business enterprises or to compete

with public enterprises. However, the Constitution provides that

only Cambodian citizens or legal entities have the right to own

land. A legal entity is considered to be Cambodian when at least 51

percent of its shares are owned by Cambodian citizen(s) or by

Cambodian legal entities. A new law allowing foreign ownership of

properties, such as apartments and condominiums is expected to be

passed in 2010. The current draft stipulates that only properties

located above the ground floor can be foreign-owned, and foreigners

would not be able to own property within 30 kilometers of a national

border.

 

40. Under the 2001 Land Law, foreign investors may secure control

over land through concessions, long-term leases, or renewable

short-term leases. If investors intend to take a long-term lease

interest in land or ownership interest through a 51 percent

Cambodian company, it is essential that caution be exercised to

ensure that clear and unencumbered ownership of the land is

verified.

 

41. The Land Law establishes a comprehensive legal framework for

long-term leasing. The leaseholder has a contractual interest in

the land, which means the lease can be sold or transferred through

succession and can be pledged as security in order to raise

financing. It is also important to make sure that the land

ownership is clearly and legally established before entering into

any leasing agreement.

 

42. Qualified investors approved by the Council for the Development

of Cambodia have the right to own buildings built on leased

property. However the law is unclear as to whether buildings from

qualified projects can be transferred between foreign investors or

whether foreign investors can own buildings built through projects

 

PHNOM PENH 00000029 007.8 OF 017

 

not approved by the CDC.

 

Protection of Property Rights

—————————–

 

43. Cambodia has adopted legislation concerning the protection of

property rights, including the Land Law and the Law on Copyrights

and Law on Patent and Industrial Design. Cambodia is a member of

the World Intellectual Property Organization (WIPO) and the Paris

Convention for the Protection of Industrial Property.

 

44. Chattel and real property: The 2001 Land Law provides a

framework for real property security and a system for recording

titles and ownership. Land titles issued prior to the end of the

Khmer Rouge regime in 1979 are not recognized due to the severe

dislocations that occurred during the Khmer Rouge period. The

government is making efforts to accelerate the issuance of land

titles, but in practice, the titling system is cumbersome,

expensive, and subject to corruption. The majority of property

owners lack documentation proving ownership. Even where title

records exist, recognition of legal title to land has been a problem

in some court cases where judges have sought additional proof of

ownership. Although foreigners are constitutionally forbidden to

own land, the 2001 law allows long or short-term leases to

foreigners.

 

45. Intellectual property rights (IPR): Cambodia\’s IPR regime is

in compliance with its WTO member commitments; however,

comprehensive enforcement remains problematic. The 1996

U.S.-Cambodia Trade Agreement contained a broad range of IPR

protections, but given Cambodia\’s very limited experience with IPR,

the WTO agreement granted phase-in periods for the Cambodian

government to fully implement IPR protections. On November 9, 2005,

the WTO granted a deadline extension until 2013 for Cambodia and

other least developed countries to enforce copyright laws and begin

accepting patents.

 

46. In a significant step toward consolidating IPR policy-making,

enforcement and technical assistance, the Council of Ministers

created the National Committee for Intellectual Property Management

on September 18, 2008 with its secretariat within the Ministry of

Commerce. This committee is responsible for developing national

policy on intellectual property, strengthening interagency

cooperation, preparing and disseminating new laws and regulations,

and acting as a clearinghouse for technical assistance relating to

the intellectual property sector. This new interagency IPR

committee chaired by the Minister of Commerce includes a broad range

of IPR actors including representatives from the Council of

Ministers and the Ministries of Industry Mines and Energy; Culture

and Fine Arts; Interior; Economy and Finance; Posts and

Telecommunications; Health; Agriculture, Forestry and Fisheries;

Environment; Justice; Education; and Tourism.

 

47. Trademarks: The Cambodian National Assembly approved the Law

Concerning Marks, Trade Names and Acts of Unfair Competition to

comply with Cambodia\’s WTO obligations under the Agreement on

Trade-Related Aspects of Intellectual Property Rights (TRIPS).

Signed in February 2002, the law outlines specific penalties for

trademark violations, including jail sentences and fines for

counterfeiting registered marks. It also contains detailed

procedures for registering trademarks, invalidation and removal,

licensing of marks, and infringement and remedies.

 

48. Since 1991, the Ministry of Commerce has maintained an

effective trademark registration system, registering more than

35,500 trademarks (nearly 6,599 for U.S. companies) under the terms

of a 1991 sub-decree, and has proven cooperative in preventing

unauthorized individuals from registering U.S. trademarks in

Cambodia.

 

49. Despite lacking clear legal authority to conduct enforcement

activities, the Ministry of Commerce has taken effective action

against trademark infringement in several cases since 1998. The

Ministry has ordered local firms to stop using well-known U.S.

marks, including Pizza Hut, McDonalds, Nike, Scotties, Marlboro,

Seven Eleven, and Pringles. In 2009, the Ministry of Commerce

resolved 12 cases of trademark infringements.

 

PHNOM PENH 00000029 008.8 OF 017

 

50. Copyrights: Copyrights are governed by the Law on Copyrights

and Related Rights, which was enacted in January 2003.

Responsibility for copyrights is split between the Ministry of

Culture and Fine Arts, which handles phonograms, CDs, DVDs, and

other recordings, and the Ministry of Information, which deals with

printed materials. Pirated CDs, videos, textbooks, and other

copyrighted materials are widely available in Cambodian markets and

used throughout the country. Before the adoption of the law, there

were no provisions for enforcement of copyrights.

 

51. To protect and manage their economic rights, authors and

related rights holders are allowed by law to establish a collective

management organization (CMO). The creation of the CMO requires

authorization from either the Ministry of Culture and Fine Arts or

the Ministry of Information, depending on the nature of their work.

The Ministry of Culture and Fine Arts is developing a sub-decree on

collective management. In mid-2007, the Ministry of Culture and

Fine Arts created a Copyright Department which is gradually building

capacity.

 

52. Patents and industrial designs: Cambodia has a very small

industrial base, and infringement on patents and industrial designs

is not yet commercially significant. With assistance from WIPO, the

Ministry of Industry, Mines, and Energy (MIME) prepared a

comprehensive law on the protection of patents and industrial

designs which went into force in January 2003. The law provides for

the filing, registration, and protection of patents, utility model

certificates and industrial designs. The MIME issued a declaration

in June 2006 on granting patents and registering industrial

designs.

 

53. Encrypted satellite signals, semiconductor layout designs, and

trade secrets: The Ministry of Commerce is preparing a draft law

for trade secrets while the Ministry of Industry, Mines, and Energy

is drafting a law on integrated circuit protection. Cambodia has

not yet made significant progress toward enacting required

legislation on encrypted satellite signals, although it obtained a

model law on encrypted satellite signals and semiconductor layout

designs from WIPO in March 1999.

 

54. IPR enforcement: With the exception of the trademark

enforcement, the Cambodian government has taken few significant

actions to enforce its IPR obligations. However, in January 2008,

at the annual conference of the Ministry of Culture and Fine Arts,

the government suggested it would increase prosecutions for

copyright violations on domestically produced products before

expanding prosecutions for foreign products. Cambodian copyright

law allows IPR owners to file a complaint with the authorities to

take action. Law enforcement action taken at the request of owners

is directed against the piracy of domestically produced music or

video products, but not against piracy of foreign optical media.

The owners requesting crackdowns must pay support costs to the

authorities for conducting the operation. Crackdowns on such IPR

violations are not conducted on a consistent basis.

 

55. Infringement of IPR is pervasive, ranging from software,

compact discs, and music, to photocopied books and the sale of

counterfeit products, including cigarettes, alcohol, and

pharmaceuticals. In 2008, the Business Software Alliance estimated

a 95 percent software piracy rate in Cambodia which cost the

industry USD 47 million in 2007. Although Cambodia is not a major

center for the production and export of pirated CDs, videos, and

other copyrighted materials, local businesses report Cambodia is

becoming an increasingly popular source of pirated material due to

weak enforcement. The Ministry of Commerce has plans to put in

place measures to stop IPR-violating products at borders, as

post-inspection mechanisms are unlikely to be effective. During the

TIFA discussions in November 2007, Cambodia requested technical

assistance for a draft sub-decree on Border Measures detailing

procedures at the borders allowing IPR owners to file an application

with customs to suspend clearance of suspected counterfeit goods.

 

Transparency of the Regulatory System

————————————-

 

56. There is no pattern of discrimination against foreign investors

in Cambodia through a regulatory regime. Numerous issues of

transparency in the regulatory regime arise, however, from the lack

 

PHNOM PENH 00000029 009.8 OF 017

 

of legislation and the weakness of key institutions. Investors

often complain that the decisions of Cambodian regulatory agencies

are inconsistent, irrational, or corrupt.

 

57. The Cambodian government is still in the process of drafting

laws and regulations that establish the framework for the market

economy. In addition to existing laws and regulations, in 2009, the

government adopted the Law on Tourism, the Insolvency Law, and a

sub-decree establishing a national commercial arbitration body. A

commercial contract law and other important business-related laws

such as commercial court, e-commerce, telecommunications, and

personal property leasing laws are in draft.

 

58. Cambodia currently has no anti-monopoly or anti-trust statutes.

On a practical level, Cambodia has indicated a desire to discourage

monopolistic trading arrangements in most sectors.

 

59. Cambodia is currently working on the establishment of standards

and other technical measures based on international practice,

guidelines, and recommendations. Under the Law on Standards in

Cambodia, passed in 2007, the Institute of Standards in Cambodia

(ISC) was created within the Ministry of Industry, Mines, and Energy

(MIME) as a central authority to develop and certify national

standards for products, commodities, materials, services, and

practices and operations. The ISC serves as the secretariat of the

National Standards Council which consists of representatives from

various government ministries, state-controlled academic/research

institutions, the private sector, and a consumer representative

created to advise as well as approve standards.

 

60. The ISC has been assigned as the focal point for technical

barriers to trade (TBT) and as the agency responsible for

notifications and publications required by the WTO TBT Agreement.

The Ministry of Health is charged with prescribing standards,

quality control, distribution and labeling requirement for

medicines, but this responsibility may be brought under the ISC in

the future.

 

61. Quality control of foodstuffs, plant and animal products is

currently under the General Directorate of CamControl of the

Ministry of Commerce. Cambodia is a member of the Codex

Alimentarius Commission. Currently CamControl is the national

contact point for Codex Alimentarius. Its primary responsibility is

the enforcement of quality and safety of products and services

relating to sanitary and phytosanitary (SPS) measures. Cambodia was

provided a transition period until January 2007 to implement its WTO

TBT Agreement commitments and until January 2008 to implement its

SPS Agreement commitments, but has not yet fully implemented these

commitments. The RGC plans to adopt a subdecree on Automatic

Adoption of Codex Norms by the end of 2010.

 

62. The Cambodian Constitution and the 1997 Labor Code provide for

compliance with internationally recognized core labor standards.

The law authorizes the Ministry of Labor and Vocational Training to

set health, safety and other conditions for the workplace. (The

\”Labor\” Section of this report discusses the labor situation in more

detail.)

 

63. The National Bank of Cambodia supervises Cambodia\’s banks and

financial institutions while the Ministry of Economy and Finance

regulates the insurance industry. The insurance market in Cambodia

is relatively new, but has recently begun to gain credibility and

expand its scope. Currently, there are a few major insurance

companies operating here such as Asia Insurance, the state-owned

insurance company Caminco, Forte Insurance, Campubank Lonpac

Insurance, and Infinity Insurance. Cambodia Reinsurance Company

(Cambodia Re) is the only reinsurance company in Cambodia

established by the government to carry out reinsurance business

operations for all classes of risk, including general insurance and

life insurance.

 

64. To help Cambodian businesses stay competitive in the world

market, the government introduced specific measures to facilitate

business, in particular exports, by attempting to reduce informal

costs and streamline bureaucratic hurdles. Measures included: (1)

introduction of a joint inspection by CamControl and the Customs and

Excise Department and issuance of a common inspection report valid

for both agencies and the \”Federal Office\” in order to reduce the

 

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amount of time spent applying for export goods inspection; (2) based

on this common report, MIME and the Ministry of Commerce will issue

the Certificate of Processing (CP) and the Certificate of Origin

(CO), respectively; (3) reduction of the costs of registration from

USD 615 to USD 177 and of the time limit for Cambodian government

issuance of registration from 30 days to ten and a half working

days; and (4) reduction of time required to acquire documents

related to the CO and exports and for goods inspection.

 

65. Cambodia has renewed its commitment to creating a favorable

environment for investment and trade and has further committed to

reducing unofficial fees and costs related to imports and exports.

 

Efficient Capital Markets and Portfolio Investment

——————————————— —–

 

66. Cambodia is moving to address the need for capital markets. In

November 2006, the National Assembly passed legislation to permit

the government to issue bonds and use the capital to make up budget

deficits. However no bonds have been issued since 2007 and Prime

Minister Hun Sen said in 2008 that the government does not plan to

issue bonds in the near future. In 2007, the government also passed

the Law on the Issuance and Trading of Non-government Securities,

and, in partnership with the Korean Stock Exchange, plans to

establish a stock market by the end of 2010.

 

67. At the end of November 2009, the Securities and Exchange

Commission of Cambodia (SECC) released a draft administrative order

on equity securities issuance, which is expected to be adopted in

2010. According to the regulation, the issuance of equity

securities in the Cambodia stock market can be private placement or

public offering. Private placement refers to a personal offer that

is made to no more than 30 investors and with an issue size not

exceeding 20 percent of shareholder\’s equity when shareholder\’s

equity is less than USD 4.8 million or with an issue size not

exceeding 15 percent of shareholder\’s equity when shareholder\’s

equity is more than USD 4.8 million during a 12-month period. In

addition, the allotment of equity securities of public offerings are

divided, with a reserve of 20 percent of total public offering for

investors who are Cambodian citizens, and 80 percent of the

remaining public offering amount open to investors who are both

Cambodian and non-Cambodian citizens.

 

68. The Cambodian government does not use regulation of capital

markets to restrict foreign investment. Domestic financing is

difficult to obtain at competitive interest rates. A new law

addressing secured transactions, which includes a system for

registering such secured interests, was promulgated in May 2007.

Most loans are secured by real property mortgages or deposits of

cash or other liquid assets, as provided for in the existing

contract law and land law.

 

69. The total assets of Cambodia\’s banking system as of September

2009 were approximately USD 4.9 billion, an increase of nearly 22

percent from 2008. Loans account for about 49 percent of the

banking system\’s assets. The National Bank of Cambodia (NBC)

reported that the non-performing loans (NPLs) ratio of banks has

increased from 3.7 percent in December 2008 to 5.2 percent in May

2009 and that the rate could reach as high as 10 percent by the end

of the year. Credit disbursement has also slowed, from a growth

rate of 50 percent in 2008 to just 1 percent through the middle of

2009. As of September 2009, credit granted by the commercial banks

amounted to USD 2.4 billion. Loans made to services and the

wholesale and retail sectors accounted for over 40 percent of total

loans. The banking sector has shown significant improvement, but

requires continued progress to gain international confidence.

 

70. Under the amended Law on Banking and Financial Institutions,

all of Cambodia\’s commercial banks had to reapply for licenses from

the NBC and meet new, stricter capital and prudential requirements

by the end of 2001. As a result, there was a significant shakeout

and consolidation within the banking sector with the closure and

liquidation of 12 banks. In September 2008, the National Bank of

Cambodia moved to slow the rapid growth in the number of commercial

banks, which increased by more than 20 percent in the first nine

months of 2008, giving commercial banks without an investment grade

shareholder until the end of 2010 to triple minimum capital from USD

13 million to USD 37 million. In January 2008, Cambodia\’s banks

 

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were given their first-ever risk assessment from Standard & Poor\’s

of a \’B+/B\’ rating with stable outlook. Their placement was

alongside that of banks in Venezuela, Bolivia, Ukraine, and Jamaica.

Banks have been free to set their own interest rates since 1995 and

average annual interest rate spread has declined from 15.3 percent

in 2004 to 9.6 percent in May 2009 which reflects an increase in the

interest rate for deposits and a decline in the interest rate for

credit.

 

Competition from State Owned Enterprises

—————————————-

 

71. Private enterprises are allowed to compete with public

enterprises under the same terms and conditions and in general are

not entitled to special trading rights or privileges. However,

certain laws and regulations reserve special rights for the state to

monopolize various services including the Electricity Law which

provides special privilege for the Electricity of Cambodia (EDC) to

provide power transmission to the distribution companies and bulk

power consumers.

 

72. Cambodia has several state-owned enterprises and two

joint-venture enterprises with a majority state holding. These

include rubber plantations and an agricultural inputs company,

infrastructure operating companies, the Phnom Penh Water Supply, the

EDC, the Rural Development Bank, and two joint-venture companies -

telecommunication operator Camintel and Cambodia Pharmaceutical

Enterprise. Currently, the country does not have a sovereign wealth

fund.

 

73. All SOEs are under the supervision of certain line Ministries

or government institutions and are overseen by boards of directors

drawn from among senior government officials. The Law on Audit

established the National Audit Authority and empowers the Auditor

General to conduct audits of state-owned enterprises. The audit

conducted by the Auditor General\’s Office primarily focuses on

compliance with rules governing SOE financial management. Limited

information is publicly available on the financial position and

performance of state-owned enterprises.

 

74. Cambodia has yet to pass the Law on Competition as part of its

WTO accession obligations. Under the draft law, a National

Committee on Competition will be established. However, the 1993

Constitution of Cambodia provides for the state to take necessary

intervention measures to protect the competitive process of the

marketplace as well as to protect consumer welfare.

 

Corporate Social Responsibility (CSR)

————————————-

 

75. CSR is a new concept to Cambodia and is not widely understood

among local producers or consumers. However, certain labor and

social standards have been established in key industries,

particularly in the garment sector. Under the terms of the 1999

U.S.-Cambodia Trade Agreement, the U.S. Government committed to

increase the size of Cambodia\’s garment export quota if the country

could demonstrate improvements in labor standards. This was the

first bilateral trade agreement to positively link market access

with progress in compliance with labor obligations. Currently labor

standard monitoring in the garment sector is being conducted by the

International Labour Office (ILO) in coordination with the

government. The ILO project succeeded in improving compliance with

labor standards, virtually eliminating the worst labor abuses such

as forced labor and child labor within the garment sector. Socially

responsible businesses continue to source garments from Cambodia due

to its well-deserved reputation for high labor standards.

 

76. Currently, the ILO\’s Better Work and Better Factories Cambodia

program is developing a training package on planning and

implementing the transition of the inspections regime towards

substantial compliance with international labor standard such as the

OECD Guidelines for Multinational Enterprises. In addition, several

multinational enterprises conduct CSR programs in Cambodia which are

viewed favorably by the local community.

 

Political Violence

——————

 

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77. Cambodia is relatively peaceful compared to its pre-UNTAC

history. Election-related violence has decreased in each national

election held at five-year intervals since 1993. Cambodia\’s 2007

commune council elections followed by the July 2008 National

Assembly election had little of the pre-election violence or

intimidation that preceded the 2002 and 2003 elections. The 2007

and 2008 polls resulted in clear victories for the Cambodian

People\’s Party, with the Sam Rainsy Party emerging as the main

opposition party.

 

78. Cambodian political activities have turned violent in the past,

and the possibility for politically motivated violence remains.

During the anti-Thai riots in 2003, the Royal Embassy of Thailand

and Thai-owned commercial establishments were attacked. In November

2006, police arrested six people for allegedly plotting to conduct

bomb attacks in Phnom Penh during the Water Festival.

 

79. On July 29, 2007, three improvised explosive devices (IEDs)

were planted at the Vietnam-Cambodia Friendship Monument in Phnom

Penh. One of the IEDs partially exploded, but the others failed to

detonate and were recovered by Cambodian authorities. No one was

injured. On January 2, 2009, two undetonated IEDs were found near

the Ministry of National Defense and state-owned TV3. While there

is no indication these incidents were directed at U.S. or other

Western interests, the possibility remains that further attacks

could be carried out.

 

80. Following the July 2008 UNESCO World Heritage Site listing of

the Preah Vihear Temple, thousands of Thai and Cambodian soldiers

amassed in a few isolated areas along the Thai-Cambodian border,

particularly near the disputed Preah Vihear temple area. Since

then, soldiers have clashed near the temple resulting in deaths on

both sides, but the outbreaks of violence have been rare and lasted

only a few hours. Both the Thai and Cambodian governments have

committed to a peaceful resolution of the dispute.

 

Corruption

———-

 

81. Despite increasing investor interest, Cambodia continues to

rank poorly on global surveys of competitiveness and corruption.

According to the World Economic Forum\’s Global Competitiveness

Report 2009-2010, Cambodia\’s competitiveness ranking slipped by one

point to 110 of 133 countries surveyed, a reversal of the one point

climb to 109 in the 2008-2009 report (of 134 countries). The World

Bank also ranked Cambodia in the lower half of the list, 145 of 183,

on business climate. In 2009, Cambodia scored 2.0 on a scale of 0

(highly corrupt) to 10 (highly clean) in Transparency

International\’s Corruption Perceptions Index, ranking 158 out of 180

countries assessed, suggesting widespread and endemic forms of

corruption.

 

82. Business people, both local and foreign, have identified

corruption, particularly within the judiciary, as the single biggest

deterrent to investment in Cambodia. Corruption was cited by a

plurality of respondents to the World Economic Forum survey as the

most problematic factor for doing business in Cambodia. A 2007

USAID-funded survey of the Phnom Penh Chamber of Commerce also found

that corruption is considered to be the main obstacle for doing

business.

 

83. Public sector salaries range from USD 25-60 per month for

working level officials, and around USD 2000 per month for

high-ranking officials. Although there is an annual salary increase

of 10-15 percent, these wages are far below the level required to

maintain a suitable quality of life in Cambodia, and as a result,

public employees are susceptible to corruption and conflicts of

interest. Local and foreign businesses report that they must often

pay extra facilitation fees to expedite any business transaction.

Additionally, for those seeking to enter the Cambodian market, the

process for awarding government contracts is not transparent and is

subject to major irregularities.

 

84. Current Cambodian laws and regulations and their application

are insufficient to address the problem of corruption. Laws dating

from the UNTAC period (1991-93) against embezzlement, extortion, and

bribing public officials exist, but are enforced rarely, often for

political reasons.

 

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85. Cambodia is not a signatory to the OECD Anti-Bribery

Convention, but has endorsed the ADB/OECD Anti-Corruption Action

Plan for Asia and the Pacific. In 2007, the government signed a

regional anti-corruption pact with eight other ASEAN countries, and

in September of the same year, also signed the UN Convention Against

Corruption. Cambodia is considering joining the Extractive

Industries Transparency Initiative governing the oil sector.

 

86. Cambodia is under increasing pressure from donors to address

the issue of good governance in general, and corruption in

particular. Cambodia began efforts to draft and enact

anti-corruption legislation in the 1990\’s. In a draft action plan

on good governance presented to donors in May 2000, Cambodia

promised to pass anti-corruption legislation by late 2001. Since

then, donors have become increasingly frustrated with the

government\’s failure to meet a series of benchmarks to enact new

anti-corruption legislation.

 

87. However, in October, the National Assembly passed a new Penal

Code, which the government has long stated was a prerequisite to the

heavily anticipated anti-corruption law. In December, the Cambodian

government finally approved the draft anti-corruption law which is

expected to be approved by the National Assembly in 2010. Under the

new law, all civil servants would be obliged to declare their

financial assets to the government every two years.

 

88. The Ministry of National Assembly-Senate Relations and

Inspection (MONASRI) has an anti-corruption mandate, but is largely

inactive. In 2007, however, MONASRI, with technical assistance from

USAID, created a draft Access to Information Policy. The draft has

yet to be forwarded to the Council of Ministers. The government

also created an anti-corruption commission within the cabinet in

late 1999, which has undertaken a few investigations, one of which

resulted in the dismissal of a mid-level official in late 2001.

Also in 2001, the government established a National Audit Authority,

which has been only marginally effective because of its lack of

transparency and independence.

 

89. Ignoring the existing anti-corruption commission, the

government established the Anti-Corruption Unit (ACU) in August

2006, a temporary body designed to address corruption until the

anti-corruption legislation is passed. The mission of the ACU is to

focus on preventing corruption, strengthening law enforcement, and

obtaining public support for combating corruption. However the ACU

is considered to be ineffective because of its lack of independence

and capacity.

 

90. In its most comprehensive reform strategy, the Rectangular

Strategy Phase II, adopted as the government platform in 2008 after

phase I in 2004, the Cambodian government once again renewed its

commitment to fight corruption and make good governance the

centerpiece of reform. The strategy acknowledges the importance of

taking action against corruption, but the challenge remains a

daunting and long-term one that will require political will at the

highest levels of the government.

 

Bilateral Investment Agreements

——————————-

 

91. Cambodia has signed bilateral investment agreements with

Australia, China, Croatia, Cuba, the Czech Republic, France,

Germany, Indonesia, Kuwait, Japan, Laos, Malaysia, the Netherlands,

North Korea, the Organization of the Petroleum Exporting Countries

(OPEC), Pakistan, the Philippines, Singapore, South Korea,

Switzerland, Thailand, and Vietnam. Future agreements with Algeria,

Bulgaria, Burma, Egypt, Hungary, Libya, Malta, Qatar, Russia, the

United Kingdom, and Ukraine are planned. The agreements provide

reciprocal national treatment to investors, excluding benefits

deriving from membership in future customs unions or free trade

areas and agreements relating to taxation. The agreements preclude

expropriations except those that are undertaken for a lawful or

public purpose, are non-discriminatory, and are accompanied by

prompt, adequate and effective compensation at the fair market value

of the property prior to expropriation. The agreements also

guarantee repatriation of investments and provide for settlement of

investment disputes via arbitration.

 

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92. In addition, in July 2006, Cambodia signed a Trade and

Investment Framework Agreement (TIFA) with the United States, which

will promote greater trade and investment in both countries and

provide a forum to address bilateral trade and investment issues.

Two very successful meetings were held under the TIFA in 2007 in

which the U.S. and Cambodian governments discussed WTO accession

requirements, trade facilitation and economic development

initiatives, and progress on intellectual property rights. Since

then, several bilateral working level meetings have been held to

advance the TIFA agenda.

 

OPIC and Other Investment Insurance Programs

——————————————–

 

93. Cambodia is eligible for the Quick Cover Program under which

the Overseas Private Investment Corporation (OPIC) offers financing

and political risk insurance coverage for projects on an expedited

basis. With most investment contracts written in U.S. dollars,

there is little exchange risk. Even for riel-denominated

transactions, there is only one exchange rate, which is fairly

stable. Cambodia is a member of the Multilateral Investment

Guarantee Agency (MIGA) of the World Bank, which offers

political-risk insurance to foreign investors.

 

94. The Export-Import Bank of the United States (Ex-Im Bank)

provides financing for purchases of U.S. exports by private-sector

buyers in Cambodia on repayment terms of up to seven years. Ex-Im

Bank support typically will be limited to transactions with a

commercial bank functioning as an obligor or guarantor; however, it

will consider transactions without a bank undertaking on a

case-by-case basis.

 

Labor

—–

 

95. The country has an economically active population (defined as

being ten years of age and older) of some 8.8 million people out of

a population of 13.4 million. While government statistics are

somewhat higher, they do not fully capture the problems of

unemployment and underemployment in Cambodia.

 

96. The economy is not able to generate enough jobs in the formal

sector to handle the large number of entrants to the job market.

This dilemma is likely to become more pronounced over the next

decade. Cambodia suffers from a large demographic imbalance.

According to the 2008 General Population Census of Cambodia,

Cambodia\’s annual population growth rate is 1.54 percent. Persons

20 years of age or younger account for 48.1 percent of the total

population. As a result, over the next decade at least 275,000 new

job seekers will enter the labor market each year.

 

97. Approximately 65 – 70 percent of the labor force is engaged in

subsistence agriculture. At the end of 2009, about 278,000 people,

the majority of whom are women, were employed in the garment sector,

with 300,000 Cambodians employed in the tourism sector, and a

further 50,000 people in construction.

 

98. The 2009-2010 Global Competitiveness Report of the World

Economic Forum identified an inadequately educated workforce as one

of the most serious problems in doing business in Cambodia. Given

the severe disruption to the Cambodian education system and loss of

skilled Cambodians during the 1975-79 Khmer Rouge period, workers

with higher education or specialized skills are few and in high

demand. A Cambodia Socio-Economic Survey conducted in 2004 found

that about 12 percent of the labor force has completed at least an

elementary education. Only 1.2 percent of the labor force completed

post-secondary education.

 

99. Overall literacy, for those aged fifteen and over, is 75.1

percent with male literacy rates considerably higher than those for

females in both urban and rural areas. Many adults and children

enroll in supplementary educational programs, including English and

computer training. Employers report that Cambodian workers are

eager to learn and, when trained, are excellent, hardworking

employees.

 

100. Cambodia\’s 1997 labor code protects the right of association

and the rights to organize and bargain collectively. The code

 

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prohibits forced or compulsory labor, establishes 15 as the minimum

allowable age for paid work, and 18 as the minimum age for anyone

engaged in work that is hazardous, unhealthy or unsafe. The statute

also guarantees an eight-hour workday and 48-hour work week, and

provides for time-and-a-half pay for overtime or work on the

employee\’s day off. The law gives the Ministry of Labor and

Vocational Training (MOLVT) a legal mandate to set minimum wages

after consultation with the tripartite Labor Advisory Committee. In

January 2007, the minimum wage for garment and footwear workers was

officially set at USD 50 per month. In April 2008, a USD 6 per

month cost of living allowance was instituted to offset high levels

of inflation. There is no minimum wage for any other industry. To

increase competitiveness of garment manufacturers, the labor code

was amended in 2007 to establish a night shift wage of 130 percent

of day time wages.

 

101. Acleda Bank, a local commercial bank, is currently managing

Cambodia\’s first National Social Security Fund (NSSF), which

protects workers against occupational risks and workplace accidents.

The fund was established by sub-decree in 2007 and requires

employers to contribute 0.8 percent of each employee\’s salary to the

NSSF. As December 29, 2009, approximately 350,000 workers, most

from the garment sector, contribute to the fund through their

employer. The Cambodian government has responded to the global

economic crisis by temporarily contributing 0.3 percent towards the

NSSF on behalf of employers for two years (2009-2010) which has

resulted in a reduction of employers\’ obligation from 0.8 percent to

0.5 percent of total wages. A second phase of the fund, to be

implemented in 2010, will focus on health care for employees,

followed by pensions in 2012.

 

102. Enforcement of many aspects of the labor code is poor, albeit

improving. Labor disputes can be problematic and may involve

workers simply demanding conditions to which they are legally

entitled. In labor disputes in which workers complain of poor or

unhealthy conditions, MOLVT and the Ministry of Commerce have

ordered the employer to take corrective measures. The U.S.

Government, the ILO, and others are working closely with Cambodia to

improve enforcement of the labor code and workers\’ rights in

general. The U.S.-Cambodia Bilateral Textile Agreement linked

Cambodian compliance with internationally recognized core labor

standards with the level of textile quota the U.S. granted to

Cambodia. While the quota regime ended on January 1, 2005, a

\”Better Factories\” program continues to build on the labor standards

established.

 

Foreign Trade Zones

——————-

 

103. To facilitate the country\’s development, the Cambodian

government has shown great interest in increasing exports via

geographically defined special economic zones (SEZs), with the goal

of attracting much-needed foreign direct investment.

 

104. The government is preparing a Law on Special Economic Zones

which will define SEZs and establish the rules under which they will

operate. The law may be submitted for approval of the Council of

Ministers in 2010.

 

105. In late December 2005, the Council of Ministers passed a

sub-decree on Establishment and Management of Special Economic Zones

to speed up the creation of the zones. The sub-decree details

procedures, conditions and incentives for the investors in the

zone.

 

106. Since issuing the sub-decree, the Cambodia Special Economic

Zones Board (CSEZB) has approved 21 SEZs as of December 2009, of

which 4 are in operation, located near the borders of Thailand and

Vietnam, and in Phnom Penh, Kampot, and Sihanoukville.

 

Foreign Investment Statistics

—————————–

 

107. Foreign Direct Investment (FDI) proposals approved by the

Council for the Development of Cambodia (CDC) have dramatically

increased in recent years, with approved FDI reaching USD 10.9

billion in 2008, compared with USD 201 million in 2004. However, FDI

inflows declined dramatically to only USD 1.6 billion as of October

 

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2009 due to the impact of the global economic crisis. FDI registered

capital however, has been modest since 1995, with an average inflow

of USD 304 million in the period 1995-2008. The FDI registered

capital figures probably understate actual investment, since they

report only registered capital and not fixed assets. CDC statistics

for fixed assets, however, are based on projections, and the CDC has

no effective monitoring mechanism to determine the veracity of the

numbers. The FDI registered capital flow into Cambodia is uneven

and gradually declined from USD 135 million in 1999 to USD 30

million in 2003, but rose to USD 105 million in 2009.

 

108. Total FDI registered capital flows into Cambodia for the years

1998-2009 are presented in the table below, in USD million.

(Source: CDC) (Note: statistics from the National Bank of Cambodia

differ significantly from CDC\’s figures.)

 

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

320 135 74 81 50 30 45 383 209 473 260 105

 

109. Figures from the CDC for registered capital of approved

projects, including domestic investment, and broken down by country

of origin and economic sector, are provided below. The FDI

registered capital figures below may overstate investment because

they include projects that have not yet been, or may never be, fully

implemented and retention of dormant or defunct projects from

earlier years makes the investment figures appear higher.

 

110. Total cumulative registered investment projects approved, by

country of origin, August 1994 to October 2009 (source: CDC)

 

Country USD millions Pct.

Malaysia 1,736 32.17

Cambodia 1,526 28.28

China 603 11.17

Taiwan 405 7.50

Thailand 221 4.09

Singapore 199 3.68

South Korea 170 3.15

U.K. 132 2.44

USA 71 1.31

Vietnam 69 1.27

Indonesia 55 1.01

Australia 55 1.01

France 42 0.77

Japan 24 0.44

Other 88 1.63

Total 5,396 100

 

111. Total cumulative registered investment capital by sector, from

January 1998 to October 2009 (source CDC)

 

Sector USUSD millions Number of Projects

Industry 1,538.7 748

- Food Processing 93.5 13

- Garments 469.4 421

- Petroleum 212.2 9

- Wood Processing 100.3 17

- Footwear 33.8 27

Agriculture 209.6 90

Services 342.8 81

- Construction 64.6 15

- Telecommunications 94.5 16

Tourism 446.4 98

Total 2537.5

 

112. New investment projects in USD million, by country of origin,

2004-2009(source: CDC)

 

Country 2004 2005 2006 2007 2008 2009

Malaysia 7.81 0.6 2.5 19.8 1 na

Cambodia 15 78.5 116.8 264.3 99.8 17.6

U.S. 2.1 2.2 4.3 6.5 12.3 1

Taiwan 4.6 4.1 16.4 14 9.5 5

Singapore 1.6 5.3 3.8 1 12 5.5

China 24 38 28.3 40.4 37.9 34.5

South Korea 4.1 16 4.5 22 19.5 5.2

Hong Kong na 0.3 1.5 0.6 na 1

France 0.6 0.4 na 0.3 2.3 1.6

 

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Thailand 2 15 10 13.8 30.6 15.5

U.K. 1.5 1 1 1.5 1 2

Canada 1.7 0.6 1.5 na 4.8 1

Indonesia na na na na na 1

Australia na 7 na 3.5 1 na

Japan 0.7 na 1 7.5 4.6 1

Other na na 8.1 78.5 4.1 11

Total 65.71 169 199.7 473.7 240.4 102.9

 

113. New investment projects in USD million, by sector, 2004-2009

(source: CDC)

 

Sector 2004 2005 2006 2007 2008 2009

Industry 53.5 325 173.4 269.9 90 56.7

- Food Processing 1 na 22 24 4 2

- Garments 19 54 41.9 45.1 49 20

- Petroleum 1 200 na na na 9.2

- Wood Processing 1 na na 2 na 2

- Mining na 30 1 149 4 7

Agriculture 2 4 2 50.1 26 32.5

Services 5 32 16.3 127.2 43 4

- Construct 3 31 6 5 1 na

- Telecom na na na 42.2 2 2

- Infrastructure na na na 65 na 1

Tourism 5.5 18 18 33.5 101 12

Total 66 379 209.7 480.7 260 105.2

 

114. The CDC has registered approximately USD 71 million in U.S.

investment since August 1994. Caltex has a chain of service

stations and a petroleum holding facility in Sihanoukville; Crown

Beverage Cans Cambodia Limited, a part of Crown Holdings Inc.,

produces aluminum cans; and Chevron is actively exploring offshore

petroleum deposits. W2E Siang Phong Co., Ltd., a joint venture

between U.S.- Dutch investors, invested in biogas power generation.

There are also U.S. investors in a number of Cambodia\’s garment

factories.

 

115. In 2008, several Cambodia-focused private equity funds emerged

seeking to raise between USD 100 and USD 500 million each for

investments in infrastructure, agriculture, tourism, and real estate

development, among other sectors. However it appears the global

economic slowdown is limiting fund-raising abilities, and widespread

investments by these funds have not yet materialized.

 

116. Major non-U.S. foreign investors include Asia Pacific

Breweries (Singapore), Asia Insurance (Hong Kong), ANZ Bank

(Australia), BHP Billiton (Australia), Oxiana (Australia), Infinity

Financial Solutions (Malaysia), Total (France), Cambodia Airport

Management Services (CAMS) (France), Samart Mobil Phone (Malaysia),

Shinawatra Mobile Phone (Singapore), Thakral Cambodia Industries

(Singapore), Petronas Cambodia (Malaysia), Charoeun Pokphand

(Thailand), Siam Cement (Thailand), and Cambrew (Malaysia).

 

117. Since 2007, several well-known U.S. companies opened or

upgraded their presence in Cambodia. General Electric and DuPont

have established representative offices. Otis Elevators, a division

of United Technologies, also upgraded to a branch office, and

Microsoft initiated a presence through its Market Development

Program.

 

118. Some major local companies and their sectors are: Sokimex

(petroleum, tourism, garment), Royal Group of Companies (mobile

phone, telecommunication, banking, insurance), AZ Distribution

(construction, telecommunication), Mong Rethy Groups (construction,

agro-industry, rubber and oil palm plantation), KT Pacific Group

(airport project, construction, tobacco, food and electronics

distribution), Hero King (cigarettes, casinos and power), Anco

Brothers (cigarettes, casinos and power), Canadia Bank (banking and

real estate), Acleda Bank (microfinance), and Men Sarun Import and

Export (agro-industry, rice and rubber export).

 

119. In 2009 Acleda Bank opened its first bank branch outside of

Cambodia in Laos, and has announced plans for further expansion into

Vietnam and China. Statistics on Cambodian investment overseas are

not available, but such investments are likely minimal.

 

RODLEY

“

“230797″,”10/22/2009 9:42″,”09BANGKOK2712″,

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SIPDIS

 

E.O. 12958: DECL: 10/21/2019

TAGS: PGOV, PREL, MARR, MOPS, PINS, PHUM, TH

SUBJECT: SCENESETTER FOR THE VISIT OF THAI CHIEF OF DEFENSE

GENERAL SONGKITTI

 

Classified By: Charge d\’ Affaires a.i. Robert D. Griffiths, Reasons 1.4

(b) and (d).

 

1. (C) Summary. The visit of Royal Thai Armed Forces (RTARF)

Chief of Defense Forces General Songkitti Jaggabartra to the

PACOM-sponsored Chiefs of Defense conference and to

Washington to meet with Chairman of the Joint Chiefs of Staff

Admiral Mullen affords a chance to affirm support for our

important mil-mil relationship and initiatives such as Cobra

Gold, the Defense Reform Management Study (DRMS), and

Thailand\’s deployment of peacekeepers to Darfur. END SUMMARY.

 

ENDURING BILATERAL RELATIONSHIP

——————————-

 

2. (C) Our military relationship began during World War II

when the U.S. trained hundreds of Thais as part of the \”Free

Thai Movement\” that covertly conducted special operations

against the Japanese forces occupying Thailand and drew

closer during the Korean War era when Thailand provided

troops for the UN effort. Thai soldiers, sailors, and airmen

also fought side-by-side with U.S. counterparts in the

Vietnam War and, more recently, Thailand sent contingents to

Afghanistan and Iraq.

 

3. (C) The relationship has evolved into a partnership that

provides the U.S. with unique benefits. As one of five U.S.

treaty allies in Asia and straddling a major force projection

air/sea corridor, Thailand remains crucial to U.S. interests

in the Asia-Pacific region and beyond. Underpinning our

strong bilateral relations is the U.S.-Thai security

relationship, which is based on over fifty years of close

cooperation. The relationship has advanced USG interests

while developing Thai military, intelligence, and law

enforcement capabilities.

 

4. (C) Thailand\’s strategic importance to the U.S. should not

be understated. Our military engagement affords us unique

training venues in Asia, training exercises that are nearly

impossible to match elsewhere, a willing participant in

international peacekeeping operations, essential access to

facilities amid vital sea and air lanes that support

contingency and humanitarian missions, and a partner that is

a key South East Asian nation, and current chair of ASEAN.

POLITICAL ENVIRONMENT

———————

 

5. (C) The December 2008 installation of the Democrat-led

coalition government of Prime Minister Abhisit Vejajjiva

calmed the Thai political environment as the \”yellow-shirt\”

People\’s Alliance for Democracy (PAD) halted street protests.

That said, the \”red-shirt\” United Front of Democracy against

Dictatorship (UDD) has continued protests against the

government with a royal pardon for their champion, former

Prime Minster Thaksin Shinawatra, among the objectives.

 

6. (C) The basic split in Thai society and the body politic

remains. The traditional royalist elite, urban middle class,

Bangkok, and the south on one side (\”yellow\” in shorthand)

and the political allies of ex-Prime Minister Thaksin

Shinawatra, currently a fugitive abroad, along with largely

rural supporters in the North and Northeast (\”red\”) on the

other. Neither side of this split is as democratic as it

claims to be, and both movements reflect concerns stemming

from perceptions of a lack of social and economic justice in

Thailand. New elections would not likely calm political

tensions, and political discord could very well persist for

years. We continue to stress to Thai interlocutors the need

for all parties to avoid violence and respect democratic

norms within the framework of the constitution and rule of

law.

 

7. (C) Prime Minister Abhisit has had to navigate a difficult

political climate and tough economic circumstances. Abhisit

generally has progressive instincts and says the right things

about basic freedoms, social inequities, policy towards

Burma, and how to address the troubled deep south, afflicted

by a grinding ethno-nationalist Muslim-Malay separatist

insurgency. Whether Abhisit can deliver change is another

matter. He is beset with a fractious coalition, with

partners more interested in self-enrichment than good

governance.

 

IMPORTANT MILITARY ENGAGEMENT PROGRAM

————————————-

 

BANGKOK 00002712 002 OF 004

 

8. (C) Thailand\’s willingness to allow the United States to

use Utapao Naval Air Station as the hub for our regional

assistance program was key to making the 2004 tsunami and the

2008 Cyclone Nargis relief operations a success. While those

high-profile relief operations highlighted publicly the value

of access to Utapao, the air base has been a mainstay for our

military flights. A prime example was the critical support

Utapao provided during OEF by providing an air bridge in

support of refueling missions en route to Afghanistan.

Approximately 1,000 flights transit Utapao every year in

support of critical U.S. military operations both regionally

and to strategic areas of the world. Thailand also provides

valued port access with U.S. naval vessels making calls,

primarily at Laem Chabang and Sattahip, over sixty times per

year for exercises and visits.

 

COBRA GOLD AND THE MILITARY EXERCISE PROGRAM

——————————————–

 

9. (C) By means of access to good military base

infrastructure and large areas to conduct unrestricted

operations, Thailand gives the U.S. military a platform for

exercises unique in Asia. Thai leaders are far more willing

to host multinational exercises than are other countries in

Asia. Unlike Japan, which only hosts annual bilateral

exercises due to legal prohibitions over collective security,

or the Philippines, where planning for multinational

exercises has been difficult, or Australia, which refuses to

multilateralize Tandem Thrust, the Thai government encourages

multinational exercises as a way to show regional leadership.

This has allowed us to use exercises in Thailand to further

key U.S. objectives, such as supporting Japan\’s growing

military role in Asia and engaging the Indonesian and

Singaporean militaries.

 

10. (C) Cobra Gold, the capstone event of our exercise

program, is PACOM\’s largest annual multi-lateral exercise and

for 28 years has served to strengthen our relations with

Thailand, highlight our commitment to Southeast Asia, and

provide exceptional training opportunities for our troops.

The event has evolved over the years and now facilitates

important objectives such as promoting a greater role in the

Asian Pacific region for Japan, Singapore, and South Korea

and re-establishing a partner role with Indonesia. Cobra

Gold is key to building partner nation capacity in

humanitarian assistance and disaster relief, especially at a

time when U.S. forces face other global commitments. We have

also been able to incorporate into Cobra Gold a robust Global

Peacekeeping Operations Initiative (GPOI) event with the

active participation of Indonesia and Singapore.

 

BORDER CONFLICT WITH CAMBODIA

—————————–

 

11. (C) Bilateral relations with Cambodia continue to be

volatile, primarily due to a border dispute centered on 4.6

square kilometers of overlapping territorial claims adjacent

to the 11th century Hindu Preah Vihear temple. Minor

skirmishes have erupted three times since mid-2008, leading

to the deaths of seven soldiers.

 

12. (C) The roots of the dispute lie in the Siam-France

agreements of 1904-8 and a 1962 International Court of

Justice ruling that granted Cambodia the temple but left the

rest of disputed land unresolved. Tensions spiked in 2008

when the Thai government in power at that time supported

Cambodia\’s application to UNESCO for a joint listing of the

temple as a world heritage site, only to subsequently face

opposition in parliament and an adverse court ruling.

 

13. (C) Difficult issues lay at the heart of the matter and

political schism in Bangkok may make tough decisions more

difficult for the Thai government. We urge both sides to

resolve their differences peacefully through bilateral

negotiations, border demarcation, and a reduction of troops

deployed along the border. Talks under the auspices of the

Foreign Ministry-led Joint Border Commission (JBC) are

attempting to address the conflict through negotiations, but

thorny internal politics and historical rancor between

Thailand and Cambodia make progress difficult.

 

PEACEKEEPING EFFORTS

——————–

 

BANGKOK 00002712 003 OF 004

 

14. (C) Thailand has historically been a strong supporter of

UN peacekeeping missions and was an early contributing nation

to operations in Afghanistan and Iraq. In addition, Thai

generals very effectively led UN forces in East Timor, where

Thailand contributed 1,500 troops, and in Aceh, where a Thai

general served as the principal deputy of the Aceh Monitoring

Mission. Thailand\’s success in peacekeeping has led the RTG

and the military to seek a more prominent role in

international stabilization and peacekeeping missions. For

instance, Thailand is currently preparing for a deployment of

a battalion of troops for a difficult UNAMID mission in

Darfur. With deployment currently scheduled for early 2010,

we have continued to underscore to the leadership of the Thai

military that we stand ready to assist again where possible.

 

15. (C) We are working with the military to increase its

peacekeeping capabilities, both as a contributing nation and

as a trainer of neighboring nations. Using GPOI funding,

necessary upgrades and modernization work to a peacekeeping

training facility at Pranburi will be completed in FY10.

Thailand will provide instructors and maintain the facility,

which will be used for Thai peacekeepers for deployments

abroad and for peacekeeping training events with regional

partners. Thailand is also working to become a center for

training peacekeeping troops from around the region.

 

ONGOING REFUGEE CONCERNS

————————

 

16. (C) Due to inherent institutional capabilities, the Thai

military plays a prominent role in the management of the many

refugees that enter Thailand from neighboring countries. The

Thai government has so far failed to set up a transparent

screening process for about 4,000 Lao Hmong — some of whom

we believe have a legitimate claim to refugee status — who

seek resettlement in the U.S. Detained in an RTARF-run camp

for over two years, some are former fighters (or their

descendants) allied with the U.S. against the communist

Pathet Lao during the IndoChina War. We want to take every

opportunity to underscore to the military the importance of

transparently handling these refugee cases.

 

SOUTHERN THAILAND

—————–

 

17. (C) The Thai military, since the installation of General

Anupong Paochinda as Army Commander, has taken a more

assertive role in trying to quell the ethnic Malay Muslim-led

insurgency in southern Thailand, a region that has witnessed

episodic violence since its incorporation into Thailand in

1902. Regional violence has claimed more than 3,500 lives

since January 2004, when the latest round of violence began

to escalate. The root causes of the conflict are political

and reflect larger issues of justice, decentralized

democracy, and identity in Thai society. More specifically,

however, Malay Muslims feel that they are second-class

citizens in Thailand.

 

18. (C) The Thai military currently has the lead in trying to

resolve the conflict, but has focused solely on the difficult

security situation. General Anupong has made clear his

feeling that political leaders need to take charge of efforts

to solve the root causes of the insurgency. There is little

political will in Bangkok to take on this issue, however, and

the efforts of civilian agencies have lagged, focusing on

economic development projects – which most analysts agree

will have little impact on the violence. While the Abhisit

government appears to want to adopt an integrated government

approach to solving the insurgency with budgetary and policy

decisions possibly transferred to the Office of the Prime

Minister, it remains unclear how the civil-military dynamic

will change.

 

19. (C) Southern separatists direct their anger at the

government in Bangkok, not at the United States. Since a

U.S. presence or perception of U.S. involvement in the South

could redirect that anger towards us and link it to the

international jihadist movement — a link that is currently

absent — we ensure that any offers of assistance or training

pass the \”location and label\” test. Put simply, we keep U.S.

military personnel away from the far South and we make sure

that we do not label any assistance or training as directly

linked to the southern situation. Likewise, we work to avoid

feeding rampant, outlandish speculation that we are somehow

fomenting the violence in the South in order to justify

 

BANGKOK 00002712 004 OF 004

 

building permanent bases — a very sensitive issue in

Thailand. We do not want to jeopardize our access to key

military facilities in Thailand like Utapao Naval Air Station.

 

20. (C) The Embassy maintains a three-pronged focus to

improve our military cooperation in order to address the

violence in the South:

1) Using our exercise and training program to improve the

professional and operational skills of the Royal Thai Armed

Forces, especially the Thai Army;

2) Helping the Thai break down stovepipes between the Thai

military, police forces, and civilian agencies;

3) Doing everything we can to ensure the Thai respect

international human rights norms as they counter the violence.

 

INTEROPERABILITY

—————-

 

21. (SBU) The U.S. remains the country of first choice for

arms procurement by the military, and has more than $2

billion of arms procurements currently in process. We

continue to look at ways to improve interoperability with the

Thai military, but must take into account the presence of

other regional and global players. Following U.S. sanctions

imposed as a consequence of the coup in 2006, other countries

such as China, Israel, Sweden, and South Africa were looked

at more closely for procurement.

 

22. (SBU) The Defense Resource Management Study (DRMS)

program is finishing its second phase in Thailand. Former

RTARF Supreme Commander General Boonsrang Niumpradit was a

key proponent of defense reform and meetings with General

Songkitti will provide an excellent opportunity to underscore

our desire to work closely with the Thai military leadership

as they work to learn from the DRMS process.

 

THE INCREASING ROLE OF CHINA

—————————-

 

23. (C) Thai leaders continue to develop closer relations

with China while simultaneously emphasizing the vital role of

the U.S. in the region. While Thai military links with the

United States are deeper and far more apparent than Sino-Thai

links, China\’s growing influence in Thailand and Southeast

Asia is evident in business, popular culture, the media, and

the military.

 

24. (C) The Chinese, through hosting visits, have made a

strong effort to court the Thai military. The Thai military

has a range of Chinese weapons systems in its arsenal; the

PLA Navy is interested in closer links with the Thai navy,

and China has worked with Thailand to improve air defense

equipment provided to Thailand in the late 1980\’s. In 2007

and 2008, Thai and Chinese Special Forces conducted joint

exercises, and other mil-to-mil exchanges have expanded in

recent years, as has the number of bilateral military VIP

visits. A yet to be finalized bilateral Marine Corps

exercise between China and Thailand near the eastern seaboard

port of Sattahip next year highlights the continuing push by

China to expand its mil-to-mil relations with Thailand\’s

military.

 

25. (C) As the shape of Southeast Asia, Asia writ large, and

the world has changed, so have Thai attitudes. The Chinese

have been making a major push to upgrade all aspects of

relations, including mil-mil with its ASEAN neighbors.

Thailand is not interested in making a choice between the

U.S. and China (nor do we see closer Chinese-Thai relations

as automatically threatening to our interests here), but we

will need to work harder to maintain the preferred status we

have long enjoyed.

GRIFFITHS

“

“219534″,”8/5/2009 10:22″,”09BANGKOK1901″,

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SENSITIVE

SIPDIS

 

H PLEASE PASS TO SENATOR WEBB

 

E.O. 12958: N/A

TAGS: PREL, PGOV, MARR, MOPS, PINS, TH

SUBJECT: THAILAND SCENESETTER FOR SENATOR WEBB’S VISIT

 

BANGKOK 00001901 001.2 OF 004

 

1. (SBU) Senator Webb, Embassy Bangkok looks forward to

welcoming you back to Thailand. Your visit will afford a

chance to express the United States’ commitment for

Thailand’s democracy in meeting its current challenges and

emerging strengthened, as well as to engage Thai officials

and others on the U.S. foreign policy agenda in Asia,

particularly challenges like Burma and North Korea. It is

also an opportunity to underscore our appreciation for the

long-standing bilateral relationship, which has facilitated

shared benefits in the fields of security, law enforcement,

and intelligence efforts, as well as groundbreaking

health/research collaboration and long-standing refugee

support.

 

CALM IN THE KINGDOM, BUT FOR HOW LONG?

————————————–

 

2. (SBU) Nearly eight months after your last visit, which

came in the immediate wake of the late 2008 airport takeover

and change in government, the political scene on the surface

has calmed considerably, but it is likely the calm of the eye

of a still churning storm. Thailand remains deeply divided,

politically and socially, and struggles to break free of an

inward focus. The traditional elite, urban middle class and

the mid-south are on largely one side (Democrat in

parliament, “yellow” in the street) and the political allies

of Thaksin, with largely rural supporters in the North and

Northeast on the other (opposition Puea Thai in parliament,

“red” in the street).

 

3. (SBU) Prime Minister Abhisit Vejjajiva is a photogenic,

eloquent 44-year old Oxford graduate who generally has

progressive instincts about basic freedoms, social

inequities, policy towards Burma, and how to address the

troubled deep South, afflicted by a grinding

ethno-nationalist Muslim-Malay separatist insurgency.

Whether Abhisit can deliver on change is another matter.

Although he has performed well, holding his government

together and restoring stability in the face of significant

political pressure is a persistent challenge. He is beset

with a fractious coalition, as well as a resurgent post-2006

coup military. His Foreign Minister Kasit Piromya is a

capable strategic thinker, but Kasit is controversial due to

his 2008 affiliation with the yellow-shirt People’s Alliance

for Democracy (PAD) movement. Kasit recently had to answer a

court summons regarding the 2008 PAD takeover of Bangkok’s

airports, leading to calls that he step down.

 

4. (SBU) Since your last visit, the most dramatic political

development was the mid-April red-shirt riots in Bangkok and

Pattaya. The United Front for Democracy against Dictatorship

(UDD), disrupted a regional Asian Summit and burned busses in

Bangkok, leading to two deaths, after ex-PM Thaksin, now a

fugitive abroad in the wake of an abuse of power conviction,

called for a revolution to bring him home. The opposition

Puea Thai Party and red-shirt movement will continue to seek

to drive Abhisit from office, call for changes to the

constitution which ban Thaksin’s cronies from participating

in politics, and demand the amnesty for the former Prime

Minister, who was convicted in a 2008 abuse of power case.

The latest red-shirt move is to appeal to the King for a

pardon for Thaksin, a not so subtle effort to drag a monarchy

which is supposed to be above politics into the political

fray; after several months of quiet after the April riots,

the red-shirts have resumed weekly rallies. The PAD

yellow-shirt movement has indicated it will oppose all of

these UDD initiatives.

 

5. (SBU) Both major parties in Thai politics are favorable

towards the U.S.; in fact, there are no radical, non-middle

of the road parties represented in the Thai parliament. On

the street, while both yellow and red try to lay exclusive

claim to the mantle of democracy, neither side of this split

is as democratic as it claims to be. Both movements reflect

deep social concerns stemming from widespread perceptions of

a lack of social and economic justice in Thailand, but both

seek to triumph in competing for traditional Thai

hierarchical power relationships. New elections would not

appear to be a viable solution to political divide, and

political discord could very well persist for years. We

continue to stress to Thai interlocutors the need for all

parties to avoid violence and respect democratic norms within

the framework of the constitution Qd rule of law, as well as

our support for long-time friend Thailand to work through its

 

BANGKOK 00001901 002.2 OF 004

 

current difficulties and emerge as a more participatory

democracy.

 

6. (SBU) Linked to the political uncertainty in Bangkok is

the RTG’s inability to resolve an ethno-nationalist Malay

Muslim insurgency in southern Thailand which has claimed an

estimated 3,500 lives since 2004. The fundamental issues of

justice and ethnic identity driving the violence are not

unique to southern Thailand, and ending the insurgency will

require the government to deal with these issues on a

national level – which the on-going political instability in

Bangkok has, to this point, prevented. In the mean time, the

insurgents use IEDs, assassinations, and beheadings to

challenge the control of the Thai state in the deep South.

The government has responded through special security laws

which give security forces expanded power to search and

detain people.

 

7. (SBU) Underlying the political tension in Bangkok is the

future of the monarchy. On the throne for 62 years, the

U.S.-born King Bhumibol is Thailand’s most prestigious

figure, with influence far beyond his constitutional mandate.

Many actors are jockeying for position to shape the expected

transition period Thailand during royal succession after the

eventual passing of the King, who is currently in poor health

and rarely seen in public anymore.

 

THAI FOREIGN POLICY

——————-

 

8. (SBU) If there is one area of policy difference between

Thai political parties affecting U.S. interests, it may well

be certain elements of foreign policy. PM Abhisit and FM

Kasit have stated that Thailand’s foreign policy should

reflect that it is a democracy, rather than being reduced to

mere commercial interests of cabinet members, as they claim

pro-Thaksin governments did.

 

9. (SBU) Thailand’s Burma policy has shifted noticeably since

Abhisit/Kasit came to office last December. Abhisit and

Kasit met with Burmese activists, exiles, and 1990 MPs elect

in March on the margins of an ASEAN summit, the first such

engagement since 2000, pre-Thaksin. As the Chair of ASEAN,

Thailand released a May 18 ASEAN Chairman’s Statement

reminding the Burmese regime that ASEAN Leaders have called

for the immediate release of Aung San Suu Kyi (ASSK) and that

Thailand, as the ASEAN Chair, was gravely concerned about

recent developments relating to ASSK. The ASEAN and ASEAN

Regional Forum (ARF) Ministerial statements issued in Phuket

by Kasit in late July adopted a similar tone.

 

10. (SBU) Border tensions with Burma have increased since

June as approximately 3,000 Karen have entered Thailand. The

refugee influx resulted from a Burmese Army and Democratic

Karen Buddhist Army offensive against the Karen National

Union. FM Kasit has directed the MFA to work closely with

NGOs to address the refugees’ needs while in Thailand and to

ensure they return home voluntarily.

 

11. (SBU) Relations with Cambodia continue to be volatile,

primarily due to a border dispute centered on 4.6 square

kilometers of overlapping territorial claims adjacent to the

Preah Vihear temple. While Thailand and France in 1904-8

agreed in principle on the Thai-Cambodian border, ownership

of Preah Vihear was not decided until 1962 when the

International Court of Justice ruled in favor of Cambodia.

Tensions spiked in mid-2008 when the pro-Thaksin Thai

government in power at that time supported Cambodia’s

application to UNESCO for the unilateral listing of the

temple as a world heritage site. The decision was seized by

the opposition in order to attack the government. Periodic

clashes between the two sides’ militaries since then have

resulted in the deaths of at least seven Thai soldiers. We

continue to stress to the Thai interlocutors that the dispute

should be resolved peacefully and bilaterally.

 

12. (SBU) The rise of China, and the perceived absence of a

focused U.S. presence in the region in recent years, is

another strategic issue of concern to Thailand and the

region. Thailand does not seek to choose between the U.S.

and China, rather preferring to have good relations with both

and hoping the U.S. strengthens engagement in the region.

There was universal praise for Secretary Clinton’s

ARF-related visit to Thailand in late July, including U.S.

 

BANGKOK 00001901 003.2 OF 004

 

accession to the Southeast Asian Treaty of Amity and

Cooperation (TAC) and the holding of a U.S.-Lower Mekong

Ministerial that underscored Secretary Clinton’s comment

that: “The U.S. is back in Asia.” That said, Thailand

continues to develop closer relations with China. The Thai

military employs a range of Chinese weapons systems, and Thai

and Chinese special forces have in recent years conducted

joint exercises.

 

ENDURING, PRODUCTIVE BILATERAL ALLIANCE

—————————————

 

13. (SBU) As one of five U.S. treaty allies in Asia and

straddling a major force projection air/sea corridor,

Thailand is crucial to U.S. security interests well beyond

Southeast Asia. Our bilateral military relationship provides

distinctive force projection opportunities from Thai military

facilities amid vital sea and air lanes that support combat

and humanitarian assistance missions, and the opportunity to

conduct live fire training exercises, both bilateral and

multilateral, that are impossible to match elsewhere in Asia.

The COBRA GOLD exercise is PACOM’s largest exercise. The

event has evolved to facilitate important objectives such as

a greater role in the Asian Pacific region for Japan and

Singapore and re-establishing a partnership with Indonesia.

We access the Utapao Naval Air Field alone a 1000 times a

year. The base was a key for air-bridge operations to Iraq

and for combat operations in Afghanistan. Preserving such

unfettered, unquestioned access requires engagement and

remains a mission and USG priority. Thailand has performed

well on international peacekeeping missions, particularly in

leading UN forces in East Timor, to which Thailand

contributed 1,500 troops. The RTG is currently preparing to

deploy a battalion of peacekeepers for Darfur.

 

14. (SBU) The U.S. and Thailand have extensive cooperation in

medical research. Approximately 400 Mission staff work on

health issues, making the Embassy one of the USG’s largest

efforts to fight the world’s most dangerous diseases:

malaria; TB; dengue; HIV/AIDS; and pandemic influenza. CDC,

USAID, USDA/APHIS, and the Armed Forces Research Institute of

Medical Sciences (AFRIMS) closely collaborate with Thai

counterparts on basic research and trial vaccines. The

sophistication of the Thai scientific and public health

community makes collaboration as useful to the USG as it is

to the Thai. A number of important breakthroughs, such as in

the prevention of HIV/AIDS transmission from mothers to

children, were developed here, and several phase III, double

blind trials for potential HIV vaccines are currently ongoing.

 

15. (SBU) Forty years of law enforcement cooperation

initially focused on counter-narcotics efforts has expanded

to all aspects of transnational crime, defending U.S.

interests and securing extraditions of both U.S. citizens and

third country nationals, and building capacity in the Thai

criminal justice system. Eighteen federal and local law

enforcement agencies are currently represented in the

Embassy. The U.S. and Thailand co-host the International Law

Enforcement Academy, a regional platform to promote law

enforcement professionalism. The extradition case of Russian

arms trafficker Viktor Bout, wanted in New York on charges of

conspiring to provide arms to terrorists, is our current law

enforcement top priority. The court decision is expected

August 11, your first day in Thailand.

 

16. (SBU) On refugees, Thailand continues to host more than

114,000 registered Burmese refugees and has allowed the

resettlement of nearly 10,000 refugees to the U.S. this

fiscal year, for which we are grateful. We continue to push

for greater self-sufficiency activities to end the

“warehousing” of refugees unwilling or unable to resettle

abroad. About 4,000 Burmese refugees crossed into Thailand in

June in response to an offensive by government-allied militia

groups. Thailand has provided temporary protection to this

latest influx, comprised mostly of women and children. A

group of 5,000 Lao Hmong is also of concern. 158

UNHCR-recognized refugees have been confined in an

immigration jail for 2.5 years. Another 4,700 are in an

army-run camp in Phetchabun. The RTG and Government of Laos

have insisted the issue will be handled bilaterally, although

the RTG recently assured the United States that none will be

forcibly returned to Laos. We have also been invited for the

first time to discuss the issue in a trilateral format on

August 7 at the Phetchabun.

 

BANGKOK 00001901 004.2 OF 004

 

THAI ECONOMY CONTINUES TO STRUGGLE

———————————-

 

17. (SBU) The United States and Thailand have long enjoyed a

robust trade relationship; annual bilateral trade has been

over $32 billion in recent years. Cumulative U.S. investment

over the past twenty plus years is estimated at $23 billion.

There is a large American Chamber of Commerce with some 650

members; you will have an opportunity to address the AMCHAM

membership at lunch on August 17. While U.S. direct

investment is down this year largely due to the global

economic crisis, many U.S. firms receive preferred national

treatment in a number of sectors under the bilateral Treaty

of Amity and Economic Relations, the bedrock of our economic

relationship since 1966. A number of large U.S. investments

in petrochemicals, computer parts, and automotives use

Thailand as an export manufacturing base for the region.

Thai officials still need to do more to strengthen the

overall investment climate, particularly on customs reform

and intellectual property rights enforcement.

 

18. (SBU) The global economic crisis hit Thailand’s

export-driven economy particularly hard over the last year.

Exports, historically the bright spot of the Thai economy,

declined 23.5 percent over the first six months of this year

when compared to the same period last year (with exports to

the U.S. declining 27.1 percent). The tourism industry,

another longtime economic growth generator, has experienced a

serious decline in the number of tourist arrivals for the

past 10 months; tourist arrivals in June alone fell 18.6

percent year-on-year. With the lessons of the 1997 financial

crisis under its belt, the banking sector remains sound due

to strong regulation and minimal exposure to risky or toxic

assets. The economy went into official recession with a 7.1

percent drop in GDP the first quarter of this year. Forecasts

show a three to five percent GDP contraction for all of 2009.

If global trade activity remains depressed, Thailand’s

export-dependent economy likely will continue to suffer

significant losses this year.

JOHN

“

“189147″,”1/28/2009 10:02″,”09PHNOMPENH71″,

“Embassy Phnom Penh”,”UNCLASSIFIED”,

“08STATE123907|09HONGKONG48|09SINGAPORE12|09SINGAPORE194″,

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TO RUEHC/SECSTATE WASHDC PRIORITY 0338

INFO RUCNASE/ASEAN MEMBER COLLECTIVE

RUCPDOC/USDOC WASHDC

RUCPCIM/CIMS NTDB WASHDC

RUEATRS/DEPT OF TREASURY WASHINGTON DC 0779

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STATE FOR EAP/MLS, EB/IFD/OIA, EB/TPP/ABT, EEB/TPP/MTA, EEB/TPP/BTA

STATE PASS TO USTR/BISBEE AND WEISEL

STATE PASS TO USTDA/ROSSITER

BANGKOK FOR USAID/KISSINGER, FCS/MEYER

HANOI FOR FAS/REIDEL

HO CHI MINH CITY FOR FCS/LE

 

SIPDIS

 

E.O. 12958:N/A

TAGS: ECON, EFIN, EINV, ELAB, ETRD, KIPR, OPIC, KTDB, USTR, CB

SUBJECT: 2009 Investment Climate Statement – Cambodia

 

REF: 08 STATE 123907

 

1. Cambodia, a developing country, began the transformation from a

command economy to the free market in the late 1980s. It is now

integrating into the regional and world trading framework. In 1999,

Cambodia joined the Association of Southeast Asian Nations (ASEAN)

and in September 2004, became a member of the World Trade

Organization (WTO). On December 15, 2008 the entry into force of

the ASEAN Charter brought Cambodia and other member states into a

new regional legal framework. Cambodia has shown interest in

participating in other international trading arrangements, including

the Asia-Pacific Economic Cooperation forum (APEC).

 

2. As part of its WTO commitments to strengthen the investment

climate for both foreign and domestic businesses, Cambodia committed

to enact 46 new laws or regulations to address areas where existing

law did not meet WTO requirements. Cambodia has been behind

schedule in fulfilling its WTO commitments to pass necessary

business legislation. However, the country has made progress

recently, passing several significant laws in 2008, including a Law

on Plant Breeder Rights and Law on Civil Aviation. In 2007, the

government promulgated a Customs Law, Law on Water Resources

Management, Law on Land Traffic, Law on Insolvency, and Secured

Transactions Law. The government has either completed drafts of

most of the remaining required laws or is waiting for their approval

by the legislature. According to the Economic Institute of

Cambodia, an independent think tank, the government must promulgate

an additional 17 laws required by WTO accession.

 

3. Since the re-establishment of a constitutional monarchy in 1993,

the economy has grown steadily. Real GDP growth averaged 8.8

percent during the 1994-2008 period. Despite dire predictions

surrounding the expiration of the Multi-Fiber Agreement on January

1, 2005, through which Cambodia obtained limited duty-free access to

the U.S. market for garments, the economy grew at 13.4 percent in

2005 — the highest rate in a decade — and in 2007 expanded by 10.2

percent. During the same period, per capita GDP grew from USD 440

to USD 590. Success in the garment, construction, and tourism

sectors and good weather for agriculture generated the high growth.

For 2008, the growth rate decreased to an estimated 6.7 percent,

mainly as a result of decreasing garment orders, constrution

projects, and tourist arrivals due to the global economic slowdown

and political instability in Thailand. Per capita GDP for 2008 was

USD 625.

 

4. Inflation increased sharply in 2008, as it did in many countries

throughout Asia. According to the Economic Institute of Cambodia,

in 2008 the inflation rate reached an estimated 22.7 percent. The

rising price of fuel, depreciation of the dollar, and dramatic

increase in food prices contributed to the dramatic spike. Apart

from the CPI, land prices retreated from record levels achieved at

the beginning of the year, with the price of residential property in

Phnom Penh decreasing by 25 percent from earlier highs, after rising

by 100 percent in 2007.

 

5. Foreign Direct Investment (FDI) approved by the Council for the

Development of Cambodia (CDC), Cambodia\’s investment approval body,

has dramatically increased in recent years, with approved proposals

reaching nearly USD 11 billion in 2008, compared with USD 201

million in 2004. The CDC does not have a functional mechanism to

monitor implementation of projects, so it is not clear how many

proposed projects are fully implemented. Nonetheless, the increase

in investor interest may be attributed to increased political and

macroeconomic stability, and ongoing government reforms designed to

integrate Cambodia into the regional and global marketplace.

Corruption has been singled out as one of the most serious

deterrents to further private investment. Given inadequate private

investment and poor revenue collection, Cambodia remains dependent

largely on foreign donor funding for budget assistance, capital

expenditure, and social services.

 

6. Since early 1999, the Cambodian government has intensified its

economic reform program, a process the international financial

institutions and donors encourage, participate in, and monitor

closely. In recent years the government has publicly committed

itself on numerous occasions to fighting corruption, pursuing good

governance, and increasing transparency and predictability. This

strategy is set out in phase II of the government\’s latest public

reform effort called the \”Rectangular Strategy for Growth,

Employment, Equity, and Efficiency.\”

 

7. The government has initiated specific measures to promote

 

PHNOM PENH 00000071 002 OF 016

 

business, especially small and medium-sized businesses, by reducing

costs and the time required for business registration and by

establishing a number of committees for business promotion and trade

facilitation.

 

Openness to Foreign Investment

——————————-

 

8. Cambodia officially welcomes foreign direct investment.

Cambodia\’s 1994 Law on Investment established an open and liberal

foreign investment regime. All sectors of the economy are open to

foreign investment and 100 percent foreign ownership is permitted in

most sectors. Article 44 of the Constitution provides that only

Cambodian citizens and legal entities have the right to own land.

Aside from this, there is little or no discrimination against

foreign investors either at the time of initial investment or after

investment. However, some foreign businesses have reported that

they are at a disadvantage vis-a-vis Cambodia or other foreign

rivals, who engage in acts of corruption or tax evasion, or take

advantage of Cambodia\’s poor enforcement of legal regulations.

 

9. In addition, there are a few sectors open to foreign investors

which are subject to conditions, local equity participation, or

prior authorization from relevant authorities. These sectors

include manufacture of cigarettes, movie production, rice milling,

exploitation of gemstones, publishing and printing, radio and

television, manufacturing wood and stone carvings, and silk weaving.

The government has issued a sub-decree restricting foreign

ownership of hospitals and clinics and forbidding the employment of

non-Cambodian doctors in any specialty in which the Ministry of

Health considers there to be an adequate number of Cambodian

practitioners.

 

10. Under a sub-decree dated September 2005, Cambodia prohibits

certain investment activities, including investment in production or

processing of psychotropic and narcotic substances, poisonous

chemicals, agricultural pesticides and insecticides, and other goods

that use chemical substances prohibited by international regulations

or the World Health Organization that affect public health and the

environment. Production of electric power by using waste imported

from foreign countries is prohibited, as is forestry exploitation.

 

11. The privatization of state enterprises and transactions

involving state property has not always been carried out in a

transparent manner. In several instances, the public learned that

enterprises were for sale or swap only after the government

announced a sale or deal to a particular buyer.

 

12. Investor rights (investment guarantees) provided for in the Law

on Investment include:

 

– Foreign investors shall not be treated in a discriminatory

manner by reason of being a foreign entity, except in respect to

land ownership as provided for in the Constitution of the Kingdom of

Cambodia.

– The Royal Government of Cambodia shall not undertake a

nationalization policy that adversely affects the private property

of investors.

– The Royal Government of Cambodia shall not fix the price of

products or fees for services.

– The Royal Government of Cambodia, in accordance with relevant

laws and regulations, shall permit investors to purchase foreign

currencies through the banking system and to remit abroad those

currencies as payments for imports, repayments on loans, payments of

royalties and management fees, profit remittances and repatriation

of capital.

 

Conversion and Transfer Policies

———————————

 

13. There are no restrictions on the conversion of capital for

investors. The Foreign Exchange Law allows the National Bank of

Cambodia (the central bank) to implement exchange controls in the

event of a crisis; the law does not define what would constitute a

crisis. The U.S. Embassy is not aware of any cases in which

investors have encountered obstacles in converting local to foreign

currency or in sending capital out of the country.

 

14. The U.S. dollar is widely used and circulated in the economy.

The 2008 exchange rate was stable, although slightly depreciated

compared to 2007. At the end of 2008, the exchange rate was USD 1 =

4,049 riel. The government is committed to maintaining exchange

 

PHNOM PENH 00000071 003 OF 016

 

rate stability.

 

Expropriation and Compensation

——————————-

 

15. Article 44 of the Cambodian Constitution, which restricts land

ownership to Cambodian nationals, also states that \”the (state\’s)

right to confiscate properties from any person shall be exercised

only in the public interest as provided for under the law and shall

require fair and just compensation in advance.\” Article 58 states

that \”the control and use of state properties shall be determined by

law.\” The Law on Investment provides that \”the Royal Government of

Cambodia shall not undertake a nationalization policy which

adversely affects the private property of investors.\”

 

16. In spite of various legal protections, protection of immovable

property rights is complicated by the fact that most property

holders do not have legal documentation of their ownership rights.

Numerous cases have been reported of influential individuals or

groups acquiring property through means not entirely in keeping with

the Constitution or laws. These actions are usually directed at

poor people and those unable to protect their rights. Human rights

NGO ADHOC reported receiving 195 land-related cases from January to

August 2008. During the same period, another NGO received 51

land-related cases in Phnom Penh and 13 other provinces affecting a

total of 3,275 families. If granted at all, compensation in these

types of cases is usually less than the market value of the property

being taken.

 

17. The Ministry of Economy and Finance is drafting a law on

expropriation which will set broad guidelines on land-taking

procedures for public interest purposes and define public interest

activities such as construction of infrastructure projects,

development of buildings for national protection and civil security,

construction of facilities for research and exploitation of natural

resources, and construction of oil pipeline and gas networks.

 

18. To date, there are no known investment disputes involving

government expropriation of property belonging to U.S. citizens. Up

to 17 Thai businesses sustained varying degrees of damage during

anti-Thai rioting in Phnom Penh on January 29, 2003. The Cambodian

government pledged to compensate Thai business owners, and all of

claims have been resolved.

 

Dispute Settlement

——————-

 

19. Cambodia\’s legal system is a mosaic of pre-1975 statutes

modeled on French law, communist-era legislation dating from

1979-1991, statutes put in place by the UN Transitional Authority in

Cambodia (UNTAC) during the period 1991-93, and legislation passed

by the Royal Government of Cambodia since 1993.

 

20. Cambodian culture and its legal system have traditionally

favored negotiation and conciliation over adversarial conflict and

adjudication. Thus, compromise solutions are the norm, even in

cases where the law clearly favors one party in a dispute. In civil

cases, courts will often try conciliation before proceeding with a

trial. The Ministry of Commerce is currently finalizing draft

legislation to create a Commercial Court that will likely include a

pre-trial mediation component. A number of draft bills are slated

to be considered by the National Assembly during its fourth term

(2008-2013); no date has been set for consideration of Commercial

Court legislation.

 

21. Cambodia\’s court system is generally seen as non-transparent

and subject to outside influence. Judges, who have been trained

either for a short period in Cambodia or under other systems of law,

have little access to published Cambodian statutes. Judges can be

inexperienced and courts are often understaffed with little

experience, particularly in adjudicating commercial disputes. The

local and foreign business community reports frequent problems with

inconsistent judicial rulings as well as outright corruption.

 

22. The Cambodian judiciary system is beginning to undergo reform.

To provide the necessary background knowledge, judges and court

staff from around the country are being trained by the Royal Academy

for Judges and Prosecutors, which was created in 2002. In an effort

to clean up the court system, the Prime Minister has announced ad

hoc anti-corruption measures, including the dismissal, replacement,

and transfer of judges and prosecutors. The Supreme Council of

Magistracy, comprised of a president (the King) and 8 other members,

 

PHNOM PENH 00000071 004 OF 016

 

is responsible for the appointment and conduct of judges and

prosecutors.

 

23. To handle specific disputes with regard to labor, the Ministry

of Labor and Vocational Training established an Arbitration Council

in May 2003. Basing its decision on the provisions of the Labor

Law, the Council has 30 arbitrators. The Council is an independent

body whose function is to resolve collective labor disputes that the

Ministry is unable to solve by conciliation. The Council\’s

decisions are non-binding but it has been very successful in

reducing the number of industrial actions in the garment sector.

The Council plays a vital role in contributing to the development of

healthy industrial relations in Cambodia. The Council\’s success in

the garment industry has prompted unions in other sectors, e.g., the

hospitality and tourism sectors, to seek the Council\’s arbitration

and mediation services.

 

24. Under the 2006 Law on Commercial Arbitration, a National

Arbitration Center (NAC) will be established in the Ministry of

Commerce. When active, parties involved in a commercial dispute

that have a written arbitration agreement will be able to settle

commercial disputes by means of quasi-judicial methods without

involvement of the Cambodian courts. Parties will be able to select

arbitrators without direct government interference. The law also

allows the Cambodia Chamber of Commerce to establish its own

arbitration center for disputes between members or between members

and third parties. Neither of these proposed arbitration centers

has been established to date. However a sub-decree on the

establishment of the National Arbitration Center is currently

awaiting approval by the Council of Ministers. The Law on

Commercial Arbitration also mandates recognition of arbitral awards

made outside of Cambodia. Arbitration awards can be appealed to the

Appellate and Supreme Court of Cambodia based on limited grounds.

 

25. Although party to the Convention for the Settlement of

Investment Disputes between States and Nationals of Other States

since 2005, Cambodia has not yet had any cases taken to the

International Center for the Settlement of Investment Disputes.

 

Performance Requirements and Incentives

—————————————–

 

26. The Council for the Development of Cambodia (CDC), Cambodia\’s

foreign investment approval body, administers a package of

investment incentives. The CDC was created as a one-stop shop to

facilitate foreign direct investment.

 

27. Seeking to increase government revenue, the international

financial institutions recommended that the Cambodian government

scale back its investment incentives. Consequently, the Cambodian

government amended the Law on Investment in 2003. The law creates

regimes for profit (20 percent), salary (5 to 20 percent),

withholding (4 to 15 percent), value-added (10 percent) and excise

taxes (rates vary). While some incentives have been eliminated, the

law provides a simplified, more transparent, and faster mechanism

for investment approval.

 

28. Under the amended Law on Investment, the profit tax exemption

is allocated automatically on the basis of activity and minimum

investment amounts as set out in the sub-decree. To maintain the

incentives under the law, qualified investment projects (QIP) are

required to obtain an annual Certificate of Compliance from the CDC

and file this with the annual tax return.

 

29. The amended Law on Investment includes the following

provisions, which include the exemption, in whole or in part, of

customs duties and taxes, for QIPs:

– An exemption from the tax on profit imposed under the Law on

Taxation for a set period. The tax exemption period is composed of

a trigger period + three years + n years (a number of years

determined according to the Financial Management Law and depending

on the economic sector). The maximum allowable trigger period is to

be the first year of profit or three years after the QIP earns its

first revenue, whichever is sooner.

– 100 percent exemption from import duties for construction

material, production equipment and production input materials for

export QIPs and supporting industry QIPs in accordance with the

provisions of the sub-decree on the Implementation of the Amendment

to the Law on Investment

– Transfer of incentives by merger or acquisition.

– Renewable land leases of up to 99 years on concession land for

agricultural purposes and land ownership permitted to joint ventures

 

PHNOM PENH 00000071 005 OF 016

 

with over 50 percent equity owned by Cambodians.

– No price controls on goods produced or services rendered by

investors.

– No discrimination between foreign and local investors.

– 100 percent exemption from export tax or duty, except for

activities specifically mentioned in the Law on Customs.

– Employment of foreign expatriates where no qualified Cambodians

are available. QIPs are entitled to obtain visas and work permits.

– A QIP that is located in a designated special economic zone

(SEZ) is entitled to the same incentives and privileges as other

QIPs as stipulated in the law.

 

30. The September 2005 sub-decree on the Implementation of the

Amendment to the Law on Investment also details investment

activities that are not eligible for incentives, although investment

is permitted. They include the following sectors: retail,

wholesale, and duty-free stores; entertainment (including

restaurants, bars, nightclubs, massage parlors, and casinos);

tourism service providers; currency and financial services; press

and media related activities; professional services; and production

and processing of tobacco and wood products.

 

31. Incentives are also not available for production of certain

products with an investment of less than USD 500,000 such as food

and beverages; textiles, garments and footwear; and plastic, rubber,

and paper products. Investors are encouraged to refer to the

sub-decree for details of other investment activities that are not

eligible for incentives.

 

32. Investment activities that are eligible for customs duty

exemption, but not eligible for the profit tax exemption, are

telecommunication basic services; exploration of gas and oil,

including supply bases for gas and oil activities; and mining.

 

33. Cambodia allows foreign lawyers to supply legal services with

regard to foreign law and international law, and allows them to

supply certain legal services with regard to Cambodian law in

\”commercial association\” with Cambodian law firms. Cambodia\’s WTO

General Agreement on Trade in Services (GATS) commitment defines

\”commercial association\” as any type of commercial arrangement,

without any requirement as to corporate form. Thus, there are no

equity limitations on the practice of foreign and international law

by foreign enterprises and there are no equity limitations on the

formation of \”commercial associations\” under which foreigners may

practice certain legal services with regard to Cambodian law.

 

34. Investors who wish to take advantage of investment incentives

must submit an application to the Cambodian Investment Board (CIB),

the division of the CDC charged with reviewing investment

applications. Investors not wishing to apply for investment

incentives, or who are ineligible, may establish their company

simply by registering corporate documents with the Department of

Legal Affairs of the Ministry of Commerce. Once an investor\’s

application is submitted, the CDC will issue to the applicant either

a Conditional Registration Certificate or a Letter of Non-Compliance

within three workdays. The Conditional Registration Certificate

will set out the terms, such as approvals, authorization,

clearances, permits or registrations required. If the CDC fails to

issue the Conditional Registration Certificate or Letter of

Non-Compliance within three workdays, then the Conditional

Registration Certificate will be considered approved.

 

35. The CDC has the responsibility to obtain all of the licenses

from relevant government agencies on behalf of the applicants. The

relevant government agencies must issue the required documents no

later than 28 workdays from the date of the Conditional Registration

Certificate. At the end of the 28 days, the CDC will issue a Final

Registration Certificate.

 

36. The Sub-decree on the Implementation of the Amendment of the

Law on Investment adopted on September 27, 2005 does not require

investors to place a deposit guaranteeing their investment except in

cases in which the deposit is required in a concession contract.

Investors who wish to apply are required to pay an application fee

of seven million riel (approx. USD 1,750) representing the

administration fees for securing the approvals, authorizations,

licenses, or registrations from all relevant ministries and entities

including stamp duty.

 

37. Under a 2008 sub-decree, the CDC is required to submit

investment proposals to the Council of Ministers for approval with

an investment capital of USD 50 million or more; involve

 

PHNOM PENH 00000071 006 OF 016

 

politically sensitive issues; involve the exploration and the

exploitation of mineral or natural resources; may have a negative

impact on the environment; have long-term strategy; or, involve

infrastructure concessions.

 

38. After receiving several billion dollars of real estate

development proposals, the Ministry of Economy and Finance (MoEF)

proposed new regulations in July 2008 to protect consumers from

fraud. The proposed rules require all developers to obtain licenses

from an Inter-Ministerial Task Force, purchase construction site

insurance, and deposit two percent of total project costs in a

non-interest bearing MoEF account at the National Bank of Cambodia.

License fees and the period of the license would be determined by

the type and size of development. It also requires developers to

create a housing development account at a commercial bank into which

buyers can make down payments on units. Developers would need

approval from an inter-ministrerial working group to access the

account, and the working group can intervene if the company fails to

honor its contracts. The rule was originally slated to take effect

from September 30, 2008 but was postponed amid complaints from

international developers. After receiving support from the Prime

Minister at the Government-Private Sector Forum in November 2008,

the MoEF intends to reintroduce the regulations in early 2009.

 

Right to Private Ownership and Establishment

———————————————

 

39. There are no limits on the rights of foreign and domestic

entities to establish and own business enterprises or to compete

with public enterprises. However, the Constitution provides that

only Cambodian citizens or legal entities have the right to own

land. A legal entity is considered to be Cambodian when at least 51

percent of its shares are owned by Cambodian citizen(s) or by

Cambodian legal entities. Investment incentives vary depending on

the nature of the investment project.

 

40. Under the 2001 Land Law, foreign investors may secure control

over land through concessions, long-term leases, or renewable

short-term leases. If investors intend to take a long-term lease

interest in land or ownership interest through a 51 percent

Cambodian company, it is essential that caution be exercised to

ensure that clear and unencumbered ownership of the land is

verified.

 

41. The Land Law establishes a comprehensive legal framework for

long-term leasing. The leaseholder has a contractual interest in

the land, which means the lease can be sold or transferred through

succession and can be pledged as security in order to raise

financing. It is also important to make sure that the land

ownership is clearly and legally established before entering into

any leasing agreement.

 

42. Qualified investors approved by the Council for the Development

of Cambodia have the right to own buildings built on leased

property. However the law is unclear as to whether buildings from

qualified projects can be transferred between foreign investors or

whether foreign investors can own buildings built through projects

not approved by the CDC. To remove the ambiguity, several real

estate developers and members of the legal community are urging the

government to issue formal regulations for foreign ownership rights

on buildings such as apartments and condominiums.

 

Protection of Property Rights

——————————

 

43. Cambodia has adopted legislation concerning the protection of

property rights, including the Land Law and the Law on Copyrights

and Law on Patent and Industrial Design. Cambodia is a member of

the World Intellectual Property Organization (WIPO) and the Paris

Convention for the Protection of Industrial Property.

 

44. Chattel and real property: The 2001 Land Law provides a

framework for real property security and a system for recording

titles and ownership. Land titles issued prior to the end of the

Khmer Rouge regime in 1979 are not recognized due to the severe

dislocations that occurred during the Khmer Rouge period. The

government is making efforts to accelerate the issuance of land

titles, but in practice, the titling system is cumbersome,

expensive, and subject to corruption. The majority of property

owners lack documentation proving ownership. Even where title

records exist, recognition of legal title to land has been a problem

in some court cases where judges have sought additional proof of

 

PHNOM PENH 00000071 007 OF 016

 

ownership. Although foreigners are constitutionally forbidden to

own land, the 2001 law allows long or short-term leases to

foreigners.

 

45. Intellectual property rights (IPR): As a WTO member,

Cambodia\’s IPR regime is in compliance with its WTO commitments;

however, comprehensive enforcement remains problematic. The 1996

U.S.-Cambodia Trade Agreement contained a broad range of IPR

protections, but given Cambodia\’s very limited experience with IPR,

the WTO agreement granted phase-in periods for the Cambodian

government to fully implement IPR protections. On November 9, 2005,

the WTO granted a deadline extension until 2013 for Cambodia and

other least developed countries to enforce copyright laws and begin

accepting patents.

 

46. In a significant step toward consolidating IPR policy-making,

enforcement and technical assistance, the Council of Ministers

created the National Committee for Intellectual Property Management

on September 18, 2008 with its secretariat within the Ministry of

Commerce. Once operational, this committee will develop national

policy on intellectual property, strengthen interagency cooperation,

prepare and disseminate new laws and regulations, and act as a

clearinghouse for technical assistance relating to the intellectual

property sector. This new interagency IPR committee chaired by the

Minister of Commerce includes a broad range of IPR actors including

representatives from the Council of Ministers and the Ministries of

Industry Mines and Energy; Culture and Fine Arts; Interior; Economy

and Finance; Posts and Telecommunications; Health; Agriculture,

Forestry and Fisheries; Environment; Justice; Education; and

Tourism.

 

47. Trademarks: The Cambodian National Assembly approved the Law

Concerning Marks, Trade Names and Acts of Unfair Competition to

comply with Cambodia\’s WTO obligations under the Agreement on

Trade-Related Aspects of Intellectual Property Rights (TRIPS).

Signed in February 2002, the law outlines specific penalties for

trademark violations, including jail sentences and fines for

counterfeiting registered marks. It also contains detailed

procedures for registering trademarks, invalidation and removal,

licensing of marks, and infringement and remedies.

 

48. Despite lacking clear legal authority to conduct enforcement

activities, the Ministry of Commerce has taken effective action

against trademark infringement in several cases since 1998. The

Ministry has ordered local firms to stop using well-known U.S.

marks, including Pizza Hut, McDonalds, Nike, Scotties, Marlboro,

Seven Eleven, and Pringles. In 2008, the Ministry of Commerce

resolved 12 cases of trademark infringements.

 

49. Since 1991, the Ministry of Commerce has maintained an

effective trademark registration system, registering more than

30,000 trademarks (nearly 6,000 for U.S. companies) under the terms

of a 1991 sub-decree, and has proven cooperative in preventing

unauthorized individuals from registering U.S. trademarks in

Cambodia.

 

50. Copyrights: Copyrights are governed by the Law on Copyrights

and Related Rights, which was enacted in January 2003.

Responsibility for copyrights is split between the Ministry of

Culture and Fine Arts, which handles phonograms, CDs, DVDs, and

other recordings, and the Ministry of Information, which deals with

printed materials. Pirated CDs, videos, textbooks, and other

copyrighted materials are widely available in Cambodian markets and

used throughout the country. Before the adoption of the law, there

were no provisions for enforcement of copyrights.

 

51. To protect and manage their economic rights, authors and

related rights holders are allowed by law to establish a collective

management organization (CMO). The creation of the CMO requires

authorization from either the Ministry of Culture and Fine Arts or

the Ministry of Information, depending on the nature of their work.

The Ministry of Culture and Fine Arts hopes to draft a sub-decree on

collective management in 2009. In mid-2007, the Ministry of Culture

and Fine Arts created a Copyright Department which is gradually

building capacity.

 

52. Patents and industrial designs: Cambodia has a very small

industrial base, and infringement on patents and industrial designs

is not yet commercially significant. With assistance from WIPO, the

Ministry of Industry, Mines, and Energy (MIME) prepared a

comprehensive law on the protection of patents and industrial

designs which went into force in January 2003. The law provides for

 

PHNOM PENH 00000071 008 OF 016

 

the filing, registration, and protection of patents, utility model

certificates and industrial designs. The MIME issued a declaration

in June 2006 on granting patents and registering industrial

designs.

 

53. Encrypted satellite signals, semiconductor layout designs, and

trade secrets: The Ministry of Commerce is preparing a draft law

for trade secrets while the Ministry of Industry, Mines, and Energy

is drafting a law on integrated circuit protection. Cambodia has

not yet made significant progress toward enacting required

legislation on encrypted satellite signals, although it obtained a

model law on encrypted satellite signals and semiconductor layout

designs from WIPO in March 1999. Cambodia has committed to the WTO

to promulgate a law by 2009 but is unlikely to meet this goal.

 

54. IPR enforcement: With the exception of the trademark

enforcement, the Cambodian government has taken few significant

actions to enforce its IPR obligations. However, in January 2008,

at the annual conference of the Ministry of Culture and Fine Arts,

the government suggested it would increase prosecutions for

copyright violations on domestically produced products before

expanding prosecutions for foreign products. Cambodian copyright

law allows IPR owners to file a complaint with the authorities to

take action. Law enforcement action taken at the request of owners

is directed against the piracy of domestically produced music or

video products, but not against piracy of foreign optical media.

The owners requesting crackdowns must pay support costs to the

authorities for conducting the operation. Crackdowns on such IPR

violations are not conducted on a consistent basis.

 

55. Infringement of IPR is pervasive, ranging from software,

compact discs, and music, to photocopied books and the sale of

counterfeit products, including cigarettes, alcohol, and

pharmaceuticals. The Business Software Alliance recently estimated

a 95 percent software piracy rate in Cambodia which cost the

industry USD 47 million in 2007. Although Cambodia is not a major

center for the production and export of pirated CDs, videos, and

other copyrighted materials, local businesses report Cambodia is

becoming an increasingly popular source of pirated material due to

weak enforcement. The Ministry of Commerce has plans to put in

place measures to stop IPR-violated products at borders, as

post-inspection mechanisms are unlikely to be effective. During the

TIFA discussions in November 2007, Cambodia requested technical

assistance for a draft Sub-decree on Border Measures detailing

procedures at the borders allowing IPR owners to file an application

with customs to suspend clearance of suspected counterfeit goods.

 

Transparency of the Regulatory System

————————————–

 

56. There is no pattern of discrimination against foreign investors

in Cambodia through a regulatory regime. Numerous issues of

transparency in the regulatory regime arise, however, from the lack

of legislation and the weakness of key institutions. Investors

often complain that the decisions of Cambodian regulatory agencies

are inconsistent, irrational, or corrupt.

 

57. The Cambodian government is still in the process of drafting

laws and regulations that establish the framework for the market

economy. In addition to existing laws and regulations, in 2008, the

government adopted the Law on Civil Aviation and the Law on Plant

Breeder Rights. A commercial contract law and other important

business-related laws such as commercial court, e-commerce,

telecommunications, and personal property leasing laws are in draft

or still pending promulgation.

 

58. Cambodia currently has no anti-monopoly or anti-trust statutes.

On a practical level, Cambodia has indicated a desire to discourage

monopolistic trading arrangements in most sectors.

 

59. Cambodia is currently working on the establishment of standards

and other technical measures based on international practice,

guidelines, and recommendations. Under the Law on Standards in

Cambodia, passed in 2007, the Institute of Standards in Cambodia

(ISC) was created within the Ministry of Industry, Mines, and Energy

(MIME) as a central authority to develop and certify national

standards for products, commodities, materials, services, and

practices and operations. When fully functional, the ISC will serve

as the secretariat of the National Standards Council which will

consist of representatives from various government ministries,

state-controlled academic/research institutions, the private sector,

and a consumer representative created to advise as well as approve

 

PHNOM PENH 00000071 009 OF 016

 

standards.

 

60. The responsibility for establishing industrial standards and

certifications currently resides with the Department of Industrial

Standards of Cambodia of MIME which will become part of the

Institute of Standards of Cambodia in the future. The ISC has been

assigned as the focal point for technical barriers to trade (TBT)

and as the agency responsible for notifications and publications

required by the WTO TBT Agreement. The Ministry of Health is

charged with prescribing standards, quality control, distribution

and labeling requirement for medicines, but this responsibility will

be brought under the ISC in the future.

 

61. Quality control of foodstuffs, plant and animal products is

currently under the Department of Inspection and Fraud Repression

(CamControl) of the Ministry of Commerce. Cambodia is a member of

the Codex Alimentarius Commission. Currently CamControl is the

national contact point for Codex Alimentarius. Its primary

responsibility is the enforcement of quality and safety of products

and services relating to sanitary and phytosanitary (SPS) measures.

 

62. The Cambodian Constitution and the 1997 Labor Code provide for

compliance with internationally recognized core labor standards.

The law authorizes the Ministry of Labor and Vocational Training to

set health, safety and other conditions for the workplace. (The

\”Labor\” Section of this report discusses the labor situation in more

detail.)

 

63. The National Bank of Cambodia supervises Cambodia\’s banks and

financial institutions while the Ministry of Economy and Finance

regulates the insurance industry. The insurance market in Cambodia

is relatively new, but has recently begun to gain credibility and

expand its scope. Currently, there are a few major insurance

companies operating here such as Asia Insurance, the state-owned

insurance company Caminco, Forte Insurance, and Infinity Insurance.

 

64. To help Cambodian businesses stay competitive in the world

market, the government introduced specific measures to facilitate

business, in particular exports, by attempting to reduce informal

costs and streamline bureaucratic hurdles. Measures included: (1)

introduction of a joint inspection by CamControl and the Customs and

Excise Department and issuance of a common inspection report valid

for both agencies and the \”Federal Office\” in order to reduce the

amount of time spent applying for goods inspection; (2) based on

this common report, MIME and the Ministry of Commerce will issue the

Certificate of Processing (CP) and the Certificate of Origin (CO),

respectively; (3) reduction of the costs of registration from USD

615 to USD 177 and of the time limit for Cambodian government

issuance of registration from 30 days to ten and a half working

days; and (4) reduction of time required to acquire documents

related to the CO and exports and for goods inspection.

 

65. Cambodia has renewed its commitment to creating a favorable

environment for investment and trade. During the Trade and

Investment Framework Agreement (TIFA) discussions in November 2007,

the government further committed to reducing unofficial fees and

costs related to imports and exports.

 

Efficient Capital Markets and Portfolio Investment

——————————————— —–

 

66. Cambodia is moving to address the need for capital markets. In

November 2006, the National Assembly passed legislation to permit

the government to issue bonds and use the capital to make up budget

deficits. The Budget Law for 2007 permitted the government to issue

bonds worth USD 250,000. However no 2007 bonds were sold to

investors and Prime Minister Hun Sen mentioned in 2008 that the

government does not plan to issue bonds in the near future. In

2007, the government also passed the Law on the Issuance and Trading

of Non-government Securities, and, in partnership with the Korean

Stock Exchange, plans to establish a stock market by the end of

2009.

 

67. The Cambodian government does not use regulation of capital

markets to restrict foreign investment. Domestic financing is

difficult to obtain at competitive interest rates. A new law

addressing secured transactions, which includes a system for

registering such secured interests, was promulgated in May 2007.

Most loans are secured by real property mortgages or deposits of

cash or other liquid assets, as provided for in the existing

contract law and land law.

 

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68. The total assets of Cambodia\’s banking system as of July 2008

were approximately USD 4 billion, an increase of nearly 50 percent

from the end of 2005. Loans account for about 56 percent of the

banking system\’s assets. Nonperforming loans have fallen to

historic lows, between 2 – 4 percent, likely due to dramatic

increases in property values through mid-2008, but banking experts

predict an increase in future nonperforming loans as property prices

decline. As of July 2008, credit granted by the commercial banks

amounted to USD 2.2 billion. Loans made to services and the

wholesale and retail sectors accounted for over 50 percent of total

loans.

 

69. The banking sector has shown significant improvement, but

requires continued progress to gain international confidence. Under

the amended Law on Banking and Financial Institutions, all of

Cambodia\’s commercial banks had to reapply for licenses from the NBC

and meet new, stricter capital and prudential requirements by the

end of 2001. As a result, there was a significant shakeout and

consolidation within the banking sector with the closure and

liquidation of 12 banks. Since the shakeout, Cambodian banks have

gradually increased in number with 25 commercial banks in operation

as of January 2009. As a supplement to commercial banking, six

specialized banks and seventeen microfinance institutions also offer

financial services to the public. In September 2008, the National

Bank of Cambodia moved to slow the rapid growth in the number of

commercial banks, which increased by more than 20 percent in the

first nine months of 2008, giving commercial banks without an

investment grade shareholder until the end of 2010 to triple minimum

capital from USD 12.5 million to USD 37.5 million. In January 2008,

Cambodia\’s banks were given their first-ever risk assessment from

Standard & Poor\’s. Their placement was alongside that of banks in

Venezuela, Bolivia, Ukraine, and Jamaica.

 

Political Violence

——————-

 

70. Cambodia is relatively peaceful compared to its pre-UNTAC

history. Election-related violence has decreased in each national

election held at five-year intervals since 1993. Cambodia\’s 2007

commune council elections followed by the July 2008 National

Assembly election had little of the pre-election violence or

intimidation that preceded the 2002 and 2003 elections. The 2007

and 2008 polls resulted in clear victories for the Cambodian

People\’s Party, with the Sam Rainsy Party emerging as the main

opposition party.

 

71. Cambodian political activities have turned violent in the past,

and the possibility for politically motivated violence remains. In

November 2000, an anti-government group based in the U.S. led an

attack against government buildings in Phnom Penh. During the

anti-Thai riots in 2003, the Royal Embassy of Thailand and

Thai-owned commercial establishments were attacked. In November

2006, police arrested six people for allegedly plotting to conduct

bomb attacks in Phnom Penh during the Water Festival.

 

72. On July 29, 2007, three improvised explosive devices (IEDs)

were planted at the Vietnam-Cambodia Friendship Monument in Phnom

Penh. One of the IEDs partially exploded, but the others failed to

detonate and were recovered by Cambodian authorities. No one was

injured. On January 2, 2009, two undetonated IEDs were found near

the Ministry of National Defense and state-owned TV3. While there

is no indication these incidents were directed at U.S. or other

Western interests, the possibility remains that further attacks

could be carried out.

 

73. Following the July 2008 UNESCO World Heritage Site listing of

the Preah Vihear Temple, thousands of Thai and Cambodian soldiers

amassed in various areas along the Thai-Cambodian border,

particularly near the disputed Preah Vihear temple area. Soldiers

clashed October 15, 2008 near the temple resulting in deaths on both

sides, but the outbreak of violence was isolated and lasted only a

few hours.

 

Corruption

———–

 

74. Despite increasing investor interest, Cambodia continues to

rank poorly on global surveys of competitiveness and corruption.

The World Economic Forum\’s 2008 competitiveness survey ranked

Cambodia 109 out of 134 countries surveyed, slightly better than its

2007 rating of 110 out of 131. The World Bank also ranked Cambodia

in the lower half of the list, 134 of 181, on business climate. The

 

PHNOM PENH 00000071 011 OF 016

 

2007 Transparency International Global Corruption Barometer ranked

Cambodia second-worst in corruption with 72 percent of those

surveyed reporting that they paid a bribe to receive a service in

the previous 12 months.

 

75. Business people, both local and foreign, have identified

corruption, particularly within the judiciary, as the single biggest

deterrent to investment in Cambodia. Corruption was cited by a

plurality of respondents to the World Economic Forum survey as the

most problematic factor for doing business in Cambodia. A 2007

USAID-funded survey of the Phnom Penh Chamber of Commerce also found

that corruption is considered to be the main obstacle for doing

business.

 

76. Public sector salaries range from USD 25-60 per month for

working level officials, and around USD 2000 per month for

high-ranking officials. Although there has been a recent salary

increase of 15 percent for some officials, these wages are far below

the level required to maintain a suitable quality of life in

Cambodia, and as a result, public employees are susceptible to

corruption and conflicts of interest. Local and foreign businesses

report that they must often pay extra facilitation fees to expedite

any business transaction. Additionally, for those seeking to enter

the Cambodian market, the process for awarding government contracts

is not transparent and is subject to major irregularities.

 

77. Current Cambodian laws and regulations and their application

are insufficient to address the problem of corruption. Laws dating

from the UNTAC period (1991-93) against embezzlement, extortion, and

bribing public officials exist, but are enforced rarely, often for

political reasons.

 

78. Cambodia is not a signatory to the OECD Anti-Bribery

Convention, but has endorsed the ADB/OECD Anti-Corruption Action

Plan for Asia and the Pacific. In 2007, the government signed a

regional anti-corruption pact with eight other ASEAN countries, and

in September of the same year, also signed the UN Convention Against

Corruption. Cambodia is considering joining the Extractive

Industries Transparency Initiative governing the oil sector.

 

79. After a draft national anti-corruption law was sent to the

National Assembly but not voted on in 2003, the Cambodian government

undertook to revise the draft with cooperation from local and

international NGOs, and international donors. The draft, which is

still pending, falls short of international standards due to limited

independence of the proposed anti-corruption body and weak

declaration of assets provisions.

 

80. Cambodia is under increasing pressure from donors to address

the issue of good governance in general, and corruption in

particular. In a draft action plan on good governance presented to

donors in May 2000, Cambodia promised to pass anti-corruption

legislation by late 2001. After missing the first deadline, the

government again promised to pass anti-corruption legislation by

July 2003. In the December 2004 Consultative Group (CG) meeting of

development assistance agencies, donors established a benchmark to

have a new anti-corruption law submitted to the National Assembly

before the next CG meeting, which was held June, 2006. However,

this deadline was not met and donors have become increasingly

frustrated with the government\’s failure to act. The passage of new

anti-corruption legislation is reportedly a high priority for the

fourth mandate government.

 

81. The Ministry of National Assembly-Senate Relations and

Inspection (MONASRI) has an anti-corruption mandate, but is largely

inactive. In 2007, however, MONASRI, with technical assistance from

USAID, created a draft Access to Information Policy. The draft has

yet to be forwarded to the Council of Ministers. The government

also created an anti-corruption commission within the cabinet in

late 1999, which has undertaken a few investigations, one of which

resulted in the dismissal of a mid-level official in late 2001.

Also in 2001, the government established a National Audit Authority,

which has been ineffective because of its secrecy and lack of

independence.

 

82. Ignoring the existing anti-corruption commission, the

government established the Anti-Corruption Unit (ACU) in August

2006, a temporary body designed to address corruption until the

anti-corruption legislation is passed. The mission of the ACU is to

focus on preventing corruption, strengthening law enforcement, and

obtaining public support for combating corruption. The first

investigation of ACU resulted in the arrest of five illegal car

 

PHNOM PENH 00000071 012 OF 016

 

importers and 39 officials; 10 mid-level officials have been removed

from their positions. Other investigations are underway. However

the ACU is considered to be ineffective because of its lack of

independence and capacity.

 

83. In its most comprehensive reform strategy, the Rectangular

Strategy Phase II, adopted as the government platform in 2008 after

phase I in 2004, the Cambodian government once again renewed its

commitment to fight corruption and make good governance the

centerpiece of reform. The strategy acknowledges the importance of

taking action against corruption, but the challenge remains a

daunting and long-term one that will require political will at the

highest levels of the government.

 

Bilateral Investment Agreements

——————————-

 

84. Cambodia has signed bilateral investment agreements with China,

Croatia, Cuba, the Czech Republic, France, Germany, Indonesia,

Kuwait, Japan, Laos, Malaysia, the Netherlands, North Korea, the

Organization of the Petroleum Exporting Countries (OPEC), Pakistan,

the Philippines, Singapore, South Korea, Switzerland, Thailand, and

Vietnam. Future agreements with Algeria, Burma, Egypt, Russia, the

United Kingdom, and Ukraine are planned. The agreements provide

recprocal national treatment to investors, excluding benefits

deriving from membership in future customs unions or free trade

areas and agreements relating to taxation. The agreements preclude

expropriations except those that are undertaken for a lawful or

public purpose, are non-discriminatory, and are accompanied by

prompt, adequate and effective compensation at the fair market value

of the property prior to expropriation. The agreements also

guarantee repatriation of investments and provide for settlement of

investment disputes via arbitration.

 

85. In addition, in July 2006, Cambodia signed a Trade and

Investment Framework Agreement (TIFA) with the United States, which

will promote greater trade and investment in both countries and

provide a forum to address bilateral trade and investment issues.

Two very successful meetings were held under the TIFA in 2007 in

which the U.S. and Cambodian governments discussed WTO accession

requirements, trade facilitation and economic development

initiatives, and progress on intellectual property rights. In 2008,

several bilateral working level meetings were held to advance the

TIFA agenda.

 

OPIC and Other Investment Insurance Programs

——————————————–

 

86. Cambodia is eligible for the Quick Cover Program under which

the Overseas Private Investment Corporation (OPIC) offers financing

and political risk insurance coverage for projects on an expedited

basis. With most investment contracts written in U.S. dollars,

there is little exchange risk. Even for riel-denominated

transactions, there is only one exchange rate, which is fairly

stable.

 

87. Cambodia is a member of the Multilateral Investment Guarantee

Agency (MIGA) of the World Bank, which offers political-risk

insurance to foreign investors.

 

Labor

——-

 

88. The country has an economically active population (defined as

being ten years of age and older) of some 7.8 million people out of

a population of 13.4 million. According to the EIC, the labor

participation rate was 70 percent in 2008. While government

statistics are somewhat higher, they do not fully capture the

problems of unemployment and underemployment in Cambodia.

 

89. The economy is not able to generate enough jobs in the formal

sector to handle the large number of entrants to the job market.

This dilemma is likely to become more pronounced over the next

decade. Cambodia suffers from a large demographic imbalance.

According to the 2004 Intercensal Population Survey (CIPS), persons

20 years of age or younger account for 53 percent of the total

population. As a result, over the next decade at least 275,000 new

job seekers will enter the labor market each year.

 

90. Approximately 65 – 70 percent of the labor force is engaged in

subsistence agriculture. At the end of 2008, about 337,000 people,

the majority of whom are women, were employed in the garment sector,

 

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with 300,000 Cambodians employed in the tourism sector, and a

further 50,000 people in construction.

 

91. The 2008-2009 Global Competitiveness Report of the World

Economic Forum identified an inadequately educated workforce as one

of the most serious problems in doing business in Cambodia. Given

the severe disruption to the Cambodian education system and loss of

skilled Cambodians during the 1975-79 Khmer Rouge period, workers

with higher education or specialized skills are few and in high

demand. A Cambodia Socio-Economic Survey conducted in 2004 found

that about 12 percent of the labor force has completed at least an

elementary education. Only 1.2 percent of the labor force completed

post-secondary education.

 

92. Overall literacy, for those aged fifteen and over, is 74

percent with male literacy rates considerably higher than those for

females in both urban and rural areas. Many adults and children

enroll in supplementary educational programs, including English and

computer training. Employers report that Cambodian workers are

eager to learn and, when trained, are excellent, hardworking

employees.

 

93. Cambodia\’s 1997 labor code protects the right of association

and the rights to organize and bargain collectively. The code

prohibits forced or compulsory labor, establishes 15 as the minimum

allowable age for paid work, and 18 as the minimum age for anyone

engaged in work that is hazardous, unhealthy or unsafe. The statute

also guarantees an eight-hour workday and 48-hour work week, and

provides for time-and-a-half pay for overtime or work on the

employee\’s day off. The law gives the Ministry of Labor and

Vocational Training (MOLVT) a legal mandate to set minimum wages

after consultation with the tripartite Labor Advisory Committee. In

January 2007, the minimum wage for garment and footwear workers was

officially set at USD 50 per month. In April 2008, a temporary USD

6 per month cost of living allowance was instituted to offset high

levels of inflation. There is no minimum wage for any other

industry. To increase competitiveness of garment manufacturers, the

labor code was amended in 2007 to establish a night shift wage of

130 percent of day time wages.

 

94. Acleda Bank, a local commercial bank, is currently managing

Cambodia\’s first National Social Security Fund (NSSF), which

protects workers against occupational risks and workplace accidents.

The fund was established by sub-decree in 2007 and requires

employers to contribute 0.8 percent of each employee\’s salary to the

NSSF. As of October, 2007, approximately 250,000 workers, most from

the garment sector, contribute to the fund through their employer.

A second phase of the fund, to be implemented in 2010, will focus on

health care for employees, followed by pensions in 2012.

 

95. Enforcement of many aspects of the labor code is poor, albeit

improving. Labor disputes can be problematic and may involve

workers simply demanding conditions to which they are legally

entitled. In labor disputes in which workers complain of poor or

unhealthy conditions, MOLVT and the Ministry of Commerce have

ordered the employer to take corrective measures. The U.S.

Government, the ILO, and others are working closely with Cambodia to

improve enforcement of the labor code and workers\’ rights in

general. The U.S.-Cambodia Bilateral Textile Agreement linked

Cambodian compliance with internationally recognized core labor

standards with the level of textile quota the U.S. granted to

Cambodia. While the quota regime ended on January 1, 2005, a

\”Better Factories\” program attempts to build on the labor standards

established.

 

96. For the past few years, Cambodia has enjoyed high economic

growth and low inflation of approximately 4-6 percent, keeping

inflation-driven wage increases in check. However, the early part

of 2008 saw inflation skyrocket, driven in part by high oil and food

prices. After peaking in May, inflation has slowly been declining

to about 18 percent in November, year-on-year. Experts suggest the

increase in the cost of living insufficiently compensated by the

recent USD 6 cost of living allowance has led to a recent shortage

of workers willing to work in the garment industry.

 

Foreign Trade Zones

——————-

 

97. To facilitate the country\’s development, the Cambodian

government has shown great interest in increasing exports via

geographically defined special economic zones (SEZs), with the goal

of attracting much-needed foreign direct investment.

 

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98. Cambodia has yet to pass the Law on Industrial Zones which will

define SEZs and establish the rules under which they will operate.

The law is currently being drafted by the Council for the

Development of Cambodia and may be submitted for approval of the

Council of Ministers in 2009.

 

99. In late December 2005, the Council of Ministers passed a

sub-decree on Establishment and Management of Special Economic Zones

to speed up the creation of the zones. The sub-decree details

procedures, conditions and incentives for the investors in the

zone.

 

100. Since issuing the sub-decree, the Cambodia Special Economic

Zones Board (CSEZB) has approved 19 SEZs, located near the borders

of Thailand and Vietnam, Phnom Penh, Kampot, and at Sihanoukville.

 

Foreign Investment Statistics

——————————-

 

101. Foreign Direct Investment (FDI) proposals approved by the

Council for the Development of Cambodia (CDC) have dramatically

increased in recent years, with approved FDI reaching USD 10.9

billion in 2008, compared with USD 201 million in 2004. FDI

registered capital however, has been modest since 1995, with an

average inflow of USD 304 million in the period 1995-2008. The FDI

registered capital figures probably understate actual investment,

since they report only registered capital and not fixed assets. CDC

statistics for fixed assets, however, are based on projections, and

the CDC has no effective monitoring mechanism to determine the

veracity of the numbers. The FDI registered capital flow into

Cambodia is uneven and gradually declined from USD 135 million in

1999 to USD 30 million in 2003. FDI registered capital increased to

USD 260 million in 2008.

 

102. Total FDI registered capital flows into Cambodia for the years

1995-2008 are presented in the table below, in USD million.

(Source: CDC) (Note: statistics from the National Bank of Cambodia

differ significantly from CDC\’s figures.)

 

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

—- —- —- —- —- —- —- —- —- —- —- —- —-

351 294 320 135 74 81 50 30 45 383 209 473 260

 

103. Figures from the CDC for registered capital of approved

projects, including domestic investment, and broken down by country

of origin and economic sector, are provided below. The FDI

registered capital figures below may overstate investment because

they include projects that have not yet been, or may never be, fully

implemented and retention of dormant or defunct projects from

earlier years makes the investment figures appear higher.

 

104. Total cumulative registered investment projects approved, by

country of origin, August 1994 to December 2008 (source: CDC)

 

Country USD million Pct.

 

Malaysia 1,736 32.79

Cambodia 1,509 28.50

China 569 10.27

Taiwan 400 7.56

Thailand 206 3.89

Singapore 194 3.67

South Korea 165 3.12

U.K. 130 2.46

USA 70 1.32

Vietnam 61 1.15

Indonesia 54 1.02

Australia 54 1.02

France 40 0.76

Japan 23 0.43

Other 82 1.55

Total 5293

 

—————————————-

 

105. Total cumulative registered investment capital by sector, from

January 1998 to December 2008 (source CDC)

 

Sector USD million No. of Projects

Industry 1,482.0 699

- Food Processing 91.5 12

 

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- Garments 449.4 401

- Petroleum 203.0 5

- Wood Processing 98.3 15

- Footwear 27.8 21

Agriculture 177.1 74

Services 338.8 78

- Construction 63.6 14

- Telecommunications 92.5 15

Tourism 434.4 88

Total 2432.4

 

106. New investment projects in USD million, by country of

origin,1998-2008(source: CDC)

 

Country 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

——– —- —- —- —- —- —- —- —- —- —- —-

Malaysia 22.6 17 1.6 28 na 3.6 7.8 10.6 2.5 19.8 1.0

Cambodia 110 98 28 47 21 44 15 78.5 116.8 264.3 99.8

USA 2.3 4.4 3.7 5.2 na na 2.1 2.2 4.3 6.5 12.3

Taiwan 79 29 16 35.6 5 1 4.6 4.1 16.4 14 9.5

Singapore 12 2.3 3.1 na 10 3.3 1.6 5.3 3.8 1 12

China 75 36 3.9 4.2 8 14 24 38 28.3 40.4 37.9

South Korea 4.0 na 10 2 7.6 1 4.1 16 4.5 22.0 19.5

Hong Kong 48 22 4 0.7 1 1 na 0.3 1.5 0.6 na

France 0.6 0.6 3 na na 1.7 0.6 0.4 na 0.3 2.3

Thailand 53 16 17 3.1 na 3.1 2.0 15 10.0 13.8 30.6

U.K. 0.4 1.5 6.5 1.5 0.4 0.5 1.5 1 1 1.5 1

Canada 2.1 0.2 1 na 2.2 na 1.7 0.6 1.5 na 4.8

Indonesia 10 0.4 3 na na na na na na na na

Australia 1.4 0.02 0.8 na na 0.6 na 7 na 3.5 1

Japan 2 2.1 0.2 na 1.2 na 0.7 na 1 7.5 4.6

Other 8.3 2.8 1.3 1.7 13.6 na na na 8.1 78.5 4.1

——————————————— ——

Total 430 233 103 129 69 74.3 66 379 209.7 473.7 259.9

 

107. New investment projects in USD million, by sector, 1998-2008

(source: CDC)

 

Sector 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

—— —- —- —- —- —- —- —- —- —- —- —-

Industry 298 101 48 61 22.5 41 53.5 325 173.4 269.9 90

- Food 8.0 2.4 27 1.5 na 1.6 1 na 22 24 4

Processing

- Garments 91.6 49.5 28 17 12.6 42 19 54 41.9 45.1 49

- Petroleum 1 1 na na na na 1 200 na na na

- Wood 92 na na 1 1 1.3 1 na na 2.0 na

Processing

- Mining 5 na na na na 2 na 30 1 149 4

 

Agriculture 44 31.3 8.5 1 6.2 2.0 2.0 4.0 2.0 50.1 26

 

Services 22.1 55 10 5.2 18 5.5 5 32 16.3 127.2 43

 

- Construct 1.2 16.4 na na na na 3.0 31 6.0 5 1

- Telecom 13.4 22 na na 2.9 10 na na na 42.2 2

- Infrastructure 2 na na 1.5 4.1 na na na na 65 na

 

Tourism 67 45.5 36.5 61 22 26 5.5 18 18 33.5 101

——————————————— ——

Total 430 233 103 129 69 74 66 379 210 473 261

 

108. The CDC has registered approximately USD 70 million in U.S.

investment since August 1994. Caltex has a chain of service

stations and a petroleum holding facility in Sihanoukville; Crown

Beverage Cans Cambodia Limited, a part of Crown Holdings Inc.,

produces aluminum cans; and Chevron is actively exploring offshore

petroleum deposits. There are also U.S. investors in a number of

Cambodia\’s garment factories.

 

109. In 2008, several Cambodia-focused private equity funds emerged

seeking to raise between USD 100 and USD 500 million each for

investments in infrastructure, agriculture, tourism, and real estate

development, among other sectors. However it appears the global

economic slowdown is limiting fund-raising abilities, and widespread

investments by these funds have not yet materialized.

 

110. Major non-U.S. foreign investors include Asia Pacific

Breweries (Singapore), Asia Insurance (Hong Kong), ANZ Bank

(Australia), BHP Billiton (Australia), Oxiana (Australia), Infinity

Financial Solutions (Malaysia), Total (France), Cambodia Airport

Management Services (CAMS) (France), Samart Mobil Phone (Malaysia),

Shinawatra Mobile Phone (Singapore), Thakral Cambodia Industries

 

PHNOM PENH 00000071 016 OF 016

 

(Singapore), Petronas Cambodia (Malaysia), Charoeun Pokphand

(Thailand), Siam Cement (Thailand), and Cambrew (Malaysia).

 

111. Since 2007, several well-known U.S. companies opened or

upgraded their presence in Cambodia. General Electric opened a

representative office in July 2007. In 2008, Cargill and Dupont

established representative offices. Otis Elevators, a division of

United Technologies, also upgraded to a branch office, and Mircosoft

initiated a presence through its Market Development Program.

 

112. Some major local companies and their sectors are: Sokimex

(petroleum, tourism, garment), Royal Group of Companies (mobile

phone, telecommunication, banking, insurance), AZ Distribution

(construction, telecommunication), Mong Rethy Groups (construction,

agro-industry, rubber and oil palm plantation), KT Pacific Group

(airport project, construction, tobacco, food and electronics

distribution), Hero King (cigarettes, casinos and power), Anco

Brothers (cigarettes, casinos and power), Canadia Bank (banking and

real estate), Acleda Bank (microfinance), and Men Sarun Import and

Export (agro-industry, rice and rubber export).

 

113. In January 2008, Acleda Bank announced it obtained permission

to operate in Laos, and the bank has plans for further expansion

into Vietnam and China. Statistics on Cambodian investment overseas

are not available, but such investments are likely minimal.

RODLEY

“

“79058″,”9/20/2006 9:06″,”06BANGKOK5797″,

 

“Embassy Bangkok”,”UNCLASSIFIED//FOR OFFICIAL USE ONLY”,”

“,”VZCZCXRO8434

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DE RUEHBK #5797/01 2630906

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RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY”,”UNCLAS SECTION 01 OF 02 BANGKOK 005797

 

SIPDIS

 

SENSITIVE

SIPDIS

 

STATE FOR EAP/MLS AND EB

COMMERCE FOR EAP/MAC/OKSA

TREASURY FOR OASIA

STATE PASS TO USTR FOR WEISEL

STATE PASS TO FEDERAL RESERVE SAN FRANCISCO FOR DAN FINEMAN

STATE PASS TO FEDERAL RESERVE NEW YORK FOR MATT HILDEBRANDT

 

E.O. 12958: N/A

TAGS: ECON, EFIN, TH

SUBJECT: LIMITED ECONOMIC FALLOUT FROM COUP

 

BANGKOK 00005797 001.2 OF 002

 

1. (SBU) There is near universal agreement among Thai and US

businesspersons and RTG civil servants with whom we have

spoken that any economic fallout from Thailand\’s military

coup will be shallow and short-lived. Banks tell us that they

have very few clients asking to exit baht-denominated

portfolio investment while a number are actually seeking to

buy on any further baht or Stock Exchange of Thailand

weakness. As one bank executive told us \”if the baht goes

down more, many foreign hedge fund will see this as a

short-term opportunity to buy cheap Thai stocks at a further

discount.\” Most expect tomorrow to bring a decline in the

value of the baht and Thai equities to be quickly followed by

a rally back up, perhaps above previous levels. One analyst

noted that following the February 1991 coup, the Stock

Exchange index fell 8 percent on day one following the event,

but gained 19.5 percent in the following three weeks. The

Exchange reports that they plan on operating normally

tomorrow.

 

2. (SBU) We spoke to the Governor of the Bank of Thailand by

cell phone as he was returning to Bangkok from the Bank/Fund

meetings in Singapore. He said that the baht had depreciated

from 37.30/$ to 37.95/$ as news of the coup spread, but

quickly strengthened to 37.60-37.70 as Thai exporters took

advantage of the situation to convert dollars. He said the

BoT had not intervened in the currency markets and, while

prepared to do so, had no expectation that it would be

necessary. He also advised that the Bank stood ready to add

liquidity to the banking system if such action were

necessary. In a subsequent conversation, the Assistant BoT

Governor for Financial Institutions said that in his survey

of banks there was no indication of any expected increase in

cash withdrawals or demand for foreign currency and expects

banks to reopen tomorrow. At foreign exchange kiosks open

today business has been slow, presumably because of a decline

in arriving tourists and an expectation among consumers that

the baht will be low

er tomorrow. The price on Credit Default Swaps which

increased from US$35,000/contract to US$55,000 yesterday is

reportedly back below US$40,000 this afternoon.

 

3. (SBU) An official from the Federation of Thai Industries

explained that the coup was \”good news for business\” because

\”everyone is tired of all the political fighting.\” He added

that he expects a caretaker government to be named soon that

will be comprised of highly qualified technocrats \”who could

make decisions.\” Dr. Pichit Likitkijsomboon, an economics

professor at Thammasat University, said the military was not

well informed on economic issues and did not expect them to

make any radical changes that would affect the long-term

investment environment. The Deputy Director General of the

Fiscal Policy Office of the Finance Ministry echoed this

view, recalling that after the 1991 coup, the interim

government pushed through regulations that had long been

bottled up in the parliament of the bureaucracy. The

Executive Director of the American Chamber of Commerce in

Bangkok advised us that some foreign companies had not opened

today due to uncertainty as to how martial law would be

implemented but that they

had no particular concerns about business conditions going

forward. Thai exporters with whom we spoke were positive on

the political developments, saw no real downside to their

export business and looked forward to greater economic

stability. They were concerned about the short-term impact

on the domestic market, but believed the impact would be

minimized if the military executed a quick transition to

civilian leadership.

 

4. (SBU) The biggest caveat in this rosy scenario is if

violence breaks out between Thaksin supporters and

coup-backers – a possibility that seems unlikely but cannot

be dismissed. Such an event would likely depress confidence

for a far longer period and negate the relief felt by many

that the political battles of the past year are now over and

everyone can focus on their jobs, including government

bureaucrats. Violence would also seriously impact the

important Thai tourism industry, a sector that contributes 6

percent of total Thai GDP. Barring the outbreak in violence,

 

BANGKOK 00005797 002.2 OF 002

 

however, the feeling among most Thais is that overall

uncertainty is reduced because of the coup, and less

uncertainty is better for business. While all the key credit

rating agencies now have their rating on Thailand under

review, it appears that they will be little changed.

 

5. (SBU) Comment: The optimism of the business community,

even in the face of martial law, is striking. One foreign

brokerage has actually recommended a double-weighting for

Thai assets in the wake of the coup. Most expect a knee-jerk

decline in markets tomorrow morning followed by a rapid

recovery. The real question is how the economy reacts over

the next year. Will the apparent approval of the coup among

consumers and business result in increases in domestic

consumption and private investment? Will an interim

government be able to make some of the infrastructure

investments that have been on hold for the past year? The

answers to these questions will determine whether Thai

economic growth remains sluggish over the short-medium term.

BOYCE

“