The cost of doing business
DRIVE NORTH OUT of Phnom Penh for 10 minutes or so and you’ll reach a flat stretch of dark yellow sand where the southernmost shore of Pong Peay lake used to be. At first it doesn’t look like much: children play in the remaining streets of the shanty town, rickety stalls sell drinks to a handful of Khmer idling on parked motorbikes. Then comes the sign: a huge arch proclaiming "New History is COMING" straddles the dirt road, and in the background cranes tower over half-built apartment blocks that dominate the flat land around them. A new city is being built.
Funded by Korean banks and built by Korea’s Hanil Engineering, Camko City – the name is a conflation of Cambodia and Korea – will offer apartments, houses, villas, a hospital, a school and a business district to house Cambodia’s new stock exchange. The latter, a joint venture with the Korean Stock Exchange, is to open in September 2009.
Back in Phnom Penh, Korean construction firm GS continues work on the new $1 billion, 52-storey IFC building that will tower over the city’s low skyline when it is completed in 2012. Perhaps some of the private equity firms that have been sniffing around Cambodia in the past 12 months will settle there: for the moment the lack of A-grade office space in the city forces them to look elsewhere, and two of the most prominent funds, Leopard Cambodia and Cambodia Emerald, are for the moment lodged in converted colonial villas.
Interest in this country of 14 million people has been quietly building for a few years but in the past 12 months there has been an explosion of foreign direct investment. One fund manager estimates that the rate of FDI has more than tripled. The country has attracted brotherly sympathy, financial aid and the help of a bewildering number of NGOs and charities since it emerged gasping from the brutality of Khmer Rouge rule. Now, though, some of Asia’s emerged and emerging countries are making investments driven by financial as much as filial concerns and the country is changing rapidly.
"Years ago when we started looking at this place, people thought we were crazy," says Doug Clayton, managing partner at Leopard Capital. "But in the last six months other people seem to have realized that we might be on to something." The fund launched in April with $15 million of seed capital, and Clayton says that sum will all be invested within the next month or two as the firm moves on to a second round of financing and a final target size of $100 million. Although Cambodia’s economy at the moment is poorly diversified, with clothing accounting for 80% of exports, Clayton says that project ideas are pitched to him almost every day and the challenge is to pick the ones that have been properly thought through and have the best chance of being properly executed.
New world order
Investment in emerging Asia has in the past often come from the US and Europe, so it’s perhaps a sign of the new world order in financial markets that Cambodia is very much an intra-Asian project. In addition to the heavy involvement of Korean firms in the real estate sector, there are lots of projects developing the country’s physical and financial infrastructure sponsored and managed by Asian institutions. The Japanese development banks have built bridges and roads; Thais have invested in power; and a Kazakh bank, Advanced Bank of Asia, has invested heavily in telecoms.
Ruslan Zhukeyev, chief executive of Advanced Bank of Asia (whose largest shareholder is Kazakh investment bank Visor), explains one of the most appealing reasons for investing in Cambodia: "We are the largest GSM operator in Nepal, and built our brand there from scratch until it was one of the largest companies in the country. We began looking around for similar opportunities in Asia and came to Cambodia in 2006. It’s one of the easiest markets to get into in the region because there are very few entry barriers: if you have an idea, you can come here and start a business, without difficult visa issues, in a dollarized economy where capital flows are not as tightly regulated."
Of course, pegging your economy’s fortunes to those of the dollar is not without its risks: in recent months the Cambodian authorities have been waging the same battle against inflation as their counterparts across the region without access to some of the same countermeasures. The National Bank has raised capital reserve requirements for banks from 8% to 16%, draining liquidity from the system and attempting to slow the country’s accelerating credit growth. The authorities work closely with the IMF, and while bank chief executives were initially upset at the measures, most privately describe the National Bank’s actions as sensible and well-advised.
Still, inflation is a real threat. The government had yet to disclose the latest CPI figures, in itself a cause for alarm and dismay among some market participants urging greater transparency from the authorities. However, the present rate of inflation is believed by most to be between 25% and 30%. An informal Euromoney poll of taxi and moto drivers in Phnom Penh supports the view of a local paper that the price of rice has doubled in the past 12 months, making life difficult for some.
While the government can and does argue that much of this inflation is driven by external factors affecting most of Asia, there are also issues unique to Cambodia. This is a small market, and there’s a real worry that the sudden flurry of interest from foreign investors is driving price increases and distorting land values. Who will populate the towering new financial centres and gleaming villas?
"We have almost sold out the first phase of Camko City’s development," says Duk-Kon Kim, vice-president at World City, the special purpose company set up by Korean shareholders to build the new city.