Coronavirus is crushing Cambodia's dreams of oil wealth
Barrel price has fallen low and economic difficulties are mounting
/NOVOSTIVL/ It is almost as if COVID-19 were specially designed to wreck Cambodia's 2020. This article appeared in Asia Nikkei
Though the pandemic is causing serious pain everywhere, it is hitting every engine which would have allowed Cambodia to repeat its 7.1% growth last year. Now, the World Bank predicts a contraction of as much as 2.9% as the garment industry, tourism and construction go into reverse.
Yet that is not the worst news: the pandemic is also derailing Cambodia's plans to begin producing oil.
Achieving first oil, as energy aficionados say, was viewed as the economy's easiest way to escape poverty. For years now, Prime Minister Hun Sen has been betting on proceeds from the Apsara oil field off the nation's southwest coast. Billions of dollars of revenue would fill government coffers and, in theory, finance more rapid economic development.
Even as COVID-19 started to upend Southeast Asian growth, Phnom Penh could still look forward to tapping -- and monetizing -- an initial 30 million barrels, from a reserve of potentially 400 million barrels.
Then oil prices tanked. The drop from $68 per barrel of Brent crude at the start of 2020 to $40 now, via a mid-April low of less than $20, is partly the result of plunging demand from China, Cambodia's main benefactor. Even as the pandemic slows the timeline for producing oil this year as planned, the Chinese investment on which Cambodia relies is drying up.
Cambodia is a unique commodity tale. Normally, nations struggle to diversify away from oil. From Nigeria to Indonesia, governments have rarely done the job of sharing resource windfalls with the masses or investing them productively. Too often, that largesse just warps incentives and fuels corruption.
Cambodia's $24 billion economy is, comparably speaking, diverse already. Exporting oil is seen as a means of turbocharging growth. Yet the delay in getting things on stream is spotlighting the economy's underlying cracks -- faults the government hoped to paper over with oil proceeds.
Exhibit A: chronic graft. Under the authoritarian Hun Sen, in power since 1985 and a ruthless crusher of opposition, Cambodia is 162nd out of 180 governments in Transparency International's corruption perceptions index, on a par with Chad and Iraq.
An opaque regulatory environment and bureaucracy have also hobbled the sector's development. Hun Sen's government ranks 144th in the World Bank's ease of doing business survey, behind Lebanon and Nicaragua. These inefficiencies are largely to blame for two decades of oil production delays.
That is why a who's-who of oil behemoths came, kicked the tires and left, including the U.S.'s Chevron, China Offshore Oil Corp., PTT of Thailand and PetroVietnam. Now, Cambodia is placing its chips on Singapore-based KrisEnergy to get the oil fields up and running.
Once the tankers and trucks are moving, Phnom Penh can put the nation on a stronger footing. It can start by narrowing a current-account deficit that is around 16% of gross domestic product. Hun Sen's government could shore up a health care system that is among Southeast Asia's worst, despite its coronavirus success so far.
The World Bank now worries that Cambodia faces the "greatest threat" to economic progress in three decades. The lending institution reckons Cambodia will probably experience its worst growth since 1994 -- a contraction of between 1% and 2.9%. It estimates that at least 1.76 million jobs are at risk.
Yet the knock-on effects of the pandemic could result in even bigger GDP losses. Along with blows to garments, tourism and construction, which account for almost 40% of all jobs, the World Bank expects remittances in Southeast Asia to fall 13% this year. Workers sending money home generates 5.9% of Cambodia's GDP.
Fewer inflows from China, Cambodia's top source of remittances and foreign direct investment, put the banking sector at risk. Nonperforming loans could increase in sectors from construction to real estate development to mortgages. The 47% annualized drop in steel imports in the first two months of the year augured poorly for demand in 2020 even before coronavirus.
So far, Hun Sen's government has earmarked $350 million in aid for vulnerable groups and modest wage subsidies. It will need to spend considerably more. Yet the delay in oil proceeds on which the government benchmarked 2020 policies is its own mini-crisis.
The strains can be seen at KrisEnergy headquarters. In 2014, it paid Chevron $65 million for a controlling stake in an oil field known as Block A. Now it is stumbling under a crushing debt load. It has had to divest from projects in Indonesia and Vietnam. Fitch Solutions, the research company, said: "The marked decline in oil prices since makes producing oil from Apsara more uneconomic than before."
The pandemic has merely exacerbated underlying problems that Hun Sen had 35 years in power to sort out. Thanks to his oil dreams, one of the world's longest-serving leaders is now flailing as the global economy takes a nightmarish turn. Rumors that oil would save the day have been greatly exaggerated.