Cambodia's war-battered economy is expected to grow at a much slower rate of three

percent this year, down from 10 percent as originally forecast, following a second

straight quarter of almost stagnant economic activity, a U.N. report said.

The survey of economic indicators for June said business activity remained "very

depressed" through the second quarter because of uncertainty over the political

situation in the period surrounding the May 23-28 election.

With the 23,000-man U.N. peace mission pulling out in the third quarter, the downturn

is expected to continue over the next three months.

In the aftermath of the polls, an interim coalition administration was formed, joining

together the former Phnom Penh-based government with the royalist FUNCINPEC Party

and two smaller parties. The radical Khmer Rouge boycotted the election, but has

pledged to recognize the results and is currently negotiating for a role in the new

government which will be formed in three months after a charter is drawn up.

While foreign investors and local businessmen welcomed the peaceful outcome of the

election, the U.N. report said they would likely adopt a wait and see posture during

the interim period.

"Prospects of economic recovery are clearly contingent on the resumption of

revenue , aid flows and foreign private investment which hopefully will occur when

the government is fully in place in the fourth quarter," it said.

The report said "unrestrained price increases exacerbated the poor economic

outturn for the quarter."

Inflation rose 12 percent at the end of May, largely as a result of increases in

the price of food goods, particularly the price of meat, fish and eggs which rose

by 20-50 percent. These rapid increases were offset, however, by the reasonable stability

of other major food items notably rice so that the composite food index rose by only

14 percent.

Prices of clothing items rose by 14 percent and other imported household goods at

a slower seven percent.

The poor fiscal performance and resurgence of inflation was accompanied by the weakening

of the riel. This gave an impetus, in turn, to speculative hoarding. In the three

months since mid-March, the international value of the riel has been dictated by

the political situation.

In the aftermath of the elections the riel has continued to strengthen through the

early weeks of June and by the middle of the month it was back to the level of the

begining of the year, the report said. The rise and fall of the riel was reflected

by similar movements in the gold market.