Previous Quarterly Editions
Expropriation Risk: 63 63 63 62 ► Political Violence Risk: 57 57 57 57 ► Terrorism Risk: 27 27 27 25 ▼ Exchange Transfer and Trade Sanction Risk: 64 64 64 64 ► Sovereign Default Risk: 57 57 57 57 ►
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
In Cambodia, climate change exacerbates two factors that affect the country’s environment: changes on the Mekong River as a result of decisions by upriver countries, specifically China, and the impact of widespread illegal logging. Global warming has affected the monsoon season –coupled with actions on Mekong dams – Cambodia has recently endured severe droughts that have deprived the population of fish from Ton Le Sap, the largest lake, typically responsible for providing 25% of protein for Cambodians. Rising seas are also an issue on the Gulf of Thailand. Cambodia adds to its existing list of problems with plans to erect new dams on tributaries of the Mekong, which environmentalists believe will further destabilise the environment.
In 2013, the government launched the Cambodia Climate Change Strategic Plan 2014-2023, an extensive strategy that is inherently pragmatic. It aims to protect critical ecosystems and the country’s cultural heritage, a major draw for Cambodia’s tourism sector. However, the government states “Cambodia bears very little responsibility for the historical and current climate crisis”, an oblique reference to the expectation that attempts to ameliorate the crisis will be funded externally. Nonetheless, Cambodia has established the Ministry of Environment as a permanent agency.
Environmental non-governmental organisations (NGOs) are viewed by Prime Minister Hun Sen’s regime as detrimental to an orderly society, particularly since they tend to expose and protest corruption in deals concerning natural resources such as forestry, land use, industrialisation and other factors that affect the environment. Nevertheless, Cambodian environmental NGOs are sustained by support from their counterparts in South-east Asia (particularly in Thailand, Malaysia, Indonesia and the Philippines) and the fact international donors prefer to work through NGOs than directly with the host government.
In December 2021, in compliance with the Paris Agreement, Cambodia released its first Long-Term Strategy for Carbon Neutrality. This calls for Cambodia’s Naturally Determined Contributions to be reviewed every five years. Under the Strategy, Cambodia aims to be carbon neutral by 2050. The Strategy focuses on the energy and agricultural sectors; to address the impact of logging, the government will attempt to slow deforestation while it also supports reforestation projects.
According to the United Nations Development Programme, Cambodia has been quick to embrace renewable energy, increasing generation from those sources from a 10 megawatts (MW) pilot in 2017, to 372 MW by the end of 2021. This effort is expected to reach a total of 1,815 MW of solar power on its grid by 2030. Solar power has been particularly useful in Cambodia’s impressive rural electrification programme: in 2000, less than 7% of Cambodian villages had electricity; by 2020 that percentage was 97%.
Except for Myanmar, South-east Asian countries aim to increase foreign investment, and most are moving, at various speeds, toward more investor-friendly laws and regulatory frameworks. With encouragement from the international community in the 1990s, Cambodia has prioritised foreign investment with incentives including 100% foreign ownership of companies, corporate tax holidays of up to eight years, duty-free importation of capital goods and capital repatriation without restrictions.
Since late 2021, Cambodia has worked to ease or remove restrictions on the country and the economy imposed because of COVID-19. Cambodia has one of the world’s highest vaccination rates, which bodes well for the return of tourism. The government continues to support survival and recovery of small and medium enterprises and the sectors most affected, particularly garments.
According to government figures, USD1.45 billion was expended in 2021 to shore up vulnerable companies and households, and USD1.04 billion is earmarked for this in 2022. In 2022, the government will consider what infrastructure investments might follow the stimulus to the domestic economy that has been provided over the past two years. This will likely include renovation of roads in tourist-heavy areas and completion of a new international airport in Siem Reap.
However, such positive moves are often offset by factors such as widespread corruption and lack of transparency in government approval processes. Moreover, although Cambodia’s current investment framework endeavours to be business-friendly, this could easily change under the current strongman government and caged judiciary.
The bulk of foreign direct investment is in commercial and residential real estate development and physical infrastructure. Such investments, and the government’s liberal use of expropriation laws to provide land for them, have made land use issues extremely controversial with the public. Projects are often the subject of charges of illegal land seizures and of sustained protests from local communities and environmental groups.
Cambodia will begin its next election cycle in 2022 with local elections, with general elections in 2023. Prime Minister Hun Sen is almost certain to lead the Cambodian People’s Party (CPP) in the 2023 elections and likely will retain his leadership role for another five years. However, he is laying the groundwork for control beyond that through a political dynasty, declaring publicly that Hun Manet, his son and the present Army Commander, will be his political heir. CPP leadership concurs.
The primary opposition party, the Cambodian National Rescue Party (CNRP), has been outlawed, with their leaders in exile, house arrest or otherwise side-lined. Four smaller opposition parties have emerged and will attempt to contest the coming elections, but they will likely be targeted for repression. Hun Sen’s control remains strong enough to tamp down political violence in the short term if it emerges. In the meantime, Hun Sen will attempt to project a positive image domestically and internationally as Cambodia emerges from the pandemic, largely due to COVAX donations of vaccine.
Regarding the current energy crisis’s effect on the Cambodian economy and population, rising costs and broader inflation will slow plans to move the economy forward. However, Cambodia could benefit from international sanctions on Russia. With the West cutting economic ties with Russia, Moscow’s friends in Asia will likely benefit from cheaper supplies of oil and wheat.
TREND ▼
Cambodia has low risk of internal insurgency or terrorist attacks. However, with millions of dollars in suspected illicit cash seized by Cambodian authorities in recent years, the country was placed on the European Union’s ‘grey list’ for its “strategic deficiencies” in anti-money laundering and counterterrorism financing frameworks in 2019. In September 2020, Cambodia upgraded its regulatory framework with the new Anti-Money Laundering and Combating the Financing of Terrorism Law, a stiffer version of a 2007 law.
Although the riel is Cambodia’s official currency, most transactions are conducted in the U.S. dollar. Dollarisation has provided some degree of macroeconomic stability, but growth in Cambodia’s dollar economy has greatly surpassed that in the riel-denominated economy. Dollarisation is entrenched, a risk if the National Bank of Cambodia is unable to maintain adequate levels of dollar liquidity. As a result, Cambodia has embarked upon a de-dollarisation campaign, phasing small U.S. notes out of circulation. For the time being, however, this campaign has had only a cosmetic effect.
To offset this risk and more generally wean itself off dollar dependence, in 2021 the central bank launched its own digital currency, the Bakong, the first central bank to do so, intending to increase the share of the riel in commerce with the aid of the Japanese blockchain technology company Soramitsu. As of November 2021, the Bakong had 270,000 users and had reached nearly half of the Cambodian population.
The U.S. and Europe express their disapproval of the Cambodian government’s human rights practices with targeted sanctions against individual leaders and an arms embargo. However, there are no plans at present for broad economic sanctions on Cambodia, or on critical sectors.
In late 2020, Cambodia’s government revised its 2021 debt estimate upward, from USD8.8 billion to nearly USD10 billion by end-2021. The final figure was USD9.84 billion, more than 35% of the gross domestic product. Debt is expected to climb steadily through the decade, with the 2022 total estimated at USD11.12 billion and USD12.48 billion for 2023.
The Ministry of Economy and Finance continues to insist that these levels are manageable. With China attempting to intensify its Belt and Road Initiative projects with willing South-east Asian partners, primarily Cambodia and Laos, an increase in borrowing and therefore debt is unavoidable, despite international concern Phnom Penh may fall into a ‘debt trap’. In late 2021, the Ministry of Economy and Finance reported that China accounted for 43.78% of the country’s foreign debt.
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