Previous Quarterly Editions
Expropriation Risk: 60 60 61 63 Political Violence Risk: 57 57 57 57 Terrorism Risk: 27 27 27 27 Exchange Transfer and Trade Sanction Risk: 64 64 64 64 Sovereign Default Risk: 57 57 57 57
TREND ►
Cambodia’s response to COVID-19 was initially slow, in part because of Prime Minister Hun Sen’s reluctance to offend China. However, by March 2020 the government had pulled together a COVID-19 response committee, imposed travel restrictions and closed schools and factories.
Since then, Cambodia has received relatively high marks from the World Health Organization for averting a large-scale outbreak; the first COVID-19 death was reported in March 2021. The country began its vaccination programme in February 2021 and was one of the first to receive vaccine through the COVID-19 Vaccine Global Access (COVAX) programme. However, a new surge caused the government to impose a strict lockdown on April 19, which threatens to create a humanitarian crisis, with food shortages and other consequences.
The pandemic’s impact on the global economy was felt in Cambodia’s garment and tourism industries. After 7% growth in 2019, the economy contracted in 2020 by 2%, although the World Bank projects a 4% rebound in 2021. For much of 2020, Angkor Wat, Cambodia’s greatest tourist attraction, was empty. Remittances shrank as 86,000 Cambodian workers in Thailand were forced by border closures to re-turn. Due to the COVID-19-related recession, Cambodia’s poverty rate is expected to double to 17.6%.
Apart from COVID-19’s economic damage, Cambodia’s food supplies are increasingly imperilled by ecological changes on the Mekong River because of upriver dams in China and Laos. Droughts in 2019 and 2020 were attributed in part to water being withheld upriver and shortened fishing seasons in the downriver countries.
While Cambodia’s economy fluctuated dramatically over the past year, its political dynamic has remained stable under the authoritarian grip of Hun Sen and the Cambodian People’s Party (CPP). In office for 36 years, Hun Sen has no plans for retirement, although he is presumably grooming a political heir. The two most likely candidates are Hun Manith, Hun Sen’s eldest son and a four-star general in Cambodia’s armed forces, and Deputy Prime Minister Aun Pornmoniroth, who is also minister for the economy and finance.
Until he is ready to relinquish power, Hun Sen will maintain control through systematic dismantling of the opposition. In early March 2021, Sam Rainsy, the exiled leader of the Cambodia National Rescue Party (CNRP), was sentenced in absentia to 20 years in prison for treason, along with several other senior CNRP personnel, also in exile.
With an eye on general elections in 2023, Prince Norodom Ranariddh, leader of the royalist FUNCINPEC Party, announced that he would re-enter politics. However, Ranariddh is not likely to carry the election; if he wins a significant portion of the votes, Hun Sen will force him into a coalition government, as he did in the 1993 transitional elections.
Hun Sen’s intolerance of a political opposition and his overall disregard for human rights has caused Cambodia’s relations with the West to deteriorate measurably. In August 2020, the European Union withdrew a part of the duty-free access it had granted to Cambodia under its ‘Everything but Arms’ trade preference programme for least-developed countries. The decision will affect roughly 20% of Cambodia’s exports to the European Union.
In the short term, estrangement from the West serves to push Cambodia closer to China, now its largest trading partner and largest provider of foreign direct investment. Beijing has employed this lever-age to press Phnom Penh to allow the refurbishment of Ream Naval Base for exclusive Chinese use. Although the Cambodian government refuses to confirm any plans, commercial satellite photos indicate work to dismantle several features on the base, presumably to prepare for new construction.
However, Hun Sen is likely to go slowly on the project for the next few years. Cambodia will chair ASEAN in 2022 and would not want to risk a boycott of the East Asia Summit and other key activities by the group’s Western partners (the United States, United Kingdom, European Union and Australia) over China’s intentions to build a strategic outpost on the Gulf of Thailand. Nor would he want to exacerbate anti-Chinese feeling in the Cambodian public in the lead-up to the 2023 general elections.
TREND ▲
With encouragement from the international community in the 1990s, Cambodia has prioritised foreign investment with incentives that include 100% foreign ownership of companies, corporate tax holidays of up to eight years, duty-free importation of capital goods and capital repatriation without restrictions.
However, these attractions are often offset by factors such as widespread corruption, inadequate infrastructure and lack of transparency in the government approval process. Moreover, although Cambodia’s current investment framework endeavours to be business-friendly, that 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 has an extensive history of political violence, from the genocidal reign of the Khmer Rouge in the 1970s to Hun Sen’s nearly 40-year hold on power, backed by force. This is exacerbated by a large number of arms left over from the Cambodian civil war and the tendency for politicians across the spectrum to target ethnic Vietnamese in the country as scapegoats in election campaigns.
Large-scale protest demonstrations, such as the garment workers protests of 2014, are usually met with a brutal response from the government. COVID-19 has revived these protests; over the past year, large groups of garment workers have rallied to demand unpaid wages from suspended factories, often seeking to shut down traffic in Phnom Penh. With Hun Sen’s continued hold on politics, the short-term risk of widespread political violence is relatively low. However, the prospects for violence in the mid-term rise rapidly if that hold begins to slip.
With the 1993 UN-sponsored peace process that ended the Cambodian civil war and the marginalisation of the remnants of the Khmer Rouge over the decade that followed, 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 and denominated in the US 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. However, dollarisation is entrenched rather than transitional, which presents a risk if the National Bank of Cambodia is unable to maintain adequate levels of dollar liquidity. This will likely be the case in 2021, with a weak export performance because of COVID-19.
In 2021, Cambodia is expected to see a large fiscal deficit equal to 8.8% of the gross domestic product because of increased capital spending and an expansion of the military budget. Nevertheless, the Ministry of Economy and Finance maintains that the level of public debt is manageable, with room for further borrowing, much of which will come from concessional loans from China.
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