Previous Quarterly Editions
Expropriation Risk: 60 61 63 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 has not escaped the dramatic surge in COVID-19 cases in South-east Asia in 2021, with 1,870 deaths by end-August and nearly 92,000 total cases. These are still less than 1% of Cambodia’s population and compares favourably to many Western COVID-19 ‘hotspots’, but the pandemic exerts a disproportionate effect on poor countries such as Cambodia.
However, Cambodia has exceeded expectations in its vaccination programme. The country has one of the highest percentages of COVID-19 vaccinations among the adult population in the Western Pacific region and was one of the first countries to vaccinate teachers. Vaccination hesitancy is low, and the government has taken a diversified approach to vaccine procurement with a strong reliance on the COVAX international vaccine aid scheme. Phnom Penh’s goal is to vaccinate 10 million of its 17 million population by end-2021, a goal it believes it can reach. By the end of July, nearly 7 million had received a first dose of vaccine and 4.5 million were fully vaccinated.
The pandemic continues to drag down Cambodia’s economy, which is highly dependent on global demand, particularly for garments and tourism. In early August, Prime Minister Hun Sen revealed that the government had reduced its 2021 growth projection from 4.1% to 2.5%. Much of that growth is in the agricultural sector, since tourism continues to be hampered by COVID-19 -- prior to the pandemic, tourism represented nearly 33% of Cambodia’s Gross Domestic Product (GDP).
The United Nations Development Programme continues to forecast a jump in the poverty rate to as much as 17.65%, double the 2019 rate, and a continued rise in unemployment. Growing unemployment has put downward pressure on wages because of surplus labour, but in late August trade unions representing garment workers were demanding a salary increase for 2022, to USD200 per month from the current average of USD192.
Although Cambodia’s economy continues to fluctuate in response to the pandemic, its political dynamic remains essentially stable, under the authoritarian grip of Hun Sen and the Cambodian People’s Party (CPP). Hun Sen will continue to maintain control through systematic dismantling of the opposition. In addition, Chinese surveillance software enables Hun Sen to suppress his political opposition.
As 2023 general elections approach, he will focus his efforts on suppressing leaders of the outlawed Cambodian National Rescue Party (CNRP) and exiled leader Sam Rainsy. This will be complicated by the re-introduction in August 2021 of the bipartisan Cambodia Democracy and Human Rights Act in the US Congress, a bill which has been proposed but has failed to pass in previous Congresses. If approved, the bill would impose sanctions on Cambodian officials who obstruct democracy, with Hun Sen obviously at the centre of that target.
The US State Department will likely attempt to persuade Congress to accept stronger diplomatic efforts over sanctions. The Biden Administration hopes to dissuade Cambodia from permitting China to build a naval base in Ream, and it will also need to work with Hun Sen to address the post-coup situation in Myanmar when Cambodia chairs ASEAN in 2022.
Hun Sen is aware of this difference of views in the US policy community and will favour the diplomatic side where possible; in late August, he agreed to access for 300 Afghan refugees after the fall of Afghanistan to the Taliban. Beyond acquiring a strategic outpost at Ream, Beijing aims to pull Cambodia further into its supply chains to aid its own post-COVID-19 economy and defend against efforts by the Biden administration to strengthen the US supply chain in the region.
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.
In response to the pandemic, the government has taken several measures to stimulate business and encourage foreign investment. It has added USD200mn to the Credit Guarantee Fund and lifted late fees and other bureaucratic obstructions for the renewal of visas for foreign workers.
However, such positive moves 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.
COVID-19 has revived public protests, although these currently target the business sector rather than the Hun Sen regime. Demands by unions for garment workers for higher wages could spark political unrest later this year and early in 2022. 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.
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 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. Dollarisation is entrenched, 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.
To offset this risk and more generally wean itself off dollar dependence, the national bank has launched its own digital currency, the Bakong, to increase the share of the riel in commerce with the aid of the Japanese blockchain technology company Soramitsu.
In late 2020, Cambodia’s government revised its 2021 debt estimate upward, from USD8.8bn to nearly USD10bn by the close of 2021. This would set debt above 35% of the gross domestic product. Debt is expected to rise further by a minimum of 2% per year for 2022 and 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 that Phnom Penh may fall into a ‘debt trap’. The ministry currently estimates that China accounts for 44% of Cambodia’s foreign debt.
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