Previous Quarterly Editions
Expropriation Risk: 63 62 62 62 ►Political Violence Risk:57 57 57 57 ►Terrorism Risk:27 27 25 23 ▼Exchange Transfer and Trade Sanction Risk: 64 64 64 64 ►Sovereign Default Risk:57 57 57 65 ▲
TREND ▲
Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Although Cambodia aims to maintain a balanced foreign policy, it is listing increasingly towards China. This is largely driven by economic incentives from Beijing and its support in keeping the current regime in power rather than any calculation on Cambodia’s own security. As with other countries such as Myanmar, China’s influence has grown by default in Cambodia, as the U.S. and Europe impose new layers of sanctions due to the regime’s suppression of the political opposition and the media.
While arguably, Cambodia might technically fall into the category of a semi-democracy, the Cambodian and Chinese regimes have common cause in maintaining authoritarianism. Moreover, Beijing can be counted on to overlook corruption in Cambodia and has no interest in imposing environmental standards in its projects.
Cambodia has multiple layers of alignment, most of them a reflection of the present and longstanding regime of Prime Minister Hun Sen and the Cambodian People’s Party (CPP). French colonisation of Indochina linked Vietnam, Cambodia, and Laos together, and the Vietnamese Communist Party was a driving force in creating the Khmer Rouge. In the late 1970s, however, Vietnam invaded Cambodia to depose the Khmer Rouge regime, installing Hun Sen as foreign minister, becoming prime minister in 1985 and retaining this position through elections and coups ever since.
The end of the Cambodian civil war in the early 1990s and the international community’s prominent role in reconstructing Cambodia opened a window to the West. Japan was similarly important, as a bridge between Cambodia and the West. Hun Manet, Hun Sen’s son and political heir and the current military commander, is a graduate of the U.S. military academy West Point. More importantly, Cambodia’s economic growth has been fuelled by the garment industry and tourism, both of which largely depend upon relations with the West.
Without doubt, however, China plays a growing role in Cambodian foreign policy, and Hun Sen has shown his willingness to accommodate Beijing. This is largely because of China’s role as a partner in developing infrastructure through the Belt and Road Initiative (BRI), with current partnerships in train to provide roads, bridges, seaports, airports, railways, and communication satellites.
As a downriver county in the Mekong Region, Cambodia has suffered significant droughts in recent years, which are believed to be due in part to China’s withholding water in their upriver dams. Nevertheless, BRI’s portfolio with Cambodia includes hydropower dams that could further destabilise the environment and thus Cambodia’s food security.
Although the current situation in Laos, which hovers on the edge of default of its sovereign debt, half of which is owed to China, gives Phnom Penh some cause for concern, the government seems to be confident it can avoid falling into a similar ‘debt trap’. This would be achieved through some combination of negotiation with China and assistance from the international community.
China’s projects suit Beijing’s strategic purposes, with Chinese companies renovating Ream Naval Base, which has drawn considerable international attention, and should China be granted exclusive basing rights, this will give it a strategic outpost on the Gulf. While Hun Sen does not deny China will likely have rights to Ream, he insists it will not be exclusive. A Chinese military presence in the country does not necessarily suit Cambodia’s own strategic interests, not least because it will pull the country deeper into great power rivalries, but Phnom Penh seems to place economic interests above security.
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In general, Cambodia remains open to foreign investment, with 43% of the country’s USD3 billion in total investments is now with China. In the first half of 2022, China provided USD1.3 billion in fixed-asset investment. Apart from infrastructure, most foreign direct investment is in real estate property and light industry. The growing share of Chinese investment and the impact of infrastructure projects on local populations, including land use, increases the threat of greater public opposition to Chinese investment and, in the extreme, to foreign investment more generally, However, that is likely a mid-term rather than short-term danger.
Cambodia achieved 3% growth in 2021, with 2022 forecasts varying from 4% to 6%. International organisations, such as the World Bank and Asian Development Bank, tend toward 4%, but Standard and Poor’s and other private institutions peg growth closer to 6%. Meanwhile, Cambodia’s central bank predicts growth in 2022 to be 5.3%. The greatest general stimulation to the economy has likely been the impact of the Regional Comprehensive Economic Partnership, which went into effect in January 2021.
Cambodia approved 63 new investment contracts in the first half of 2022. Like other South-east Asian countries, Cambodia has felt the continued impact of COVID-19, particularly new lockdowns in China that disturb bilateral trade, new supply chain shortages due to the Russia/Ukraine crisis, rising inflation – predicated to be 4.7% in 2022 but to drop to 2.2% in 2023 – and global recession fears.
The June 5, 2022, communal elections, which signalled the start of a new electoral cycle, returned an 80% majority to the CPP. The party is the only political one large enough to field candidates in all slots, which exceeded 1,600 seats, and demonstrated its political strength is at the grassroots.
However, the CPP’s margin of victory was less than the regime anticipated. Despite the intimidation of opposition candidates ahead of the polls and the government’s ongoing decapitation of opposition parties through the courts, the Candlelight Party, a composite incarnation of past opposition parties, has established itself as the second-largest political party by default.
This suggests more competitive national elections in 2023 and with it more vigorous CPP attempts to stymie the opposition. Whether this results in a rise in political violence will likely be determined not by general support for greater human rights on the part of the Cambodian population but by the unemployment rates, food and fuel prices, and other economic concerns of ordinary Cambodians.
TREND ▼
Cambodia was placed in the lowest rank in the 2022 Global Terrorism Index, at 93rd, signifying minimum risk. However, money laundering and other corruption continue to be a concern. Some progress was noted when the Financial Action Task Force upgraded Cambodia from “partially compliant” to “compliant” on four counts, but Phnom Penh is still deficient on 32 other counts.
At the same time, the U.S. 2022 Human Trafficking Report downgraded Cambodia into Tier 3, the lowest ranking, citing endemic corruption and lack of accountability against traffickers. Although trafficking is primarily of sex and labour workers, the state’s lax efforts and weak apparatus leaves the country vulnerable to being used by terrorist organisations as a conduit for violent extremism.
The government continues its “realisation” (de-dollarisation) campaign to limit the use of the U.S. dollar and promote the circulation of the riel. Recent hikes in the U.S. interest rate have strengthened resolve to do so, since it further depreciates the riel. This effort is not only financial but also political, since the government believes wider use of the riel will strengthen national identity. However, at a time when Cambodia is attempting to strengthen its tourism sector, in particular to attract more Western tourists, it is unlikely to abandon dollarisation rapidly.
The U.S. and Europe continue sanctions on Cambodia for human rights violations and these are likely to continue, and possibly increase, as the government seeks to retain political dominance. However, Phnom Penh is hopeful it can persuade the U.S. administration to lift third-party sanctions imposed on Cambodia over its relations with China and to avoid similar sanctions on trade with Russia. These will likely become bargaining chips as Washington continues to press its case against Chinese use of the Ream Naval Base.
By the end of the first half of 2022, Cambodian public debt was at USD9.7 billion; an average of estimates holds that debt will remain constant with 2021 at 35% of GDP. The government points out this is still below the threshold of 40%. Nevertheless, the spectre of a ‘debt trap’, as in neighbouring Laos, will bring greater scrutiny upon Cambodia’s relations with China and its possible impact on Cambodia’s national debt.
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