Worldbox Intelligence Risk Rating DECEMBER 2022

CAMBODIA

 

SUMMARY

Overall Score 19  Stable

Political Risk: Stable 6/10

Economic Risk: Stable 7/10

Commercial Risk: Stable, 6/10

The risk assessment of a country is made up of 3 components, being Political, Economic and Commercial. Each component is scored out of 10 with 1 being the lowest risk and 10 the highest.

Political Risk – Stable at 6

Cambodia has enjoyed political stability since the late 1990s and there is little indication that this will change in the foreseeable future. Prime Minister Hun Sen has led the country for 37 years and appears to have consolidated his already strong grip on power in recent years. The 70-year-old Hun Sen is reportedly grooming his eldest son Hun Manet, a four-star general educated in the UK and the United States, to take over the leadership.

In July 2022, Cambodia’s National Assembly advanced a proposed change to the country’s constitution eliminating the need for the legislature to approve a prime minister designated by the king. The change would all but ensure Hun Manet succeeds his father. However, Manet is unlikely to take over any time soon. In December 2021, Hun Sen said he intended to remain prime minister for the next 10 years.

In 2017, the Supreme Court dissolved the only significant opposition party, the Cambodia National Rescue Party (CNRP), which won 45 per cent of the vote at the July 2013 national election. The ban expired in November 2022 – see December bulletin. Many of the CNRP’s leaders fled the country, while others were arrested and charged with treason. Unsurprisingly, Hun Sen’s Cambodian People’s Party (CPP) won every seat at the 2018 election.

The CPP scored a landslide win in local commune elections held in June 2022, taking 80% of the vote. However, a new opposition party, the Candlelight Party, gained more posts than expected and took 18% of the vote. The Candlelight Party contains many of the elements of the CNRP whose members and supporters are among hundreds of people who have been jailed for sedition under a widespread government crackdown.

The media now faces strict controls on what it can report, and has effectively been neutered by the authorities. The Cambodia Daily, an English-language daily known for its investigative journalism, was forced to close after receiving a huge tax bill. Another independent newspaper, ´The Phnom Penh Post´ was acquired by a businessman, allegedly with close links to the government, after it received a large tax bill.

Economic Risk – Stable at 7

Cambodia experienced some of the highest economic growth in the world in the two decades prior to the pandemic. Driven by garment exports and tourism, annual growth averaged 7.7% between 1998 and 2019. The country made the transition to lower middle-income status in 2015, with the ambition of achieving upper middle-income status by 2030.

Despite extensive government support, the pandemic had a significant impact on the economy, which shrank by 3.1% in 2020, down from the 7.1% expansion achieved in 2019, according to the IMF, which concluded its 2021 Article IV Consultation with Cambodia in December 2021. However, the economy expanded by faster-than-expected 3% in 2021 and growth is expected to accelerate this year and next. (see December bulletin for forecasts)

Cambodia attracted more than US$3.5 billion in foreign direct investment (FDI) in 2021, 11% higher than the previous year, despite the crackdown on political opponents. Total FDI in the kingdom amounted to over US$41 billion by the end of 2021 and the country registered another US$3.3 billion in the first eight months of 2022.

Clearly, continuous concerns over human rights appear to have had little impact on economic growth and foreign investment. This is partly explained by the source of the investments – Chinese investors accounted for around half – yet there is little sign of a fall in FDI from other countries. The other mains sources of FDI are Taiwan, South Korea, Vietnam, Singapore, Japan and Malaysia.

In terms of sectors, finance topped the FDI list, attracting US$9.4bn, followed by manufacturing (US$8.5 billion), real estate (US$4.9 billion), hotels and restaurants (US$4.4 billion), agriculture (US$4.2 billion), electricity (US$2.6 billion) and construction (US$1.6 billion), with US$5.3 billion flowing into other sectors.

However, relations with traditional Western partners, the EU and the United States, have deteriorated further since the flawed national elections in 2018, when repression of the political opposition and local media drew international criticism. In May 2020, the EU implemented trade sanctions, reversing Cambodia’s preferential access to the European market under the Everything But Arms (EBA) programme.

Cambodia shipped 26.8% of its exports to European markets in 2019, of which more than 90% were exempt from custom duties. Meanwhile, the United States has imposed sanctions against government officials and threatened to withdraw its preferential trade agreements with Cambodia. The US is particularly concerned about Cambodia’s ever closer ties with China and fears that Beijing could open a naval base in the country. Work on upgrading the Ream naval base, funded by China, began in early 2022, apparently confirming Washington´s fears.

Cambodia has responded to Western sanctions by redoubling its efforts to strengthen ties with China, which is now its largest trading partner. The two countries signed a free-trade agreement on 15 November 2020. In the short term, however, Cambodia is expected to remain highly dependent on its main customers, namely the European Union and the United States.

Cambodia is particularly vulnerable to climate change, as indicated by recent droughts and floods, the IMF reports.

Commercial Risk – Stable at 6

Cambodia rated as one of the most difficult countries in the Asia–Pacific region in which to do business. It ranked 144 among 190, according to the 2021 World Bank Ease of Doing Business guide. This ranking is ahead of only Myanmar and Laos in Southeast Asia.

Foreign investors often complain that the decisions of Cambodian regulatory agencies are inconsistent, irrational or corrupt. Infringement of intellectual property rights is widespread, with Cambodia reportedly becoming an increasingly popular source of pirated material due to weak enforcement.

Cambodia ranks joint 160th out of 180 countries in Transparency International’s (TI) 2021 Corruption Perceptions Index. The country continues to occupy the third-lowest spot in the Asia–Pacific region, coming above only Afghanistan and North Korea, and the lowest spot in ASEAN. However, TI reported that the country had made some progress, including efforts to reduce corruption in the private sector, reform public financial management (mainly through the strengthening of resource mobilisation), foster e-government and improve public services, particularly in response to COVID-19.

The Cambodia Corruption Report by GAN provides confirmation of the rampant nature of corruption in the country. It warns companies to expect extensive red tape to obtain the proper licences and business permits. GAN adds that corruption among judges, prosecutors and court officials is widespread, and consequently businesses tend to avoid the court system and seek to resolve commercial disputes through negotiations facilitated by the Ministry of Commerce, the Council for the Development of Cambodia, the Chamber of Commerce, or other involved institutions. In September 2021, the World Justice Project, a Washington-based independent group that promotes rule of law, ranked Cambodia next to last – ahead only of Venezuela – in its global Rule of Law Index for 2021.

December Bulletin

Political Risk – stable at 6 out of 10

Hun Sen and the Cambodian People’s Party (CPP) show little sign of relaxing their grip on power, and look set to win the July 2023 general election. That is despite the five-year ban on the main opposition party – the Cambodia National Rescue Party (CNRP) – expiring in November 2022.

While nearly half of the CNRP politicians have been convicted of crimes such as incitement and conspiracy to overthrow the government, around 50-60 have not been charged with any offenses and could rejoin the political fray. However, the CNRP will likely continue to face insurmountable obstacles that will prevent it making an effective electoral challenge against the government.

In April 2022 Hun Sen confirmed that he would stand in the 2023 general election but added that his West Point-educated son Hun Manet, chosen to be the future premier candidate for CPP, could succeed him at any time. General Manet, 44, who is also the deputy commander-in-chief of the military, was unanimously elected by the party’s Central Committee to be the future Prime Minister at the end of 2023. However, Manet is unlikely to take over any time soon.

However, the party could face growing internal dissent, particularly if the economy fails to recover rapidly. The CPP lost many of its strongholds in the 2013 general elections and the 2017 communal polls, while 70% of Cambodia’s population lack access to quality education and employment with living wages, providing a fertile ground for the growth of political dissent.

In August in a rare show of dissent, striking workers clashed violently with the police in Phnom Penh. The former workers are from a group that has been holding regular protests since they were among 1,300 laid off by the NagaWorld Casino in December 2021. The workers say they were unfairly fired and offered inadequate compensation.  NagaWorld is a subsidiary of a Hong Kong-listed Chinese company.

Economic Risk – Stable at 7 out of 10

In November, Moody’s forecast growth in Cambodia of 4.5% in 2022 and 5.5% in 2023, lower than previous estimates by the likes of the ADB. Moody’s warned that weakening growth in the US and EU, Cambodia’s top export markets, as well as in China and other jurisdictions with significant economic ties to the Kingdom would weigh on economic activity.

The ratings agency also downgraded Cambodia’s outlook from “stable” to “negative” while maintaining its B2 local and foreign currency issuer ratings. Moody’s said that the negative outlook reflected a deteriorating external position as illustrated by the severe widening of the current account deficit. Moody’s added that while the country’s foreign exchange reserves have slowly eroded, to $16.1 billion in July, they remain relatively high. However, the declining reserves coverage ratio highlights increasing pressure on Cambodia’s external position.

The IMF, in its September 2022 Article IV report, painted a slightly more optimistic picture, forecasting growth of 5% in 2022. Its projection of 5.5% in 2023 mirrored that of Moody’s. The IMF too warned of the impact of a slowdown in consumer demand in advanced countries—the US and Europe are significant markets for Cambodian manufactures—and tighter global financial conditions (mainly via external demand, but also funding costs for some financial institutions).

Inflation reached 7.8% in June 2022, the highest level in over a decade. However, inflation has ebbed since and by November was reported to be running at around 4.5% in line with the central bank forecast that annual average inflation would remain under 5% in 2002. The pressure on consumer prices is expected to moderate in 2023.

The IMF expects the public finances to gradually improve. It says lower-than-expected tax revenue resulted in a fiscal deficit of just over 7% of GDP in 2021, which is expected to narrow to just over 4% in 2022 with a strong bounce-back in revenues.

However, it is concerned about the “very high” level of private debt which raises “concerns about the drag on the economy if borrowers struggle to meet repayments”. Credit growth has outstripped growth in nominal GDP for several consecutive years, according to the IMF, with outstanding private sector credit reaching 170% of GDP by the end of 2021, a ratio “notably” above that of other countries in the region. The IMF adds that the numbers do not account for credit issued by unsupervised lenders (such as real estate developers and pawn shops), which could be “sizeable”. The IMF reports that restructured loans are estimated to have reached about 13% of GDP by June 2022, and non-performing loans have risen to nearly 4.5% of GDP.

The garment, footwear and travel goods industry has flourished despite the pandemic. Lockdowns and temporary factory closures hit production in 2020 but output resumed in 2021 and the sector´s exports increased by 15.2% in 2021 to US$11.38 billion. The industry is Cambodia´s largest foreign exchange earner and consists of around 1,100 factories and branches, employing approximately 750,000 workers, mostly female, according to the Labor Ministry.

Cambodia may also reap the rewards of global manufacturers shifting production to Southeast Asia if relations between China and the West continue to sour in 2022. The Regional Comprehensive Economic Partnership (RCEP) and the Cambodia-China Free Trade Agreement (CCFTA), which both took effect earlier this year, are also likely to boost exports. According to official figures, Cambodia’s total exports to RCEP members was valued at US$3.28 billion in the first half of 2022, up 10% from US$2.99 billion in the same period last year.

Commercial Risk – Stable at 6 out of 10

The Cambodian financial system has weathered the pandemic well and has relatively low levels of non-performing loans. Cambodian banks face challenges as support programmes introduced by the central bank come to an end. These programmes were introduced in March 2020 to avoid widespread defaults in the key industries of garment manufacturing, construction and tourism. Financial institutions restructured $5.2 billion worth of loans, equal to about 20% of GDP. The restructuring programme is due to be phased out at the end of June.

Counterparty risk, already difficult to assess, given that the availability and reliability of corporate financial information varies widely, has almost certainly risen during the pandemic. This is particularly true of the sectors worst hit by the pandemic, including tourism, transport and real estate.

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