Worldbox Country Risk Climate September 2024
CAMBODIA
Summary
| Overall Risk 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 highest risk and 10 the lowest. |
ESG Risk: 4/10 (Stable)*
*Environmental, social and governance (ESG) issues are becoming increasingly important to companies, investors and consumers in Southeast Asia. That is why we are now preparing a separate ESG score and section with our quarterly country risk reports. We explain how each country rates, looking at the E, S and G individually, and outline recent developments. |
Political Risk – Stable at 6
Nominally a parliamentary democracy with a bicameral parliament and a king as head of state, Cambodia is in fact a one-party state. Hun Sen, who became prime minister in 1985 and his Cambodian People’s Party (CPP) dominates the political scene. Hun Sen stepped down as prime minister in 2023 with his eldest son Hun Manet being sworn in as the new prime minister.
The transfer followed a landslide victory for Hun Sen’s ruling Cambodian People’s Party at the July election. It won 120 of 125 seats. The US, EU and other Western nations refused to send observers to the poll, saying it was neither free nor fair. In May, the main opposition party and the sole credible challenger to Hun Sen was barred from contesting the vote. The decision by the electoral authorities to ban the Candlelight Party for allegedly filing the wrong paperwork echoes developments in the run up to the 2018 election.
Worldbox Business Intelligence does not expect any significant shifts in policy making following the succession of Hun Manet. Even though he has relinquished the prime minister’s job, Hun Sen, 71, is expected to retain a large amount of control as his party’s president and president of the Senate. However, Cambodia’s political stability could well be challenged. Manet is untested and his promotion would certainly not be welcomed in some parts of the CPP or the country at large. His support is reportedly limited to younger urbanites.
The Cambodian opposition, meanwhile, is trying to regroup. Cambodian political figures abroad launched a new pro-democracy movement in the US in March. The Khmer Movement for Democracy (KMD) intends to serve as a de facto opposition to the CPP, according to a report on Deutsche Welle.
The movement is led by Noble Peace Prize nominee and exiled Cambodian Mu Sochua, who aims to hold Hun Manet’s regime to account and attract attention to the government’s crackdown on political voices and activists both at home and abroad. The report added that it will be very difficult for the KMD to make much of an impact, given its lack of presence within the country and the government’s control of the media.
However, a report on Radio Free Asia in August argued that Hun Manet is vulnerable. David Hutt, a research fellow at the Central European Institute of Asian Studies, wrote that Hun Manet’s power will only be secure as long as his father remains.
Hutt argued that while the prime minister’s family “wields considerable institutional power, from the military to the civil service and business elites, most of these institutions ultimately answer to Hun Sen, not his son”. He added that:
“Taking control of these power centers will be far more of a challenge in the coming years than simply being handed the prime ministership. For now, Hun Manet’s legitimacy rests solely on the economy, which ought to concentrate his attention. However, holding power in Cambodia’s political system requires more than just delivering jobs and food to the populace.”
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 rapid growth resulted in significant gains in poverty reduction with the poverty rate in Cambodia declining to 18% in 2020 from just under 50% percent in 2007. From 2000 to 2020, life expectancy increased from 58 years to over 70.
If Cambodia is to achieve its goal of becoming an upper-middle-income economy by 2030 and a high-income economy by 2050, it needs to maintain this high growth rate. In a blog published in December 2023, the World Bank called on the government to use the current economic slowdown to implement reforms. It said these are the need to overcome various challenges. They include declining productivity. It said further improvements to the business environment are critical for boosting the productivity and competitiveness of Cambodian firms.
The blog argued that the cost of doing business remains relatively high in Cambodia, reducing international competitiveness and inhibiting innovation and shifts into higher value activities. It called on the government to strengthen the predictability of the regulatory environment and expand small and medium-sized enterprises’ access to finance.
The World Bank added that further efforts to streamline complex and restrictive business entry requirements, together with improvements to the functioning of the insolvency framework, would help reduce costs of entry and exit. The blog also called on the government to upgrade infrastructure and to boost productivity and international competitiveness. It added that the government also needs to address shortfalls in education that are resulting in growing skills shortages and declining labor productivity growth.
In an October 2023 Article IV consultation, the IMF echoed some of these concerns. It called for structural reforms that “focus on diversifying trade partners, investing in new growth drivers, and capitalizing on climate transition opportunities”.
It added that enhancing public governance and transparency will be vital to attract more foreign direct investment and to ensure macroeconomic stability. The IMF also called on the government to improve the quality of macroeconomic data, saying this would benefit the monitoring of the economy and policy making.
Commercial Risk – Stable at 6
Cambodia ranked joint 158th out of 180 countries in Transparency International’s (TI) 2023 Corruption Perceptions Index, although it moved down eight places over the course of the year. Between 2019 and 2022, the country’s score had steadily risen. Cambodia is the second-lowest-rated country in the Association of Southeast Asian Nations (ASEAN), ahead of only Myanmar, and one of the lowest-rated countries in Asia.
Pech Pisey, executive director at Transparency International Cambodia, said that systematic corruption remains a widespread problem and is complicit in the erosion of democracy. He noted that Cambodia had tightened restrictions on fundamental rights, including freedom of expression, and pointed to corruption in the judicial system.
The Heritage Foundation ranks Cambodia as “mostly unfree”, according to its 2024 Freedom Index. The country’s score of 55.6 makes its economy the 106th freest out of 184 countries in the world. Its rating has decreased by 0.9 points from last year. Cambodia is ranked 21st out of 39 countries in the Asia-Pacific region, and its economic freedom score is lower than the world and regional averages.
September Bulletin
Political Risk – Stable at 6
Cambodia attracted unwanted attention in July when international human-rights groups criticized the government for arresting nearly 100 people for protesting against a decades-old regional development agreement with neighbouring countries.
The Cambodia-Laos-Vietnam Development Triangle Area – or CLV-DTA – agreement is a development plan intended to facilitate cooperation on trade and migration in four northeastern provinces of Cambodia and border areas in Laos and Vietnam. It was signed in 1999 and formalized in 2004.
In July, Hun Sen said that three people had been arrested for spreading false information about the agreement. This included claims that Vietnam had initiated the agreement and that it had led to a loss of sovereignty by Cambodia to Vietnam.
According to the publication The Diplomat, Hun Sen’s comments sparked large-scale protests throughout the global Cambodian diaspora, and more criticism of the agreement on social media inside the country. That resulted in the government crackdown.
The issue is so sensitive in Cambodia because many Cambodians view Vietnam as a “traditional enemy” that has long plotted to take over the country. The large Vietnamese population within Cambodia is viewed with suspicion and has in the past been treated brutally.
Vietnam launched its invasion of Cambodia in 1978, after the Khmer Rouge attacked Vietnam, and following years of a genocide carried out by the Khmer Rouge against ethnic Vietnamese within Cambodia. The Vietnamese army captured Cambodia within two weeks and ejected the Khmer Rouge from power.
The latest episode highlights the continuing sensitivity of Khmer-Vietnamese relations. According to The Diplomat, it also highlights the continuing leading role of Hun Sen in the government. The publication stated that, although Hun Sen handed over the office of prime minister to his son Hun Manet in August 2023, “he has made it clear that he is still in charge”.
Economic Risk – Stable at 7
Cambodia’s economy continued to recover in 2023, but at a slightly weaker pace of 5.0%, according to the ASEAN+3 Macroeconomic Research Office’s (AMRO) regional economic outlook, released in September 2024. The services sector, particularly tourism, led the economy, while the non-garment manufacturing sector, notably exports on solar panels, vehicle parts and electrical parts, also proved strong. Garment exports and the real-estate sector remained weak.
AMRO projects growth of 5.6% in 2024 and 5.9% in 2025, driven by a rebound in the garment sector, a robust tourism recovery, and growth in the non-garment manufacturing sector. It added that the real-estate sector remains weak, with oversupply and subdued demand, particularly in the residential and commercial segments.
The current account recorded a surplus of 1.3% of GDP in 2023, primarily reflecting a significant reduction in the trade deficit. The trade deficit narrowed to 6.9% of GDP in 2023, significantly lower than the historical average, largely driven by a decline in imports. AMRO added that the fiscal deficit widened sharply to 4.6% of GDP in 2023, from 2.4% in 2022, mainly due to a revenue shortfall, but it is expected to narrow from 2024 onwards.
Meanwhile, inflation declined rapidly from its peak in 2022, averaging 2.1% in 2023, before turning to a modest deflation at the beginning of 2024. The volatility of CPI inflation is primarily driven by fluctuations in food and oil prices, which are prone to global trends. AMRO expects CPI inflation to rise to 2.2% in 2024 and 2.3% in 2025, due to higher domestic demand and a possible rebound in energy prices.
AMRO concluded that:
“External risks include slower economic growth in China, a sharp growth slowdown in the U.S. and Europe, potential shifts in U.S. and E.U. trade policy, and a spike in global commodity prices. Domestically, the banking sector is faced with declining asset quality, which could lead to losses and erode capital buffers. Additionally, the real estate sector could weaken further, resulting in financial distress among real estate developers. In the long term, Cambodia’s potential growth may struggle to rebound to pre-pandemic levels due to the scarring effects of COVID-19.”
Commercial Risk – Stable at 6
A reverse stress test carried out by AMRO indicates that the banking sector remains resilient, the organisation reported in September 2024. However, it warned that the capital adequacy ratio of a few banks could fall below the minimum requirement – particularly those with large exposure to sectors with high non-performing loans, such as hotels and restaurants, real estate, and the wholesale and retail trade. A further weakening of the real-estate sector could result in financial distress for some developers and heighten credit risks, added AMRO.
Environmental, Social and Governance (ESG) – Stable at 4
The United Nations’ Sustainable Development Goals (SDGs) are recognized as a beneficial framework for responsible investment. The Sustainable Development Report from Cambridge University Press assesses the progress of UN Member States on the SDGs. It provides a useful means of ranking Southeast Asian countries on their ESG progress.
Cambodia is ranked 104 out of 166 in the 2024 report, with a score of 64.9.
Environment: Cambodia has one of the highest rates of deforestation in the world, with forest cover down to around 46% of the country’s land area, from 72% in 1973. Air pollution and water scarcity are two other major environmental concerns. Air pollution causes a number of significant health problems, including asthma, chronic bronchitis, decreased lung function, and premature death. Meanwhile, around 20% of the population lacks essential access to clean water.
Social: Workers’ rights are enshrined in law but in practice few of these laws are obeyed or enforced. To meet quotas, workers are often either forced to work overtime, “enticed to do so with a small bonus that is usually never paid”, according to the Borgen Report. In addition, many companies employ children under 15 even though the law states that employees should be aged 15 plus.
Governance: ESG principles have only recently appeared on the corporate agenda in Cambodia. According to the GRI Sustainability Disclosure Database, however, the total number of sustainability reports in Cambodia has more than doubled since 2015, with the majority of these reports coming from the financial services sector.
September Bulletin
Environmental, Social and Governance (ESG) – Stable at 4
Cambodia is reportedly developing a Climate Change Strategic Plan 2024-2033, aimed at providing a blueprint for climate-smart development over the next decade. The CCCSP 2024-2033 is supported by UNICEF and the Cambodia Climate Change Alliance. The new strategy aligns with Cambodia’s broader climate goals, including a vision of achieving carbon neutrality with 60% forest cover by 2050.
Latest economic data
f – forecasts
Source: AMRO/IMF/ World Bank/Asian Development Bank
Useful Links
https://www.transparency.org/en/cpi/2021
https://www.imf.org/en/Countries/KHM
https://www.adb.org/countries/cambodia/main
https://dashboards.sdgindex.org/profiles/cambodia
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