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 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 36 years and appears to have consolidated his already strong grip on power in recent years. The 69-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, although there is little sign that the prime minister plans to step down in the near future.
In 2017, the Supreme Court dissolved the only significant opposition party, the Cambodia National Rescue Party, which won 45 per cent of the vote at the July 2013 national election. Many of its 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. Cambodia faces new local and national elections in June 2022 and July 2023 effectively as a single-party state.
The media now faces strict controls on what it can report, and has 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 also received a large tax bill.
Economic recovery from the COVID-19 pandemic should boost popular support for the government. By January 2022, around 99% of the adult population had received two doses of the vaccine, while nearly half had also received booster shots. Cambodia recorded fewer than 1,000 cases in January and experienced no COVID deaths. Cambodia has, however, relied on Chinese-made vaccines whose efficiency has been questioned.
Economic Risk – Stable 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 per cent 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 has had a significant impact on the economy, which shrank by 3.1 per cent in 2020, down from the 7.1 per cent expansion achieved in 2019, according to the IMF, which concluded its 2021 Article IV Consultation with Cambodia in December 2021.
Continuous concerns over human rights in recent decades appear to have had little impact on economic growth and foreign investment. Cambodia attracted more than US$3.5 billion in foreign direct investment in 2019, nearly 12 per cent higher than the previous year, despite the crackdown on political opponents. This is partly explained by the source of the investments – Chinese investors accounted for around half – but there is little sign of a fall in FDI from other countries.
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 per cent of its exports to European markets in 2019, of which more than 90 per cent 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 6
Cambodia is 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. Cambodia continues to occupy the third-lowest spot in the Asia–Pacific region, coming above only Afghanistan and North Korea, and the lowest spot in the ASEAN region. 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.
Political Risk – No Change
Hun Sen and the Cambodian People’s Party (CPP) show little sign of relaxing their grip on power. Having outlawed the only significant opposition party, the Cambodia National Rescue Party, the CPP – currently the only party in the National Assembly – looks set for another clean sweep at local and national elections in June 2022 and July 2023.
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, and 70 per cent of Cambodia’s population lack access to quality education and employment with living wages, providing a fertile ground for the growth of political dissent.
The trial of Kem Sokha, the former leader of the Cambodia National Rescue Party (CNRP), recommenced in January 2022, having been postponed for two years due to the pandemic. Sokha was arrested in 2017 and charged with trying to overthrow the government with the support of the USA. The international community have condemned the case against Sokha, calling it “politically motivated”. There is considerable doubt that he will receive a fair trial.
Economic Risk – No Change
Cambodia´s economic outlook is “highly uncertain”, according to the IMF, which concluded its 2021 Article IV Consultation with Cambodia in December 2021. The IMF is forecasting a slow recovery, anticipating growth of 2.2% in 2021, increasing gradually to pre-crisis rates of 6.5% after a few years. It adds that growth prospects depend heavily on the course of the pandemic, explaining “faster containment of the virus in Cambodia and other countries will facilitate resumption of tourism; slower progress would damage growth further.” The economy is projected to grow by 5.1% in 2022 says the IMF.
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 recovery in tourism is likely to prove long and slow. Cambodia was one of the first Southeast Asian countries to lift restrictions on foreign tourists, ending the curbs in November 2021. Prior to the pandemic, 36% of tourist arrivals to Cambodia came from China, and Beijing is likely to deter outbound tourism for at least the rest of 2022. Other long-haul arrivals came via Vietnam and Thailand and the slow re-opening of those two countries could also limit the growth of tourist arrivals in Cambodia. The country earned US$4.919 billion in 2019, prior to the pandemic. In 2021 that figure fell to just US$184 million.
Inflation averaged 3.2% in 2021 and is forecast to remain relatively subdued at 3% in 2022, says the IMF.
Commercial Risk – No Change
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. The central bank introduced support programmes 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.
In December 2021, the IMF warned the "surge" in restructured loans added to the "highly uncertain" outlook facing the country in the years to come. It added that "losses on restructured loans could weaken capital positions and potentially undermine the ability of the financial sector to finance the recovery," and that "results from bank stress tests and the extra reporting will allow the central bank to implement a carefully calibrated sequence of steps to gradually return to standard prudential requirements."
The IMF has also warned that lending to the real-estate sector has grown rapidly, is largely unregulated and could pose a risk.
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.
Latest Economic Data
Source: IMF unless otherwise stated
f – forecast (WBI unless otherwise stated)
1 - Trading Economics
2 – CEIC data
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