Event

On 29 July, the ruling Cambodian People’s Party (CPP) won all 125 Parliamentary seats after elections. The turnout was high, around 80%, in spite of boycott calls from the opposition, but blank votes were high too, up to 17% in capital Phnom Penh. The main opposition party, the Cambodia National Rescue Party (CNRP), which had been dissolved several months earlier, rejected the results. Western community also considered the polls as flawed. On the other hand, China congratulated PM Hun Sen for his latest success. Recently, Hun Sen made symbolic appeasement gestures by freeing fourteen CNRP activists from prison after they apologized to him and got royal pardon.

Impact on country risk

The ruling party’s crushing victory at elections was known in advance given the absence of the main opposition party and arrest of several political figures. Still, the magnitude of the outcome and threat of Western sanctions are somewhat compelling PM Hun Sen to adopt a conciliatory stance towards political opponents. Although China has become Cambodia’s first ally, the EU and the US still keep an influential role through their high demand of Cambodian garments. However, two reasons explain why economic sanctions are not the dominant scenario. First, even though an EU suspension of the preferential trade access is currently being considered, it could affect the country’s development and would principally penalise the large workforce in the key garment sector which is already suffering from a strong US dollar (in Cambodia’s highly dollarised economy). Given that economic sanctions would raise garment tariffs, the sector would lose competitiveness vis-à-vis neighbouring countries and probably be hit by social protests. Secondly, economic sanctions would risk that the EU and the US lose further political weight to the benefit of China and to a lower extent to Russia too. The same reasoning goes for Myanmar where a recent UN report has accused the army of genocide against the Rohingyas.

Therefore, any future sanctions are pragmatically likely to be limited to Hun Sen’s close circle through visa restrictions and assets freeze. Despite potentially turbulent times ahead, PM Hun Sen is expected to consolidate his power and stay firmly in control of the country, increasingly relying on the Chinese political and financial support and investments. Besides potential sanctions, the impact of the intensifying US-China trade war might be a dominant risk event for Cambodia’s fast-growing and export-led economy. It might even be an upside risk as Cambodia appears to be one of several alternatives for Chinese garment and footwear companies’ relocations in the region. Credendo’s short-term (3/7) and medium-to long-term (6/7) political risk classifications remain unchanged for the time being.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com