• Cambodia: The dissolution of the CNRP and implications for foreign investment

  • Cambodia: The dissolution of the CNRP and implications for foreign investment
  • Summary:

    The dissolution of Cambodia’s only credible opposition party on 16 November has heightened the risk of political and social instability in the run-up to next year’s general elections, yet the move will likely have limited economic implications over the short term. The threat of sanctions by Western countries will likely not be heeded, while the possibility of the EU suspending Cambodia’s inclusion in its Everything but Arms (EBA) initiative would be a gradual and enduring process. Yet, Access Asia cautions that the political situation in Cambodia is fluid and events are changing daily. The likelihood of an intensification of the ruling party’s crackdown on members of the now defunct CNRP, civil society and the media is high. This could trigger a backlash, though anti-government protests are likely to be small-scale and uncoordinated due to the CPP’s firm control over the police and military. We view Cambodia’s political situation as unstable, yet the economic implications as slight.

    The dissolution of the CNRP and implications for foreign investment

    The dissolution of Cambodia’s main opposition party on 16 November has heightened the risk of political and social instability in the run-up to next year’s general elections. However, Access Asia believes the move will not have any significant immediate impact on foreign investment in Cambodia, which is overwhelmingly from other Asian nations, while a 2018 election victory for the CPP is widely regarded by many in the business community as the best-case scenario for stability and business continuity in 2018 and beyond. The dissolution of the CNRP has essentially cemented a CPP electoral victory next year, yet the election’s legitimacy will be called into question by members of the now defunct CNRP and that any mass boycott of the vote (which some CNRP members are calling for) could further undermine the election’s legitimacy.

    The CNRP’s social-based and union friendly policies, as well as its penchant for anti-Vietnamese rhetoric (especially in the lead up to elections), hyper nationalism and inexperience in government, were seen as destabilizing by many in the business community – particularly among Asian investors such as those from China, Vietnam, Thailand, Malaysia, and South Korea.

    It should be noted that the ruling CPP has over the past decade forged close relationships with chambers of commerce and held an annual business consultative forum to solicit advice from business leaders and address their needs. Western businesses and investment are relatively small when compared to investment from Asian countries, while the opinions of western executives have little impact on the CPP as their calls to create a transparent, corruption-free business environment are unpalatable to the CPP. Moreover, investment in Cambodia is primarily into labor intensive industries, which are dominated by companies from Asia.

    Access Asia, however, cautions that the political situation in Cambodia is fluid and events are changing daily. The likelihood of an intensification of the ruling party’s crackdown on members of the now defunct CNRP, civil society and the media is high. This could trigger a backlash, though anti-government protests are likely to be small-scale and uncoordinated due to the CPP’s firm control over the police and military.

    Market Access

    The Supreme Court’s ruling to dissolve the CNRP, which essentially leaves Cambodia as a one-party state, could eventually affect preferential access to three of the country’s most important export markets: the EU, the United States and Canada. They, along with Japan, account for the lion’s share of Cambodia’s garment and footwear exports, which comprise about 80 percent of total merchandise exports. Cambodia’s garment sector is vital to the country’s economy, contributing some 18 percent of GDP and generating about 80 percent of export revenue. The sector is also the most vulnerable to retaliatory actions from the West due to Cambodia’s deteriorating political and human rights environment as underscored by the dissolution of the CNRP; Cambodia is given preferential access to markets in the EU and Canada due to Cambodia’s low per capita GDP, while Washington’s Generalized System of Preferences is a similar initiative for least developed nations but it does not include garments and footwear.

    A second factor making the garment industry vulnerable is that the main buyers from the factories are Western brands, including H&M, Adidas, The Gap and Levis. These companies are highly sensitive to factors that can damage their brand, including rights abuses in their supply chains and/or the countries they source from.

    Moreover, because the garment sector employs about a third of all industrial employment in the country and labor discontent in Cambodia frequently materializes into anti-government protests, a downturn in the sector could be a catalyst to political and social instability.

    While the threat of sanctions has been raised by some officials of Western governments, Access Asia believes the more likely course of action will be in the form of limited cuts in aid – such as the US withdrawing aid for the elections and Sweden recently stopping new aid for Cambodia except in education and research – and gradual in-country changes as opposed to a direct confrontation with the implementation of sanctions. Prime Minister Hun Sen recently challenged Western countries to impose sanctions on Cambodia saying China would fill the gap left by the West, directly addressing the west’s dilemma over the ever-growing Chinese sphere of influence in Cambodia and the region.

    However, the possibility of the EU suspending Cambodia’s inclusion in its Everything but Arms (EBA) initiative would have the most damaging impact on Cambodia. The EU issued a statement on 17 November warning that the dissolution of the CNRP could jeopardize the country’s eligibility for the EBA, which allows duty and quota free access for Cambodian exports to the EU.  This action would be a serious blow to the garment sector, which could result in the shutdown of hundreds of factories and put hundreds of thousands of jobs at risk. However, it is critical to note that under the EBA initiative (and other EU trade initiatives that allow preferential access to goods from least developed countries) the process for removing a country from the eligibility list can take three years and is preceded by a review and dialogue process. The process is far from arbitrary and intentionally gradual to allow countries under investigation to respond to allegations of human and labor rights violations and take measures to remedy them.

    Still, such a threat from the EU could have damaging impacts over the short term in two ways. First, global brands that Cambodian factories supply could see the possibility of reputational damage and begin phasing orders down in Cambodia and shifting to other production bases. Second, factory owners may delay investments for expansion or construction of new factories if they believe Cambodia may lose its preferential access to the EU.

    Geopolitical Battleground

    Despite swift and widespread condemnation by Western governments following the dissolution of the CNRP, China and Russia have expressed support for the government. Russia has said Cambodia should be allowed to choose its own development path and the China immediately offered to provide financial support for next year’s elections after Washington suspended any aid for the vote. This is indicative of the re-emergence of overt geopolitical wrangling in Cambodia by global powers.

    This rhetoric indicates that geopolitical interference in Cambodian politics is on an upswing, with rivals of Western democracy sensing weakness, Washington’s withdrawal from its preeminent role in the region, and China’s rising assertiveness. China is particularly interested in Cambodia’s coastal region, where state-owned enterprises are among the major owners of yet untapped offshore oil and gas blocks. It has also acquired a 36,000-hectare concession that includes about one-fifth of Cambodia’s coastline for a purported ecotourism resort in Koh Kong province, as well as another coastal concession in Preah Sihanouk Province’s Ream National Park for a second “tourism development project.”

    Our embassy and security sources have said both developments will include ports for Chinese naval ships as well as sophisticated radar equipment that will allow China to, among other capabilities, detect and track the presence of US submarines in the Gulf of Thailand. A deep sea port has already been announced for the eco-tourism project in Koh Kong. Fewer details have been publicly released about the tourism project in Ream National Park, though its proximity to Cambodia’s Ream Naval Base is significant, which until recently had been the base from which Cambodian and American navies conducted joint exercises (these were ended by the CPP this year.)

    Besides sanctions of which the now defunct CNRP is currently advocating, the CNRP is powerless to do little but make threats and possibly shame businesses that invest in Cambodia through the media. National Assembly seats held by the CNRP are now being given to members of other political parties. Members of the CNRP say, however, that any concessional loans approved by the National Assembly will not be regarded as valid and that when they gain power they will regard them as illegal loans. Yet, the possibility of the CNRP (or any reincarnation of the party) gaining power is now remote.

    Although the CPP is widely regarded as business friendly due to its liberal investment policies and the country’s strong economic growth, its politically controlled judiciary remains a deep concern to investors, second only to endemic corruption. As a rule, arbitration clauses in contracts call for arbitration to be conducted in a foreign jurisdiction, often Singapore. With the country’s highest court being used to dissolve an opposition party, Prime Minister Hun Sen will face a bigger challenge convincing the business community that the judiciary can be trusted.

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    About Access Asia:

    Access Asia Consulting Company (www.accessasiaconsulting.com) is a boutique risk management firm specializing in corporate investigations, due diligence, and security-related services across Southeast Asia. We maintain extensive local networks that enable us to gain access, insight and client-oriented information to help foreign investors and other clients navigate the complex business, political and security landscape of the region.