In early 2020, Cambodia’s Everything But Arms (EBA) scheme with the European Union (EU) continues to be the spotlight issue.
The preferential scheme has eliminated duties on nearly all Cambodian exports to the EU since 2001, with the result that the EU accounted for some 40% of the Kingdom’s exports in 2018. Most of those exports are provided by Cambodia’s textiles sector, which employs approximately 750,000 of Cambodia’s population and provides for an estimated 3 million people.
The EU is nearing the end of an 18-month review process of Cambodia’s preferential trade status amid concerns about the country’s deteriorating human rights. In the crosshairs is opposition leader Kem Sokha, who was arrested and charged with treason in 2017 and has been under trial since January 15 2020. The case is ongoing and a verdict is not expected until after February 12, which is when the EU will hand down a decision on Cambodia’s EBA status.
Some Cambodia observers see this as a gambit to put pressure on the EU, in an apparent attempt to make the union hostage to the outcome of the Kem Sokha trial. If so, it reflects badly on the impartiality of Cambodia’s legal system and few insiders think it would be sufficient cause for the EU to reconsider suspending Cambodia’s privileged trading status. The opposite is more likely to be the case.
Indeed, EBA revocation is increasingly likely, with Prime Minister Hun Sen preparing for more costly Cambodia exports rather than acquiescing to EU demands for improved human rights. In December 2019, the Cambodian government announced it was holding back USD 3 billion in tax revenues to deal with losing preferential exporting rights to the EU. To put that in perspective, Cambodian exports to the EU totaled USD 5.8 billion in 2018, 95% of which fell under the terms of the EBA scheme.
In December 2019, the International Monetary Fund (IMF) warned that EBA suspension would likely come at a steep cost to the Cambodian economy, noting in a report: “In the event of a full EBA suspension, tariffs would rise on average from 0.1% to 12.5% … This increase is estimated to cause a decline of exports to the EU of about 13%.”
The IMF warned that full EBA withdrawal by the EU could lead to “a 3 percentage point decline in GDP growth.”
It should be noted, however, that any EU move on Cambodia’s EBA status would not come into effect until late 2020 and, in the meantime, the World Bank considers that growth will remain steady at an estimated 6.8% this year.
Meanwhile, Cambodia is at risk from structural issues that have plagued the country for decades. Transparency International’s Corruption Perceptions Index scores Cambodia at 161 with a worst possible ranking of 180. The GAN Business Anti-Corruption Portal says of Cambodia: “Corruption is rampant in Cambodia. Companies should expect to deal with extensive red tape to obtain the proper licenses and business permits. The judiciary is understaffed, lacks qualified resources and receives insufficient financing, leading to widespread corruption and deterring foreign investment.”
The global money-laundering watchdog Financial Action Task Force (FAFT) put Cambodia on its list of countries that are “highly vulnerable to money laundering” in February 2019. Other institutionally weak areas of governance in Cambodia include the public service, the police force, land administration, public procurement, natural resources (which numerous sources describe as being “plundered”) and unenforced legislation that allows public officials to “act with impunity.”
Institutional concerns aside, the domestic economy faces risk associated with household debt. “The growth of domestic credit in Cambodia has been faster than any other country in East Asia – increasing nine-fold in 12 years,” the World Bank reported in 2018. By July 2019, household debt had increased 23.1% year-on-year.
The National Bank of Cambodia (NBC), in its latest Financial Stability Review, published in April 2019, warned of individual debt having potentially “destabilizing effects on the economy”. An economist at the central bank said: “We’re acting as though it is not a problem today. But if the property sector falters slightly – if more Chinese people take their money out of the country, it could happen rapidly – and if we see a downturn with foreign investment, debt will become a major problem.”
An official at the Ministry of Finance described the problem as “worse than official reports let on, from the World Bank and IMF.” In the banking sector, reported nonperforming loan (NPL) ratios rose to 2.8% in 2018, up from 2.3% in 2017. NPL ratios in the agricultural sector, however, were at 8%, and in the manufacturing sector at 4%. Sources said that efforts must be made to reduce the speed at which debt is growing and, at the same time, to increase deposit-taking. Sources also contend that the full extent of Cambodia’s debt problem is being masked by high levels of foreign investment, especially in the property sector, by artificially keeping land and sale prices high – and if foreign investment declines, many debts will become unmanageable.
Over the last two years, there has also been growing concern about the microfinance sector. Roughly 2.4 million Cambodian borrowers now have $5.4 billion in outstanding micro-loans. After a report by two local NGOs in August 2019 reiterated the negative impact of microfinance loans on poor communities – including the forced sale of land to pay for outstanding debts, increased emigration and often forced labor – the Council of Ministers spokesman called staff of the NGOs to an unprecedented meeting and demanded they retract the report. They refused. Cambodia has only rudimentary laws on personal bankruptcy that favor the repossession of debtors’ goods by creditors.
A provincial manager at a large MFI in Cambodia admitted that the culture has changed in recent years towards being more profit-motivated. The manager added: “Years ago, we were very focused on helping people and improving lives. Now, my bosses are looking for profit. We are pressured to issue more loans and higher loans. And we are getting stricter on repayment. I don’t know, sometimes, if many borrowers really understand the terms.”
Despite government attempts to rein in the microfinance sector by capping annual interest rates, sources report that MFIs have reacted by coming up with more creative ways make up for lost revenue streams.
An official at a foreign institution that invests in Cambodia’s microfinance sector said: “I am advising against investing any more in the sector. It’s overheated, it cannot keep on going as it is, and, at some point, we are going to see a backlash as poor Cambodians get more desperate. Also, Cambodia MFIs have been bought out by international companies in the last two years, and they aren’t aware of Cambodia’s specific problems – the microfinance sector is worse in Cambodia than anywhere else in the world – and are more profit-driven.”
Another unsteady sector is energy. In early 2019 – and the problem continues into the early days of 2020 – much of Cambodia experienced daily blackouts for months due to power shortages, as an unusually-long drought reduced output from hydropower dams. In November 2019, Prime Minister Hun Sen warned of continued power shortages into 2020, with power-plant production at one-10th of normal output.
The cost to businesses has yet to be publicly announced, though reports suggest that it is costing the economy hundreds of millions of dollars annually due to lost working hours and supply-chain disruptions. In response, the government is showing greater interest in renewable energy – especially solar-power.
“If I was an investor, I would look at Cambodia’s energy market,” says an independent economist. “The appeal of renewables is really great. The government is slow to realize this, even now. But it’s getting there, and there could be good profits here in the coming years.”
This may be so, but Access Asia Group advises that all investment in Cambodia comes with inherent risks, as outlined above, and wherever there may be “great profits” there will also be significant risk.