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TYPES OF POLITICAL RISKS: Political Instability

a) Trade barriers

For long time, Cambodia has many exporting and importing operations with Thailand and Laos.
The favor that the government has put on Thailand helped its goods to be the first choice of
Cambodian. Just like Vietnam, back to 1986s, we have many favor for Japanese manufacturer to
export their products (especially motorbike) to our country. Vietnamese people, when they talk
about buying new motorbike, they usually use the word Honda bike (still a popular word until
2010s) although the brand name of the bike they are buying is Yamaha or Suzuki.

Its seemed so hard to change the consumption habits, but it isnt, thanks to the policy of the
government to establishing the Union of investors from Vietnam to invest to Cambodia
No.29TTg-QHQT on 16 July 2009. After that, many Vietnamese company has been exporting
their products, or even move their company to Cambodia to make product.

Source: http://www.eastbysoutheast.com/cambodia-economic-data/
However, on the newest policy, Cambodia planned to put their priority to China both in politics
and economics. As a consequence of this change, Vietnams goods is not popular in Cambodia
anymore (dropped from 40% to 28% last 4 years), and the future of exporting to this country is
getting worse due to the territorial disputes of Vietnam and China. This is also a barrier to
Vietnamese company to take an seriously consider to join in the Cambodian Market or even
continuing their business in Cambodia. Vinamilk has also build their dairy-farm in Cambodia,
and facing this policy will make they think again whether continuing the exporting or not.

Change in political leadership

Currently represented in Parliament: there is two main party, the first one is Cambodia National
rescue party and Sam Rainsy party. The ideology of both party is liberalism. The Prime Minister
of Cambodia is a representative from the ruling party of the National Assembly. He or she is
head of the party that holds the most seats in the legislature is appointed by the King on the
recommendation of the President and Vice Presidents of the National Assembly. In order for a
person to become Prime Minister, he or she must first be given a vote of confidence by the
National Assembly. (Wikipedia)

Some Want the Return of the Khmer Rouge

The current government is so bad that some Cambodians have quietly expressed a desire for the
return of the Khmer Rouge. One student told Philip Shenon of the New York Times, "In the
Khmer Rouge time, they killed many people, but there was no corruption. And corruption is the
most terrible problem that we have now."

Despite their savagery, the Khmer Rouge had a reputation of being nationalistic and honest.
Another student told Shenon, "Corruption is destroying Cambodia, and I think maybe that is a
much bigger danger than the Khmer Rouge. Pol Pot may be bad, but some of the other Khmer
Rouge leaders are not so bad." (Wikipedia) http://factsanddetails.com/southeast-
asia/Cambodia/sub5_2d/entry-2904.html

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Ownership risk associated with change in the structure of foreign ownership and control of
assets and properties

Change in political ideology of a country


Change in political leadership
Change in opinions of political leaders

Ex.
Operational risks occur when there is change in the rules of the game by the government or
the political climate, affecting daily operations of the foreign business

Political instability in a host country or region arising from riots, civil war, terrorism and
natural disaster disrupt Vinamilks local operations.
Host or home government introduce changes in rules of investment on FDI and limit
foreign ownership of equity.
Host government actions such as confiscation, expropriation (seizure of property without
compensation) and nationalization of foreign business and assets interrupt Vinamilks
daily operations causing FDI losses, closure and even exit the country.

Ex.

Transfer risks arise from barriers to transfer of FDI capital, profits and human resources by
Vinamilks

Host government imposes foreign exchange controls on Vinamilks that restrict outflow
of their FDI profits back to their home country.
Host government restricts placement of expatriates in key positions at foreign companies.

Ex.

Micro and macro political risks

Micro: obvious position due to size, monopoly influences and brand icon.

Macro: political actions affect a wide spectrum of foreign investors, such as when political
actions of a host country affect all foreign operations.

------------NHP-------------

Fragile calm on the political stage in the run-up to the 2018 elections

During the parliamentary elections of July 2013, the Cambodian People's Party (CPP) led by
Prime Minister Hun Sen won a greatly reduced number of seats and the Cambodia National
Rescue Party (CNRP) contested the elections and refused to sit in parliament for nearly a year.
The opposition benefits from weariness with Hun Sen's reign, acute social tensions over
wrongful expropriations and working conditions in the textile sector. The country has thus been
affected by widespread protests, severely suppressed by the ruling powers.

In July 2014, a fragile agreement was made between the CPP and the CNRP and the opposition
candidates have since sate in parliament. This agreement provided, in particular, for the position
of vice-president to be awarded to a CNRP member of parliament and for a government
commitment to combat endemic corruption, but the government and the opposition clash
frequently. The Prime Minister decided to postpone the elections by five months, without
consulting the opposition. They will now be held in June 2018. In addition, we might see
renewed mass protests in view of an observed increase in political repression.

Finally, the business climate is still marked by a lack of transparency, considerable legal
instability and a high level of corruption.

---Tham khao

The Historical and Political Context

7. Governance risks need to be considered in the context of the distinctive historical and political
features that have shaped modern governance arrangements in Cambodia. For much of
Cambodias history, governance was structured along decentralized territorial lines, with
particular regions and their leaders being very strong and independent for extended periods. The
movement to a unified state with strong, central control and basic democratic forms of
governance is relatively new, and mainly since the traumatic

Khmer Rouge period (19751979). The nascent movement to democratic arrangements and
citizen participation through national and subnational administration elections and decentralized
communes are even more recent. Common governance themes through most historical periods
have been

(i) recurring conflicts in order to secure particular regions, and more recently, the nation;

(ii) ensuring security through strong links between the dominant political party, government, and
business;

(iii) wide acceptance by citizens of the directives of political and government leaders, with little
citizen participation until quite recently;

(iv) limited experience with holding managers accountable for results or with the requirements of
modern PFM or procurement systems;

(v) continuing strong, centralized territorial management, through centrally appointed governors
and officials with links to political leaders and senior government officials; and

(vi) recent heavy reliance on foreign funding for a dual-stream national budget.

8. While moves to strengthen democratic forms of governance are well under way, they need to
be considered in the context of the past and current reality of a state with fragile democratic and
governance underpinnings. Governance reforms are likely to be pursued if they enhance
Cambodias international reputation and quest for external financing. However, tensions can
arise in the design and implementation of governance reforms, especially when the interests of
political leaders are not being met. While the identification of governance risks under the
GACAP II methodology was relatively straightforward, implementing effective mitigating
actions has proven more difficult. Delays have often led development partners to revert to their
own parallel systems in order to reduce fiduciary risk, and this in turn has often been at the cost
of development effectiveness. If aid is to achieve better results, more trusting approaches in
governance and fiduciary arrangements are needed by both government and development
partners.

C. Cambodias Current Development Strategies

9. The government adopted the Rectangular Strategy for Growth, Employment, Equity, and
Efficiency Phase 2 (Royal Government of Cambodia 2008) to guide national development. The
Strategy remains central to the National Strategic Development Plan Update (20092013),
(Royal Government of Cambodia 2010). With the overall goal of poverty reduction and
economic growth through enhancement of agricultural sector development, the Rectangular
Strategy is founded on principles of good governance, peace, political stability, social order,
macroeconomic stability, partnership, and economic integration. Thus the Rectangular Strategy
and successive development plans highlight the need to improve the governance environment,
including implementation of the first (20012004) and second (20052008) governance action
plans and their five crosscutting reform areas. These are

(i) administrative reform and anticorruption measures;

(ii) legal and judicial reform;

4 Cambodia: Country Governance Risk Assessment and Risk Management Plan

(iii) decentralization and deconcentration;

(iv) economic and financial reform; and

(v) social sector development and reforms in the armed forces, land policies, and natural
resources management. Governance action plans also recognize that reform is a lengthy and
challenging process due to the need to build institutional and human capacity. Nevertheless,
many of the reform areas are progressing less quickly than envisaged, although progress is being
made in core planning and toward the goals of poverty reduction and economic growth.
However, a positive correlation between governance reform and economic development is not
always observed; indeed, despite high economic growth from 19982008, relatively modest
gains have been achieved in governance reforms.

D. The Economic Context


10. Before the significant global economic downturn in 20082009, Cambodias economy
performed exceptionally well, with real annual gross domestic product (GDP) growth averaging
9.1% over 19982008. The economy then faced two independent external shocks: a spike in
inflation from much higher global oil and food prices in mid-2008, and the onset of the global
financial crisis beginning in late 2008 that led to a severe downturn in growth. Through late 2008
and 2009, the two global crises created major challenges for Cambodias economic management.
Key growth sectorsparticularly garments, tourism, and constructiondeclined, though
agriculture, which employs the bulk of the population, held up somewhat better. Expansionary
monetary and fiscal policies (on both the revenue and expenditure sides) boosted domestic
demand and helped prevent a major recession, with GDP growth virtually stagnant for 2009. In
2010, GDP growth returned to a reasonable 6.3%, with ongoing recovery in the garment and
tourism sectors, and, to a lesser extent, in construction. Government macroeconomic
management during this challenging period has been favorably recognized by international
institutions, including the 2010 International Monetary Fund (IMF) Article IV mission.

11. As well as returning to solid (though still below potential) economic growth, inflation
declined from 35.6% at the end of May 2008 to 3.1% at the end of 2010. Deflation actually set in
for part of 2009 during the depths of the contraction. The finance sector withstood the crisis
reasonably well, with no systemic or major institutional failures. Fiscal policies remain
accommodative and the government has recognized a need to reduce fiscal deficits of around
6%7% of GDP to levels closer to balance, as prevailed in the pre-crisis period. Public sector
debt remained modest at around 28% of GDP in 2010, though the external balance was critically
dependent on official aid inflows, with current account deficits of around 11.0%. Successful
macroeconomic management during the most challenging economic environment in decades is a
major positive indicator of improving governance in Cambodia. ADB guidelines stress the
importance of PFM in relation to governance improvements, and the starting point for improved
PFM must be a sound macroeconomic base. The international community should give due credit
to Cambodia for this aspect of its governance arrangements in response to a global crisis which
had its roots in poor economic governance in Europe and the United States.

--

Three main political parties have dominated Cambodian politics since the early 1990s: the
Cambodian Peoples Party (CPP), FUNCINPEC (Front Uni National pour un Cambodge
Indpendant, Neutre, Pacifique, et Coopratif), and the Sam Rainsy Party (SRP) opposition
party. The Norodom Ranariddh Party (split from FUNCINPEC) and the Human Rights Party
were established prior to the 27 July 2008 parliamentary election. In the 2008 election, the fourth
since the Paris Peace Accords of 1991, the CPP won 90 seats out of 123, giving it more than the
50+1 majority required under the Constitution to form a government. FUNCINPEC is still a
minor coalition partner.
--

The legal system makes debt collection very unpredictable. The institutional framework has very
serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly
risky environments rated D.

Growth expected to remain high in 2017

Having edged up in 2016, growth is expected to level off at a robust pace in 2017. Cambodia's
economy is set to continue benefitting from lively domestic demand, favored by rapid credit
growth, moderate inflation and a rise in the minimum wage. Meanwhile, exports of textile
products will continue to benefit from the country's growing integration in the world economy.
The construction sector is benefiting from the booming property market and the development of
tourism-related infrastructure. Tourism, in particular from Asia, is expanding rapidly. Foreign
direct investments look set to remain high, especially in the textiles sector, despite steady
increases in the minimum wage for the sector, which will be set at USD 153 USD per month
(+9.3%) in January 2017. This renewed rise will hit the country's price competitiveness,
especially in comparison with neighboring countries like Bangladesh and Myanmar, while the
strong dollarization of the economy could adversely affect Cambodian exports if the dollar
appreciates. Nonetheless, this increase should ensure relative social stability at a time when the
country is experiencing regular episodes of political and social instability, which hamper activity.

Meanwhile, investment will remain limited by the country's infrastructure shortcomings,


especially regarding energy, and by the poor education system. The agricultural sector, which
employs two-thirds of the economically active population, is likely to continue to be impacted by
weak commodity prices.

The country remains dependent on foreign aid and the current account balance is still in deficit

In 2017, the country continued to run a trade balance deficit, although this is expected to improve
slightly. The value of imports of capital goods and oil products remains high, despite weak oil
prices. Nonetheless, completion of a number of construction projects should help contain imports
of capital goods. The high level of international aid and remittances by expatriate workers will
offset the repatriation of dividends by the foreign companies with leading positions in the textile
sector. FDIs are rising steadily and make it possible to fund the current account deficit.
Accordingly, foreign exchange reserves are expected to continue to increase to reach almost 6
months of imports.

As regards the public accounts, the fiscal deficit should recover as the country has improved the
collection of taxes. Moreover, the government has introduced a fiscal consolidation policy and
the public accounts are benefiting from the dynamism of the economy. In this context, the public
debt will remain stable. However, the public finances will remain highly dependent on foreign
aid.
Meanwhile, credit is growing rapidly and the banking sector remains weak because of inadequate
supervision. At the same time, the economy as a whole is highly dollarized and foreign currency
deposits account for almost all deposits. The banks are, therefore, heavily exposed to exchange
rate risks.

Fragile calm on the political stage int he run-up to the 2018 elections

During the parliamentary elections of July 2013, the Cambodian People's Party (CPP) led by
Prime Minister Hun Sen won a greatly reduced number of seats and the Cambodia National
Rescue Party (CNRP) contested the elections and refused to sit in parliament for nearly a year.
The opposition benefits from weariness with Hun Sen's reign, acute social tensions over
wrongful expropriations and working conditions in the textile sector. The country has thus been
affected by widespread protests, severely suppressed by the ruling powers.

In July 2014, a fragile agreement was made between the CPP and the CNRP and the opposition
candidates have since sate in parliament. This agreement provided, in particular, for the position
of vice-president to be awarded to a CNRP member of parliament and for a government
commitment to combat endemic corruption, but the government and the opposition clash
frequently. The Prime Minister decided to postpone the elections by five months, without
consulting the opposition. They will now be held in June 2018. In addition, we might see
renewed mass protests in view of an observed increase in political repression.

Finally the business climate is still marked by a lack of transparency, considerable legal
instability and a high level of corruption.

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