Guest post: Cambodia’s delicate diplomatic balance

Guest post: Cambodia’s delicate diplomatic balance

Financial Times | May 29, 2014

It might seem odd to think of Cambodia as a haven of political stability. Labour unrest in Cambodia’s garment factories turned violent in January this year, while the country’s opposition party, the Cambodia National Rescue Party (CNRP), has boycotted Parliament for six straight months in protest of last year’s “flawed” general elections.

Nevertheless, in the space of a week, Cambodia has seen thousands of Chinese residents in Vietnam fleeing across the border as a result of escalating tension between China and its southern neighbour, Vietnam. Meanwhile, the recent military coup in Thailand led to implicit suggestions by the lawyer of former prime minister Thaksin Shinawatra that Cambodia might be willing to host his “government-in-exile”, though these suggestions have been denied by Cambodian Prime Minister Hun Sen. 

This confluence of events has put Cambodia in a delicate balance – China and Vietnam are by far Cambodia’s most important economic and political partners, while the country has benefited significantly from the spill-over effects of growth in Thailand. In the short term Cambodia may turn the recent crises across its borders to its advantage. But if the tensions drag on, then Cambodia’s economy may suffer from perceptions of instability in the region as ties with its key external partners deteriorate.

Impressive headline numbers

In many ways, Cambodia’s macro outlook remains robust given the country’s own lingering political problems. Despite January’s labour unrest, full year GDP growth is expected to come in at more than 7 per cent: in the first quarter, total exports grew 19 per cent year on year, with cumulative volume growth at the ports of Phnom Penh and Sihanoukville up 13.4 per cent year on year. Demand for Cambodian garments and bicycle products remains strong in the European Union – Cambodia’s largest export market – while Taiwanese and Singaporean investors in these sectors now have greater reason to consider Cambodia as an alternative to Vietnam.

A surge in investments from Japan – which has long been the largest ODA provider to Cambodia but whose corporations had rarely invested – has also propped up the economy. Companies such as Yamaha and Minebea have set up component factories in Cambodia for their Thailand-based supply chains; partly as a result, Cambodia’s exports to Thailand grew 42.3 per cent year on year in the first quarter. Senior executives at the Japan Bank of International Cooperation (JBIC) have told Asean Confidential that they believe these trends are “highly sustainable”, even despite the lack of skilled labour in Cambodia.

The domestic economy’s prospects are also looking rosy. Cambodia’s major banks are flush with liquidity as a result of deposit growth which generally still continues to outpace lending. Foreign banks such as Siam Commercial Bank – which are allowed to take 100 per cent stakes in locally incorporated banks – are pushing forward with an aggressive expansion into Cambodia. The property market has also seen strong growth over the last two years, with average residential prices growing at around 10 per cent annually, and an ongoing construction boom in many parts of the capital.

Cambodia remains vulnerable

Nevertheless, it is possible that Cambodia’s bullish outlook, including any short term benefits it may reap from the recent instability, can easily be outweighed by the negative effects of a protracted crisis on either side of its borders.

Persistent political malaise in Thailand could affect Cambodia in numerous ways. It could damage Cambodia’s tourism sector – a major contribution to GDP – particularly since the majority of tourists enter Cambodia via Bangkok. It could also affect the output of Thai-based multinationals, which in turn would affect their Cambodia-based supply chain. Some analysts in Cambodia also worry that the Thai military may also ignite dormant border disputes between the two countries as a means to deflect domestic criticism, which has happened in the past.

It remains unclear how a further deterioration in China-Vietnam relations would affect Cambodia, but the implications may not necessarily be positive. The two countries are by far Cambodia’s most important political partners, and Cambodia needs both of them.

Competition for influence has grown in the last few years; private and state-owned companies from both countries control tens of thousands of hectares of land in Cambodia. Chinese banks have lent large sums of money to both the government and the private sector, with some major local conglomerates now indebted to Chinese interests. China’s absolute Foreign Direct Investment (FDI) into Cambodia is also much larger due to large-scale hydropower projects and off-balance sheet land/real estate and industrial investments.

Yet Vietnam arguably has a more varied reach across a wide range of Cambodia’s economic sectors and political institutions. Prime Minister Hun Sen’s personal ties with Vietnam go back to 1979 and beyond. Vietnam also supplies roughly 30-40 per cent of Cambodia’s electricity, including a recently installed direct transmission line providing power to Phnom Penh from Ho Chi Minh City. Viettel, one of Vietnam’s largest telecoms companies, is a major player in Cambodia, while Vietnam Airlines has a 50 per cent stake and managerial influence in Cambodia’s Angkor Air, the country’s national flag carrier.

A seasoned political tactician though he may be, Hun Sen is sure to face a tough balancing act in the coming months, engaging with (and potentially mediating between) all relevant sides – ranging from the Puea Thai and the Thai military to the Chinese and Vietnamese governments – while trying to appear as outwardly neutral as possible.

Gavin Bowring is a research director at Asean Confidential, a research company owned by the Financial Times