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Politics

Cambodian business world shrugs off political crackdown

Execs signal confidence as opposition dissolved, but unrest simmers

Police officers stand guard at the Supreme Court in Phnom Penh on Nov. 16, during a hearing prior to the ruling to dissolve the main opposition party.   © Reuters

PHNOM PENH -- As Cambodian Prime Minister Hun Sen tightens the screws on democracy to secure a resounding win at next year's election, the country's business community has struck a grimly defiant tone amid political convulsions and controversy. Some analysts, however, warn that Hun Sen's bullying tactics to destroy the opposition and snuff out dissent could be creating a false sense of stability amid simmering tensions.

In recent months, the Cambodian strongman has taken direct aim at obstacles that could cause him problems at the polls and lead to a rerun of the last election, in 2013. That year, the opposition Cambodia National Rescue Party came close to ousting Hun Sen's ruling party, gaining 44.46% of the popular vote, a result mirrored in local elections earlier this year.

In a crippling blow, Cambodia's Supreme Court ordered the dissolution of the CNRP on Nov. 16 over allegations it was conspiring with foreigners to topple the government. As a result, the party's elected politicians will lose their positions and 55 seats in the 123-seat National Assembly. The party's leader Kem Sokha was arrested in September and is awaiting trial on charges of treason. Authorities have also cracked down on foreign media and non-governmental organizations, with several journalists arrested and one independent English-language newspaper forced to close.

The party's dissolution caps months of hostility amid mounting threats of civil war from Hun Sen if his ruling Cambodian People's Party loses the election.

"I had been planning on sending my family out of the country over the election period, but now I'm nowhere near as concerned," said a local businessman who has held senior roles in Cambodia's banking industry. He declined to be named.

In 2013, the country's banking system was thrown into disarray when more than $600 million flooded out around the time of the election, as protests against the CPP's widely disputed win crippled the city.

Pily Wong, CEO of Hung Hiep (Cambodia), a local distributor of international brands such as Volkswagen and Ernst & Julio Gallo wine, told the Nikkei Asian Review that he plans to reduce his stock levels in anticipation of a drop in consumer spending ahead of next year's election, but he is not terribly worried.

"I think the opposition has been taken care of ... so in some ways the election should be more stable," he said.

Tens of thousands of supporters of the opposition Cambodia National Rescue Party march during the last day of campaigning for commune elections, in Phnom Penh on June 2. (Getty Images)

Rahul Anand, founder of venture capital company SEA Ventures, said the ruling party has the experience and "pro-business attitude" that offers investors certainty and confidence.

"If a new party comes into play, then I'll be extremely worried," he said.

Turning to China

The deterioration of Cambodian democracy coincides with Hun Sen's turning away from the West in favor of China, which in recent years has become a major political and commercial partner.

China is the country's single largest investor and a major source of tourism. It offers loans without the strings attached by the U.S. to encourage government reforms. The U.S. accounts for a fraction of foreign direct investment in Cambodia. From 1994 to 2014, Asian countries accounted for 90% of an estimated $19.2 billion in FDI, with China contributing 44% and Europe 7%, according to the national bank.

China's dominance of Cambodia has emboldened anti-American sentiment in the prime minister, who often reminds the nation of the U.S. secret bombing campaign in the early 1970s to stop the spread of communism from Vietnam.

After the U.S. announced it would abandon plans to help fund Cambodia's 2018 election due to the CNRP's dissolution, Hun Sen sneeringly invited it to cut all aid. In August he suspended cooperation with the long-running U.S. program to search for the remains of Americans killed in the Vietnam War, and a month later expelled the U.S.-funded National Democratic Institute.

Yet American business sentiment is "unchanged," with companies neither avoiding nor pulling out of Cambodia, said Anthony Galliano, CEO of financial services company Cambodian Investment Management.

"Frankly it is no secret that American companies invest in much more politically sensitive countries than Cambodia. There is no reason for American companies to shun Cambodia," said Galliano.

"However, the escalating tensions will obviously not contribute positively towards American sentiment," he said, noting that some multinational companies in particular have avoided Cambodia because of its weak legal institutions.

Hit where it hurts

Export-oriented companies would be among the business sectors hardest hit by fallout from the government's recent actions, analysts say.

In the once-thriving apparel industry, most of the factories producing Cambodia's garments are owned by Asian companies, which are typically less averse to political and reputational risk than Western companies. However, the U.S. and European Union are among the major markets for Cambodian textile exports.

For more than a decade Cambodia's garment, bicycle and rice industries have flourished under the EU's Everything But Arms scheme, which offers underdeveloped countries tariff-free access to Europe.

The EU accounts for around 43% of Cambodia's clothing exports and the U.S. 29%, according to the International Labor Organization. Garments account for 80% of total exports, and amounted to $6.8 billion worth of export revenue in 2015.

To pressure the government into reinstating some semblance of democracy, the EU recently issued a statement saying it will not consider next year's election legitimate without the main opposition party's participation.

Frankly it is no secret that American companies invest in much more politically sensitive countries than Cambodia. There is no reason for American companies to shun Cambodia.

Anthony Galliano, CEO of financial services company Cambodian Investment Management

"Respect of fundamental human rights is a prerequisite for Cambodia to continue to benefit from the EU's preferential Everything But Arms scheme," the statement said.

Ken Loo, secretary-general of the Garment Manufacturers Association in Cambodia, said he has yet to hear of manufacturers showing trepidation over the political situation.

Sebastian Strangio, author of Hun Sen's Cambodia, said harsh sanctions may force the prime minister to make some concessions, but "it's very hard to see Hun Sen permitting any election that he stands a chance of losing."

Though Cambodia's economy could well navigate the current political turmoil unscathed, for the growing constituency of young Cambodians who are demanding a new government, the political situation is far from resolved, said Dane Chamorro, head of Southeast Asian operations at Control Risks, a risk consultancy

"Things are going to get worse before they get better," he said, adding that new investors and Western clothing companies will be monitoring the situation carefully.

"You can't just get into bed with the strongman because he brings short-term stability because in the medium to long term, that's a no-winner."

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