Emerging Cambodia:  Three risks investors should keep an eye on

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Phnom Penh istockphoto:Lquang2410

Decades after the Khmer Rouge murdered most of the middle class and brought the country’s economy back to the stone age, Cambodia is finally making an economic comeback. While growth in 2016 is expected to hit only 7.5 percent, up from 7.3 percent last year, the number remains high.

But at the same time, political, human rights and labor tensions are on the rise, and it is expected that tensions between the ruling and opposition parties will increase, and could even become overtly hostile.

Here are three major risks that investors – whether they are manufacturers or emerging market funds managers – should keep a close eye on.

Political turmoil and improved communication via social media

Hun Sen, who has lead Cambodia for the last few decades – and is one of the world’s longest-ruling leaders – is nervous about the opposition gaining ground. While the president is overseeing an improving economy – in terms of GDP at least – he is under pressure from the opposition, with the ruling party losing an unprecedented 22 seats in the last elections.

In analyzing the reasons for the opposition’s significant gains, mainstream media has left out a crucial factor: Namely, the political opposition’s use of the Internet — especially Facebook and Skype — to bring their own message to voters, creating an alternative to state controlled media, which tows the ruling party’s line.

As opposition Member of Parliament Mu Sochua wrote in an exclusive op-ed in Borderless last year, Facebook is revolutionizing politics in Cambodia. 

This has made the ruling party nervous (perhaps most of all because it remains unknown what fate some members will face if they lose an election). The opposition and international rights groups accuse the ruling CPP of brutally cracking down on the political opposition, as seen a few months back when a mob of CPP supporters attacked two opposition members of parliament on the street, injuring them severely. In the lead-up to the general elections in 2018, tensions are expected to rise, with the possibility of more frequent outbreaks of political violence

Labor tensions could cause foreign investors to pack up and leave

Relations between employers — including foreign employers — and labor have grown tense, and the country has seen an average of 123 strikes per year over the past four years, according to an estimate from the Garment Manufacturers Association of Cambodia (GMAC).

Some strikes have turned violent and have caused serious supply chain disruptions. Some demonstrations have sparked outcry from rights groups after police violently broke up the protests.

There also remain other ongoing labor issues that, if not addressed, could chip away at Cambodia’s competitive advantage.

Mu Sochua told Borderless that while she does not expect any major unrest among workers at the moment,  “daily strikes are enough by workers who are fighting for better working conditions and higher wages for investors to consider moving next door.”

She added that human rights violations and use of armed forces and hired thugs to crack down and kill workers who protest may pull away some foreign investors as well. At the same time, some investors may be drawn toward Vietnam, as that nation will sign the Trans Pacific Partnership, a trade agreement that will give members preferential access to U.S. and Japanese markets.

Minimum wage in an increasingly expensive country

Cambodia may be a developing country, but for many of those on the lower end of the earning ladder, it is not cheap. Many of Cambodia’s poor live paycheck to paycheck. A sudden calamity, such as a death of the family’s main bread winner or unexpected medical expenses from a sudden illness — most Cambodians have no medical insurance –can put a family in debilitating debt.

Those and other issues are at the root of workers’ demands for better pay in the garment sector — the linchpin of the nation’s economy.  But paying them what they ask could drive some foreign employers to neighboring Vietnam, or even Indonesia or Myanmar.

Indeed, over the past three years, minimum wage for garment workers saw dramatic growth, nearly doubling from $80 per month in 2013 to $140 this year.

The pay hike has already put Cambodia’s labor costs well above some of its key regional rivals, and unions are still unsatisfied with that number, and would like to see it rise to $160 per month.

Minimum wages in Bangladesh, Laos and Vietnam stand at $68, $78 and $90-130 respectively, eroding Cambodia’s competitiveness.

Prolonged labor tensions could also cost Cambodia at a time when regional competitors such as Indonesia, Myanmar, and Bangladesh are rapidly ramping up productivity, infrastructure, and logistics chains.

Competition is particularly high from Vietnam, whose garment industry could soon reap the benefits from a number of free trade deals, including one with the European Union that will take effect this year.

 

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