Ratings agencies’ about-turn on Cambodia signals danger of lending to Hun Sen
The European Union’s decision at the beginning of October to impose tariffs on Cambodian exports unless there are clear improvements in labor and human rights has prompted an about-turn by ratings agencies that were previously content to accept the country’s record of economic growth at face value.
Fitch acknowledged on October 15 that while it had “previously argued that Hun Sen was managing to navigate the risks posed by his authoritarian rule … it appears that his past efforts were insufficient.” The risks to Fitch’s GDP growth forecasts of 6.0% in 2019 and 5.7% in 2020 are therefore “firmly weighted to the downside.” Fitch also noted that the US might follow suit in withdrawing trading privileges.
As recently as April, Moody’s had noted Cambodia’s “robust GDP growth prospects” and “macroeconomic stability.” But Moody’s followed Fitch with a statement on October 22 that highlighted “significant credit-negative effects” on Cambodian sovereign debt from the loss of EU duty-free access. Moody’s said that other countries such as Australia and Canada could follow the EU’s lead.
The change of language by the agencies should be a wake-up call to current and potential lenders to the corrupt regime of Cambodian Prime Minister Hun Sen. Ratings agencies, rightly or wrongly, play an important part in policymaking. These comments on possible further losses of trading rights, therefore, have the potential to become a self-fulfilling prophecy.
As a purely financial proposition, lending to Cambodia has become a lot riskier. The country’s commerce minister has estimated that the loss of EU trade preferences would incur US$676 million worth of tariffs.
Finance and politics, of course, are never truly separate. Tariff-free market access for Cambodia was originally granted by the EU as recognition of the country’s transition to democracy. From the start, the EU urged Cambodia to diversify its exports to avoid reliance on a single product or market. Yet around 40% of Cambodia’s gross domestic product still comes from garment exports.
Progress toward democracy, which has always been painfully slow in Cambodia, collapsed completely in July when the government held a bogus election from which the Cambodia National Rescue Party (CNRP), the only serious challenger to Hun Sen’s ruling Cambodian People’s Party, was excluded. No credible international observers were willing to monitor the poll.
For the first time since the elections organized by the United Nations in 1993, Cambodia lacks a legitimate government recognized by the international community
For the first time since the elections organized by the United Nations in 1993, Cambodia lacks a legitimate government recognized by the international community. The government has disregarded Cambodia’s constitution, as well as the Paris Peace Agreements of 1991, and lacks the legal authority to contract loans.
Restoring the fragile equilibrium on which Cambodia’s economic growth and creditworthiness has depended is a matter of political will. The CNRP, now banned, must be reinstated, and the restrictions on the movement of its leader, Kem Sokha, which are tantamount to house arrest, must be lifted. All of the political prisoners who are being held hostage by the Hun Sen regime must be released.
Fifty-five CNRP representative were elected to the 123-seat National Assembly in 2013, and more than 5,000 CNRP activists were chosen in 2017 local elections as commune councillors. All of these arbitrarily confiscated positions must be returned, and a timetable for prompt and genuine national elections must be published.
To date the regime has shown no sign of the good faith required to avoid losing EU market access. Lenders must therefore consider whether it is responsible to keep funding such a regime.
Hun Sen’s government projects that it will need to borrow up to $2 billion in 2019. In addition, leading government figures need access to foreign bank accounts to hide the fortunes they have amassed during their decades in power. Banks must cooperate in locating and freezing these accounts, which are used to hide the spoils of a regime of which the hallmarks are intimidation, violence and murder.
Lenders should also understand that a future, democratically elected government of Cambodia will not be bound by borrowing decisions that have been rubber-stamped by the current, illegally constituted National Assembly.