PM’s Policy Continuity Implies Low Short-term Political Risk

Easing inflationary pressures as well as resilient economic growth and government social spending are likely to limit the risks of social unrest, according to research house BMI, which raised Cambodia’s Short-Term Political Risk Index score
Rising economic growth and social spending reduce political risk in Cambodia, BMI says. Kiripost/Siv Channa
Rising economic growth and social spending reduce political risk in Cambodia, BMI says. Kiripost/Siv Channa

The assumption of the premiership role by Hun Manet might not result in a radical shift in policy direction, said BMI, noting that the “historic transfer of power” from his father and long-time leader Hun Sen carries limited risks to Cambodia's political stability and policy continuity over the coming quarters.

Along with the peaceful transfer of power and tight restrictions on opposition activists, near-term stability risks are minimised.

“With this in mind, and against the backdrop of improving economic conditions, we have raised our Short-Term Political Risk Index [STPRI] score for Cambodia to 65 out of 100 from 64.4,” BMI, a Fitch Solution Company, said in a note to investors Thursday.

The score sits above Thailand's, which is 60, but still below Laos (71.4) and Vietnam (81.7). A higher score implies lower risk.

In that, the policy continuity remains the “strongest” subcomponent underpinning Cambodia's STPRI score, and has left unchanged its subcomponent score at 70 out of 100.

For BMI, Manet’s takeover as prime minister, along with the roles assumed by the children of senior political figures in Cambodian People’s Party (CPP), was “widely expected and forms part of a wider generational transfer of power”.

The research house views that Manet would “broadly follow the core policies of his father”, prioritising economic growth and development under the long-term goal of Cambodia becoming a high-income country by 2050.

The implementation of the Pentagonal Strategy - Phase 1 (2023-2028) by the new government, which was previously announced by Hun Sen, is in its current five-year mandate.

Six policy priorities have been outlined for the coming years, including expanding healthcare provision and increasing spending on social assistance and youth training schemes for low-income households.

Western, Chinese ties

Manet has also signalled that he would pursue a multilateral and balanced foreign policy, with a focus on the ASEAN region.

Given his ties to the West, as he attended the West Point Military Academy and New York University in the US, and the UK’s University of Bristol, BMI notes that there has been “considerable” speculation about whether Manet would seek closer ties with US and Europe.

“While some efforts at improving relations with the West are possible, we do not believe that Manet would undermine the long-standing friendly relations his father developed with mainland China,” it opined.

In fact, it added, Chinese Foreign Minister Wang Yi met with Manet in Phnom Penh “even before he was confirmed as Prime Minister in a sign of Beijing's support for the new leader”.

“As such, over the coming years we expect China to remain Cambodia’s largest foreign investor [30 percent of total investments in Cambodia] and an increasingly important trade partner,” BMI said.

‘Wield significant power’

Its forecast for broad policy continuity is also backed by the expectations that Hun Sen would maintain a prominent role in decision-making over the coming years.

“Indeed, Hun Sen remains president of the CPP and was recently appointed president of the Supreme Privy Council to the King, while he is expected to also become president of the Senate after elections due to be held in February 2024,” BMI shared.

“On stepping down, Hun Sen stated that he intends to remain active in politics until 2033 and we expect he will continue to wield significant power and influence over the new government's policy direction.”

In addition, Hun Sen has indicated that he would return as Prime Minister if his eldest son Manet was “endangered”, a sign that the former leader would “carefully manage” the transition of power to prevent a power struggle within the CPP, it said.

Growth to hold up

In the meantime, BMI has raised the social stability subcomponent score in its STPRI to 60 from 57.5 to reflect an easing of inflationary pressures and improved outlook for growth.

Quoting National Bank of Cambodia’s headline consumer inflation data, which dropped to 0.1 percent year-on-year in June, while averaging 1.3 percent over the first half of 2023, BMI said it expects inflation to average at 2.2 percent in 2023.

Down from 5.4 percent in 2022, the current forecast reflects easing pressure on household purchasing power.

It also revised its forecast for real gross domestic product growth in 2023 to 5.8 percent from 5.6 percent on the back of a sharper recovery of the tourism industry and stronger goods export growth in the first half.

“We believe a brighter economic backdrop should limit the threat of social unrest over the coming quarters, while we also expect the new government to boost social spending and support ongoing wage increases,” BMI added.

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