Political Deal Restores Investors’ Confidence

Cambodia’s business community appears to have let out a collective sigh of relief following Tuesday’s news of an end to the nearly yearlong political deadlock, an impasse that had caused a dip in foreign direct investment.

According to Chris Hobden, a surveyor at real estate firm CB Richard Ellis (Cambodia) Co. Ltd., the deadlock—which led to a number of mass protests, particularly late last year—resulted in potential investors holding back from entering the local market.

“The backdrop of political uncertainty and, at times, civil unrest has clearly led to a number of potential investors delaying their entry into the Cambodian market,” he said Wednesday.

“Whilst it is important to keep in mind that, regionally, Cambodia remains comparatively politically stable, the ongoing deadlock between the CPP and the CNRP has evidently been detrimental to foreign investment.”

Mr. Hobden added that it is still too early to assess how significant the effects of the political resolution will be for investors but that “it is clearly a step in the right direction.”

Though estimates of economic growth remained high at about 7 percent for the third consecutive year in the wake of last July’s election, the Asia Development Bank said in its outlook for the year that the political situation dented investor confidence and disrupted production in the country’s biggest industry, garment production.

“Inflows of net foreign direct investment were buoyant at $1.3 billion, though that figure represented a decline from the previous year, partly a result of political tensions after Cambodia’s national elections in July 2013,” reads the outlook, which was published in April.

Grant Knuckey, CEO of ANZ Royal bank, said the resolution would buoy investors’ confidence, eventually boosting the country’s economy.

“The stalemate had an impact ‘at the margin’ on investment decisions, finalization of some market entry, and hiring. In essence it meant the economy was not performing at its potential, although it was still performing relatively well,” he said via email.

“Hence the main impact of the resolution will be on confidence, and then investment and hiring decisions. That should feed through over time to consumption and the broader economy.”

Chann Veasna, CEO of local accountancy firm APV, said the end of the deadlock will give Cambodia greater appeal in comparison to regional rivals Thailand—currently under a junta government—and Vietnam and should lead to a rise in foreign direct investment over the next three years.

“Of course, it interests foreign direct investment after the political stalemate is solved, which makes the investment environment in Cambodia look better than neighboring countries,” Mr. Veasna said.

The garment industry, which has been rocked by concurrent protests over wages and working conditions, should especially benefit from political stability, said Ken Loo, secretary general for the Garment Manufacturers Association in Cambodia.

“Investors have been looking forward to it. Will it put an end to the demand to higher wages? I don’t think so,” he said.

Violent strikes were put down by force in January, resulting in the deaths of at least five garment factory workers and dozens of injuries and arrests. At the time, factories warned of cutbacks and pulled orders. An estimated $72 million was lost to the unrest. The market, however, appeared to have bounced back quickly, posting a 16 percent year-on-year rise for the first two quarters of 2014.

Srey Chanthy, an independent economist, said foreign investment is particularly sensitive to shocks and political instability.

“Based on my observation and tracking of the investment situation, I see that the sector most sensitive to the political stalemate in Cambodia was foreign direct investment.”

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