Moody's says withdrawal of Cambodia's preferential trade with EU to weaken growth

Ratings agency Moody’s on Monday said the withdrawal of a duty-free trading access by the European Union for Cambodia over the Southeast Asian nation’s human rights record would have a negative effect on European investments in the country.

Cambodia’s biggest export market, the EU, warned this month that it would lose its “Everything but Arms (EBA)” initiative, to the world’s largest trading bloc, in a punitive response to its move away from democracy.

Some western countries have criticised the July election won by Prime Minister Hun Sen, calling it flawed, because of a campaign of intimidation by his allies, and the lack of a credible opposition dissolved by the Supreme Court.

“The potential loss of preferential trade access to the EU is credit negative for Cambodia,” Moody’s said in news release on Monday.

Moody’s said that if the EBA were to be withdrawn, the imposition of tariffs would increase the cost of Cambodian-made goods in Europe.

“Additional cost increases as a result of tariffs would undermine the price competitiveness of Cambodia’s garments exports unless they are offset by productivity gains,” the agency said.

Rising costs, including a hike in minimum wage, will also reduce Cambodia’s attractiveness as a production base and could weaken foreign direct investment inflows, Moody’s said.

Moody’s said other countries such as Australia and Canada, which have previously voiced concerns over political and human rights in Cambodia, could follow the EU in reviewing their trade agreements, compounding the effect on exports.

Cambodia’s factories supply global brands such as Gap Inc, Swedish fashion brand H&M, and sportswear brands Nike, Puma and Adidas, among others.

Cambodia’s exports to the European Union, were worth 5 billion euros ($5.8 billion) last year, EU data showed.

Hun Sen has termed the threat by the EU a “psychological warfare” against his government, adding that the withdrawal of the EBA would not affect Cambodia.

“I would like to tell all compatriots: did you lose jobs or income yet? Nothing has been lost but they issue this review as a psychological war attack,” Hun Sen told thousands of Cambodians living in Europe during a gathering in Brussels on the weekend.