Business confidence among EuroCham Cambodia’s predominantly European member companies fell this year as a result of a lack of positive reforms and uncertainty surrounding upcoming elections, according to a survey released yesterday.

The annual EuroCham Business Confidence Survey, compiled from the responses of 115 EuroCham member companies, found that while Cambodia remains an attractive destination for investment due its cheap labour, businesses were increasingly pessimistic in their outlook.

The overall decrease in sentiment, falling from a score of 50.4 in 2015 to 48.8 this year, was attributed to uncertainty over the upcoming elections and the typical business wait-and-see approach that follows potentially contentious political cycles.

“While Cambodia’s economic growth remains stable, past experiences have shown that pre-election times have always proved challenging for the Kingdom’s economic activity,” the report said.

According to the survey, the main obstacle to doing business remains non-transparent practices, unofficial fees and a “long-standing systematic problem” of unfair competition that is heightened during regulatory transitions, especially regarding taxation changes. It also noted that respondents perceived that government reforms had done little to further attract foreign direct investment throughout 2016, with only 10 percent claiming they had felt a positive impact.

“The Royal Government’s ongoing reform agenda has not yet brought about the anticipated improvements to the business environment – respondents remain relatively unenthusiastic about its implementation,” the report added. “This year’s results point to no significant improvements in how businesses perceive the ease of doing business in Cambodia.”

Some 63 percent of companies felt as if they would achieve 2017 profitability goals, down from 71 percent last year, while only 60 percent said that they would continue with expansion plans, compared to 81 percent last year.

Ratana Phurik-Callebaut, executive director of EuroCham, said it appeared that the government was becoming less concerned about addressing private sector grievances.

“Compared to previous years, there have been less consultation meetings between the government and the private sector,” she said. “And in regards to reforms, unfortunately their implementation tends to only have a short-term effect while further discriminating between compliant and non-compliant companies.”

“Our survey shows that there is growing uncertainty and that companies are not expanding their activity but actually consolidating it as profitability expectations decrease,” she added.

The survey, conducted between March and May, preceded Cambodia’s commune elections and recent events that analysts have described as a “political deterioration” ahead of next year’s general election.

When asked if recent developments – including a slew of populist policies pushed forward by Prime Minister Hun Sen, the jailing of opposition party leader Kem Sokha and heightened anti-American rhetoric – would have swayed the survey’s outcome if it were conducted today, EuroCham Cambodia Chairman Arnaud Darc said he doubted the overall score would have differed significantly.

“EuroCham looks at the evolving political environment, but that does not necessarily translate into the commercial viability of its members,” he said. “The overall mood is still pretty good when taking a long-term perspective for growth. It is just that every five years businesses hold their breath while waiting for signs of stability.”

George Edgar, European Union ambassador to Cambodia, said that while he could not speak about the current political climate and its link to business sentiment, one of the main challenges to European trade and investment in Cambodia is the eventual loss of the Everything But Arms scheme.

“Cambodia needs to be ready for that transition and that should be the government’s main focus,” he said, adding that the key to future investment was attracting the right investment that goes beyond the “finite life” of the garment industry, which will lose its competitive advantage as wages rise.

“Eventually, Cambodia will have to face the fact that it will lose its competitive advantage and preferential access to the EU market as well as a decline in developmental assistance to fill the state’s budget,” he added.

The release of EuroCham’s business confidence survey was accompanied by an update of its White Book, a set of policy instructions aimed at helping the Cambodian government improve its ease of doing business rankings and attract European investment to the Kingdom.

EuroCham reported that five issues raised in last year’s White Book, primarily concerning taxation, had been resolved while 34 of its 58 recommendations had received an official government response.

This year’s White Book sets out 78 new, updated and carried-over policy recommendations that will be handled by the chamber’s working groups. Additionally, it adds a dedicated new section confronting the challenges of an economy that lacks investment protection mechanisms.

For investment protection, EuroCham gave out 10 regulation suggestions spanning from intellectual property rights to consumer protection and the establishment of a fair competition law, as well as urging the government to update its Investment Law in order to increase investor confidence.

Bun Youdy, a EuroCham board member and the head of the dispute resolution team at legal firm Bun & Associates, said the government needs to do more in terms of investor protections.

“Currently, the only real avenue for investor protections is through dispute and arbitration that generally goes to Hong Kong or Singapore because Cambodia lacks the legal framework to handle commercial cases,” he said. “This is costly and time consuming and Cambodia needs to build the capacity and reputation so that it can handle cases here.”

Sok Chenda Sophea, secretary-general of the Council for the Development of Cambodia, said he welcomed the business confidence survey and White Book recommendations, but felt that EuroCham members were being pedantic in listing their grievances.

“While this is an excellent survey and policy recommendations, I ask EuroCham members to not be too simplistic in their thinking as most of the members don’t actually produce much in Cambodia and are more oriented to the service sector.”

As for upcoming regulations, he tried to curb enthusiasm that the government would provide additional incentives beyond the current Law on Investment.

“We are revising the Investment Law and drafting a law on special economic zones – those laws are coming,” he said. “But a lot of companies expect that the new laws will give more generous fiscal incentives and I am here to tell you that they won’t.”