This is part two in a two-part series.

In part one, we explored three potential responses Cambodia could make following the designation of Cambodia’s Prince Group as a Transnational Criminal Organization over allegations that they run large online scam operations suspected of using trafficked workers and defrauding people around the world. This decision resulted in the freezing of the US-based assets of its affiliates and leadership and, given the kingdom’s highly dollarized economy, could have catastrophic ramifications.

The most likely scenario, we concluded, was that authorities would remain defiant, as their early statements have suggested, and deepen their reliance on Chinese investment. A less likely, but ideal scenario, suggested they would address the structural problems and step up enforcement of these operations, thus building confidence that they will address these operations conclusively. A third, and especially dire, response, would see the US and its partners escalate sanctions.

Three structural variables will drive divergence among these scenarios. The first is the depth and configuration of Cambodia’s dollar dependency. The relevant question is not whether the country is dollarized but whether enough credible correspondent capacity remains to clear cross border dollar flows without punitive frictions. The second is the extent of elite entanglement in sanctioned networks that creates incentive compatibility problems for reform while technocrats face a confidence deficit that messaging cannot solve. The third is the scope of external alignment, in particular China’s willingness to provide liquidity and diplomatic protection in ways that do not attract reputational blowback or secondary exposure. Beijing’s calculations are likely to be pragmatic, sustaining Cambodia as a compliant ally while avoiding actions that trigger further extraterritorial measures.

Secondary variables are also salient. ASEAN diplomacy matters for signaling and for quiet coordination on enforcement against compounds. Thai border volatility remains a live tail risk to logistics, insurance premia, and informal financial flows. South Korea’s pressure has escalated from consular concern to a structured bilateral agenda after the killing of a South Korean student linked to a compound, with travel restrictions, repatriation plans, and investigation support now shaping the bilateral channel. These dynamics raise the cost of a purely defiant stance and create incentives for visible actions against compounds and trafficking networks.

In the short term, until 2027, Cambodia will likely experience a marked contraction in new foreign direct investment. Western, Japanese, and Korean investors will continue to withdraw from sectors that require clean global financial connectivity and predictable correspondent banking. Construction, real estate, fintech, and digital services will see the steepest decline, with tourism exposed to travel advisories and insurance hurdles. Dollar liquidity pressures may lead to higher interest rates and tighter credit conditions for firms and households, constraining domestic consumption and pushing small and medium enterprises toward informal finance. Payment latency, higher rejection rates for international wires, and episodic outages in domestic digital channels become practical symptoms of the new risk environment. Gross domestic product growth could decline to between 3 and 3.5% compared with the pre sanctions trend of 6%, with regressive distributional effects as households and firms with less access to alternative settlement routes bear higher effective costs.

In the medium term from 2028 to 2030, under a reform scenario, growth could gradually recover toward 5% driven by restored investor confidence, improved financial governance, and a narrowing of the dollar-funding premium as correspondent banks regain comfort. Under the defiance scenario foreign direct investment will remain concentrated in Chinese and regional sources, primarily infrastructure and low-value manufacturing sustaining moderate growth around four percent while productivity improvements lag and the cost of capital remains elevated. In an isolation scenario sustained financial exclusion would erode output and living standards reducing growth to below 2% and widening inequality through price spikes in imported essentials.

Cambodia’s dollarization amplifies every dimension of the sanctions crisis. The structure that once signaled macroeconomic stability, widespread use of the United States dollar, has become a conduit of vulnerability. The central task is not quick de-dollarization, which is neither feasible nor desirable in the short run. Rather, the central task is to keep the dollar rails credibly open by demonstrating enforcement and compliance capacity that convinces regional correspondents and multinational banks that Cambodian flows can be processed without reputational and legal risk. The state’s response will determine whether Cambodia can maintain the credibility of its dollar-based system through reform fragment it through a dual currency adaptation that hardens over time or lose it altogether through isolation.

The sanctions against Prince Group, the FinCEN 311 exclusion of Huione, the diplomatic crisis with South Korea, and the volatility along the Thai border have converged into a single structural test. That test is whether a deeply dollarized politically centralized and geopolitically exposed state can preserve financial stability while confronting the consequences of impunity. The most probable outcome remains strategic defiance with selective compliance sustained by Chinese liquidity and elite continuity but now shadowed by a clearer and more immediate risk that dependence on the dollar will exact a rising premium unless verifiable enforcement and supervisory reforms change the calculus of the banks that keep the system’s essential cross border channels open.

PacNet commentaries and responses represent the views of the respective authors. Alternative viewpoints are always welcomed and encouraged.

Bradley J. Murg ([email protected]), Ph.D. is Provost and Vice-Rector for Academic Affairs at Paragon University and an Adjunct Fellow at Pacific Forum.

Photo: US dollars and Cambodian riels || Credit: People Places and Thoughts