# **1. Introduction**

Cambodia is facing multiple crises. The lingering effects of the COVID-19 pandemic, growing impacts of climate change, economic imbalances, and rising debt distress make the country vulnerable to compound shocks. The unique nature of compound risks – characterized by nonlinear<sup>1</sup> and hard-to-predict effects – defies simple summation of individual shocks. These complexities amplify the consequences of climate-related shocks and introduce formidable challenges to financial stability and monetary policy. When compound shocks intersect with preexisting vulnerabilities, they may unleash cascading effects, further magnifying impacts and increasing the risk of enduring consequences (Pescaroli and Alexander, 2018).

This paper considers a ‘worst-case plausible’ scenario in which a chain of ‘cascading’ disaster events is triggered. It draws on the principle of ‘risk thinking’ laid out in Dembo (2021) and builds on the possibility of climate-induced cascading risks described in Pescaroli and Alexander (2018) and Kemp and others (2022).<sup>2</sup> Although the definition of ‘plausible’ is necessarily ambiguous to reflect the underlying uncertainty about the events discussed, the scenario laid out in this paper resembles the situation in Pakistan in 2023, whereby the country experienced disease outbreaks and severe financial instability following the floods in 2022. The scenario is not a prediction; instead, it aims to depict potential outcomes in the absence of sufficient preparations to protect against future losses.

This paper highlights the range of spatial and temporal scales that can ultimately lead to extreme impacts: from long-term global warming making climate and weather patterns more volatile, through to the increased occurrence and severity of flooding events along the Mekong River Basin, and finally to the localized effects in terms of disease outbreaks and devastating damage to the region’s economies. While each individual disaster event may be relatively unlikely, the chances of it happening may increase both due to climate change and due to previous events in the chain occurring (Zscheischler and others, 2018). The probability of the full scenario occurring (if it could be measured) is thus higher than multiplying the probabilities of each individual element. Climate change increases the likelihood and severity of disaster at every stage in the chain.

The aim of this exercise is also to identify key vulnerabilities within Cambodia, which may be exacerbated by climate change. Having identified these vulnerabilities, it becomes possible to assess pre-emptive responses that could reduce future risks within Cambodia. Given that Cambodia cannot much influence the rate of global climate change, these responses could play a key role in the country’s long-term strategy for developing a resilient economy.

1 In the context of compound shocks, non-linearity implies that the combined impacts of events have the potential to diverge from what would be expected by simply adding up the impacts of individual shocks.

2 For clarity, we adopt the Intergovernmental Panel on Climate Change (IPCC) definition of ‘risk,’ which focuses on the potential for adverse consequences. Unlike economic definitions that consider both positive and negative outcomes (Keynes, 1921; Knight, 1921), the IPCC’s definition applies only to adverse events. While the probabilities of these events cannot be measured, this analysis focuses on downside risks. A similar definitional issue arises with the use of the term ‘conservative,’ which has different connotations in economic and environmental contexts. In economics, ‘conservative’ often refers to estimates that are likely milder than the actual outcome, while natural scientists may use ‘conservative’ to indicate a worst-case scenario. Throughout this paper, we avoid using the term ‘conservative’ without clarifying its intended meaning.