First Debt Ratings a Sign of Financial System’s Progress

Cambodia’s first sovereign debt ratings, which were awarded by glo­bal ratings agencies Standard & Poor’s and Moody’s last month, are one more sign of the country’s emerging financial infrastructure.

The ratings, along with the country’s strong GDP growth, rising foreign direct investment and the prospect of oil, have inspired some to hope that the economic debate in Cambodia may one day shift from how to manage poverty to how to manage wealth.

The middling B-plus Standard & Poor’s rating will have some immediate benefits, notably in Cambo­dia’s expanding banking sector, said In Channy, CEO of Acleda Bank, Cambodia’s largest microfinance institution.

The ratings will enable banks to secure loans from international fin­ancial institutions at lower interest rates than previously offered, he said.

The ratings also pave the way for the government to issue bonds.

Hang Chuon Naron, Secretary-General of the Finance Ministry, said money raised from government bonds would likely be used for specific infrastructure projects, rather than being put into the general budget. Government officials are discussing which projects to fin­ance, he said.

Government bonds will also be useful as a benchmark for private sector financing, which the government hopes to boost with the launch of a small domestic securities markets in 2009, he added.

In Channy welcomed the pros­pect of taking Acleda public. But three things have to happen first, he said.

An interbank loan market must be established, so that banks can meet customer withdrawal de­mands. Second, Cambodia must develop some kind of savings guarantee policy. Third, he said, Cam­bodia needs a credit bureau, so lending institutions can track bad debtors.

Hang Chuon Naron doesn’t disagree that Cambodia still has a lot of work to do, but he says the time to begin working on a stock market is now.

“Banks are thriving. We don’t have to wait for the judiciary to be perfect,” he said. “[South] Korea established its stock market in the 1950s, when the economic foundation of Korea was not that robust.”

Cambodia’s biggest global draw at the moment is oil.

Standard & Poor’s did not take into account Cambodia’s potential oil and gas revenues in its country assessment, because they are a “medium-term” prospect, still subject to many conditionalities, Stand­ard & Poor’s Associate Director Agost Benard said.

The ratings make it easier for the government to eventually secure oil-backed loans from commercial banks, should it choose to do so, Hang Chuon Naron said. He em­phasized that no decision to seek such loans, which are a classic in­gredient of the so-called oil curse that has afflicted other developing countries, has been taken.

John Nelmes, the International Monetary Fund’s resident representative for Cambodia, said the government should be “very cautious” about using the credit ratings to borrow on international or dom­estic markets.

“Such borrowing will be at market interest rates, the financing costs will be high, and budget re­sources will need to be directed a­way from other activities towards meeting those financing costs,” he wrote in an e-mail.

Nelmes said the government needs more cash, especially for poverty-reducing investments in in­frastructure, health and education. But like S&P, he encouraged Cam­bodia to get that money by doing a better job collecting taxes.

According to S&P, Cambodia’s ratio of government revenue to GDP is just 12 percent, half that of similarly rated countries, and the lowest in the Asia Pacific region.

Hang Chuon Naron says that the advent of a functioning, well-regulated securities market in Cambodia would change more than just the politics of development, which have been driven by donor aid. He says it could change politics altogether.

In theory, once a company—or government—issues securities, it must answer to its stock and bond holders. In an adequately regulated environment, it must also adhere to minimum standards of transparency and good governance, thus creating a new mechanism of public accountability.

A warning is being softly spoken, too, as Cambodia embarks on the road to economic maturity: Where capital flows in, it can also flow out, and private sector investors have historically proven far less forgiving than donors.

“Financial markets have the cap­acity, and years of experience, in delivering financial discipline in the event of policy slippages, sometimes very swiftly and harshly,” Nelmes said.

(Additional reporting by Pin Sisovann)

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