For years, discussions between the government, central bank and investors over which currency to use on Cambodia’s bourse produced strong arguments for and against the use of the national currency.
The National Bank of Cambodia pushed for the riel, saying a bourse run on dollars would set the country back years in its quest to de-dollarize the economy.
Foreign investors, in most cases, opted for dollars, in part so that funds could be transferred more easily. Officials at the Finance Ministry have also supported the idea of running the stock market in dollars, as 90 percent of the banking system is dollarized.
The end decision, which came on Friday through the Securities and Exchange Commission of Cambodia, ensured everybody won. Securities prices will be listed in riel, but payments can be settled in dollars for the first three years of operations.
Financial experts say the decision will boost the country’s attempt to promote the local currency as well as discourage investors looking to make a quick bet on a dollarized bourse.
“They’ve been smart here, I think, by allowing trading in both currencies,” said Peter Brimble, senior country economist for the Asian Development Bank. “You will have a chance to invest in the riel, in Cambodia, rather than in dollars, which is essentially investing in the world.”
Mr Brimble likened the government’s decision to going to a restaurant, getting the bill in the local currency and paying in dollars.
“It’s putting the riel up front but not making people pay in riel,” he said, adding that the next step would be gradual to make sure that investors do perform transactions in riel.
Still, critics say there is no guarantee that investors are ready to invest money in a stock market valued in riel.
Strong parallels can be made with Vietnam, which has struggled for years to promote the local currency. Over the past three years, Vietnam has devalued its currency on numerous occasions to make its exports cheaper and more competitive, causing people to pull assets out of dong in preference for either gold or dollars.
“The government has to really boost up the confidence of the public sectors in order to be confident to invest in the riel currency,” said Han Peng Kwang, senior vice president of Hwang DBS Bank, which started doing business here in 2009.
He added that continuing a policy of pegging the value of the riel to the dollar would be a good way of doing that.
Whatever happens to confidence in the riel, envisaging its success would have been difficult with a dollarized stock market.
“This is the only opportunity for Cambodia to swap from US dollars to the riel,” said Simon Luu, country manger of Vinacapital, a Vietnamese investment firm that recently launched a $100 million fund in Cambodia. “If they don’t do it now, there won’t be any other opportunities to do it.”
Nevertheless, it remains to be seen whether after three years investors will be ready to trade uniquely in riel.
Mr Luu said this would depend on how strictly regulators ensure that transactions are carried out using the domestic currency.
Ming Bankosal, SECC director general, said regulators would develop policies on how stocks listed in riel could be paid for in dollars.
He said the decision to allow traders to do transactions in dollars was an attempt to provide the market with the time necessary to install confidence in the local currency.
“Even though Cambodia is a highly dollarized economy, we still allow three years” of dollar use, he said, adding that the central bank had a detailed, long-term action plan to promote the riel.
Experts say more time is needed for confidence levels in the riel to be high enough for a bourse operating in only riel.
“I have no problems with dollarization in Cambodia,” Ralph Wrobel, an economics professor at the West Saxon University of Applied Sciences of Zwickau in Germany, said at an economic forum in Phnom Penh yesterday. “It’s an anchor for stability, and monetary stability is very important.”
The government says it will de-dollarize gradually in order to be sure the economy remains stable.
Also speaking at the forum, Phan Phalla, deputy secretary-general of the Supreme National Economic Council, said the government had encouraged de-dollarization by introducing measures such as injecting more riel into the economy and making sure more salaries are paid in riel.
“Since the economy is deeply dollarized, we cannot just do it in one day,” he said. “De-dollarization is a major goal, but we have to do it step by step.”
While a dollarized economy brings stability, the government is unable to control the supply of money. Promoting the riel will allow the government to do that.
“The important thing is macro-economic stability,” said Mr Phalla. “Once we use more riel, then we can take the dollar out.”