S&P Assigns B-Plus Rating to Cambodian Debt

The global credit rating agency Standard & Poor’s announced Thursday that it had given the government of Cambodia its first sovereign debt rating: a B-plus, which places it on par with Fiji, Mongolia, Sri Lanka and Pakistan, but lower than Vietnam and Thailand.

The Standard & Poor’s rating and a similar rating made by rating agency Moody’s were published as advertisements in Rasmei Kam­puchea Daily and Koh Santepheap newspapers on Thurs­day, company and government officials said.

The newspapers published a letter of congratulations, in English, to Finance Minister Keat Chhon from two executives at Credit Suisse, which acted as rating adviser to the government.

They also published a Khmer-langu­age statement detailing an April 11 meeting between Keat Chhon and Lito Camacho, Credit Suisse’s head of Asia Pacific Public Policy.

The Credit Suisse letter was meant to be confidential, Standard & Poor’s Associate Director Agost Benard said by telephone from Singapore on Thursday.

Standard & Poor’s released a press statement and a research note on Cambodia’s rating late Thursday, only after it became clear the rating information was already in the public domain, he added.

A spokesman for Credit Suisse in Hong Kong confirmed that the letter published in the newspapers contained accurate information, but said he had been taken by surprise by its publication.

“We are advising the government of Cambodia on a press re­lease and we haven’t gotten anything from them,” he said. “We didn’t expect the information to get out so quickly,” he added.

Ernest Chan, a spokesman for Moody’s in Hong Kong, said Thursday afternoon that Moody’s did not have any public reports on its rating of Cambodia. “I think we will issue something soon,” he added.

An editor at Rasmei Kampuchea, speaking on condition of anonymity, said both notices were placed in the newspaper by a Ministry of Fi­nance official.

One high-ranking official from the Ministry of Finance, who also spoke on condition of anonymity, said that he did not know who was responsible for the publication of the information, which he decried as “totally wrong.”

“This kind of information should come from the Prime Minister or Deputy Prime Minister,” the official said. “The documents aren’t secret but it’s not the right time to publish them.”

Credit ratings are important be­cause they let investors know how risky an investment is. The higher the risk, the more interest a debtor must pay to entice investors. Credit ratings also determine who may purchase a bond.

Many institutional investors, who are the driving force of global bond markets, are restricted to buying in­vestment-grade bonds. Standard & Poor’s ranks Cam­bodia and Viet­nam below investment grade, while Thailand is investment grade.

Some investors chasing high yields will buy speculative, or non-investment grade, debt but they are less risk averse than most global pension funds.

While obtaining an international credit rating is a first necessary step for a government wishing to issue bonds, such ratings are also useful as a benchmark.

In addition, they provide a measure of transparency for people seeking to invest directly in a country. Some nations that have yet to offer bonds have engaged Stan­dard & Poor’s to assign them a rating, Benard said.

“It offers a benchmark and is a means of transparency,” Benard said.

“It’s a statement that the government is willing to submit itself to external scrutiny.”

Even if Cambodia does choose to offer government bonds, it is unlikely to be able to wean itself any time soon from donor aid, which amounts to some $600 million a year, he added.

“If the government is contemplating a bond issue I would imagine it would be a small amount and more for the purpose of setting an interest rate benchmark in international capital markets,” Benard said.

“The proceeds would be used for some kind of capital infrastructure which may have something to do with the hydrocarbon industry. That’s my guess,” he added.

Cambodia’s high level of public debt, coupled with its limited ability to generate revenues and narrow economic base were the main reasons for its speculative, grade B-plus rating by Standard and Poor’s, Benard said.

Government debt amounts to about 45 percent of GDP, and with a government debt-to-revenue ratio of about 400 percent, the ability to pay back that debt appears limited, according to the Standard & Poor’s research note.

If Cambodia improved its “chronically low” and “stagnant” ability to generate revenues and lifted some of the “multitude of deterrents to in­vestment,” its rating could im­prove, the note said.

Cambodia captures just 8 percent of its GDP in taxes, according to Standard & Poor’s.

Agriculture—which accounts for about a third of economic activity and over 70 percent of the job market—is not only a volatile, and therefore unreliable source of revenue: It also remains largely outside the tax net.

Moreover, Cambodia’s industrial base rests almost entirely on two low value-added sectors: garments and gemstones, according to the research note.

On the positive side, most of Cambodia’s outstanding public debt has very favorable terms, with an average interest rate of just 2 percent, a weighted average maturity of 29.5 years, and a grace period of 8.9 years, the research note said.

The report praised Cambodia for its political stability and liberal economic and trade policies, which it said helped drive real GDP growth of 9 percent per year from 2000 to 2006 on average.

Standard & Poor’s expects GDP growth, supported by foreign investment in tourism and by oil and gas extraction, to continue at 7 to 8 percent a year.

“The stable outlook is predicated on the expectation that policy continuity, including market-oriented reforms, and a prudent macroeconomic setting will prevail after the 2008 elections, in turn helping maintain good support from donors,” the research note concluded.

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