Cambodia's stock market is no quick fix

16-12-2009
By Bruce Gale, Senior Writer
The Straits Times

Given Cambodia's reputation for shady dealings, foreign investors are likely to remain wary for some time. Junk-level credit ratings also suggest the country is a risky bet.

Weak oversight and neglect of real economy are potential dangers

IS CAMBODIA in danger of developing a taste for quick fixes? A statement issued by the nation's Finance Ministry earlier this month called the establishment of a stock exchange 'an important and historic event' that will create new jobs, revitalise the local economy and transform Phnom Penh into 'a world-class city'.

Until recently, 'offshore oil' was what officials touted as the country's way out of dire poverty. But since it is still not clear when the oil will be commercially viable, the government has begun looking elsewhere.

After numerous delays, Cambodia's stock market is now set for launch around November next year. This is the date when the exchange's building is expected to be completed in Camko City, a major new development just north of central Phnom Penh.

Official concern about the need to boost the economy is understandable. The International Monetary Fund expects the economy to contract by 2.75 per cent this year. By comparison, the economy expanded by 10.25 per cent in 2007 and about 6.5 per cent last year.

Despite the rapid growth of recent years, about 40 per cent of Cambodians still live below the poverty line. The country remains heavily reliant on international aid.

The planned stock exchange, however, will not be for the faint-hearted. Despite all the talk about the importance of regulation, the new bourse is widely expected to reflect Cambodia's penchant for weak oversight. As a Cambodian opposition leader, Mr Sam Rainsy, put it: 'Many potential stock holders will be cheated by stock manipulation.'

Cambodia is regularly listed by Transparency International as one of the most corrupt countries in the world.

Cambodia's Finance Ministry has asked state companies such as Telecom Cambodia, port operator Sihanoukville Autonomous Port and the Phnom Penh Water Supply Authority to list shares. Other companies that are expected to list within a year of the exchange opening for operations include petroleum company Sokimex and the country's largest bank, Acleda Bank Plc. The government is also considering a range of tax incentives to encourage companies to go public.

According to the Korea Exchange, which is providing technical advice on the establishment of the new Cambodian bourse, each company will probably issue about US$10 million (S$14 million) worth of shares initially.

One of the main justifications for the establishment of the exchange is the need to mobilise funds from outside the banking system. Cambodia is a largely cash-only economy. This is because citizens distrust the banks and prefer to hoard their money at home.

With limited deposits, banks are unable to lend large amounts for long periods. Companies that wish to borrow funds for expansion also face high interest rates. The hope is that the proposed stock market will provide such companies with an alternative means of raising capital.

In addition, by forcing companies which want to list on the exchange to publish audited accounts, it is argued that the bourse could go a long way towards forcing greater transparency on the local corporate scene.

Supporters have also cited the stock market as a possible source of additional foreign investment. Despite the progressive easing of official restrictions, Cambodia lags far behind neighbouring Vietnam in terms of its ability to attract foreign investors.

But creating a stock market is unlikely to be an economic quick fix. Indeed, the reality is likely to be far more prosaic than that suggested by the official hyperbole surrounding the establishment of a stock market.

Given Cambodia's reputation for shady dealings, foreign investors are likely to remain wary for some time. Junk-level credit ratings also suggest the country is a risky bet.

It will also be a while before the bourse is able to deliver on its promise to provide a much-needed alternative source of funds. After all, the move will mainly benefit the nation's larger companies, most of whom have much less problem obtaining capital than small and medium-sized enterprises.

One worrying possibility is that the nation's political and economic elite will become so distracted by the opportunities the new institution may provide for quick profits that they neglect the needs of the real economy.

If the new institution is well run, however, there are some grounds for optimism over the medium and long term. Vietnam's bourse, which was set up in July 2000, languished for several years before taking off in 2007. Cambodia's exchange may follow a similar course.

Cambodia has much potential. For some years now, it has no longer been necessary for economic policy to take a back seat to security issues. As a result, the private sector has begun to flourish.

The garment industry in particular survived the end of the Multi-Fibre Agreement, and employs large numbers of rural-urban migrants. Prior to the recent global slowdown, Western investors were also beginning to show greater interest in the country.

It is matters such as these - together with the official attitude towards the promotion of good governance - that will ultimately determine whether the revitalisation the country's economic managers crave will actually come to pass.