Shares Needed as Cambodia Gets a Stock Exchange

July 10, 2011
By SIMON MARKS
The New York Times

PHNOM PENH — Having experienced more than a decade of economic growth after years of civil unrest and political disorder, Cambodia is set to open its stock market Monday, a move the government hopes will attract more investors to this country’s small and developing economy.

But there is a stumbling block: Cambodia has no companies that are ready to go public.

And the lack of preparedness among local businesses reflects a broader uncertainty about the country’s capacity to adapt to the challenges of operating financial markets.

The introduction of an exchange would add sophistication to the Cambodian economy and potentially help to wean it off its dependence on the dollar. But in a society where claims of corruption are common and laws often weakly implemented, critics say there are concerns over whether market regulators are capable of enforcing rules on issues like corporate governance and accounting and trading standards.

“Cambodia’s market regulator will have all the necessary laws to tackle crime, ensure good governance and create a decent, law-abiding exchange,” said Lee In-pyo, senior manager of the derivatives market division at the Korea Exchange, which has a 45 percent stake in the Cambodia Securities Exchange, with the government owning the remaining 55 percent. “But given Cambodia’s common practices, culture, and experience, full implementation of the law will be very difficult.”

Korea Exchange signed a venture agreement with the Cambodian government in March 2009 as part of wider plans to expand throughout the region. Keat Chhon, the country’s finance minister, will be the chairman of the Securities and Exchange Commission of Cambodia.

So far only three state-owned enterprises have announced their intention to list on the Cambodia Securities Exchange: Telecom Cambodia, Phnom Penh Water Supply Authority and Sihanoukville Autonomous Port.

Han Kyung-tae, managing director for Tong Yang Securities, which is preparing the initial public offerings for Telecom Cambodia and Phnom Penh Water, said the two companies still needed work to make sure they were compliant with market regulations. Mr. Han said the two were hoping to be ready to list by the end of the year at the earliest.

SBI Phnom Penh Securities, which is preparing the initial public offering for Sihanoukville Autonomous Port, did not respond to requests for comment.

Still, with the Cambodian economy having rebounded from a 2 percent contraction in 2009 during the global financial crisis to experience growth in gross domestic product of 6.7 percent in 2010, according to the World Bank, economists say the exchange could help bring more capital into the economy.

In a country where the total number of loans in the banking system accounts for 30 percent of gross domestic product, compared with nearly 100 percent in Thailand and Vietnam, there is plenty of room for an influx of funds.

“It’s a very good time for Cambodia to introduce a stock market,” said Hiroshi Suzuki, chief economist for the Business Research Institute of Cambodia.

Cambodia has its own currency, the riel, but the economy essentially functions on the dollar, with 90 percent of deposits and credit in the banking system denominated in dollars. This restricts the tools available to the central bank for cooling or stimulating the economy and inflation.

While all stock quotations on the Cambodian exchange are to be in riel, the dollar can be used to buy shares for the first three years of the bourse.

After that, the central bank, which issues the riel, will have more influence on the money circulating in the domestic financial system, making the Cambodian economy less dependent on the dollar.

Morten Kvammen, founding partner at Cambodia Capital, a corporate advisory and investment firm and one of seven licensed underwriters in Cambodia, said the attractiveness of the market in Cambodia went far beyond that of the Lao Securities Exchange, which after six months of trading has just two state-owned companies trading stock.

“We think volume will build very quickly, and we could have up to or maybe more than 10 companies listed in the first year of trading,” he said.

Mr. Kvammen noted that while Laos had licensed two companies capable of underwriting and brokering, Cambodia had 13 doing the same thing.

Still, Cambodia has ranked near the bottom of Transparency International’s Corruption Perceptions index for years. And some people in Cambodia are all too aware of the risks that could come along with a stock market, saying that it could act as a tool to further benefit the country’s elite.

“We live in a culture where there is no rule of law,” said Tioulong Saumura, a lawmaker for the opposition Sam Rainsy Party and former vice governor of the National Bank of Cambodia. “No doubt it is easy to adopt a good regulation — copy it down yourself and come up with something on paper that looks good.”

Hang Chuon Naron, secretary of state at the Ministry of Finance, said that enforcing high regulatory standards depended upon not only the government, but also issuers and investors.

He said that bringing a stock market to Cambodia would be a “learning process” for everyone involved and that it could take up to five years to ensure all the necessary standards are met.

Analysts often draw cautionary lessons from the Ho Chi Minh Stock Exchange, formerly known as the Ho Chi Minh City Trading Center, when it opened in Vietnam in 2000. Trading was slow to take off and only a handful of companies were listed after five years of trading.

Then in 2005, as the world economy was enjoying a period of sustained growth, speculation brought in a plethora of companies and investors. The Ho Chi Minh index jumped from 100 points in 2000 to about 1,000 points in early 2007.

But by early 2009, the market had dropped to below 300 points as investors pulled out in the wake of the global financial crisis.

“I think it is going to be a steep learning curve, not only for the fund managers but also for the locals,” said Sany Zainudin, a fund manager at MIDF Amanah Asset Management in Kuala Lumpur, who was one of 32 regional fund managers who arrived in Cambodia in November to learn about the country’s legal framework with a view to investing in the market.

Economists also say that many Cambodian companies with the financial clout to be able to list are completely unaccustomed to the financial benefits associated with a stock market, as they are used to a culture of running businesses as family outfits.

“They don’t like to see some part of the stock sold to others,” said Mr. Suzuki, the economist.

Mr. Suzuki said he expected some of Cambodia’s larger telecommunication companies like Mobitel, as well as some of the bigger local banks, to be among the first private companies to list.

As was the case in Vietnam, Mr. Suzuki said, securities firms would probably spend years trying to persuade companies to list. “How to increase the number of these companies will be the hardest job,” he said.