[S&P] Credit rating drops [... due to concerns over unstable political environment]

Cambodia has to pay dearly because of Hun Xen's rule (Photo: Xinhua)

Tuesday, 01 November 2011
Liam Barnes
The Phnom Penh Post

Standard & Poor’s yesterday downgraded Cambodia’s sovereign credit rating, pointing to what it said was an unstable political environment and low per capita income.

These constricting factors, in addition to the country’s highly dollarised economy and reliance on international donors, led the rating agency to lower the Kingdom’s long-term sovereign rating to B from B+, Agost Benard, an S&P credit analyst, told the Post yesterday.

“As a result of our new rating methodology introduced in June, we reassessed Cambodia’s rating, placing greater emphasis on per capita income and political environment and quality.”

S&P believes the weaknesses of the “political score” in its review of the Kingdom include ineffective institutions and governance and a lack of ability in transferring political power, according to Benard.

“[Cambodia has an] untested succession mechanism and a corollary key-man risk,” he said, referring to Prime Minister Hun Sen’s 26-year run as prime minister of the country.

Although these negative factors are expected to be long-standing issues, even with a general election slated for next year, an improvement on the fiscal front could benefit Cambodia’s credit rating in the future, Benard said.

“If revenue-generated capacity is increased, reliance on international donors declines, and more money is spent on human and physical infrastructure, the Kingdom may be upgraded in the future.”

Benard said another factor weighing negatively on S&P’s assessment of the Kingdom’s political score was the continuing arrears on sovereign debt to Russia and the US, “which indicates a weak debt-payment culture”.

But the impact of the downgrade on a country like Cambodia was expected to be negligible, he said.

“Cambodia is not part of the internat-ional bond market, has no commercial external debt and all funding needs are taken care of by concessionary loans. So the rate cut is unlikely to have a material impact on the cost of funds.”

Although the Kingdom’s long-term sovereign credit rating, which assesses the credit horizon for more than a year, was lowered by a notch, the short-term rating, assessing less than 12 months, remained at B, according to the S&P statement released yesterday.

S&P defines B-grade debt as speculat-ive, saying a country with such a rating is “more vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments”.

The United States-based financial service company also downgraded the US in August – a move experts said would have both positive and negative effects on Cambodia.

ANZ Royal Bank chief executive Stephen Higgins told the Post in August the effects of the US debt downgrade might ripple out to Cambodia, even though the Kingdom’s economy was “booming” at the moment.

But he yesterday emphasised the lack of impact Cambodia’s sovereign downgrade would have on the financial sector.

“The significance is fairly limited, given that Cambodia doesn’t currently have access to public markets and there are no bond issues,” Higgins said.

“However, on the margin, it may cause some potential investors to re-assess their position, if they don’t take time to look at the fundamental reasons [to invest in Cambodia]."

Higgins said the sector was not overly concerned by credit ratings, “considering the recent debacle”– a reference to credit agencies’ role in the US sub-prime mortgage crisis.

“Rating agencies have hardly covered themselves in glory in recent years. People should take their ratings with a pinch of salt.”

Although she could not be reached for comment yesterday due to the national holiday, National Bank of Cambodia director-general and spokeswoman Nguon Sokha in August echoed Higgins’ sentiments.

“Ratings give some indicat-ion of the strength of the economy, but we should not 100 per cent rely on that,” she said, adding that the government had no immediate intention to issue sovereign bonds.