[PHNOM PENH POST]
The global focus on Standard and Poor’s downgrade of United States debt
inevitably brought attention to the Kingdom’s credit ratings. At the
same time, one wondered why the Cambodian government had yet to leverage
those ratings to issue debt of its own.
Cambodia’s funding needs
far outpace its generated revenues, making extensive donor support
essential for development. However, there are steps that could be taken
to move the country toward greater financial independence, even if this
is a long-term goal.
No doubt issuing bonds is a small first
step, but doing so sets in motion a virtuous circle of events that could
benefit the entire economy.
“Once the government can prove
itself as a credit-worthy borrower, these kinds of standards should
spill over into the corporate sector and banking sector. So money
doesn’t just pour into government bonds but also into the real economy,”
said Christian DeGuzman, an analyst at Moody’s Investors Service in
Singapore, this week.
He pointed to Vietnam in the 1990s, when
the country adopted the transparency needed to build investor
confidence. Admittedly, Vietnam still has a long way to go, but growth
there has skyrocketed nonetheless. Bond issuance carries with it that
transparency and its positive effects.
China went through a
similar process, albeit on a much larger scale, restructuring its
economy to capitalist from communist. And tiny Singapore now boasts a
thriving economy and a AAA rating from S&P.
Of course, there
are dangers inherent in issuing bonds for a developing country such as
Cambodia. DeGuzman again highlighted Vietnam in this respect, saying the
government there sold debt in order to fund state-owned enterprises,
one of which, Vinashin, almost collapsed as it missed debt payments to
international lenders. Now there’s doubt as to whether Vietnam will
honour those debt commitments when they come due. Also, one could argue
the government’s decision to not sell debt on the international markets
spared the country even greater trouble when the global financial crisis
hit.
But Standard and Poor’s analyst Agost Benard said
Cambodia’s bonds most likely could have withstood the hit. He reckoned
the country would have issued a relatively small amount, maybe US$500
million worth, to investors seeking their high yields, rarity and
novelty. As a result, the Kingdom should have had a greater ability to
service that debt.
“I don’t think that would have had an effect
on Cambodia at all,” he said of the downturn’s potential impact on the
Kingdom’s bonds.
Still, Benard also saw potential threats in the
Kingdom overextending itself by taking on too much debt, as well as a
drop in the riel-US dollar exchange rate.
Cambodia’s bonds would
be dollar-denominated, as he said there would be little international
demand for riel-based issues. Therefore, a drop in the exchange rate
would leave the Kingdom vulnerable because it lacks the ability to
quickly generate new dollars if needed when those bonds mature.
Despite these challenges, Cambodia should push forward with bond issuances nonetheless.
Cyn-Young
Park, principal economist at the Asian Development Bank’s Office of
Regional Economic Integration, agrees. She said that while foreign aid
is still very much needed, the country’s long-term goal should be to
wean itself off that funding.
“The country needs to work on
establishing more self-sustainable funding sources, including better tax
collection and more efficient domestic resource mobilisation.”
She
added the idea of developing local currency bond markets to those
suggestions as well, among other initiatives. Doing so would help the
government reduce reliance on external funding for its fiscal spending,
she said.
The importance of reducing that external funding is
integral to Cambodia’s economic development. While no one can fault the
government for accepting donor money at interest rates far below a
potential bond yield, the practice could eventually run counter to the
goal of financial independence.
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