November 4, 2011

Credit ratings don’t yet matter


In a growing country like Cambodia, where international investors pour in billions of dollars, where GDP growth will once again reach double digits, and where bond issuance is non-existent, sovereign credit ratings are largely irrelevant.

Of course, that doesn’t stop the Kingdom from being rated, as we discovered this week when Standard and Poor’s cut its unsolicited rating on the country’s long-term debt to B from B+.
A B rating represents a speculative investment.

The standard reasoning was offered for the downgrade:  “. . . the country’s low income, highly dollarised and narrow economic profile, and limited flexibility”.

By now, that refrain has become as monotonous as the Cambodian government’s pitch to foreign investors: the country enjoys political stability, offers an open regulatory environment and allows investment without requiring a local partner.

Sure, many of the concerns voiced by S&P – low per capita income, a highly dollarised and narrow economic profile – are valid.

Soaring fuel and food costs this year showed how few tools the National Bank of Cambodia has to fight inflat-ion, while reliance on all- important garment exports has stalled the domestic economy during past crises.

But the fact remains that Cambodia has not yet issued sovereign bonds as a source of fund-raising. Therefore, S&P’s credit rating should have little impact on public financing for the foreseeable future.

S&P said as much this week. Agost Benard, the analyst responsible for Cambodia’s sovereign rating, told the Post the rate cut was “unlikely to have a mat-erial impact” on the interest rate the Kingdom pays on its loans.

That was because Cambodia was not part of the international bond market, had no commercial external debt and all funding needs were taken care of by concessionary loans, he said.

An argument could be made, though, that potential investors still consider the sovereign rating before entering the Cambodian market.

However, the latest Council for the Development of Cambodia approved-investment figures, for the first nine months of 2011, showed a 305 per cent year-on-year increase to US$5.67 billion – hardly a sign that investors are worried about doing business here.

It’s worth pointing out as well that both ratings agencies had graded Cambodia in the B range since 2007, and investors had continued to come regardless.

The non-impact of credit ratings, at least for now, has been much discussed since Moody’s first downgraded ACLEDA Bank in September,  then later changed its outlook for Cambodian Public Bank.

Insiders, experts and government officials largely agree those actions will have  negligible, if any, effect for the time being.

There was, however, one interesting note from S&P’s Agost Benard regarding the downgrade: namely, that the ratings agency now lends greater weight to political stability in its sovereign evaluations.

Although S&P’s statement listed Cambodia’s political stability as a positive, Agost in the Post interview pointed to what he said were the Kingdom’s ineffective instit-utions and governance, and a lack of ability in transferr-ing political power.

He said Cambodia had an “untested succession mechanism and a corollary key-man risk” – referring, of course, to Prime Minister Hun Sen.

As previously mentioned, political stability is a proud bullet point in the Cambodian government’s pitch to investors, and there’s little doubt Hun Sen and the CPP’s hold on power will continue. But weak public institutions are most defin-itely a problem.

Johannes Lund, Southeast Asia analyst for the consult-ancy Control Risks in Sing-apore, said yesterday this weakness in fact benefited Hun Sen and his party.

Hence, the awarding of lic-ences and government contracts would be controlled by the CPP and Hun Sen instead of strong, capable and independent institutions.

As a result, “the operating environment in Cambodia would remain challenging,” Lund said.

That rampant corruption is most likely the biggest deterr-ent to investor confidence in the Kingdom – certainly more so than an unused sovereign credit rating.

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