Policymakers may issue government bonds by 2023

Chhut Bunthoeun

Asian Development Bank, has stated that issuing government bonds in the local riel currency could help Cambodia in promoting the development of its capital markets.

Cambodia’s regional development bank, the Asian Development Bank, has stated that issuing government bonds in the local riel currency could help Cambodia in promoting the development of its capital markets and could be considered as an important tool to encourage domestic investment.

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In its report titled, “Asia Development Outlook 2020”, the bank says that government-issued bonds could help diversify the nonbank financial sector and deepen local capital markets while establishing a risk-free benchmark for pricing locally issued debt securities. That is to say, the development of a new debt instrument market will help reduce companies’ reliance on bank credit while offering new channels for long-term financial intermediation.

“This would support private sector development, diversify the nonbank financial sector, and channel domestic savings to investment, thus reducing reliance on foreign capital flows. It’s also important to cultivate long-term institutional investors in government bonds in addition to banks, such as insurance companies and pension funds, to deepen the market,” the report said.

Previous efforts to develop a sovereignty bond market have faced a particular challenge due to Cambodia’s high levels of dollarisation and under-used local currency. However, with the promotion of local currency bonds, the ADB says this would assist with the central bank’s broader goal of expanding the use of riel, that currently only accounts for about 20 percent of currency in circulation.

In addition, the report states that government authorities are working on a draft amendment to the Law on Government Securities, providing a clear legal framework and paving the way for issuing government bond on the local bourse.

This began in 2012 when the ASEAN+3 Bond Market Guide in 2012 was welcomed as the first official information source offering a comprehensive explanation of the region’s bond markets. The ADB says it is also working closely with the Association of Southeast Asian Nations and the People’s Republic of China, Japan, and the Republic of Korea – known as ASEAN+3 – to develop local currency bond markets and facilitate regional bond market integration under the Asian Bond Markets Initiative to strengthen the resilience of the region’s financial systems.


Plan in the pipeline

While there is not a set launch date for these government bonds, they have been mooted to list on the local bourse by 2022 or 2023, depending on when the Public Debt Strategy for 2019-2023 is ready, according to Chou Vannak, deputy director-general of the General Department of Financial Industry.

“We will consider launching a pilot mechanism for bond issuance by 2022 or 2023 when concessional loans dry out and we can continue with the bond market. This is what we have envisioned for the Public Debt Strategy for 2019-2023,” he said.

“Government securities will play an important role for financial services supporting economic growth, reducing reliance on foreign currencies and other risks associated with currency exchange rates, while allowing the central bank to take more control of the country’s monetary policy,” he explained.

He also pointed out that the bonds will play a crucial role when the aid and development funding is reduced as Cambodia becomes a wealthier and more self-reliant nation; this will also protect the country against external shocks affecting the government’s debt portfolio.

“Additionally, these financial tools will mobilise domestic savings for investments, provide diversified investment products to investors and support the interbank market and the development of the financial system,” Mr Vannak said.

Hong Sok Hour, CEO of the Cambodia Stock Exchange said that once government bonds are officially listed they will definitely bring a large and positive impact to the Kingdom’s securities industry as a whole.

He added that government bonds are considered to be the most stable security and will attract large companies to invest such as insurers, banks and state-owned institutions including the National Social Security Fund.

“The government bond is also expected to provide a new avenue for companies to raise funds for capital improvements, expansions, debt refinancing or acquisitions,” Mr Hong stated.

The Asian Development Bank says that government-issued riel bonds can help deepen local capital markets, amongst many other benefits. CC/Sokunthea Chor

More corporate bonds on the way

There are already three financial firms that have issued their corporate bonds on the local capital market, raising a total of $61 million in the process. These are microfinance institutions Hattha Kaksekar Ltd, LOLC Cambodia Plc and ABA Bank.

In addition, RMA Cambodia (RMAC) is expected to be officially listed  later this month, with a total issue amount of 80 billion riel. Microfinance Institution PRASAC, is expected to list on the CSX in late April, issuing 127.2 billion riel.  PPCBank, a South Korea-based commercial bank, will join them with an issue total of 80 billion-riels worth of bonds.

That said, 2020 is proving very difficult for big policy decisions as the COVID-19 pandemic has a devastating shock on markets around the world.

However, many state it is necessary to keep these capital markets operating. Seng Chan Thoeun, Managing Director at SBI Royal Securities said that companies still need to raise money and investors still need to invest money to keep the economy g moving, although he does admit strategies for both may need to be adjusted NBC urges the private sector to participate in cross-border riel trade transactions CC/Mai Vireakto fit with prevailing market conditions.

He added that it is time to consider IPOs as a funding source and find a balance between funding via debt and stock, noting that both stocks and debt should be considered as alternative financial instruments that can be used for business expansion because each has unique benefits in varying circumstances.

“In fact, bond issuances may be even more important right now since the local and international banks may reduce lending activities in response to the outbreak,” he said.

“Some companies may require extra funds at this time to carry on operating as normal. Having a variety of funding sources, including capital markets and bank loans, ensures that companies can remain strong during temporarily difficult circumstances,” Thoeun added.

“Concerning investors, it is important for them to diversify their investments to be financially protected during various economic conditions. Most investment advisors recommend a mix of stocks, bonds, and cash in the form of savings accounts,” he pointed out.  


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