Cambodia Eyes Stock Market for Capital

Sunday November 18, 2:58 pm ET
By Ker Munthit, Associated Press Writer

Cambodia Plans Stock Market for Cash-Strapped Economy, but Will Companies Open Their Books?

PHNOM PENH, Cambodia (AP) -- Until recently, the buzzwords of hope for lifting Cambodia out of dire poverty were "offshore oil."

Now come new ones -- "securities market" -- that the government hopes will draw international capital to this tiny country and help it expand the economic base beyond the clothing industry, which has been Cambodia's main moneymaker so far.

Last month, senators passed a law on the issuance and trading of stocks and bonds in the latest move to prepare the country for establishing its first stock market by 2009.

Finance Minister Keat Chhon says the country needs a stock market to diversify the way businesses raise money. So far, beyond international aid for development projects, most financing has come from banks.

But he acknowledged that it will take some time for Cambodian entrepreneurs and the public to accept the idea of a stock market -- particularly the requirement that all companies' bookkeeping would be open to scrutiny.

"It is like entering exams with a strict standard. Some firms could be reluctant to be part of it," Keat Chhon said.

Companies will not be allowed to sell shares if their accounting is not certified by independent auditors, he said.

Neighboring Vietnam started its stock market in July 2000, and it has been a big success, both for companies and investors.

"There's always complaints made that capital is hard to get in Cambodia," said Bretton Sciaroni, an American lawyer running a law firm in the capital, Phnom Penh. "The banks are very liquid but it's all short-term money that the banks have, and it makes it difficult for long-term projects."

For investors, the country's junk-level credit ratings suggest it is a risky bet because of its weak oversight and rampant corruption.

The economy, while growing at more than 11 percent annually during the past three years, is small and largely driven by just one industry, textiles, which accounts for nearly 80 percent of exports. The other key industries are tourism, construction and agriculture, and telecommunications is a promising area.

"The very weak state of governance -- in terms of overall effectiveness of government operations, regulatory quality and rule of law -- adversely affect Cambodia's credit fundamentals," Thomas Byrne, a vice president of Moody's Investors Service, said in a statement in May.

Until Cambodia is able to broaden its economic base, "it will remain vulnerable to domestic and external shocks," he said.

Moody's gives the country's government bonds a credit rating of "B," five rungs below investment grade. Standard & Poor's put Cambodia at "B+," four levels below investment grade.

U.S. energy giant Chevron Corp.'s discovery of offshore oil in the Cambodian seabed last year has triggered hope that the country could benefit from that income. But it is not clear yet if the oil will be commercially viable or when it can be tapped.

Cambodia needs to move beyond relying only on international aid and banks loans, Prime Minister Hun Sen said in early September at the launching of the stock exchange plan.

Those two sources are "still not sufficient to fulfill enormous capital demand of the Cambodian capital-hungry economy," he said, adding that banks loans last year totaled about $500 million.

The creation of a stock market would likely boost foreign direct investment, which last year totaled just $483 million, compared with $2.3 billion and $9.7 billion in neighboring Vietnam and Thailand respectively, according to the U.N.'s World Investment Report 2007.

Local business executives appear to be positive -- and perhaps somewhat cautious -- about setting up a local bourse.

"Having a stock exchange is a good idea. Companies and the public can benefit by taking part in it," said Kith Meng, president of Royal Group, which includes Mobitel, the country's biggest mobile phone service provider. "But I will have to see first."

To be listed on the exchange, companies will be required to submit their balance sheets for auditing and stamping by certified professional accountants, government officials say.

In Channy, the CEO of Acleda Bank PLC, a leading commercial bank in the country, says his company has already been making its financial reports public on its Web site for some time.

That's "our bank's obligation to let our partners and clients know about our situation," he said. "We have no fear to participate in a stock market."

Last month, the government began requiring some 400 enterprises to submit their financial statements to independent auditors by December -- one of a series of steps the government says is necessary for a successful opening of a stock market.

To develop an exchange, Cambodia has turned for aid to South Korea, which has provided $1.8 million to set up an exchange and train personnel.

But Sam Rainsy, the country's former finance minister and main opposition leader, warns that most Cambodian companies have questionable business practices.

"There are few companies that meet international standards. But the rest are rather dubious if not controversial companies, which are here doing business not in a transparent manner but rather (through) friends and cronies of political establishment," he said.

"I am afraid that many potential stock holders will be cheated by stock manipulation" such as insider trading, said Sam Rainsy, the president of Sam Rainsy Party. "Big risk. They will be victims of manipulation."