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Inaugural $300M Cambodia sovereign bond ‘a step in the right direction’ says UNDP

Harrison White

The UN Development Programme in Cambodia has welcomed the announcement of $300 million in Cambodia sovereign bond after it was announced in the recent Draft Law on Financial Management for 2022.

The Law on Government Securities was signed into law by King Norodom Sihamoni on Dec 31, 2020, after the legislation was passed by the country’s Senate.

The law allows the government to issue bonds in Cambodian and foreign currency locally or abroad to finance development needs.

Alissar Chaker, UNDP Resident Representative told Cambodia Investment Review that the development organization has been assisting the Royal Cambodia Government on the issue of a feasibility study on bond issuance in Khmer Riels that will be ready soon.

She added, the UNDP believes that the initial issuance of $300 million is about the right size as the government can use this to test the demand in the market.

Cambodia is forecast to graduate from its Least Developed Country (LDC) status in either 2027 or 2028, according to a report published by the UNDP.

In response, the international development organization has recommended an expansion of domestic lending instruments detailing specifically a sovereign bond issuance in Khmer riels.

“It is a good step in the right direction to help Cambodia achieve its graduation ambitions,” Chaker said.

“Once Cambodia completes graduation from the LDC status, grants, concessional loans, and trade benefits will fade out gradually. Therefore, it is important for Cambodia to start diversifying its sources of financing,” she added.

Increasing domestic lending capability is now needed as Cambodia’s foreign-owned debt-to-gross domestic product ratio is expected at 34% this year as Ministry of Economy and Finance’s Aun Pornmoniroth announced outstanding external debt will rise to over $10 billion.

The IMF has previously said Cambodia can borrow 40% of its GDP before becoming a risk.

Cambodia’s outstanding external debt reached more than $9.18 billion in the first half of 2021 and is expected to reach more than $10 billion this year, an increase from $8.8 billion at the end of 2020.

Cambodia sovereign bond potential for greater investment in social protection schemes

In terms of the potential use of the resources, as indicated by the government, the bond will support the implementation of public investment projects in key sectors such as energy, irrigation, and physical infrastructure.

The UNDP has highlighted the bonds can also support other relevant social investments, such as the expansion of the social protection system beyond social assistance.

Providing economic and social safeguards built into the Kingdoms investment portfolio to ensure more inclusive, greener, and resilient risk-informed development, they added.

Since the COVID 19 pandemic Cambodia has been forced to establish more social security initiatives such as the ID poor certifications which allow for a cash handout with the money being transferred to Wing agents throughout the country.

As of September, the government has spent approximately $432 million on the cash relief program for people who have been hit hard by the pandemic since the program was launched in June 2020.

In addition, the UNDP believes the issuance of local currency government bonds will provide a benchmark risk-free rate of return on investment that can be utilized by investors to evaluate their investment plans and asset allocations.

As well as severing for constructing a yield curve that describes the behavior of bond interest rates and defines long-term interest rates for private borrowing.

“Households and enterprises will have a reference of how much they are paying for their credits that would allow them to make informed decisions on the terms of their credits. Furthermore, it will help Cambodia to strengthen its monetary policy and move away from dollarization,” Chaker said.

Cambodia sovereign bond must meet the fair market value

Investors however have cautioned that any sovereign bonds issued must come with fair market terms or come under a guarantee facility such as the Asian Development Bank Credit Guarantee and Investment Facility.

Potential investors outlined their interest in the long-term debt instrument with the proviso that the government would need to set fair market rates for the bonds.

Life insurance companies would be most likely to purchase government bonds and have outlined the sector’s interest in long-term bonds as the maturities of life policies are also long-term (around 15 years).

In terms of fair market value for sovereign bonds on the local Cambodian market international companies are continuously investing in bonds on international capital markets, also in lower-rated bonds.

For comparison, the Telcotech bond (CSX:TCT26A) this year fully subscribed its KHR 80 billion ($20 million) qualified investor bond in off-market sales. Qualified investors refer to institutional investors or high net worth investors.

The corporate bond has an annual coupon rate of 4.5% to be paid out over five years will be settled in US dollars and fully insured by the Credit Guarantee and Investment Facility.

Seven companies have now listed commercial bonds on the Cambodia Securities Exchange since its establishment in 2012 offering from between 4.5% to 8.5% annual coupons to both local and international investors.

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