Stock Exchange in Cambodia: Is Cambodia Ready for Stock Market?

For the last several years, the economy of Cambodia has undergone quite an improvement, with Cambodia’s GDP currently standing at $ 11.2 billion in 2008, according to Bureau of East Asian and Pacific Affairs of the U.S. Department of States (May 2009). This figure may seem so superficial if compared to ones of developed countries with huge economy such as the US with the 2005 GDP of ($ 12 trillion) (Watts, n.d.); however, if examining Cambodia’s economy some years ago (for example, in 2005 Cambodia’s economy was sized only $ 6.2 billion in GDP) (Chandler & Rooney, n.d.), it has been definitely an impressive progress. But with this, one might ask how healthy this economy is; is economy with GDP currently at $ 11.2 billion enough for the country with the population (2008 census) of 13.4 million (Chandler & Rooney, n.d.) and the geographical size of 181,035 km­². Is it strong enough to take up other type of economical institutions that have played significant parts in most developed and some developing economies, such as the stock market?

            With regards to the recent attempt of the Cambodian government to introduce and set up stock market in this country, this paper will mainly look at various aspects of the Cambodian’s current situations, both encouraging and discouraging for the establishment and existence of a stock market. This will be done through the analysis of opinions and evidences raised by various groups of people, from independent economists to government officials. This paper will also give the records of some of the ideas expressed by a few of the public regarding their general perception about the stock markets and its introduction into Cambodia. Basically, this paper is designed to test if Cambodia is ready for stock market.

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Stock Market in Cambodia

Cambodia may be small in terms of its newly-born economy but in terms of ambition, it is rather big. With countries sharing the same continent surging ahead in Asian markets, Cambodia is “rushing to join the crowd,” according to an article, published in the BusinessWeek, by Susan Postlewaite, an international business writer based in Phnom Penh (Postelwaite, 2007). According to the same writer, “the country has been moving full speed ahead since September 6, when it announced an agreement with the Korea Exchange to launch a Cambodian stock exchange by 2009—and a handful of the country’s biggest corporate players are lining up to get in first.”

            The project of a stock market in Cambodia was initiated in 2005 (Ros & Gouanvic, 2008), but it was in late 2006, when the Korea Exchange (KRX), which runs South Korea’s stock market and assisted Vietnam to develop Vietnam’s financial markets, signed and sent a memorandum of understanding (MOU) to the government of Cambodia to set up a jointed venture to manage and develop the stock market, as reported by The Cambodian Press Review (VietNamNet/Xinhuanet, 2006). As expressed in the same source, with this MOU signed, the government, according to Mr. Chea Penh Chheang, Secretary of State at the Ministry of Finance, started working on a draft law on the stock market, which would come into effect in 2007, and the stock market was planned to be opened in 2009. Following this, in September 2007, the Cambodian government announced a stock market project, after which the Cambodian Securities and Stock Exchange Law was adopted and a Securities Commission of Cambodia created (The Mirror, 2009). These conditions were favourable for the creation of the stock exchange, which would issue shares and take action against whatever companies violating the law (2009).

            “The Cambodian government [would] own a minimum 51 percent in the new bourse while KRX [would] hold as much as 49 percent” (Rhee, 2008, Jan 22).

Preparations for the coming of the stock market:

To make well-prepared for the coming of stock markets into Cambodia, the Cambodian government, with funds and technical support from South Korea, has performed series of steps, one of which was that, because in order for companies/enterprises to be listed they must meet specific requirements, the government began to put into force a law demanding firms to undergo financial audits (The Associated Press, 2007). In this initial stage, as Ngy Tayi, an undersecretary of state for Cambodia’s Ministry of Finance, was quoted, about 400 enterprises were obliged to submit their financial reports to independent auditors by December 2007 (2007, August). With regard to the same article, companies subject to auditing need to meet at least two of three criteria—“having annual turnover of three billion riel (US $ 731,700), total assets of two billion riel (US $ 487,800) and 100 employees”—according to a regulation issued by the Finance Ministry.

Besides, Cambodia has also been prepared materially. With $ 1.8 million promised by South Korea in 2007 to pay on trainings and helping set up the modern stock market in Cambodia (Rhee, 2008, Jan 22), the building set has been architecturally designed to host Cambodia securities market. Plus, computing and other general equipment has already been purchased. Moreover, other than material resources, the Cambodian government has, too, taken care of human resources to make the scheme possible. The Securities and Exchange Commission of Cambodia (SECC) is in operation, with a contact with the Ministry of Justice having been established (Ros & Gouanvic, 2008). The minister told, “The training of ‘employees and future collaborators, both coming from the public and private sectors’ is being carried out” (2008, Oct.).

Who would be participating?

As indicated by Huot Pum, Deputy Director General of the Securities and Exchange Commission of Cambodia (SECC), companies that could participate could be either foreign or Cambodian, and the local companies would be comprised of banks and big groups such as Sokimex; for foreign enterprises, ones from Korea, Thailand and Vietnam have shown their interests (Ros & Gouanvic, 2008).

            Furthermore, according to an article in China View, as said by KRX manager Inpyo Lee, the main source of liquidity in the early stages of the stock market would be institutional investors and foreigners. And during these early stages, before the exchange was “operating ‘normally,’” there would be 30 companies listed.

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Is Cambodia ready to handle stock market?

“The financial crisis, which set off in the United States and is still shaking countries all over the world, did not spare a single Asian stock market. But Cambodia, right in the middle of this financial crisis situation, is about to launch its own stock exchange, and plans it for 2009” (Ros & Gouanvic, 2008). 

This is definitely controversial. In fact, the initiatives of bringing a stock market into Cambodia have not always been well received; many have shown their negative opinions. Economists, one of whom is Kang Chandararoth, expressed their concern about the future of the newly-created exchange if it happens to fail winning the trust of the public and the institutions” (Ros & Gouanvic, 2008). However, a lot of good words, uttered with optimism, were also heard. The authorities and the Securities and Exchange Commission of Cambodia (SECC) both held a much more positive perspective, perceiving it as “the right moment to create a new financial market which, so they hope, will play a leading part in the kingdom's economy” (2008). 

Hence, it is only fair that we take time considering arguments from both sides.

Points against the introduction of the stock market into Cambodia:

There may be a boom in Cambodia’s economy for the past several years, but this progress is still largely dependent on massive amount of funds “pumped into the country each year in the form of international aid…”  This economic growth that Cambodia has been enjoying, however, seems to take a decreasing trend. Also, “the International Monetary Fund (IMF) said that Cambodia's economy will come under intense pressure in 2009 as tourism, garments and construction take a hit from the global economic meltdown” (Xinhua, 2009).

Sam Rainsy, the leader of the Cambodia opposition party, who used to be a former finance minister himself, is strongly against the government’s ambition to set up the stock market (ABC Radio Australia, 2007). One point to support this standpoint of his is the prevailing state of corruption in Cambodian societies (Cambodia was ranked number 162 out of 180 most corrupt countries by the Transparency International (Postlewaite, 2007)); Cambodia still has yet to adopt the anti-corruption law —a factor that can present hazards to investors. He claimed, “As long as we don’t ensure the rule of law, as long as we don’t really fight against corruption, any stock exchange in Cambodia will not function properly.” He also expressed his concern that the corrupted, with the authority they have, would “manipulate the market” and unfairly capitalize on the stock market and make money at the expenses made by “the poor, innocent investors,” with reference to the same source. On this point, the Director of the Cambodia Institute of Development Studies, Kang Chandararath, agreed that corruption would lead to various misconducts, such as “hiding facts in financial reports about capital, losses, and profits” (The Mirror, 2009), which is an obvious disadvantage to the investors.

With such issues as corruption and bribery, attaining trust from the general public is made even more difficult. Kang Chandararoth asserted, “Before taking any action, we must gradually inspire confidence among the public. Then, and only then, we will be able to create the stock market. The contrary would be wrong: creating the market and then gaining people’s trust….” (Ros & Gouanvic, 2008). Gaining trust can only be done slowly, little by little, leaving very little hope that the stock market can be launched as planned in 2009. On the other hand, rushing into establishing an exchange prematurely would result in the risk of losing investors’ confidence, he said.

Besides, convincing companies is no easy task either. Earlier in the process, based on the studies carried out by the Securities and Exchange Commission of Cambodia (SECC), many companies seemed to show interest and would like to take part in this; however, after they having been informed of the “strict regulations” to be applied, those who had claimed to be listed on the market, seemed “to retract” (Ros & Gouanvic, 2008). Also, reluctance of companies to participate in the market can also be related to the current crisis of the world’s economy.

Another potential problem that the stock market in Cambodia would face can be attributed to the current attitude of investors these days. Indeed, at present, during one of the worst global crises in the history, which has turned quite a number of companies and businesses around the world into bankruptcy, “many owners of shares sold their shares in order to recoup [as much as is left of their] original capital, and many other potential customers give up their intentions to invest in the stock market” (The Mirror). This points out the possibility of few people interested in investing their money in the Cambodian stock market.

Furthermore, lack of experts and competences to handle stock exchange-related work and insufficiency of “complex technical basis to meet operations of a stock market” is another hurdle, as coined by Soum Chanthy, an advisory of the National Accounting Council and Finance professor of the Royal University of Laws and Economics (The Mirror, 2009). There is no “a firm legal system and courts with high capabilities to quickly and justly solve issues related to doing businesses in a stock market.”

Points for the introduction of the stock market into Cambodia:

It can be argued that Cambodia is no longer a politically unstable country; there is no more war, sectors such as tourism are doing outstandingly well in boosting the country’s economy with Cambodia’s temples, beaches, and numerous sites of natural attractions, plus a “potential multibillion-dollar oil project under exploration off its south coast” (Postlewaite, 2007). And according to the International Monetary Fund, there has been a constant growth in the economy of Cambodia, as well as in the finance sector, and new banks were set up one after the others in Cambodia, with approximately 40 percent in increase of bank loans and deposits. Even though ones might stress the fact that this nation still has many problems, Cambodia’s GDP growth rate hit 10.8 % in 2006 on top of 13.3 % the year before, and despite the global financial downturn, stayed at 10.2% and 6.8 % in 2007 and 2008, respectively, based on the data issued by the Cambodia’s Ministry of Economy and Finance. This improvement can somehow justify Cambodia’s ambition to establish her own stock exchange.

Besides, Cambodia is not doing this alone with her infant experience; the South Korean government and the organization Korea Exchange, whose stock market achieve a world-top10 place of stock and securities markets (Ros & Gouanvic, 2008), have given full support, both in terms of funds and technical support. For one thing, people would be made ready for the coming of the stock exchange. Plans were under way to send future staff to Seoul for trainings, to organize workshops for privates companies that might list, and to offer investment seminars to Cambodians (Postlewaite, 2007). In-Pyo Lee, the Korea Exchange project director, having been working since July 2007 in the Ministry of Economy and Finance Cambodia, was quoted as saying, “I am sure they will be ready” (2007).

One may use the fact of the non-existence of a Court of Commerce in Cambodia and the lack of knowledge and competences in the current world economic crisis to argue against the establishment of stock market in Cambodia. In response to the former, Huot Pum, Deputy Director General of the Securities and Exchange Commission of Cambodia (SECC) and in charge of the establishment of the stock market, although admitting that no decision has been settled yet about this matter, was quoted as saying, “But even though it does not exist yet, and authority or a commission could organize and gather the required abilities and thus try the settle the conflicts” (Ros & Gouanvi, 2008). Additionally, with regards to the issue of not having competences in the current crisis situation, Huot Pum also expressed his opinion by comparing Cambodia to developed nations that are badly affected by the crisis, “imitat[ing] that Cambodia was no less ready for the crisis than developed countries were: ‘Developed countries are also faced with problems and their political decision-makers are trying to find solutions to them. In the event of a crisis, measures can always be taken…. Saying that we will be spared by all the financial crises would be wrong. Once the stock market will be created, we too will be faced with such problems. We therefore have to organize things step by step in order to avoid such a situation, and when it does happen, we must be able to lessen its impact and limit the effects on the economy of Cambodia’” (2008).
            With all these affirmative beliefs held by the government, it is not suggesting that the government of Cambodia did not reflect upon and thus ignored potential problems. According to Keat Chhon, the Cambodian Minister of Economy and Finance, the government did oversee the negative impacts that the “current amplified frailty of the financial environment” that the world is confronting might bring about, but it also did not want to abandon its original objective to launch a stock exchange in Cambodia in 2009. Consequently, balancing the two factors, the government needed to be “twice as cautious” (Postlewaite, 2007). “Cambodia’s stock market will not be delayed because of the world financial crisis and will be brought forward as planned: little by little, starting with the laying of solid bases. Cambodia must be very careful in the process of establishing its securities market, and must continue to set up the necessary infrastructures. What we are doing right now is meant to last long,” His Excellency was quoted as saying in the Conference on Initial Public Offering and Securities Exchange Establishment, taking place in Phnom Penh on October 16-17, 2007 (2007).

There may be still many factors in Cambodia that remain fairly discouraging for the existence of the stock market, but this situation is easily comparable to one of Vietnam about a decade ago, when a stock market was launched in Vietnam. Things were difficult for the first several years, when only 5 to 10 companies listing shares, but the market then “doubled” in the past years (Postlewaite, 2007). The stock markets in Cambodia can take similar path. 

Have things gone well according to plans of the government?

Unfortunately, no. Despite all the optimism and careful preparations, Cambodia’s ambition to launch a stock market in the middle of global financial crisis did not really pay off. On January 12, 2009, it was published in The Phnom Penh Post, one of English-language daily newspapers, that “Cambodia’s much-touted stock exchange market has been delayed indefinitely due to the worsening global economic slowdown”.

            Indeed, “Cambodia has been affected by the global financial crisis especially in terms of real estate and garment exports. Therefore, the plan to open our own stock market has been postponed, and no specific schedule is set for it,” as quoted being said by Mey Vann, Director of the Department of Finance Industry of the Ministry of Finance and Economy. He attributed the problems to impact of the financial crisis, making it necessary that Cambodia give more focus to developing and strengthening her economy rather than trying to push the establishment of the stock market without “a solid foundation” (Beijing Time, 2009).

Voices of the public:

A big part of this paper has been devoted to describing what the government agencies and those who would directly involved with the activities of the stock market once it’s established. Now let us hear what the public has to say.

- Mr. Him Sophal, a second year student majoring in Finance and Banking at the Royal University of Laws and Economics:

Sophal thinks the presence of the stock market in Cambodia is very important for the country’s economy. He said, “The important thing is that foreign investors can finance for their capital by issuing bonds or stocks. Bonds are issued to receive loans from citizen—bond holders. And stocks are issued to get capital from share holders. However, both bonds and stocks are issued in order to collect cash as a capital for their plans. […] Thus with small amount of money, all foreign and domestic investors can still operate their businesses. Then, the number of investments is increased. This will, as a result, pleasantly contribute to our country’s economy; for example, unemployment will be decreased.”

But does Sophal think this plan of the stock market established in Cambodia will be successful? Yes, he does. “According to an economy minister, the plan of establishing a stock market will be done with a Korean company’s cooperation by December 2009, although the initial plan to launch it in January 2009 was halted by the economic crisis,” he was positive to say.

            As just a university student himself, how much does he care about its existence in Cambodia? In response to this question, he raised his concerns about the Cambodia’s auditing system. “Auditing plays an important role if a financial statement of a company is to be reliable,” he said. “I care because in the future, if I buy 100 of 50-dollar shares, I will get dividend at fiscal date. And how much is the dividend is completely dependent on the income statement, one of financial statements.”

- Ms. Long Tavy, having received a bachelor’s degree in Finance from Arizona State University and currently working on her MBA at Thunderbird School of Global Management:

Being asked about the prospect/future of the stock market in Cambodia, a lot of questions seemed to suddenly appear in Tavy’s mind. Her immediate questions are as: “Is Cambodia ready for this? Are the physical structures in place? Are the institutions (government, financial intermediaries, administration, etc..) set up? Are the companies ready for IPOs? Who are the investors? Do these investors, administration and government understand about investing? Are there strict laws protecting the rights of the investors?”

With these doubts in mind, she is firm that there is “a good indication that Cambodia is not entirely ready.” She asserted, “The near future may not be too bright (as with anything new), but it should improve with time when current issues get ironed out.” Despite her doubts and worries, she still expressed her optimism, seeing this first step as a sign of progress.

Her realization and understanding of the advantages the presence of a stock market in Cambodia apparently gives rise to this optimism of hers.”[The stock market] is important because it provides access to capital.  When an investor looks at a country with a stock exchange, they may think, "ah, there is access to capital...I can finance my business."  The other thing about having the exchange is that it allows potential investors to re-evaluate Cambodian companies in terms of transparency and corruption. Since these companies require audited financial statements, registrations, and surveillance before getting listed, they somewhat put investors at ease (at least at first glance),” Tavy explained.

However, when asked if in her opinion the stock market would be successful, some uncertainty seemed apparent in her utterance, “In the long, long-term when all the administrative and logistic (non-systematic, financially driven) issues are ironed out it may be successful, but in the short-term, many issues still need to be addressed.

Tavy asserted, “[Its existence in Cambodia] is critical to the economic development of a country. Key factors that attract foreign direct investments include educated labor force, efficient government (no corruption), infrastructure (Cambodia is still lacking) and access to capital. If Cambodia wants to compete on the global stage with Vietnam and Thailand, development of infrastructure and sound financial institution/system is critical.

How about her thoughts about how involved in the stock market Cambodians will be in future? In response to this question, “Ideally, there should be mutual benefits between all parties in a joint venture (whether it be between a foreign firm and a local firm, a foreign firm and a government, etc...).  I am assuming one of the benefits to the Khmer government […] is the transfer of knowledge and technology, which is equal to development.  I am not sure how many Khmers are involved, but even if there are currently more Koreans, the knowledge transfer will take place with time...and before you know it...it might be all Khmer owned...Again I am being optimistic.”

Conclusion

Introduction of this powerful tool of the globalized economy is no easy task; it has come with all the controversies. The government has been firmed in their position with the excitement of the fruitful results the stock market would bring to Cambodia; however, there are many other people that see it differently, fearing that regarding the uninviting conditions having embedded in this country, this step may be too big for Cambodia to take, which would bring more harms than advantages. After all, although it is an all-agreed proposition that the stock market is good for Cambodia’s economy, according to the progress made so far with the plans of the government and all the arguments raised by the proponents of those plans, the right time to set up the stock market in Cambodia is not now; this country is simply not ready for it yet.

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