No Further Coupon Rate Hikes for One-year Bond Tenors

After the low take-up rate for Cambodia’s debut sovereign bonds, the government raised the one-year coupon rate to 2.2 percent from two percent, but no more, from the looks of it going forward
A person walks near the Ministry of Economy and Finance in Phnom Penh. Kiripost/Siv Channa
A person walks near the Ministry of Economy and Finance in Phnom Penh. Kiripost/Siv Channa

Despite a slow uptake for the last three sovereign bond auctions, the government has no plans to increase the coupon rate further than its initial hike after its debut in its upcoming sovereign bond issuance.

Meas Soksensan, spokesman for the Ministry of Economy and Finance, reasoned that sovereign bonds are not the “only source of funds” for the government.

This seems to indicate that the current coupon rate of 2.2 percent, raised from two percent – set for its maiden issuance –, was adequate to attract investors.

Since the debut of the fixed rate government securities last September with three tranches listed on Cambodia Securities Exchange (CSX), 72,100 bond units with one-year tenors have been auctioned via the National Bank of Cambodia’s (NBC) platform.

A back of the envelope calculation showed that proceeds from the bonds absorbed by local financial institutions, including banks and microfinance institutions, came up to around 72.02 billion riel (approximately $17.8 million).

Looking at the total so far, the government might have a long way to go to meet its $300 million target, as stipulated in the Financial Management Act 2022.

According to the Ministry, the bonds will be split into two, with bonds holding one- and five-year maturity valued at 200 billion riel, and five-year tenor bonds worth 800 billion riel.

This year, it expects to auction the remaining bonds valued at more than $200 million, though it would depend on the “market and market trends”, Soksensan said in a brief response to Kiripost, without elaborating. Details for the bonds’ tenor and yield this year are unknown.

Last year, one attempt by the government to raise $50 million by offering three-year maturity bond units with a coupon rate of 2.44 percent was cancelled as auction bids did not fall in the range of predetermined coupon and max yield rates.

Understandably, coupon rates for longer-term bonds are higher, owing to higher risks compared to shorter-term bonds, CSX market operations department director Kim Sophanita said last year.

She believed that the government was aware of the low coupon rate and would revise it in the following issuance to around four percent, to be “at least equal, if not higher than US Treasury, but lower than local bank interest rates”.

Strike a balance

Plans to issue sovereign bonds came into fruition after years of discussion, though the pandemic compelled the government to move faster as fiscal deficit widened in recent years, along with its public debt stock.

As the economy improved in 2022 with increased tax revenue, the deficit has narrowed, albeit large still, the World Bank said, noting it would be around 4.6 percent of gross domestic product (GDP) from above five percent in 2021.

In its December 2022 economic update, the World Bank said Cambodia’s fiscal deficit is likely to be “largely financed by external funds”, and the remainder funded by government deposit drawdowns.

CSX CEO Hong Sok Hour acknowledged the low demand among investors, given the relatively small take-up rate – 24,300 units in November and 6,000 units in December – compared to 41,800 units in September 2022. (The first tranche fell short of the target. Out of 100,000 auctioned, only 41,800 units were sold).

However, the second and third auctions were sold at the stated par value of one million riel compared to the first bid, which was sold at a 0.2 percent discount at 998,033 riel.

The auction is necessary because the government has set the coupon rate at two percent, Sok Hour said, adding that the market expects more than that, hence the discount.

“[But] step-by-step, the government has increased the coupon rate a little bit and investors were ready to accept it at face value. I call it a learning process or test between investors and the issuer, which is the government.

“So, there should be a balance between the government, which needs funds, and investors who want higher coupon rates,” he said.

‘Not a good year’

As a second issuing agent for government bonds after NBC, CSX would enable increased participation by institutional investors in the long run.

This could include insurance companies, fund managers, securities firms and others permitted by the government in the direct access of CSX’s bidding platform.

For now, efforts have been made by talking to potential investors and understanding their expectations although final decisions on investment is up to MEF, Sok Hour said.

With the likelihood for bond issuance, including corporate bonds, “not good” this year, it would be advisable to raise coupon rates to attract investors, something corporate bond issuers were already doing, he said.

Nevertheless, he expressed hope that 2023 is a “better year than 2022” for government bonds and CSX as a whole.

Asked about the next date for the auction, Sok Hour said normally the government holds auction bids every month, possibly starting in January, but it was up to MEF to set the timetable.