Sovereign Bonds’ Slow Take-Off Prompts MEF To Revise Up Coupon Rates, Yield

Despite the grand debut for the much-awaited government bonds, it did not grab investors’ attention due to low coupon rates and yield. But increased rates, perhaps close to that of US Treasury Bills, and the automatic trading on the securities market are likely to bring it up to speed again
Cambodian Securities Exchange (CSX) in Phnom Penh, October 26, 2022. Kiripost/Siv Channa
Cambodian Securities Exchange (CSX) in Phnom Penh, October 26, 2022. Kiripost/Siv Channa

Nearly 10 years since the talks on government bonds, Cambodia has finally witnessed the maiden issuance of 41,800 units in local currency with a one-year tenor and a 2.2 percent yield-to-maturity rate on Sept 7. Eight banks and microfinance institutions (MFIs) participated in the direct bidding via National Bank of Cambodia (NBC)’s platform.

Ideally, the government hopes to raise a total of $300 million with the issuance of one-, three-, and five-year bond tenors every four weeks, in several tranches.

The Ministry of Economy and Finance (MEF) said in August that the bonds would be split into two, with bonds holding one- and five-year tenors valued at 200 billion riel, and five-year tenor bonds worth 800 billion riel.

However, the 41.8 percent subscription rate for the first phase fell short of a planned issuance of 100,000 units and was sold at a discount (988,033 riel with a payment maturity of one million riel). The government recorded proceeds of around $10 million in the first phase.

Its second attempt to raise $50 million via bond units with a three-year tenor and coupon rate of 2.44 percent was deferred when all auction bids were rejected as it “did not fall in the range of predetermined coupon and max yield rates”.

“There’s a standard operating procedure in place including applied rates for decision making on whether to accept or reject the bidding,” MEF spokesman Meas Soksensan told Kiripost.

Ministry of Economy and Finance, October 26, 2022. Kiripost/Siv Channa
Ministry of Economy and Finance, October 26, 2022. Kiripost/Siv Channa

The plan for government bonds has been regularly discussed for some time to expand Cambodia’s domestic lending instruments, deepen its capital market and diversify its funding base including tax revenue.

Against this backdrop several challenges persist including a rising debt stock (estimated at $11.1 billion in 2022), limited fiscal space and the graduation of Cambodia from least developed country (LDC) status in a decade.

With the graduation, the likelihood of preferential trade schemes by the US and EU evaporating is imminent.

The haste for government bonds was apparent during the pandemic when socioeconomic intervention was needed to ease the burden of poor and vulnerable households. By July 2022, over $744 million had been disbursed to 2.7 million people as part of the government’s cash transfer programme, the Asian Development Bank said.

In addition, fiscal deficit is projected at 6.6 percent of gross domestic product (GDP) this year, which is likely to be funded by government deposit drawdowns and additional external borrowing, the World Bank stated in June.

The deposits have reduced to 17 percent of GDP in February 2022 compared to 22.5 percent in the corresponding period last year, indicating an urgency to prop up state coffers.

National financial pride

Calling the bond issuance a “landmark event on the nation’s journey from frontier to developed market”, Anthony Galliano, CEO of financial services firm Cambodian Investment Management Co Ltd, said he has been advocating the accelerated development of capital markets.

“[It] has been historically slow-paced with minimal attention. Having a benchmark sovereign bond issue will absolutely anchor the financial market’s progress,” he said.

He noted that the risk appetite in the emerging market debt is “surprisingly less adverse” than he thought. The yield at 2.2 percent is “decidedly low” for a first-time emerging market issuer and generally lower than regional neighbours.

“This is a testament to the market’s positive perception of Cambodia’s country risk,” Galliano said.

In comparison, larger economies such as Thailand’s two-year government bond yield stood at 1.78 percent while three-year bond yield for Indonesia was 6.93 percent, Philippines (6.33 percent) and Malaysia (four percent).

“The kingdom’s first sovereign issue with substantially lower yields than regional neighbours at a rate in the 2.2 percent range is a resounding success and should be a source of national financial pride."

“I am especially delighted that this is a major stepping stone to progressing the capital markets, especially hoping to see more corporate bond issuance, start-up capital for entrepreneurs, development of the funds management sector, and more initial public offering by large local corporates,” he said.

“Not attractive”

That being said, the yield with an issue price of 988,033 riel and payment maturity of one million riel is lower than the equivalent one-year US Treasury Bill yield of about 4.6 percent, as of Oct 24, according to the US Department of Treasury.

Cambodia Securities Exchange (CSX) market operations department director Kim Sophanita concurred, noting that the two percent coupon rate is “very low”.

“That is why it was not attractive enough to investors, the result [being its] under subscription,” she said, adding that the coupon rate does not reflect the current situation to cope with inflation rise.

Is it still attractive to institutional investors? “You would have to ask them,” said executive director Chakara Sisowath of Cambodia’s first credit rating agency Rating Agency of Cambodia Plc.

He felt that there might be other reasons than expected returns that Cambodian institutions buy the bonds. One of them being the need to hold KHR assets to match their KHR liabilities, as in the case for insurance companies, he cited.

“Given the scarcity of risk-free KHR investments [like, government bonds] these institutions might find these [bonds] suitable for their investment purposes in spite of the low yield,” Sisowath said.

In any case, Sophanita believed that the government has realised that the coupon rate is low and is revising it for the next issuance.

“Let’s say four percent as it is supposed to be at least equal if not higher than US treasury but lower than local bank interest rate,” she said.

In general, she explained, a longer-term bond has higher risk than a shorter-term bond, thus the longer-term bond would offer a higher coupon rate.

Sophanita stressed that the increase in coupon rate would not add on to the nation’s debt burden as the government could use the proceeds to finance projects or raise investments that could generate higher income and boost the economy, for instance providing financing to SME Bank or Agricultural and Rural Development banks.

When asked, MEF’s Soksensan confirmed that the government would increase the rates in line with market development and the risk level of the bonds.

“This is also accompanied by additional measures on the methodology, regulatory aspect and fast tracking of secondary market development,” he said.

Cannot default

In the second phase (in the near-term), CSX has been appointed as another issuing agent for the government, opening up the passage for more institutional investors to take part. This could see increased participation of banks, financial institutions, insurance companies, fund managers, securities firms and others permitted by the government in the direct access of CSX’s bidding platform.

In the absence of bond rating, Sophanita shared that the target investors of the sovereign bonds in the early stage are local investors.

Given that government bonds are risk-free assets compared to other credit asset classes in Cambodia, it should be rated triple A (AAA) by a local rating standard. Credit rating issuer Moody’s Investors Service Inc’s B2 rating on Cambodia, a non-investment grade rating, indicates that Cambodia is “highly speculative” and has a “high credit risk”.

With yield around the two percent range, Galliano pointed out a “dichotomy” between rating and yield.

For instance, he said, Cameroon and Rwanda have the same B2 rating by Moody’s with Cameroon’s three-year bond yield at 9.5 percent.

“B rating is considered speculative and subject to high credit risk, which a two percent yield is not reflective, therefore the market considers the credit risk on the Kingdom’s bonds to be much less,” Galliano added.

Sharing his views, Sisowath asserted that Moody’s rating is useful primarily for international investors with the USD as the benchmark currency.

“For local institutions investing in KHR, [the] international rating is less relevant than a local rating might be,” he said, adding that in principle, a sovereign that issues debt in its own currency would have a AAA local rating as it “cannot default”.

“It can always repay its local currency debt by raising taxes or printing money. In the specific case of this one-year KHR Cambodian government bond, I have no doubt that coupon and principal will be repaid,” he said.

Therefore, the rating would not be a “big issue” now, Sophanita added on. “But what would drive the success of the next government bond issuance is raising the coupon rate and yield and providing access to bondholders in the secondary market, which seems to be the expectation from the investors.”

The rules are being amended by CSX to allow the listing and automatic trading of the government bonds in the secondary market “very soon”, she said.