The Asian Development Bank’s Indochina Bond Barrage
While Cambodia and Myanmar, despite logging high-single digit GDP growth, have been off mainstream investor radar screens as they face possible US and EU human rights sanctions, the Asia Development Bank issued bond market guides charting potential allocation paths to join the rest of the region’s $10 trillion local currency volume. The studies were conducted under the auspices of the Asean+3 (China, Japan and Korea) Bond Forum, and update their 2012 series with the intent of mobilizing an estimated $1.7 trillion in annual infrastructure funding. Japan’s Nomura Research Institute worked with government-regulatory officials and banks, brokers and stock exchanges in the two countries as they position for near-term launch and takeoff that could follow Vietnam’s more advanced development charted quarterly in the ADB’s on-line tracking service.
Cambodia’s Financial Sector Development Strategy through 2020 envisions government bond issuance, and an interbank money market already trades negotiable certificates of deposit. In 2017 the securities commission finalized rules for corporate bond “qualified buyer” professional institution eligibility, although payment is still physically by check as opposed to electronically in the real-time international standard. The central bank is to take the lead with regular open market operations through designated primary dealers, according to provisions agreed last June. Equity and fixed-income tax incentives were introduced in 2015 which slash the company profit levy 50% and reduce investor withholding over three years. Early this year official decrees are due for credit rating agencies, corporate placement application and disclosure and bondholder representation.
The securities regulator is independent but answers to the Economy and Finance Minister as Chair, who is mainly responsible for the current draft government bond guidelines. The Ministry will finalize primary sales procedures, while secondary trading is overseen by the supervisory authority and stock exchange, which lists five companies. Non-resident firms cannot yet offer debt, although both dollar and rial-denomination will be allowed in the 2018-2020 trial period. Foreign investors get the same withholding tax rebate as domestic counterparts, but currency controls may limit fund repatriation. Documents are published in both Khmer and English, and the future framework assumes overseas wealthy individual bond market participation. A trust law is under preparation to bolster investor protection, and debt securities will be subject to a stock exchange entry fee at 0.1% of the total amount.
The ADB recommends creation of a yield curve, and a capacity building program to spread specialist and public knowledge, with bond market inauguration. Corporate governance from audited statements to management reporting is still lacking, and accounting and custody should convert to international standards. The planned 2019 timetable for pilot government activity will release “pent-up” local demand among insurance and pension funds in particular. A new asset class will be created, which could appeal also to Korean investors with its joint venture stake in the Cambodian stock exchange.
Myanmar is further along on bond market development with technical advice from Japan’s Daiwa Institute of Research, with the government floating bonds since the early 1990s and recently selling 2-5 year Treasuries under competitive auctions. The Myanmar Economic Bank and Stock Exchange are the authorized dealers, with the central bank previously handling direct financial institution transactions. The original government securities act dates back to 1920 under English law, with a more modern code passed in 2013 with powers split between the monetary and exchange supervisory bodies. Corporate bonds are not yet available, and non-residents will not be able to issue under the proposed template. The Finance Ministry has a debt management unit, and in line with International Monetary Fund preference Treasury bills and bonds are equally divided in the total, although without existing benchmarks.
The 3-month interest rate was between 7-9% the past fiscal year, and the 5-year yield was 9.5%, and private enterprises and individuals are big buyers. Default will be covered under the new Companies Law, and credit rating and corporate governance systems are in formation. Repos are used and borrowing and lending may soon be approved to avoid settlement failure. Taxation “lacks clarity” and foreign investors await specific local debt and equity access parameters. The guide predicts “much change,” including municipal bond creation, over the next 1-2 years, with the caveat that sound fiduciary practice may still not apply outside this confined sphere.
