Despite some of the worst flooding in the country’s history, the Asian Development Bank forecast a robust GDP growth rate for Cambodia, hovering at about 6.5 percent for 2012 and edging up to 7 percent for 2013. The major factors underlying the prediction are strong exports and a buoyant tourism industry. But the hottest new development has been the commencement of stock trading on the Cambodia Stock Exchange.
Embracing capitalism
The first stock began trading on April 19 when state-owned enterprise Phnom Penh Water Supply Authority (PPWSA) floated its initial public offering (IPO). The Phnom Penh Post reported that the IPO was 17 times oversubscribed, and the stock jumped 48 percent to 9,300 riel ($2.33) with a volume of 879,426 shares on its debut, up from 6,300 riel in the IPO.
“[The commencement of share trading] is a very positive development,” says Marae Ciantar, partner at Allens Arthur Robinson. “It provides a stable regulatory framework for raising funds from the public, and that is the one activity that companies in Cambodia have not been able to do at this point. So that is really the key to having a stock market, letting you access a broader market, and raise funds.” Financing in Cambodia has generally been limited to private investment and/or financing from banks and issues with liquidity abound as the amount of money available to be lent within the country has been limited. The stock exchange is predicted to change that significantly.
The PPSWA generated an unprecedented amount of investor interest during its subscription phase. Brett Sciaroni, senior partner at Sciaroni & Associates, confirms that “the broker could not have anticipated the response that this IPO got from the public; it has gotten a tremendous response. You would not think that a water company would have that kind of play. But the prospectus is very professionally done, so this augurs well for the future of the stock market; it is a good start. We can anticipate the day that the private companies will also list.”
Set to follow are the IPOs of two other state-owned enterprises, Telecom Cambodia and Sihanoukville Autonomous Port. Private companies are standing by however, as Bun Youdy, managing partner at Bun & Associates, affirms that “there are a lot of good candidates in the private sector, such as banks and telecoms companies, that will wait to see how the listings go before making a decision.”
From a legal perspective, this bodes well for the marketplace. Besides working on the actual processes of the IPOs themselves, Bun adds that “we also expect there will be more work on due diligence and acquisitions.” Once the process gets underway, lawyers expect to see a significant amount of restructuring, auditing and accounting-related work, getting companies ready for public scrutiny.
Investor-friendly nation
Jean Loi, partner at VDB Loi, says: “The stock exchange will definitely draw foreign direct investment. This is a good step for the government, and they have provided a strong incentive for investors to come.”
Sciaroni agrees: “Absolutely. There are foreign investors that came here with the specific understanding that we will have the stock market up and running. So it has taken longer than anticipated (five years). But I give the government credit for not rushing; it is important to get it right than to get it done fast.”
Beating Cambodia to the punch was its neighbour Laos, which launched its stock exchange in January 2011 amid a high level of international interest. The first two state-owned companies to list on the stock exchange gathered a flurry of global attention, but were ultimately unsustainable and the financial infrastructure remains relatively undeveloped right now.
Sources remain confident, however, that a very different story is about to unfold in Cambodia. Sciaroni says: “We have a far more open, free market economy than most in Southeast Asia and the ease of do-ing business is better than in Vietnam, Laos, and other places. This will not mirror the Laotian stock market and Cambodia will have a robust stock market in a number of years. There is an insatiable demand for capital that is growing by leaps and bounds, and soon a lot of local companies will want to be listed.”
In comparison, Cambodia has a more diverse economy than Laos, which is generally mining-based. It also offers investors low listing requirements and fewer restrictions on foreign ownership. Bun affirms that “it’s difficult to predict but we can say that the Cambodian stock market has taken more time in preparation than Laos to launch. The delay has likely, however, given them more time to be better prepared. The government has looked at all the different angles seriously and has the advantage of observing what happened in Laos before launching.”
Leaving aside the stock exchange, legal practitioners affirm that conducting business in Cambodia is an efficient process. “It is an investor friendly environment compared to its neighbours,” affirms Ciantar. “The government is pro-investment and companies can proceed economically, not artificially.”
Sources also note that the amount of red tape is significantly less in Cambodia, and the government is flexible. “As part of this process, it is possible for investors to get access to very senior levels of government quickly. It does not take years and years,” continues Ciantar.
Minor hiccups, however, do remain. Corruption is an issue for international investors as well as certain gaps in the legal framework; certain industries such as telecom and oil lack overarching laws, draft laws are in place, but it remains to be seen when the government will solidify these. Additionally, undeveloped infrastructure is a sticky point. But the marketplace is aware of these issues, and is working towards resolving them. “From the business side, one of the rea-sons that Cambodia is not on the radar is because of the size of the market,” says Bun. “It is a country of 14 million, so it is very difficult for a certain type of industry to fully commit to Cambodia as a hub. But that problem is being solved. We are working on that because in 2015, you will be able to distribute a product throughout ASEAN without a tariff.”
Trends
Alongside the stock exchange, several other developments have affected the legal marketplace. One key event in this regard has been the issue of a new civil code, containing more than 1000 articles that cover a vast range of civil legal arrangements. Sciaroni reveals that “it is going to take lawyers a while to get on top of all of these provisions. Now we will have to assess the impact of the new civil code and what effect it has on structures and practices that have been previously established. There is definitely going to be a period of uncertainty while lawyers come to grips with those provisions.”
Banking and project finance transactions also remain plentiful, bringing in high amounts of foreign investment. This in turn, has had an effect on the local marketplace. Bun elaborates, saying: “Generally speaking, legal work has expanded because more investors have come into the country. But specifically, the quality of the investors haschanged, they are not speculators, they are serious. They pay attention to the quality of legal work and that has an impact on the local business culture as well. We have seen more Cambodian businesses trying to become familiarised with the requirements of foreign investors.”Sources predict this trend to only grow as more international money pours in.
While Cambodian companies are getting up-to-speed with international standards, local law firms are also keeping pace. Ciantar says: “There has been a rise in the number of well-established local law firms that are getting good roles and good client feedback from international investors and clients. This is a very positive development.”
Law firms in Cambodia are recognising the need to combine the best of international and local talent, and are regularly hiring expatriate lawyers, resulting in a broader pool of legal choices for clients. Ciantar continues: “There have certainly been rumours of some of the larger international firms setting up associations here as well.”
In terms of the overall marketplace, legal work chugs along steadily with “M&A activity and commercial work increasing,” says Loi, continuing that “another sector where we have seen a lot of activity is agricultural projects where the government provides concessions to investors. Property also remains hot with a steady stream of Chinese, Korean and Japanese investors.”
Competition he ats up
Headlines about Myanmar have run rampant over the last year as the country opens up for business. What will this mean for Cambodia? Local media sources have confidently proclaimed that their neighbour’s economic promise is no threat to Cambodia. Legal practitioners, however, have a more balanced view.
Bun says: “The Myanmar market size is very big compared to Cambodia and also close, geographically speaking, to China and India. It’s also rich in natural resources and has the heritage of a British colony. As soon as the country opens, investors will find opportunity there. So it depends on how fast they can organise their democracy and make economic progress. It will, however, take time for them to be fully liberal. So by that time, Cambodia will already have reached a different stage of development and the current key obstacles to foreign investments will be mostly solved.”
Ciantar elaborates: “In the short term, Myanmar is a very risky environment and going into a country at this stage, it can go really well or you can have real issues with projects because of the whole uncertainty of the political environment. In contrast, Cambodia is very economically and politically stable; it is a known environment. You have had the same ministers in key positions for years. Maybe in two or three years, the impact will be felt. But it is too early now.”
Overall, the Southeast Asian nation is sitting pretty in 2012 as its economy grows, the legal framework develops, and international investors continue to flock to it. The amount of positive indicators ensures that Cambodia will remain one to watch for in the foreseeable future.
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