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Low risk and national development: The benefits of government bonds

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Minister of Economy and Finance Dr Aun Pornmoniroth (centre) attends the CSX 10th anniversary celebration with its chairman HE Dr Hean Sahib (fourth right) and CEO HE Hong Sok Hour (right). Hong Menea

Low risk and national development: The benefits of government bonds

Cambodian investors are likely already familiar with “corporate bonds”, a type of debt securities already introduced into the Kingdom’s market.

However, another type of debt securities has only recently been initiated into the country’s securities market at the end of 2022 – “government bonds”.

So what are government bonds? What are the differences compared to corporate bonds? And why should investors look into this particular investment instrument?

What are government bonds?

Government bonds are a type of debt instrument whereby investors loan their money to the government in return for a regular fixed interest payment based on the coupon rate set by each bond.

Moreover, government bonds carry the legal responsibility of returning the bondholder’s principal amount at the conclusion of the maturity period.

Funds raised through this investment instrument will be used on various development projects that align with the Royal Government’s strategic plans.

Cambodian government bonds

Government bonds are currently issued by the Ministry of Economy and Finance, representing the Cambodian government, to develop the Kingdom’s financial sector and diversify sources of funding to support the country’s development needs.

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Government bonds are issued by the Ministry of Economy and Finance. Hong Menea

In 2022, the government approved the Government Bond Issuance Plan for the first year, with a total of 1.2 trillion riel, or US$300 million, with the first historical issuance taking place on September 9, 2022.

With the Government Bond Issuance occurring near the end of 2022, the Royal Government of Cambodia has managed to successfully organise three issuances, raising capital of approximately 72 billion riel, or $18 million.

In spite of the less than ideal result, the government has set out a Government Bond Issuance Plan for 2023 with a total target issuance of 813 billion riel, or $200 million.

Based on the experience of Government Bond issuance in 2022 and the introduction of new strategies this year, the government of Cambodia is optimistic that the new Government Bond Issuance Plan 2023 is achievable.

Primary market

The existing issuances of government bonds were completed through auctions that took place at the National Bank of Cambodia through the “National Bank of Cambodia Auction Platform” (NBCP).

However, the Cambodian government plans to increase the issuance of government bonds in the primary market this year through private placements and auctions using the “Government Securities Auction Platform” (GSAP).

GSAP is a soon-to-be-launched platform developed by the Cambodia Securities Exchange (CSX) in addition to the NBCP, with both auction platforms putting emphasis on different maturity periods.

Both government bond auction platforms allow various potential investors to enter the market directly, including commercial banks and microfinance institutions, securities firms, insurance companies, the National Social Security Fund, fund managers and custodians, as well as other investors and institutions in accordance with the government’s issuance plan.

Secondary market

With the secondary market for the trading of government bonds still in development, securities listed on the CSX are yet to be offered for trading. However, the secondary mar-ket is set to launch this year.

Advantages

There are a number of benefits for investing in government bonds, including:

Low risk

Government bonds are known to have the lowest risk – almost zero – strictly because they are backed by a country’s government.

It is therefore highly unlikely for interest payments and principal repayments to be defaulted on with government bonds.

A functioning government will always have adequate funds to meet payment promises to compensate bondholders with interest and principal payback.

However, it should be noted that, due to the lower risk, it also means a lower rate of return compared to corporate bonds.

Steady returns

Akin to bank investment, government bonds allow investors to earn steady returns based on regular interest payments.

All government bonds come with a coupon rate providing periodic interest amounts at regular intervals to bondholders.

Portfolio diversification

Government bonds enable investors to spread their investment assets and reduce reliance on a single class of asset.

With government bonds generally a secure investment, they serve as a kind of backup allowing investors to allocate a remainder of their savings on securities and assets with higher risk to balance their portfolio.

This is especially useful for financial institutions such as insurance companies and banks for lowering the risk of negative returns and bankruptcy.

National development

As the key word “government” makes clear, this particular instrument plays a major role in the development of the nation. The creation of a government bond market brings the following national benefits:

Government funding

Capital raised from the issuance of government bonds will be used to directly fund Cambodian government development projects and public services, and serve as a stimulus for the growth of the national economy.

Each government bond has a clearly defined objective, such as for economic development or improvements to social infrastructure.

As a result, the people of Cambodia may show their interest and participate directly with the kind of development they wish to see in the foreseeable future.

Monetary policy

Government bonds act as a key tool for the implementation of monetary policy in Cambodia. For instance, the central bank can purchase government bonds to increase the supply of money in the economy and lower interest rates.

Conversely, government bonds can also be sold back by the central bank to reduce the amount of money in circulation and increase interest rates.

This economic instrument along with other monetary policy will play an important role in governing Cambodia’s overall GDP growth, money supply, interest rates and inflation, as well as with price stability across the country.

Benchmarks

A benchmark bond is a standard measure of a bond’s risk and return against which other bonds are benchmarked.

Government bonds are used across the globe almost always as benchmark bonds due to their high rating and liquidity.

This means the success of the bond market in each country is reflected in its government bond listings. The development of this new product helps complement the infrastructure of the Cambodian financial market, ensuring it is more complete and comprehensive.

Government bonds are regarded as one of the safest financial instruments on the market as they allow investors to offset losses in other asset classes through regular interest payments.

Being backed by the government, this kind of instrument provides guaranteed interest and repayments of principal, and can be used as an effective complement to a base portfolio. In Cambodia’s case, investors also directly contribute to the government’s development plans.

Prepared by: Cambodia Securities Exchange (CSX), Market Operations Department.
Email: [email protected].
Tel: 023 95 88 88 / 023 95 88 85.

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