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Kingdom unfazed by Fed rate hike

A bank employee counts out money for a client load earlier this year at a Phnom Penh branch.
A bank employee counts out money for a client load earlier this year at a Phnom Penh branch. Heng Chivoan

Kingdom unfazed by Fed rate hike

A day after the US Federal Reserve increased interest rates, which can potentially impact incoming investments and make debt more costly, experts say the Kingdom’s strong underlying growth will help maintain investments flows and leave the country largely unaffected.

The Fed’s 25 basis point rate hike – its first increase since rates were kept at near-zero levels after the global financial crisis – was widely expected and priced in by markets across the world, with Asian stocks ending yesterday’s trading in the positive.

Chea Serey, director general of the National Bank of Cambodia, said the rate hike could possibly make Cambodia “slightly less attractive” as an investment destination, but only compared to a now-higher yielding, but non-competing, US market.

She added that foreign direct investment (FDI) in the country was largely directed towards long-term projects and these should remain unaffected.

“While Cambodia has a very liberal capital account regime, however, at present there are few investment options for short-term capital and thus Cambodia is relatively immune from a sudden capital pullback,” Serey said.

The FDI-heavy construction sector, she said, has already factored in risks to return on investment and will not see Wednesday’s events as a reason to pull out.

“A mere 0.25 per cent increase in the US base rate would not be enough to turn these investors away from Cambodia yet,” Serey said.

Another effect of a rate hike is a rise in the cost of debt, with Serey adding that non-resident deposits and debt, which are sensitive to such rate hikes, are only a small portion of a bank’s funding in the Kingdom.

“We think cost of debt in Cambodia will eventually increase to account for the higher US fed fund rate, but it will do so only gradually and over a fairly long period of time,” she added.

According to Serey, the National Bank of Cambodia did not foresee any issues with liquidity in the economy and was well-placed to use resources and tools at its disposal to “mitigate any possible liquidity shortage in the system”.

Stephen Higgins, managing partner of Cambodia-based investment firm Mekong Strategic Partners, said investors should not “get too carried away” with the small rate hike and can take comfort in the Fed’s dovish approach to the hike.

“I don’t think we’re likely to see a sharp dislocation in markets, or major impacts here in Cambodia,” he added.

Even sectors, such as microfinance institutions, which are more exposed to large borrowings, should not feel the heat from the Fed’s actions on Wednesday, he added.

“Given that the institutions’ borrowing here are probably the big MFIs, and they’re borrowing about 7 to 8 per cent, a 25 basis points impact isn’t really that material,” Higgins added.

Janet Yellen, chairwoman of the Federal Reserve, has indicated in the past that any kind of rate hike would be gradual and more of a long-term process, with economists around the world expecting rates to still be under 4 per cent by 2018.

Despite this expected increase in rates, Thomas Hugger, CEO and fund manager at investment firm Asia Frontier Capital, said the slowing down of the Chinese economy and lower agricultural prices are, at present, of greater concern for the Indochina region.

“We don’t expect a major impact from the announced rate hikes,” he said. “We are more concerned about weak natural resources and energy prices and a general slowing Chinese economy.”

Looking at the regional markets’ response to previous hikes, Hugger said a rate hike has not necessarily been a negative for emerging markets, given that markets have risen significantly during previous rate hikes from 1998 to 2000 and from 2003 to 2006.

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