Dear Editor,

The establishment of a bourse in Cambodia is expected to promote domestic savings and enhance the functions of our financial system, thus increasing the quantity and quality of investment. But will the stock market play an important role in allocating capital to our economic activity and industry?

The answer will depend much on the progress of our economic and institutional fundamentals: sound macroeconomic environment, healthy and developed banking sector, the transparency and accountability of our institutions, and shareholder protection.

The bourse might not perform efficiently in allocating investment resources as expected, given the huge costs of doing business, poor financial infrastructure, and weak regulatory and institutional arrangements Cambodia is facing now.

Without improvements in institutional quality and legal frameworks, Cambodia can, of course, be easily well prepared for a new casino in mid-2011, or even sooner. It would be a casino where stock price and information manipulation, insider trading and accounting fraud are widespread. Furthermore, a stock market, like other asset markets, can develop its own speculative dynamics, which may be guided by irrational behaviour. The irrational exuberance can adversely affect the real sector of the economy, as it is in danger of becoming the by-product of a casino.

To overcome these serious problems and limitations, Cambodia will need technical and institutional improvement. Though it is demanding, Cambodia needs to take steps to improve legal and accounting frameworks, private-sector credit evaluation capabilities and public-sector regulation to address serious problems of informational and disclosure deficiencies. In this regard, bankruptcy and accounting law need to be in place, and the move to insulate the regulatory and supervisory authorities from political pressure and corruption is quite essential.

The development of a stock market per se does not ensure benefits. Only after Cambodia addresses institutional and infrastructural bottlenecks can it expect an environment conducive to successful economic growth and active domestic and foreign participation in the market. The expected problems of the small size and low liquidity of the proposed stock market in the first several years after opening can positively serve as lessons for the Cambodian authorities to learn to supervise and regulate.

Meanwhile, for many reasons, focus should be zeroed in not only on opening the stock market itself, but also on strengthening the banking sector.

First, the bourse in its early stages will be just a complement rather than substitute for the banking sector. Second, strengthening the financial intermediaries can promote stock-market development as the former provides many supporting services. Third, the banking sector will continue to play a major role in financing for Cambodia’s economic development in the decades to come.

Heng Dyna

Canberra, Australia

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