Life must be lived forwards, but it can only be understood backwards. So wrote the Danish philosopher Soren Kierkegaard in the 19th century. He was writing about human consciousness, but this epigram can just as easily apply to the collective life of countries such as Cambodia, whose tragic history continues to shape its existence.
I find myself as I write this column in Phnom Penh, the capital city of Cambodia. It’s obvious to me that, in countries which have been benighted by various systemic horrors and in the process decimated economically, it is the financial markets – for want of a better term – which offer the greatest hope of recovery from collective trauma.
Cambodia is such a country, and, however you decide to cut the divide between the commercial gain for the banks now dotted conspicuously over the country and the repair of a damaged zeitgeist, you are likely to conclude that finance is a better healer than truth commissions or an army of stress counsellors.
That sounds a harsh judgement but I think it’s the truth. Demographic dynamics may chip away at the collective memory but definitive healing will only come from economic progress. And that is where the banks come in.
Wander around Phnom Penh and you will be hard pressed to avoid the presence of the home-grown banks such as ABA and Acleda Bank via their ubiquitous ATM machines, while lingering with a less conspicuous presence you will notice Maybank and ANZ (under the brandname ANZ Royal) amongst others.
ON THE SURFACE it might appear to be like Hong Kong or Singapore (absent the dusty poverty which distinguishes the streets of Phnom Penh) but it is anything but as far as Cambodia’s financial system is concerned.
The country is dollarized, and the US currency is the primary unit of commerce. As a tourist you will encounter the Cambodian riel most frequently in the change you are given from proffering dollars in ordinary transactions.
If you are a rather anal economist wandering the country and do the maths you will probably conclude you are losing out on a purchasing parity basis in transacting this way, but rounding everything up to a dollar number makes life easier than counting out stacks of riel bills.
Take the local currency you get given in change and suck up the inconvenience – that’s how it is in Cambodia, at least in the metropolis. The rural sector of Cambodia is a more frequent user of the Khmer riel, but the reality is that the country is dependent on US dollars for the most significant financial transactions. The hope within Cambodia’s central bank is that confidence in the riel will grow over time, allowing the country to “de-dollarize,” but economists expect that may well be decades in the making.
Meanwhile, outside the “normal” banking sphere of ATMs, mortgage applications and corporate loans, the finance which counts most in Cambodia is microfinance - lending to the poor in amounts which would probably put the average citizen of a developed economy to shame. That crucial sector now appears to be in danger after some restrictions imposed by Cambodia’s financial authorities last week.
Microfinance institutions (MFIs) make up around a quarter of Cambodia’s financial system and play a key role in the economies of the rural areas of the country. A leading economic consultant in Cambodia told me last week that in relation to the bulk of the banks conducting “normal” business in the country, the MFIs are far more sophisticated and, in many cases, bigger in terms of balance sheet.
SO IT WAS a blow when last week the Cambodian financial authorities (the measure was allegedly framed by Cambodia’s Prime Minister Hun Sen) announced an immediate compression of the MFI lending rate to 18% – from as much as the prevailing 50% – while capping the rate at that level.
This move is likely to bankrupt numerous MFIs as well as in the process evaporating credit channels to Cambodia’s poor. The country has 54 licensed MFIs and seven deposit-taking microfinance companies with a combined loan portfolio of a hefty US$3bn-equivalent and a low non-performing asset ratio.
As well as having a potentially devastating impact on MFIs in Cambodia, the surprise move to slash and cap microfinance lending rates could deal a heavy blow to the provision of offshore capital to the country, a source which has been crucial to the development not only of MFIs but also SMEs and larger corporates in Cambodia.
I recall over a decade ago, a breathless banker at a bulge-bracket investment bank coming up to me at a watering hole in Hong Kong and triumphantly announcing that his house had won a mandate to arrange a dollar bond issue for Cambodia. That trade didn’t happen.
More recently another banker suggested that the US$3bn of micro finance loans in Cambodia could be securitised and sold as a bond. Ditto for that plan.
Despite its solid economic growth, which has outpaced the rest of Southeast Asia, I doubt either of these will come to pass for Cambodia in the immediate future as long as there appears to be the possibility of unexpected policy initiatives from the highest level. One can only hope that life can go forwards with less thinking backwards for this country and its eminently deserving citizens, with the help of a thriving financial industry.
