Cambodia Struggles to Break Out

Being designated a “frontier market” means two things in the financial world… it means there are a ton of risks (foreseen or otherwise) and a ton of potential rewards.

For an ambitious frontier nation, though, it means that with a little hard work, competitiveness, and transparency that “emerging market” status is well within reach and that “first-world respectability” is at least a realistic goal, and not just some politician’s utopian dream or empty platitude.

But climbing is never easy, and every minor detail that gets overlooked or ignored could quite possibly turn into another hill or mountain never successfully accomplished.


One such aspiring frontier market is the Cambodia Securities Exchange (CSX). Founded in July 2011 with the help of the Korea Exchange (KRX), the exchange launched its first domestic IPO—the Phnom Penh Water Supply Authority (PPWSA)—in April 2012. It actually had a successful launch, with the stock seeing a 48% jump in the first day of trading. Since that successful first launch, though, the market has had a -14.9% annualized return. (That’s negative just in case you’re sleepwalking through this article).

In addition, the market has seen a grand total of only two participants grace its index. And there doesn’t seem to be any sign of that changing in the near future either.

The CSX’s failures are not a reflection of the country’s economy. The economy is actually doing quite well, having expanded in recent years from its traditionally heavy focus on agricultural to include manufacturing, tourism, and services. Additionally, the discovery of oil deposits and prospective mineral resources (bauxite, gold, iron, and gems) has turned Cambodia into an emerging star in the region.

Cambodia’s GDP is a respectable 7.2% annualized, down from its peak of 13.4% just before the financial crisis of 2007–08. Now the climb is on again, but this time with a high watermark in the rearview mirror and an even brighter future lying ahead.

So why can’t the CSX pull itself together?

One obvious answer is corporate transparency. In order for a market to function properly (or at least appear to function properly), there needs to be some sort of transparency so speculators and shareholders can have a chance to try to filter out reality from the noise. Obviously, not all markets and exchanges are created equal, but at a very basic level participants have a chance for price discovery. If transparency is kept at a minimum, price discovery becomes impossible, and participants become scarce.

Transparency is a noticeably key ingredient, but if a country’s corporate and business culture has never successfully operated outside the private sector, and is under the impression that public disclosure might be detrimental, where’s the incentive to go public?

This transparency issue is much greater than, say, a private company opening its books. Imagine what you do and how you prepare when you’re trying to sell your home. How many potential buyers would you get if you took pictures and held open-house when your house was at peak messiness/disorder? This is not too dissimilar to what’s happening with companies there, and poor corporate governance is obviously to blame.

To be fair, transparency needs to be encouraged, not demanded. Encouragement needs to be incentivized. The government of Cambodia needs to create a positive environment for the market place to thrive, and the only way this can be accomplished is by stepping back, cutting taxes (or creating progressive ones0, and regulating less rather than more.

Additionally, foreign investment needs to be allowed to broaden and thrive. Great market places like the United States, the United Kingdom, Japan, and China did not become wildly successful by shunning foreigners and their investment capital… quite the opposite. The United States became a great market and economy because it embraced foreigners and their capital. Even after the American Revolutionary War, the United States relied heavily on the continuation of foreign investment even from its “enemy” Britain. The two nations might have been bitter enemies on the battlefield, but when the fighting stopped it was more like brothers-in-arms at the business table.

Setting up a stock exchange is complex and difficult, sure… but it is not impossible. Especially if you have experienced partners. This leads one to question, where is KRX’s leadership in all of this? Three years with only two listed companies is not something to be proud of… even war-ravaged Iraq boasts more than this.

There’s no time like the present for the Cambodian government and CSX to pay serious attention to these issues. The Association of Southeast Asian Nations (ASEAN) is scheduled to organize a unified market at the end of 2015, and it’s abundantly clear that it’s time to turn this ship’s sails with the wind and take advantage of all the potential downstream.

The pressure is on, and not just for Cambodia either. Laos’ Lao Securities Exchange (LSX) is under similar duress to get their act together. Coincidentally, Myanmar is aiming for frontier market status, too, and has tapped the Tokyo Stock Exchange (TSE) for guidance. It will be interesting to see how the Japanese fare compared to the Koreans. Something tells me that a rivalry in Southeast Asia is brewing… and it has more to do with Eastern Asia than anywhere else.