First local credit rating company to boost capital markets

A man looked at the CSX stock index in December 2020. POST STAFF

Cambodia has issued an operating license to its first locally owned credit rating company, Rating Agency of Cambodia Plc (RAC), which will offer credit rating services to the securities industry and financial institutions.

The license, issued by the Securities and Exchange Regulator of Cambodia (SERC) on July 12, is an important milestone for the development of capital markets in the country, RAC said in a statement obtained by The Post on July 18.

“By improving the quality of information available, it will increase investor participation as they will have more choices to achieve their investment goals,” he added.

In the meantime, bond ratings will improve the liquidity and depth of the bond market, while encouraging companies to issue more bonds, allowing them to diversify their sources of funding.

“It would accelerate investment and employment for the benefit of the Cambodian economy,” he said.

In addition to its core bond rating and pricing business, the firm provides institutional ratings for various sectors, risk management solutions, investment analysis, sector and financial research and analysis.

RAC Executive Director Sisowath Chakara told The Post on July 18 that capital markets investors are at a disadvantage compared to issuers because they have less information than insiders, which is seen as a problem of ‘”information asymmetry”.

He said credit rating agencies solve some of these problems by providing access to enhanced information.

This would improve the quality and quantity of capital market information for the benefit of investors.

Because Cambodians are less familiar with financial markets, there is a need for RAC to raise public awareness and train businesses and financial institutions.

“The objective of the RAC is to bring advantages to investors and borrowers in the capital market. The availability and quality of information are therefore essential. Academic literature has shown that investors demand a higher premium to compensate for information asymmetry.

“This translates into a higher cost of financing for borrowers. The RAC can help reduce the cost of financing and increase market participation by improving the information available in the market,” Chakara said.

SERC chief executive Sou Socheat told the Post on July 18 that the RAC is a game-changer for the capital market and financial industry.

“When our local businesses, such as banks or corporate bond issuers, require credit ratings for their business activities, they normally look for foreign companies.

“However, we have a local company that is credible enough to provide ratings. The business should not only be limited to the securities market, but can also extend to the financial sector,” he said.

Almost every country in the world has its own rating agency, Socheat said, noting that Cambodia now also has its own.

RAC was established in February as a joint venture between Royal Group of Companies Ltd and 3E-Fii Group member 3E-Fii Capital.

Due to the rapid growth of the Cambodian economy, more rating services are needed, Chakara said.

“We are optimistic about Cambodia’s growth prospects. As such, there will be a strong demand for financing Cambodian business expansion projects.

“We hope that they will be increasingly attracted to the capital market as another source of financing that will support their development in the medium term,” he added.