Thailand
Cambodia – Riel benefits: CSX index helps to build currency confidence in Kingdom
Increasingly over the last decade, the National Bank of Cambodia (NBC) has been moving to expand the use of the local currency both within the Kingdom and in cross-border trade in its bid to strengthen the riel and the eventual phasing out of the US dollar.
NBC Director-General Chea Serey says the motivation behind the NBC’s moves is that regional dependence on the dollar has left economies vulnerable to any issues the US currency might face and that continued reliance on it means “losing control of our monetary policy”.
The bank has since observed circulation of riels increasing from around 6.4 trillion in 2016 to 13.5 trillion by the end of 2020, with riel deposits at banks increasing from 4.3 trillion to 8.5 trillion during that time, according to NBC’s annual report 2020.
The strongest move made yet, in May last year, was when the NBC announced it would phase-out small-denominated US bills – $1, $2, and $5 notes – following broad negotiations with banks and microfinance institutions (MFIs).
Going hand in hand with the move towards taking control of monetary policy, has been the development of the Cambodia Securities Exchange (CSX), which is the sole operator of the stock market in Cambodia.
Founded in 2010, the CSX was granted approval to function as the market operator, the clearing and settlement facility and the depository operator. Most importantly, the CSX index has always operated in riels. According to Chief Operating Officer of the CSX Jong Weon, the adoption of riels is imperative for the Cambodian economy, which the CSX stock market can continue to boost in order to build confidence in the currency’s full implementation in the future.
“By adopting Khmer riel in transactions on the CSX and among the public, confidence in the currency is seen to be rebuilt in several ways. First of all, the requirement for making transactions in the local currency boosts the demand for that currency by both local and foreign customers. Under supply and demand theory, as demand increases, the currency in the long term will appreciate against other currencies, making its use favourable among retail and institutional investors.
“Second, not only do trades using Khmer riels waive the exchange rate risk for current domestic investors but they also encourage more new local investors to join the market because most of them hold more Khmer riels than they do USD. This will definitely strengthen the power of the Khmer riel because there is a market for it.
“Third, the more a currency is used, the more familiar people will get with it. For example, the USD is widely recognised because everyone is using it. Similarly, the introduction of only using Khmer riels in trading transaction policy draws people’s attention to the currency. In the long term, as the public gets familiar and starts using it daily, it will encourage those giant business firms to switch to using KHR quotes instead of USD quotes to increase sales. With these three aforementioned notions, we can clearly see the advantages of Khmer riels working as stepping stones to allow Cambodia to switch from USD into using Khmer riels completely.”
Serey added that the riel helps the central bank to enhance the effectiveness of conducting monetary policy to maintain price stability and support economic growth. In other words, if the riel is widely used, we can influence economic activities by raising or lowering the interest rate. The benefit of using local currency is that the NBC can act as the lender of last resort to financial institutions with liquidity support, especially during periods of downturn. This means that the central bank can provide emergency credit in riels to financial institutions that face liquidity shortages.
Weon says that, so far, the use of the riel has boosted the Cambodian economy, including in trade and other sectors, in a further three ways.
“Small businesses – one of the main pillars to support the development of the Cambodian economy – hugely benefit from it. The adoption of a single currency will reduce exchange and inflation risks for them because most of their transactions are made in riels.
“Second, riel deposits will benefit both depositors and borrowers. On the one hand, those who hold more local currency will benefit from higher bank deposit interest rates, which is considered as extra income. On the other hand, as the supplies of riels become widely available, making loans cheaper, it will encourage borrowers, especially small business owners, to take out loans more often for business expansion.
“Last, but not least, the riel is currently considered cheap against some of our neighbouring countries’ currencies, so this is viewed as a comparative advantage for Cambodia to strengthen its export position. Cheap currency means cheap products, thus it boosts demand from outsiders.”
Weon says the adoption of the riel will be especially important in the near future because it will create a smoother pathway for government to raise bigger budgets by issuing local-currency-denominated government securities once the currency is available in everyone’s hands.
“As a result, a number of national master plans will be achieved and these will benefit not only local people but also foreign investors as well.”
He said that, as the currency appreciates, imported products and inputs – especially raw materials – will become cheaper, generating multiple benefits for production processes such as enabling firms to earn more profits as production costs decrease.
“At the same time, the surge in firms’ profits will lead to a soaring in national revenue from taxes collected. On the other hand, as a firm’s profits grow, leading to business expansion, it will generate more job opportunities for local people,” he said.
While critics of the reversion to riels have suggested that the process may produce unfavourable exchange rates, thus reducing foreign investment, advocates such as Weon remain confident that a healthy and independent national currency, situated within a stronger financial system, would be sufficient to keep foreign investment flowing, which, after the region’s multiple landmark free trade agreement signings, appears to hold true.
However, the process cannot happen overnight because too swift a move may potentially result in a short-term lack of stability, discouraging businesses from trading in Cambodia.
Weon said that while the country is working hard to make its economic rebound after COVID-19, it is not yet the time to switch into adopting one single currency.
“Allowing the dual-currency system will attract more foreign direct investments into the country. However, I support the idea that the NBC is promoting the use of Khmer riels along the way now. By doing so, it is believed that the currency will be widely recognised and used by the time the economy fully recovers. Hence, Khmer riels will be more favourable in the post-pandemic era.”
The momentum towards the switch to riels also increasingly reflects changing geopolitics, particularly within Asian integration, spurred particularly by China’s heavy investment in the belt and road initiative, strengthening the country’s independence.
The US-China trade war has been one of the biggest influences on the global economic picture. The dollar has been resilient for most of the dispute. However, an eventual trade deal could weaken the currency, as was the case with the so called “Phase 1 deal”.
A deal between the US and China would not only spark a resurgence in the latter’s currency, but it will also improve the global trading landscape and give emerging economies a platform for growth. Also, a weaker US dollar would improve the purchasing power of several other nations, with the Kingdom set to benefit from trade relations with a revitalised Chinese economy, in turn increasing further confidence in the riel.
Source: https://www.khmertimeskh.com/50829796/riel-benefits-csx-index-helps-to-build-currency-confidence-in-kingdom-2/