Cambodia Gets A Modest Bond Boost

It may take years for investors to confidently put their money in highly corrupt Cambodia. Yet, Cambodia’s first-ever rating by the Moody’s Corporation this week signals that the country, ruled by Prime Minister Hun Sen—a one-eyed former Khmer Rouge soldier—is not completely without hope.

Moody's rated Cambodia’s foreign-currency and local-currency government bonds at B2, a junk-bond level that indicates a high risk of default. The rating, however, is considered stable, meaning it is unlikely to be changed soon, for better or worse.

Cambodian external debt at the end of 2006 was $3.2 billion, according to Thomas Byrne, a vice president and senior analyst at Moody's. Byrne adds that virtually all the debt is from creditors including the Asian Development Bank and the World Bank. Meaning that Moody's rating is on Cambodia itself, as the nation hasn't issued any bonds yet. "What our rating is, technically, (is) a rating on the government," Byrne said.

Even so, there is reason to believe that things are turning to the better in Cambodia. "Cambodia has recently attracted significant inflows of foreign investment into such sectors as tourism, garments and energy, which should help boost the overall level of investment in the economy, as well as strengthen the balance of payments," Byrne said.

Byrne also said the inflows of foreign investment have partly offset Cambodia's account deficit and built up its foreign exchange reserves, thus providing a buffer for its external debt.

Cambodia's credit fundamentals and macroeconomic policy flexibility, however, are still hindered by its weak state of governance. Other structural problems include the financial system's high degree of dollarization, low level of intermediation and the government's weak revenue base.

Byrne says Cambodia’s future depends on the government’s ability to improve its revenue performance, the country’s competitiveness in the garment and tourism sectors and its relatively large reserves of oil and gas.

After ruling the country for over 20 years, Hun Sen recently opened up the Cambodian economy while still keeping tight political control.

In a road show in Melbourne, Australia last October, Hun Sen introduced a series of initiatives to encourage foreign investment. These included the removal of overlapping government licensing, the reduction of value-added and income taxes, and the simplification of company registration.

Hun Sen also emphasized that his government counted on foreign investment to help solve irrigation problems, build new railroads, bridges and airports, and develop petroleum reserves.

Recently, BHP Billiton (nyse: BBL - news - people ), the world largest mining company, began digging for bauxite in Cambodia. Also U.S. oil giant Chevron (nyse: CVX - news - people )drilled four exploration wells there earlier this year, and is expected to finalize its petroleum reserve estimations in the next few months.

Foreign investment in Cambodia reached nearly $4 billion in 2006. Of this, $2.6 billion came from tourism, mineral exploration, energy development and construction. Textiles production earned $552 million, and agriculture yielded $481 million. The International Monetary Fund recorded 10.5% gross domestic product growth for Cambodia in 2006.

Nevertheless, Cambodia is still heavily dependent on foreign aid. It receives nearly $600 million in financial assistance from foreign powers, totaling nearly two-thirds of the government’s annual revenue.