dr. chhiv s. thet: "macroeconomic & financial development-cambodia"
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Macroeconomic Development-CambodiaFinancial Development-CambodiaFinancial and Economic System Development-CambodiaTRANSCRIPT
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Macroeconomic and Financial
Development in Cambodia
Dr. Chhiv S. Thet
Phnom Penh, November 2013
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Macroeconomic and Financial Development
in Cambodia
By
Dr. Chhiv S. Thet,
Phnom Penh, November, 2013
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Table of Contents
Part I: Economic and Financial System
1. Economic and financial system of Cambodia
2. Dollarization and Macroeconomic Policy of Cambodia
3. Cambodia Macroeconomic and Economic Growth
3.1 Cambodia Economy Framework
3.2 Agriculture Sector
3.3 Industrial Sector
3.4 Capital Investment
3.5 External Trade
3.6 Inflation and Exchange Rate
3.7 Budget Implementation
Part II: Development of Cambodia Financial Markets
1. Securities Exchange Commission of Cambodia
2. Securities Market of Cambodia
3. Challenges of the Financial Markets Development
3.1 Banking System
3.2 Capital Markets Development of Cambodia
3.3 Governance and Legal Framework and Regulations
3.4 Risk and Other Challenges
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Macroeconomic and Financial Development
in Cambodia
By
Dr. Chhiv S. Thet,
Phnom Penh, November, 2013
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PART I
1. Economic and Financial System of Cambodia
The kingdom of Cambodia is currently carrying out the free market economic
system as mentioned in the national institution1. The organizations of economy and taxation
are put into operation within relevant laws and regulations. Cambodia's two largest industries
are textiles and tourism, and agriculture remains the main source of income for country. The
service sector is heavily concentrated on trading activities and catering-related services.
Recently, Cambodia has reported that oil and natural gas reserves have been found off-shore.
In 1995, the government transformed the country's economic system from a planned
economy to its present market-driven system. Currently, Cambodia's foreign policy was
integrated into the regional (ASEAN) and global trading systems (WTO). Some of the
obstacles faced by this emerging economy are the need for a better education system and the
lack of a skilled workforce; particularly in the poverty-ridden countryside, which struggles
with inadequate infrastructure. Nonetheless, Cambodia continues to attract investors because
of its low wages, plentiful labor, proximity to Asian raw materials, and favorable tax
treatment.
The component of current financial system of Cambodia consists of: (1) banking
system: the national bank of Cambodia “center bank” with their 19 branches and commercial
banks, specialized banks and microfinance institutions and (2) insurance companies. Both
organizations support the financial system of Cambodia. However, Cambodian financial
system is still fragile; it cannot provide financing to people for cultivation, commerce and
rural business enterprises. Therefore, in order to strengthen the financial system, Government
has set out the financial development strategies which focused on the financial market
development, especially, the capital market development to sustain the financial system of
1 Constitution of the Kingdom of Cambodia, chapter 5, article 56
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Cambodia. This is new mechanism and alternative for private and public institutions aiming
to raise funds from the capital markets, besides the banking system.
2. Dollarization and Macroeconomic Policy of Cambodia
In 1991-1992, the United Nations Transitional Authority in Cambodia (UNTAC)
was one of the largest and most expensive operations in the UN history, at a cost of USD 1.7
billion. US dollars flooded the economy, creating a new shock against the national currency,
which the National Bank of Cambodia was not prepared to cope with. Subsequently, the
central bank and the unique commercial bank handled all the UNTAC operations and
received growing foreign currency deposits. Dollarization did not result from a policy
decision. It emerged because confidence of the public in the national currency and in the
government policy was eroded.
Figure 1: Bank deposits in USD and Riel
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In the early 1990s, while tax revenues were very limited due to inactive economy,
low profile of the fiscal policy and lack of international support, the budget was mainly
financing by the central bank. The money supply (M2) swelled by 241% in 1990, 29% in
1991, and above 200% in 1992. This resulted in a sharp devaluation of the riel (Cambodian
Currency) and in a three-digit hyperinflation which created an additional shock for potential
users of the riel.
The dollar has been widely used since 1993, until now, dollarization persists despite
the economic and political stability since 1999, indicating an influence of market
expectations on the choice of currency used in Cambodian economy. Due to the lack of
public confidence in the riel, dollarization has helped in maintaining payment capabilities in
Cambodia. First, introduction of large quantities of banknotes in dollars and allowed the
people to switch from using gold to banknotes for transactions and to store wealth. Until then,
using unproductive physical assets such as gold was common practice in Cambodia.
Subsequently, the progress of monetization has encouraged savings within the middle class.
Second, dollarization has prevented capital/fund flight from Cambodia and encouraged to
deepen the financial system. The elimination of incentives to place savings abroad
encouraged the domestic financial intermediation, which resulted in the growth of the
financial system. Third, dollarization lowered the risk of currency devaluation. The demand
for riel remained low and the market very small. Hence there was little incentive for
speculators to try to gain from short term changes in the price of riel. Dollarization has
protected Cambodia against contagion in the face of the Asian crisis (1997-2000). It sustained
confidence of investors in their operations. Fourth, dollarization promoted awareness by
policymakers of the need to avoid bank financing of public deficits. Eventually, the use of
dollar facilitated to integrate Cambodian trade in the international economy. The currency
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stability promoted macroeconomic stability and a predictable business environment. It
reduced the transaction costs and allowed the boom in the garment industry in Cambodia.
However, there are disadvantages in dollarization. First, it undermines the effective
conduct of monetary policy. The National Bank of Cambodia cannot develop instruments of
monetary policy and its role of lender for banks facing liquidity problems is greatly
constrained. Second, the national currency may appear as a symbol of sovereignty and
nationhood. Third, the income from seignorage is minimized. US government gains
seignorage benefits from Cambodia, since the dollar denominated in Cambodia and does not
earn interest.
3. Cambodia Macroeconomic and Economic Growth
The major principal was used in the economic performance in 2011-2013 is based on
production function in real economic sector, effective tax rate in the fiscal policy and money
velocity in the monetary policy. According to primary estimation of National Institute of
Statistics of the Ministry of Planning, it illustrates that real economic growth rate will be
0.1% at constant price and its deflation index will be 2.6% in 2009. The growth supported by
good performance in agriculture and service sectors at 5.4% and 2.3% respectively, offsetting
the decline in other sectors such as industry, especially the garment sector which dropped by
9%. In the year 2010, the Economic and Public Finance Policy Department of the Ministry of
Economy and Finance estimated that the real economic growth rate will approximately
flourish by 5% at constant price and its deflation index will be 4.8%. The real economic
growth rate will, in the period of 2011-2013, increasingly average by 6.3% per annum.
3.1 Cambodia Economy Framework
The economic growth will probably be at 6% at constant price and its deflation
estimated to be 2.9%. This is, in fact, based on global economic recovery from worldwide
financial crisis as well as recovery of Cambodian economy, especially, tourism and
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agriculture sector. Overall the forecasted growth needs more investment capital about 3,023
million USD or around 24.2% of GDP in which public investment is approximately 841
million USD, domestic private investment is 1,505 million USD and foreign direct
investment is 676 million USD. The real economic growth rate, thus, will be responding to
the objectives designed in the National Sustainable Development Plan.
For the period of 2011-2013, economic growth will average by 6.3% in each year.
The increase in 6% is in the year 2011 and in 6.5% in 2012-2013 (figure 2). This growth
needs investment capital approximately 3,316 million USD per year or about 24.3% of GDP
in which public investment is 921 million USD per year or about 6.7% of GDP, foreign direct
investment is 747 million USD per year or about 5.5% of GDP and domestic private
investment is 1,648 million USD per year or about 12.1% of GDP. GDP per capita (PPP) is
1,250 USD in the year 2004, which was up to 2,230 USD in the year 2011.
Figure 2: GDP Growth Rate
Category 2004 2005 2006 2007 2008 2009 2010 2011
GNI per capita,
PPP ($)1,250 1,440 1,630 1,830 1,960 1,970 2,080 2,230
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GDP
(Millions US$)5,337.83 6,293.05 7,274.42 8,639.16 10,351.83 10,401.94 11,242.27 12,829.54
GDP Growth
(annual %)10.34 13.25 10.77 10.21 6.69 0.1 5.96 6.5
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3.2. Agriculture, it increases by 3.2% at constant price in 2011. To support the
growth it requires more investment capital at least by 605 million USD, in which the public
investment reaches to 168 million USD, domestic private investment is by 415 million USD
and foreign direct investment is 22 million USD. Crops increase by 3.5% at constant price.
The quantity of paddy rice yield will probably rise by 4.7%, compared to the year 2010
(about 8 million tons), in this amount, about 1.1% comes up from an increase in cultivated
lands and about 6% is from an increase in paddy rice production. Other supplemental and
industrial outputs will increase by 3.1%. Livestock and poultry increase by 4.4% at constant
price. The livestock of cattle is 4.5 million ones that increase by 2.3%. Livestock of pig is 2.6
million ones that increase by 5% and livestock of poultry is 19.8 million ones that increase of
6.3%, compared to the amount of the previous year 2010. Fisheries increase by 2.5% at
constant price. The total of fisheries output will be 51l million tons in which the industrial
fisheries output will be 239 million tons and the fisheries output by family is 227 million
tons.
Figure 3: GDP ratio by economic sectors
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3.3 Industry, it increases by 7.3% at constant price in 2011. The proportion of this
sector increase by 21.3% of GDP, compared to 21% of GDP in 2010. Overall the increase
need investment capital at least by 1,394 million USD in which the public investment will be
by 459 million USD focusing on electricity and sanitation water supply, irrigation and public
transport system and private investment be equivalent to 935 million USD the domestic
private investment will be by 353 million USD and foreign direct investment will be about
582 million USD. Textile and wearing apparel, it goes up by 10% at constant price in 2011,
compared to the worth of 1.5% in the year 2010, the value of exported garment increase to
more than 3 million USD. Other industrial components food and beverage, plastic products,
machinery spare parts, electronic appliances and construction materials and so on will be in
high increase in order to stabilize growth rate in this sector between 8% and 9% per annum.
Service, it increases by 7.3% at constant price in 2011. Its proportion is up to 38.9% of GDP,
compared to the worth of 38.3% of GDP in the year 2010. Hence, the growth rate will
demand investment capital by 1,022 million USD in which public investment capital is by
212 million USD, domestic private investment capital is by 738 million USD and foreign
direct investment is by 72 million USD. Hotels and restaurants, it increases by 9.4% at
constant price, the foreign visitors about 2.6 million in 2011 that increases in 12% compared
to 2010 and local tourists will come up to 7%. Other services - commerce, telecommunication
and transportation, finance and real estate and business, and so on, will also go up in order to
become constant to the growth in this section with 8% per annum.
3.4 Capital Investment
In year 2011, overall capital investment is about 3,023 million USD or about 24.2%
of GDP that increases in 9.6% compared to 2010 in which public investment is 841 million
USD; foreign direct investment (FDI) is 676 million USD; domestic private investment is
1,505 million USD. The public investment capital sources compose of domestic capital of
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194 million USD, of external grant of 646 million USD - untied aid from development
partner of 340 million USD and foreign loans of 266 million USD.
Figure 4: Growth rate of FDI
3.6 External Trade
In year 2011, overall-exported goods is worth of 4,846 million USD or approximately
38.8% of GDP that increases in 13.2%, compared to the year 2010. Totally-imported goods
are worth of 6,711 million USD or about 53.7% of GDP that increases in 11.8%, compared to
the year 2010. Current account deficit of external payment balance is 1,212 million USD or
around 9.7% of GDP. The deficit is financed through official transfers of 617 million USD
and through capital and finance account of 614 million USD. Total foreign balance of
payment is in surplus of 19 million USD as capital source for increase in nation reserve
capital.
3.7 Inflation and Exchange Rate
In the year 2011, inflation is adjusted to 5.5%. The adjusted inflation is basically due
to determining growth of expending in basket of consumption goods of the last expense of
households. In the year 2011, the last consumption expense of households will increase
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around 12.5% at current price in which increase in real expense is determined about 5.6%, the
population growth is about 1.9 % and its inflation is about 4.5 %. The value of riel exchange
rate against USD that its average price is by 4.135, increasing by 0.2%, compared to the year
2010. Official exchange rate decrease in 0.1% in each year against USD, at the same time,
operational cash flow will increase in average of 22% per year and money velocity will
decrease from 2.49 in the year 2010 to 1.82 in the year 2013. Therefore, overall foreign
capital reserve will be extended in 3.5 month for importing goods and services for local
consumption.
Figure 4: Growth rate of FDI
3.8 Budget Implementation
Budget implementation in the period of 2011-2013, domestic revenue will averagely
increase by 13.5% or around 0.5% of GDP, in a year from 12.6% of GDP in 2010 to 14.2%
of GDP in 2013. At the same time, tax buoyancy in average in 1.45 per year. Totally budget
expenditure will increasingly average 17.8% of GDP - increasing in average of 8.7% per
annum. An average of current budget expenditure is 10.9% of GDP in which salary expense
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2007 2008 2009 2010 2011-5
0
5
10
15
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3.5
19.7
-0.60000000000
0001
45.5
Inflation rate
Inflation rate
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accounted for 4.4% of GDP and operational expense is 6.5% of GDP. Expenses of priority
ministries increase by 13.6% and others also increase about 5.8% of GDP. The capital
expenditure average about 6.8% of GDP per year and current budget surplus is 2.2% of GDP
as overall budget deficit is 4% of GDP per year.
In the period of 2011-2013, the worth of exported goods will increase by 15.2% and
import will be up at 11.8% per year. At that time, the current account deficit of external
balance of payment is in average of 8.8% of GDP that will be financed by official transfers of
4.8% of GDP, also capital account and finance of 5.5% of GDP and the rest of 1.5% of GDP
will add into the national capital reserve. As to foreign debt, excluded pervious debt of Russia
and America, will go up to 25.5% of GDP in 2013 and expense on debt service remains of
0.6% of GDP per year.
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PART II
Development of Cambodia Financial Market
The financial Sector has played an important role in developing the private sector and
maintaining sustainable economic growth. In 2001, the Royal Government of Cambodia
(RGC) adopted the Vision and Financial Sector Development Plan for 2001-2010 (FSDP)
which is a long-term strategy for financial sector development in Cambodia. Since that time it
has served to guide the efforts of the RGC, stakeholders and development partners in defining
policy and programs to support the development of the financial sector in Cambodia to
achieve sound and market-based financial system. The second stage, the FSDP was to revise
and update as to address priorities for the period of 2006-2015, building upon the lessons
learned during the initial five years of implementation of the FSDP 2001-2010 and the
objectives of the RGC, the National Strategic Development Plan 2006-2010 and Cambodia’s
Millennium Development Goals.
During 2006, the National Bank of Cambodia (NBC), the Ministry of Economy and
Finance, the Ministry of Commerce, and other stakeholders in Cambodia’s financial sector
worked closely with ADB technical team and development partners through a consultative
process to develop this Financial Sector Development Strategy 2006-2015 (FSDS). The
FSDS intended to provide the strategy, guidance, and framework to support the financial
sector development in Cambodia, particularly; it is a roadmap to establish the financial
markets in the country, in the first priority, is to build the capital market of Cambodia.
The RGC is supporting the development of financial markets in Cambodia for three
reasons:
a) In the short term, addressing the risks arising in the financial system
b) In the intermediate term, removing obstacles to the financial development in
other sectors
c) In the longer term, developing an alternative mechanism for financing and
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investment
The objective is to develop financial markets which appropriately address risks,
remove obstacles to the financial development and support risk management and financial
resource accumulation and allocation. The financial markets may provide a mechanism to
support the finance and investment. At the same time, it is important to develop a progressive
framework for company development which can incentivize company and human capital
development. The international experience has shown it is very difficult to develop effective
financial markets. This has been highlighted by work over the past forty years in the
European Union, especially continental civil law countries, and over the past twenty years by
experiences in Russia, central and Eastern Europe, Asia, and China. At the same time, a
number of significant, positive lessons have emerged for countries seeking to develop the
financial markets. An effective legal framework is essential for markets to develop. The legal
framework has designed to support the protection of investors; ensuring markets are fair,
efficient and transparent; and reduction of systemic risk.
1. Securities Exchange Commission of Cambodia (SECC)
The Securities Exchange Commission of Cambodia (SECC) is established under the
law on the Issuance and Trading of Non-Government Securities. The SECC regulates the
securities industry in Cambodia to contribute to the socio-economic development through
capital mobilization from public securities investors to meet the demand of financing for
business investors. The SECC’s mission is to develop and maintain the confidence of public
investors in Cambodia by protecting their lawful rights and ensuring that issuance and trade
of securities are carried out in a fair and orderly manner; and promote the effective
regulation, efficiency and orderly development of the securities markets; as well as encourage
the varieties of saving tools through buying of securities and other financial instruments
including support the foreign investment and participation in the securities markets in
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Cambodia; and assist the privatization of state-owned enterprises in Cambodia. The SECC is
responsible for regulating, controlling, and developing the securities sector.
2. Securities Market of Cambodia (CSX)
To take one step further in the implementation of the Financial Sector Development
Strategy 2006-2015, the Government of Cambodia decided to establish the Cambodia
Securities Exchange (CSX) as a public enterprise with government shareholding of 55% and
the remaining stake held by the Korea Exchange, a well-known securities exchange operator
of the Republic of Korea. The CSX’s main mandate is to establish and operate a securities
market, a clearing and settlement facility, and a depository, in accordance with the Law on
Issuance and Trading of Non-Government Securities and its subsequent regulations.
With the strong support from the Government of Cambodia, the Ministry of Economy
and Finance, and the Securities and Exchange Commission of Cambodia, we intend to offer
investor-friendly environment for all market participants, and become the main channel of
financing for Cambodia. Besides, the CSX is a place and platform of the securities trading
and facilitates to raise capitals for business and investment, which done by companies and
government institutions and establishes the friendly environment for securities trading for all
investors both local and international investors including offering the products and services to
all market participants and support the state enterprises under the guidance of the
Government of Cambodia.
3. Challenges of the Financial Markets Development
The current economy of Cambodia run off the world economic crisis and started
growing in the form of “V” since 2010 and 2012, after seriously fallen in 2009 and affected
on main sectors such as garment, construction and tourism. Furthermore, although the
banking system of Cambodia now is progressive, but financial sector of Cambodia was in the
first phase, its infrastructure could not sustain the financial markets. Therefore, the challenges
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is that Cambodia strongly relied on banking system for capital collection and allocation
including the financial asset gathering of big banks might lead to the systematic risk and
highest spending for intermediaries.
Moreover, the absence of long-term financing, human resources and management
skills as well as competence might, and lacking of convincing credit, rural financing, and
payment system, information exchange and coordination are main sources of challenges in
the country.
3.1 Banking System
Although, Cambodia financial system has progress, but quantity of saving allocation
is still limited if compared to the neighboring countries in ASEAN. The gap between the
saving and investment sharply increased from -0, 7% in 2006 to -0, 7% in 2010, accordingly,
Cambodia could not relied only on the foreign savings from abroad, it is necessary to
encourage domestic resource collection through the capital markets and moreover, the
capability of center bank is still unable fully to support the financial system in the country.
For financial products is still focus on small sectors of credit and savings. The money market
and inter-banking is still not operating. So, financing has relied on the banking that an
original source of financial crisis in Asian 1997.
Insurance sector is too small in Cambodia, it is not yet fully support the financial
system after the launch of the Cambodian Securities Exchange in July 2011, some foreign
insurance companies has operated the life insurance services, although, the capital source
from the insurance sector is unable to support the capital markets of Cambodia.
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3.2 Capital Markets of Cambodia
The Cambodian securities exchange was established in July 2011, but there is only
one company listing for trading and transactions are allowed to be settled in U.S. dollars for a
transition period of three years, the stock market will eventually boost foreign exchange
transactions and therefore also requires upgrading Cambodia’s shallow foreign exchange
market. Furthermore, the bond market is not yet developed due to lacking some components
for support the market and the principal ratio to determine the value of issuance and other
involving mechanisms.
3.3 Governance and Legal Framework and Regulations
Because of Cambodia financial system is rapidly changing and reinforcing and also
created the new challenges to safeguarding the financial stability in the country. So, the
reinforcement of legal and regulation framework have become more critical after the launch
of the FSDF 2006-2015, particularly, after capital market development. Simultaneously, the
laws and regulations involving in developing the domestic financial markets were
established, but they are not enough to support the operation of efficient market and
transparent transaction, they need to be improved and further new developed in order to
support the strongly financial system, especially, the financial market system in the country.
Additionally, we are lacking the specific research center for studying the laws and other
regulations involving the financial sector development.
In order to strengthen the market infrastructure, the government has carrying out the
law and regulations of international standard of accounting and auditing and international
finance report standard, however, they are still challenging in these sectors because of
incapability of specialized accountants and finance in the country.
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3.4 Risk and Other Challenges
Although, the stock market development is good for both short-term and long-term
economic growth, but there are many challenges for recent situation of Cambodia’s financial
globalization. The systematic risk and speculative bubble should take into account in terms
of the imperfection and fraud in the financial market causing failure of financial stability in
the country. Actually, Cambodia is still a work in progress, but simultaneously, there are
many challenges for the stock exchange development. Just one company trading, the
exchange generated a lot of interest among local and foreign investors. In the first three days
of trading, the share price for Phnom Penh Water Supply Authority (PPWSA) rose 60%
above its IPO price, but by the following week, short term-investors started selling to take in
profits. The stock price came down substantially.
In addition, in order to list on the CSX, it must have at least three years of proper
audits prepared by an accredited international accounting firm approved by the Cambodian
government. This is a hard challenge for many local companies. The institutional investors
from Japan, Korea and China have also taken a bite of the recent IPO but whether that
interest can be sustained for long term or not. The corruption is also a big concern even
though the government passed an anti-corruption law in 2010, but the fear is still in mind of
investors, especially, after general election on July 2013, based on an observation, showed
that the price of PPWSA’s stock is still going down from 6,300 Riel per share in July 2013
to 5,600 Riel per share in November 2013. Furthermore, the lack of capital market
infrastructure and capacity building can be challenges for investors who are not familiar with
the Cambodia securities market.
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References:
National Bank of Cambodia (2010), Economic and Monetary Statistic, Phnom Penh, #196
National Bank of Cambodia (2009), Balance of Payments Statistic Bulletin, issue #29
National Bank of Cambodia (2011), Cambodia Inflation, issued in April 2011, Phnom Penh
Hang Chuon Naron (2009), Macroeconomic, 1st edition, Phnom Penh
Government of Cambodia (2001), Vision and Financial Sector Development Plan 2001-2010
Government of Cambodia (2006), Financial Sector Development Strategy 2006-2015
Ministry of Economy and Finance, http://www.mef.gov.kh/
Securities Exchange Commission of Cambodia, http://secc.org.kh
Economic Institute of Cambodia (2011), Cambodia Economic Watch, Today Economic
Magazine, Phnom Penh
Tal Nay Im, Michel Dabadie (2007), Dollarization in Cambodia, retrieved from http://www.nbc.org.kh/
CDRI (2010), Cambodia Economic Perspective, Phnom Penh
Shik, Eom Kyong (2007), Initial Design for the Cambodian Securities Market, Projection of the Cambodian GDP and Stock Market, Korea Securities Research Institute.
ASEAN Exchanges (2011), Asean Exchange Collaboration, ASEAN Exchange Network. Retrieved from http://www.aseanexchanges.org
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