When China devalued its currency, the yuan, in August, it triggered a chain reaction around the world. Stock markets tumbled and currencies dropped, especially in China-dependent and resource-based countries such as South Korea, Indonesia, Malaysia, Thailand, Canada and Australia. In Asia, where years of trade enmeshment with the world’s second-largest economy has created high levels of economic co-dependency, central bankers reached for monetary levers to cushion the impact. One exception was Cambodia, whose economy is so highly dollarized that the country hardly has an effective monetary policy.
Anyone who has been to Cambodia knows that the U.S. dollar is the de facto currency there. From paying for a coffee to buying a car, locals and foreigners alike deal in the greenback. According to the latest data, the dollar accounts for 83% of total transactions and more than 90% of banking deposits. While high dollarization has made Cambodia an attractive destination for foreign investment and has given the economy much-needed stability after decades of civil conflict, it has also left the country vulnerable to dramatic shifts in the international economy, as the yuan devaluation demonstrates.
The National Bank of Cambodia last month unveiled a new strategy to urge its citizens to use the riel, its local currency. Chea Serey, director general of the country’s central bank, reassured the market there would not be any sudden switch; instead, the authorities would rely on public education and marketing campaigns to encourage people to use the riel. In this interview with Knowledge@Wharton, Cambodia’s top central banker said the last thing Cambodia wants is to create panic in the capital market, especially for an economy highly reliant on foreign investment. At the same time, the persistence of the dollar means continued loss of economic sovereignty, national pride and seigniorage (the profit made by a government by issuing currency, based on the difference between a currency’s face value and its cost of production).
A mother of two, 34-year-old Serey hails from a banking family. Her father, Chea Chanto, is the Governor of the National Bank of Cambodia. Her own history with the bank stretches back to 1999, when she worked there as a French translator. With a degree in finance from France, accounting from New Zealand and an MBA from the University of London, she rose to her current position in 2013, joining a select band of female central bankers such as Janet Yellen (U.S.), Elvira Nabiullina (Russia), Zeti Akhtar Aziz (Malaysia) and Karnit Flug (Israel).
The interview below starts off with a reference to 1992, the year when hundreds of millions of dollars flowed into the country courtesy of the United Nations Transitional Authority in Cambodia (UNTAC). Described as the largest and most expensive operation in its history — $1.7 billion — the UN peace mission smoothed the way for foreign aid and foreign investment into the stricken country. A World Investment Report estimates that foreign direct investment in Cambodia increased from $38 million in 1990 to $1.6 billion in 2000 and to $3.5 billion in 2007. The local riel, reintroduced in 1980 after the Khmer Rouge abolished it in 1975, rode on the back of the dollar’s strength, giving Cambodia the macroeconomic stability it needed. With more than two decades of continuous growth and a predicted GDP growth of 7.3% for 2015, has the time come for Cambodia to wean itself off the dollar?
An edited transcript appears below:
Knowledge@Wharton: The dollar is so dominant in Cambodia. How do you go about convincing Cambodians to use the local currency?
Chea Serey: First, it helps to know how the dollar came to Cambodia. In 1992, when the United Nations came to Cambodia … they brought a lot of U.S. dollars into the economy, and that was a very good opportunity for Cambodians because the currency before wasn’t strong and there was inflation. The exchange rate was devalued manifold.… [Cambodians] immediately adopted the U.S. dollar, and that’s been going on and on until now.
Why don’t people want to shift back to their local currency? … One of the reasons is convenience, because people are now so used to the U.S. dollar that they have lost the notional value of their own currency. For example, people know that an apartment, say, would cost $50,000, but they wouldn’t know how to quantify [it in] their own local currency. You’d have to pick up a calculator and do the translation. And because things in Cambodia are priced in U.S. dollars, people are used to it. And it’s not because they don’t trust the currency; it’s because it’s so convenient to use the U.S. dollar.
“A lot of investors see that they can invest in U.S. dollars [in Cambodia]. It’s an additional layer of protection for them, at least in terms of foreign exchange risks.”
The other thing is that dollarization hasn’t been all that bad for Cambodia. In the beginning, it meant [we were] able to attract FDI into the country. A lot of investors see that they can invest in U.S. dollars. It’s an additional layer of protection for them, at least in terms of foreign exchange risks. It has also shielded Cambodia from inflation.
The Cambodian economy and our exchange rate have been stable for the past 15 years. Inflation is relatively low, below 5%. And our economic prospects are bright.
Now, the time has come for Cambodia to stand on its own and promote its own currency. There is a question of sovereignty, national pride and so on. And there is also the question of losing seigniorage. And there is also the question of monetary policy tools.
Knowledge@Wharton: Given the advantages of de-dollarization, why have you ruled out a time frame? How does it work if you don’t have a time frame?
Serey: We don’t call it de-dollarization, which makes people think you’re taking dollars out of the economy — and that, I can tell you, can be really frightening for investors, because suddenly [their] U.S. dollars would have to be converted into local currency. And the thing that we worry about is capital flight. So we call it the strategy [for] the promotion of the use of local currency. We want to use moral persuasion rather than administrative measures.
The idea of introducing a time frame, a road map … I think that would go against our objective of moral persuasion, because when you use a time frame, you have to abide by a time frame, right? So if it doesn’t happen by 2020, you’ll have to do something, because your goal has not been reached. We have a road map of what to do but we don’t set a time frame, mostly because we don’t want to worry investors; we want them to see it as an evolution rather than a revolution. We’ll do it slowly, and we want to make sure that when people use [the local currency], it’s because they trust it and not because we forced them to use it.
Knowledge@Wharton: According to an IMF report, the U.S. dollar makes up 90% of all transactions in Cambodia. When does that become 99% and irreversible?
Serey: It’s not irreversible. In terms of volume, it’s still low, because only people in Phnom Penh and some tourist cities use U.S. dollars, and for the big value transactions. If you go to the rural areas, people mostly use local currency. So, yes, in terms of value it is 90%, but in terms of volume it’s not that much.
Knowledge@Wharton: What is more important for you as a central banker, the value or the volume?
Serey: All is important. But [it’s] the volume — meaning a lot of people using local currency and only a few rich people using U.S. dollars — where we think that [de-dollarization] can be done with certain measures in place.
As the central bank, we promote stability. That is the first and foremost thing that we do — to promote stability and confidence. People know they can use [the currency] without fearing it will lose its value next week. I can’t guarantee next year, but at least I’m sure next week and next month it will about the same.
We also tried to make our bank notes more attractive … introducing different [and] new features into the bank note to reflect our new socio-economic conditions … and we have embedded new technologies to prevent counterfeiting. These are the things that a central bank can do. Going beyond that, we need the private sector.
“We want to make sure that when people use [the local currency], it’s because they trust it and not because we forced them to use it.”
Knowledge@Wharton: When you talk about the private sector, which particular part — retail, banking — did you have in mind?
Serey: Both the banking sector and the retail sector. There is no point pushing the retail sector to accept the local currency if … their transactions are mostly in U.S. dollars. And we are working with the banks [to] make them understand … it is the government’s strategy to promote the use of the local currency and we do have some expectations of the banks … contributing to this strategy, because they can’t exist on their own; we have to work together. We encourage the private sector to use more of the local currency in their transactions and in how they set their prices and how they accept their payments.
Knowledge@Wharton: You spoke earlier about people’s fears if you forced them to de-dollarize. How much of that fear, do you think, is a legacy of Cambodia’s past?
Serey: I think the fear would come mostly from foreign investors. For locals, yes, they are traumatized by all this legacy, but what is there for them to do? This is their country, where are they going to go? They have to live with it. Foreign investors, however, always have –- Cambodia is very free in terms of capital flow, the freest in the region — the option to remit their capital if they don’t like to hold local currency.
We know there are serious investors who wouldn’t mind changing everything into local currency, because what they are into is the economic prospect and the opportunity that Cambodia can offer, and not merely the exchange rate risk. Vietnam is a very good example. Vietnam managed to attract much, much, much more FDI than Cambodia.
Knowledge@Wharton: It’s a bigger country, though.
Serey: Yes, but the exchange rate is very volatile, relative to Cambodia. That is what I’m trying to say … people are attracted to Vietnam because of the economic prospect, because of the opportunity that Vietnam has to offer, rather than the … exchange rate.
Knowledge@Wharton: You touched on the advantages and disadvantages of de-dollarization. At the end of the day, when you weigh up the cost and benefit, which way would you go?
Serey: The long-term benefit of using our own local currency is there. The short-term impact of de-dollarization [is] perhaps a little unclear because … we are talking about people’s sentiment; it’s not like you can trace a graph so you know right away, and we need to do lots and lots of surveys.
“As the central bank, we promote stability. That is the first and foremost thing that we do — to promote stability and confidence. People know they can use [the currency] without fearing it will lose its value next week.”
Knowledge@Wharton: Have there been any surveys?
Serey: We have done surveys, but I have to admit that we haven’t done enough. It’s not like we have done it on a big scale, with market intelligence and so on, and generally, people say they want to participate in the use of the local currency and they don’t mind accepting local currency as payment. The only thing that I worry about is what you say and what you do may not be consistent. This is something that we need … as policymakers … to be cautious [about], because we can’t leave everything to what people say.
Knowledge@Wharton: What about political consensus between the government and the opposition?
Serey: It is clear for everyone — the government and. I’m sure, the opposition — that we need to strengthen the use of the local currency. Now, the way to do it — people might have different opinions. Some people might want it right away, but as a central bank we tend to be more cautious in our policymaking.
Knowledge@Wharton: Is this something you would like to have as your legacy?
Serey: I can only hope it will happen within my lifetime, though I have a lot more years to live.