Efforts under way to deepen and diversify the Philippines' local capital markets

In an effort to deepen and diversify the local capital markets, the Philippine Stock Exchange (PSE), the Securities and Exchange Commission (SEC), Bangko Sentral ng Pilipinas (BSP) and international partners such as the Asian Development Bank (ADB) have been active in rolling out a series of reforms to pave the way to sustainable long-term growth. These changes are expected to complement earlier reforms implemented in 2017 to support President Rodrigo Duterte’s infrastructure agenda, Build, Build, Build (BBB).

Changes Outlined

In September 2017 Nestor A Espenilla Jr, governor of the BSP, announced plans to launch a capital markets reform agenda aimed at developing the peso debt market, with changes to be carried out over 18 months. Reform priorities include establishing a reliable yield curve, introducing a repurchase (repo) programme, and strengthening regulatory oversight of both repo and fixed-income markets. The new roadmap focuses on deepening local bond markets by overhauling the eligible dealer system for government securities, increasing the supply of shortterm securities, and developing an effective regulatory framework for derivatives and repo markets. Reforms should also create a reliable benchmark for the valuation of financial instruments, as well as establish integrated financial market infrastructure that will promote price discovery, transparency, and orderly trading, clearing and settlement. The plan was officially launched in November 2017 in partnership with the SEC and ADB, backed by a $300m loan and a $500,000 technical assistance grant from the latter.

Policy Targets

The blueprint’s overarching goal is to help reach infrastructure funding targets outlined in the government’s BBB programme, estimated at $158bn between 2017 and 2022. Public spending on infrastructure is forecast to hit 7.3% of GDP by 2022, up from 5.1% in 2017 (see Economy chapter).

To reach these sizeable funding requirements, the authorities will need to mobilise and deepen the capital markets for both government and private debt. Reforms include launching an expanded primary dealer system, which will dovetail with a reduction in the number of outstanding government debt issues from 201 in 2015 to 85 as of late 2017, thereby reducing the cost of debt through competition.

Another change will see the re-introduction of a repo market based on the Global Master Repurchase Agreement. This will enable the Philippines to link financing activities of both domestic and global banks operating within and outside the country, while also allowing lenders to make active two-way quotes. As it enables market participants to hedge the risk of holding longterm, fixed-rate investments, this reform is also a vital prerequisite for the introduction of bond futures.

Lastly, the reform package seeks to improve overthe-counter government bond market operations to ensure the Philippines is on a par with other major South-east Asian economies. Industry self-regulation structures are also to be developed, followed by new measures to enhance bond pricing and transparency.

PPP Financing

These efforts come after the government approved new regulations for the initial public offering (IPO) of private companies involved in public-private partnerships (PPP) in December 2016. PPPs are set to play a significant role in implementing initiatives under the BBB programme.

The 2016 framework aims to open up alternative funding channels for PPP developers, allowing companies with a project worth at least P5bn ($98.8m) to tap the PSE for infrastructure financing. New listing and disclosure rules also exempt PPP companies from the requirement to provide three years of financial statements and operating history in the Philippines; however, all fundraisers must prove that they have been awarded a PPP contract by the state. Applicant firms are further required to have already completed one phase of the project, and established either associated commercial operations or maintenance services, per the contract.