Interview: Ramon S Monzon
How do you assess the market’s appetite for initial public offerings (IPOs) on the PSE?
RAMON S MONZON: Although IPOs remain a viable option for firms and investors, most companies are finding that it is cheaper to raise capital from the debt market than from the equity market due to the prevailing low-interest environment. In May 2019 the central bank, Bangko Sentral ng Pilipinas, reduced interest rates by 25 basis points. That same month it cut the reserve requirement ratio (RRR) by 100 basis points, with additional reductions of 50 basis points implemented by the end of June and July 2019. The RRR cuts will increase liquidity in the banking system, thereby allowing banks to offer more loans and further reduce interest rates.
Historically, companies have refrained from tapping the capital market around elections, such as the midterm elections held in May 2019. All of these factors contributed to a dearth of capital-raising activities and IPOs, but we are hopeful – if not confident – that companies will soon be back in the equity market for their capital-raising requirements.
What kinds of assets is the PSE looking to develop?
MONZON: The focus of the PSE is on creating new financial products, as this is the best way to expand our investor base and compete with our regional counterparts. While the PSE is ASEAN’s second-oldest stock exchange, it is regrettably the second smallest.
Cooperation between the PSE and its regulator, the Securities and Exchange Commission (SEC), is crucial if we are to catch up with our peers in terms of capital market development. We hope to launch short selling in the third quarter of 2019. The PSE is also working to secure the approval of the SEC and the Bureau of Internal Revenue to allow the use of offshore collateral in the form of foreign currencies, treasuries and equities for domestic transactions in securities, borrowing and lending, as well as the acceptance of the Global Master Securities Lending Agreement (GMSLA). The latter can act as a substitute for the local template to accommodate foreign investors that already have GMSLAs. Short selling is a useful tool for foreign investors looking to diversify and hedge their Philippine portfolios.
We also hope to launch real estate investment trusts (REITs) in the third quarter of 2019. To this end, we recently released the revised listing rules – which address the Department of Finance requirement for proceeds raised from REITs to be reinvested in the country – for comments from stakeholders. Once these products are fully available, we expect to see a marked increase in foreign investment inflows in the country.
Which market considerations are most likely to influence the performance of PSE equities in 2019?
MONZON: The delay in the approval of the 2019 national budget has adversely affected GDP growth and the performance of the capital markets. However, low interest rates and a moderate inflation rate of around 3% are leading to a bullish economic performance as companies’ operational costs decrease and profit margins increase. Although only a few IPOs are likely to occur for the rest of the year, the average daily trading volume has risen by 9.7% since the end of 2018 to P7.8bn ($145.1m) by the end of June 2019.
In addition, the April 2019 upgrade of the Philippines’ credit rating from “BBB” to “BBB+” by Standard & Poor’s bodes well for the country, including its equities market, as this move affirms the Philippines’ solid economic fundamentals. We expect investor optimism, particularly from institutional funds, to boost trading volumes.
In terms of international trends that could affect the Philippines, the US-China trade dispute is the top concern. Global economic growth is also slowing: the IMF dropped its international GDP growth projection for 2019 from 3.5% to 3.3%, while the World Bank forecast growth of 2.6%. If global growth slows, this will likely have a trickle-down effect on the Philippines and impact the performance of the stock exchange.
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