Interview: Eduardo V Francisco
What changes or new developments can be expected from the domestic stock market?
EDUARDO V FRANCISCO: The nation’s capital markets continue to grow quickly, as can be seen through the year-on-year (y-o-y) increase in bond issuances and higher numbers of initial public offerings. Our numbers still seem small, relative to other countries, but they are understated. There is an abundance of domestic liquidity and some clients opt not to go via capital markets, instead utilising other options. For example, in many cases when a client would normally want to issue a bond, banks will instead offer a loan of up to 10bn ($225m).
As a result of this, the banking system is competing with capital markets by making financing easier, which creates the impression that our capital markets are weak. However, once liquidity is reduced, we will see normal capital market activity and higher numbers, since banks are currently exceptionally strong and dominate the fixed-income market.
From the perspective of issuers, there are many clients who are large enough to hit the capital markets and be attractive to not just local investors, but also regional ones. Thus, effort is going toward building awareness among private firms, educating them about the benefits of having new investors and the additional transparency requirements.
If a Filipino firm is listed, it enjoys a seal of good housekeeping, access to capital and can be tapped by foreign partners first. The benefits of listing are significant, but challenges remain, like changing the business culture and increasing disclosures. Consider the bond market: y-o-y issuance growth has increased and the Philippines is working to encourage smaller companies to tap the bond market, while also pursuing cross-border listing opportunities.
What are the biggest challenges during the process of regional capital markets integration?
FRANCISCO: The two areas we need to address during integration are the kinds of products and services that will be offered in the equities and fixed-income market, and the simplification of tax structures. These go in tandem with the ongoing deployment of infrastructure and the development of a regulatory framework that makes the country more competitive.
From a private sector perspective, there is a willingness to pursue integration, and the Philippines presents a value proposition as an investment destination; however, we first need to get our things in order. We need to come up with more products and address existing regulatory issues, particularly related to the Bureau of Internal Revenue, like the taxability of foreign investors. Additionally, there have been efforts by the Philippine Dealing Exchange to unify and simplify existing tax structures, as there are currently tax exempt and non-tax exempt Philippine institutions that cannot trade among themselves. These issues confuse local firms and would prove difficult for foreigners.
On the securities side, integration creates a situation where the countries’ national priorities may conflict, thereby creating the potential for smaller players to be marginalised. For instance, the Philippines enjoys abundant liquidity domestically, but its product offering is not diverse. When the Philippines is linked to other countries in the region, if it does not exhibit the variety of investment products of its regional peers, ASEAN neighbours may not invest in the country, while at the same time, the country’s $40bn in liquidity could be invested abroad. As a result, it is imperative to first fix the domestic market, or else integration will see our funds exit and we may not receive any in return.
Additionally, we have to educate our customers before pushing for securities, because they are not yet sophisticated enough to buy equity, as they are accustomed to fixed income. To protect customers, it would, for example, be unwise to tell them to buy Malaysian-issued equities or Islamic bonds, because they are not financially adept. The investor base will grow quickly from its current 0.5% of the population, and this expansion must be complemented with educational support.
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