Interview: Eduardo Francisco
What trends do you see in the initial public offering (IPO) segment over the next few years?
EDUARDO FRANCISCO: While other countries have 10 to 20 IPOs per year, four to five has been the norm in the Philippines. We want more corporates to debut in the capital markets and establish their name and presence. Listing allows them to bring in new investors and also gives the latter more investment options. The significant capital-raising method in the past year has been through follow-on equity placements, many of which resulted from IPOs or backdoor listings that needed to raise additional capital. With the current local regulations, they are a faster way to raise capital as compared to an IPO or rights issue. A limitation to a follow-on is that it is sold abroad without a local roadshow or domestic offer, so we are unable to sell to retail investors.
In what way does the fixed-income market compare to that of bank lending?
FRANCISCO: There have been select retail bonds issued in 2013, but this instrument has been reserved for highly rated institutions. Given the high liquidity in the banking system, private and government-owned corporations often opt for loans, since the issue does not have to be registered with the Securities and Exchange Commission, and a credit rating does not have to be obtained. This creates the wrong perception that the domestic fixed-income markets are weak. The numbers are not that high because banks are liquid and end up funding these corporations. As loans are privately placed, fixed-income issues may not increase as fast. With the healthy growth of the Philippines, and loan growth being a multiple of gross national product, loans are set to remain a key source of funding in the country.
How can the Philippines Stock Exchange (PSE) diversify listed entities and encourage larger issues to better reflect the make up of the economy?
FRANCISCO: The PSE changed the rules when it eliminated its second board to only include its main board and small and medium-size enterprise board, which has raised the profile of publicly listed companies. The issue now is that the index valuation has been relatively high, so that while on the one hand it encouraged issuers to list, on the other hand it led investors to question whether to invest in an IPO or buy from the existing issues. Three to four years ago, the majority of trades were foreign, but now local trading surpasses the foreign segment as our local investor base grows.
The volume of trades has also risen to P7bn-8bn ($168.7m-192.8m) from only P1bn-3bn ($24.1m-72.3m) a few years back. With the excess liquidity in the system and the phasing out of the special deposit accounts, we expect more funds to come onto the stock market.
How sophisticated can financial instruments become and still be suitable for local investors?
FRANCISCO: There are several institutions interested in Exchange-Traded Funds, however the tax due to friction costs remains an issue. Capital markets in the Philippines are not only based on equity; the bond markets are also growing. Unlike other markets where there is only one exchange for fixed income and equity, in the Philippines there is a separate legal entity handling the trading for fixed income, called the Philippine Dealing and Exchange Corporation (PDEx). Considering that the PSE owns 20% of PDEx, there is discussion to merge them to increase efficiency. In the PDEx, the government constitutes the majority of listed bonds in values whereas corporates are only a dozen or so, though we are convincing more corporates to raise bonds to diversify their funding base. We want to create and list more products to give investors more options: convertibles, for instance, which are not publicly traded here; or warrants, which have been issued in the past.
Further, the link up of stock exchanges in ASEAN will enable local investors to buy from bourses abroad and better utilise liquidity. Integration will also increase the size of our overall investor base, which has grown to 500,040 individual local investors as of year-end 2012.
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