With strong economic growth and an environment of high liquidity, the Philippines’ capital markets have been outperforming many regional peers. The year ahead holds great promise too, as presidential elections and the continued roll out of government infrastructure projects set up more economic stimulus and more demand for project financing, with capital markets increasingly serving as a source for this type of funding. However, these are also uncertain times globally, with the long-anticipated US Federal Reserve rate rise taking place in late 2015. Also likely to have an impact is the slowdown in Chinese economic growth. However, the Philippines’ capital markets now have increasing reserves of strength to depend on, with the sector looking to get wider and deeper in the years ahead.
Institutions & Agencies
The year 1927 saw the first capital market begin trading in the Philippines, with the opening of the Manila Stock Exchange (MSE). This was joined in 1963 by the Makati Stock Exchange. In 1992 the two merged, with the present Philippine Stock Exchange (PSE) the result. Currently, the PSE is supported by the Philippines Depository and Trust Corporation (PDTC), which is the central depository, and the Securities Clearing Corporation of the Philippines. The main market regulator, the Securities and Exchange Commission (SEC), dates back to 1936, when it was brought in to tame the excesses of the MSE. The SEC was reorganised in 1975 and then expanded in 1981, before taking its present form in 2000 in accordance with the Securities Regulation Code (SRC), which was also passed in that year.
In 2003 the Philippines Dealing System (PDS) Group was established and the shareholders of the PDTC – which included the PSE, the Bankers Association of the Philippines (BAP) and several others – transferred their equity to shares in the PDS Group’ holding company, PDS Holding. This also owns the Philippine Dealing and Exchange Corporation (PDEx), the operator of the country’s fixed-income exchange, and the Philippines Securities Settlement Corporation, which handles domestic transfer systems for US dollar and Chinese renminbi settlements. In 2013 talks began on a possible merger between the PSE and the PDS that would produce a unified platform for securities and fixed-income products. In July 2015 the PSE bought BAP’s share in PDS, making the exchange the largest shareholder, yet the merger then faced regulatory issues, as the SRC does not allow a single industry or business group to own more than 20% of the exchange. Progress was expected in 2016 as the merger would also bring the exchanges into alignment with the requirements for a cross-border trading platform across the ASEAN (see analysis).
In addition to the SEC, the central bank, Bangko Sentral ng Pilipinas (BSP), also has a regulatory role when it comes to non-banking financial institutions (NBFIs), insofar as they have ownership connections to banks. NBFIs and banks are also subject to specific banking laws, in addition to the SRC, while companies in the market are also subject to the Corporation Code. Finally, the Financial Stability Coordination Council, launched in February 2014, has also played an important role in capital markets development. Consisting of representatives from the SEC, the Department of Finance, the BSP, the Insurance Commission and the Philippines Deposit Insurance Corporation, it unites all the key financial sector institutions behind a drive to increase sector stability, strength and innovation, with major benefits for the economy as a whole.
Plans & Projects
To try and grow the sector further, a series of Capital Markets Development Plans (CMDPs) have been launched by the government, with the first of these running from 2005 to 2010, and a successor plan for 2013-17. The first plan saw some notable successes, including on the regulatory and legal side, with the establishment of the Credit Information Corporation to hold a central database of borrower information. Real Estate Investment Trusts (REITs) were also given a legal framework, private pension funds were developed under a Personal Equity and Retirement Account Law, and the Financial Rehabilitation and Insolvency Act also became law.
The PSE was also reorganised internally, with its compliance and surveillance group becoming the Market Regulation Division, itself then spun off in 2011 to become an independent company, the Capital Markets Integrity Corporation (CMIC). Further moves were made towards a scripless environment, as well as in the simplification of clearing and settlement and electronic payments. The PDEx also came into being during the first plan period in 2005. On a wider level, the SEC also ramped up its involvement, joining with other countries in the Asian Bond Market Initiative. The PSE introduced a new trading system, PSET rade, in 2010, and in 2012 the CMIC launched its Total Market Surveillance system, which can monitor up to 1m orders/trades per day.
The first plan thus established a firm basis for the capital markets to go to the next level. The objectives of the 2013-17 CMDP include enhancing competitiveness through the introduction of more products, such as exchange-traded funds (ETF), while cutting a lot of the costs of doing business in terms of commissions and fees. Other goals include boosting liquidity, strengthening the clearing and settlements system, and boosting regional integration, corporate governance and investor protection. Reforms in underwriting, distribution of equities and ramping up of regulatory capacity also come under the plan.
Progress
Much has been achieved in these fields already. By September 2014 the fixed-income segment saw a market maker programme introduced to enhance liquidity, along with a framework design for continuous switch and bond swaps. Liquidity in equities has been enhanced by a rule introduced in 2013 that requires listed companies to maintain a minimum public float of 10%. The PSE has also undertaken a number of structural reforms, such as a new listings board structure, cutting the previous three boards to two – the Main Board and the Small, Medium and Emerging Board. The new online system PSETraDex was also set up in 2013 which, according to Eduardo Francisco, president of BDO Capital & Investment Corporation, will equalise market access. “The PSE has been bullish in sponsoring its online trading system. Whereas in the past only large institutions could come up with proprietary trading systems and small brokers would be left out, with the introduction of an open online trading system, which is available to all brokers, access is democratised.” The PSE has also moved into the Islamic market, with the issuing of a list of sharia-compliant securities and regular screening to ensure their adherence to sharia principles.
Private debt issue markets have also been improved with rules on ETFs issued by the SEC and the first ETF listing in December 2013. Clearer tax codes have also been introduced, while rules on hedge protection markets are still under discussion. The SEC has also been busy with the ASEAN+3 (ASEAN, Japan, China and South Korea) Bond Market Forum, while ASEAN exchanges have also launched three new tradeable indices in partnership with the FTSE Group.
Numbers Games
Thanks to earlier reforms and external economic factors, the new CMDP also came in at a time when the capital markets were experiencing new vitality. The Philippine economy entered a period of sustained strong growth after 2011, with Asian Development Bank (ADB) data showing GDP growth at 6.7% in 2012, then 7.1% in 2013 and 6.1% in 2014. The ADB estimated 6% growth in 2015, increasing to 6.3% in 2016. Inflation, meanwhile, has also been relatively low and stable; the national consumer price index shows 3.2% growth in 2012, 3% in 2013 and 4.1% in 2014, with the ADB expecting 2% for 2015 and 3% for 2016. In such a positive environment, companies have been boosting output and earnings. The production index for manufacturing, for example, went up from 100.2 points in 2012 to 114.2 in 2013 and 122.7 in 2014. The World Bank also noted a significant improvement in the standard of governance, with a related index seeing the Philippines’ score rise from 35 in 2010 to 43.1 in 2013.
Rising Scores
The country also saw a rise in its ratings by international credit rating agencies. Standard & Poor’s hiked the Philippines long-term sovereign rating from “BBB- stable” to “BBB stable” in May 2014, the highest level it had ever achieved and re-affirmed this rating in April 2015. Fitch had also given an investment grade rating, “BBB- positive” in September 2015, while Moody’s joined the others in conferring this status in December 2015, giving a “Baa2 stable” rating. These favourable circumstances helped drive a major surge in capital markets activity. The main board, the PSEi, began an inexorable rise in early 2011, when it crossed the 4000-points mark, reaching 7000 points two years later, before falling below 6000 points. From there, it steadily rose before crossing 7500 points in January 2015. April 2015 saw an all-time high at 8100 points. Some decline set in after that, with the PSEi closing 2015 at just under 7000 points and staying around that mark into 2016.
In terms of market capitalisation (mcap), the top five companies listed on the PSE as of end-December 2015 were: Manulife Philippines (P1.4trn, $31.08bn); Sun Life Financial (P872.6bn, $19.4bn); SM Investments (P693.8bn, $15.4bn); JG Summit Holdings (P525bn, $11.7bn); and Ayala Land (P506.3bn, $11.2bn). At the end of 2015, total mcap stood at P13.47trn ($299bn), with this broken down by sector into financial (28.4%), holding firms (24.29%), industrial (18.89%), property (13.28%), services (12.77%), and mining and oil (2.37%).
The factors behind the PSEi’s decline from its April 2015 high were largely external. For most of 2015, the market had been awaiting a decision by the US Federal Reserve to raise rates. In addition, the state of the Chinese economy has been a growing concern, with the East Asian giant now accounting for around 11% of world GDP and 10% of world trade. In terms of commodities, Chinese demand is even more crucial, consisting of around 11% of world oil demand and 40-70% of demand for a range of other key commodities. Thus, the slowdown in China has had an impact throughout the Asia-Pacific, both directly, as China is the Philippines’ third-largest export market, and indirectly, as economies even more reliant on China and which are also key trading partners for the Philippines, such as Japan and Australia, have also lost exports and seen their economic growth stumble. Following April 2015 the market had more visibility on the nature of China’s slowdown and on the likelihood of a US Fed rate hike, leading to a drop in the PSE.
Positive Realities
Yet while these factors have had an impact, the economy has continued to show strong growth, driven by robust consumer demand. “There have been pull backs,” John Benette Mamangun, assistant vice-president and head of corporate planning and communications at the PSE, told OBG. “But there continues to be basis for momentum to be on the upside.” This can be seen in the continuing demand for initial public offerings (IPOs). In 2014 there were four listings via standard IPOs, one via a follow-through offering and one listing-by-way-of-introduction. The first IPO of 2015 occurred in April, when Crown Asia Chemicals listed. The company’s plans demonstrated why companies are turning to the market; P222.8m ($4.9m) was raised, P69m ($1.5m) earmarked for working capital, P66.2m ($1.47m) was for constructing new warehousing and plant, and P25m ($555,000) was for modernising an existing facility. The market is thus being used to finance expansion in a growing economy.
A month later, in May 2015, bar and restaurant operator Gweillo received approval for an IPO, and property and infrastructure developer DM Wenceslao recently announced plans for a listing sometime in 2016. In October 2015 the SEC also issued construction outfit DATEM permission to list – although the company has postponed its plans. Shell also plans to hold an IPO in 2016, after upgrades to its Batangas refinery are completed. In November 2015 Metro Retail Stores held its IPO and real estate developer Italpinas Development received SEC permission to hold an IPO. In terms of sector performance on the PSE, with consumer expenditure driving much economic growth, it is those companies that deliver services in this area that are, in general, looking to expand and thus explore ways of using the market.
Construction is also benefitting from the continued commitment of the government to press ahead with its infrastructure programme, with public-private partnerships (PPPs) being a key part of this. In the 2015 national budget some P303.2bn ($6.7bn) was allocated to the Department of Public Works and Highways, a 37.9% hike over 2014. A range of expressway projects are also due to be implemented via PPP schemes. In 2016 the presidential election is also widely thought likely to spur a wave of spending on consumer goods and services in particular, as the parties and candidates vie for supporters.
Fixed Income
The government infrastructure programme, and the need for private sector players to raise finance for PPPs and for their own expansion, also made 2015 a good year for fixed-income. In addition, Philippine banks have been trying to raise their capital in order to meet their Basel III requirements, also giving them an incentive to enter the bond market. In November 2015 the Basel committee announced a 4.7% increase in overall capital requirements, although the amount individual banks would have to change depends on their particular position. The strong US dollar and low long-term US Treasury bill yields have also helped out. Relatively low inflation domestically has also added to the interest.
In terms of government securities, 2015 began with the government returning to the international capital markets with a major $2bn offshore issue, dated for 2040. These bonds were priced with a coupon of 3.95%, the lowest coupon on a global bond ever issued by the country, demonstrating market confidence in the economy. In terms of local-currency government bonds, the first quarter of 2015 saw some P135bn ($3bn) in issues, and the second quarter of 2015 had P90bn ($2bn). The third quarter of that year saw a return to the P135bn ($3bn) level, with the Bureau of the Treasury (BoT) issuing a similar amount in the fourth quarter, albeit in more short-term papers, given the US Federal Reserve announcement. Towards the end of 2015, however, the market for government securities visibly weakened, as investors awaited the US’s decision, with the BoT switching to partial awards in the face of high bids and low demand. ADB figures from June 2015 show that investors in local-currency government bonds are led by banks and financial institutions, which constituted 37.2% of all investors in that month. The second-largest group included contractual savings and tax-exempt institutions with 28.9%, followed by BoT-managed funds at 16.6%.
When it came to corporate bonds, the issuers by industry were also led by banks and financial services, with 32.65%, followed by real estate (21.6%), holding companies (17.3%), electricity generation and distribution (5.9%), and thoroughfares and tollways (5.7%). The brewery and alcoholic beverages sector came in last with 5%. Notable corporate bond issuances in the first half of 2015 included: BDO Unibank, with a P7.5bn ($166.6m), five-year paper; Ayala Land, with a P7bn ($155.4m), seven-year bond; and three issues by the South Luzon Tollway, totalling P7.3bn ($162.1m). However, the corporate bond market is still highly concentrated. The ABD reported that only 51 firms were tapping the market, with the top 30 issuers accounting for 89.9% of the total.
Funds
In terms of fund management, the Philippines is still some way behind more developed capital markets. Yet, as the economy grows and the market continues to widen, the asset management sector is expanding with it. The Fund Managers Association of the Philippines reported that in May 2015 assets under management totalled some P2.68trn ($59.5bn), with most of the retail collective investment side of this in unit investment trust funds (UITFs). According to the PSE, the country had 53 registered mutual funds as of March 2016, with 22 investing in bonds, 14 in balanced portfolios, 13 in stocks or equities, three in money markets and one as an index fund.
These products have been around for a while, although mark-to-market pricing for UITFs was only introduced in 2006. Hit by the global downturn, they came back after 2013, when special deposit accounts were removed from retail investment by the BSP. The key body for the UITF sector is the Trust Officers Association of the Philippines, which brings together all BSP licensed institutions in the sector.
Outlook
With continuing economic growth and major government infrastructure and election spending ahead, the year is likely to see continued expansion in the markets – albeit tempered by external factors, such as the Chinese slowdown and rate hike in the US. For the Philippines, this is a time when market makers may therefore have a good opportunity to push for a widening and deepening of the market. While much has been done to develop the range of products, the Philippines is still very much a case of equities and bonds, with few other products on offer.
The first ETF was a step forward, as was the introduction of REITS, but so far there has been little follow up in these new areas. As a result, fund managers still tend to look abroad for places to take their clients’ investments. There are, however, moves afoot in the most recent CMDP and elsewhere that aim to boost the range and depth, along with greater recognition in government that there are substantial benefits to be gained from continuing market expansion and increasing sophistication. With such a backdrop, the period ahead looks to be a rather busy one.
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