FOR the second day in a row, key figures in the local bond and equities markets expressed concern about the underdevelopment of the Philippine capital markets, saying that their potential to meet the country’s enormous infrastructure and corporate funding requirements is being overlooked.
Speaking at the Financing Growth of Philippine Companies conference at the Shangri-la Makati on Wednesday, Securities and Exchange commissioner Ephyro Amatong, Philippine Stock Exchange President Hans Sicat, and Philippine Dealing System President and CEO Cesar Crisol described the Philippine capital market environment as having the critical components in place, but needing more refinements to attract a larger and more diverse investor base.
The conference was the second annual conference held in the Philippines by Hong Kong-based global consulting firm Latham and Watkins, and was sponsored by regional trade association Asifma, the Financial Executives Institute of the Philippines (Finex), the Management Association of the Philippines, and the Financial Times.
The first such event took place in Makati last March, and also tackled issues concerning corporate and project financing.
P2-T private infra investment needed
Citing figures from the National Economic Development Authority (NEDA), SEC Commissioner Amatong explained that the need for private investment in infrastructure “over the next few years” now exceeds P2 trillion.
The bulk of the P2 trillion would be directed into power generation projects and projects under the public-private partnership (PPP) program, Amatong said.
To meet this huge financing demand, Amatong made a case for the development of infrastructure bonds. “As of now, 19.8 percent of corporate local currency bonds are already infrastructure-related,” he explained.
Impact of borrowing limits
Amatong pointed to the single-borrower limit (SBL) imposed on banks as a factor pushing companies to seek market funding.
“SBL presents an opportunity for bond and equity markets,” he said. “Particularly since the additional 25 percent limit on borrowing for PPP projects will expire at the end of 2016.”
The single-borrower limit restricts lending to a single borrower to 25 percent of a bank’s available capital, to minimize losses to the bank in case of a default. As a boost to the PPP program, loans for PPP projects have a higher ceiling of 50 percent, but only temporarily as the extra 25 percent incentive will expire at the end of next year.
Sicat agreed with Amatong’s view, saying that the SBL will continue to encourage more bond and equity issuances from companies seeking funding. Sicat’s counterpart at the Philippine Dealing System (PDS), however, pointed out that the SBL is actually restricting growth in the Philippines’ bond market.
“Because of the single-borrower limit, there is insufficient borrowing and lending in our secondary market,” PDS’ Crisol explained. “There is a lack of liquidity in the secondary market, and secondary market spreads are higher than original issuances,” all of which tends to discourage bond issuing activity.
Crisol said that while bond market volume has increased fairly rapidly—from $40.3 billion in 2013 to $45.9 billion in 2014—and while the corporate bond sector is growing faster than government bonds, the market is still limited. “Right now we only have 31 corporate issuers,” the lowest among bond markets in the region except Cambodia. Malaysia, by comparison, has 234 corporate issuers.
An expanding theme
Many of the points raised on Wednesday were the same ones discussed at Euromoney’s Philippine Investment Forum on Tuesday, and suggest a common theme that Philippine capital markets are “an understatement,” as Eduardo Francisco, president of the Investment Banking Group of BDO Capital and Investment Corp., earlier described them. Market players paint a picture of an investment environment in which the limits of conventional bank financing—traditionally the preferred funding method for most Philippine companies—seem to have been reached, but where the natural alternative of the capital markets is not yet adequately developed.
“All the pieces are in place for expanding bond financing, particularly in infrastructure,” SEC’s Amatong stressed. “The Philippines has a solid PPP program, a developing corporate bond market, and a conducive regulatory environment.”
Over on the equities side, PSE’s Sicat highlighted the ongoing merger of the country’s stock and bond markets as a potential benefit, as well as the stock exchange’s upcoming shift to the NASDAQ trading engine system to improve efficiency and trader access. “The Philippines’ economic momentum discounts domestic politics. For now. Investors should take advantage of the window of opportunity,” Sicat said.
On the bond market, Crisol stressed that key initiatives have yet to be undertaken, such as development of a repurchase program, and loosening constraints on transfers between taxable and tax-exempt bondholders. In terms of progress so far, he said that the recent reopening of the long-term negotiable certificate of deposit (LTNCD) market would attract more investors, as would a pilot issuance of a bond under the Asean Multi-Currency Bond Issuance Framework (AMBIF) sometime later this year.