Philippines: Selected Issues

Abstract

Philippines: Selected Issues

Capital Market Development in the Philippines: Boosting Investment and Growth1

Capital markets could make a significant contribution to addressing the Philippines’ key developmental challenges in the years ahead. Though progress has been made in recent years, there is still much to do. Priorities include strengthening the role of the government bond market as a reliable benchmark for pricing corporate securities, developing private debt markets to help finance infrastructure, and opening up equity markets to small and medium sized enterprises (SMEs). The enabling environment could be made even more conducive to capital market development in the event that taxation policy incentivized greater activity from both issuers and investors.

A. The Case for Capital Market Deepening in the Philippines

1. With the appropriate supervisory and regulatory frameworks in place, capital market deepening could strengthen the resilience and growth of the Philippines economy. Well functioning capital markets could enhance resource allocation, by aiding in the management of risk for both borrowers and lenders, and by opening up new avenues of financing for capital formation and SMEs. Mobilizing market-based financing of the capital stock is especially relevant at present given the country’s low level of investment (Figure 1), coupled with constraints on the ability of the banking sector to finance long-term projects such as ‘greenfield’ infrastructure which may require many years to generate positive cash flows.2 Governance standards could be further strengthened if the corporate sector were to be more exposed to market discipline and international norms of best practice. In time, debt capital markets could also pool and distribute natural disaster risk originated by insurers, creating additional space for the insurance industry to expand coverage, which is unusually low in the Philippines.

Figure 1.
Figure 1.

Emerging Markets: Investment Spending

(In percent of GDP)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: IMF, World Economic Outlook.

2. More generally, capital markets could facilitate diversification for both borrowers and lenders, allowing for more effective management of single-name or project-specific risk.3 Deep and liquid capital markets also promote financial stability by dampening the impact of shocks. A greater array of investment opportunities (including asset backed securities with flexible cash flow tranching and credit enhancement features) would allow investors to better meet their return and risk objectives. Importantly for a country like the Philippines, cross-country analysis suggests the growth and financial stability benefits from financial deepening tend to be largest for countries at low levels of financial development, assuming the process is well sequenced and paced (Sahay and others, 2015; Dabla-Norris and Srivisal, 2013; Arcand and others, 2012; see Box 1 for a related discussion of financial inclusion).

B. Taking Stock of Recent Progress

Constructive Recent Developments

3. The development of domestic capital markets has been assisted by a more favorable enabling environment, an outcome of various policy initiatives over recent years. Notable elements include:

  • The most favorable mix of economic growth and inflation seen in decades (Figure 2);

  • The awarding of investment grade status for local and foreign currency debt by each of the major international credit rating agencies (Figure 3);

  • A broad based improvement in indicators of governance quality (Figures 4 and 5);

  • The publication of, and general adherence to, the Capital Market Blueprint Development Plan (initially for the 2011–16 period, and subsequently revised for 2013–17);

  • Greater regulatory clarity associated with the restructuring of the Securities and Exchange Commission (SEC) and strengthening of its monitoring and enforcement capacity;

  • Reforms to promote neutrality in taxation across different classes of investors, as a means of creating a more level playing field and reducing market segmentation;

  • Participation in regional fora, such as the ASEAN Capital Markets Forum, designed to strengthen regional capital market development and integration; and

  • The establishment of the Financial Stability Coordination Council, an interagency initiative aimed at fostering a strong, resilient and innovative financial system.

Figure 2.
Figure 2.

Philippines: Growth and Inflation

(Average y/y changes, measured on a rolling quarterly basis)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Sources: Haver Analytic; and IMF staff estimates.
Figure 3.
Figure 3.

Philippines: Credit Ratings

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Sources: S&P; Moody’s; and Fitch Ratings.
Figure 4.

Philippines: Governance Indicators, 2004-2013

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: World Bank, Worldwide Governance Indicators. 1/1/The Worldwide Governance Indicators are a research da taset summarizing the views on the quality of governance provided by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries. These data are gathered from a number of survey institutes, think tanks, nongovernmental organizations, international organizations, and private sector firms.
Figure 5.

Philippines: Overall Governance Index, 2004-2013

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: World Bank, Worldwide Governance Indicators. 1/1/The Worldwide Governance Indicators are a research da taset summarizing the views on the quality of governance provided by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries. These data are gathered from a number of survey institutes, think tanks, nongovernmental organizations, international organizations, and private sector firms.

4. In response, the Philippine capital markets have begun to increase in scale and scope, albeit from a low base. Based on an index of financial market development indicators introduced by Sahay and others (2015), the country ranking for the Philippines has risen noticeably over the past decade (Figure 6). Financial market development in the Philippines now stands at levels that are broadly consistent with those seen elsewhere in Emerging Asia, after adjusting for differences in per capita income (Figure 7). Progress in bond market development has been particularly notable. The value of corporate bonds outstanding (relative to GDP) has risen strongly since 2007, with the local currency share increasing from one-third to 60 percent (Figure 8). While the local currency share is still lower than in Malaysia and Thailand, it now compares favorably to Singapore and Indonesia (Figure 9). The maturity structure of both corporate and government debt has also lengthened, thus reducing refinancing risk (Figures 10 and 11).

Figure 6.
Figure 6.

Philippines: Financial Market Development Indices 1/

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Sources: Sahay and others (2015); and IMF staff estimates.1/ Index values for the ‘overall financial markets index’ range from 0 (lowest) to 1 (highest), indicating the country ranking in financial market development terms, based on the depth, access, and efficiency. Financial market ‘depth’ relates to stock market capitalization, value of stocks traded, international government debt securities, and the value of all debt securities of nonfinancial and financial cooperations (all expressed as a share of GDP). Financial market ‘access’ relates to the number of debt issuers (domestics and external, nonfinancial and financiáis), and the share of equity market cap tí zat on outside of the top LO largest companies. Financial market ‘efficiency’ relates to stock market turnover.
Figure 7.
Figure 7.

Asia: Financial Market Development versus GDP 1/

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Sources: Sahay and others (2015); and IMF staff estimates.
Figure 8.
Figure 8.

Philippines: Nonfinancial Corporate Bonds Outstanding by Currency, 2007-2014

(Asa share of GDP)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: Dealogic.
Figure 9.
Figure 9.

ASEAN-5: Nonfinancial Corporate Bonds Outstanding by Currency, 2014

(Asa share of GDP)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: Dealogic.
Figure 10.
Figure 10.

Corporate Bond Maturity Structure

(Share of total outstanding)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: AsianBondsOnline database.
Figure 11.
Figure 11.

Government Bond Maturity Structure

(Share of total outstanding)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: AsianBondsOnline database.

Remaining Challenges

5. Despite considerable progress in recent years, a number of remaining challenges must be addressed if the capital markets are to play a larger role in enhancing growth and stability in the Philippines:

  • Government securities markets—irregular liquidity across the yield curve plagues the market for government securities. By regional standards, the Philippines bond market is characterized by wide bid-ask spreads and low turnover (Figures 12 and 13). Illiquidity reflects numerous factors: the absence of an inter-dealer repo market; an ineffective primary dealer system; the absence of inventory management instruments necessary for dealers to make two-way prices in size (such as organized markets for repo and interest rate derivatives); and the inability of dealers to short bonds. As a result, the bond market is essentially a one-way, buy-and-hold market. Taxable and tax-exempt entities have also been precluded from transacting freely with one another until recently, a distortion which has exacerbated illiquidity. Additionally, supply side issues have posed challenges to the efficient functioning of the money and bond markets, namely a critical shortage of short-term securities, a fragmented schedule of bond issuance (i.e., a large number of small issues), illiquidity at key benchmark maturities, and a low and declining stock of debt (of which, a legally mandated bond sinking fund holds around 20 percent).

Figure 12.
Figure 12.

ASEAN-5: Bid-Ask Spreads—Local Currency Government Bonds

(In basis points)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: AsianBondsOnline database.
Figure 13.
Figure 13.

Philippines: Government Bond Turnover Ratio

(Ratio of value of bonds traded to value of bonds outstanding)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: AsianBondsOnline database.
  • Private debt markets—although corporate bond issuance has picked up in recent years, private debt markets continue to play a marginal role in corporate financing. Surveys of market makers do not point to any material improvement in secondary market liquidity,4 and there have been few securitization issuances of note despite a decade having passed since regulations governing securitizations were first passed into law. The development of private debt markets, including corporate bonds, project (infrastructure) bonds, and securitization markets, has been stymied by a range of common factors: the impediments to pricing credit risk when illiquidity in the government yield curve at key maturities prevents it from serving as a reliable reference point; the lack of risk management instruments enabling investors to disentangle different sources of risk; the absence of reliable national credit rating agencies; and frictional costs such as high listing fees and regulatory burdens (including the maintenance of a registry of ultimate beneficial owners following secondary market transactions) which can encourage corporates to default back to tapping bank credit lines.

  • Equity markets—against the backdrop of a fast growing economy, the Philippine stock market has seen surprisingly modest activity in the form of new capital raisings. Initial public offerings (IPO’s) have declined sharply in absolute and relative terms in recent years, from an annual average of 1.1 percent of market capitalization from 2005—2008, to just 0.3 percent over the 2009-14 period. This is just one half of the average for other ASEAN markets (Figure 14). Equity capital raisings have increasingly taken the form of rights offerings by established firms, rather than IPO’s (Figure 15), and the stock market remains dominated by large firms—around two-thirds of market capitalization is accounted for by the ten largest firms, second only to Singapore in ASEAN (Figure 16). The Philippines is the only country in ASEAN to levy an IPO tax, ranging from 1 percent to 4 percent of the value of the capital raising. More generally, secondary market turnover has been constrained by a range of factors (Figure 17): relatively high frictional costs (among the highest across 12 bourses in Asia);5 the absence of market-traded risk management instruments (futures and options); and low investor confidence.

Figure 14.
Figure 14.

ASEAN: Initial Public Offerings (IPOs)

(As a share of market capitalization)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Sources: Dealogic; and IMF staff estimates.1/ Indonesia, Malaysia, Singapore, and Thailand.
Figure 15.
Figure 15.

Philippines: IPOs vis-a-vis Rights Offerings

(As a share of total equity capital raised)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: Philippines Stock Exchange.
Figure 16.
Figure 16.

Large Firm Stock Market Concentration

(Large firm capitalization as a share of total capitalization)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Sources: Bloomberg L.P.; and IMF staff estimates.
Figure 17.
Figure 17.

ASEAN: Equity Value Traded

(As a share of GDP)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Sources: Worldwide Federation Exchange; Haver Analytics; and IMF staff estimates.

C. Policy Responses

6. As the development of financial markets is typically hierarchical, sequencing matters (Karacadag and others, 2003; Sahay and others, 2015). A conducive enabling environment—based on favorable macroeconomic policies, and reinforced by sound supervisory, regulatory and tax policies—is a necessary but not sufficient catalyst for capital market development. The Philippine capital markets remain underdeveloped and exhibit a limited ability to intermediate borrowing and lending effectively. For capital markets to reduce the dependence of the economy on bank-based financing and better align long-term financing needs with long-term funding, a range of additional measures will likely be required (Figure 18).6

Figure 18.
Figure 18.

Framework for Capital Market Development

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: IMF staff.

Enabling Environment

7. Despite a material improvement in the broad-based enabling environment, additional regulatory and taxation measures would be helpful in facilitating capital market development. On the regulatory side, reform of Bank Secrecy Laws could pave the way for the Philippines to join other ASEAN countries in becoming a signatory to the International Organization of Securities Commissions (IOSCO) Multilateral Memorandum of Understanding (MMoU). This initiative sets an international benchmark for cross-border cooperation by providing securities regulators with the tools for combating the cross-border fraud and misconduct that can weaken global markets and undermine investor confidence. On the taxation side, increasing the ability of investors that differ in tax status’ to trade among each other, carefully calibrating concessionary tax treatment to transform short-term savers into long-term investors, streamlining the withholding tax registration process, and reducing or eliminating taxes on initial public offerings, could all be useful measures to help deepen the capital markets.

Money and Government Bond Markets

8. A liquid and reliable yield curve for public securities is essential to provide a benchmark for pricing credit risk—without which a derivatives, corporate bond, and structured finance market cannot develop. Yet the Philippine money and government bond markets exhibit a structural lack of liquidity that inhibits this core developmental role. Recent initiatives aimed at addressing the remaining inefficiencies in core fixed income markets are to be encouraged. These include:

  • Improvements in cash management and forecasting at the Bureau of the Treasury;

  • The increased ability of tax-exempt and taxable investors to transact freely with one another, thus reducing market bifurcation;

  • A further reduction in the fragmentation of bond issuance to ensure that trading activity is not spread thinly among individual issues;

  • The introduction of an organized inter-dealer repo market (assisted by the removal of the documentary stamp tax from repo transactions) and securities lending framework to aid in dealer inventory management; and

  • A clearer set of obligations and incentives for primary dealers.

9. Two remaining priorities are as follows: (i) ensuring an adequate level of issuance and trading activity is concentrated at key benchmark maturities, consistent with the existing mandate of the Bureau of Treasury which includes facilitating capital market development; and (ii) developing an organized (exchange-traded) market for interest rate derivatives (with a more conducive tax policy having a role to play), which would facilitate two-way market making by dealers and thus assist financial market participants and other economic agents to manage duration risk.

Private Debt Markets

10. Private debt markets have a key role to play in opening up new avenues for long-term financing, particularly where bank financing is constrained by single borrower limits or asset-liability mismatches. Initiatives must address both supply- and demand-side impediments in corporate debt, project bond and securitization markets. In some cases, these impediments have common roots—a government yield curve that does not provide a reliable reference point for pricing credit risk; a paucity of interest rate risk management instruments; the absence of reliable national credit rating agencies; high frictional costs for issuers; and corporate governance requirements that differ from those of other ASEAN jurisdictions. In other cases, more specific remedial measures may be required.

Corporate Bonds

11. The authorities have made facilitating a more conducive environment for corporate bond investors and issuers a priority. On the demand side, the SEC has approved PDEx rules to expand the list of eligible trading participants to include investment houses, and clarified the tax treatment of corporate bonds. The process for the insurance sector to undertake new investments, including corporate credit, has been streamlined. On the supply side, the issuance of corporate debt will be further encouraged by initiatives to streamline the registration process. Remaining priorities specific to the development of corporate bond markets include the introduction of exchange-based trading in the Qualified Notes Market (aimed at increasing transparency and price discovery), and clarifying the regulatory framework for perpetual debt.

Infrastructure Bonds and Project Financing

12. Insufficient infrastructure has been a major constraint on investment, productivity and inclusive growth in the Philippines (Nakao, 2014). From a peak of 6 percent of GDP in 1998, private infrastructure investments have declined to below 1 percent over the past decade. The Global Competitiveness Report 2013—2014 has identified the inadequate supply of infrastructure as among most problematic factors in doing business in the Philippines and assigned the country a ranking of 98 (out of 144 countries) for quality of infrastructure—the second lowest rating within ASEAN. The Philippine Development Plan (2011–2016) has described the state of domestic infrastructure as inadequate, and the level of access as inequitable.

13. Against this backdrop, the Philippines has undertaken a concerted effort to catalyze infrastructure investment through Public Private Partnerships (PPPs). The government’s PPP Center has identified 56 potential PPPs with nine—valued at nearly US$3 billion, or 1 percent of GDP—already awarded.7 In order to crowd in more private domestic capital, an Investment Advisory Council is also set to be established by the Insurance Commission to explore ways for insurance companies to channel funds directly to PPP projects. The newly created Philippine Investment Alliance for Infrastructure (PINAI) Fund, a US$625 million private equity fund co-funded by pension funds and the ADB (with the Government Service and Insurance System contributing the largest equity share at 64 percent), is another source of private financing for Philippine infrastructure projects (Navarro and Llanto, 2014).

14. Removing administrative hurdles, ensuring policy consistency and clarity, streamlining project clearances and easing foreign ownership restrictions, remain key priorities in making PPP financing an attractive proposition for private capital. The authorities have also recognized that parallel efforts are needed to channel more private savings into infrastructure investments through the domestic financial markets, particularly the bond market.8 Project bonds are now permissible under the revised Insurance Code. The government should carefully weigh the benefits and costs of credit enhancements for infrastructure bonds, drawing on cross-country experiences with similar structures—infrastructure projects that are likely to generate higher social returns than investment returns are best financed by government (subject to fiscal constraints), and vice versa. Related to this, authorities should avail themselves of the financial capacity building and knowledge-sharing network (including the dissemination of best practice financing approaches) arising from the Global Infrastructure Hub initiative recently established by the G-20 in Sydney.

Securitization

15. When operating efficiently, securitization supports economic growth and financial stability by enabling issuers and investors to diversify risk. Securitization can also free up bank capital and liquidity by transforming a pool of illiquid assets into tradable securities and offloading them to investors, thereby allowing banks to extend new credit to the real economy. Over time, the structured finance market could also play a role in pooling and distributing natural disaster risk originated by insurers (i.e., through catastrophe bonds), which would create additional space for the insurance industry to increase coverage (insurance penetration is unusually low in the Philippines, see Box 1). However the asset-backed securitization market in the Philippines remains underdeveloped.9 Activity has generally been muted, although private transactions have been conducted involving receivables from leases, residential mortgages,10 and credit cards, and the Metro Rail Transit Corporation completed the largest securitization in the Philippines through the issuance of receivable-backed notes to local institutional investors.

16. In anticipation of the growth of the domestic securitization market with the enactment of the Securitization Law in 2004, the BSP issued in 2005 guidance on the risk-based capital treatment of banks’ exposures to structured products and securitization structures. It has since issued procedural guidelines for investment in credit-linked notes, structured products and related securities. The BSP requires issuers of securitizations (along with commercial paper and corporate bonds) to obtain credit ratings from either the Philippine Rating Service Corporation (PhilRatings), or from any internationally-accepted credit rating agency with a representative office in the Philippines.

17. However a lack of subsequent activity has prompted the authorities to examine amendments to the current legislation governing securitization, based on industry feedback. There is a generally recognized need to level the playing field between banks and nonbanks insofar as taxes and related issues are concerned. The development of a vibrant ‘plain vanilla’ corporate bond market would also provide a firmer platform for more complex forms of financing, including securitization.

Equity Markets

18. A number of initiatives have been introduced in recent years to enhance the role of equity financing in the Philippines, and more are under consideration. The remaining priorities are to build confidence and participation among domestic investors, strengthen global and regional integration, and make initial public offerings a more attractive proposition, particularly for SMEs.

  • Building domestic investor confidence and participation: the SEC has created a corporate governance and finance department to issue guidelines mandating that all publicly listed companies publish an annual corporate governance report. It has also recently promulgated a revised code of corporate governance, completed the ASEAN corporate governance scorecard assessment, and will issue a corporate governance roadmap. The aim of increasing investor confidence has also motivated enhanced market surveillance through the introduction of an automated surveillance system. Additional measures to strengthen investor confidence and participation include reducing frictional costs incurred in secondary market trading (direct market access for authorized investors would be helpful), expanding outreach programs to increase financial literacy among the public, and tax incentives that could encourage channeling surplus bank deposits toward long-term equity investment.11

  • Strengthening global and regional integration: better integrating the Philippine stock market, both regionally and globally, remains a priority. The SEC has prescribed the adoption of International Financial Reporting Standards in order to raise levels of corporate transparency and accountability. Signing the IOSCO MMOU (likely requiring reforms to Bank Secrecy laws) would help ensure the full participation of the Philippines in the cross-border investment initiatives of the ASEAN Capital Markets Forum (including collective investment schemes and cross-border public offerings). In the meantime, harmonization of other corporate documentation and procedures (i.e., investor prospectus and listing/delisting rules) with regional norms would likely stimulate foreign investor interest. Foreign investors would also view a streamlining of the registration process regarding withholding tax favorably.12 Moreover, subject to appropriate oversight of governance and financial stability considerations, the proposed consolidation of the equities and fixed income exchanges, aimed at achieving significant cost savings, should help to enhance the financial market architecture and hasten the Philippines’ participation in the regional market.

  • IPOs: a reduction or elimination of the tax on primary issuances, and harmonization of listing criteria with regional norms, would be viewed favorably by issuers and international investors respectively. Given the critical role of SMEs in supporting inclusive growth, measures aimed at revitalizing the board for SMEs should be a priority. The recent signing of a memorandum of understanding between the Capital Market Development Committee and the Philippine Chamber of Commerce to promote the SME Board is a welcome step in this regard, as is the recent streamlining in SME listing requirements announced by the Philippines Stock Exchange (PSE). The PSE has also engaged more closely with the Development Bank of the Philippines to encourage SME listings. Initiatives to promote the SME board could also draw on relevant cross-country experiences (see Shinozaki, 2014). In the People’s Republic of China (PRC), the Shenzhen Stock Exchange (SZSE) has developed a three-tier market venue comprising the Main Board, SME Board (May 2004), and ChiNext (October 2009; high-tech venture board), in line with national economic development strategies. Hong Kong, China’s Growth Enterprise Market (GEM) is an alternative stock market for high-growth enterprises. India has recently developed dedicated stock exchanges for SMEs (via the Bombay and National Exchanges) following the recommendation of the Prime Minister’s Task Force in June 2010. The KONEX launched in July 2013 has emerged as the key market for SME listings in the Republic of Korea. MESDAQ under Bursa Malaysia was re-launched as the ACE (Access, Certainty, Efficiency) market in August 2009, a sponsor-driven alternative market. Catalist in Singapore is a Singapore Exchange (SGX)-regulated but sponsor-supervised market for rapidly growing enterprises established in December 2007. The Securities Exchange of Thailand (SET) has operated the market for alternative investment (mai) since June 1999, targeting SMEs as potential issuers. Further afield, the London Stock Exchange has also developed considerable expertise in fostering SME listings, with over 3000 companies having joined the Alternative Investment Market (AIM) platform in the past two decades.

Philippines: Financial Inclusion

Financial inclusion can reduce poverty and support broad-based growth in various ways. It can facilitate consumption smoothing in response to shocks, encourage investment and entrepreneurship by micro SMEs, and reduce the incidence of informal lending at punitively high interest rates. These are highly relevant issues for the Philippines.

Financial inclusion has been a key policy focus in the Philippines in recent years.1/ To tackle geographical dispersion and widen access to basic financial services, the BSP has encouraged the establishment of micro-banking offices and offsite ATMs, as well as alternative financial service providers (credit cooperatives, pawnshops, remittance agents, and e-money agents). Innovative delivery channels have been promoted, such as correspondent banking by post offices, grocery stores, pharmacies, and gasoline stations, in addition to mobile banking. More efficient systems for remittance repatriation have also been approved, helping to lower transactions costs and reduce delivery times. Minimum targeted bank lending quotas have been implemented in order to increase the availability of credit for micro SMEs and agribusiness. The Agrarian Production Credit Program (APCP) has been introduced to expand credit and capacity development in the agrarian sector, while the Credit Surety Fund (CSF) Program aims to increase the credit worthiness of micro SMEs and SMEs that are experiencing difficulty in obtaining loans from banks due to a lack of acceptable collateral, credit knowledge and credit track records. To help increase access to finance for low income households and SMEs, the BSP has also issued new guidelines on sound credit risk management practices for BSP-supervised institutions, with an emphasis on the shift from collateral-based credit risk assessment to one based on ability-to-pay and cash flow of the borrower. Furthermore, a credit bureau has been established to set up the necessary infrastructure to facilitate the country-wide dissemination of borrower information.

Although financial inclusion initiatives have achieved good progress in recent years, there is strong need for the momentum to continue. Given that around 70 percent of the population are without a bank account, extending the reach of banking and payment services remains a top priority (notwithstanding the limited pool of domestic savings, and geographic challenges associated with servicing an archipelago with a relatively low urbanization rate). The adoption of micro-lending initiatives designed to increase access to credit for micro SME’s—including the expansion of credit information bureaus to reduce informational asymmetries—should also be encouraged, though regulatory supervision and consumer protection safeguards will need to keep pace as credit becomes more accessible. Greater flexibility in designating eligible collateral may also be required to ensure the granting of collective rather than individual land ownership titles does not lock creditworthy borrowers out of the intermediation process. The increase in insurance coverage in recent years, especially among low income earners (i.e., farmers) who are especially susceptible to natural disasters, is welcome and could be supported by basic levels of public sector coverage given that the absolute level of insurance (particularly non-life) coverage in the Philippines remains low by regional standards. A new National Strategy for Financial Inclusion (NSFI) was launched in July 2015, with the objective of aligning the development-oriented financial inclusion initiatives of various stakeholders with the Philippines Development Plan. The major elements of the NSFI are: (i) policy and regulation, (ii) financial education and consumer protection, (iii) advocacy programs, and (iv) strengthening data and measurement capabilities. 2/ If successful, the NSFI may also serve as a blueprint for other countries in the region facing obstacles to financial inclusion.

A05ufig1

Access to Formal Institution, 2013

(Share of population)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: World Bank.
A05ufig2

Access to Formal Institution, 2014

(Share of respondents)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: World Bank.
A05ufig3

Philippines: Insurance Premiums

(Share of GDP)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: World Bank.
A05ufig4

Asia: Insurance Premium

(Share of GDP)

Citation: IMF Staff Country Reports 2015, 247; 10.5089/9781513586243.002.A005

Source: World Bank.
1/ For a broad overview, see “Financial Inclusion in the Philippines,” 2014 IMF Selected Issues Paper.2/http://www.bsp.gov.ph/downloads/publications/2015/PhilippinesNSFIBooklet.pdf

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1

Prepared by Brad Jones (MCM).

2

These constraints pertain to asset-liability mismatches, and the more exacting liquidity and capital charges under Basel III.

3

Single borrower limits are set at 25 percent of capital in the Philippines, and PPP-related exemptions are due to expire in 2016.

4

Objective time series data on trading volume and turnover for corporate debt securities in the Philippines are not available. However, corporate bonds on the Philippine Dealing & Exchange Corp (PDEx) accounted for less than 1 percent of the value traded of all fixed income securities in the Philippines as of 2012 (Securities and Exchange Commission, 2013, “Capital Market Development Plan Blueprint, 2013–17,” page 11).

5

Securities and Exchange Commission, 2013, “Capital Market Development Plan Blueprint, 2013‒17,” page 7.

6

The following discussion pertains largely to the development of the ‘markets and instruments’ pillars, as issues related to intermediaries and developing the investor base will be addressed in forthcoming IMF and Asian Development Bank technical assistance programs.

7

See ADB to Help Philippines Prepare its Largest-Ever PPP Project.

8

Having the capital markets finance infrastructure projects will also increase fiscal space, paving the way for more expenditure on human capital, especially in education, health, and other basic social services.

9

There are general principles that can guide the development and efficient operation of securitization markets, spanning the entire chain of financial intermediation (Segoviano and others, 2015). Recommendations across the four-stage financial intermediation chain can summarized as follows. First, underlying loan origination practices must be robust so as to both guard against the typical late-cycle deterioration in underwriting quality, and to reduce the risk that unregulated entities come to dominate origination (as occurred in the United States during the housing bubble). Second, securitization intermediaries must be encouraged to develop structures that are transparent, straightforward to value, and primarily designed to finance the real economy (i.e. no re-securitizations). Legal ambiguities related to the rights and obligations of servicers, trustees, and investors should be avoided. Establishing the secure, transparent, and cost-effective transfer of claims on collateral is paramount. Third, standardized definitions of securitization characteristics and full disclosure of the credit rating process would increase transparency and confidence. The practice of ‘rating shopping’ by issuers should also be disclosed. Fourth, greater participation in securitization markets by long-term institutional investors can be galvanized by ensuring the consistent application of capital charges across asset classes and borders, and by avoiding large step-changes in charges (so-called “cliff effects”) between classes of securitized assets that only marginally differ in terms of underlying risk characteristics.

10

Given the low level of mortgage penetration in the Philippines, there is no near-term impetus for banks to engage in widespread mortgage loan sales—a process that would be needed to stimulate a mortgage backed securities market.

11

These could include applying relatively lower rates of taxation on dividends and capital gains on equity securities (or investment vehicles holding equity securities) where such securities are held in excess of minimum holding periods. However such measures need to be carefully crafted to ensure their fiscal sustainability.

12

Investors from countries with mutual tax treaty agreements with the Philippines are required to obtain a Bureau of Internal Revenue tax clearance for every withholding event (e.g., for every dividend or coupon payment). This could be simplified by adopting a one-time registration process, through accredited intermediaries to establish the tax regime applicable to a particular investor which would prevail until changed or revoked (SEC, 2013).

Philippines: Selected Issues
Author: International Monetary Fund. Asia and Pacific Dept