January 15, 2025 l Business Mirror
THE Asian Financial Crisis of 1997 has brought to surface the realization that Asian economies cannot and should not be so over-reliant on bank financing for businesses but should develop their capital markets as a balancing source of alternative financing.
So how are we doing in our capital market development efforts?
The Capital Market Development Council (CMDC) will probably make a formal assessment since it oversees the implementation of the Capital Market Development blueprint currently in place until year-end 2025.
There are interesting developments to watch out for 2025-2026. Here they are.
First, the plan for the Land Bank of the Philippines (Landbank) and the Development Bank of the Philippines (DBP) to offer their shares to the public has been percolating since the time of Finance Secretary Carlos “Sonny” G. Dominguez. Now is as good a time as any to push through with the plan. It fulfills the state policy of democratizing wealth, allowing Filipinos to invest and share in those two banks which have a hoard of mandatory deposits from local government units (LGUs). It also will support the capital build-up of the banks which have contributed heavily to the controversial Maharlika Investment Fund.
Second, the Securities and Exchange Commission (SEC) has just issued the guidelines for the issuance of Sukuk bonds, a type of bond that are Sharia compliant. Our government has issued sukuk bonds in the Middle East market, so why not introduce sukuk bonds domestically?
A Google search reveals that the Islamic finance market size (largely sukuk) was $3.154 billion in 2023, projected to grow annually by 5.13 percent, to $4.945 billion in 2032. The Philippines can immediately partake of the Islamic funds, which are driven by a growing demand for so-called ethical financial products (no charging of interest) accompanied by the growing affluence of Muslim investors.
Islamic finance offers an interesting menu of Sharia-compliant investment options. But sukuk bonds are the popular ones.
Third, the Philippine Stock Exchange (PSE) is poised to launch its Philippine Global Depositary Receipts project, which should make it easier for foreign investors to participate in the local trade of shares.
Fourth, the PSE and SEC are working to prepare the regulatory legal framework for derivatives, using a PSE-crafted index. This will probably take a little time to launch but they’re seriously working at it.
Fifth, there is the move to revive interest in securitized products, more specifically, residential mortgage bond securities. While the legal framework has been there, there have been just a very few securitization products in the market, largely by the National Home Mortgage Financing Corp. Securitization indeed has suffered from a bad name arising from the experiences in the Global Financial Crisis of 2008-2009 when the securitizations of sub-prime mortgages was marked by malpractices by banks and the global rating agencies.
But the concept of securitization is valid, workable, tested and is the answer to the need for financing the President’s “one million housing units per year” program during his administration.
Then, sixth, there are the new asset classes of bonds: Green Bonds or, more expansively, for Environment, Social, Governance bonds and the more comprehensively described Sustainability Bonds. A new generation of investors has become more meticulous in choosing investments with clear commitments to social purpose.
Seventh, there are what can be described as lower-tier bonds of medium-sized companies with much growth potential and already doing profitably well. These companies may not merit the highest triple A rating in the standard corporate rating scale, but they are still investment grade that yield good returns. PhilRatings (Philippine Rating Services Corp.) provides the same independent objective assessment of creditworthiness. But it has also developed an “SME Credit Rating” scale customized for small-scale and medium-sized enterprises (SMEs). In other words, there are more available ways to get reliable credit opinions to help both issuers and investors.
Eighth, LGU bonds are being discovered by well-managed provinces and cities as a useful, workable funding source for local infrastructure development projects. These local development projects that need to be undertaken now cannot be financed by current tax sources.
We have few more in our list but let’s end by calling attention to the recent purchase by PSE of majority of the Philippines Dealing System Holdings Corp. shares. This consolidates the trading of equities and fixed income securities under one “house” with all the possibilities of synergies in processes, technology, manpower, research and product development.
Lastly, the term of the incumbent SEC chairman ends in June this year. What will this mean to the many initiatives on capital market development he has started?
***His views do not necessarily reflect those of the Financial Executives Institute of the Philippines and the BusinessMirror. Photo is from Pinterest.