Philippines Market Capitalization accounted for $309.985 billion in July 2023, compared with $300.014 billion in the previous month. It accounted for 75.2% of its Nominal GDP in December 2022, compared with a percentage of 93.2% in the previous year.
A comparison of the size of market capitalization of elected countries, which accompanies this column, is from www.ceicdata.com/en/indicator/philippines/market-capitalization.
Does size matter? At the Ayala-FINEX Finance Summit “Reigniting the Philippine Capital Market towards a Sustainable Future” on Aug. 10, that was the bothersome question — why is the Philippines, which first opened its stock exchange in 1927, now so much smaller in the capital markets than its ASEAN neighbors Singapore, Indonesia, and Thailand?
A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. According to the Financial Times (FT), capital markets overtook bank lending as the leading source of long-term finance in 2009, reflecting the risk aversion and the tightening of bank regulation in the wake of the 2008 financial crisis. Proceeding from this observation by the FT, perhaps the same disenchantment with depository banks gave rise to investment banks and even regular banks who tailored their services to meet the re-directed needs of investors or borrowers for an underwriter or lead bank to organize a network of brokers to sell bonds or shares.
When raising long-term finance, Government will sell bonds in the capital markets, under the same protocols it had ordered for underwriting and syndication or brokerage. Companies choose between issuing bonds or shares to raise capital. In this situation, “from an investor’s point of view, shares offer the potential for higher returns and capital gains if the company does well. Conversely, bonds are safer if the company does poorly, as they are less prone to severe falls in price, and in the event of bankruptcy, bond owners may be paid something, while shareholders will receive nothing,” one analyst pointed out.
At the Ayala-FINEX conference, Pol de Win, Head of Global Sales and Origination of the Singapore Exchange (SGX), spoke on Asia’s most international, multi-asset exchange, and its operating environment that had fostered its successes in the capital markets. He pointed out that the government and the private sector plan and work together to achieve macro objectives prioritized over the micro goals of businesses. “Everybody gets to work together,” he said, and that is political will exercised in solidarity, to ensure sustainability. At the Q&A, Mr. De Win clarified that companies do not all go to the market for liquidity. Same for generational transitions (estate planning) — as market forces and opportunities maximize the best “deal” for the common All. Liquidity has costs — trading costs, but not taxes.
Francis Ed. Lim, Chairman of the FINEX Academy and Past FINEX President, spoke about the Philippine capital markets and the delayed, much-studied plans for its development. Mr. Lim was President, Chief Executive Office, and Director at Philippine Stock Exchange, Inc. and President and CEO of Securities Clearing Corp. of the Philippines (a subsidiary of the Philippine Stock Exchange, Inc.). He deplored that the Philippine capital market has not advanced since 2005 when the Capital Market Development Council was set up amid high hopes that the Philippines would zoom together with its ASEAN neighbors to take prominence as active leaders and movers of the global financial markets. It has been 20 years in the to-and-fro of recommendations and “Roadmaps” on the capital markets, and we have not moved forward. There is no political will. We have been overtaken by Thailand, Mr. Lim said.
And yet Vietnam has performed spectacularly, even if its market size is smaller than the Philippines’, Mr. De Win commented. “It is a controlled market in Vietnam; everything is controlled in Vietnam,” he said. But perhaps the secret for this small economy is its domestic focus. Contrary to the usual global financial competitive stance, Vietnam has a domestic focus that is micro-driven. “Companies must get something from investing in another,” Mr. De Win emphasized. With its prioritizing of its domestic markets, Vietnam has accelerated its growth by strengthening from the inside.
At the conference, Jaime Alfonso Zobel de Ayala spoke on the “Ayala Corp. investment opportunities and sustainable future.” “The Philippines has the lowest market turnover in Asia,” he said. “We might seem OK in general, but from a much lower base. We must grow and sustain that growth.” It might have been in response that Erwin Sta. Ana, Deputy Treasurer of the Bureau of the Treasury offered yet another “Philippine Capital Markets Roadmap” which outlined general fiscal and monetary plans of government in the post-COVID recovery.
On Feb. 7, the Philippine government raised an initial P162.180 billion in an auction of retail Treasury bonds (RTBs), the second under the Marcos administration. Tenders at the rate-setting auction hit P196.109 billion, or more than six times the P30 billion on offer at the BTr’s first retail bond offer this year. The five-and-a-half-year RTBs fetched a coupon rate of 6.125%, 37.5 basis points (bps) higher than the 5.75% set for the previous RTB offering in August 2022 (BusinessWorld, Feb. 8, 2023).
The government may launch a retail dollar bond offering in the third quarter of 2023, National Treasurer Rosalia V. de Leon said. The offer size will be around $2 billion (up from $1.5 billion earlier announced to be in May), surpassing its previous retail dollar bond issuance. The Philippines’ last retail dollar bond sale was in 2021, when it raised almost $1.6 billion or P80.91 billion. “We are looking for a more comfortable exchange rate. It’s a moving target, we’re now looking at the third quarter. We are planning this carefully, because otherwise we’ll be adding more debt,” she said. (BusinessWorld, May 15, 2023).
At the FINEX conference, hushed discussions at the lunch tables worried about “adding more debt” amidst the inflation and sticky prices still choking the economy. The peso-dollar exchange rate has not gone down from the P55.5+ per US dollar level, strangling debt repayments and massive imports. Are we to be excited with the government about the expanded opportunities to borrow and/or solicit investments in the global capital markets, when we know we have to attend to pressing issues and needs here first?
The example of Vietnam focusing first on its micro concerns and domestic urgencies seems a good suggestion. Vietnam has chosen to go slow and think out the more prudent and practical plans for its people. This was the way Singapore designed its spectacular rise as an independent and self-sufficient nation since it was expelled from Malaysia and became an independent republic on Aug. 9, 1965. Now tiny city-state Singapore is ranked No. 34 of the major economies and acknowledged to be the most competitive country in the world.
Size does not matter.
Amelia H. C. Ylagan is a doctor of Business Administration from the University of the Philippines.