Revving up our capital markets

Revving up our capital markets | Daily Tribune

Ever since the flood control project scam and the accompanying unconscionable display of extravagance of illegally acquired wealth by the culprits — the so-called public servants elected to serve the people — and their evil accomplices exploded in the consciousness of the Filipino people, the mood of the country has turned understandably foul.

The people are thirsting for blood and rightful revenge while businesses have considerably slowed as all are watching and holding their collective breath for what other bad news still awaits us.

And along with this dismal mindset, the financial markets have similarly plunged into an endless abyss of pessimism and investor scorn as erstwhile bright GDP growth estimates clouded by the continuing geopolitical and economic turmoil overseas have dimmed as well.

The latest World Bank estimate of our 2025 GDP growth rate is now down to 5.1 percent from its previous rosier forecast of 5.3 percent, which was already lower compared to 2024’s growth of 5.7 percent and considerably much lower than the Philippine government’s target of 5.5 to 6.5 percent.

The country’s ultimate guardian of financial stability, the Bangko Sentral ng Pilipinas, projects a much lower growth rate of 3.8 percent for the fourth quarter due to the market’s concerns of even a much wider web of corruption in the various agencies of the government. The Philippine Stock Exchange Index, the bellwether of the capital market’s sentiments, continues to linger a shade below 6,000 compared to previous highs in 2024 of about 7,200 to 7,500.

So what can be done to reverse this dismal trend?

An advocacy group — composed of the Institute of Corporate Directors, Financial Executives Institute of the Philippines, Capital Markets Development Foundation, and the Center for Research and Communication initiated by Dr. Jesus Estanislao to promote the capital market in light of the OECD’s Philippine Capital Market review recommendations — has embarked on a journey, with the cooperation of key capital market stakeholders, to create a roadmap that hopefully could finally reverse this seemingly intractable trend of great starts followed inevitably by speed bumps, causing an endless cycle of pullbacks to progress, and consequently finding ourselves at the tailend compared to our regional neighbors in terms of investor sentiments.

After a series of consultations with the players in the capital market, the group’s next steps are further consultative meetings but this time with the regulators and possibly legislators to present the findings and recommendations classified as to the urgency of the reforms needed.

Sharing below the gist of the most urgent concerns to tackle based on the consultative meetings.

To increase the supply of capital market issues which are critical to ensure a wider selection of choices of companies and industry sectors in order to attract institutional and retail investors. A limited number of issuers typically go hand in hand with a lower market volume turnover resulting in a relatively shallow secondary market turning off foreign investors, in particular, whose trades are relatively large amounts.

Currently, the PSE lags way behind our regional neighbors in the number of listed companies.

Only a handful of blue chip issues which are primarily part of conglomerates dominate the local market in terms of market valuation and turnover. We have 283 compared to Hong Kong’s 2,414, Singapore’s 425, Indonesia’s 825, Malaysia’s 963, and the 402 of Vietnam, the rising star and apparent favorite of foreign investors of late.

And for foreign investors who are equally concerned with an orderly exit strategy if needed, a market with a low turnover could easily distort the true intrinsic value of their investments.

The protracted regulatory underwriting process and higher cost to list and trade compared to the relative ease, speed, and lower cost of bank financing, particularly for blue chips, and ripe for listing matured second liners. The whole cycle from origination to eventual public offering can easily take a minimum of nine months to one and a half years and can increase the cost of funding by as much as 500 basis points.

In sum, the concerns center primarily on regulations, processes, liquidity, and taxes which upon completion of the meetings with the regulators and hopefully with some agreed resolutions and timelines, as envisioned, will be shared finally in a general assembly of key market participants.

An underlying concern above all that is unfortunately beyond the control of the regulators and market players, no matter what the resolutions are, is the macro, overarching view of the troubling political situation in the Philippines and how it can be resolved. Let’s keep our fingers crossed.

Merry Christmas to all!

Until next week… OBF!