PHILIPPINE CAPITAL MARKETS: THE NEED TO BE MORE INCLUSIVE AND

INNOVATIVE

Members:
Albellera, Gee-chelle Mariexris
Aum, Maria Kristina
Basan, Roselle Jane
Lara, Patricia
Naldoza, Rominna
 ABSTRACT

Philippine Capital market was established in the year 1927.During the first five
centuries of operation, gold, copper, and oil mining stocks dominated trading in the late
1970s. The Philippine Capital Market is considered to be one of the oldest capital markets
in Asia. Although the Philippines is one of the oldest capital markets in Asia, compared to
other nations in the region, the Philippines financial industry is still underdeveloped. Thus,
there remain a lot of opportunities to further develop the markets for a more liquid, more
sound, and more resilient economy. The purpose of this paper is to have a comparative
study and provide an in-depth analysis on the underlying issues of the country’s capital
markets compared to the capital market in neighboring countries in the SEA (South-East
Asia). This included an examination on the country's Development Index, Stock Market
Turnover, and the local currency bond market of each country. An examination of the
different capital markets in the SEA (South-East Asia) revealed that the Philippines has
the lowest Development Index, Stock Market Turnover, and local currency bond market.
However, the researchers limit only three countries out of the eleven countries included
in the SEA (South-East Asia). The paper also discusses how the Philippines Capital
Market can be at par with that of developed countries in the SEA (South-East Asia). Based
on the results, the Philippine Capital markets needs to be deepened through inclusivity in
terms of making it possible for ordinary people to invest in stocks and bonds and by
increasing the participation of issuers in the capital markets which can help increase
demand for capitaland innovation in the financial sector of the country. Lastly, this paper
talks about the need for the Philippine capital market to be more innovative in looking for
new platforms and models that provides innovative solutions which can attract more
participants in the market.

INTRODUCTION
 Capital markets are places where savings and investment are channeled between
capital-intensive providers and those in need of capital. It is also a form of financial market
in which long-term debt or equity-backed securities are bought and sold. Philippine
capital market was established in year 1927 which is first called as Manila Stock
Exchange and still exist up to the present. They use gold, copper as well as oil as a form
of trade that caused a boom in the late 1970s. Today, Philippines offer diverse kind of
capital markets like stocks, bonds, and other marketable securities. In addition, financial
regulators like Philippine Stock Exchange (PSE), Securities and Exchange Commission
(SEC), Bangko Sentral ng Pilipinas (BSP) and international partners such as the Asian
Development Bank (ADB) and the U.S. Securities and Exchange Commission (SEC)
oversee capital markets to protect investors against fraud, among other duties. They also
sees the overall process in any form of exchange and trades happened in the country. In
the Philippines, we have the PSE or also known as the Philippine Stock Exchange. It is a
private corporation with a regulatory public interest function. It could be categorized as a
market operator enabling investors to avail of the investment opportunities and listed
securities through the trading process. Listed securities are able to raise funds from public
investors and not just retail investors, but also insurance companies, banks, and
institutions. When it comes to secondary trading, an existing stock holder chooses to buy
or sell securities which are listed in the market using the PSE’s facilities. Furthermore,
most capital markets can be accessed only by entities within the financial sector or the
treasury departments of governments and corporations, but some can be accessed
directly by the public.

Capital Market’s role in the Philippines is to enable the growth of the economy and
allocate funds accordingly. The more the Philippines implement the deepening of Capital
Markets, the more they can invite investors to invest and put their money to work for the
country. Thus, it helps to increase the flow of money in the companies and put up projects
that will benefit the society. Over the years, significant developments of the Philippines
capital markets have observed, but it remains comparatively small compared to other
prominent economies in Asia. With the effort of the different financial regulators to
deepen and diversify the local capital markets in the country, they have been active in
rolling out a series of reforms to promote the way to sustainable long-term growth.
However, these are not still enough to be at par with the other competing countries in
Southeast Asia.

I. History to present

On August 8, 1927 the Manila Stock Exchange is the first stock exchange
that was established in the Philippines and one of the oldest financial markets in
Asia. It was introduced and brought by five U.S. businessmen namely W.P.G.
Elliot, W. Eric Little, Gordon W. Mackay, John J. Russell and Frank W. Wakefield.
Their purpose is to have a stock exchange that would serve and provide the public,
practice and maintain ethical standards and uphold good business practices. They
also believed that trading in stocks would stimulate the Philippine's economy. On
May 27, 1963 the Makati Stock Exchange was pioneered by five founding
members: Miguel Campos, Bernard Gaberman, AristeoLat, Eduardo Ortigas and
Hermenegildo B. Reyes. Although, the Philippines already had an operating stock
exchange, there was an opposition to a second one. The Philippines had two stock
exchanges remained as separate entities, they basically trade the same listed
stocks but they had different policies, different members and different stock prices.
The existence of the two stock exchanges in one country caused confusion among
prospective investors. It soon became evident that the country needed only a
single stock exchange to attract more investors.
During July 14, 1992 the government induced the two exchanges to merge
and form as the Philippines Stock Exchange (PSE). PSE provides platform for
trading equity products, warrants, and deposit receipts. Furthermore, on
December 23, 1993 the leaders of two courses, Makati and Manila exchanges
agreed to unify and be involved under the PSE (Philippine Stock Exchange).
Meanwhile on March 4, 1994 the Securities and Exchange Commission
acknowledged the Philippine Stock Exchange, Inc., together with its license to
work as a securities exchange in the Philippines declaring that “a unified Stock
Exchange is vital in developing a strong capital market and a sustainable economic
 growth. “The Philippine Stock Exchange is currently the only organized exchange
in the Philippines licensed for trading stocks and warrants. In 1998 the Securities
and Exchange Commission conferred Self-Regulatory Organization to Philippine
Stock Exchange. In addition, in the year 2001 Philippine Exchange Commission
was demutualized. It is year 2003 when Philippine Exchange Commission listed
by way of introduction. In 2004 PSE sold 16.5% of its authorized capital stock to
strategic investors through private placement. The SCCP became a wholly-owned
PSE subsidiary. 2008- 2011 PSE declared 100% stock dividend. And on 2012 the
PSE (Philippines Stock Exchange) implemented extended trading hours Capital
Markets Integrity Corp. (CMIC) started operations.

II. Programs and projects

The following are the listed programs and activities of the Philippine Stock Exchange
(PSE) in collaboration with reliable organizations that ought to achieve progress and
development.

● PSE aims to produce and distribute reference materials concerning investment in

the stock market,reference materials serves as a means and guideline to acquire
basic information in relation to stock market , specifically to those potential
investors
● Development of stock investor discussion. PSE encourages individuals to consult
or to seek advice to financial analyst with regards to financial matters. Philippine
Stock Exchange also acknowledges the needs of investors and other
stakeholders.
● PSE conduct outreach programs/awareness of investing in the stock market to
provide accurate and reliable information, train and educate individuals by
rendering quality services.
● PSE intends to support associations and institutions related to the capital market
industry to optimize market growth in the Philippine economy through prioritizing
the common good of the market instead of individual interest
III. Capital market in neighboring countries in the SEA

It has long been argued that capital market improvement is a necessary and
sufficient condition fostering economic development. To achieve a better living
standard, the expected roles of the financial market include; increasing supply of
capital, better use of (financial) resource and improve the allocation of funds
available, are the fundamental elements needed. Asian markets are already
exchanging stocks for more than 100 years. However, they did not grow to
prominence until after World War II. For more than ten countries in Asia, Japan
became the exporting powerhouse with strong protectionist policies together with
its strong central-government-led development effort.

As time passes by, its neighboring countries were able to notice the trend.
Countries such as Hong Kong, Singapore, South Korea, Taiwan, Vietnam,
Thailand, India, and China eventually began a period of rapid industrialization in
the early 1960s that continued up until now. These following nations entered into
a global marketplace by exporting mass-produced products as well as developing
their efforts through engaging high-tech arena. Furthermore, with the installation
of a large amount of foreign investment capital, Asian economies grew between
the late 1980s and early-to-mid 1990s.

Listed below are some of the examples of Capital markets in Southeast Asia;
however, in this paper, the researchers’ limit only 3 out of the 11 countries.

Capital Markets of Singapore

Singapore’s capital markets are regulated by The Monetary Authority of

Singapore. Since 1998 up until now, Singapore plays a vital role in ASEAN’s
capital markets. Ever since then, the bond market in Singapore increased in size
and scope every single year. Moreover, the Singapore Government Securities
(SGS) initiated Singapore’s capital markets development through issuance
program to be the benchmark for corporate bonds. Singapore was able to initiate
 the growth of different products to provide a more excellent opportunity to the end-
users. Their Government also introduced regulations on the capital treatment for
asset securitization and credit derivatives that enable financial institutions to
participate, certainty on the risks and responsibilities associated with such
transactions. Lastly, Singapore was able to liberalize its taxes to facilitate the
development of the capital market.

Capital Markets of Malaysia

As one of the ASEAN Five, Malaysia enviably enjoys and tops the market-
leading position in the global capital market with its wide range of unique offerings
and or products. In a recent study by William (2018), Malaysia has the largest bond
market in ASEAN and among the top three countries with the highest bonds
outstanding in Asia. Through investment growth, Malaysia was able to offer
opportunities for capital markets. Also, strong governance, as well as intuitive
government support, enables the efficient marketplace that has turned out to be a
global marketplace. Capital Markets Malaysia (CMM) was established by the
Securities Commission Malaysia to optimize further development and
internationalization of Malaysia’s capital market.

Capital Market of Hong Kong

Hong Kong is one of the famous market fundraisers from the past years
until the present. According to Lexology (2015). Hong Kong’s equity capital market
raised the most funds from IPO’s. Several listings are also present in the market.
Moreover, Hong Kong is also considered as the key financial center, which
provides the opportunity to open the local market to the international listing. The
opening started relatively slow due to the financial crisis, but from 2010, it began
to move rapidly. The known profile of Hong Kong as a capital market does not
have any significant way included in the regulatory arbitrage. In fact, Hong Kong’s
has a degree of regulatory conservatism, which resulted in attracting certain IPO’s
companies.

IV. Comparative Study

 To further understand, graphs are made to visualize and compare the
capital markets of the Philippines to its neighboring countries. The indicators used
are based on the Asia-Pacific Economic Cooperation.

Figure 1: Stock traded, Turnover ratio of domestic shares as of 2018

V. PHILIPPINE CAPITAL MARKET TO BE MORE INCLUSIVE

 The Philippine Capital Markets might have had experienced meaningful advances
or vital developments over the years. However, Philippine Capital Markets is not yet as
deep as those of several other Asian emerging economies for it remains comparatively
low relative to other developing Asian countries. The savings ratio remains low, according
to the Philippine Statistics, the number of stocks, bonds, and IPOs (Initial Public Offerings)
issued in the Philippines is still small compared to other rising countries.
Thus, the Philippine Capital Markets needs to be more ‘inclusive.’ Inclusivity in
terms of making it possible for ordinary people to invest in stocks and bonds. It was stated
by BDO Capital president, Eduardo Francisco, that the key to attaining inclusivity and to
be able to match the Philippine Capital Market to those of developed countries is not just
to digitalize but also to boost the financial literacy of every individual residing in the
country. He also suggested that one of the many solutions in attaining financial inclusivity
for individuals is to remove too many key points, numerous forms, documents and
identification requirements for IPOs (Initial Public Offerings) or bonds subscriptions which
is considered to be a reason why it is too difficult to invest in stocks and bonds in the
country and can make individuals less likely to invest in those types of financial
instruments. Financial inclusivity in the Philippine Capital Markets focuses on achieving
more participants in the country. Although it is true that while average incomes in the
Philippines remain low, the developments of recent years have brought comparatively
higher wealth at least to a segment of the population but not totally as a whole. The growth
of Shopping Malls all around the country is the testament to this. But this is not the case,
what the Philippine Capital Market needs the most is to open to new ways to raise the
number of investors where retail investments are stable and secure, and there is an
increased domestic trading in the market which makes it more available to the masses.

VI. Philippine market to be innovative

“Philippine capital markets are growing and evolving, but there are still many
opportunities in both the equity and debt spaces that we should consider, to further
grow the sector,” says Reginaldo Cariaso, BPI Capital Corporation’s Senior
 Managing Director and Co-Head. Although, this may be true but in terms of our
Capital Markets, innovation loosely equates to keeping up with the competitive
times. Without constant innovation, our capital markets will lag behind further than
they already have. The Philippines is already ninth according to an index called
the McKinsey Asia Capital Markets Development Index. Foreign organizations still
dominate equity trading, so when foreign funds leave the Philippines, the market
tends to decrease and dry up. Thus, financial legislators such as the Monetary
Board, Securities and Exchange Commission, Philippine Stock Exchange has the
need to look for new platforms and models that provides innovative solutions that
can attract more participants in the market. It was stated by, BDO Capital
president, Eduardo Francisco, the Philippines could adopt to other countries
platforms and new models that would help minimize documentation. With this, it
would help the corporate bond market to expand and can increase the participation
of issuers in the capital markets that would help increase demand for capital
market. Also, one of the innovative ways to boost the Philippine capital market is
through the use of advanced technology for it could be the most significant factor
in the growth of high-quality capital markets in important areas of economic
infrastructure. Policy makers need to decide whether to permit the accelerated use
of technology for certain market functions. Furthermore, another possible course
of action by policy makers to boost the innovativity of our capital markets is by
having transparent rules and regulations, with predictable enforcement, which can
help decrease costs and risks for market participants. Also, policy makers must
strike a balance between supervision and regulation and establish enforcement
mechanisms that do not exceed the legal system’s capabilities. Thus, the country’s
capital market needs to be innovative to be able to keep up or to be at par with the
developed neighboring countries, increase the flow of money within the country’s
market, and to reach a long-term market growth.

VII. References
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