Gov’t kicks off debt mart reform round

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Facade of the Bureau of Treasury at Intramuros, Manila on September 15, 2014.
Facade of the Bureau of Treasury at Intramuros, Manila — BW FILE PHOTO

THE GOVERNMENT yesterday embarked on a package of reforms to be rolled out in the next 18 months in order to deepen the local debt market, with the launch of an organized repurchase (repo) facility and of the Treasury bureau’s New Registry of Scripless Securities (NRoSS) kick-starting the effort.

The Bangko Sentral ng Pilipinas (BSP), the Bureau of the Treasury, the Securities and Exchange Commission (SEC) and the Department of Finance kicked off an 18-month reform plan for the local debt market designed to increase the supply of short-term securities and create “reliable financial benchmarks” for debt instruments.

“This is anchored and calibrated on the sequenced initiatives in building a road map to build more synergy in banks and the local debt market, with the latter to be more efficient in playing a more strategic role,” National Treasurer Rosalia V. De Leon in a speech during the Treasury’s 120th Anniversary celebration at the Ayuntamiento de Manila.

“We have seen the performance of the GSEDs (government security eligible dealers) improve, to better subscriptions, higher participation in the pre-auction service and more GSEDs providing bids.”

GSED performance in the primary and secondary markets will be reviewed yearly.

Also announced at the event yesterday were the new facility’s 10 market makers who will facilitate auctions and support capital market reforms, namely: BDO Unibank, Inc.; Bank of the Philippine Islands; China Banking Corp.; Citibank; Development Bank of the Philippines; First Metro Investment Corp.; Land Bank of the Philippines; Metropolitan Bank & Trust Co.; Rizal Commercial Banking Corp and Security Bank Corp.

In the same event, BSP Governor Nestor A. Espenilla, Jr. described “[t]he government security repo program [as] a key initiative under the local currency debt market development reform package.”

“The BSP strongly believes the establishment of an organized repo market is a key element in developing and deepening the domestic financial market,” Mr. Espenilla said in his remarks.

“In particular, the organized inter-dealer repo market is expected to boost market liquidity and enhance price discovery as it gives GSEDs the ability to hold two-way prices.”

He cited the need to establish an organized repo market in order to provide “regulatory oversight and prudent government standards” to manage risks attached to the reuse of government securities and the possible buildup of “excessive leverage in the financial system”.

Sought for comment, Money Market Association of the Philippines President Raul Martin A. Pedro said that the planned reforms are a “welcome development” that will spur further activity in the local currency debt market.

“We’re excited. It’s meant to deepen the GS markets. Hopefully it would smoothen the movements: you wouldn’t see large jumps anymore, because the repo effectively allows participants to trade two way,” Mr. Pedro said on the sidelines of the event.

“Unlike before when bond prices go down: those participants, what they will do is just watch the prices go down. That’s the beauty of repo.”

The government also launched the NRoSS, with Ms. De Leon saying it “modernizes the auction platform and registry of securities, eradicating possible operational and reputation risks.” Among others, the new system also consolidates auction and registry information for data mining and analytics to support policy-making.

Coming up in the months ahead, Ms. De Leon said, are more reforms aimed at encouraging participation from offshore markets in government securities.

“We are working on package four of the comprehensive tax reform program to promote neutrality and treatment of capital income and ensure equity across investors,” Ms. de Leon said.

“At the same time, we are discussing with our partner banks on the inclusion of government securities in the emerging market indices.”

Eventually, participants in a more developed debt market should be able to go into hedging, Mr. Espenilla told reporters separately on the sidelines of The Philippines Investment Forum 2017 at the Shangri-La at the Fort in Taguig City yesterday, citing improved pricing mechanisms that should enable market yields to approximate policy rates while remaining supportive of growth. The pricing mechanism includes regular assessments of political risks.

“Developing the capital markets will allow markets to produce hedging products and hedge FX (foreign exchange) exposures… That’s what we want to develop,” Mr. Espenilla said.

“A well-developed financial market is less likely to misprice risks. Prices will reflect properly and individuals will make the right decisions and stand back when necessary — that’s the key element,” he added.

“At the same, developing the financial and capital market enables players to produce risk management products: hedging.”

“Rather than speculate and take views on the cash market, we would encourage players to hedge their positions.”

Hedging protects users against risks from adverse price movements, and Mr. Espenilla has said that products like currency forwards and swaps are particularly needed.

A deeper debt market is seen to provide a “second engine” to drive economic activity, with Mr. Espenilla citing the need to complement financing needs sourced from Philippine banks. The central bank chief has pointed out a “mismatch” between deposit-funded loans versus long-term borrowing, particularly for big-ticket projects.

“Eventually, banks are going to hit their SBL (single borrower’s limit) and the banks are structurally funded short run… If you’re going to fund long term, there’s a mismatch and that’s creating instability,” he explained.

Aaron Gwak, Standard Chartered Bank’s head of capital markets for Southeast Asia, cited the need for various capital-raising avenues for “different stages” of a company cycle as firms ride the Philippines’ rapid economic growth.

At the same time, BDO Capital & Investment Corp. President Eduardo V. Francisco cited the need to streamline requirements that have become “too cumbersome” for small investors.

“Unless we remove all those roadblocks, we will make it difficult for man on the street to join the capital markets,” Mr. Francisco said. — Elijah Joseph C. Tubayan and Melissa Luz T. Lopez

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