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 120^th 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

THE COUNTRY’S external payments gap remains manageable, the Bangko Sentral ng Pilipinas (BSP) chief said, citing robust economic activity behind the latest numbers.

BSP Governor Nestor A. Espenilla, Jr. said concerns over the balance of payments (BoP) deficit are “misplaced,” since the gap merely reflects rapid economic expansion fueled by rising investments.

The BoP measures the country’s transactions with the rest of the world at a given time. A deficit means more funds left the economy than what went in, while a surplus shows that more funds entered the Philippines.

The country posted a $1.735-billion BoP deficit as of end-October, a reversal from the $1.465-billion surplus recorded in 2016’s comparable 10 months, according to central bank data. This is also substantially wider than the $500-million deficit expected by the central bank for the entire 2017.

Sustaining a current account deficit — which measures the country’s external trade in goods — should also not be a cause of worry. Mr. Espenilla said the central bank sees the country’s current account deficit settling “well below” one percent of gross domestic product (GDP) for the entire 2017, albeit reversing from the $601-million surplus posted a year ago that was equivalent to 0.2% of GDP. The BSP expects the current account shortfall to settle $600 million this year, ending 15 years of surplus.

“[A]s observed, previous current account surpluses actually reflected low levels of investment — something also unsustainable and undesirable. Behind the deficit, the economy’s rapid growth is backed by rising investments,” Mr. Espenilla explained, citing increased importation of raw materials and machinery behind latest trade data.

“Eventually, we expect this to translate to higher productivity and exports which will support sustainability of the current account and the overall external payments position.”

The economy is well-armed against external shocks with $80.616-billion gross international reserves as of end-October, he noted.

Inflows from the steady stream of worker remittances, business process outsourcing revenues, tourism receipts, and increasing investment flows will prop up the country’s external position to balance out the increased importation.

Mr. Espenilla added that the Philippines is on track to hit the government’s 6.5-7.5% growth goal for 2017, with indications that expansion will pick up further to 7-8% over the next few years amid robust household and public spending, with a boost from the government’s planned infrastructure boom.

Philippine GDP grew by a faster than expected 6.9% in the third quarter, which pulled the nine-month pace to 6.7% from the first half’s 6.55%. “Our economic outlook is strong and robust… Further economic growth of 7-8% over the medium term is expected,” the central bank chief said, as he downplayed overheating risks.

Still, the BSP remains “vigilant” over upbeat growth in bank lending, with total credit posting a 21.1% surge in September.

On the exchange rate, Mr. Espenilla said the “modest and controlled depreciation” of the peso against the dollar simply illustrates the economy’s “structural shift from being consumption-led to being more investment-led.”

The peso averaged P50.3412 against the greenback for the first 10 months, touching 11-year-lows in October as it logged above the P51 level. The central bank has employed “tactical intervention” to smooth out excessive swings during day-to-day trading. — Melissa Luz T. Lopez

COMPANIES in the Philippines are largely unaware of inclusive business practices which would otherwise help overall rapid economic expansion benefit more of the poor, according to findings of a joint study of the Board of Investments (BoI) and the United Nations Development Program’s (UNDP) Istanbul International Center for Private Sector in Development (IICPSD) that were released to journalists yesterday.

A joint BoI-UNDP IICPSD press release — which accompanied the release of the Business+ The Philippines report — noted that inclusive business “offers an opportunity to not only generate profit, but also helps those at the base of the economic pyramid and thereby contribute to reducing poverty in the country.”

Findings from 19 interviews with Philippine business executives and results of an online survey e-mailed to senior executives of 223 companies of various sizes and belonging to various industries “showed that the current levels of awareness and engagement in inclusive business are low.”

“[A]wareness was quite low and the terminology was hardly in use at all,” read the report itself, citing a mean score of 1.51 out of 7 where 1 meant “not aware at all.”

“Even those companies that exhibited inclusive business practices were not aware that they were actually already doing it and they did not consider themselves inclusive businesses,” it added.

“The lack of awareness regarding their own practices in inclusivity can easily result in their not being able to go further with it and benefits not being maximized in terms of reaching the poor.”

And while respondents believed such models were applicable to their industry (4.64 out of 7) and could be successful when applied (4.60 out of 7), “this attitude did not necessarily lead to engaging inclusive business practices.”

The study noted that inclusive business can especially be applied to “entry points” for the poor into the value chain: being an employee, consumer, supplier, distribution channel member, and entrepreneur.

“Around 33.6% of the participant companies did not even target the poor as customers or consumers while 26.9% did not do business with the poor in their distribution channels and 22.9% did not do business with the poor as suppliers,” the report noted.

Respondents had an overall inclusiveness mean score of 3.74, consisting of: 4.39 for employing poor people, 4.03 for investing in less developed neighborhoods, 3.79 for emphasizing the poor in one’s business strategy, 3.74 for considering poor people as entrepreneurs in one’s business model, 3.72 for emphasizing the poor in one’s mission statement, 3.52 for doing business with the poor (such as low-income producers) as suppliers, 3.41 for doing business with the poor in the distribution channel (e.g. as carriers, retailers, etc) and 3.35 for targeting the poor as customers/consumers.

Social enterprises had the highest scores across entry points, followed by large Philippine corporations, multinational corporations and small- and medium-scale enterprises.

The study also cited emerging inclusive business (IB) models in agriculture, tourism, health and education “but many of these companies were not aware that they were already undertaking IB practices.”

It also noted that respondents “see the national and local government bureaucracy and the existing regulatory environment in the country as the most significant challenges in doing inclusive business.”

In his foreword to the study, Ola Almgren, United Nations Resident Coordinator and UNDP Resident Representative in the Philippines, noted that while the country’s economy “has undergone unprecedented growth in recent years”, with gross domestic product expansion averaging 6.2% from 2010 to 2016 to make the Philippines “one of the fastest growing economies in Asia”, rates of underemployment and of poverty are still relatively high at 18.3% and 25.2%, respectively, while “inequality is still one of the highest in the region particularly in terms of income”.

“There are several ways companies can contribute to development but one is proving effective, sustainable, and feasible while addressing the unfulfilled gaps of poverty – inclusive business,” Mr. Almgren wrote.

“At its heart is the integration of the base of the economic pyramid — those that often get left behind — into companies’ value chains to ensure both commercial success and social impact,” he explained.

“Inclusive business underscores the idea that the pursuit of profit and development can and should be supportive of society’s more challenged sectors.”

For instance, Mr. Almgren said, “[c]ompanies can shift focus to creating commercially viable goods and services that will have a significant social impact while addressing the needs of the poor.” — with inputs from A. G. A. Mogato