Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. said there are three things he wants to see to have a deeper domestic capital market, including a debt market with medium-rated bonds and a stock market that is more responsive to “eventful” or market-moving news.
Remolona also pushed for a Philippine capital market with more exposure to an emerging market bond exchange-traded funds (ETFs), which are funds traded on stock exchanges that track index funds.
He said the BSP is asking supervised banks to do a lot to deepen the capital market and to work more with the central bank in establishing a credible yield curve.
“The money market has issues (that we need) to take care of,” he told reporters in Filipino, in an informal press chat before the weekend.
He discussed some of these, primarily the three main issues, which he referred to as his “wish list” during the 119th Meeting of the Capital Market Development Council (CMDC) last Dec. 6.
The three main issues he wanted was: open the corporate bond market to single-A and triple-B borrowers; make the stock market more eventful when material information arrives; and join the global shift to equity index and emerging market bond ETFs.
Among three other ASEAN countries that include Thailand, Malaysia and Indonesia, plus South Korea, the Philippines is fourth in terms of stock market growth vis-à-vis gross domestic product (GDP), and in the corporate bond markets versus GDP, in 2022.
Remolona said when it comes to the development of the capital market, “there are more questions than answers” such as why is it that “in our corporate bond market, all the bonds are triple-A (or double-A)” compared to Thailand which has an overwhelming population of “BBB” rated bonds than “AAA” bonds as what is happening in the Philippines.
The BSP chief, who has worked with the Bank for International Settlements (BIS) and the Federal Reserve Bank of New York, said the Philippines need a Michael Milken, an American financier who was recognized for his contribution to the development of the US market. Milken was known as the “junk bond king” of the 1980s.
Remolona recalled Milken worked with investment bank Drexel Burnham Lambert to “put together a network of investors in high-yield bonds, which allowed him to raise vast amounts of money for leveraged-buyout firms.”
“Today, the median bond issue in US corporates is non-investment grade,” he noted.
Remolona also noted that in the Philippine stock market, an “event” is not an event, or that “sometimes a listed firm’s stock price shows no reaction to the public release of significant news.”
“This would suggest that insiders had already traded on the news before its release,” he said.
He cited Uptal Bhattacharya, a finance professor at Hong Kong University, and his study of 87 countries with insider trading laws. Remolona said only 38 of those countries have enforced the necessary laws to curb insider trading, and that these 38 countries have lower cost of equity financing as a result.
Meanwhile, the BSP chief said it is important that Philippine corporates participate in the emerging ETF market.
He listed the big three in index funds as BlackRock, Vanguard and State Street. “Together they are the largest shareholders in 88% of S&P 500 firms,” he said.
These three manage the biggest ETFs “which are highly tradable index funds” and the “the top three emerging market bond ETFs are by JP Morgan, Barclays and Invesco.”
“Philippine markets are not included in any of the major global equity ETFs or emerging market bond ETFs,” observed Remolona.
He wants supervised banks to find out why, and he is encouraging market bond participants and investors to “get invited to the global ETF party.”