Capital markets key to growth, BSP says

The Central bank chief has outlined reforms that the country needs to implement to attract additional local and foreign investments, which would help boost the economy’s current consumption-driven boom.

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said building up the country’s capital markets, for example, would reduce the economy’s dependence on bank loans to finance big-ticket projects such as new roads, buildings and homes.

“Heavy dependence on banks can present challenges. As global interest rates trend higher, those that relied on bank credit face increased pressure on cash flow to handle higher costs of debt servicing,” Tetangco said.

Speaking at the Philippine Investment Forum organized by Euromoney magazine, Tetangco said the Philippine economy remained “bank-centric” as loans still covered most of the funding requirements of businesses and households.

To illustrate the country’s reliance on bank loans, Tetangco said that in 2013, local businesses raised P84 billion in bonds, which were sold to both institutional and retail investors.

This paled in comparison to the P663 billion expansion in the banking system’s loan portfolio in the same period.

“Having the right balance between credit and access to capital market (securities) is essential to managing systemic risks,” Tetangco said.

Additional sources of finance, Tetangco said, would help insulate local firms from uncontrollable increases in interest rates.

The presence of more securities in the country would also allow more households to make the shift from being “savers” to investors.

One such instrument that the BSP is working on to bring to the market are so-called “strip” or zero-coupon bonds, which are debt instruments that have had their principal and interest payments broken into two components and sold separately.

“Depending on how it’s structured, you’ll be able to fill up gaps in the yield curve. There are certain segments where there is hardly any trading. If you’re able to do strips, these gaps can potentially be filled,” Tetangco said.

Other initiatives that aim to fill gaps in the yield curve, which shows different benchmark interest rates for different maturities, include the introduction of price-setting structures that involve the use of “implied zero rates” for mid- to long-term securities, the overnight index swap for short-term IOUs.

Tetangco stressed that domestic consumption, which is driven partly by robust remittances from migrant workers, helped the Philippines dodge several bullets in the past as economic growth stayed positive during global crises.

“(But) we’d also like to look at sustainable growth in the medium to long term. There, you’ll need investments in areas like infrastructure and manufacturing. Capital markets will help because these projects will need long-term funding,” he said.