Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona. FILE PHOTO
When he took over as governor of the Bangko Sentral ng Pilipinas (BSP), Eli Remolona Jr. made three wishes for the country’s financial system.
Those are wishes that he carries on from his predecessors, who had hoped for a future where the Philippines is no longer reliant on its banking system for the funding of various economic activities.
In his past speeches, Remolona—whose career highlights include his previous work at the Bank for International Settlements and the Federal Reserve Bank of New York—had repeatedly underscored the unsustainability of the country’s overdependence on banks, as he dreams of a deep capital market that enterprises can tap if they need to raise funds.
And the BSP chief aims to make those wishes come true within his six-year term, believing that a “deep and liquid” capital market “enhances the transmission of monetary policy.”
Wish No. 1:
Remolona’s first wish is to develop a “good” benchmark yield curve.
Under this plan, he specifically wants to “revive” the country’s interest rate swap market (IRS), arguing that having such a derivative contract would lessen a borrower’s exposure to fluctuations in interest rates.
An IRS allows a borrower to sell bonds using the most attractive rates that can be offered to creditors at the time of the sale, then repay the principal amount and borrowing costs via a financing schedule they desire. This typically involves the exchange of a fixed interest rate for a floating rate—which changes periodically based on market conditions—or vice versa.
Once the local swap market is active again, the BSP chief explains that a “swap curve” will eventually emerge that can replace the Philippine Bloomberg Valuation (BVAL), the current benchmark being used following the 2023 phaseout of the London Interbank Offered Rate due to scandals involving alleged yield manipulation by rate-setting banks.
For Remolona, the BVAL is a “choppy” curve that is “not a good reference for pricing instruments.”
“It’s not a good curve, there are some sharp portions to the curve. I think it clearly means that there’s not enough liquidity because market participants can easily take positions on opposite sides of the kink and make some easy money if there were enough liquidity,” the BSP chief says.
To revive the swap market, Remolona recognizes the need to attract demand and liquidity for it, noting that such transactions used to be popular in the Philippines. The BSP chief says he plans to make the swap market active again within his term.
”We used to do swaps quite a bit, but somehow they disappeared. So I would like to revive the swaps market—the IRS markets,” he says.
Wish No. 2
Remolona’s second wish is to have a corporate bond market that is accessible to potentially lower-rated borrowers.
At present, the central bank chief says it is hard for a lower-rated issuer to join the corporate bond market in the Philippines, all while countries like Thailand have done it.
He has likened the local corporate bond market to “Lake Wobegon,” a fictional town created by Garrison Keillor as the setting of a recurring segment called “News from Lake Wobegon” for a radio program in Minnesota.
In his speeches, Remolona likes to quote Keillor on Lake Wobegon: “All the women are strong, all the men are good-looking and all the children are above average.”
It is an apparent reference to the so-called “Lake Wobegon effect” or the human tendency to overestimate oneself compared to others. What Remolona is trying to say is the domestic corporate debt market is becoming more exclusive to higher-rated borrowers who, he says, are typically not in serious need of cash compared with lower-rated ones.
“Right now, basically, our corporate bond market is ‘triple A’ [while there are just] a few ‘double A’ issues. That’s not a real corporate bond market, if you ask me. It’s accessible only to the guys who don’t need to go to the corporate bond market to borrow,” he says.
Wish No. 3
Remolona’s third wish is for the Philippines to join the global exchange-traded funds (ETF) party.
According to him, the investing game changed when the world came to know ETFs, a financial instrument that tracks an index, a commodity, or a basket of assets like an index fund. He says ETFs typically attract more stable foreign portfolio investments that are not ‘hot’ money, whose flighty nature is not good for financial stability.
In 2013, the Philippines’ very first ETF debuted on the local stock exchange. But Remolona says the Philippines is still missing out on inflows because it is not part of major global indices. The biggest ETFs are managed by the so-called “Big Three”—namely Vanguard, BlackRock, and State Street—and Remolona wants the Philippines to join their investment baskets.
“The Philippine market is not included in the big ETFs. We have small ETFs here in the Philippines, I think, but not the global ETFs. If we are not in the global ETFs, that means when investors put money into the stock market, we are not included,” Remolona says.
“And these are good investments for us. These are passive investments, which means if something goes wrong, the investors do not flee. Either they stick with the fund, or they leave the fund. But they do not get out of individual countries or stocks. It is a good kind of investment for a country like ours,” he adds.
“This is the kind of portfolio investment we want—a portfolio investment that is not hot money. Either they stay with equity, or they leave the equity market.” INQ