THE need to introduce further improvements to the Philippines’ capital market has risen especially in recent years to help address the dovish interest rate outlook and slower global growth, among others.
Reliance on banks as major fund source for corporates should be lessened. Instead, businesses should have greater access to the capital market.
Bangko Sentral ng Pilipinas (BSP) Assistant Governor Johnny Noe Ravalo, in a briefing on the release of the Financial Stability Report for the first half of 2018 until 2019 at the central bank Wednesday, said members of the Financial Stability Coordination Council (FSCC) has recommended three interventions to ensure financial stability in the domestic economy.
These measures are namely fewer but deeper benchmark tenors, indexed bonds, and tenor-based pricing.
Revelo said these proposed interventions are very timely because interest rates are falling and so it financing.
In an interview by journalists, he explained that reducing dependence on banks for funding cannot be done overnight since an economy needs an efficient capital market first to really change the market landscape.
He pointed out that an efficient capital market reflects fair prices of risks and fair price of risks for a particular tenor, which investors can compare.
“So by giving out fair prices, tenor-based, you’re allowing people choices. Do I borrow one-time seven years or do I borrow five years and then borrow two years after the fifth year? Those are the decisions that have to be made,” he said.
To date, some listed companies are now issuing their bond debt papers, thus, Ravelo said the change will not start from zero because there is already a market for these instruments.
“What we’d like to do going forward is polish whatever we have right now so that a lot more of the SMEs (small and medium enterprise) can go to the capital market instead of just going to the banking industry,” he said.
The BSP executive explained that while there is nothing wrong from borrowing from banks, these financial institutions also get part of their funds from deposits, which account holders can withdraw anytime they want.
This, he pointed out, “comes in a market friction cost and market development cost.”
“Whereas compared to the capital market when an issuer says I’m raising 10-year money those who buy the 10-year bond are saying we have 10-year money. So the tenor mismatch is removed,” he said.
“From that alone that’s going to be a massive improvement already. So it’s the next step but just to be absolutely clear we’re not starting from zero,” he said.
“That’s also why we are growing by six percent because we have a financial market that allows for the economic activities to be financed,” he added. (PNA)
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