In order to encourage long-term savings and investment, the following specific reform strategies shall be pursued:
1. Develop auxiliary markets through forwards and cash markets.
The development of the domestic capital market cannot be fully consummated only by the presence of liquidity and higher investor participation reflected in the volume of transactions. A capital market that promotes price discovery mechanism, that allows investors to manage resources efficiently, and that provides the avenue to protect investments, is the necessary infrastructure to provide alternative financing to the country's economic development. Toward this end, there is a need to develop auxiliary market through forwards and cash markets.
Specific reform shall be pursued to:
a. Institutionalize repurchase agreements (repos) and securities lending and borrowing (SLB) as a second-layer platform for the trading of government securities (GS). Repos and SLBs provide another means for short-term financing and can provide the inventory of GS to avoid failed trades. Putting this in place would require an efficient infrastructure that would ensure proper tagging of securities (i.e., once used in a repo or SLB, it cannot be used for subsequent transactions unless released by the contracting parties) and would need common ground rules to govern the securities trading.
b. Develop a derivative forwards market to formalize the mechanism for investors to hedge their investments and manage their risk exposures. With the presence of a derivatives market, the volatility currently generated by abrupt spot trades can be addressed and provide the market with the necessary time to adjust to the required future volumes while using the forward rates as a valuation guide.
2. Establish a reliable capital market infrastructure
The flow of resources from those with excess funds to those with better use for funds will not be fully consummated in the absence or the lack of infrastructure that would ensure the sanctity of transactions, the protection of capital as well as encourage their economic use. It is therefore desirable to set in place a reliable market infrastructure as foundation for saving and investment. This would require the development of legal and regulatory frameworks to govern the exchange of capital which entails crafting of appropriate enabling laws to encourage savings, disseminate credit information, strengthen regulatory supervision and protect the rights of investors.
As an archipelago, a market infrastructure that can integrate the physically segregated markets across regions is important. Technology is available to allow for a central board that can present a uniform price for an issue regardless of the location of the purchaser.
Thus, reforms shall be undertaken to create a market infrastructure that provides for the following: (1) default arrangement, (2) elimination of clearing and settlement risks and (3) availability of access to other retail clearing or settlement processes.
3. Support faster integration of the financial system into the ASEAN region.
Increased exposure to the Asian-wide financial markets can serve as an additional momentum to further deepen the domestic financial markets. It can also encourage the rapid growth of the country's economy by improving the efficiency of savings allocation and providing additional financing to the domestic industries and businesses.
Specific reform strategies on ASEAN financial integration shall be pursued to:
a) Liberalize financial products and services;
b) Further liberalize capital account25:
(1) Continue the assessment and formulation of measures or regulations in the Philippines for foreign direct and portfolio investments as well as other foreign exchange flows. This will further removal of restrictions in inward and outward capital flows while ensuring consistency with member countries' national agenda and readiness of the economy and allowing adequate safeguards against potential macroeconomic instability and systemic risk that may arise from the liberalization process; and
(2) Participate in the mutual assessment process, identification and formulation of measures or rules to promote freer flow of foreign direct investments, portfolio investments and other foreign exchange flows, including the strengthening of monitoring and oversight systems to improve the management of large and volatile capital flows under the ASEAN Finance Process.
c) Support the regional capital market development through the following:
(1) Participate in the region-wide capacity building initiatives26 to collectively enhance liquidity and efficiency in Asian capital markets.
(2) Further develop long-term capital market infrastructure comparable and attuned with those in other Asian countries.
(3) Enhance capital market access, linkages and liquidity by participating in proposed regional initiatives such as the ASEAN Exchange linkages and Bond Market linkages.
(4) Promote credit ratings comparability between domestic and international credit rating agencies.
d) Harmonize payment and settlement system.
This specifically includes participation in the harmonization of the payment and settlement systems in the region to facilitate efficient, secure and reliable cross border transactions.
e) Strengthen regional monitoring and surveillance initiatives.
This generally aims to support the strengthening of regional monitoring and surveillance initiatives within existing regional arrangements through the ASEAN Economic Community Blueprint27 to boost resilience against external shocks.
________________________________________________________________________________________________
25 Cf: eStandards Forum: Business Indicator Report (August, 2010). In its Country Commercial Guide, the US Department of Commerce describes the Philippines as "open to portfolio investment".
26 Participation in regional negotiations should be supported by regular consultations with domestic stakeholders such as the National Government, the private sector and non-government organizations.
27 Cf: www.aseansec.org