Philippines: Encouraging Investment through Capital Market Reforms Program

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The Philippine Development Plan (PDP), 2011–2016 called for real gross domestic product (GDP) to grow by an average of 7%–8% per year, investment ratios to reach 22% by 2016, and a corresponding 17% reduction in extreme poverty.  Recognizing the role played by investment in meeting the broader goals of inclusive economic growth and poverty reduction, the PDP targeted public infrastructure spending at 5% of GDP, with private infrastructure spending exceeding 1% of GDP, by 2016.  Midway in the implementation of the plan, the government achieved measured success in meeting these targets. As fiscal reforms initiated in 2010 began to take hold, public spending on infrastructure rose to 3.5% of GDP in 2014 from 2.2% in 2012, while private sector spending increased to approximately 1% of GDP. However, the country’s infrastructure needs continued to balloon, with estimates calling for annual infrastructure spending of 6% of GDP.

Aware of the constraints facing its traditional funding sources, the government adopted a capital market blueprint covering 2011–2016. Initiatives included fundamental reforms to improve the function of and liquidity in the government bond market and enlarge and diversify the domestic financial markets. To support these initiatives, the government requested the Asian Development Bank (ADB) for programmatic financing of the Encouraging Investment through Capital Market Reforms Program.  In response, ADB approved a total of $600 million in two policy-based loans to finance the program, which consisted of two subprograms with a financing of $300 million each.

The program’s impact was aligned to meeting the government targeted investment rate. Its expected outcome of the program was a deeper nonbank financial sector and its three intended outputs were (i) liquidity in the government bond market enhanced, (ii) long-term savings and long-term investment products encouraged, and (iii) market depth and diversity increased. Three technical assistance (TA) grants aggregating $1,710,000 supported the program.

Subprogram 1, approved in November 2015 and completed in August 2016, began by addressing fundamental weaknesses in the operations of the Bureau of the Treasury (BTr), which were preventing the formation of a more active and liquid government bond market. These reforms, covering the BTr’s cash management, cash forecasting, and capacity, helped the BTr introduce more predictable auctions to reduce costs and increase participation. In addition, the program completed the foundational reforms to broaden and diversify financial sector participation and engage the contractual savings sector as a natural repository for long-tenor financial instruments, such as project finance.

Building on subprogram 1 accomplishments, subprogram 2, approved in November 2017 and completed in June 2018, further strengthened BTr operations.  Significant fiscal savings arising from efficiencies gained in both subprograms 1 and 2 were made available to drive infrastructure expenditure. More complex reforms were completed to increase efficiencies and introduce competition into the government bond auction process, which led to higher issuance volumes at lower relative cost. The government also continued to encourage long-term savings and long-term investment by introducing new products and expanding authorized investment parameters. Foreign banks and insurance companies received approval to establish domestic operations, further diversifying the finance sector, and efforts were launched to consolidate and strengthen the insurance subsector. Finally, the government continued to close the regulatory gap between the Philippines and the international financial markets.

Backed by a holistic multi-donor diagnostic, which identified existing constraints and set out a well-sequenced development plan for the next 2–3 years, the program substantially achieved its intended outcome.  By end−2018, corporate bonds outstanding had increased to 7.6% of GDP and 18 project bonds were issued, providing funding for tollways, power plants, and telecoms.  Shortfalls in meeting targets during program implementation—for instance, in increases in the trading volume of government bonds and foreign bank assets, the Personal Equity and Retirement Account, personal tax, and long-term retirement savings plan—are either projected to be filled in 2019−2020, with no additional reforms necessary, or have been moved to the subsequent programmatic financing being worked out by ADB. 

Overall, the program has built a solid foundation for additive and sequenced reforms to be pursued under the next capital development program due for consideration by ADB in 2020.  This program had the Department of Finance as executing agency, and the Bureau of Treasury and Securities and Exchange Commission as implementing agencies.

Project Information
Project Name: 
Encouraging Investment through Capital Market Reforms Program
Report Date: 
December, 2019
Main Sector: 
Project Number: 
Report Type: 
Policy-based loan
Goal 16: Peace, Justice, and Strong Institutions
Loan Number: 
3334, 3595
Source of Funding: 
Date Approved: 
L3334: 26 November 2015, L3595: 21 November 2017
Report Rating: