BEYOND the confines of their quarterly meetings, the Capital Market Development Council (CMDC) is hardly known. But their deliberations, decisions, advocacies and projects have long-term impact on the country’s financing scenario and ultimately on the whole economy. Let me explain.
The CMDC is a government-private sector voluntary organization of major institutional stakeholders who have taken upon themselves the planned joint effort to promote the country’s capital market development. They do this by undertaking to put together in a Capital Market Development Blueprint (CMD Blueprint) a program of “what to do,” integrating the policies, projects and related activities required to pursue their objectives. The current Third CMD Blueprint covers the period 2019 to 2025.
Here is a successful public-private sector collaborative effort and, noting its effectiveness, is being institutionalized more formally through legislation: the Capital Market Development Act, which is still in Congress.
To be more acquainted with this group of capital-market advocates, let us get to know who are represented in the CMDC. The Secretary of Finance is chairman and the co-chairmen are the chairman of the Securities and Exchange Commission and a nominee from the Financial Executives Institute of the Philippines (Finex), representing the private sector. On the government side, we have additionally a member of the Monetary Board of the Bangko Sentral ng Pilipinas (BSP), the Insurance Commissioner, the National Treasurer and the executive director of the Bureau of Local Government Finance.
On the private sector side, we have the presidents or head executives of the Philippine Stock Exchange, the Philippine Depository and Trust Corp., the Philippine Dealing and Exchange Corp., the Bankers Association of the Philippines, the Investment House Association of the Philippines, the Fund Management Association of the Philippines, the Philippine Association of Securities Brokers and Dealers Inc. and, of course, Finex.
The CMDC has refocused its overarching objectives to:
Deepen the capital market;
Promote more inclusion; and,
Attain sustainable long-term growth
The fuss over capital-market development is neither an empty exercise nor an abstract aspiration. It is about getting more capital funneled from investors with money to business enterprises who need the money, with expectations of mutual benefit. The capital market is the facility that mobilizes investors’ funds to finance businesses, which grow the economy and provide for the goods and services the population requires. At the same time, these provide the jobs that people seek.
Businesses, of course, can finance themselves from their own capital (very limited) or borrow from banks (the usual way but also with limitations). The alternative to raise financing, especially for business expansion, is to tap the capital market. The capital market offers long-term financing that banks cannot inherently offer because banks’ lending are largely deposit-based, and deposits are short-term funds.
By comparison, in the capital market, a bond issue is a long-term fixed-maturity, fixed-income obligation; and a common stock issue is a long-term co-ownership participation that has no fixed maturity. In both these cases, there are relatively no pressures for sudden interest rates hikes or for repayments.
The 1997 Asian Financial Crisis has imprinted in the minds of our policymakers that indeed our businesses are over-financed by bank borrowings–which they find as a risk–and should be balanced by capital market financing.
Former BSP Governor Amando M. Tetangco Jr. said it well: “A growing economy such as ours requires a steady flow of financing from both local and foreign sources.”
“In sustaining this development, the economy needs a healthy financial system, one that is built upon strong pillars: a robust banking system and a fully-functional capital market,” Tetangco said in his speech to the IHAP in 2005. “A fully developed capital market can stimulate domestic savings and provide investment opportunities. A sound capital market also improves the financial environment with the offer of alternative financial instruments. At present, government papers dominate the local capital market with minimal alternative for other financial instruments.”
Here’s an update on what our capital market raised in funds this year (as of December 3, 2021) through our exchanges, as reported by SEC:
Total debt securities issue value of P198.6 billion (representing 18 bond issuers and two commercial paper issues)
Total equity securities issue value of P217.3 billion (representing 31 applications approved)
The issue value of equities was a mere P56.2 billion in 2019 and P66.5 billion in 2020. The issue value of debt securities was P375.6 billion in 2019 and P387.8 billion in 2020.
We see progress here, but if we compare ourselves to our Asean (Association of Southeast Asian Nations) neighbors, we have a long way to go; hence, the need for a collaborative serious effort. The CMD Blueprint is evidence of this effort.
Santiago F. Dumlao Jr., past president of the Financial Executives Institute of the Philippines, is the current Secretary-General of the Association of Credit Rating Agencies in Asia.