start with the general overview on the business landscape of the
Philippine economic growth. With the start of the new Administration,
you have already managed to have some very modest growth with
good, strong points, such as the credit upgrade of the Philippines
from both Standard and Poor's and Moody's. Additionally, there
is, of course, a 22-year high economic growth at 7.4% for the
GDP (Gross Domestic Product). So, I think we are on the right
track, and that is what everybody believes as well. Could we have
your personal assessment on the current business environment in
the Philippines, as well as on the capital market?
There is a
very solid base for the real economy. The question of course,
is whether we can repeat last year's 7.4%. Probably not, but the
Philippines will have more than respectable growth this year.
According to conventional wisdom, it will be above a 5% growth
number despite all the external issues, such as Japan, the Middle
these are what threw the ballpark figures and estimates off for
some extent, especially with what happened with Japan.
will be peer and, of course, inflationary pressures, which is
a situation we did not have for all of 2010. Consequently, there
was not much inflation during most of last year, and that has
obviously been very helpful for companies and the stock market.
This year, however, we do have a few challenges and pressures.
Having said that, I think there are two overriding issues that
are good, which is why I say that the fundamentals of the real
economy are quite stable. The first thing is the feel-good nature
that we have by having President Aquino stepping in. His statement
on how good corporate governance is something we need to live
by has created a stronger sense of prosperity for both institutions
and companies as long as they go about doing things the right
business community also has this view, so it is something positive.
The second thing is that most of the companies operating in today's
economy have grown and survived over the last 8-10 years. Interestingly,
despite the fact that there has been political turmoil in the
Philippines of one nature or another, essentially, we have had
continuous growth, corporate or not, for the last 10 years.
actually 45 years.
Is it 45 years?
The point about the 10 years is that it has been an unbroken positive
growth each quarter, even during the darkest moments of the global
financial crisis. The country grew about 0.5% when there was a
5, 6, 7, or even 10% negative growth everywhere else. That is
an amazing thing. The overall feeling is that the country's entrepreneurial
and professional spirit is alive, and that there is an ability
to compete with global corporations, maybe in a small way.
to the global financial crisis, everybody believes that perhaps
the worst is over. Seeing that the Philippines has also relatively
escaped from this crisis, how would you rate the investment aspect
of the environment, in terms of what we can offer now to the international
that it is correct to say that the Philippines has come out of
the most recent global crisis. It also goes to show how the reforms
that the BSP (Central Bank of the Philippines) has been undertaking
over the past few years have actually created a relatively strong
banking system, unlike, interestingly enough, the Western banks
in the US (United States) and the Western world that were truly
affected. I think that the leveraging and reforms that had taken
place before the crisis helped the Philippines weather the storm
in a way. All this demonstrates that the country, if given the
right opportunity, can be responsive to external shocks in a positive
manner. I am very pleased, by the way, that Governor Tetangco
has gotten reappointed.
there was a general clamor that he be reinstated again.
runs the BSP (Central Bank of the Philippines) in a very prudent
manner, thus increasing confidence in it. Therefore, the argument
would be that if the Philippines were as stable as some of the
other developed economies in the political front, it could probably
achieve an even higher and faster growth. So, what can we offer
the world? There are many comparative advantages here. You have
obviously seen what has been done in the BPO (Business Process
Outsourcing) sector, and you may or may not know that, as of 2010,
the Philippines has now overtaken India in terms of call centers.
We are not on the other high-end sector yet, like KJO (7:45) or
KPO (Knowledge Process Outsourcing). Clearly, India is ahead of
us. In fact, they had the enviable head-start with a rumble for
the Y2K (Year 2000 problem). However, if you take a look around,
you could think of it as basic shared services. The Board Meeting
has been approving more HR or accounting-related jobs to move
into the country during the last couple of years, starting with
all the big companies, such as IBM, Deutsche, or City Group. In
other words, a venue has been created for semi-skilled and skilled
professionals to stay in the country. Hopefully, this will reverse
the Philippine Diaspora to consider the opportunities here in
the Philippines. Obviously, talking has significantly changed
what can be done. As for the stock market, I think we have a couple
of very exciting things happening this year. It is all very helpful
to get more companies listed.
you look forward to in terms of IPOs (Initial Public Offerings)
or initiatives that you have?
me backtrack a bit. I think that for the stock market, clearly
2010 was a good year from a performance perspective. We actually
had a record year in many respects, like the highest index level
ever or the highest daily volume ever. Part of it, of course,
had to do with some of the stuff that we had done earlier in the
year. We changed our own trading platform after continuously having
operated on an old legacy one. This upgrade allowed us to achieve
the volumes that we saw in October, November, and up to early
December, which are double of what our average daily volumes were
for most of the year. This meant going from 4.5 billion Pesos
to something about 9.3 or 9.5 billion Pesos. So, that was unprecedented.
There are a number of things that we are working on right now.
First, we have reinstated something called the Minimum Public
Float, which means that, in order to remain listed, you need to
have at least 10% of your capitalization in public hands or flowing
through the stock market. Now, when we looked at the data as of
the end of 2010, 46 out of 255 companies were either slightly
or significantly below the minimum amount. Those companies obviously
want to continue participating in the stock market for all the
pluses, and we expect what we call follow-ons, where people just
top off to comply with this. Compliance, though, is perhaps the
last reason why they would do it. There are many reasons why you
want to have a larger float, including the distribution of some
of the wealth to the public or at least the ability to own part
of these companies. Even from the government's perspective, this
is something positive because you are giving a lay person the
ability to own a piece of active companies, whether it is Ayala
Corporation, Cebu Pacific, etc.
by giving people this opportunity, it will enable them to have
a say on the distribution of wealth from a capitalist point of
view. Of course, this will also allow these companies to raise
more money in the capital market through equities. Being listed
also makes it easier for them to raise money in the debt markets,
whether it is a bank loan or a bond issue. This is good because
there is a certain level of disclosure that they provide to, let
us say, an investing client. We have been working with the IFC
(International Finance Corporation), the World Bank subsidiary,
in terms of launching what we call the Maharlika Board. To describe
it very simply, it is a listing board that shows the companies
that are branded as Maharlika-Compliant, meaning, they have a
higher level of disclosure for investors; they have a higher public
float, and they probably practice the highest levels of good corporate
why we talk about this is because of the experience of Brazil.
About 10-11 years ago, Brazil established what was then known
as Novo Mercado or New Market. Again, this is about higher disclosure
standards. What has happened over these 10 years is that, evaluation-wise,
the index of companies in this Novo Mercado have all increased
compared to companies that are just in the regular Bovespa (São
Paulo Stock Exchange). The stock market and the Novo Mercado have
demonstrated to investors and the world how they can invest in
specific Brazilian companies with a type of gold standard in terms
of practicing best global ways of corporate disclosure.
like a differentiator, really.
It is a differentiator.
We hope that it will have the same effect for those companies
that are starred Maharlika Board. In a way, it actually serves
one additional purpose, which is to demonstrate that better corporate
governance practices result in good and better evaluation for
potential investors. The confidence level in the country will
hopefully improve, as well. We are talking about a virtuous cycle
here, because with more activity, the government will eventually
collect more taxes. So, in a way it is all going in the right
direction, and we hope to be part of that movement for change.
of other IPOs (Initial Public Offerings), what can you look forward
be a lot of other sectors, including those that have not done
enough IPOs (Initial Public Offerings), such as the mining sector.
This is a very important sector, which, I think, has overcome
the initial missteps.
is on the rebound.
Yes, it is
on the rebound. About 4 years ago, the law changed, allowing investors
to own natural resource companies. The new law was aimed at foreign
investors because about 30 or 40 years ago, some misguided legislators
here decided to keep it for themselves as it was a very rich industry.
It became 100% Filipino-owned. It was a wrong move because in
a high capital expense industry, when you cannot get enough capital,
you cannot expand; you cannot do business. Consequently, the industry
died and moved away to Australia, Brazil, and Chile. The government
corrected this a generation later, after becoming aware of the
mistake. Two years ago, there was an attempt to restart one of
the gold mines, but there was an accident: the leaching owned
by Placer Dome overflew onto the river. The mine was shut down,
and rightfully so. This has been a positive experience because
now companies involved in new mining projects are very mindful.
They do not want to be the next bad boy.
We spoke with Mr. Romaldez (18:36) about this and he is, of course,
very pleased with the overturn of the Mining Act. Everybody knows
that sustainable mining and conservation are clearly a priority.
So, many more mining companies are showing interest in going public?
Yes, I think
we will see more of them on that side. There is one highly successful
construction company, Megaworld, who is doing IPO (Initial Public
Offering). With all the PPP (Public-Private Partnership) projects
online, a number of the smaller development and construction companies
will require more capital, so going public is clearly one of the
options. The BPO (Business Process Outsourcing) industry might
be a bit difficult because, despite its huge growth, most of its
companies here are what we call "captives", owned by
J.P. Morgan. So, they do not necessarily want to go on an IPO
(Initial Public Offering) to grow and maximize the benefits. Those
types of companies are good for employment generation, and they
are great for the real estate and technology markets. However,
maybe they are not good candidates for listing because, in a way,
J.P. Morgan is not going to want to explain exactly what their
price differential is, or why HSBC (Hong Kong and Shanghai Banking
Corporation) is hiring people at this level. Actually, there was
only one company in the BPO (Business Process Outsourcing) sector
that was listed, which went private again a few years ago.
By the way,
some of the game and technology-related companies, along with
their subsidiaries, are good candidates for listing. The other
untapped area, and I have talked about this with Secretary Purisima
and Secretary Domingo, is those companies that have been granted
incentives by the Board of Investments. Basically, these companies
have a lot of tax breaks, and the quick protocol was that they
had to go public. The only problem with the previous regulation
was that they had to go public without specifying by when. So,
that kind of fell through the cracks, I think. Our discussion
now along with some legislators is to maybe put some initiative
guidelines to say that look, you have been operating during the
last 5 years, but you have never reached a certain size; if you
want to continue receiving the benefits of these tax breaks and
all the other incentives, you will actually have to do a public
offering by another year or two. So, this would occur in the medium-term.
We know that those companies that started off as small BOI (Board
of Investments)-incentivized companies have done relatively well,
and have appropriate sizes.
the things that are currently in your agenda with respect to the
stock market? What do you really want to see in terms of achievement
for the PSE (Philippine Stock Exchange)?
we lost two CEOs (Chief Executive Officers) in the span of 2010,
the first order of business is just stabilizing everything internally.
There is someone who is trying to calm things down by talking
to his regulators, and, despite the fact that we are a private
sector company, he is also making sure that we are working very
much hand-in-hand with the general objectives of the government.
In other words, improve transparency, have more activity, and
try to assess what we can. Also, you may have heard of the effort
to do REITs (Real Estate Investment Trusts) which are real estate
investment costs, and we are finalizing those. We obviously need
our regulators as well as the policy makers to be in sync with
us and with what can be done in the market. There is another law
that was passed, called the Parallel PRA (Philippine Retirement
Authority) (26:44). It is very similar to the US (United States)
401(k) Savings. You get a portion of these people's incomes and
invest it in some equities or equity index funds. That should
only have a positive impact on both the market and hopefully the
portfolios of these individuals. We have seen examples all over
the place: Chile has done a great job of doing that. We need the
help of policy makers and the government, and so we are trying
to help them help us, and hopefully get things done correctly.
Also, if we take a look at our plans, clearly we need more activity
in the stock market, more liquidity.
One of the
things is trying to increase the number of companies being listed
and improving corporate governance, which, I think, will have
a positive effect at least in the medium-term. The results will
probably not be apparent in a month or two, but rather over time.
The second item is having the ability to generate the same interest
from within ASEAN (Association of Southeast Asian Nations). In
one sense, that is the reason for the ASEAN (Association of Southeast
Asian Nations) linkage, which essentially is about connecting
our trading engines. This initiative also requires introducing
a bank mechanism because, for example, an investor in Manila may
want to buy Synctel, get a coded local currency through his computer
or broker, and put in the order. This process does not deal with
a bank providing foreign exchange and does not demand a second
or third broker to get the code or use the trading engine. The
idea is to avoid having, for instance, the PSE (Philippine Stock
Exchange) and the Singapore Exchange pass the trade and the money
back and forth, to only send it back to the original stock seller.
The new process seems simple at first with the use of technology,
but it is actually complex when we consider the regulations and
all sorts of other things involved that go in the middle.
cost money, so what we are trying to do is bringing down the average
cost for the day-to-day investor. That will hopefully create a
lot of activity within the region, especially with trades with
us that have Philippine names, whether they are buying or selling.
Locally, we are trying to work a lot on many fronts with the Bankers
Association. An example is getting more leverage into the system
both for broker dealers and to expand the types of products that
a bank can sell, which will hopefully include some index funds
or trade of stocks. Banks already have their Internet networks
in place, and while we are encouraging all brokers to go online
as well, not everybody is as successful in this mode. There is
one local company that has been extremely successful, Citisec
Online, which started a long time ago. Actually, in the beginning
they underwent a huge loss. Maybe that is the price for being
the first ones and for paying for more expensive technology than
necessary, but I understand that they are doing quite well now.
This is an example of utilizing a plank permit (31:08). Now even
local banks can do it. They can offer their Internet access system
to their branch banking network, and extend that for one additional
asset class (31:19) stocks. The idea is to improve that. Finally,
and this is not just with the Maharlika Board, is improving the
image of the Stock Exchange to that of being very transparent,
above board, and professional. I guess history has been a bit
muddy and, unfortunately, some exchanges in the late 1990s were
a black eye. There was a huge scandal that brought down the President
by his involvement in it.
As a consequence,
sometimes people claim not to be investing in the stock market
because they view it as a casino, as if funny things went on inside.
We remind them that the scandal happened more than 10 years ago.
In fact, we have been very serious about corporate governance
and reforms. During my first months here, I delisted high companies
that had been non-compliant for a few years. I am actually surprised
they lasted that long. My predecessors could have done the same
thing I did, but maybe they just could not focus on it at the
time. After the celebrated case of the Bank of Philippines, I
was shocked to find out that they were still listed. How can that
be? They were in violation of so many things, including our own
rules. What we are trying to demonstrate today is that we are
following our own rules. If only to be fair to the other 255 companies
who are following our own rules by paying dues and giving updated
information to investors, why should we be giving special handling
to those who are not? It is a disservice. Another example is how,
for the first time, we also helped apprehend one of our own, so
a company called AHK Securities, which was a family-owned brokerage
firm. To make a long story short, they unauthorized the use of
securities or money of their clients without their consent. They
bet on some stocks and went the wrong way: they lost money, clients
asked for their money back, and the company went bankrupt. We
not only shut it down, but we actually pressed 4 charges for the
equivalent of racketeering in the US (United States), which is
a premeditated fraud and a non-billable type of offense. We used
some of the funding to actually get this guy with our NBI (National
Bureau of Investigation), which is the FBI (Federal Bureau of
Investigation) equivalent, and the trial is about to start now.
A message had thus been sent out. Overall, we got very good comments
from the public, commenting on how we really meant business. If
only for that, I think this hopefully demonstrates that we are
on the right path to increasing confidence in our system. Lastly,
we also span off what we call our Market Regulatory Division.
These are the ones who monitor the broker dealers. The comment
about the PSE (Philippine Stock Exchange) was that certain broker
dealers would appeal to their colleagues who also sat on the Board
in order to scale down the punishment whenever they committed
illegal actions. Whether or not that has happened, it has probably
been the prevailing view from the public.
think we have already disproved it. In addition, by spinning this
division off to a separate, independent company, it will report
directly to the SCC (Securities Clearing Corporation). We have
implemented this for extra vigilance, but more importantly, to
signal that we have less conflicts of interest within the PSE
(Philippine Stock Exchange). These are all efforts to demonstrate
that we are a professional, transparent organization where people
can do their transactions. Hopefully, that will improve the view
from investors not just locally, but globally, as well. I think
this will do many wonders for the economy because we are a major
part of the fundraising for companies.
like for you to relay your comments about what your role today
is for the banking capital markets, and what it is that you would
like to communicate as your vision towards the development of
the PSE (Philippine Stock Exchange) here in the Philippines.
It is fair
to say that as CEO (Chief Executive Officer) of the Stock Market,
I want to promote the view that we are partners in development;
partners in growth for not just companies, but also the government.
As partners, we are trying to promote transparency; trying to
promote professionalism. I hope that these two key parameters
can help solve a couple of the issues in the Philippines, which
is its limited liquidity with respect to our neighbors, and the
problems that seem to revolve around the perception of bad corporate
governance. With such efforts, we are an important leg of the
economy. Banks are one, and the stock market is another one.
As a final
message to those readers across USA Today, what is going to be
your final message on behalf of the Philippines?
be great for them to participate in the new Philippines as an
investor, a saver, or by coming here to contribute. There are
a lot of opportunities here.