Nestor A Espenilla, Jr: Beginning a meaningful conversation - first
coordination dialogue on developing the local debt market
Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central
bank of the Philippines), at the Local Debt Market Development Workshop, Manila, 25 August
2017.
* * *
The Securities and Exchange Commission, the Bureau of Treasury, and the Bangko Sentral ng
Pilipinas are no strangers to coordination and collaboration (Many of our achievements come
from working together!) and while this is not our first time to collaborate, it IS the beginning of a
new and meaningful conversation. Today, we mark a milestone as we unveil the Philippine
roadmap for developing the local debt market. At the same time, we look forward to engaging in
an initial discussion with market participants.
This is a great time to begin this conversation!
Recently, our capital market was recognized as an emerging investment hub in Asia by three (3)
major debt watchers - Moody's, Standard and Poor's, and Fitch.
Robust economic conditions coupled with Government's thrust to promote infrastructure create
favourable conditions for capital market deepening. Government's vision of a "Golden Age of
Infrastructure" to support value-added output to the housing, manufacturing, connectivity and
1
agricultural sectors is a game changer. A deeper capital market will mobilize long-term savings
for the financing requirements of these priority industries.
Moreover, GDP is projected to grow at 6.8 percent in the medium term, with the inflation outlook
for the next two (2) years manageable and within the Government's three (3) percent ± one (1)
percentage point target.
Our international reserves are at a level of eighty point eight billion US Dollars (USD80.8B) as of
end-July 2017 - enough to cover eight point six (8.6) months of imports and payments of goods
and services.
As if these are not encouraging enough, our discussion on capital market reform received
support via technical assistance from the IMF. The time is right to talk and take up reforms.
Colleagues and friends, it is our pleasure to start this conversation with you and to make local
history. I am honoured to represent the BSP in this regard.
SEC Commissioner Ephyro Amatong, Treasurer of the Philippines, Rosalia De Leon,
representatives of the Bankers Association of the Philippines (BAP), headed by President Nestor
Tan and BAP Open Market Committee Chairman Wick Veloso, the Money Market Association of
the Philippines under President Michael Joseph Delfino Government Securities Eligible Dealers
(GSEDs), esteemed guests, on behalf of the Monetary Board and the Bangko Sentral ng
Pilipinas, I welcome you to the BSP. Magandang hapon sa inyong lahat.
Allow me to share some pointers on how to make common-ground conversations more
meaningful.
These tips are borne not just out of my thirty-six (36) years of experience as a Central Banker not
just as Deputy Governor of the Supervision and Examination Sector for twelve (12) years but
these points were learned chiefly in my capacity as a friend and colleague (perhaps even as a
husband and father!).
In my experience, a conversation is more meaningful when: First, it is between those with the
same goals.
In this, there is no issue. As mentioned earlier, the SEC, BTr and BSP have always been
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partners. For one, together with other institutions, we are members of the Financial Stability
Coordination Council (FSCC). The FSCC's key objective is to identify, manage and mitigate the
build-up of systemic risks. Our institutions share the prudential objective of financial stability and
development. Our being here today is just a step-up an expression and a specific
operationalization of our original goals. In this particular case, we share the same vision of
developing our local currency debt market to support our growing economy in a sustainable
manner.
As a result, the Capital Market Working Group of the BSP, the BTR, and the SEC, with the
support of the Department of Finance, joined hands in developing the Philippine Roadmap to
accelerate the development of the domestic debt market. Three areas are prioritized: (1)
deepening the local bond market by adopting reforms to incentivize market-making, increasing
supply of short-term debt securities, and developing an effective regulatory framework for the
repo and OTC government securities markets; (2) the creation of reliable financial benchmarks
and valuation of financial instruments; and (3) the establishment of an integrated financial market
infrastructure to promote price discovery, transparency and orderly trading, clearing, and
settlement of the full range of financial transactions.
Second, the value of a conversation is greater when those who engage in it understand its
relevance and importance. Otherwise, discussion is just chatter, intellectual calisthenics or a
venturing into hypothetical thinking.
Thankfully, we are here not just to engage in an academic exchange. While there are scholarly
points to be made and learned, we all agree that debt market development is a pressing concern
one that has real-life implications, deserving of our particular attention.
We understand there is greater demand for more active debt markets as financial systems
require funding sources from outside the banking system. We know that a vibrant capital market
can serve as an alternative source of industry financing and act as a powerful complement to
bank lending.
We appreciate that a developed local currency debt market is essential for efficient fiscal
operations, supporting a sustainable market-oriented debt strategy at reasonable costs and
desirable mix of maturities. A liquid money market likewise can help strengthen BSP's monetary
transmission mechanism. Development of the domestic currency debt market will also broaden
investment opportunities and pave the way for increased availability of financial products,
including hedging instruments. This boosts economic resilience to external shocks.
My third tip is that a dialogue becomes productive when it is open and honest when even hard
questions are respectfully asked and when responses are heard and listened to. This is perhaps
the most important tip to follow. When adhered to, this is when real connections are made.
And what are some of the hard questions? Perhaps we can begin by asking, "What does it really
mean to deepen the bond market, to develop it? What are the barriers to an efficient, transparent
and fair market?"
How can we enable more people to have access to capital? How do we increase scale and
efficiency?
Should we take a deeper look at the secondary retail market? It is common knowledge that with
bond sales there is not much incentive to serve retail customers. The issue is cost as it is
cheaper to deal with institutional investors transacting in large sums rather than with retail
investors, who (despite their potential number) have smaller transaction sizes. The barrier of
minimum investment requirements in T-bills and bonds exclude many. Also, there is disparity as
while institutional investors could manage the information asymmetries (with respect to price
discovery), retail investors are limited to deal only with their own banks.
My take away from this is that while a deepening of the financial market might translate to
financial inclusion, the two may not be automatically synonymous as they have different policy
implications. As a staunch proponent of financial inclusion, I suggest we bear these nuances in
mind when crafting regulations, with a commitment to financial inclusion as part of a broader
agenda.
There is a need to be pragmatic, but we must be open to out-of-the-box ideas, balancing
regulation and innovation. We must be mindful of the changes brought about by digitization and
technological innovation. We might explore encouraging on-line bond trading even for individuals
in the secondary market, perhaps doing away with cumbersome paper work to complete
transactions. We can also look into how we can build capacity and acquire the individual and
institutional expertise to deepen capital markets.
Finally, I have learned that a conversation is only as good as the actions and changes that follow
it. Parties must move the dialogue forward, with a clear identification and fulfilment of their
corresponding roles to add value to the objectives sought.
Winston Churchill said, "to improve is to change; to be perfect is to change often." This is a good
note to end on since this afternoon, SEC, BTr and BSP, will be announcing some changes
aimed at improving our local currency debt market. I also like the quote as it implies constant
improvement.
I hope I have sufficiently set the stage for beginning our dialogue. Although now, I can see from
your faces that very little motivation is needed for this group to move forward with
excitement. You are excited enough!
Looking at the participants - prime movers and stakeholders in our debt market, from both the
government and private sectors - it is evident that discussions will be interesting, meaningful and
engaging.
I wish us all Godspeed in our important task, not just for today, but in the days to follow. Thank
you and good afternoon.
1
The Philippine Development Plan. 2017 to 2022.
2
The Insurance Commission, the Philippine Deposit Insurance Corporation and the Department of Finance