This chapter provides an assessment of five areas of the Philippine capital market: corporate governance, access to the public equity market, stock market liquidity, market-based long-term financing via corporate bonds and the investor base. Each assessment is complemented by recommendations aimed at improving the functioning of capital markets. The analysis draws on an extensive range of data, complemented by consultations with stakeholders and market participants.
OECD Capital Market Review of the Philippines 2024
Abstract
Well-functioning capital markets are important enablers of economic growth. They can provide an important lever by channelling capital to where it is needed most, thus helping to unlock growth. By enabling corporations to access financing, capital markets allow companies to scale operations, create employment opportunities and invest in new technologies to raise productivity – the only sustainable way to consistently increase living standards over time. Capital markets achieve this by channelling household savings into investment in productive sectors of the economy. This not only supports economic growth but also financial democratisation by allowing households to share in corporate value creation.
Equity markets provide companies and innovators with the type of long-term and risk-willing capital needed for launching new business ventures and developing new technologies. Market-based financing enables funds to be raised and directed to projects that lack collateral but might lead to major productivity gains, increased competitiveness and overall growth. This provides a valuable complement to bank financing which usually requires collateral and relies on long-term relationships.
Moreover, the immense need for investment in climate-resilient infrastructure and financing for the climate transition – especially in at-risk countries such as the Philippines presents an opportunity to leverage private capital markets. Globally, debt and equity markets have funnelled a significant part of the investments in renewable energy technologies such as solar, wind and battery storage. While the Philippines is not a large greenhouse gas emitter by global standards, increasing the share of renewables in the energy mix could improve energy security and reduce import dependence. Moreover, important sectors such as water and transportation are highly vulnerable to climate-induced shocks, and require climate-resilient upgrading to withstand extreme weather (NEDA, 2023[1]).
In addition to being an engine of growth, capital markets can also help democratise the returns stemming from the corporate sector. In countries with low levels of public participation in capital markets, much of corporate wealth creation is captured by a small group of owners. Potential high growth in such an environment can be regressive, leading to increased inequality and failure to deliver the broad-based improvements in living standards associated with economic development. Citizen participation in capital markets will not in itself ensure this is overcome, but it can provide a lever for people to save and build financial security and wealth over time, and give them a sense of ownership in their country’s development.
Importantly, many pension schemes rely on returns from capital markets to grow, allowing individuals to secure income for retirement and maintain their quality of life. In OECD countries, over 400 million people (about 30% of the total population) are indirectly invested in capital markets through pension assets backing their future retirement income. Asset-backed pension systems are central to addressing demographic shifts and ensuring that citizens can maintain living standards, while also helping to relieve fiscally constrained states of the burden of managing pension commitments. In addition, capital markets indirectly facilitate household access to credit by enabling financial institutions to raise funds at competitive rates. This availability of credit helps households borrow for major investments, such as homes and education.
Another core feature of well-functioning capital markets is the reinforcing interlinkages of value creation, competitiveness and transparency. Capital markets reward companies that compete effectively and penalise those that fail to adapt, by reflecting these results in the value of outstanding securities. Corporate executives are thus driven to make strategic decisions that are value maximising. Investors in open capital markets are incentivised to allocate their capital to firms with the best potential for creating value. They also restrict executives’ ability to direct resources for their own benefit or that of certain stakeholders. Malfeasance will face scrutiny, lead to lower valuation and potentially takeovers. Opening books and answering external demand for transparency limit the opportunity for transactions or relationships with related parties that are not conducted on market-based terms, as well as initiatives or investments not aligned with the overall interest of shareholders. On a macro level, such scrutiny can also put a spotlight on inefficient market structures in certain sectors.
For investors to exercise such a disciplinary role, they need to be incentivised by the potential for returns. These in turn rely on strong corporate governance. The Philippine stock market is dominated by mature firms in sectors that are traditionally reliable dividend generators. However, payout ratios are low by international standards and only a handful of companies in the main index pay out meaningful dividends. Following the example of other economies in the region, the Philippines could benefit from creating a more attractive, dynamic and investor-friendly capital market.
In any case, the impact of capital markets on economic growth and their ability to generate returns is reliant on the broader economic structure and dynamism – areas beyond the direct purview of this report. Besides the level of investable savings, a sufficient amount of attractive companies seeking financing, and the market infrastructure that connects the two, the industry composition and prevalence of high growth sectors open to investment are important determinants of the dynamism of the capital market. Equally important is the reliability of the judicial system, financial sector regulation and market integrity.
Reflecting the central role of capital markets in enabling growth, driving financing towards climate transition investments and democratising wealth creation, this first chapter provides an assessment of five key areas of capital market policy and formulates policy recommendations aiming to: strengthen corporate governance; facilitate access to the public equity market and increasing its attractiveness; increase stock market liquidity; facilitate long-term corporate bond financing; and deepen the investor base. In the long term, these recommendations aim to enhance the role of the Philippine capital market in the country’s economic growth and inclusive development for all Filipinos. These policy areas and recommendations are inter-connected and reinforce each other. They represent a targeted approach, with other policy areas outside the focus of this report playing a crucial role in determining the effectiveness of reforms to drive meaningful changes. To facilitate a discussion of key focus areas a selection of 10 priority recommendations is presented below.
A well-functioning corporate governance framework can promote innovation, productivity and entrepreneurship by improving companies’ access to financing, particularly from capital markets. Moreover, such a framework protects investors, in particular retail investors and households with invested savings, while also supporting the sustainability and resilience of corporations.
The Philippines has made significant efforts to improve corporate governance standards. However, there is still room for improvements. Compared with its ASEAN peers, the Philippines ranks lowest in shareholder governance (95 out of 141 globally) (Figure 1.1, Panel B), which assesses the role and rights of shareholders in key corporate decisions and the safeguards in place to protect them from excessive board control and entrenchment. In addition, the Philippines ranks second to last in overall corporate governance (100 out of 141 globally) (Panel A) and performs poorly in protection of minority shareholders’ interests (51 out of 141 globally) (Panel C). Importantly, in recent years, the SEC has issued several Memorandum Circulars (MCs) aimed at enhancing the protection of minority investors and promoting good corporate governance.1 Collectively, these circulars have strengthened shareholder rights.
The biennial survey conducted by the Asian Corporate Governance Association (ACGA) ranks the Philippines second to last among 11 Asian jurisdictions, highlighting several areas for improvement (ACGA, 2023[2]). For instance, many listed companies lack a dedicated committee to review significant related party transactions, and there is often no disclosure of whether such transactions are conducted on fair and commercial terms. Another critical issue is the enforcement of director independence, with many Philippine listed companies failing to meet the recommended one-third threshold for the number of independent directors. These governance weaknesses highlight the need for more robust reforms to bring the country in line with international best practices.
Note: In Panel A, the index assesses the broad scope of corporate governance issues including the strength of auditing and accounting standards, regulations on conflicts of interest and shareholder governance. Panel B focuses on shareholder governance, assessing specific issues related to shareholder rights including 1) shareholders’ roles and rights in major corporate decisions; 2) governance safeguards that protect shareholders from excessive board control and entrenchment; and 3) corporate transparency concerning ownership stakes, compensation, audits and financial projections. In Panel B, Singapore, Thailand and Viet Nam share the same value, thus ranking equally. Values and rankings for Panels A, B and D are for 2019. Those in Panel C are for 2017. Panels B and C have been rescaled to a range of 100 from initial values between 1 to 7. Panel D has been rescaled to a range of 100 from initial values between -2.5 and 2.5. Panels A, B and C data is retrieved from the WEF Global Competitiveness Index 4.0. Panel D data is retrieved from World Bank Worldwide Governance indicators.
Source: World Bank (2023[3]), WEF (2019[4]) Global Competitiveness Index 4.0, https://prosperitydata360.worldbank.org/en/dataset/WEF+GCI Kaufmann and Kray (2023[5]), Worldwide Governance indicators, www.govindicators.org.
1.2.1. Board independence
A comparison between the Philippines and ASEAN peers on corporate governance issues for listed companies reveals significant differences, particularly in the application of board independence requirements. In the Philippines, the mandatory requirement for board independence is set at a minimum of 20%, lower than most other ASEAN countries that require one-third of directors to be independent. The Philippine Code of Corporate Governance (under a "comply or explain" framework) recommends that one-third of the board should be independent.
Note: [ ] indicates a requirement by the listing rule or regulation; ( ) indicates a recommendation by codes or principles. For Viet Nam, the requirements refer to the Hanoi Stock Exchange.
Source: PSE (2024[6]), Main Board - IPO Listing Requirements, https://www.pse.com.ph/ipo-listing-requirements/#listing1; IDX, (2024[7]), Stocks, https://www.idx.co.id/en/products/stocks/; SGX (2024[8]), Mainboard, https://www.sgx.com/securities/mainboard; Bursa Malaysia, (2024[9]), Listing Criteria, https://www.bursamalaysia.com/listing/get_listed/listing_criteria; SET, (2022[10]), Common Shares Listing Admission, https://media.set.or.th/set/Documents/2022/Jul/Common_Shares_Listing_Admission.pdf; SSC (2020[41]) Decree No. 155/2020/ND-CP, https://lawnet.vn/en/vb/Decree-155-2020-ND-CP-elaboration-of-some-Articles-of-the-Law-on-Securities-76571.html.
A well-functioning corporate governance framework requires independent directors, who typically play a crucial role in providing objective oversight and ensuring that the interests of shareholders, particularly minority shareholders, are protected. In the Philippines, despite the requirement for listed companies to have a minimum number of independent directors, enforcement remains weak. Companies typically have concentrated ownership in the hands of controlling shareholders (see Section 3.1 for more details) who generally exercise significant influence over the appointment, remuneration and removal of independent directors. This dynamic often compromises the independence of these directors (Gurrea-Martínez, 2020[11]).
One concern is the long tenure of many independent directors in the Philippines. According to International Finance Corporation (IFC) guidelines, an independent director should not serve on the board for more than 10 years to maintain objectivity (IFC, 2023[12]). Longer tenures can undermine independence as directors may become too familiar with the company and its management, potentially becoming "new insiders". This compromises their ability to provide the unbiased oversight necessary to effectively monitor management. A significant proportion of directors in the Philippines have served for more than 9 years, as shown in Figure 1.2.
In 2017, Memorandum Circular No. 4, was issued to address the term limits of independent directors, stipulating that an independent director may serve for a maximum of nine years. If a company wishes to retain an independent director beyond this limit, the board of directors must provide justification and obtain shareholder approval at the annual general meeting. In consultations for this report, the SEC reported a decline in the number of independent directors serving beyond the nine-year limit. However, stronger enforcement will be needed to ensure full compliance.
Source: OECD-ORBIS Corporate Finance dataset.
In the Philippines, most independent directors only serve in one listed company (83%), but 7% serve in three or more listed companies. Cases also exist where independent directors serve in more than five listed companies at the same time. The time and energy that independent directors devote to a company is an important factor affecting their performance. Independent directors holding more than three positions simultaneously will find it difficult to ensure that they have sufficient time and energy to perform their duties in each listed company (Wushe, Shenje and Ndlovu, 2017[13]). The People’s Republic of China (hereafter “China”) regulates that independent directors can serve in a maximum of three listed companies to ensure that they have sufficient time to dedicate to each firm.
Source: OECD-ORBIS Corporate Finance dataset.
A significant number of directors sit on the board of several companies within the same group, which can undermine their ability to exercise independent judgement due to potential conflicts of interest. Their objectivity and decisions may also be influenced by group-level priorities rather than the best interests of each individual subsidiary. Six per cent of independent directors sit on the boards of more than two subsidiaries within the same group. While this is low, it raises concerns about their ability to remain impartial and fully committed to the governance of each company. Addressing these potential conflicts of interest is essential to maintaining the integrity of independent board oversight. Limiting the number of boards a director may serve within the same group, or enforcing stricter policies on board membership, could help ensure that directors maintain the independence and objectivity necessary to discharge their governance responsibilities effectively.
Source: OECD-ORBIS Corporate Finance dataset.
1.2.2. Company groups
Conglomerates play a dominant role in the Philippine economy and contribute significantly to GDP. The revenue of the top 15 conglomerates represented 20% of GDP in 2018 and, as this is only the direct contribution to GDP, their full contribution may be undercounted (Torio et al., 2021[14]). These large, family-owned companies have traditionally expanded into a wide range of industries, enabling them to exert considerable influence across multiple sectors. Many of their subsidiaries are publicly traded, reflecting their strong presence in the stock market. This is evident in the ownership structure of Philippine listed companies, where domestic firms hold the largest share with 43% of total listed equity (see Section 3.1 for more details). This highlights the prominent role that local conglomerates continue to play in shaping the country’s economic landscape.
Company groups generally face significant governance challenges that require a robust corporate governance framework. Key concerns include insufficient transparency of the group structure and beneficial owners, and the potential abuse of related party transactions (RPTs). The complexity of groups may also lead to inadequate disclosure, making it difficult for investors to understand the full scope and ultimate ownership of the company. Additionally, as the company management is often controlled by the parent company or major shareholders within the groups, the protection of minority shareholders risks being compromised (Cayanan, 2019[15]). In addition, overlapping activities can create conflicts of interest when allocating business opportunities within the group (Medina, de la Cruz and Tang, 2022[16]; OECD, 2020[17]).
Expropriation through RPTs is a common problem for minority shareholders, particularly within conglomerates. In such structures, controlling shareholders often have incentives to transfer resources from public companies through RPTs, leaving small shareholders to bear the cost. To address these concerns, the Philippine Code of Corporate Governance (the Code hereafter) contains several key recommendations aligned with the G20/OECD Principles of Corporate Governance on RPTs and board oversight. The Code emphasises the responsibility of the board with respect to RPTs by ensuring there is a group-wide policy and system governing RPTs. Furthermore, the Code also recommends that in the absence of a related party transaction committee, the audit committee should evaluate all RPTs to ensure that these are not undertaken on "more favorable economic terms" (SEC, 2019[18]).
However, further efforts may be needed to strengthen the monitoring of RPTs. For instance, in the Philippines, shareholder approval is not required for material RPTs, which weakens minority shareholders’ ability to protect their interests. Shareholder voting can serve as a powerful tool to mitigate these risks by empowering smaller shareholders and curbing the influence of controlling shareholders. In contrast, other ASEAN jurisdictions, such as Indonesia, Malaysia, Singapore, Thailand and Viet Nam, mandate shareholder approval for material RPTs that exceed a certain percentage of company assets. In Singapore, for example, prior shareholder approval is required for RPTs exceeding 5% of the group’s latest net tangible assets.
In the Philippines, for material RPTs, the board is required to appoint an external independent party to evaluate the fairness of the terms of the material RPTs. Moreover, the material RPTs must be approved by at least two-thirds of the board of directors, with a majority of independent directors voting in favour. However, concerns about the true independence of these directors raise questions about whether this safeguard is sufficient to protect minority shareholders from the influence of controlling shareholders. Consequently, additional measures are needed to ensure more robust protection against RPT-related risks. An effective approach to protecting minority shareholders is to require audit committees to review significant related party transactions (RPTs). In Singapore, for example, the audit committee is required to declare whether a transaction with an interested party is “on normal commercial terms and not prejudicial to the interests of the company or its minority shareholders” (Monetary Authority of Singapore, 2019[19]). Similarly, in Malaysia, the audit committee is tasked with reviewing and reporting to the board on any RPTs or potential conflict of interest situations within the company or its group (Bursa Malaysia, 2023[20]). These policies play a crucial role in preventing controlling shareholders from exploiting their power for personal gain, thereby protecting the interests of minority shareholders.
The prevalence of group structures has also contributed to cross-shareholdings in listed companies. Of all Philippine listed companies, 51 have another listed company as their largest shareholder and 60 have another domestic listed company owning more than 10%. This widespread practise of cross-shareholding can have several drawbacks. Cross-held shares are typically rarely traded on the stock exchange, which limits the number of shares available for trading and reduces overall market liquidity (Section 1.4). Moreover, cross-shareholding can entrench management, making it difficult to replace underperforming managers. Since managers are less threatened by takeovers - an important mechanism for disciplining and motivating managers - they may have reduced incentives to perform efficiently and effectively (Levy M, 2017[21]). Moreover, companies might prioritise transactions that benefit the cross-held companies rather than those that are economically optimal.
To address this phenomenon, in 2021, the SEC issued for public comments a draft memorandum on cross-shareholding structure for publicly listed companies. It stipulates that a subsidiary would not be allowed to hold more than 10% of the total shares in its parent company, excluding shares with no voting rights. Moreover, once this memorandum becomes effective, shares in excess of this limit will be subject to a process of conversion within 12 months by the parent company (SEC, 2021[22]). Questions on the draft memorandum were raised in light of Section 176 of the Revised Corporation Code, which grants full authority to the Congress of the Philippines to set maximum limits for stock ownership, upon recommendation of the National Economic and Development Authority. Therefore, this draft memorandum has not moved forward.
Another important characteristic of conglomerates in the Philippines is the presence of banks in the conglomerate, closely linking non-financial companies to the financial system (IMF, 2022[23]). As shown in Table 1.2, 7 out of the 10 largest banks in the Philippines are part of a conglomerate, with total assets of USD 368 billion (equivalent to 84% of GDP) at the end of 2023. These banks held 60% of the banking sector’s assets (IMF, 2022[24]).
Note: Data on conglomerate information is collected from each bank’s website. The ranking is based on total assets of banks.
Source: BSP (2024[25]), Ranking as to Total Assets, https://www.bsp.gov.ph/Statistics/Financial%20Statements/Commercial/assets.aspx.
The presence of banks within conglomerates facilitates access to finance for affiliated companies. However, this also can give rise to financial risks associated with intra-group lending. In addition, large banks have significant exposures to several conglomerates, including their own. These conglomerates borrow both internally and externally. Contagion from common borrowers could be a potential risk. The network analysis study of the central bank, Bangko Sentral ng Pilipinas (BSP), also shows that the failure of large conglomerates would have profound contagion effects on banks (IMF, 2022[24]).
To mitigate this, the Philippines has regulations in place to prevent excessive lending to a single borrower. Specifically, the BSP enforces a regulation that limits the total amount of loans, credit facilities and guarantees that a bank can extend to a single borrower to 25% of the bank’s net worth (BSP, 2021[26]). This regulation is critical to maintaining financial stability and effective risk management within the banking sector. Additionally, due to the widespread practice of intra-group lending in the Philippines, the BSP has introduced specific regulations to govern such transactions. The regulation limits a bank’s total loans, credit accommodations, and guarantees to a single subsidiary or affiliate to 10% of its net worth and to 20% for all subsidiaries and affiliates combined.
1.2.3. Enforcement of the corporate governance regulatory framework
Enforcement of the corporate governance regulatory framework in the Philippines could be improved. According to the Asian Corporate Governance Association, its enforcement ranks second lowest in the region. The SEC has focused its enforcement efforts primarily on shutting down scams and Ponzi schemes rather than on enforcing capital market regulations (ACGA, 2023[2]). As the SEC diverts its attention to address these illegal activities, it often lacks the resources to adequately oversee corporate governance compliance. As a result, authorities frequently rely on investors to raise concerns about non‑compliant companies. However, during consultations for this report, market participants pointed out that investors in the Philippines tend to be passive and rarely take an active role in upholding corporate governance standards.
The SEC and PSE currently provide limited information regarding their enforcement activities. The SEC’s most recent annual report, which covers the period from 2020 to 2023, is available on its website. This document mainly focuses on legal actions taken against fraudulent schemes, while providing minimal information on enforcement actions pertaining to capital market regulations. For the PSE, the most recent annual report available on its website dates back to 2019 and only provides the most basic enforcement statistics. Figure 1.5 illustrates a declining trend in the number of market investigations, indicating a potential area of concern for regulatory oversight.
Note: The information presented is available only until 2019.
Source: PSE Annual Reports
The PSE EDGE portal serves as the PSE’s official disclosure and information platform and provides access to various reports of listed companies. Currently, the platform only allows users to search for reports from the last two years, which limits its usefulness compared to similar platforms in other ASEAN countries such as Singapore and Malaysia, where annual reports from all previous years are available online. Expanding the PSE EDGE portal’s historical database to include a wider range of documents covering multiple years could significantly enhance its value, especially for investors and analysts who need access to longitudinal data and trends to make informed decisions. In addition, the platform does not currently provide prospectus information.
The publication of corporate governance reports is also essential to maintain transparency and accountability standards within companies. These reports not only help to demonstrate a company’s compliance with governance regulations, they also provide explanations for any deviations, thereby allowing flexibility while promoting transparency. In the Philippines, listed companies are required to submit an integrated annual corporate governance report, in line with the “comply or explain” principle advocated by the Securities and Exchange Commission (SEC, 2017[27]). This approach allows companies to either confirm their compliance with the governance code or explain the reasons for non‑compliance. Weak minority shareholder activism and low activity on the secondary market (see Section 1.5), may limit pressure to ensure that compliance failures or lack of reasonable explanations are punished by the market.
A close examination of the Integrated Annual Corporate Governance Report (I-ACGR) of the top 10 listed companies in the Philippines reveals possible areas for improvement. For instance, Recommendation 8.4 of the Code requires disclosure of individual directors’ detailed compensation. Although only 2 of the10 companies explicitly stated their non-compliance, all of them failed to disclose executive compensation on an individual basis, opting instead for aggregate reporting. This highlights a wider issue of transparency in reporting and suggests the need for stricter enforcement and possible revision of the guidelines to ensure more detailed disclosure in line with best practises.
Recommendation 3.2 of the Code stipulates that the audit committee must consist of at least three qualified non-executive directors, with a majority being independent. While many companies state that they comply with this recommendation, they often fail to ensure that the majority of audit committee members are independent. Indeed, in a significant proportion of listed companies in the Philippines, less than half of the seats on the audit committee are held by independent directors, potentially compromising its independence and effectiveness (Figure 1.6). This is contrary to the best practice of having audit committees composed entirely of independent directors. As the primary role of the audit committee is to oversee financial reporting and the activities of the external and internal auditors, independence is critical to ensure unbiased oversight and governance.
Source: OECD-ORBIS Corporate Finance dataset.
1.2.4. Regulatory framework
Securities regulators play an important role in ensuring the integrity and efficiency of capital markets. They have three core objectives: protecting investors; ensuring that markets are fair, efficient and transparent; and reducing systemic risk. In the Philippines, the SEC is mandated with supervising the corporate sector, capital market participants, and the securities and investment instruments market, while simultaneously safeguarding the interest of investors. Moreover, the mandate of the SEC also includes its role in developing capital markets, fostering good corporate governance and enhancing investor protection (SEC, 2024[28]).
The role, duties and organisational structure of the SEC were redefined by the Securities Regulation Code (SRC) in 2000. Since then, there have been two major reforms to the SRC. One was the redefinition of the SEC’s regulatory responsibility that led to the transfer of its quasi‑judiciary function to the judicial courts, enabling the SEC to focus on its core regulatory functions. Prior to the enactment of the SRC, the SEC also possessed authority to adjudicate intra-corporate disputes and oversee corporate rehabilitation. Another important reform provided by the SRC is the demutualisation of the PSE, which sought to address the inherent conflict of interest of being a self-regulatory organisation controlled by trading participants.
The PSE is the sole stock exchange in the Philippines and plays a critical role as the primary venue for the listing and trading of stocks and other securities. It is mandated by the SEC to operate as a self-regulatory organisation, granting it regulatory responsibilities over the marketplace. The role of the PSE and its oversight by the SEC are mainly defined in the SRC. The SRC mandates the PSE to protect investors and the public interest as well as additional responsibilities of SROs, such as supervising trading practices, ensuring transparency in securities transactions and prices, and overseeing the auditing, supervision and disciplining of its members and participants. According to the SRC, the SEC oversees the stock exchange and the exercise of its responsibilities, and if necessary, has the right to assume control of the stock exchange to ensure adequate compliance with regulatory standards (SEC, 2001[29]). The PSE submits its updated Compliance Plan to the SEC annually, which covers the applicable regulatory reporting and disclosure requirements to ensure alignment with current regulatory standards (PSE, 2024[30]).
The demutualisation of the PSE in 2001 reduced the dominance of its 184 member brokers at the time. As mandated by the 2000 SRC, no single industry or business group may beneficially own or control more than 20% of the voting rights of the exchange (SEC, 2001[29]). As a listed self-regulatory organisation, the PSE is tasked with enforcing regulations, while as a private for-profit firm, it also seeks to maximise shareholder returns. The regulatory objectives can thus sometimes conflict with the priorities of the shareholders (Di Noia, 2000[31]). To address potential conflicts of interest, the PSE incorporated its market regulation division into the Capital Markets Integrity Corporation (CMIC). The aim of this restructuring was to enhance the regulatory independence and effectiveness of the exchange. By 2012, the CMIC was granted Self-Regulatory Organisation (SRO) status and became the primary regulator of the exchange’s trading participants (CMIC, 2024[32]).
As an SRO, the CMIC ensures market integrity and protects investors by enforcing compliance with CMIC and exchange rules and the SRC and other securities laws. However, the CMIC’s regulatory mandate is restricted to the supervision of the exchange’s trading participants. Other key regulatory functions, such as ensuring compliance with corporate disclosure requirements and listing approvals remain the responsibility of the PSE. Similarly, Singapore Exchange Regulation (SGX RegCo) operates independently of the Singapore Exchange (SGX) to ensure a clear separation of regulatory and commercial objectives. However, SGX RegCo operates as a fully separate entity dedicated to regulatory functions, including the monitoring of compliance with listing requirements, and the review and approval of new listings. This separation between its commercial and regulatory roles enhances the SGX’s governance as an SRO by reducing conflicts of interest, strengthening market integrity and promoting investor confidence.
Along with its overall oversight of the operations of the PSE, the SEC is also tasked with ensuring that the PSE adheres to best practices in corporate governance. This includes monitoring compliance with the Corporate Governance Code and enforcing disclosure requirements (SEC, 2016[33]). The PSE has made significant progress in corporate governance, including publishing its own sustainability report since 2019. However, it still faces challenges in fully complying with the Corporate Governance Code (PSE, 2024[34]). For instance, while independent directors are recommended to serve for a maximum term of 9 years, the Chairman of the Board, one of the independent directors, has already held his position for 12 years (PSE, 2023[35]).
The SEC has administrative responsibilities beyond supervising securities and the capital market. The SEC serves as the registrar and supervisor of the Philippine corporate sector, overseeing over 600 000 active corporations and evaluating their financial statements (SEC, 2024[28]). This contrasts with peer countries such as Malaysia and Singapore, where a specialised agency is responsible for national business registry and ensuring compliance with corporate filing requirements. This dual responsibility may limit the resources available to the SEC for its core capital market supervisory functions. The SEC is allowed to retain the fees it collects from its function as national business registry but not the fees collected as the capital market supervisor. A limited number of employees have direct or indirect oversight responsibilities for 600 market participants (IMF, 2019[36]). This suggests that the SEC’s resources may be insufficient to adequately address all its legal responsibilities, particularly those related to capital markets. For example, regulators typically publish an annual report every year. However, the SEC’s most recent annual report combines information for four years (2020-2023) (SEC, 2024[37]).
In 2022, the Capital Market Development Act established the Capital Market Development Council (CMDC) as a formal organisation co-chaired by the Secretary of Finance and a representative of the private sector. Its mandate is to develop the capital market by drawing up a development plan every five years that will constitute the Philippines capital market roadmap (ADB, 2023[38]). The latest plan covers the period 2022-28 and focuses on three main areas: enhancing the supply of capital, boosting demand for capital and improving market infrastructure. While the CMDC is an important initiative to involve major market participants in the development of the capital market, some participants note that it is more a forum for including stakeholders in discussions than an organisation actively leading projects (Bunye, 2023[39]).
1.2.5. Recommendations
To strengthen corporate governance, the Philippine authorities could consider:
Providing regulators with more resources and a clearer mandate to enforce the Code of Corporate Governance and update it in line with the G20/OECD Principles of Corporate Governance.
Strengthening board independence requirements and enforcement.
Strengthening regulatory measures to supervise related party transactions.
Pursuing efforts to address concerns on cross-shareholding structure for publicly listed companies.
Assessing the possibility for the PSE to fully separate its regulatory function from its commercial function.
Streamlining the SEC’s focus on capital markets and allocating more resources to the SEC's supervision function.
Strengthening the CMDC as a platform for dialogue and coordination with between authorities and stakeholders to steer capital market initiatives.
Corporate governance is a key component for increasing market attractiveness in both developing and advanced economies. In markets where ownership is concentrated and there is no established culture of minority shareholder activism, investor protection is particularly important. Proper regulatory oversight of capital markets is critical to ensure investor protection and the continuous development of the capital market. While important improvements have been made to the regulatory framework in the Philippines, several challenges remain that would benefit from further action.
The strong presence of conglomerates in the Philippine economy, with many parent companies or subsidiaries listed on the stock market, calls for an improved corporate governance framework to address the issues arising from such structures. The SEC could consider enhancing the corporate governance framework and bring it in line with global best practice. The G20/OECD Principles of Corporate Governance provide insights for potential reforms, including with regards to company groups and the regulatory framework to promote their effective oversight, disclosure and transparency, and the responsibilities of boards of directors. The Philippine Corporate Governance Code, last updated in 2019, could be revised accordingly. Given the complex structures of company groups and their numerous subsidiaries in the Philippines, the Code should emphasise the importance of ensuring the effective oversight of listed companies within company groups, as well as their subsidiaries. It should also facilitate improved disclosure, particularly regarding group structures and stakeholders impacted by them, relevant to these company groups. Finally, it should clarify the board's responsibilities in group-wide risk management and establish an effective reporting framework to ensure that boards are informed of all material information concerning subsidiaries.
Another crucial point is the enforcement of the Code of Corporate Governance, which could be better d implemented and to which more resources could be allocated. This could involve creating a centralised database to track corporate governance practices and violations which would complement the PSE’s EDGE portal. Addressing the limitations of the portal in terms of data availability would bring it more in line with international standards and better meet the needs of its diverse user base. The PSE could also organise regular campaigns and trainings to increase awareness of corporate governance regulations. Additional resources are key to supporting these enforcement efforts and ensuring that regulatory bodies have the capacity to monitor and enforce compliance effectively.
Given the significant amount of intra-group lending in the Philippines, it is important to assess the need for more robust regulatory measures to supervise this activity. Adoption of measures to supervise intra‑group lending could help enhance financial stability and reduce the risks associated with intra-group lending. Imposing strict limits and ensuring that transactions with related parties are conducted on market terms can mitigate potential conflicts of interest in banking sector and prevent the concentration of risk within conglomerates.
The Philippines could consider strengthening board independence standards and enforcement. Currently, listed companies are required to have at least 20% of independent directors on their boards or at least two independent directors. While the Code of Corporate Governance (“comply or explain”) recommends higher independence requirements, the mandatory requirement is lower than in most peer countries that require one-third of independent directors. Raising the current requirement from 20% to one-third could strengthen board independence, improve governance oversight and increase investor confidence. In addition, enforcement of board independence needs to be further improved as many listed companies do not currently comply with these requirements. The SEC and PSE should work together to strengthen enforcement of these regulations.
To strengthen corporate governance, enforcement of Memorandum Circular No. 4, Series of 2017, which limits the tenure of independent directors to a maximum of nine years, should also be strengthened. While the SEC has noted progress, including a decline in the number of independent directors exceeding the nine-year limit, further efforts are needed to strengthen enforcement and ensure consistent compliance across companies. Strengthening monitoring mechanisms and providing additional guidance to companies could help achieve these goals. In addition, it is currently recommended that audit committees should have a majority of independent directors. However, many companies do not follow this recommendation, which may compromise the independence of the committees. Consideration should be given to whether it would be feasible to enforce the independence of audit committees through listing rules, requiring them to be composed only of independent directors.
The regulation of RPTs is another critical issue that needs to be addressed. Currently, the regulatory framework for the supervision of RPTs is relatively weak compared to other jurisdictions in the region. Strengthening these regulations is essential to ensure proper oversight of RPTs. For example, a rule could be introduced requiring shareholder approval for material RPTs or giving the audit committee the responsibility to oversee such transactions. These measures would help prevent controlling shareholders from abusing their power for personal gain, thereby better protecting the interests of minority shareholders.
Authorities may also consider assessing the impact of high ownership concentration of listed companies. Given the prevailing corporate group structures in the country, a considerable number of shares are held by subsidiary companies. To address this issue, the SEC could pursue efforts to address concerns about cross-shareholding structures for publicly listed companies.
Currently, the PSE faces conflicts of interest between its commercial and regulatory objectives. While the PSE established the CMIC to partially separate its regulatory functions, it retains critical functions such as ensuring compliance with disclosure requirements and approving listings. In contrast, many exchanges have adopted models that allow for an independent entity dedicated solely to regulatory oversight to ensure impartiality in market oversight. A full separation of the regulatory and commercial functions of the PSE would improve regulatory independence. One approach could be integrating the regulatory departments into CMIC. This would transform the CMIC into a subsidiary responsible for comprehensive supervisory functions, thereby enhancing market integrity and investor confidence.
Importantly, the SEC plays a central role as the primary regulator of the capital market, yet its effectiveness is challenged by its broad set of responsibilities. One issue is its additional role as the national company registry, overseeing over 600 000 registered companies. This dual mandate has stretched the SEC’s resources and limited its capacity to effectively supervise and promote capital market development. Assessing the feasibility of transferring responsibility for company registration to a separate entity could be beneficial and is commonplace in many jurisdictions. In addition, the authorities should consider allocating more resources to strengthen its currently constrained supervisory capacity, potentially allowing it to retain fees from its supervisory activities. This might be particularly needed with a potential separation of the company registry to ensure the viability of current supervisory operations that are funded through income from the registry.
Effective co-ordination among stakeholders in capital markets and strong government commitment to market development are crucial. Authorities should prioritise strengthening the CMDC and enhancing co-ordination efficiency among stakeholders. While implementation of reforms needs to be supported by participating members, a clearer mandate and resources to produce project deliverables could incentivise change. The CMDC could serve as a platform for connecting stakeholders and advancing initiatives for capital market development, supported by clear targets and indicators to track progress.
Access to public equity markets is essential for innovative companies that need financing and for the efficient allocation of resources in the economy. Despite favourable macroeconomic conditions and strong economic growth over the last decade, the Philippine stock market has remained relatively small. At the start of 2024, the PSE had 269 listed companies on the Main Board and SME Board with a total market capitalisation of USD 234 billion, equivalent to 52% of the country’s GDP (Figure 1.7, Panel A). Compared to peer countries, the Philippines has the lowest number of listed companies and ranks second to last in terms of market capitalisation as a share of GDP.
Additionally, the amount of capital raised through initial and secondary public offerings remains low compared to regional peers. Since 2000, 95 Philippine companies have collectively raised almost USD 13 billion through initial public offering (IPOs) (Figure 1.7, Panel B). This is significantly lower than the least active market among peers, Viet Nam, where 584 companies raised USD 36 billion. Between 2000 and 2023, the capital raised through IPOs in the Philippines represented only 0.2% of GDP, much lower than in all other peer countries except Indonesia.
Source: OECD Capital Market Series dataset, LSEG, FactSet, Bloomberg; IMF (2024[40]), World Economic Outlook Data: April 2024 Edition, https://www.imf.org/en/Publications/WEO/weo-database/2024/April; see Annex for details.
Part of the reason for this low activity may be the family-dominated structure of the economy whereby owners are reluctant to bring in external investors. During consultations for this report, market participants noted that current owners perceive the additional requirement for transparency and outside oversight as negatively impacting their autonomy and how they govern their firms. The prevalence of the conglomerate structure in the economy may also limit the incentives to go public, as these company groups can quite easily funnel capital internally. Many of these groups also own banks that provide cheap and flexible funding. Moreover, market participants noted that these conglomerates also tend to quickly dominate potentially fast-growing sectors that would generally be prime candidates for seeking external financing to propel their growth. There is therefore room for improvement to ensure that companies of all sizes can access public equity markets.
1.3.1. Shareholder returns
The returns offered to investors in the Philippine stock market have not been very attractive. Meanwhile, the main index is largely dominated by a small number of conglomerates whose profits have tended to grow faster than the country’s GDP (6-7%). As shown in Figure 1.8, Panel A, during the period of strong growth up until the COVID-19 pandemic, dividends on the PSEi did not track increasing profits. These conglomerates, along with much of the Philippine economy, remain family-dominated with external shareholders generally playing a negligible role in decision-making. Keeping profits within groups to fund new expansions and investments seems to be the norm, according to OECD consultations. The Philippine stock market is dominated by large mature companies in banking, real estate and consumer goods, which are traditionally more likely to attract investors through dividends and reliable payout ratios. However, dividend yields have been low and payout ratios are declining (Panel B). During the 2010-22 period, a substantial share of the largest Philippine firms had limited payout ratios, with more than half paying out less than 30%in 2022. Tangible returns, transparency and the possibility to question capital allocation policies are needed to make Philippine firms attractive assets for outside shareholders.
Note: Panel A shows earnings before interest, taxes, depreciation and amortisation (EBITDA), earnings before interest and taxes (EBIT) and dividends paid to shareholders for the PSEi constituents. Companies included are based on the list of current constituents. All numbers have been adjusted by CPI. For Panel B, negative payout ratios have been excluded.
Source: OECD Capital Market Series dataset; IMF (2024[40]) World Economic Outlook Database, https://www.imf.org/en/Publications/WEO/weo-database/2024/April.
The Corporation Code of the Philippines states that companies are prohibited from retaining profits above 100% of the paid‑in common equity. However, according to the Code, the board can avoid paying out dividends if justified by “definite corporate expansion projects or program approved by the board of directors”. Moreover, a board with a 2/3 shareholder majority has a large degree of discretionary power to invest funds in any other corporation, business or “any other purpose” (Congress of the Philippines, 2019[41]). This potentially leaves considerable room for keeping profits within the company or group. While giving a shareholder majority flexibility in how to allocate capital is not uncommon, given the prevalence of company groups with strong shareholders whose main objective might not be returning value to shareholders through direct payouts, this might discourage outside investors.
Limited payout ratios are not uncommon globally but have been met by a range of policies to impose or encourage changes. For example, Brazil, Chile, Colombia, Greece and Venezuela have regulated the minimum share of annual profits that needs to be distributed, with payout ratios ranging from 25% to 50%. In Chile, the results suggest that this policy has been effective in protecting minority shareholder rights to cash flows without negatively affecting companies’ investment plans.
In Asia, there has been a long tradition in many markets for firms to keep profits within groups. However, China, Korea and Japan have recently implemented reforms to improve stock market performance, mainly by increasing shareholder returns. In 2023, China’s state asset regulator changed the assessment criteria used to measure SOE performance and SOEs started to be evaluated on return-on-equity (ROE) instead of net profits. Moreover, in early 2024, it said it would push companies to pay dividends several times a year. Korea released a plan in early 2024 to incentivise companies to focus on shareholder value and engage with investors to communicate targets for payout ratios and ROE, among other measures. Since the early 2010s, Japan has embarked on a sustained effort to untangle complicated cross-shareholdings and conglomerate structures and improve corporate governance practices. The recent stock market rally has been partly attributed to the success of these reforms, attracting high profile international investors (Fidelity International, 2024[42]).
1.3.2. Listing process and requirements
Public equity offerings in the Philippines are perceived by market participants to involve a lengthy process. According to the SRC, securities public offerings must be registered with the SEC, with the exception of securities issued by the government and debt securities issued by banks. The SEC must declare a registration statement effective or reject it within 45 days of filing (SEC, 2001[29]). Until recently, the timeline could be extended each time the SEC issued a Letter of Comments, with a new 45-day review period beginning upon receipt of the applicant’s response. This process frequently resulted in significant delays (IMF, 2019[36]). As stock market conditions are highly sensitive to timing, delays in the listing process may discourage companies from pursuing an IPO. Lengthy review periods can cause companies to miss optimal market windows, potentially affecting their valuation and investor interest.
In early 2024, the SEC issued a new regulation providing internal guidelines for a strict 45-day registration process. The new guidelines state that the review period commences upon payment of the registration fee without the possibility of a renewal of the 45-day review period upon receipt of the applicant’s response to the SEC’s Letter of Comments. The SEC notes that the average processing time for the registration of statements following these changes is around 36 days. During consultations, market participants did not necessarily perceive the changes as an improvement. They noted that whereas IPO applicants previously had a single point of contact at the SEC, they now have to interact with five different divisions and obtain their separate approvals before being able to send their registration application. This usually takes at least two weeks, meaning the overall process is not necessarily faster and might increase applicants’ administrative burden. However, the this is a new process, and more time may be needed before a clearcut assessment can be made.
As there is significant overlap between the requirements of the SEC and the PSE for listing and registration, co-ordination could be improved. Both the PSE and the SEC conduct a thorough review of all listing application documents, which requires filing the application simultaneously with the PSE and the SEC. On top of disclosures, the PSE also has suitability requirements that can disqualify a company from listing under specific conditions. During consultations, stakeholders highlighted the fact that the PSE usually takes 20 days to revert with comments and often requires applicants to update their application a few times. Sometimes these comments also require material changes to the prospectus already filed with the SEC, thus requiring an updated version to be submitted. Moreover, while the SEC meets twice every week, the PSE meets once a month, increasing risks of delays.
Regulators and stock exchanges in other ASEAN jurisdictions have collaborated to expedite the IPO approval process aiming to provide greater clarity and incentivise more companies to pursue public listings. For instance, in 2024, the Securities Commission Malaysia and Bursa Malaysia jointly committed to a three-month IPO approval period (SC Malaysia, 2024[43]). In Singapore, companies submit their IPO application through SGX, which liaises with the Monetary Authority of Singapore (MAS) for regulatory reviews. A single filing platform avoids multiple filings to different authorities and allows for standardised filing requirements.
While listing requirements are critical to maintaining market integrity and fostering investor confidence, it is equally important that they are structured in a balanced manner that does not discourage companies from entering the public equity market. One such requirement is profitability. The Philippines requires companies to be profitable to be listed on the Main Board, while several other ASEAN jurisdictions offer more flexibility. As shown in Table 1.3, Indonesia, Malaysia and Singapore allow unprofitable companies to list if they meet alternative criteria, such as certain market capitalisation thresholds or cash flow requirements. For example, companies wishing to list on the SGX must meet one of three criteria. One criterion allows companies with a certain market capitalisation and turnover to be eligible for listing even if they are not yet profitable. This flexibility allows for the inclusion of high-growth companies that are not currently profitable but have significant growth potential.
Note: For Viet Nam the requirements refer to the Hanoi Stock Exchange.
Source: PSE (2024[6]), Main Board - IPO Listing Requirements, https://www.pse.com.ph/ipo-listing-requirements/#listing1; IDX, (2024[7]), Stocks, https://www.idx.co.id/en/products/stocks/; SGX (2024[8]), Mainboard, https://www.sgx.com/securities/mainboard; Bursa Malaysia, (2024[9]), Listing Criteria, https://www.bursamalaysia.com/listing/get_listed/listing_criteria; SET, (2022[10]), Common Shares Listing Admission, https://media.set.or.th/set/Documents/2022/Jul/Common_Shares_Listing_Admission.pdf; SSC (2020[41]) Decree No. 155/2020/ND-CP, https://lawnet.vn/en/vb/Decree-155-2020-ND-CP-elaboration-of-some-Articles-of-the-Law-on-Securities-76571.html.
An idiosyncratic feature in the Philippine listing process that might create uncertainty is that underwriters must allocate at least 20% of the IPO to PSE trading participants and 10% to local retail investors (PSE, 2023[44]). These requirements can lead to inefficiencies when brokers or retail investors are unable to fully subscribe their allocated shares, leaving investment banks with unsold shares. The PSE reported in 2021 that retail investors only subscribed to 1.4% of shares, much lower than the 10% assigned (PSE, 2021[45]). However, more recently, the PSE notes that through the use of the PSE Easy application, the retail allocation has generally been well-subscribed. In addition to the financial implications for underwriters, allocations not fully subscribed could negatively affect the share price and reduce the liquidity of the stock if the underwriter has to hold on to a large block of IPO shares.
1.3.3. Cost of listing
For companies deciding on different alternatives to raise capital, the fees associated with listing can represent a significant cost and constitute a barrier to going public – particularly for smaller companies. Among the various costs, stock exchange fees typically include one-off initial listing fees and annual fees.
The fees charged by the PSE depend on the size of the IPO (see Section 3.1). As the comparison with peer countries’ exchanges shows (Figure 1.9), the initial listing fee is relatively high on the Philippine main market for a USD 150 million (~PHP 8.3 billion) IPO but is in line with most peers for a small USD 10 million (~PHP 556 million) IPO on the SME Board. Notably, the initial fee in the Philippine Main Board does not have a maximum, whereas in markets like Indonesia, Malaysia and Singapore the initial fee has a minimum and maximum amount. However, the PSE listing fees make up a limited amount of the total cost of an IPO.
Note: The total initial fees indicated consist of processing, registration and initial listing fees where relevant, and are for the first year of listing. The assumed issue amount corresponds to 100% of equity.
Source: PSE (2024[6]), Main Board - IPO Listing Requirements, https://www.pse.com.ph/ipo-listing-requirements/#listing1; PSE (2024[46]), SME Board – IPO Listing Requirements, https://www.pse.com.ph/ipo-listing-requirements/#listing2; Bursa Malaysia (2024[47]), Listing on Bursa Malaysia, Cost of Listing, https://www.bursamalaysia.com/listing/get_listed/cost_of_listing; SET (2024[48]), Listing Fees and Taxes, https://www.set.or.th/en/listing/equities/fees-and-taxes; SGX (2024[8]), Mainboard, https://www.sgx.com/securities/mainboard; SGX (2024[49]), Catalist, https://www.sgx.com/securities/catalist; IDX (2024[7]), Stocks, https://www.idx.co.id/en/products/stocks/.
In the IPO process, the highest direct costs correspond to underwriting fees, legal fees and post-listing costs. Total fees are estimated by the PSE to be 5-6% of the amount issued. This is considered to be high by issuers compared to other forms of financing but is not out of line compared to other economies. Post-listing costs include the need for investor relations staff and increased compliance requirements. As certain fees are fixed, they can represent a barrier, especially for smaller companies seeking to access public equity markets. To address this, some countries in Asia provide government financial support for smaller companies to cover some of these costs. For example, in Malaysia companies listed on the growth market and technology-based companies listed on the main market can benefit from a tax deduction of listing costs of up to RM 1.5 million (~USD 325 K) until 2025 (EY, 2023[50]). The Singapore Stock Exchange (SGX) offers listing grants for companies listed on the main and growth company segments. Companies can receive a grant covering 70% of their eligible expenses – such as underwriting, placement, audit, legal, valuation and listing fees – up to a cap of SGD 2 million (~USD 1.4 million) for companies with a market capitalisation above SGD 1 billion, while grants for those with a market capitalisation below SGD 1 billion are capped at SGD 1 million. Additionally, there is a grant covering 70% of fundraising expenses for SPOs, with the cap varying based on the timing of the SPO following the initial listing (MAS, 2021[51]).
Taxes related to the issuance and transfer of shares can also impact the attractiveness of a public listing. The issuance and transfer of shares are subject to a documentary stamp duty tax (DST). This tax is the highest among peer countries, some of which exempt listed shares from it altogether. For the original issue of a stock in the Philippines, the tax is 1% of the amount issued. The transfer of listed shares traded on the PSE is exempt from documentary stamp duty tax, while the transfer of unlisted shares incurs a stamp duty amounting to 0.75% of the par value of the shares sold (Section 3.4). In peer countries this rate varies from 0% in Viet Nam to 0.2% of the purchase price or net asset value in Singapore (PWC, 2023[52]; Acca Global, 2017[53]; ASEAN Briefing, 2023[54]; VDB-Loi, 2021[55]). In Indonesia there is instead a minimum fixed tax amount for the issuance and transfer of equity and debt instruments (ASEAN Briefing, 2021[56]).
1.3.4. Potential IPO candidates
In the Philippines, public equity markets could be expanded by bringing more companies to the market. Currently, there are many IPO candidates within the universe of large unlisted companies and among state-owned enterprises (SOEs).
An analysis of the current universe of companies in the Philippines suggests that in 2021, there were 411 large unlisted non-financial companies (with assets above PHP 5.6 billion or USD 100 million). The minimum criteria for listing on the Main Board of the PSE is to have shareholders’ equity or an anticipated market capitalisation of at least PHP 500 million (~USD 9 million), a free-float of at least 20%, a minimum net income of PHP 50 million (~USD 0.9 million) for the most recent fiscal year and a minimum of three years of financial reporting. Using the shareholders’ equity reported on the balance sheet as a proxy for anticipated market capitalisation and the minimum net income criteria, 55% of the large unlisted companies in the Philippines are eligible for listing. Moreover, the average company age in this category is 25 years, meaning that many are mature firms. In 2021, the median asset size of these companies was PHP 11.4 billion (~USD 224 million), their median sales were PHP 9.9 billion (~USD 196 million) and their median return on equity was 13% (Figure 1.10).
Aside from fulfilling the minimum criteria, many large unlisted companies outperform the currently listed ones both in terms of size and profitability. Large unlisted companies have slightly lower median assets but higher median sales and higher leverage (Panel A). Median profitability, measured by net profit and ROE, is higher for unlisted companies compared to listed companies (Panel B).
Source: OECD Capital Market Series dataset, LSEG, FactSet, Bloomberg, OECD-ORBIS Corporate Finance dataset; see Annex for details.
Many state-owned enterprises in the Philippines have the potential to become listed. The listing of state-owned enterprises (SOEs) has significantly contributed to the growth and dynamism of capital markets worldwide. Over the last decade, an increasing number of SOEs in Asia have been listed on regional stock exchanges to enhance their productivity, efficiency and competitiveness (Silva and Nerlich, 2021[57]). At the start of 2024, 76% of the state-controlled companies across the world were listed on Asian stock exchanges. In ASEAN countries state-controlled companies account for almost a third of the region’s market capitalisation.
Currently, there are no SOEs listed on the PSE, which contrasts with a number of peer countries where SOEs make up a substantial share of market capitalisation. The most notable example is Singapore, where the top three listed SOEs – DBS Group Holding, Singapore Telecommunications and Singapore Airlines – account for 27% of total market capitalisation (Figure 1.11, Panel A). Similarly, the top three listed SOEs in Malaysia, Indonesia, Thailand and Viet Nam each represent 15%-18% of the domestic stock exchanges’ market capitalisation. These listed SOEs include banks, telecommunication companies, airports, and gas and petroleum production companies.
Several of these countries have taken steps to expand capital markets by listing SOEs. For example, the Indonesian Stock Exchange is co-operating with the Ministry of State-Owned Enterprises to support the development of the local capital market and accelerate its use by SOEs (IDX, 2023[58]). This co-operation focuses on education and assistance for going public, as well as the issuance of other capital market instruments for SOEs and their subsidiaries. Similarly, in Viet Nam the government aims to have at least 25 SOEs with a market capitalisation of over USD 1 billion on the stock exchange by 2025, with 10 having a market capitalisation of over USD 5 billion (Hanoi Times, 2022[59]).
In the Philippines, public equity markets could be expanded by listing minority stakes of financially significant SOEs. At the start of 2023, there were 118 government owned or controlled corporations (GOCCs) in the Philippines with total assets amounting to PHP 11.6 trillion (~USD 230 billion). Among these companies two banks stand out in terms of total assets, net worth and income as potential candidates for a stock market listing: Land Bank of the Philippines with total assets of PHP 3.1 trillion (~USD 61.5 billion) and Development Bank of the Philippines with total assets of PHP 1 trillion (~USD 20 billion) (Figure 1.11, Panel B). Other potential candidates for a partial listing are shown on Panel B. However, some of these SOEs are chartered institutions and a legislative amendment may be required in order to incorporate and restructure them for listing. Listings should also be preceded by reforms aimed at enhancing the performance, governance and management of SOEs to increase and preserve their commercial viability and competitiveness, in line with the OECD Guidelines on Corporate Governance of State-Owned Enterprises.
Note: GOCCs refer to government owned or controlled corporations. Net worth in Panel B represents the difference between total assets and total liabilities.
Source: GCG (2023[60]), 2022 GCG Annual Report, https://gcg.gov.ph/files/KMvhiF0hwOysqPcrHGG3.pdf; OECD Capital Market Series dataset, FactSet, LSEG, Bloomberg; see Annex for details.
1.3.5. Equity markets for smaller companies
Smaller companies often face significant challenges when accessing bank financing due to the lack of tangible collateral and a proven track record. Lack of access to financing remains a significant barrier to the further development and sustainability of SMEs in the Philippines (BSP, 2020[61]). Most companies (90.5%) are micro companies, and very few become medium (0.4%) or large (0.4%) sized. It is estimated that 107 043 MSMEs lack access to external financing (IFC, 2018[62]). In 2022, bank loans to MSMEs represented 4.3% of total bank loans, equal to only 2.2% of GDP (Figure 1.12, Panel A). Most SME financing in the Philippines comes from internal sources. Importantly, 42% of small enterprises and 33% of medium-sized enterprises are financially constrained (Flaminiano, 2021[63]; Aldaba, 2013[64]).
Equity financing could play an important role in providing long-term and risk-willing financing to SMEs. Private equity (PE) and venture capital (VC) play a crucial role in helping SMEs expand and achieve a scale suitable for market-based financing. However, PE and VC are still nascent in the Philippines, thus offering limited financing options for smaller companies. The Philippines ranks 44th globally in terms of availability of venture capital, second to last among peer countries and just ahead of Viet Nam (Figure 1.12, Panel B).
Source: IMF (2024[40]), World Economic Outlook Data: April 2024 Edition, https://www.imf.org/en/Publications/WEO/weo-database/2024/April; World Bank (2023[3]), WEF Global Competitiveness Index 4.0, https://prosperitydata360.worldbank.org/en/dataset/WEF+GCI; ADB (2023[65]), Asia Small and Medium-Sized Enterprise Monitor 2023, https://www.adb.org/sites/default/files/publication/919641/asia-sme-monitor-2023.pdf.
Many stock exchanges worldwide, including the PSE, have established dedicated markets for growth companies. In Asia, there are currently 28 equity segments for growth companies on 23 stock exchange across 17 jurisdictions. To facilitate access to public equity markets for growth companies, the PSE introduced the SME Board in 2013.
By the end of 2023, the SME Board hosted only 10 companies with a total market capitalisation of PHP 27 billion (~USD 460 million), which is significantly lower than peer countries (Figure 1.13, Panel A). In terms of market capitalisation, the size of the SME Board in the Philippines is less than one-tenth of Singapore’s growth market, the smallest of the peer countries. It also has far fewer companies. As a share of GDP, the Philippine SME Board accounts for just 0.1%, markedly lower than peers (Panel B). While the structure and dynamism of an economy strongly impacts the demand for financing among SMEs, the stark difference relative to peers suggests significant potential for growth and increased participation of SMEs in the public equity market.
Note: For Indonesia, the growth market refers to the Acceleration and Development segments on the Indonesia Stock Exchange, and for Malaysia, it refers to the ACE and LEAP segments on Bursa Malaysia.
Source: OECD Capital Market Series dataset, LSEG, FactSet, Bloomberg, see Annex for details.
Smaller firms are at a disadvantage compared to larger firms when seeking access to market-based financing. They have less ability to shoulder the large, fixed costs associated with a listing and have less resources to deploy for meeting listing criteria and disclosure requirements. Flexibility and proportionality in regulatory requirements could therefore play a crucial role in facilitating their access to market-based finance. The primary objective for regulators of incorporating flexibility and proportionality into the regulatory framework is to accommodate access to public financing for firms at different stages of development. The G20/OECD Principles of Corporate Governance recognise the importance of applying flexibility and proportionality with respect to a range of factors, such as firm size, ownership and control structure, geographical presence, sectors of activity and stage of development of the company (OECD, 2023[66]). The SEC’s Code of Corporate Governance aligns with the Principles by making it clear that it does not prescribe a one size fits all framework and allow boards some flexibility in establishing their corporate governance arrangements (SEC, 2019[67]).
The Philippine SME Board allows companies to have a shorter operating history, a lower minimum number of target shareholders and lower financial performance compared to the Main Board (Table 1.4). However, the listing requirements in the SME Board are more stringent compared to peer markets. The SME Board requires a minimum EBITDA of PHP 15 million (~USD 0.3 million) for the previous three financial years to be listed while similar markets in Indonesia, Malaysia, Singapore and Viet Nam do not require companies to be profitable to be listed. Companies seeking to list on the Philippine SME Board also need to have a minimum operating history of two years - the longest among peer countries - and a minimum free-float level similar to that in the Main Board. Equity markets for growth companies in other jurisdictions have lower free-float requirements compared to the main markets.
Companies seeking to list on growth markets in the Philippines and peer countries are required to submit a prospectus or offering document, in addition to meeting the above-mentioned listing requirements. Philippine companies also need to submit audited business plans with projections for the next five years. The preparation of a prospectus can be overwhelming and costly for smaller companies. To address this, the Philippines, Singapore and Thailand exempt non-public offers made to qualified investors from the prospectus requirement (SEC, 2001[29]; SEC Thailand, 2008[68]; MAS, 2006[69]). Outside Asia, the EU allows member states the flexibility to waive the prospectus requirement for smaller companies with an issuance below EUR 8 million to encourage their listings. Sixteen EU member states have opted to use this flexibility up to the highest threshold of EUR 8 million, while the rest use lower thresholds (ESMA, 2023[70]).
Source: PSE (2024[46]), SME Board – IPO Listing Requirements, https://www.pse.com.ph/ipo-listing-requirements/#listing2; Bursa Malaysia (2024[71]) Rules, https://www.bursamalaysia.com/regulation/listing_requirements/leap_market/listing_requirements; IDX, (2024[7]), Stocks, https://www.idx.co.id/en/products/stocks/; SGX (2024[49]), Catalist, https://www.sgx.com/securities/catalist; SET (2024[72]), Common Shares Listing Application, https://media.set.or.th/set/Documents/2022/Jul/Common_Shares_Listing_Admission.pdf; SSC (2020[73]) Decree No. 155/2020/ND-CP, https://lawnet.vn/en/vb/Decree-155-2020-ND-CP-elaboration-of-some-Articles-of-the-Law-on-Securities-76571.html; SSC, (2019[74]), Law on Securities, Article 32, https://ssc.gov.vn/.
The registration procedure for the SME Board is the same as for the Main Board in the Philippines. However, Singapore and Malaysia apply different registration procedures for their growth markets to streamline the IPO process for smaller companies. In Singapore, smaller companies listing on the Catalist market submit an offer document to the Singapore Stock Exchange rather than to the Monetary Authority of Singapore (MAS). The offer document, however, must comply with the same disclosure requirements as a full prospectus under the Securities and Futures Act and the Securities and Futures Regulations (MAS, 2024[75]; SGX, 2024[49]). Similarly, for initial public offerings on the ACE Market, Bursa Malaysia is responsible for the review and registration of the prospectus (SC Malaysia, 2021[76]).
To facilitate the listing of smaller companies, the PSE introduced a sponsor system in 2013. Under this system, sponsors conduct a due diligence process to assess the financial condition and business viability of potential issuers and submit the certification to the PSE for approval. Sponsors provide support during the listing process, post-listing monitoring and advice on investor relations or disclosure. Sponsors can also benefit from their long-term relationship with sponsored companies through additional business opportunities. This has been the case in Singapore where the model has even created competition among sponsors (The Edge, 2020[77]). In the Philippines, the equity market for growth companies does not seem to be attractive enough for potential sponsors. Moreover, to become an accredited sponsor, a filing fee of PHP 200 000 (~USD 3 600) and an accreditation fee of PHP 3.5 million (~USD 63 000) have to be paid, along with renewal fees (PSE, 2023[78]).Furthermore, the PSE provides limited information on sponsors, in contrast to the easily accessible lists of accredited sponsors available on the stock exchange websites in Singapore and Malaysia.
More recently, the PSE and SEC have introduced new programmes and tools to support growth companies’ access to public equity. In 2021, with the support of the Capital Markets Development Council (CMDC), the PSE launched the Listing Engagement and Assistance Program (LEAP), partnering with investment banks and law and accounting firms to assist companies through the IPO process. By early 2024, the programme had 70 participants, a significant portion of which are SMEs (PSE, 2024[79]; Foxmont Capital Partners & BCG, 2024[80]). As part of the initiative, the PSE and S&P Global also inaugurated the first LEAP Insights session in 2023 to increase the financial awareness of companies. The sessions are designed to provide potential listing applicants with a preview of what it entails to be a publicly listed company (PSE, 2023[81]). The SEC also actively promotes and educates on SME financing by engaging in roadshows and supporting crowdfunding platforms across regions.
During the consultations for this report, it was noted that two companies had successfully listed through the LEAP programme and that more focused efforts might be required to encourage firms to take the final steps to listing. One major issue is that smaller firms are hesitant to open their books to scrutiny. It was also noted that given the lack of perceived proportionality in requirements, many firms do not see the SME Board as attractive enough and instead either stay private or aim for the Main Board.
1.3.6. Recommendations
To facilitate access to public equity market, the Philippine authorities could consider:
Implementing a minimum payout ratio along with guidelines and incentives for companies to communicate their plans for shareholder returns.
Easing the Main Board listing requirement to allow companies with high growth potential to be listed even if they are not currently profitable.
Committing to a three-month IPO approval process and potentially implementing a single submission platform for IPO applications.
Simplifying the listing fee structure and introducing a maximum threshold on the initial listing fee.
Lowering the stamp duty tax rate to increase the attractiveness of the Philippine equity market.
Applying proportional requirements for the SME Board to make equity financing more accessible to SMEs, and implementing a simplified prospectus for issuances below a certain size for companies seeking to list on the SME Board of the PSE.
Allowing more entities to play the role of sponsors and reducing costs for sponsors to help revitalise the equity market for growth companies.
Creating a public-private initiative between the CMDC, SEC, GOCCs and PSE to establish a special programme for large unlisted companies and large SOEs to prepare and bring them to the stock market.
Equity financing is crucial for companies as it provides the patient capital necessary for businesses to grow. Moreover, it helps maintain a robust capital structure, enabling corporations to overcome economic downturns and unforeseen crises. Despite favourable macroeconomic conditions and strong economic growth in the Philippines, the public equity market has lacked dynamism and remains relatively small. A number of policy initiatives to facilitate access to the public equity market are outlined below.
The low payout ratios of many large mature Philippine firms suggest that there might be a need to incentivise companies to commit to clear payout policies. For the stock market to be attractive, investors must have clarity on their investment returns– and the returns must be globally competitive relative to similar firms. Given the high levels of profits of PSEi firms, a higher rate of return could potentially be achieved. An in-depth review could help design a payout policy suitable for the Philippine context. For instance, reforms based on either imposing a strict minimum payout or focusing more on incentives, such as in larger Asian economies, could serve as inspiration.
An analysis of listing requirements suggests that authorities could consider easing them further. For instance, currently, companies need to demonstrate profitability to be listed on the PSE, which is not the case for many other peer countries. A more flexible set of requirements could be implemented. This could include introducing multiple optional criteria regarding company performance to allow promising growth companies that are not yet profitable to list on the stock market.
The listing procedure could be streamlined. Currently, applicants are required to navigate between multiple departments within the SEC for their IPO application. Applicants must also submit similar documentation separately to both the SEC and the PSE. The PSE often extends its review timelines and may require documentation to be re-filed to the SEC, causing delays in the offering process. This situation underscores the need for improved communication and co-ordination between SEC and PSE officials on ongoing applications. The SEC and PSE could pursue a joint initiative to shorten the process. For example, they could commit to a three-month IPO approval period, which would provide companies with greater certainty and predictability encouraging more of them to consider going public. Alternatively, a single submission platform for IPO applications could effectively streamline the process, minimise duplication and reduce the administrative burden on applicants.
The fees associated with public equity markets can represent a barrier for companies, in particular for smaller companies. To address this issue, the PSE could contemplate establishing a maximum threshold on the initial listing fee. The Philippine government could consider providing financial support to assist companies for whom the IPO costs present a barrier to entering the public equity markets. This support could take the form of tax credits or grants. Taxes on equity issuances also impact the attractiveness of a public listing. Policy makers in the Philippines could consider reducing the stamp duty tax, non-existent in many peer markets, to enhance market competitiveness.
To boost the use of equity financing by SMEs, the stock exchange could also consider applying more flexible and proportional requirements to list on the SME Board, in line with other markets. The PSE should identify the barriers through dialogue with firms and set the listing and ongoing requirements at an appropriate level, taking into account the business uncertainty and potentially unstable cash flow that these companies face. For example, the PSE could consider removing the market capitalisation threshold and financial performance requirements for the SME Board. Moreover, this could be supplemented by requiring a simplified prospectus or offer document for issuances below a certain size.
In addition, the existing sponsor listing model could be improved to attract more companies and encourage sponsors to participate. The sponsor system has not been widely used possibly due to higher fees and lack of attractive companies seeking to list on the SME Board. Reducing the costs to become an accredited sponsor, such as filing and accreditation fees, may encourage greater sponsor participation. Brokers could potentially be brought in as sponsors. In addition, the currently limited information on accredited sponsors should be expanded through publication on the PSE website to increase their visibility to companies seeking to go public. For example, relevant information about the sponsorship can be published on the webpage of the Listing Engagement and Assistance Program (LEAP).
Additionally, to encourage large unlisted companies to go public, the SEC, CMDC and PSE could create a programme for large unlisted companies to prepare them to join the stock market. While the LEAP initiative is promising, most companies in the programme are SMEs. A similar programme targeted to large unlisted companies – including grantees of local franchises of larger multinationals – could perhaps result in more listing and increase the attractiveness of the stock market. Financially significant state-owned enterprises (SOEs) could join this programme. Globally, and in Asia in particular, the listing of SOEs has significantly contributed to the growth and dynamism of capital markets. However, in the Philippines, there are no listed SOEs. Given their size, listing minority shares of these companies could stimulate the stock market and would offer SOEs an opportunity to improve their governance and their financial performance.
To facilitate the listing of SOEs, the Philippine Stock Exchange (PSE) and the Governance Commission for Government-Owned or Controlled Corporations (GOCCs) could initiate a collaboration. This partnership could prioritise initiatives aimed at preparing SOEs for joining public markets, by improving their corporate governance, financial management and operational efficiency, among others. These companies should adhere to the highest corporate governance standards, as set out in the G20/OECD Principles of Corporate Governance. Simultaneously, the government could continue implementing reforms in line with the OECD Guidelines on Corporate Governance of State-Owned Enterprises, aimed at enhancing the performance and management of SOEs to increase and preserve their commercial viability and competitiveness.
Secondary stock market liquidity is crucial to allow investors to enter and exit the market without having to accept major discounts to the fair market value. Liquidity also contributes to the price formation process and reduces price volatility. Therefore, lower liquidity risk can reduce the cost of raising capital for issuers. A liquid secondary market can therefore affect the activity in the primary market by encouraging companies to list and issue more equity.
In the Philippines, the equity market is small and illiquid compared to peer countries. In 2023, the market capitalisation-to-GDP ratio was 52% and the turnover ratio of the PSE was 8.8%, the lowest among peer countries (Figure 1.14, Panel A). The average turnover ratio for peer countries was 49%, ranging between 22% and 87%. In terms of the value of shares traded on the stock exchange, the Philippines also has the lowest figure among peer countries with only USD 24.9 billion worth of shares traded in 2023 (Panel B). The annual turnover ratio on the Main Board has been consistently low since 2010, averaging 14% between 2010 and 2023.
Note: In Panel A, the size of the bubble is proportional to each country’s share in the combined market capitalisation of all six markets. Turnover ratio is computed as the annual traded value divided by market capitalisation.
Source: IMF (2024[40]), World Economic Outlook Data: April 2024 Edition, https://www.imf.org/en/Publications/WEO/weo-database/2024/April; OECD Capital Market Series dataset; Websites of stock exchanges, see Annex for details.
1.4.1. Free-float levels
Lower trading volumes and turnover ratios are usually associated with low free-float levels, as a reduced number of shares is available for trading. In the Philippines, the prevalence of large conglomerates and family-owned businesses explains the high ownership concentration and low free-float. During OECD consultations, market participants noted this issue to be important for owners’ reluctance to list and relinquish even limited control. Corporations hold 47% of equity in the country, and on average they own 52% of the equity in 70% of the listed companies (see Chapter 3). The dominant position of family-owned groups also reflects the limited willingness of owners to dilute their ownership, in spite of the potential upside in valuation resulting from increased investor interest (IMF, 2021[82]).
The Philippines has the lowest market free-float ratio and secondary market liquidity among peer countries (Figure 1.15, Panel A). Conversely, countries with higher free-float levels, such as Singapore, Thailand and Viet Nam, have more liquid stock markets. In 2023, half of the companies listed on the PSE Main Board had a free‑float below 28%, while only one-quarter of companies had a free-float level above 40%, lower than all peers but Indonesia (Panel B). Like similar markets globally, companies listed on the SME Board have lower free‑float levels compared to the main market.
While potentially discouraging IPOs, stock exchanges often require companies to have a minimum level of free-float to support liquidity in the market. In the case of the Philippines, the PSE requires a minimum 20-33% free-float for companies to become listed, applying a higher ratio to smaller firms and a lower ratio to large firms. In addition, after the listing, companies must always maintain a minimum free-float level of 10% (PSE, 2021[83]). For example, in Viet Nam, the free-float requirement for listing is 15% and can be reduced to 10%, depending on the company market capitalisation (Viet Nam Business Law Blog, 2021[84]). In Singapore, listed companies must maintain minimum 10% of free-float level after the listing, as in the Philippines (SGX, 2024[85]).
Global index providers such as MSCI and S&P often use a free-float-adjusted market capitalisation to construct their indices with specific liquidity requirements for inclusion. The resulting low index weights for companies with a low free-float reduces demand from investors using benchmarking against indices. This both negatively affects liquidity and valuations (MSCI, 2022[86]; S&P, 2020[87]). Philippine companies constitute only 0.0%-0.7% of the MSCI Emerging Asia, MSCI Emerging Markets and AC Asia Pacific indices, respectively (Figure 1.16, Panel A), which is low relative to their share of ASEAN market capitalisation (Panel B). While small size potentially could have an impact on index inclusion, the median size of listed companies in the Philippines is similar to those in markets such as Thailand and Singapore, and larger than those in Indonesia and Viet Nam (see Chapter 3).
Note: In Panel A, free-float level represents the average across companies in each main market. The size of the bubble is proportional to each country’s market liquidity, measured by the turnover ratio. In Panel B, lower and upper bounds show first and third quantiles of the free-float distribution of companies in each market. The middle corresponds to the median.
Source: OECD Capital Market Series dataset, LSEG, FactSet, Bloomberg; see Annex for details.
To incentivise companies to maintain a high flee-float, stock exchanges often request a certain level above the minimum to be included in their own equity indices, ranging for example from 15% to 20% in Singapore, Thailand and the Philippines (LSEG, 2024[88]; PSE, 2021[89]; SET, 2023[90]).
Note: Panel A shows the total share of companies from different countries in each index. The share of Indonesian companies in Panel A for the MSCI World is 0.03% and is not visible. Panel B shows (bottom panel) the distribution of the companies included in each index and compares them with (top panel) the country’s market capitalisation shares in ASEAN’s total. The information on MSCI constituents is as of September 2023, REITS and investment funds are excluded from the indices.
Source: OECD Capital Market Series dataset, LSEG, MSCI; see Annex for details.
1.4.2. Cost of trading and taxes
The cost of trading may also affect market liquidity in the Philippines. The PSE charges 0.005% of the traded value from both the seller and buyer, plus a 12% VAT (Table 1.5). A clearing and settlement fee of 0.01% of the traded value is also paid by both parties of the transaction. In addition, the SEC collects the equivalent of 0.005% of the traded value from sellers and buyers. After the SEC removed the 1.5% minimum broker commission fee in April 2024, fees range between 0.05-1.5%2 depending on the traded value with the addition of 12% VAT (PSE, 2008[91]; PSE, 2024[92]). The seller pays an additional transaction tax amounting to 0.6% of the value traded. In summary, the buyer of PHP 10 000 in stocks pays 0.3% of the transaction value in fees and taxes, while the seller pays 0.9%.
Note: The example assumes a broker’s commission of 0.25% of the traded value. Fees to the SEC refer to “SRC fee” for the buyer and “SEC fee” for the seller.
Source: PSE, (2024[92]), Investing at PSE, https://www.pse.com.ph/investing-at-pse/.
The fees paid to the stock exchange in the Philippines are on the lower range compared to peer countries (Table 1.6). Nonetheless, the Philippines and Thailand are the two jurisdictions where the regulator charges an additional fee. Contrary to other jurisdictions, the Philippines also charges a 0.6% transaction tax over the traded volume to the seller.
Source: PSE (2024[92]), Investing at PSE, https://www.pse.com.ph/investing-at-pse/; IDX (2024[93]), Trading Hours and Mechanism, https://www.idx.co.id/en/products-services/trading-hours-and-mechanism/; SGX (2024[94]), Trading, https://www.sgx.com/securities/trading; Bursa Malaysia (2024[95]), Transaction Costs, https://www.bursamalaysia.com/trade/trading_resources/equities/transaction_costs; SET (2024[96]), Taxation on Equities Investment, https://www.set.or.th/th/market/information/tax.
The overall trading cost in the Philippines is the highest among peers (Figure 1.17). Trading costs for buyers and sellers represent 1.2% of the total traded value, almost double the average of peer countries (0.66%). The fees collected from the buyers by the PSE (0.30%) are comparable to peer countries. However, on the sell side, the additional financial transaction tax of 0.6% significantly increases the cost of selling a stock compared to peer countries. This cost is three times higher than in Indonesia, Singapore and Thailand, and more than two times that of Malaysia. Importantly, there is no capital gains tax (CGT) on the selling of listed stocks in the Philippines, whereas in peer countries capital gains are subject to specific tax rates or are taxed as ordinary income (see Section 3.4). Transaction taxes are usually a simpler way of collecting taxes than CGT and may be preferable in countries where the resources and automation of the tax authority is limited.
Note: The calculation assumes buying/selling 1 000 shares in each stock exchange. The price of the share is taken as 10 units in the domestic currency of each country for simplicity. The broker’s commission rate is 0.25% of transaction value for each country. The figure also includes taxes taken on goods and services and VAT where relevant. Capital gain taxes and other are not included.
Source: PSE (2024[92]), Investing at PSE, https://www.pse.com.ph/investing-at-pse/; Bursa Malaysia (2024[95]), Transaction Costs, https://www.bursamalaysia.com/trade/trading_resources/equities/transaction_costs, IDX (2024[93]), Trading Hours and Mechanism, https://www.idx.co.id/en/products-services/trading-hours-and-mechanism/; SET (2024[96]), Taxation on Equities Investment, https://www.set.or.th/th/market/information/tax; SGX (2024[94]), Trading, https://www.sgx.com/securities/trading.
1.4.3. Research on companies
Market research increases the visibility of listed companies, provides fundamental information about their prospects and gives insights to investors for better decision-making. It can also provide outside investors with a third-party view on governance issues and provide easy access to comparable operating performance and payout policies of local and global peers. Market research on companies also contributes to efficient price discovery and therefore can have a positive impact on liquidity. In the Philippines, private institutions and brokerage firms conduct market research on companies targeting professional investors. The LSEG also prepares reports on each company, including companies listed on the SME Board, which are published on the PSE Equities Information Platform with limited access.
To support stock market liquidity, stock exchanges promote accessible company research. For instance, in 2022, Bursa Malaysia introduced Bursa Research Incentive Scheme with the objective of increasing research coverage. As of June 2024, more than 50 000 research reports on companies were publicly available on the stock exchange’s website (Bursa Malaysia, 2024[97]). The Monetary Authority of Singapore (MAS) provides support to research houses under the Grant for Equity Market Singapore scheme. Under the scheme, eligible research houses and financial institutions can be reimbursed up to SGD 4 000 (~USD 2 984) per equity research report, depending on the number of reports they produce in a year (MAS, 2021[51]). These reports are also published on the Singapore Exchange website.
1.4.4. Market making mechanism
Market markets support a well-functioning equity market by providing liquidity at all times. In the Philippines, the market making role is undertaken by 121 brokers (PSE, 2024[98]). However, these brokers match sellers and buyers, and do not trade on their own account or build inventories. According to market participants, only half of them are active. The general rules and requirements for trading participants on the PSE do not explicitly refer to market making activities (PSE, 2009[99]).
Stock exchanges often provide incentives to market makers to compensate them for the risk they take in providing the market with liquidity. For instance, Singapore offers a clearing fee reduction for market makers and active traders based on their performance of quoting prices on certain stocks (SGX, 2024[94]). In the Philippines, some privileges are given for market makers participating in the government securities market. In 2017, the Bureau of the Treasury launched the Enhanced Government Securities Eligible Dealers (GSED) programme, with the aim of promoting depth and liquidity in the Government Securities market (Bureau of the Treasury, 2023[100]). Moreover, listed corporate bonds are required to have registered liquidity providers (see Chapter 3). Some jurisdictions, such as Croatia, have similar provisions for companies listed on the stock exchange (OECD, 2021[101]). However, in the Philippine stock market, the current regulation does not provide any privileges or incentives for trading participants acting as market makers. The revised trading rules includes an article dedicated to market making, which is still pending final approval by the SEC, as of June 2024 (PSE, 2010[102]).
1.4.5. Derivative market
The availability of derivative products improves stock market liquidity by providing better risk management opportunities for investors, enhancing the price discovery mechanism and reducing the cost of capital for firms (Jobst, 2008[103]). Financial derivatives in the Philippines are currently offered by banks to their clients and regulated by the BSP. Derivative transactions take place mainly OTC, due to the lack of a public derivative market. In 2021 and 2024, the BSP issued regulations defining which financial derivatives a bank can engage in. According to these new rules, a universal or commercial bank can without the need of prior approval from BSP deal in FX forwards, FX swaps, interest rate swaps, forward rate agreements, interest rate and currency futures, and any financial derivative traded in an organised market where the bank is recognised as a dealing participant or member (BSP, 2021[104]; BSP, 2024[105]). The BSP has expressed its support for the development of an organised derivatives market. In 2023, the Bankers Association of the Philippines introduced the dollar-peso cross-currency swap (CCS) facility (BAP, 2023[106]). The Philippine Dealing & Exchange Corporation (PDEx), the fixed income exchange, is also launching a bond forward programme.
Compared to peer countries, the Philippines is the only country without a public derivative market, which limits investors’ ability to use derivatives for managing their risks. Although the current regulatory framework does not include provisions regarding the establishment of a marketplace for derivative transactions in the Philippines, there has been ongoing efforts by the PSE to experiment with different derivative products. For instance, in 2013, the PSE and SGX initiated a collaboration for the development of SGX-PSE MSCI Philippines index future, which was launched at the SGX (PSE, 2019[107]). In 2015, the PSE introduced a new trading system allowing for improved trading capacity and the trading of fixed income and derivatives (PSE, 2024[108]). In 2025, the PSE aims to launch a new PSEi index future product in collaboration with the Hong Kong Exchange (PSE, 2023[81]). Moreover, to ensure a more robust regulatory basis, the SEC is planning to publish guidelines regarding the functioning of derivatives markets.
1.4.6. Securities borrowing/lending and short selling
To support market liquidity and diversify strategies available to investors, the PSE has launched a securities borrowing and lending (SBL) programme (PSE, 2024[109]). This programme also supports the development of other products, such as derivatives and ETFs. SBL makes equity securities more liquid and allows investors to lend their securities and earn interest. The SBL programme was first introduced in 2006 but all the regulatory infrastructure was put in place until late 2023, including facilitating foreign participation and offshore collateral. According to market participants, certain institutional investors are still not allowed to take part in securities lending.
In 2023, the PSE launched a short selling programme, allowing investors to sell securities borrowed through SBL (PSE, 2023[110]). The availability of short selling improves price discovery, as investors can take short positions against overvalued assets. It can also increase liquidity by allowing investors to hedge against downturn risks and promote trading activity also in downturns. This is especially important for investors with long-holding periods such as insurance companies and pensions funds. Moreover, the possibility to take short positions increases the appeal of the equity market to foreign investors and brings the Philippines in line with regional peers such as Malaysia, Indonesia, Singapore and Thailand. Today only 52 securities are available for short selling, including one ETF and the constituents of the PSEi, MidCap Index and Dividend Yield Index. It is worth noting that while the regulatory requirements are now in place, few brokers are seemingly offering short selling so far. However, this might mainly be due to the general upwards cycle experienced since short selling was introduced.
1.4.7. Recommendations
To increase the liquidity in the secondary public equity market, the Philippine authorities could consider:
Promoting the inclusion of Philippine companies in major investable indices to enhance the visibility and attractiveness of the market to foreign investors, for example by incentivising listed companies to increase free float levels by making follow-on offering easier or less costly.
Offering grants or implementing support programmes for research institutions to conduct independent stock analysis and research.
Introducing incentives for market participants to participate as market makers.
Accelerating the process to establish a public derivative market in the country by providing the necessary regulatory framework for their trade and supervision.
Reviewing outstanding barriers to SBL adoption and provision of short selling services.
Assessing the reduction of the stock transaction tax on the sale of PSE listed shares.
Liquidity in the secondary public equity market is a key element for a well-functioning capital market. The Philippine public equity market is characterised by low liquidity levels, driven by low free-float levels, a highly concentrated ownership structure and potential trading frictions. To support secondary market liquidity, the Philippine authorities could consider implementing the initiatives outlined below.
The limited free-float levels lead to limited participation in investable indices and lower investor interest. Authorities may want to consider streamlining the follow-on offering process and consider options to allow companies to deduct a notional interest on new equity issuance, which could provide a more amenable environment for listing additional equity.
Authorities may also consider promoting research on listed companies to boost the visibility of, and interest in, Philippine stocks. To increase the quantity and quality of information and its accessibility, the PSE might consider collaborating with brokerage firms and private research institutions. Authorities could collaborate with the PSE by establishing a programme to promote independent market research accessible to the public. It is key to ensure the autonomy of the research provider from the firms analysed to avoid conflicts of interest or undue pressure from powerful firms.
To enhance market making activities, the PSE could introduce a mechanism where trading participants acting as market makers receive an incentive to provide liquidity that compensates them for holding inventory. The incentives could be in the form of fee reductions, reputational gains or other privileges based on quoting performance and liquidity provided to the market.
In addition, the Philippine authorities could consider introducing a legal framework for the establishment and functioning of a public derivatives market outside the banking sphere with the aim of supporting the development of new instruments to manage risks. It could also provide the necessary regulatory guidelines for their trade and supervision, as well as work closely with market participants to understand any outstanding barriers to the introduction or use of these products. There is considerable space to expand the availability of equity instruments and related products. The stock market enjoys sufficient transparency in prices to develop a derivative market.
With the regulatory framework in place for SBL and short-selling, the authorities could now shift their focus to ensuring the necessary market infrastructure is in place for market participants to start offering related products. The regulator could review any impediments preventing institutional holders from making their holdings available to prospective securities borrowers. These would provide a reliable source of supply, while potentially boosting the returns for investors. The authorities could also engage with brokers to understand if there are remaining barriers that hinder their participation in short selling operations.
The transaction cost of buying and selling shares listed on the PSE is higher than in peer countries and should be evaluated. Many markets in the region are more competitive in terms of transaction fees and in offering tax advantages. Authorities could consider speeding up the Senate’s vote to reduce the stock transaction tax to bring trading costs down towards levels in peers. However, a full review should be conducted, taking into account the CGT exemption, the estimated effect on traded volumes and the overall fiscal impact.
Long-term financing via corporate bonds provides a source of finance that strengthens corporate balance sheets and enables long-term investment. It also provides a counter-cyclical buffer to bank credit, which is highly pro-cyclical. In line with this rationale, the Philippine Central Bank Governor has recently expressed a desire to expand the corporate bond market beyond top-rated securities to broaden the funding opportunities available to corporations, a goal also pursued in the 2024 work programme of the Financial Stability Coordination Council (BSP, 2024[111]).
In the Philippines, the amount of financing provided by public markets and banks to non-financial corporations is subdued relative to peers, representing only 55% and 49% of GDP, respectively (
Figure 1.18, Panel A). The Philippine market for corporate bonds remains immature, having experienced sluggish growth in the last decades. Outstanding non-financial corporate bonds made up 6.4% of GDP in 2023, far lower than in Asia and globally (Panel B). Growth in the outstanding amounts has been relatively flat since 2000, whereas bank credit to non-financial corporations has increased rapidly since 2010 (Panel C). Despite bank credit growth, the penetration of the banking system is still low. These trends suggest that corporate demand for credit is not fully served either by the banking system or the market.
While the listing of corporate bonds on the local exchange has increased over the last decade, a substantial amount of Philippine bonds is issued on foreign exchanges, in contrast to most peer countries where a larger share is issued domestically (Section 3.2). This points to competitive disadvantages in the local market. Furthermore, the relatively low number of large issuances in the Philippines over the last two decades compared to peers suggests that mainly large corporations and conglomerates accessed the market.
Note: In panel A, market-based financing is defined as the sum of the market capitalisation of non-financial listed companies and the outstanding amount of non‑financial corporate bonds as share of GDP. Bank-based financing is bank credit to non-financial corporations also expressed as share of GDP. Where possible BIS data for Bank credit to the private non-financial sector (core debt) has been used, and for those jurisdictions with no BIS data, World bank data for Domestic credit to private sector by banks (% of GDP) has been used. For the Philippines Claims on private sector reported by BSP (i.e. not including claims on other financial corporations). In Panel C, banks include universal and commercial banks (U/KBs), thrift banks, rural and cooperative banks, digital banks, non-stock savings and loans associations, and non-banks with quasi‑banking functions.
Source: Bank of International Settlements; World Bank (2024[112]) Open Data, https://data.worldbank.org/; LSEG; BSP (2024[113]), Annual Report 2023, bsp.gov.ph/Media_And_Research/Annual Report/AnnRep_2023.pdf; BSP (2021[114]), Annual Report 2021, Bangko Sentral ng Pilipinas Media and Research - Publications and Reports (bsp.gov.ph); BSP (2019[115]), Annual Report 2019, bsp.gov.ph/Media_And_Research/Annual Report/annrep2019.pdf; BSP (2016[116]), Annual Report 2016, annrep2016.pdf (bsp.gov.ph); (2014[117]), Annual Report 2014, 2014 BSP Annual Report - Rev_IFAS; BSP (2012[118]), Annual Report 2012, bsp.gov.ph/Media_And_Research/Annual Report/annrep2012.pdf; BSP (2010[119]), Annual Report 2010, BSP AR 2010 with ERM inputs; BSP (2008[120]), Annual Report 2008, Microsoft Word - Introduction.doc (bsp.gov.ph); BSP (2006[121]), Annual Report 2006, Microsoft Word - BSP Annual Report 2006.doc; BSP (2004[122]), Annual Report 2004, BSP Annual Rep 2004 vol.1.doc; OECD Capital Market Series dataset; see Annex for details.
1.5.1. Listing process and costs
The listing process and costs associated are considered by market participants as one of the main barriers to issuing corporate bonds in the Philippines (OECD, 2024[123]). The current regulation and listing rules are reverse engineered from the equity issuance rules. There is a common SEC registration form for both equity and debt securities, and several sections are clearly only relevant for equity issuance. Likewise, there are prospectus sections on compliance with corporate governance and a comprehensive business description more relevant for shareholders than bondholders (IMF, 2019[36]). The form also presents a few broad examples of suggested risks to be expanded on that might be challenging to interpret, both for issuers and investors. There is considerable overlap between the documents required by the SEC and those required by the PDEx and the process is mainly paper-based.
The registration and listing process is also lengthy, both relative to international comparisons and to alternative sources of financing. The regulator has a time limit of 45 days to approve an application and, as previously mentioned, notes that the average processing time is about 36 days. However, according to market participants it can take up to around 60 days to receive approval. Overall, the entire issuance process is estimated to take 2-3 months. The SEC Office Order No.125 issued in February 2024 aimed at reducing the approval period. At the same time, recent changes in the SEC registration and approval process require the issuer to collect separate authorisations from the SEC divisions involved instead of having a single point of contact. According to market participants, this change risks creating further delays and complicates the process. In comparison, agreeing on terms for a bank loan and receiving funds might only take weeks. Moreover, corporate bond issuance in other markets tends to be a faster process, especially for issuers with an issuance programme. Currently, the process remains slow and prevents issuers from quickly tapping the market when timing is right. A peculiar feature of the Philippine process is that the issuer needs to have an initial issuance when registering the programme. Internationally, the common practice is for the issuer to first file and register and then issue the first bond. Seeking to address some of these issues, the SEC is currently embarking on a project to improve the shelf registration framework.
Meanwhile, the Philippines is also taking part in positive regional developments, such as the ASEAN+3 Multi-Currency Bond Issuance Framework. This initiative seeks to standardise the issuance process and make corporate bonds more comparable in order to create a less fragmented market, and in turn increase investor interest and intra-regional bond transactions (ABMI, 2023[124]).
According to OECD consultations with market participants, the other main challenge related to corporate bond issuance is cost. For all but AAA-rated issuances, bond financing is too expensive relative to bank-financing. Illiquidity makes investors require high spreads for anything but the top graded bonds. There also seems to be a stigma associated with anything but a top rating, further discouraging investment in bonds not rated AAA. Most non-rated companies are listed overseas, which might be a legacy from when the Philippine government did not have an investment grade rating. Beyond the listing fees, market participants estimate the total cost of issuing a corporate bond to be 1-2% of the amount issued. This estimate includes fees for underwriting and legal costs, and a significant component is the 0.75% stamp tax. Bank loans are traditionally cheaper, with domestic banks being relatively well‑capitalised and having high liquidity (ICMA, 2024[125]; IMF, 2023[126]). A survey in a previous OECD study identified bank financing as a barrier to the expansion of market-based finance (OECD, 2024[123]).
Overall costs are an important part of the choice of financing but listing fees are arguably not excessive in the Philippines. Table 1.7 shows the fees paid to the exchange in the Philippines and peer countries, calculated based on issuances of USD 50 million (~PHP 2.8 billion) and USD 200 million (~PHP 11.1 billion) for bonds with 5-year maturity. Issuance fees decrease relatively with size for most markets. The listing costs in the Philippines are higher than in Malaysia and on par with those of Singapore for the example USD 200 million listing (see Annex G for details).
Discussions with market participants and an analysis of the listed securities on PDEx point to a clear bias towards large companies and conglomerates for issuing corporate bonds. Given the fixed costs associated with market-based finance, scale is often a key barrier to access the market. Smaller firms are more likely to find their access to bank credit reduced during downturns, making alternative sources for finance critical (OECD, 2012[127]). The enrolment option on the PDEx offers the option of a simplified listing process for issuance directed towards professional investors only. Enrolling bonds avoids SEC registration, requires a simpler offer memorandum (instead of a full prospectus) and less burdensome disclosures that are largely determined by investors. As of July 2024, 3.5% of the securities admitted to the PDEx were enrolled rather than listed.
In order to expand the available financing options for smaller companies, many countries have implemented reforms aimed at boosting SME participation in the corporate bond market. One example is the Italian mini‑bond framework, also adopted by a number of European peers. The framework allows unlisted SMEs to issue bonds without a credit rating and allows for a less stringent process compared to larger companies. Issuers may list their bonds on a segment of the exchange reserved for qualified investors. There are also tax advantages associated with the mini-bonds, making them more attractive to both issuers and investors. Mini-bonds have facilitated SMEs’ access to debt, and improved credit conditions in terms of lower interest rates and longer maturities (Croce, Quas and Tenca, 2024[128]).
Note: Corporate bonds are presumed to be listed under the Standard/Regulated Tier of each market, with an assumed maturity of five years. Source: IDX (2020[129]), Amendment to Regulation Number I-B concerning the Listing of Debt Securities, https://www.idx.co.id/media/8680/peraturan_i_b_pencatatan_efek_bersifat_utang.pdf; PDEx (2014[130]), Listing Fee Schedule; Bursa Malaysia (2018[131]), Fees and Charges for the Main Market, https://www.bursamalaysia.com/sites/5bb54be15f36ca0af339077a/assets/5c86103a39fba26bcc467dc0/MainMarketFeesandCharges_1September2018.pdf; (SGX, 2024[132]), Listing Debt Securities, https://www.sgx.com/fixed-income/listing-debt-securities; IMF (2024[133]), International Financial Statistics, https://data.imf.org/regular.aspx?key=61545850.
Another deterrent for issuers is the current tax regime, which is unfavourable compared to peers and may discourage issuance. The documentary stamp tax, at 0.75% of the issued amount, is markedly higher in the Philippines than in peer countries. For investors, the system in the Philippines is also less favourable. At 20%, the tax on interest payment is higher than in Indonesia and Singapore, where rates are between 10-17%. The current withholding tax of 20% for residents and 30% for foreign investors is also higher than peers. In order to claim tax exemptions, investors are required to register a separate account at the depository. While this can simplify the tax process, in most markets brokers use omnibus accounts for their clients to reduce the barriers for investors. However, this requires a more active role of brokers in keeping records of their individual clients. In the Philippines, capital gains are taxed as regular income, with rates ranging from 0-35% for individuals and 30% for corporations, in contrast to Indonesia, Malaysia and Singapore where there is no capital gains tax.
1.5.2. Credit ratings
The reliability of credit ratings is another barrier to the development of the Philippine corporate bond market. The credit assessment is a key investment criterion for bond investors, and credit ratings agencies (CRA) play an important role as providers of independent and competent technical analysis. Lack of reliable assessment makes investors demand a larger risk premium or even unwilling to invest, thereby increasing the cost of financing for firms seeking to raise capital. Corporate bonds in the Philippines are required to have at least one credit rating, with no minimum rating required (OECD, 2024[123]).
There are currently two SEC-accredited CRAs operating domestically, PhilRating and Credit Rating and Investor Services Philippines, Inc. According to market participants, the local CRAs lack reliability, and thus their assessments of creditworthiness are not believed to accurately assess the credit risk of rated instruments. Notably, most bonds are top graded and there is a 20-30 bps spread within the AAA-rated bonds. One of the issues raised is that CRAs do not publish price lists or their reports, nor their methodologies. This makes it difficult for users to access and assess their analyses. Market participants also question their ability to maintain their independence from issuers. No international CRA following international practices has a local footprint. The SEC published in 2014 the Guidelines on the Accreditation, Operations and Reporting of Credit Rating Agencies aiming to increase the quality of CRAs (SEC, 2014[134]). While efforts have also been made to improve the situation by joining the Association of Credit Rating Agencies in Asia, differences in rating scales and processes have in general impeded significant progress (OECD, 2024[123]).
Moreover, acquiring a credit rating may demand a level of technical expertise that many SMEs and companies unfamiliar with market-based financing may lack. Due to high fees relative to the issuance amount, obtaining a credit rating might be unaffordable and obstruct their access to long-term debt securities. To address this, Malaysia has introduced an alternative credit system where SME Corporation of Malaysia provides credit ratings for smaller companies’ issues (OECD, 2024[135]). France has a similar system in place where the Banque de France provides a credit score for a fee based on a system that collects and integrates financial information about individual firms (Banque de France, 2024[136]). Such ratings rely on collecting reliable financial statements, something the corporate registry at the SEC may struggle to provide given its limited resources (ACGA, 2023[2]).
1.5.3. Government bond yield curve and corporate bond liquidity
A deep and liquid government bond market is a prerequisite for a well-functioning corporate bond market. Government bonds are considered risk-free instruments whose central function is to provide a benchmark for pricing other risky securities, including corporate bonds. Ideally, a stable yield curve based on government bonds of different maturities in the financial markets ensures reliable pricing of instruments such as corporate bonds. In the Philippines, the government has worked extensively to create a reliable yield curve and implemented reforms. These include adding predictability to the issuance calendar, using benchmark issuance, establishing a repo market, moving trading to Bloomberg, introducing market makers and increasing the size of issuance, among others (ADB, 2019[137]; ADB, 2022[138]). Despite these efforts, liquidity remains low for Philippine government bonds in terms of turnover ratio (Figure 1.19, Panel A). Between 2021 and 2023 it hovered around 60%, around half of the peer average. The limited size of Philippine issuance limits these bonds’ attractiveness to foreign investors.
Gaps still need to be addressed in terms of the repo market, the robustness of the dealer network and in aligning issuance with market requirements. The BSP is actively working with market participants to improve the market, for example by working on the adoption of a Global Master Repurchase Agreement of the overnight reverse repurchase facility. Together with the Bankers Association of the Philippines (BAP), the BSP is introducing an enhanced Philippine peso interest rate swap market with 15 banks committing as market makers for one- to six-month swaps against the overnight reference rate. The aim is to establish market‑based two-way quotes as benchmarks for credit pricing. Longer tenors will also be included. Along with the BAP relaunching the interbank repo market last year, the BSP is also working on improving the reverse repo market to enhance liquidity (BSP, 2024[139]).
Lack of liquidity in the corporate bond market is also a barrier to the development of this source of financing in the Philippines. An illiquid market affects valuation and trading; therefore, investors require a liquidity risk premium. Corporate bond markets are inherently less liquid than stock markets and this is intensified by the fact that Asia is dominated by buy-and-hold strategy investors (AsianBondsOnline, 2024[140]). Bid‑ask spreads are the highest in the region (Figure 1.19, Panel B). Market participants attribute high spreads to low activity on the PDEx, mainly due to a limited number of counterparties. In response, the BSP has allowed PDEx dealing participants to be exempt from the Single Borrower Limit to facilitate market making (PDEx, 2020[141]). This rule normally caps the exposure of an institution to a single debtor. Nonetheless, despite this policy, there is a lack of counterparties, and currently not enough reliable market‑makers stepping in to provide two-way quotes and building inventory.
Note: In Panel A the peer average is computed as the average of the annual government bond turnover ratio of Indonesia, Malaysia, Singapore, Thailand and Viet Nam. In Panel B “Region” refers to the average of the values for the seven jurisdictions in the figure.
Source: AsianBondsOnline (2024[142]), Data Portal, https://asianbondsonline.adb.org/data-portal/.
1.5.4. Public-Private Partnerships bonds
Corporate bond markets can also be expanded by leveraging the use of Public-Private Partnerships (PPP). Delivering on the objectives of the Philippine Development Plan 2023-2028 requires substantial infrastructure investments and corporate bond markets could provide financing for PPPs. The passing of the PPP Code in 2024 highlights the intent of the government to engage the private sector. While PPP bonds are not new to the Philippine market, PPP financing is dominated by bank loans (PPP Center, 2023[143]; PPP Center, 2015[144]). However, there are limitations in tenors offered by banks at the upper end of the maturity range, limiting the flexibility of financing options for PPPs.
The new PPP Code supports a range of guarantees and credit enhancements that can increase the use of PPP bonds (NEDA, 2024[145]). Latin America provides several examples of solid PPP bond participation of both foreign and domestic investors by using effective mechanisms to allay risks. Peru has successfully employed government-backed payment certificates, subject to pre-defined completion of project milestones. This has insured cash flows in the eyes of investors while avoiding higher sovereign debt levels. In Chile, government-guaranteed revenue floors and caps have also been used to great effect. Other mechanisms in Latin America include development bank and export credit agency guarantees, and composite bank/bond financing structures where bond financing refinances a bank loan once the project is complete (Crédit Agricole, 2021[146]).
1.5.5. Recommendations
To facilitate market-based financing via corporate bonds, the Philippine authorities could consider:
Conducting a review of the listing and registration process to ensure it is tailored to bond issuance and is competitive in terms of speed of issuance.
Improving the shelf-registration process for serial issuers by allowing filing and registration without immediate issuance.
Designing a framework directed at enabling SMEs and other unserved firms to access corporate bond financing.
Implementing stricter transparency rules on local CRAs, providing alternative credit risk assessment options and incentivising international CRAs to establish a local footprint.
Promoting the use of corporate bonds for PPP financing of infrastructure projects.
The corporate bond market in the Philippines is underdeveloped and has not expanded in line with general credit growth. While the banking sector has a structural advantage, its penetration remains low compared to peers, leaving many firms without access to bank loans. Moreover, those companies relying on bank financing are more exposed since banks tend to restrict credit during economic downturns. Furthermore, a lack of debt securities with different risk-return characteristics denies long-term investors potential opportunities that match both their investment horizon and risk profiles. A deepening and expansion of long-term financing through corporate bonds should therefore be a desirable objective for the authorities. A number of policy measures can be put in place to this end.
A comparison of the listing process suggests that registration and issuance issues are part of the reason corporate bonds might not always be an attractive source of financing. For listed companies, many required documents required should already be available at the SEC, suggesting a simplified procedure could be developed. A separate SEC registration form for debt securities should be developed. In such a form, prospectus disclosure on corporate governance and business description could be revised, allowing it to focus more clearly on covenant compliance and interest coverage. Disclosure of material risks could be facilitated with clearer guidance. A drastic reduction of the timeline is needed to ensure issuers can reliably time their issuance. Relatedly, the shelf-registration process should be reviewed to make sure it adheres to international best practices by allowing filing and registration without immediate issuance. Moreover, authorities could also continue to simplify serial issuance by minimising the need for additional documentation. Ensuring that the SEC is adequately resourced is also essential to prevent delays and support a more efficient issuance timeline.
To extend market-based debt financing beyond the very largest companies and further diversify investment opportunities, authorities should consider introducing a framework directed at enabling SMEs and other unserved firms to access the market. An interesting example is Italy’s mini-bond framework, which uses a simplified process, reduced requirements and tax incentives to expand market-based debt financing to smaller companies. This approach has also provided qualified investors with a broader range of securities. Adopting a similar framework could generate more interest in the current enrolment option.
The challenge posed by the lack of reliable local CRAs implies that an overhaul of agencies’ ways‑of‑working and transparency are needed. Stricter CRA regulations should be implemented, focusing on their transparency regarding methodology, default rates of their credit categories and pricing. Authorities could also incentivise established international CRAs to establish a local footprint. Moreover, an assessment could be made of whether any authority has the capacity, competence and data needed to provide ratings, similar to systems in Malaysia or France. Resources might be needed, either at the SEC or at a new separated corporate registry, to ensure data the quality in company disclosures to perform such ratings.
To expand the corporate bond market and simultaneously boost the capital directed towards infrastructure development, the government could consider financing these investments via long-term corporate bonds. These PPP bonds could be issued by a private sector company, or an entity created specifically for the purpose of executing the project. This would broaden the types of corporate bonds available in the Philippine market, while providing attractive investments for institutional investors with long-term liabilities. Authorities could consider implementing similar mechanisms to those having been successfully employed in Latin America. These have proven to be attractive to institutional investors, while avoiding incurring greater sovereign indebtedness.
Finally, taxes are higher compared to some peer countries and may be a deterrent to issuance. The fiscal implications of adjustments to make this market more competitive by adjusting taxes could be assessed. For foreign investors, the process for seeking withholding tax exemptions is onerous and the process could be revised.
Households and institutional investors – such as pension funds, investment funds and insurance corporations – play a core part in supplying the capital needed to spur economic growth. For households, investing savings in the capital market provides an opportunity to take part in the expansion of the economy, to build wealth and improve future living standards. Traditional institutional investors like pension funds and insurance corporations are particularly important due to the scale on which they direct contributions and premiums into productive assets and the longer-term nature of their liabilities. Likewise, investment funds channel wealth and savings into productive assets that support a dynamic business sector and entrepreneurial risk-taking. Expanding the investor base and providing institutions and households with opportunities to invest their capital is therefore an important lever of inclusive economic growth.
1.6.1. Increasing the role of institutional investors
As already mentioned, the banking sector plays an outsized role in the Philippines relative to institutional investors. In 2022, institutional investors’ assets represented just over 18% of banking sector assets (Figure 1.20). Of these, pension funds were the largest with PHP 2.3 trillion (~USD 42 billion) in assets, followed by insurance corporations with total assets of PHP 1.9 trillion (~USD 34.9 billion). Assets of the banking sector have expanded by 27 percentage points as a share of GDP since 2012, while institutional investors’ assets have grown by 1.2 percentage points, with pension fund growing in line with GDP and insurance firms slightly faster.
Note: Amounts in the figure refers to total assets. Values have been adjusted by CPI and are expressed in 2023 PHP.
Source: GCG (2014[147]), 2013 Annual report of GOCC sector, https://gcg.gov.ph/files/QretpcpIww9VWxaFNEWB.pdf; GCG (2023[60]) 2022 GCG Annual Report, https://gcg.gov.ph/files/KMvhiF0hwOysqPcrHGG3.pdf; BSP (2023[148]), BSP Annual Report Volume II- Statistical Bulletin–2022, https://www.bsp.gov.ph/Pages/MediaAndResearch/PublicationsAndReports/AnnualReportVolumeIIStatisticalBulletin.aspx; IMF (2024[40]) World Economic Outlook Database, https://www.imf.org/en/Publications/WEO/weo-database/2024/April.
Globally, institutional investors are the largest investors in equity markets, owning 45% of market capitalisation in 2023 (Figure 1.21). This share is much lower in Asia at 18%, and even lower in ASEAN economies at 10%. In the Philippines, the share is only 7%, the lowest among ASEAN peer countries. Institutional investors in the Philippines are predominantly foreign, further underscoring the small size and underdevelopment of the domestic institutional investor base.
Note: Values refer to the amount owned by institutional investor as a share of market capitalisation in each market.
Source: OECD Capital Market Series dataset, FactSet, LSEG, Bloomberg; see Annex for details
1.6.2. Pension funds
Pension funds play an important role in capital markets in many countries. They underpin a sustainable public pension system by accumulating assets to finance future payouts. Their long-term investment horizon allows pension funds to finance investments that contribute to future economic growth. Capital market securities are usually a core part of their portfolios. Nonetheless, the amount of investable pension assets not only depends on the level of economic development of a country but also crucially on the design of the system. Pension assets range from a very small share of GDP in Greece to almost 200% in Denmark. In some countries the pension system is funded based on accumulating and investing contributions over time, and in others it is a pay-as-you-go (PAYG) system where pensions benefits are financed by contributions from current workers. Funded entitlements not only build up capital that can be invested productively but can also reduce the fiscal burden on the state.
The pension system in the Philippines is mainly a PAYG system, based on the mandatory Social Security System (SSS) for private sector workers and the Government Service Insurance System (GSIS) for public sector workers. Since 2022 there are also funded parts in the form of the recently rebranded MySSS Pension Booster, with a mandatory part for earnings above a certain level, as well as a voluntary part. Due to the limited share of funded components, total pension assets in the Philippines represented only 10.6% of GDP at the end of 2023. SSS total assets amounted to PHP 889 billion (~USD 15 billion) or 3.7% of GDP (Figure 1.22). This includes the reserves for the main defined benefit pensions and the MySSS Pension Booster funds. As of November 2023, the mandatory and voluntary MySSS Pension Booster funds had accumulated PHP 77.7 billion (~USD 1.3 billion), or 0.3% of GDP. The recent introduction of these funded SSS parts explains the relatively low asset accumulation. Regarding the GSIS, at the end of 2023, the assets amounted to PHP 1 699 billion (~USD 29 billion), or 7.0% of GDP. SSS and GSIS assets as a share of GDP have increased by 0.5 and 0.4 percentage point respectively in the period 2013-23. Compared to other countries with public reserves set aside to help financing future pension obligations from PAYG pension schemes, reserves in the Philippines are limited, as are asset-backed pension plans.
Source: Annual reports and Philippine Statistics Authority for GDP (Panel A); OECD (2023[149]), Pension Markets in Focus, https://www.oecd.org/pensions/pensionmarketsinfocus.htm; SSS; GSIS; and Social Security Office for Thailand (Panel B).
Apart from the SSS and the GSIS, there is also the employer retirement pay that some workers in the private sector are eligible for, which is paid by the last employer in a lump sum proportional to the years of service with that employer. There is no requirement to pre-fund these obligations, accrued benefits are not portable, and workers need five years of service to be eligible.
Apart from the low level of funding, these schemes suffer from low participation rates. The GSIS had two million active members as of March 2024, representing roughly half of government workers. Out of a 48 million labour force, the SSS had 42 million members at the end of 2023 (88%), but only 13 million (31% of the economically active population) were paying contributions in January 2024. The mandatory MySSS Pension Booster (previously WISP) had six million members at the end of 2023.
Attempts to build funded voluntary schemes have met with varying degrees of success. These include the Personal Equity and Retirement Account (PERA), open since 2016 to any person of legal age with a tax identification number, the aforementioned voluntary MySSS Pension Booster, open since 2022 to SSS members, and individual corporate pension schemes. The PERA allows a yearly 5% tax credit on contributions up to PHP 200 000, thus implying a tax reduction of PHP 10 000 (~USD 170). Overseas Filipinos can contribute double this amount as they are less likely to be able to use the tax credit. PERA adoption has so far been slow, with 5 774 contributors at the end of September 2024. The voluntary MySSS Pension Booster scheme seems more successful with 30 536 enrolled members at the end of 2023, despite these contributions not being tax deductible. While these schemes are new and thus very limited in terms of asset size, successful rollout and participation could imply a large difference in investable assets and future funding of pension benefits. OECD consultations with market participants suggest that the fact that the only available PERA-licensed administrators currently are UITF managers limits the appeal and available investments. Moreover, the modest size of the tax credits might not be a sufficient incentive relative to the time and effort needed to set up the PERA. In September 2024, the SEC issued Memorandum Circular No. 14 widening the types of entities that may register as PERA administrators, such as securities brokers, investment houses, investment company advisers, fund managers and others the SEC deems to have the necessary qualifications.
Regarding investment by pension funds, investment in equities and corporate bonds is relatively modest for the SSS and the GSIS (Figure 1.23). At the end of 2022, investment in equities represented less than 20% of total assets and investment in corporate bonds less than 10% for both institutions. A notable difference is the large share of government securities in the SSS (45%) relative to the GSIS (27%). SSS and GSIS asset allocations differ from those of public pension reserves in other countries due to their relatively large investment in loans (Figure 1.24).
Note: Data refer to end-September 2022 for the SSS and end-December 2022 for the GSIS.
Source: SSS and GSIS Annual reports.
Note: CIS means Collective Investment Scheme.
Source: OECD (2023[149]), Pension Markets in Focus, https://www.oecd.org/pensions/pensionmarketsinfocus.htm; SSS; GSIS; and Social Security Office for Thailand.
Investment rules for the SSS and the GSIS could allow a larger share to be directed towards private capital markets (Table 1.8). The SSS funds must invest 15% of assets in government securities. The GSIS must invest 40% in direct housing loans to members and group housing projects and the remainder can potentially be invested in government securities. Given the substantial share of assets the GSIS is supposed to direct to these loans, domestic corporate bonds can only make up 6% of assets, and equities 24%. Moreover, there is a limited allocation to mutual funds and thus hardly any indirect investment. For the SSS, investment options are more open but with lower limits for equities and corporate bonds for the MySSS Pension Booster funds, potentially explained by the priority to preserve capital for these two funds which are invested collectively by the SSS. Notably, the asset allocation (Figure 1.23) is markedly more conservative for the SSS relative to the investment limits and relative to the GSIS. More flexibility in permissible long-term investments for the SSS could also help to increase its options in matching its longer-term liabilities (ADB, 2022[150]). A more detailed list of the investment limits for the SSS and the GSIS can be found in the Annex.
Additional restrictions affect the investment landscape of the pension system. According to the Social Security Act of 2018, investments in corporate bonds must finance domestic projects. The issuer is required to have an investment grade rating, have no history of default and maintain an interest coverage ratio of 1.25 during 3 out of 5 years preceding the investment. For investments in equities and foreign assets, the issuer should have a proven track record of profitability over the last three years and payment of dividends at least once over the same period. For the GSIS, investment in domestic equities can only be made in companies with a market capitalisation of at least PHP 15 billion (~USD 260 million), and operating profitability for the last 3 years. Regarding initial public offerings, the issuing company must have an initial market capitalisation of no less than PHP 10 billion (~USD 170 million), a track record of profitability for the last 3 years, and the public offer should be at least PHP 1 billion (~USD 17 million). Moreover, GSIS transactions are subject to audits, especially when securities are sold at a loss. While institutional investors are limited in size, this safeguard reduces the incentives to trade for one of the major capital market actors. This can both negatively affect pension beneficiaries and remove an important trading counterparty causing them to provide limited liquidity to capital markets.
Source: Social Security Act of 2018, Revised guidelines on the implementation of the mandatory provident fund programme for SSS members, and Revised guidelines on the implementation of the new voluntary provident fund programme for SSS members; GSIS Investment Policy Guidelines.
While current rules are designed to create a level of investment conservatism that prevent excessive risk‑taking, they might limit potential returns and payouts for future beneficiaries.
Transforming the retirement system into a funded defined contribution system would increase the level of assets earmarked for retirement and could also drive the development of capital markets by developing a domestic investor base. Moreover, the current system lacks portability when workers change employer. Therefore, the retirement pay is fully paid by the last employer and calculated based on the number of years of service with that employer only. The Capital Markets Development Act of 2021 proposed the introduction of a new mandatory, fully funded and portable occupational pension system to address the weaknesses of the current system. Approval of this bill would improve employees’ expected retirement income and expand the role of institutional investors in the capital markets. The bill is still awaiting the Senate’s approval.
1.6.3. Investment funds
Investment funds have experienced significant growth since the global financial crisis, increasing from USD 24.7 trillion in 2009 to USD 74.8 trillion in 2022 (FSB, 2023[151]). In the United States and Canada, financial assets held by investment funds have surpassed these countries’ GDP, while in Japan and Korea, they represent around 40% of GDP (OECD, 2020[152]). In the Philippines, investment funds’ growth has been limited, as showcased by the low level of assets under management (AUM) by mutual funds relative to peer countries (Figure 1.25).
In the Philippines, investment funds are categorised as collective investment schemes (CIS). These schemes mainly include mutual funds, unit investment trust funds (UITFs) and variable universal life insurance (VUL). This section will focus specifically on mutual funds and UITFs, in line with the usual definition and scope of investment funds.
A peculiar feature of the Philippine CIS landscape is that mutual funds are regulated by the SEC, and UITFs by the BSP (Table 1.9). Despite both investment schemes offering similar products and investment options, each regulatory body sets its own requirements and frameworks, leading to different regulatory and tax treatments. This fragmented environment is reflected in the different legislation governing each type of investment scheme. Mutual funds are regulated under the Investment Company Act and the Securities Regulation Code, which cover registration, operation and reporting requirements. Meanwhile, UITFs are regulated under the Manual of Regulations for Banks (MORB), particularly Section 414, which governs their establishment, administration and operation.
Note: According to the Global Financial Development Database, a mutual fund is a managed collective investment scheme that pools money from multiple investors to purchase securities. In the Philippines, this can also include mutual funds issuing units of participation.
Source: World Bank (2022[153]), Global Financial Development Database, https://www.worldbank.org/en/publication/gfdr/data/global-financial-development-database.
Mutual funds and UITFs differ in key aspects, such as their structure, management, distribution and fees (Table 1.9). Mutual funds are required to be structured as corporations while UITFs are structured as trust funds. When investing in mutual funds investors acquire shares or units of participation in a mutual fund corporation, while investing in UITFs involves purchasing units of the trust. Moreover, mutual funds are managed by investment company advisors and distributed through mutual fund distributors, while UITFs are managed and distributed mainly by trust departments of banks and trust corporations. With respect to fees, mutual funds typically charge investors an upfront sales load (purchasing fee) when shares are bought, or a redemption fee referred to as a back-end sales load, while the annual management fee is deducted from the mutual fund assets. Meanwhile, UITFs only charge a management fee, also known as a trustee fee. Despite these differences, the investment options offered by these two funds are similar and include mainly money market funds, bond funds, equity funds and balanced funds.
This contrasts with the practice in many other countries, where both these investment vehicles fall under the same regulatory framework. In Singapore, for example, all investment fund activities are regulated under the Securities and Futures Act and the Monetary Authority of Singapore is the sole regulator (Singapore Funds, 2024[154]). There are a variety of fund structures to suit different fund strategies and considerations. In particular, mutual funds can be structured as either unit trusts or variable capital companies, allowing a high degree of flexibility (Singapore Funds, 2024[155]). In Malaysia, the primary law regulating investment funds is the Capital Markets and Services Act, and Bursa Malaysia is the sole regulator responsible for overseeing fund activities (Law Office Malaysia, 2024[156]).
The development of UITFs in the Philippines has significantly outpaced that of mutual funds. By the end of 2023, there were 257 UITFs with a combined AUM of USD 15.2 billion. This figure is nearly four times the AUM of mutual funds, which stands at USD 4.2 billion. (PIFA, 2024[157]). There is also a significant difference between the investment profile of mutual funds and unit investment trust funds. Money market funds (MMFs) represent 60% of total UITFS assets. These MMFs invest mainly in short-term government securities, deposits and other highly liquid instruments with a portfolio duration of one year or less. In contrast, only 29% of mutual funds’ assets correspond to money market funds. Instead, mutual funds have a riskier investment profile. Specifically, bond and equity funds account for 64% of total AUM in mutual funds, compared to 37% for UITFs.
Source: PSE Academy (2024[158]), Mutual funds and UITFs, https://www.pseacademy.com.ph/reading_materials/mutual-funds-and-uitfs/.
Several factors have contributed to the lack of dynamism of mutual funds in the Philippines. A significant barrier is the requirement for mutual funds to incorporate and register with the SEC under the Investment Company Act (SEC, 2019[159]). Unlike trusts, which follow a single authorisation process, mutual funds typically need to undergo a two-stage process: first obtaining approval for the company to be incorporated, and then gaining approval to operate as a fund. Additionally, this process involves the election of a board, which can extend the setup duration to approximately one year, as indicated by market participants. In contrast, setting up a trust can be done in three months. Another factor reducing the attractiveness of mutual funds is stringent regulatory requirements, including mandatory regular financial disclosures and a minimum 10% liquidity requirement for assets (SEC, 2019[159]). Although recent regulatory changes allow for deviations, a contingency plan should still be established. In contrast, most ASEAN countries do not mandate minimum investment in liquid assets but require mutual funds to maintain sufficient liquidity to meet redemption requests.
Source: BSP (2024[113]), 2023 BSP Annual Report, https://www.bsp.gov.ph/Media_And_Research/Annual%20Report/AnnRep_2023.pdf; PIFA
(2023[160]), PIFA Statistical Report, https://pifa.com.ph/facts-figures/downloadables/.
The differences between the two investment schemes also relate to taxes. Since mutual funds are investment companies primarily engaged in investing, reinvesting and trading in securities, they are subject to gross receipts tax from the income derived from the sale of securities and other income sources. UITFs, on other hand, are product offerings of trust entities, and thus are not subject to the gross receipts tax. Nonetheless, like mutual funds, they are subject to final withholding tax for the income earned, such as on interest and dividends. Moreover, the income of the trust entity generated from trust fees (including fees on UITFs) are likewise subject to the business tax. Moreover, there are also differences in the level of stamp duty taxes. As investing in a mutual fund is considered as purchasing an equity share, the investor is subject to a documentary stamp duty equivalent to 1% of the nominal value. In the case of UITFs a stamp duty of PHP 30 is levied on the issuance of a certificate which represents ownership or participation in the UITF (National Tax Research Center, 2018[161]).
In the Philippines, the funds are required to pay taxes on the income from investments, rather than investors themselves — a practice that differs from many other countries. Under this system, all investment income, including interest income, dividends and capital gains, are taxed at the fund level rather than at the investor level. This practice has both advantages and disadvantages. On the positive side, taxing investment income at the fund level simplifies tax obligations for investors as they do not need to report or pay taxes on these incomes individually. This can reduce administrative burden and complexity for individual investors. On the other hand, taxes at the fund level may also make funds less attractive to certain investors, as they reduce the overall return on the investment. In contrast, if taxes are deferred and applied at a later stage, investors have more flexibility to plan their tax strategies according to their personal financial situations. In some cases, taxing income at the fund level might influence fund portfolio managers to take decisions based on tax considerations rather than on maximising return on investments.
In 2022, the Collective Investment Scheme Law (House Bill No.642) was presented to Congress with a proposal to create a harmonised regulatory and taxation framework for collective investment schemes. The objective of this bill is to streamline regulations and provide a unified framework that will improve investor protection and simplify compliance for fund managers. It also aims to enhance co-operation and co-ordination among the SEC, BSP and the Insurance Commission to guarantee consistent regulatory enforcement across different types of CIS, including UITF, mutual fund and variable universal life insurance policies. However, as of June 2024, the bill is still under discussion.
Note: Tax on non-bank financial intermediaries refers to the intermediaries that performs quasi-banking functions.
Source: National Internal Revenue Code.
The Passive Income and Financial Intermediary Taxation Act (PIFTA) was approved by the House in 2022. It proposes to make taxes equitable across investor types and discourage arbitrage opportunities. The bill includes several reforms, such as coherence in the application of the stamp duty tax across different investment regimes, a single rate of 15% on interest income, dividends and capital gains, and eliminating business tax for all investment vehicles. However, despite having already being approved by the House, it has not been voted in the Senate (Business World, 2024[162]).
1.6.4. Foreign institutional investors
Foreign institutional investors bring capital, expertise and global perspectives to domestic capital markets. By demanding higher levels of transparency, accountability and corporate governance from the companies they invest in, they play an important role in enhancing the efficiency, stability and growth potential of domestic equity markets. The Philippine stock market has a low participation of foreign institutional investors compared to other ASEAN countries (Figure 1.27, Panel A). Nonetheless, foreign institutional investor ownership surpasses that of domestic institutional investors. This is the case in most industries (Panel B). Foreign investors in the Philippines also account for a significant share of trading in the secondary public equity market. In 2022, 42% of the trading activity was conducted by foreign investors (PSE, 2023[81]).
Source: OECD Capital Market Series dataset, FactSet, LSEG, Bloomberg; see Annex for details.
Apart from the fundamental economic prospects and reliability of the judicial system, the availability of diverse financial instruments and listed companies with high free-float levels are usually core components for attracting foreign investors. However, the capital market in the Philippines fall short in both. There is only one equity ETF in the Philippines, whereas Singapore, Indonesia and Malaysia have 73, 42, and 16 ETFs, respectively (IDX, 2024[163]; Bursa Malaysia, 2024[164]; SGX, 2024[165]). Similarly, in terms of investable indices, Indonesia, Singapore and Malaysia have 43, 41 and 32 equity indices, respectively, while the Philippines has only 10 (SGX, 2024[166]; IDX, 2024[167]; Bursa Malaysia, 2024[168]). The Philippine capital market also lacks a derivative market that would enable investors to hedge their risks.
There are also significant challenges related to the free-float and liquidity in the secondary stock market (see Section 1.4) which hinders its ability to attract foreign investors. Institutional investors prefer investing in large, widely held companies with higher free-float levels, as well as companies with good corporate governance, to ensure funds are not misappropriated. However, the ownership structure of listed companies in the Philippines shows high concentration levels compared to other ASEAN peer countries. In 49% of listed companies the largest shareholder owns more than half of the equity capital, which is well above the average levels in ASEAN (37%) and Asia (22%) (see Chapter 3). Moreover, Philippine companies lag behind their peers in important aspects of corporate governance, including the protection of minority shareholder rights, as highlighted in Section 1.2, making foreign investors hesitant.
Taxes and the related processes can significantly influence the attractiveness of capital markets to foreign investors. In 2024, the Philippines introduced the Ease of Paying Taxes Law with the aim of facilitating tax compliance and modernising the country’s tax administration. Several countries in the ASEAN region apply reduced tax rates for foreign investors (see Chapter 3). For instance, in Viet Nam, foreign corporations are subject to a reduced corporate income tax on the proceeds made in transfers of securities. In Indonesia, non-resident investors are subject to a final withholding tax of 20% on the dividends received from domestic corporations. Indonesia offers a reduced tax rate (10%) for non-residents on interest income from bonds versus the 15% faced by resident investors. These lower rates serve as an incentive for non-resident investors and are used with the objective of expand the investor base. In contrast, in the Philippines, foreign investors are taxed at a rate of 30% for interest income from bonds - 10 percentage points higher than the rate applied to domestic investors.
1.6.5. Providing households with more investment opportunities
Savings perform an important dual role in the economy, both as a buffer against uncertainty and as a source of investment. For households, savings represent a buffer that can protect against income shortfalls and smooth consumption over the life cycle. The domestic savings rate is low in the Philippines relative to peers, at only 14.3% of GDP in 2022 (Figure 1.28, Panel A), compared to 30%-35% of GDP in most peer countries. As low savings rates are associated with low-income levels, part of the explanation is likely to be lagging disposable incomes in the Philippines (Section 2.1). However, even when GDP per capita was higher than, or on par with, some peers (Viet Nam and Indonesia, respectively), the domestic savings rate was lower in the Philippines. A likely complimentary explanation is the demographic structure of the Philippines, with a high youth dependency ratio, which limits households’ ability to save (Panel B). Only 33.5% of all households stated that they had savings in the first quarter of 2024, pointing to a relatively unequal distribution of savings opportunities. Across all income levels the share of households with savings has yet to recover to pre-COVID-19 levels (BSP, 2024[169]).
Note: The youth dependency ratio is the ratio of the youth population (ages 0-14) per 100 people of working age (ages 15-64); and the elderly dependency ratio is the ratio of the elderly population (ages 65+) per 100 people of working age. The dependency ratio is the sum of both.
Source: CIA (2024[170]), Field Listing - Dependency ratios, https://www.cia.gov/the-world-factbook/field/dependency-ratios/; World Bank (2024[112]), Open Data, https://data.worldbank.org/indicator/NY.GDS.TOTL.ZS.
Detailed statistics on the composition of households’ financial assets is not readily available, but according to the 2021 Financial Inclusion Survey of the BSP, the activity of adult Filipinos in the capital markets is limited (Figure 1.29, Panel A). Thirty-six per cent of respondents stated that they were financial investors, up from 25% in the 2019 survey. However, if government pension schemes are excluded, the participation of retail investors declines from 15% in 2019 to 10% in 2021. If the mandatory employment-linked savings of the Home Development Mutual Fund (Pag-IBIG) are also disregarded, retail investment is scarce. Of respondents with investments, only 2% had time deposits, 1% owned stocks and 1% had assets on a PERA account. In 2022, there were around 1 million savers (0.9% of the population) in the voluntary Pag‑IBIG MP2 fund, which invests at least 70% of assets in housing finance and the rest mainly in government securities a nd corporate bonds. The increase in the number of PERA contributors to 5 774 by the end of September 2024, up 5.5% from the previous year, shows a modest growth in adoption rate (BSP, 2024[171]; BSP, 2024[113]). Meanwhile, by the end of 2023 the number of stock market accounts increased to 1.91 million, up by 11.3% from the previous year (PSE, 2024[172]). Income constraints are a major barrier to investment (63%), and so is a lack of financial literacy (11%) and an inability to finding suitable investment products (11%) (Panel B).
Note: Respondents may give several answers in Panel A.
Source: BSP (2021[173]), Financial Inclusion Survey 2021, https://www.bsp.gov.ph/Inclusive%20Finance/Financial%20Inclusion%20Reports%20and%20Publications/2021/2021FISToplineReport.pdf.
The low savings rate is also linked to the limited financial inclusion in the Philippines. Following strong growth in basic accounts targeting unbanked households and a rapid growth of e-money accounts during COVID-19, the BSP estimates household transaction account penetration to be 65%. This includes bank accounts, accounts with non-banks and e-money wallets. For individuals, the latest BSP survey answers from 2021 suggest a bank penetration rate of 56% (BSP, 2021[173]). Furthermore, the last Global Findex survey shows that many Filipinos continue to save money in their home, rather than with an institution (Figure 1.30, Panel A). This suggests a need to broaden and deepen financial inclusion to bring a larger share of savings into the financial system. Apart from a lack of funds, reasons for not having a bank account included that accounts are still regarded as expensive (57%), that providers are geographically inaccessible (41%), that the necessary documentation is lacking (35%) and trust is low (24%) (Panel B).
The growth in the number of stock market accounts from 870 000 in 2017 to 1.91 million in 2023 is mostly the result of the growth in online accounts, their share in the total number of accounts increasing from 45% in 2017 to 80% at the end of 2023 (PSE, 2023[81]). This can be attributed mostly to increased interest in the online platforms of traditional brokerage firms. In the second part of 2023 the e‑wallet provider GCash and the digital bank Maya launched online investment platforms allowing users to invest in the stock market. According to GCash, in April 2024 the number of users of its stock trading platform reached 500 000. This development is underpinned by the 2020 SEC rule that enables simplified onboarding of low-risk investors with maximum investments of PHP 50 000 (~USD 900) (SEC, 2020[174]).
While the national digital ID, Philippine Identification System (PhilSys), presents a great opportunity for introducing retail investors to the capital market, additional efforts are needed. The BSP’s 2023 approval of digital Know-Your-Customer rules, based on a risk-based approach and the national digital PhilSys identification, has streamlined the process to access the stock market. In August 2024 the BSP mandated supervised institutions to accept the digital ID, following the Philippines Statistic Authority’s June 2024 guidance for public and private institutions to do the same (BSP, 2024[177]). As the implementation of these stipulations may take time, some traditional brokers still do not accept PhilSys as identification. Another potential barrier to attracting customers is that some platforms require an initial deposit of up to PHP 10 000 (~USD 180). The minimum purchase amount on the PSE is relatively large, especially for certain share price brackets, which might also deter small investors.
Note: Accounts in Panel A refer to both financial accounts and with mobile money providers. Financial accounts are all types of accounts, including standard bank accounts, held at any financial institution. BDA refers to the Basic Deposit Account of the BSP. MF NGO refers to Microfinance Non-Governmental Organisations.
Source: BSP (2023[175]) Financial Inclusion in the Philippines the Philippines: Dashboard - As of Third Quarter 2023, https://www.bsp.gov.ph/Media_And_Research/Financial%20Inclusion%20Dashboard/2023/FIDashboard_3Q2023.pdf; World Bank (2021[176]) Global Findex Database 2021, https://doi.org/10.48529/jsmy-j747; BSP (2021[173]), Financial Inclusion Survey 2021, https://www.bsp.gov.ph/Inclusive%20Finance/Financial%20Inclusion%20Reports%20and%20Publications/2021/2021FISToplineReport.pdf.
Easy-access digital platforms have shown to be an efficient way of expanding financial inclusion and provide access to investment opportunities in developing countries. The rapid expansion of retail investors in India, from 41 million to 140 million between 2019 and 2023, is largely attributed to the digital infrastructure, such as the digital ID and accessible digital investment platforms. The BSP has been very supportive, launching initiatives such as the Open Finance pilot programme, which shares financial data through an API to enable new digital products. It is also working on a framework for digital marketplaces to give bank customers access to more financial services. Likewise, the SEC issued a memorandum in April 2024 providing for the Strategic Sandbox framework. This allows potential operators of such platforms to innovate and test financial products in a live setting prior to their full launch – even when the specific regulations are absent. Products and regulations can thereby be developed in tandem to ensure flexibility and closer co-operation between the market and the regulator.
The Philippines’ large remittance inflows (see Section 2.1) can also provide an opportunity for increased financial inclusion if some of these flows can be moved to formal channels. Research suggests that an increase in remittance income leads to higher household savings or investment (ADB, 2024[178]). Even though the COVID-19 pandemic moved some remittance transactions online, over-the-counter modes of transfer dominate, with 87% of respondents using pawn shops, money services or agents, compared to 26% using banks or online transfers (BSP, 2021[173]). Initiatives directed towards the remitters, such as the 5‑year tax-free savings account and USD bonds in small denominations, are yet to be widely used.
Improving financial literacy in the Philippines is essential for promoting financial inclusion and expanding investment opportunities. The ability to make sound investment decisions crucially depends on basic financial literacy. In the 2021 BSP Financial Inclusion Survey, only 2% could answer 6 basic financial literacy questions correctly, covering the understanding of concepts such as division, inflation and compound interest (BSP, 2021[173]). A global 2023 OECD study of 45 countries shows that financial literacy in the Philippines is significantly lower than in Malaysia and Thailand but higher than in Indonesia. Interestingly, the Philippines had the highest share of respondents holding crypto assets among all countries surveyed, while it fell below the average for those holding any financial product at all. Compared to both peers and the global average, the Philippines had markedly higher shares of respondents with negative experiences in engaging with the financial sector. These included issues such as investment scams, financial fraud, unrecognised transactions and being denied the opening of a bank account (OECD, 2023[179]).
Research conducted by the CFA Society in the Philippines shows that there is limited awareness of UITFs and mutual funds among the population, especially among younger investors (Gutierrez, 2020[180]). This lack of knowledge often leads to unrealistic expectations of investment performance and a poor understanding of the risks involved. Even current investors in these products often have a limited understanding of their investments. The BSP, SEC and PSE are all pursuing financial literacy initiatives, engaging market participants and other authorities in partnerships to boost engagement. However, more efforts are needed to generate sufficient scale in results.
Closely linked to financial literacy is financial consumer protection, which fosters trust in market participants and provides recourse against dishonest actors. Twenty-four per cent of unbanked Filipinos cite lack of trust as a barrier to opening an account, well above the 7% average in comparable countries (Figure 1.30, Panel D). To address this, the government has stepped up efforts to increase financial consumer protection through the passing of the Financial Consumer Protection Act in 2022. This provides supervisors with tools to protect consumer interests and resolve disputes in line with global standards. This has allowed the BSP to turn the Consumer Protection and Market Conduct Office into a mediator, offering quick resolution of disputes (BSP, 2023[181]).
1.6.6. Recommendations
To deepen the investor base, the Philippine authorities could consider:
Removing the minimum investment floors for SSS and GSIS and relax the pension funds’ restrictions regarding investment in equities and corporate bonds.
Reevaluate trading audits on pension funds.
Promoting PERA more intensively, removing outstanding frictions in onboarding and administration, broadening the types of administrators and potentially increasing incentives.
Approving the Collective Investment Schemes Law to bring uniformity to collective investment schemes and the Passive Income and Financial Intermediary Taxation Act to harmonise the tax structure; in the meantime, implementing a single-step registration process for mutual funds to simplify the regulatory framework and expedite the process to establish new funds.
Introducing a wider range of products on the PSE and increasing the number of ETFs.
Ensuring investors have access to easy onboarding and streamlined digital platforms at low costs with low minimum investments.
Increasing efforts to boost financial literacy, including through the involvement of market participants and co-operating to deliver common messages and launch campaigns aimed at targeted groups, and participating in the PISA financial literacy assessments.
Implementing a private-public initiative to create awareness among citizens of the financial consumer protection system in place to ensure fair and responsible treatment of consumers.
Institutional and retail investors are core elements for dynamic and vibrant capital markets. Their participation ensures that institutional capital and households take part in corporate value creation and build savings and wealth, and it helps to democratise overall economic expansion. To support the development of the investor base, the Philippine authorities could consider implementing the initiatives outlined below.
The Philippine authorities should continue to promote the use of PERA and seek to remove frictions to its widespread adoption. This could be done by increasing the number of administrators, reducing the burden of onboarding faced by new account holders and ensuring that both attractive default options and more tailored investment opportunities are available. Furthermore, authorities could also consider increasing the tax credits available to ensure the incentive is high enough to set up an account and make regular contributions.
Regulators could adjust investment limits to increase expected returns for pension funds and pension reserves. The OECD Core Principles of Private Pension Regulation recommend that regulators do not prescribe a minimum level of investment for any given category of investment and to avoid portfolio limits that prevent adequate diversification. The Philippines could consider removing the investment floors for the SSS (15% in government securities) and the GSIS (40% in loans). Moreover, easing restrictions on credit quality, maturity and share of funds allocated to an asset class or specific investment, as well as investment target size and profitability, could help direct capital to where it is most needed, while ensuring attractive returns. Current post-trade auditing rules for public institutional investors could also be reviewed to ensure these investors are not discouraged from actively trading.
The Philippines does not have a unified framework to deal with various types of collective investment schemes (CIS), unlike other ASEAN countries. The fragmented regulation of CIS has significantly prevented the industry from developing. The proposed CIS Law, once passed, will level the playing field and provide a uniform tax and regulatory framework for all CIS products. It will also establish the legal foundation for other investment products, such as exchange-traded funds (ETFs) and real estate investment trusts (REITs). Authorities should urge the approval of the bill.
The current tax system creates significant disparities between mutual funds and UITFs, potentially leading to tax arbitrage. Although the Passive Income and Financial Intermediary Taxation Act has been passed by the House, its vote in the Senate is still pending. Authorities should encourage the approval of the Act. Once implemented, it will harmonise the tax treatment of equivalent products, reduce arbitrage opportunities and promote the development of investment funds.
In the meantime, it would be beneficial to streamline the mutual fund setup process, which currently takes approximately one year. This prolonged timeline has proven to be a major obstacle, hindering the overall development of the mutual fund industry in the Philippines. Implementing a single-step registration process for mutual funds would be a natural starting point for expediting their establishment.
The presence of listed companies with high free-float levels in public equity markets and the availability of diverse financial instruments could attract more foreign investors. Authorities should focus on increasing the number of listed companies with higher levels of free-float, broadening the range of available investment and hedging products, such as ETFs and derivatives. Additionally, promoting the inclusion of Philippine companies in major investable indices and improving corporate governance standard will also help attract more foreign investors. Measures to improve the attractiveness of capital markets to foreign investors should be considered. This could include aligning taxes with peer countries and simplifying procedures.
To replicate the success of digital investment platforms in other emerging markets, regulators should collaborate with market participants to deliver a streamlined, cost-effective experience for investors. Regulators should remain flexible in addressing technical or procedural challenges to facilitate the efficient establishment of digital investment platforms. Moreover, they should encourage platforms to eliminate the minimum balance requirement for opening accounts. The BSP should ensure that banks accept the digital Philsys ID and authorities should encourage brokers and digital platforms to follow suit, with the aim of streamlining the digital onboarding process. Moreover, the SEC should approve the proposed amendment to reduce the minimum purchase amount, allowing investments starting at PHP 100 (~USD 1.8).
Although many financial literacy programmes have been established, further efforts are needed to increase financial literacy and mobilise existing savings. The authorities should consider building on the National Strategy for Financial Inclusion 2022-2028 to further engage market participants such as banks, digital financial service providers, brokers, investment firms and asset managers through a concerted effort and with common messages. Furthermore, targeted campaigns towards young people for example, could be an effective channel to increase financial literacy and inclusion. The authorities should continue to increase their efforts to raise trust in the financial system, clearly communicating the properties and mechanisms of the financial consumer protection system in place. Finally, the Philippines should join the PISA financial literacy assessments to compare its levels of literacy with other markets and gain valuable insights into how other countries have developed policies and programmes.
The large flows of remittances are mainly employed to finance household consumption, but greater financial inclusion could be achieved by channelling some of these funds through digital or banking platforms, facilitating investment in the capital market.
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← 1. MC No. 8, 2018, which requires shareholders’ approval for any change in the company’s external auditor and mandates that the Audit Committee consist exclusively of board members; MC No. 3, 2020, which establishes a minimum 21-day notice period for regular stockholders’ meetings; MC No. 12, 2020, which mandates shareholders’ approval for the sale of 51% or more of a company's assets in a single or aggregated transaction within one year; MC No. 14, 2020, which grants shareholders the right to propose items for inclusion in the agenda of regular or special meetings; MC No. 7, 2021, which grants shareholders the right to call special stockholders’ meetings; and MC No. 11, 2024, which prescribes the minimum content for meeting minutes and mandates their posting on the company’s website within five business days.
← 2. The minimum commission rate varies between 0.05%-0.25% of the transaction value, with higher commission rates charged for small transactions. The maximum broker’s commission allowed is 1.5% of the traded value.