Espenilla eyes reforms, bond market boost

Nestor Espenilla, the new governor of the Philippines central bank, talks to GlobalMarkets about the country’s infrastructure spending push, the need for a deeper bond market and his long wait for reform

  • By Matthew Thomas
  • 13 Oct 2017
Email a colleague
Request a PDF

Central bank governor Nestor Espenilla walks by the portrait-filled walls to his office at the Bangko Sentral Ng Pilipinas in Manila
On the fifth floor of the Bangko Sentral Ng Pilipinas’ main building in Malate, Manila the past looms large. The walls are covered with portraits of the Philippine central bank’s long line of past governors, from its first governor, Miguel Cuaderno, to Amando Tetangco Jr, the recently retired central bank chief whose 12 years in charge made him the longest serving in the country’s history.

When GlobalMarkets visited the central bank in early September a portrait of the new governor, Nestor Espenilla Jr, had not yet been hung alongside his predecessors. But after more than three decades with the central bank, he could be forgiven for not feeling in a rush.

Espenilla is a career central banker having first joined the bank in 1981. He has served through tumultuous moments for the Philippines from the ousting of former dictator Ferdinand Marcos to the impact of the Asian financial crisis, which the Philippines survived much better than some of its neighbours. His most recent job was a crucial one: supervising the Philippines’ banking system.

But he is now taking on the toughest job of his career.

The Philippines’ economy is in better shape than it has been in years. The country’s 6.9% growth in 2016 made it one of the fastest growing in Asia. The Asian Development Bank thinks the country will grow 6.5% in 2017 and 6.7% in 2018. The careful stewardship of Tetangco, well regarded among international investors, has also helped.

But Nestor Espenilla knows that as others reap the benefits of this growth he needs to be careful to look for potential downsides. He is also painfully aware of how much work is still to be done.


It can be hard for international observers to focus on anything in the Philippines besides Rodrigo Duterte, the country’s unpredictable president.

Duterte’s war on drugs has led to a rash of extrajudicial killings, drawing criticism from human rights groups at home and abroad. His penchant for rude jokes and outlandish threats has ensured he has attracted international attention like no Philippine leader since Corazon Aquino. But the economic story of the Philippines bears examination.

The country’s growth trajectory is undoubtedly eye-catching but perhaps just as noteworthy is how much ‘Dutertenomics’ is making the most of this growth.

Carlos Dominguez, the country’s finance minister, is pushing an ambitious tax reform bill which will help the government invest as much as 7% of GDP in infrastructure over the coming years. Duterte’s promise to “build, build, build” has made the Philippines a shining example to others in a region that suffers from chronic under-investment in infrastructure. The image of the Philippine government as being slow and obsessed with process has changed almost overnight.

Espenilla speaks with determination about the need for these changes.

“For a long time we have been lagging in infrastructure investment and that’s very evident today,” says Espenilla. “The current administration is determined to catch up… It’s necessary to promote our competitiveness and the efficiency of the economy as a whole.”

Espenilla says the central bank will add between 0.4% and 0.6% to its inflation projections for 2018, presuming the tax reform bill is passed (it is still being debated in the Senate). But by 2019, the impact should go down to 0.1%. 

That is a small worry for a country that is benefitting from quite low inflation. It was just 1.8% last year, and although the ADB thinks it will be much higher in 2017, it still projects just 3.2% inflation followed by 3.5% in 2018.

Espenilla is, of course, only working off early assessments but he points to the tax reform bill as evidence the government is being fiscally responsible at the same time as making a commitment to boost infrastructure spending. That should reduce headaches for the monetary policy board in the coming years.

“The positive signal the tax reform bill will send will potentially further dampen the impact,” he says. “If it’s going to lead to more productivity over the medium term as well as a more positive view by creditors, it will lower the credit risk assessment of the country in general … It’s very crucial.”

One notable change for the Philippines is in its balance of trade. The Philippines swung into a small current deficit earlier this year, the first time it has done so since 2002, according to Moody’s. Espenilla expects the country to stay in a deficit for the foreseeable future but thinks it will be no higher than 1% of GDP. 

It is hardly surprising that Espenilla strikes a positive note about infrastructure investment in the Philippines, something international observers agree is desperately needed. But he is realistic enough to know the government will not be able to go it alone.

For that reason, he is helping lead a push to develop the country’s embryonic domestic bond market.


Espenilla has a number of priorities including the reform of the Philippines’ electronic payments system, an area where he has already made considerable headway. But he tells GlobalMarkets at length about just how important it is for bonds to play a much bigger financing role in his country.

The Philippines has a tiny bond market even by Asia’s standards, with just $19bn of corporate bonds outstanding by the end of the second quarter of 2017, according to the ADB’s Asian Bond Monitor report. The government had another $83bn outstanding but even that combined figure is less

than just corporate issuance elsewhere. Malaysia, by comparison, had $134bn of corporate bonds outstanding, with $156bn more from the government.

“It’s largely a public sector debt market [in the Philippines] and even in that regard it is still shallow in places and very fragmented in terms of the maturity structure,” says Espenilla. “There are significant areas that can be improved.”

A major hurdle is the sheer wall of liquidity provided by the country’s banks, which compete hard to provide loans to the Philippines’ sprawling conglomerates. That leaves little room for bonds to develop at the short end of the curve. But Espenilla says the inability of these banks to provide long tenor loans in any real size means the Philippines has little choice but to deepen its bond market.

“The end game is to create a healthy capital market system that can lead to well-discovered prices in the long end,” he says. “This is where our insurance companies can come in and invest. They are natural buy-and-hold investors.”

This is a sensible step. The government plans to spend between $160bn and $170bn on infrastructure between now and 2020, Espenilla says. Multilateral institutions including the Asian Infrastructure Investment Bank can add to that. Public-private partnerships will also help.

But much of the shortfall will need to be made up by pure private sector investment. A vibrant long term bond market is all but crucial to make that happen. As a result, the BSP has teamed up with the Securities and Exchange Commission and the Bureau of Treasury to try to make real change happen.

The Treasury promised to increase its peso bond issuance as well as work to develop the repo market in the country — ostensibly the major change under discussion. The SEC will launch new financial benchmarks and approve a self-regulatory body for repo. Espenilla will do his bit by cutting reserve requirements for repo transactions, removing a cost hurdle that could scupper growth.

Espenilla says a roadmap for the development of the bond market will be launched imminently and after that it will take 18 months before a much deeper bond market is developed. That is an ambitious and speedy target but Espenilla is unlikely to give up if the plan does not work as quickly as he hoped.

He has already demonstrated admirable patience over the course of his career.


The first time this correspondent spoke to Espenilla was in August 2015 when the central bank was pushing the country’s politicians to approve a rewriting of the BSP’s Charter that would have raised its capital, bolstered its supervisory powers and better protected its employees from expensive law suits.

Espenilla spoke carefully at the time, choosing his words deliberately and precisely — and with no shortage of caveats. This personal style has not changed but what is remarkable is that nor have many of the things he is forced to talk about. More than two years later, he is still waiting for politicians to approve reforms at the central bank.

SB 1297, the umpteenth version of a bill detailing changes to the BSP’s charter, has been stuck in the political mud since being filed in the Senate this January. In July, Senate majority leader Vicente Sotto said the bill was not a priority, according to local press reports.

Espenilla admits that the tax reform bill is a higher priority for the government but he clearly hopes SB 1297 will not be forgotten amid the hubbub about tax reform.

“The BSP Charter amendment is still a high priority but it has to take its position in the overall scheme of things,” he says. “Passing the BSP Charter amendment is the optimal outcome but not withstanding that, even in its current form the BSP is able to function quite effectively. Nonetheless, we have not relented on our advocacy for getting that done.”  

From bond markets to regulation to financial technology, this a central bank governor committed to change. His long list of goals makes him appear a man with little time to spare. But as GlobalMarkets left his office on a sunny September day, we hoped he would get a brief moment to slow down soon.

After all, he has a portrait to sit for.

  • By Matthew Thomas
  • 13 Oct 2017

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 192,079.22 851 8.17%
2 Citi 181,567.62 744 7.72%
3 Bank of America Merrill Lynch 152,466.12 623 6.48%
4 Barclays 142,653.63 569 6.06%
5 HSBC 120,106.34 625 5.11%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Credit Agricole CIB 21,924.17 77 8.18%
2 BNP Paribas 19,758.95 84 7.38%
3 Bank of America Merrill Lynch 17,614.25 49 6.58%
4 Deutsche Bank 12,953.29 48 4.84%
5 UniCredit 12,369.61 66 4.62%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Morgan Stanley 6,404.49 28 10.34%
2 JPMorgan 5,770.67 35 9.31%
3 Goldman Sachs 5,595.50 27 9.03%
4 UBS 4,134.32 20 6.67%
5 Citi 4,045.71 28 6.53%