Philippines looks to bond market to meet infrastructure demand

The government of the Philippines is planning to increase the proportion of bond funding the country requires to meet a growing need for infrastructure funding, according to finance secretary Cesar Purisima.

However he acknowledged that the domestic bond market would not be able to meet the needs alone and said it highlighted the need for a regional bond market.

“The reserves of our central bank are at an all-time high, around $80 billion, the challenge is how we tap that pool of capital to meet our infrastructure requirements,” he said.

“All ASEAN countries need to deepen their bond markets, as individually we aren’t big enough, so we’ve been discussing how we can integrate our bond markets.”

Purisima said the government was working with the World Bank and its private sector arm, the International Finance Corporation, to create instruments that matched funds to infrastructure requirements as well as tapping private infrastructure funds.

“There will be an announcement from the government’s insurance service relating to a deal struck with a financial entity and the ADB to launch the first ever Philippines focused infrastructure fund.”

Pin Ru Tan, associate director Asia-Pacific rates strategy at HSBC in Hong Kong, said the Philippines government had a number of options to deepen the market. “Ensuring good secondary market liquidity is crucial and this can be done by encouraging further issuance. As a proportion of GDP, Philippines’ bond market is about 40%. This is smaller than its neighbours like Thailand which has it at 70% and Malaysia at 120% of GDP.”

Tan said encouraging more foreign participation would also help while offshore ownership of local bonds in Philippines was low relative to the rest of the region.

According to the ADB, the local currency bond market in East Asia expanded 7% in 2011 to reach $5.7 trillion driven by double digit growth in the regional corporate bond market.

Purisima said that sustaining a regional bond market would require harmonization in the regulatory and disclosure process. “We need to set rules in place that help create an ASEAN class of financial instruments, and if we are successful it would also help all of our corporations to get access not just to bank funding but also to bond funding.”

The Philippines is also seeking to reinvigorate its public private partnership policy (PPP) that was previously dogged by delays and slow implementation. “We are in the process of rebuilding trust of the population in the whole PPP concept. In the past we have had a chequered record and it’s our administration’s belief that we need to win back confidence in the whole process. It’s vital for infrastructure investment and financing in Asia that everyone – governments, the public, banks, investors – gains confidence in the process.”

This week several local banks in Manila said they were seeking to establish a $1 billion PPP fund to assist the development of the government’s plan. Nevertheless institutional sentiment remains cautious.

“Due to its fragile fiscal position, the government has tried to set up public-private partnerships (PPP) to fund new infrastructure projects. However, progress has been pitifully slow,” said Gareth Leather, an economist with Capital Economics in London.