Electronic copy available at: http://ssrn.com/abstract=1233187 Electronic copy available at: http://ssrn.com/abstract=1233187 0 INVESTMENT BANKING INDUSTRY STUDY IN THE PHILIPPINES B ASANT V ENUGOPAL Washington SyCip Graduate School of Business Asian Institute of Management Manila, Philippines. [email protected][email protected]
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Electronic copy available at: http://ssrn.com/abstract=1233187Electronic copy available at: http://ssrn.com/abstract=1233187
Electronic copy available at: http://ssrn.com/abstract=1233187Electronic copy available at: http://ssrn.com/abstract=1233187
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A B S T R A C T
The Philippines is dominated by large business conglomerates whose success has been largely
attributed to an underlying assumption that these business families had a financial institution
as the backbone for all their diverse business holdings. The lucrative nature of providing
financial services has been looked into with a view to understand whether the fundamental
assumption is correct. The study has focused especially on the investment banking services of
the Philippines to understand current trends, competitive structure and the government
support for such services. The study is a working paper that does not conclude on whether
there are enough factors to attribute the success of business conglomerates but rather is an
industry study on investment banking services and whether the environment is conducive for
other players to enter the Philippines investment banking sector.
Keywords: Philippines, Investment Banking, Performance, Current trends, Success factors.
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TABLE OF CONTENTS
C O U N T R Y A N A L Y S I S ( U S I N G S T E E P F R A M E W O R K ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
P O L I T I C A L F A C T O R S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 D O M E S T I C I S S U E S ..............................................................................................................................................4 P O L I C Y T R E N D S ..................................................................................................................................................4 G L O B A L I Z A T I O N B R O A D E N S M A R K E T H O R I Z O N S ...........................................................................................4 B A N K I N G R E F O R M S ............................................................................................................................................5 C A P I T A L M A R K E T R E F O R M ...............................................................................................................................6 I S S U E S A N D C O N C E R N S ......................................................................................................................................6
E C O N O M I C F A C T O R S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 C O U N T R Y P E R F O R M A N C E ..................................................................................................................................7 L I Q U I D I T Y A N D C U R R E N C Y I N D I C A T O R S ..........................................................................................................8 C O U N T R Y P R O S P E C T S ........................................................................................................................................9
E N V I R O N M E N T A L F A C T O R S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 C O R P O R A T E S E C T O R S T R U C T U R E ...................................................................................................................10
F A M I L Y O W N E R S H I P D O M I N A N T ..................................................................................................................................10 C O N G L O M E R A T E S D I V E R S E ............................................................................................................................................11 S T A T E O W N E R S H I P S T I L L P R O M I N E N T .........................................................................................................................11 B A N K F I N A N C I N G ...........................................................................................................................................................11 D I R E C T F I N A N C I N G M A R K E T S I M M A T U R E ...................................................................................................................11
S O C I A L F A C T O R S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 P H I L I P P I N E S O C I A L C A P I T A L ...........................................................................................................................12
T H E I M P O R T A N C E O F R E C I P R O C I T Y A N D P A T R O N - C L I E N T R E L A T I O N S H I P S ................................................................13 T E C H N O L O G I C A L F A C T O R S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4
P R O F I T D R I V E R .................................................................................................................................................14 T E C H B R E A K T H R O U G H : O F F - S H O R I N G ..........................................................................................................15
I N V E S T M E N T B A N K I N G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6
A B R I E F P A S S A G E T H R O U G H T I M E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 T H E G L O B A L I N D U S T R Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6
F U L L S E R V I C E F I R M S .......................................................................................................................................16 B O U T I Q U E F I R M S .............................................................................................................................................18
S T R U C T U R E F O R D E L I V E R Y O F F I N A N C I A L S E R V I C E S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9 B E N E F I T S A N D C O S T S O F U N I V E R S A L B A N K I N G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 0 R E A L I Z A T I O N O F T H E P O T E N T I A L B E N E F I T S A N D C O S T S ( T H R O U G H V A R I O U S
C O R P O R A T E S T R U C T U R E S ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 0 P H I L I P P I N E S I N V E S T M E N T B A N K I N G I N D U S T R Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2
I N V E S T M E N T H O U S E S - D E S C R I P T I O N ...........................................................................................................22 P R O F I L E O F I N V E S T M E N T H O U S E S .................................................................................................................22 R E G U L A T I O N S A N D T I M E L I N E .........................................................................................................................23
M A R K E T O U T L O O K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5 G L O B A L D E A L S O U T L O O K ...............................................................................................................................25
H U N T F O R H I G H E R R E T U R N S I N E M E R G I N G M A R K E T S ................................................................................................25 G O I N G L O C A L .................................................................................................................................................................26 M & A A S A N A T T R A C T I V E O P T I O N T O I P O ...................................................................................................................26
P H I L I P P I N E D E A L S O U T L O O K ..........................................................................................................................26 D E A L A C T I V I T Y ...............................................................................................................................................................27
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D E A L S O U T L O O K ............................................................................................................................................................27 C O M P E T I T I V E E N V I R O N M E N T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 8 B A N K A F F I L I A T E D I - B A N K S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 8
P E R F O R M A N C E ..................................................................................................................................................28 S E R V I C E O F F E R I N G S & B E N E F I T S ...................................................................................................................29
I N D E P E N D E N T I - B A N K S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 9 F O R E I G N I N V E S T M E N T B A N K S .........................................................................................................................30 L O C A L I N V E S T M E N T B A N K S A N D T H E I R R O U T E T O W A R D S C A P T U R I N G D E A L S ...........................................31
I N D U S T R Y A N A L Y S I S ( 5 F O R C E S F R A M E W O R K ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2
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CO U N T RY AN ALYSI S (USI NG STEEP FR A M E WOR K )
P O L I T I C A L F A C T O R S
DO M E S T I C I S S U E S
The Philippine president, Gloria Macapagal Arroyo, is in a precarious position. In the past year
she has survived a coup attempt, allegations of vote-rigging and an opposition attempt to
unseat her. Restiveness within the lower ranks of the military also remains a concern, and
opposition-led demonstrations could yet lead to her ouster in a “people power” revolution.
Despite this, the president has retained the support of the top ranks of the military. The
possibility of her sudden overthrow cannot be ruled out, but unless a credible alternative
government emerges, Ms. Macapagal Arroyo should be able to survive as president until the
end of term in 2010.
PO L I C Y T R E N D S
Ms. Macapagal Arroyo has moved very determinedly on the reform agenda, but progress has
been faltering as a result of the administration’s need to deal with political problems. The most
important casualty of the political uncertainty in 2006 was the Budget Appropriations Bill (the
piece of legislation that authorizes the government to spend money). Although a
supplementary bill was eventually passed in late 2006, the delay highlighted the kind of
problems the government will continue to experience for as long as it lacks the congressional
support it needs to carry out all of its policies. However, it appears that progress in the
privatization agenda would continue with evidence coming in the form of the raising of US $
326 million by the sale of the energy company, PNOC-Energy Development Corporation in
December 2006. More progress is expected on a scheme to rationalize investment incentives,
which would reduce the amount of the tax revenue that the government foregoes from
investments that would have taken place regardless of whether or not incentives are in place.
G L O B A L I Z A T I O N BR O A D E N S MA R K E T H O R I Z O N S
The IMF’s involvement in the economy after financial crises in the 1980s, and lower growth due
to limited reforms helped Philippine authorities protect the financial sector from the worst of
East Asia’s mid 1990s excesses. However, more prudential reforms were needed to develop
financial markets so they are more active in corporate financing and disciplining corporate
entities. Although the Philippine banking sector needed less restructuring than elsewhere in the
region after the crisis, since then, bank led restructuring has converted many non performing
loans to equity. Sales of these shares have diversified corporate ownership and increased share
market liquidity.
The Securities and Exchange Commission (SEC) proposed and enacted four financial market
development bills: the Corporate Recovery Act to fast track the rehabilitation of distressed
companies, the Special Purpose Vehicles Act to create asset management companies and to
provide them incentives to buy banks’ non performing loans, the Revised Investment
Companies Act to stimulate mutual fund industry development, and the Securitization Act to
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encourage public and private companies to borrow against a pool of existing assets and/or
receivables.
BA N K I N G RE F O R M S
In the financial sector, the thrust is to preserve overall stability and resilience of the banking
system. This is important to manage the vulnerabilities highlighted by the Asian Financial crisis
and the challenges posed by the prevailing complex financial environment. This involves key
reforms risk management, stronger capital base and improved corporate governance standards
in the banking system.
The banking system remains resilient amid an ongoing economic recovery largely weathering
local and international shocks in the latter part of the year. Key financial indicators reflected
increasing capitalization, expansion in assets, double-digit growth in deposits and resumption of
lending. Capital adequacy ratio (CAR) of the banking system was at 18.8 percent, significantly
than the 10 percent statutory standard and certainly well above the international benchmark of
8 percent.
Banks also managed to enhance their asset quality. As of June 2007, the banking sector’s non-
performing loans (NPL) ratio stood at 5.7%. To sustain this positive momentum, banks will need
to stay vigilant while nurturing their competitive spirit. Banks need to intensify efforts to build
on reform initiatives for greater efficiency and increased viability.
Towards this motive, banks have started to reinforce their asset cleanup and strengthen the
capital base. These gained initial momentum when the SPV Act of 2002 became fully effective
on 9 April 2003 and its implementing rules and regulations came into force. The SPV law
provides tax incentives for the sale of NPAS to special purpose corporations. Since then, several
banks have taken decisive steps to dispose of their NPAS through the availment of incentives
under the law.
The urgency to clean up NPAS which eat up on the banks’ capital position got further
underscored with the move towards compliance with the shift to risk-based capital
requirements under Basel II by the start of 2007. These initiatives are in accordance with our
agenda to help banks strengthen their capital base and sufficiently align capital standards with
international norms.
The Bangko Sentral ng Pilipinas (BSP) has also started to implement measures to enhance
prudential and regulatory standards and improve the quality of corporate governance and risk
management practices across the financial system. A process of fully implementing a
consolidated and risk-based approach to bank supervision is being put in place. The shift to a
consolidated and risk-based approach to bank supervision is consistent with the overarching
goal of ensuring the smooth and orderly functioning of the entire financial system.
To create a sound banking environment, it is important that cognizance of the need to foster an
effective regulatory environment is taken. In July 2004, the BSP teamed up with the SEC, the
Insurance Commission (IC), and the Philippine Deposit Insurance Corporation (PDIC) to form the
Financial Sector Forum (FSF). The FSF serves as a venue for bringing into line sector efforts to
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enhance the financial system reform agenda, particularly in addressing harmonization and
coordination of supervisory and regulatory methods and policies, reporting and information
exchange and dissemination, and consumer protection and education. Considerably, this
initiate aligns the Philippines with the international practice to adopt a system-wide
consolidated approach to supervision.
CA P I T A L MA R K E T RE F O R M
The emergence of highly interconnected financial systems transcending national boarders
encouraged BSP to take an activist stance to develop the domestic capital market and to
optimize the country’s access to international capital.
One fundamental step toward this goal is the shift to inflation targeting and the higher level of
policy transparency it requires, as basis for the conduct of our monetary policy in achieving
price stability. Price stability is the key to macro-economic stability, which is a necessary pre-
condition to capital market development. Policy wise, there has been a commitment to
mitigate supply side inflationary pressures but with some degree of flexibility so as not to
sacrifice economic growth.
Another corollary initiative is to broaden the array of available capital market instruments such
and credit derivatives. BSP has supported this with regulatory changes giving some incentive to
financial innovation but under appropriate risk management standards.
On the demand side, BSP has reformed the trust business with the conversion of the common
trust funds into a better product called the unit investment trust fund or UITF. BSP is also
looking at other managed funds to further expand the domestic investor base for sophisticated
and unsophisticated investors under adequate safeguards.
Also, the entry of more high quality rating agencies is being encouraged as they are crucial in
discovering fair prices commensurate to risk. Another reform initiative is to institutionalize an
independent securities custody system to improve investor protection, to defeat market
malpractices like multiple selling of securities and undocumented transactions, and to reduce
systemic risks.
I S S U E S A N D CO N C E R N S
Despite a number of policy reforms and recent good news, the Philippines continues to face
important challenges and must sustain the reform momentum to catch up with its regional
neighbors and to translate the current cautious optimism into the long-term confidence
required to spur investments, achieve higher growth, generate employment, and alleviate
poverty for a rapidly expanding population. Absent new revenue measures, sustained fiscal
stability will require more aggressive tax collection efficiency to address the severe under-
spending in infrastructure and social services in recent years of tight budgets. Addressing delays
in power sector privatization remains critical to the long-term stability of public sector finances,
ensuring reliable electricity supply, and to bringing down the high cost of power.
7
Potential foreign investors, as well as tourists, continue to be concerned about law and order,
inadequate infrastructure, policy and regulatory instability, and governance issues. While trade
liberalization presents significant opportunities, intensifying global competition and the
emergence of low-wage export economies also pose challenges. Competition from other
Southeast Asian countries and from China for investment underlines the need for sustained
progress on structural reforms to remove bottlenecks to growth, to lower costs of doing
business, and to promote good public and private sector governance. The government has been
working to reinvigorate its anti-corruption drive, and the Office of the Ombudsman has
reported improved conviction rates. Nevertheless, the Philippines will need to do more to
improve international perception of its anti-corruption campaign—an effort that will require
strong political will and significantly greater financial and human resources.
E C O N O M I C F A C T O R S
CO U N T R Y PE R F O R M A N C E
GDP growth accelerated to 7.3% in the first half of 2007
from 5.6% in the first half of 20061 (See attached figure
for Growth of GDP demand components). The sharp rise
was due to robust growth of net exports and private
consumption, and higher government expenditure.
Private consumption, accounting for more than three
quarters of GDP, grew by 6.0% in the period,
underpinned by an 18.1% rise (to $7.0 billion) in
remittances from overseas workers. Government
consumption rose by a sharp 11.8% and public sector construction investment surged by 33.8%.
Both were boosted by some nonrecurring factors: recovery expenditures for typhoon-damaged
areas and accelerated spending ahead of legislative & local government elections in May 2007.
GDP had risen by 5.4% in 2006, maintaining its slight
upward trend of the past 5 years (see attached figure for
GDP growth)2. Personal consumption expenditures and
net exports were the main contributors in 2006. The
substantial remittances and low interest rates supported
private consumption.
However, gross fixed capital formation continued to
decline as a share of GDP to the lowest level in 20 years 3
(refer to attached figure for Gross fixed capital formation),
reflecting a deficient investment environment and
restraints on the public capital spending required to
buttress the Government’s fiscal position.
1 Asian Development Outlook database; National Statistical Coordination Board, available: http://www.nscb.gov.ph.
2 Asian Development Outlook, ibid.
3 CEIC Data Company Ltd., downloaded from http://www.adb.org/Documents/Books/ADO/2007/figs/f2-26-2.xls.
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On the supply side, services recorded particularly strong growth of 8.6%. Retail trade, a major
sub-sector, expanded by 10.5% on the robust private consumption. Industry grew by 7.2%:
construction and mining performed well,
manufacturing less so (See attached figure for growth
of industry sub-sectors). Construction was strongly
supported by the jump in public sector investment.
Private sector construction also grew, by 8.5%, a
turnaround from a decline in the year earlier period.
Mining output (up by 24.3% in the first half)
benefited from high global prices for minerals and
startups of new projects. Production of coal, natural
gas, and nickel increased, although from low bases.
Quarrying surged with the higher levels of construction activity. Manufacturing grew by just
3.9% in the first half, the lowest rate of expansion in several years, in part because of weakness
in global demand for electronic products, a major export category.
The outlook for the full year has improved with the stronger than expected first-half
performance and lower than projected inflation. Private consumption spending will continue to
be boosted by remittances. On the other hand, with elections out of the way, government
spending is unlikely to be as strong in the second half. The contribution of net exports is
projected to decline, too, because imports were unusually weak in the first half. Still, taking into
account the higher than expected private consumption and government-led investment, the
GDP forecast for this year has been revised up to 6.6% from 5.4% by various organizations
monitoring economic activity in the region especially the Philippines.
L I Q U I D I T Y A N D CU R R E N C Y I N D I C A T O R S
Broad money (M3) rose by about 20% on average in
the first 6 months of 2007, double the rate of a year
earlier, driven mainly by foreign exchange inflows and,
to a lesser extent, by the growth of credit to the public
and private sectors. Reflecting ample liquidity in the
banking system, interest rates on domestic treasury
bills eased: the nominal yield on 91-day bills declined
below comparable US treasuries in November 2006, for
the first time in 25 years, and this relationship has been maintained this year (See attached
figure for the Treasury bill rates).4
Gross international reserves increased to $30.3 billion
as at end- August 2007, equivalent to 5.6 months of
imports. Strong demand for pesos for current and
capital account transactions led to a 5.2% appreciation
4 BSP, http://www.bsp.gov.ph; Board of Governors of the Federal Reserve System, http://www.federalreserve.gov.
9
against the US dollar in the 8 months to August.5 (See figure attached in the previous page). The
real effective exchange rate appreciated by 5.1% in that period.
BSP, the central bank, concerned that the strong growth in money supply posed inflation risks,
in May moved to drain surplus liquidity. It encouraged government-controlled corporations to
deposit funds with the central bank and made available a special deposit account facility to a
wider range of financial institutions. In July, the monetary authorities ended a tier system on
rates paid to banks on overnight deposits, an arrangement that encouraged banks to lend. BSP
has described the overall impact on monetary policy of these July changes as neutral.
Later, BSP on Oct 4, 2007 unexpectedly cut its key policy rates by 25bps, taking the borrowing
and lending rates to 5.75% and 7.75% respectively. The scope for further cuts beyond that
appears limited, however, given the expectation that the US Fed will not cut rates below 4.50%.
Importantly, inflationary risks also lie to the upside in 2008, with the output gap set to widen
and this year’s rate cuts coming ahead of a projected rise in budget spending in 2008. Given
these factors, there are signals that one more 25bp cut by the year-end is in the offing taking
the overnight borrowing rate to 5.50%.
CO U N T R Y P R O S P E C T S
Robust growth is expected to be sustained in 2008,
though not at the pace of this year. Services will
continue to be the main driver, supported by growth
in remittances and therefore in consumption. Retail
trade and transport, residential real estate, and
communications services are expected to expand
strongly. Services as a whole are projected to grow by
7.4% next year.
In industry, export-oriented manufacturing will do better if global demand for electronic
products picks up as projected, but mining and quarrying is likely to decelerate from the rapid
expansion seen in 2007. Government expenditures on infrastructure will support growth of
construction. However, the expected softening of the global electronics market and the
slowdown in overall external demand will crimp manufacturing output. Industry as a whole is
expected to grow at around 5.0%.
Investment will likely recover to 4–6% growth, compared
with 2.0% in 2006 and an average annual increase of just
0.4% in 2002–2006. It will be supported by higher
government expenditures and low real interest rates.
Bank balance sheets have strengthened (see attached
figure), and so banks’ willingness to lend may rise,
especially as the lending–deposit spread is at the top of
the range seen over recent years.
5 A point above zero indicates an appreciation of the peso. CEIC Data Company Ltd.
10
E N V I R O N M E N T A L F A C T O R S
(The environment assessed here is the business or corporate environment of the Philippines)
CO R P O R A T E SE C T O R ST R U C T U R E
The Philippines market lack competition with diverse, family controlled conglomerates
operating alongside large government owned firms. Private individuals own most firms and rely
almost exclusively on private and bank debt financing. Even listed firms retain close to 70 per
cent of their equity in private hands and draw their finance mostly from banks. Relatively weak
competition in finance, goods and services markets shelters managers from external discipline.
Conglomerates form cartels, which guarantee high profit rates in many markets, despite often
poor management.6
FA M I LY OW N E R S HI P DO M I N A N T
The Philippines’ top five families control almost 43% of total listed corporate assets, the highest
proportion in East Asia7. In total, families control 48 per cent of publicly listed firms, where
control is defined as 20 per cent of equity; this is the second highest rate of family ownership in
East Asia after Hong Kong. Families tightly control most boards, minimizing outside minority
shareholders’ influence. Business groups often comprise a complex mix of listed and private
companies, producing opaque ownership structures8. Of the major banks, each one is owned by
a family, a single firm or the Government.
% of Total Market Capitalization That Families Control
Top Family Top 5 Families Top 15 Families
Hong Kong 6.50 26.20 34.40
Indonesia 16.60 40.70 61.70
Korea 11.40 29.70 38.40
Malaysia 7.40 17.30 28.30
Philippines 17.10 42.80 55.10
Singapore 6.40 19.50 29.90
Taiwan 4.00 14.50 20.10
Thailand 9.40 32.20 53.30
Source: International Monetary Fund
6 ‘Changing Corporate Asia: What Business Needs to Know’, March 2005, Economic Analytical Unit, Department of Foreign Affairs and Trade.
7 Claessens, S., Djankov, S. and Lang, L.H.P., 2000, ‘East Asian Corporations: Heroes or Villains?’, World Bank Discussion Paper No 409, World
Bank, Washington DC and Mueller, Holger M., and Philippon, Thomas, September 2006, ‘Family Firms, Paternalism, and Labor Relations’
8 Naughton, T., 2001, Consultancy prepared for the Economic Analytical Unit, August.
11
CO N G LO M E R A T E S D I V E R S E
More than many other corporations in any East Asian economy (except maybe Japan),
Philippine corporations cross-hold equity in large portions thereby creating larger
conglomerates. They operate in a wide range of sectors, including real estate, services, banking,
infrastructure supply, manufacturing, retail, telecommunications and mass media. While this
can often reduce their economies of scale and raise costs, entry barriers maintain high profits at
consumers’ expense. Corporate groups with affiliated banks and finance companies can access
cheap finance, reducing their need for direct financing.9
ST A T E OWN E R S HI P ST I L L PR O M I N E N T
Despite more than a decade of privatization, the Government still owns and manages more
than a 100 state owned enterprises in the power, agriculture, railways, high technology and
financial sectors. The government owned Development Bank of the Philippines is a significant
source of concession finance. The government pension fund also holds equity in private banks
and other firms, potentially influencing their lending decisions and other outcomes affecting
outside investors.10 The Government can direct private banks to lend to state owned firms,
providing implicit guarantees for state firms to borrow, increasing the risk of unviable
investment.
BA N K F I N A N CI N G
Commercial banks largely finance firms, especially those belonging to the same industrial group.
However, banks’ roles in corporate governance are much less clear than, for example, in Japan,
under the ‘main bank’ system. Philippine banks are not represented in management positions,
nor do they monitor corporate activity in the way Japanese ‘main banks’ do.11
Like elsewhere in East Asia, firms prefer bank financing to equity financing, as it does not dilute
ownership. Close bank-corporate connections remove the need for managers to compete for
equity market finance; only 200 of the Philippines’ top 1 000 companies are publicly listed. Bank
ownership also is concentrated amongst powerful family shareholders, hindering prudential
supervisors’ regulatory capacity.12
D I R E CT F I N A N CI N G MA R K E T S IM M A T U R E
Banks and corporate entities are reluctant to dilute ownership by issuing equity; this inhibits
share market development. Companies often issue minimal shares to secure a listing.13 Large
blocs of controlling shareholders hold tightly most shares in most Philippine companies and
9 De Ocampo, R.F., 2000, Corporate Ownership and Corporate Governance: Issues and Concerns in the Philippines, paper presented at Asian
Development Bank—OECD-World Bank ‘2nd Asian Roundtable on Corporate Governance’, Hong Kong, 31 May-2 June. 10 Cruz, S., 2001, Economic Analytical Unit interview with Director, Corporate Affairs, Department of Finance, Manila, February.
11 Naughton, ibid.
12 De Ocampo, ibid.
13 De Ocampo, ibid.
12
often dominate decision making in public companies. Regulations require firms to list a certain
minimum of their equity in initial public offers, deterring private companies from listing.
Central bank regulations also deter securitization, with reserve requirements preventing banks
from selling commercial paper. However, with the enactment of the new Securitization Act,
there appears to be intent to bring in more liquidity and leverage to the financing market. On
the demand side, the middle class mostly prefers to hold US dollar deposits, which represent 60
per cent of all bank deposits, rather than local shares, also inhibiting the share market
developing. Hence, share market capitalization is a relatively modest 60 per cent of GDP;