Concept Paper

Project Number: 53047-001 August 2019

Proposed Programmatic Approach and Policy-Based Loan for Subprogram 1 Republic of the Philippines: Support to Capital Market-Generated Infrastructure Financing

This document is being disclosed to the public in accordance with ADB's Access to Information Policy.

CURRENCY EQUIVALENTS (as of 22 August 2019)

Currency unit – peso (₱)

₱1.00 = $0.01915

$1.00 = ₱52.215

ABBREVIATIONS

ADB – Asian Development Bank ASEAN+3 – Association of Southeast Asian Nations, Japan, the People’s

Republic of China, and the Republic of Korea BSP – Bangko Sentral ng Pilipinas (Central Bank of the Philippines) BTr – Bureau of the Treasury GDP – gross domestic product nRoSS – National Registry of Scripless Securities PDP – Philippine Development Plan PERA – Personal Equity Retirement Account SEC – Securities and Exchange Commission

GLOSSARY

Association of Southeast Asian Nations

– A political and economic organization of 10 Southeast Asian countries, which was formed on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Since then, membership has expanded to include Brunei Darussalam, Cambodia, the Lao People’s Democratic Republic, Myanmar, and Viet Nam. Its aims include accelerating economic growth, social progress, and sociocultural evolution among its members; protecting regional peace and stability; and providing opportunities for member countries to discuss differences peacefully.

Association of Southeast Asian Nations+3

– A forum that functions as a coordinator of cooperation between the Association of Southeast Asian Nations and Japan, the People’s Republic of China, and the Republic of Korea.

benchmark bond – A bond that provides a standard against which the performance of

other bonds can be measured. Government bonds are almost always used as benchmark bonds⎯also referred to as “benchmark issue” or “bellwether issue.” Benchmark issues are typically used as the basis of yield curves. (Source: Investopedia)

Build, Build, Build program

– The Duterte administration’s medium-term goal to increase infrastructure spending from 5.4% of the country’s gross domestic product in 2017 to 7.3% by the end of President Rodrigo Duterte’s term in 2022. The program initially included 75 big-ticket infrastructure projects worth P35.5 billion.

Bureau of the Treasury

– An agency of the Ministry of Finance which, under Executive Order No. 449, acts as the principal custodian of financial assets of the

Government of the Philippines and its agencies and instrumentalities. The Bureau of the Treasury’s official duties are in http://www.treasury. gov.ph/?page_id=33.

Capital Market Development Council

– A public−private partnership focused on recommending policy and legislative reforms for the development of the Philippine capital market. Its members include the Department of Finance, Bangko Sentral ng Pilipinas, the Securities and Exchange Commission, the Bureau of the Treasury, the Insurance Commission, the Philippine Stock Exchange, the Bankers Association of the Philippines, the Investment House Association of the Philippines, and various trade groups representing the insurance and securities subsectors.

primary dealers – Preapproved financial institutions that bid for the right to participate in

primary auctions of government securities. Primary dealers are responsible for purchasing the majority of government securities at auction and then redistributing them to their clients, creating the initial market in the process. These institutions must meet certain liquidity and quality requirements and are expected to assist the government in ascertaining the state of local and global securities markets. Primary dealers are also known as market makers.

yield curve – A line that plots the interest rates, at a set point in time, of bonds with

equal credit quality but differing maturity dates. The most frequently reported yield curve compares the 3-month, 2-year, 5-year, and 30-year US Treasury debt. This yield curve is used as a benchmark for pricing all other debts in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth. (Source: Investopedia)

NOTES

(i) The fiscal year of the Government of the Philippines ends on 31 December. (ii) In this report, "$" refers to United States dollars.

Vice-President Ahmed M. Saeed, Operations 2 Director General Ramesh Subramaniam, Southeast Asia Department (SERD) Directors Jose Antonio R. Tan III, Public Management, Financial Sector, and

Trade Division, SERD Kelly Bird, Philippines Country Office, SERD

Team leaders Stephen Schuster, Principal Financial Sector Specialist, SERD

Duong T. Nguyen, Financial Sector Economist, SERD Team members Aekapol Chongvilaivan, Economist (Public Finance), SERD

Thomas Kessler, Principal Finance Specialist, Sustainable Development and Climate Change Department Baurzhan Konysbayev, Principal Counsel, Office of the General Counsel Anouj Mehta, Principal Regional Cooperation Specialist, SERD Jenelyn Mendez-Santos, Project Analyst, SERD Vivek Rao, Principal Financial Sector Specialist, SERD Joehanne Kristal Santos, Operations Assistant, SERD

Lei Wang, Senior Treasury Specialist, Treasury Department Satoru Yamadera, Principal Financial Sector Specialist, Economic Research and Regional Cooperation Department

Peer reviewer Donald Lambert, Principal Private Sector Development Specialist, Viet Nam Resident Mission, SERD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page

PROGRAM AT A GLANCE

I. THE PROPOSAL 1

II. PROGRAM AND RATIONALE 1

A. Background and Development Constraints 1 B. Policy Reform and ADB’s Value Addition 3 C. Impacts of the Reform 4 D. Development Financing Needs and Budget Support 4 E. Implementation Arrangements 4

III. TECHNICAL ASSISTANCE 5

IV. DUE DILIGENCE REQUIRED 5

V. PROCESSING PLAN 5

A. Risk Categorization 5 B. Resource Requirements 5 C. Processing Schedule 5

VI. KEY ISSUES 5

APPENDIXES

1. Design and Monitoring Framework 6

2. Problem Tree 8

3. List of Linked Documents 9

Project Classification Information Status: Complete

PROGRAM AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 30042019163847485976 Generated Date: 02-Sep-2019 16:00:58 PM

1. Basic Data Project Number: 53047-001Project Name Support to Capital

Market-Generated Infrastructure Financing (Subprogram 1)

Department/Division SERD/SEPF

Country Philippines Executing Agency Department of Finance

Borrower Republic of the Philippines

2. Sector Subsector(s) ADB Financing ($ million)Finance Finance sector development 200.00

Infrastructure finance and investment funds 25.00

Insurance and contractual savings 25.00

Money and capital markets 50.00

Total 300.00

3. Strategic Agenda Subcomponents Climate Change InformationInclusive economic growth (IEG)

Pillar 2: Access to economic opportunities, including jobs, made more inclusive

Regional integration (RCI)

Pillar 1: Cross-border infrastructurePillar 3: Money and finance

Climate Change impact on the Project Low

4. Drivers of Change Components Gender Equity and MainstreamingGovernance and capacitydevelopment (GCD)

Institutional developmentPublic financial governance

Private sector development (PSD)

Promotion of private sector investment

No gender elements (NGE)

5. Poverty and SDG Targeting Location ImpactGeographic TargetingHousehold TargetingGeneral Intervention on PovertySDG Targeting

NoNoYesYes

Nation-wide High

SDG Goals SDG1, SDG8, SDG9, SDG10

6. Risk Categorization: Complex .

7. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C.

8. Financing

Modality and Sources Amount ($ million)

ADB 300.00 Sovereign Program (Regular Loan): Ordinary capital resources 300.00

Cofinancing 0.00 None 0.00

Counterpart 0.00 None 0.00

Total 300.00

Currency of ADB Financing: USD

I. THE PROPOSAL 1. The program will broaden and deepen the domestic capital market by increasing the supply of long-term finance to support investments, including the government’s ambitious infrastructure agenda. The program will advance foundational reforms to the government bond market and address key constraints that limit the growth of the corporate bond market. In addition, the program introduces efforts to broaden the contractual saving subsector to increase its role as the appropriate source of long-tenor infrastructure finance. The program is consistent with the Philippine Development Plan, 2017–2022 (PDP), and the country partnership strategy (CPS), 2018−2023 of the Asian Development Bank (ADB).1 The program intersects in the CPS’s first two pillars: (i) accelerating infrastructure and long-term investments; and (ii) promoting local economic development.2 The program is also consistent with ADB’s Strategy 2030 and will strengthen governance and institutional capacity, and foster regional cooperation and integration. 3 A programmatic approach has been used to provide for a long-term but flexible engagement⎯a modality well-suited to the long-term and complex nature of capital market development.4

II. PROGRAM AND RATIONALE A. Background and Development Constraints 2. The Philippine economy has outperformed many regional peers with economic growth exceeding 6% per year since 2012. Under the PDP, the government set a strategic target to reach upper middle-income status by 2022 and to reduce the poverty incidence from 21.6% in 2015 to 14.0% by 2022 (footnote 1). However, the Philippines’ large infrastructure deficit is a constraint to achieving these goals. In response, the government increased public spending on infrastructure to 6.2% of gross domestic product (GDP) in 2018 under its signature “Build, Build, Build” program (glossary). Nevertheless, the government still faces a large infrastructure deficit. ADB has estimated that the Philippines will require between ₱24 trillion and ₱27 trillion through 2030 to bridge the infrastructure gap and sustain the country’s growth rate.5 3. To date, the government has used a diversified funding mix to fund infrastructure, including government debt, official development assistance, and private capital. For example, debt issued by the government increased to ₱1.1 trillion in 2018 from ₱810.0 billion in 2016, largely matching the rise in government spending on infrastructure (to ₱1.1 trillion in 2018 from ₱650.0 billion in 2016)⎯an increase made possible largely by ongoing reforms to the government debt market. However, the Philippines’ local currency debt market represented only 34.7% of GDP as of 30 June 2018—well below the emerging East Asia average of 71.2%. Banks and private companies have been supplying private capital for infrastructure but have reached their limits. The bank credit–GDP ratio has increased significantly, corporate leverage for listed firms now exceeds regional comparators, and the credit-to-GDP gap is approaching early-warning levels.6 On the other hand, the contractual saving sector, a natural repository for long-tenor investments such as infrastructure finance, is underdeveloped and has played a limited role. The life insurance industry is small. Premiums represented only 1.24% of GDP in 2017, lagging

1 Government of the Philippines, NEDA. 2017. Philippine Development Plan, 2017–2022. Pasig; and ADB. 2018.

Country Partnership Strategy: Philippines⎯High and Inclusive Growth. Manila. 2 The project is included in ADB. 2018. Country Operations Business Plan: Philippines, 2019–2021. Manila. 3 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila. 4 The design and monitoring framework is in Appendix 1. 5 ADB. 2017. Meeting Asia’s Infrastructure Needs. Manila. 6 International Monetary Fund. 2018. Article 4 Consultation. Washington, DC.

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Thailand (3.59%) and Malaysia (3.32%).7 Likewise, pensions are small relative to GDP and are hobbled by legal and operational constraints. To maintain economic growth and support the “Build, Build, Build” program, more must be done to deepen the finance sector to provide enough public and private long-tenor debt capital. 4. Development constraints. The government has identified and addressed fundamental constraints in the government debt markets and will begin addressing the next set of higher-order constraints: (i) strategic oversight and the enabling environment for capital market development; (ii) liquidity and price discovery in the government bond market; and (iii) institutional participation in the capital market. 5. Capital market development efforts in the Philippines have not been guided by any overarching framework as they have in Malaysia and Thailand, where markets are now far more advanced. The existing Capital Market Development Council is driven from a regulatory perspective. The private sector provides product-driven inputs rather than supporting holistic market development. Consensus-driven coordinated action is required. An informal work group must be formalized and its activities⎯focused on the government bond market⎯successfully implemented. A more comprehensive planning effort, including contractual savings, will be needed to progressively introduce complex products such as project finance. The enabling environment also needs to be strengthened. The Charter of the Central Bank of the Philippines (BSP) does not provide the tools to ensure monetary and financial stability, a prerequisite for advanced finance sector development. The Corporation Code, which has not been updated since 1980, and the Securities Regulation Code, which has not been updated since 2000, contain provisions that increase friction costs, inhibit product development, and limit competition. 6. Additional improvements to the government debt market are necessary to ensure sufficient take-up of the increasing amounts of government debt sold to finance infrastructure. A reliable yield curve must be developed to serve as a pricing benchmark to facilitate issuance of corporate and infrastructure debt by the private sector. The government must (i) encourage more trading to generate market-based pricing data, and (ii) upgrade systems to use that data to build a reliable yield curve. Disciplined issuance of predictable timing and volume into key benchmark tenors and a competitive primary dealer system are needed to contain costs and increase liquidity. System upgrades are needed to increase efficiency and interoperability, and to facilitate tax-exempt entities such as public pensions and ADB. A new yield-curve methodology is needed to eliminate exaggerated pricing volatility, which deters international investors and debt issuance. 7. Institutional investors need to play a larger role in market development, but the contractual savings subsector is underdeveloped and will take some time to mature. In the insurance industry, recent legal changes have relaxed restrictive investment guidelines, but tedious approval processes remain. Pension funds face several development constraints including (i) the law does not require private pensions to be fully funded, (ii) public pensions have limited authority to raise contribution rates, (iii) widespread noncompliance, and (iv) restrictive investment regimes. Corporate bonds and notes represent just under 10% of the total financial assets of each of the largest public pension funds. In the interim, foreign-domiciled contractual savings institutions could provide an alternative source of demand for long-tenor infrastructure-linked investments. However, the tax system is high-cost relative to comparator countries and the final withholding tax applied to interest is typically not refunded, all of which deters investors. In addition, the government has not taken the initiative to tap offshore climate or other specialty funds, which could provide an immediate funding alternative.

7 Swiss Re Institute. 2018. Sigma. Zurich.

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B. Policy Reform and ADB’s Value Addition

8. Government reform strategy. The PDP continues the government’s emphasis on inclusive growth through investment. Public spending on infrastructure is projected to increase to as much as 7% of GDP by 2022. To help raise fiscal resources, the government will reform tax policy and implement complementary capital market reforms. The Bureau of the Treasury (BTr) will manage the borrowing mix proactively, boost liquidity in the government bond market, and reduce friction costs to establish a reliable term structure of interest rates (yield curve). In addition, the government will promote efficiency in the trading, settlement, and delivery of securities.

9. Proposed policy reforms. The program will comprise two subprograms designed to increase the availability of long-term finance to support the government’s infrastructure initiatives. A third subprogram may be added, subject to government concurrence, during the processing of subprogram 2.8 The outcome will be increased long-term finance for infrastructure. The reform areas are (i) strategic oversight and the enabling environment, (ii) liquidity and price discovery in the government bond market, and (iii) institutional participation in the capital markets.

10. Strategic oversight and the enabling environment. Under subprogram 1, the BSP, the Securities and Exchange Commission (SEC), and the BTr will formalize their work group, and implement the Philippines’ first coordinated medium-term capital market development plan. The government will amend the BSP Charter to strengthen its ability to assure finance sector stability and the government will authorize the BSP to supervise all payment systems. The government will revise the corporation code to simplify corporate actions and reduce friction costs. Under subprogram 2, the government will implement a broader, longer-term capital market development road map that includes infrastructure finance and contractual savings. In addition, the government will modernize and improve the framework for the securities industry by presenting a revised Securities Regulation Code to Congress for approval.

11. Liquidity and price discovery in the government bond market. Reforms will enable increased issuance of government debt at lower relative cost and will provide a reliable yield curve for pricing private sector debt. Under subprogram 1, the BTr will increase trading levels and reduce relative issuance costs of government debt by (i) concentrating all domestic issuance into six key tenor buckets, and (ii) introducing competition through 10 market makers as part of its enhanced primary dealer system. The BTr will launch the new National Registry of Scripless Securities (nRoSS). The nRoSS is efficient and will facilitate the entry of new tax-exempt participants (international contractual savings), including ADB, into the government securities market. The domestic trading platform will be replaced with a vender supplied system (Bloomberg E-bond) and the current yield-curve calculation methodology (R2) with a globally accepted system (Bloomberg Bval). Under subprogram 2, the government will complete its transition to an over-the-counter, self-regulated market. The BTr will expand market maker responsibilities, achieve critical mass in all benchmark issues, and expand the nRoSS to accommodate new products.

12. Institutional participation in the capital markets. This reform area will encourage greater participation by institutional investors. Under subprogram 1, the government will lower barriers to international participation by completing a proposal to reduce and rationalize tax rates, including final withholding taxes. The SEC will issue regulations to target pools of international investment green funds to finance infrastructure. To encourage demand from domestic institutional investors, Congress will amend the Social Security Act to increase the contribution rate, broaden membership, and provide flexibility in investment decisions. The Insurance 8 A third subprogram may be added, subject to government concurrence, and would be formulated during processing

of subprogram 2 to continue strengthening and expanding the contractual saving sector.

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Commission will issue guidance to enable insurance companies to invest in infrastructure projects. BSP will streamline the Personal Equity Retirement Account (PERA) to encourage participation. On the supply side, the government will ease regulatory hurdles to issuing corporate bonds. The SEC will approve the first debentures issued in the Philippines under the Association of Southeast Asian Nations, Japan, the People’s Republic of China, and the Republic of Korea (ASEAN+3) Multi-Currency Bond Issuance Framework. Under subprogram 2, the government will implement the revised tax code and BSP will relaunch PERA with improved accessibility and functionality. Credit ratings will be strengthened, and the Philippine Guarantee Corporation will support the introduction of guarantee products to support infrastructure finance. 13. ADB engagement. The engagement reflects the lessons learned and continues a sequenced approach to capital market development.9 The program also highlights the benefits of a “One ADB” approach 10 with extensive coordination covering the implementation of the government’s first capital market development plan, the launch of the nRoSS, the PERA upgrade, enhancements to the payment system, the ASEAN+3 Multi-Currency Bond issue, the Green Bond Framework, and the launch of a repo market.11 In addition, the program compliments ADB’s ongoing direct and indirect support to develop and fund infrastructure. An ADB-funded project is supporting project preparation,12 while the country operations business plan lists direct lending support to infrastructure at $2.6 billion in 2019 and $2.0 billion in 2020 (footnote 2). C. Impacts of the Reform 14. The performance indicators in the design and monitoring framework demonstrate the program’s impact. The program’s impact is aligned with the PDP and will help the government achieve its targeted investment rate by (i) helping the government fund infrastructure at lower relative costs, and (ii) enabling the private sector to fund infrastructure through the capital markets. Corporate bonds outstanding will increase to at least 12% of GDP, government bonds held by the contractual savings subsector will increase to 35% of the total outstanding, and corporate debt held by public pension funds will increase to 15% of the funds’ total financial assets. D. Development Financing Needs and Budget Support 15. The government has requested a regular loan of $300 million from ADB’s ordinary capital resources to help finance subprogram 1, with an indicative $300 million planned for subprogram 2. The government may draw part of the loan in domestic currency, depending on market conditions. Financing needs are large with a projected budget deficit for 2019 at 3.2% of GDP. The loan size is based on the government’s financing needs, the development impact of the policy reform package, and development spending arising from the reforms. E. Implementation Arrangements 16. The Department of Finance is the executing agency. The BSP, the BTr, and the SEC are the implementing agencies. A steering committee chaired by the Department of Finance with the

9 ADB. 2013. Completion Report: Financial Market Regulation and Intermediation Program. Manila. 10 Within ADB, the Southeast Asia Department, the Economic Research and Regional Cooperation Department, the

Philippines Country Office, and the Treasury Department provided inputs. Development partners include the International Monetary Fund and the United States Treasury.

11 ADB. 2017. Technical Assistance to the Republic of the Philippines for Institutionalizing Capital Market Reforms. Manila.

12 ADB. 2017. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of the Philippines for the Infrastructure Preparation and Innovation Facility. Manila.

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implementing agencies as members will oversee the program’s implementation. ADB may add representatives from the insurance and pension industries to the capital markets work group as implementing agencies for subprogram 2. The implementation period for subprogram 1 is July 2017−March 2019; for subprogram 2 it is April 2019−July 2020 (footnote 10).

III. TECHNICAL ASSISTANCE 17. An independent transaction TA facility planned for 2019 will provide TA.

IV. DUE DILIGENCE REQUIRED 18. A public financial management assessment and a program impact assessment will be completed.13 The program is expected to be classified category C for all safeguard aspects. Subprogram 1 has initially been categorized no gender elements. However, the first debenture issued in the Philippines under the ASEAN+3 Multi-Currency Bond Issuance Framework is under evaluation and is likely to have produced significant gender benefits. In addition, incorporating overseas workers in the public pension plan is gender-positive because women make up 54% of this group. Finally, the upgrades to the PERA are likely to include the collection of gender-disaggregated data. These considerations may warrant a higher classification.

V. PROCESSING PLAN A. Risk Categorization 19. Subprogram 1 exceeds $200 million and is thus considered complex. B. Resource Requirements 20. ADB staff will prepare the program using about 37 person-months of international and 12 person-months of national staff time.14 C. Processing Schedule

Proposed Processing Schedule

Milestones Expected Completion Date

Concept clearance August 2019 Loan fact-finding September 2019 Management review meeting October 2019 Loan negotiations November 2019 Board consideration February 2020 Loan signing February 2020

Source: Asian Development Bank.

VI. KEY ISSUES

21. There are no key issues.

13 The initial poverty and social analysis can be found in Appendix 3. 14 Mission leader (18 person-months), co-mission leader (12 person-months), finance sector specialist (6 person-

months), legal counsel (1 person-month), national officer (6 person-months), and project analyst (6 person-months).

6 Appendix 1

DESIGN AND MONITORING FRAMEWORK Country’s Overarching Development Objective To reduce inequality and increase the nation’s growth potential by accelerating strategic infrastructure development (Philippine Development Plan, 2017–2022).a

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting

Mechanisms Risks

Effect of the Reform Increased long-term finance for infrastructure

By 2021: a. Corporate bonds outstanding increase to at least 12% of GDP (2017 baseline: 7.5%). b. Government bonds held by contractual savings institutions increase to 35% of the total (2017 baseline: 31%). c. Corporate debt (notes and bonds) held by the public pension funds increases to 15% of total financial assets (2017 baseline: 10%).

a. Asiabondsonline Data portal

b. Asiabondsonline Quarterly Bond Monitor c. Annual reports of Social Security System and Government Service Insurance System

Adverse global trade or macroeconomic conditions depress economic activity and the supply of and/or demand for capital market products.

Reform Areas under Subprogram 1 1. Strategic oversight and the enabling environment

Indicative policy actions By 2018: 1.1 Coordinated government-driven medium-term capital market development plan developed, adopted, and implemented with an immediate focus on liquidity, price discovery, market efficiency, and oversight. (2017 baseline: not applicable) 1.2 The National Payment Systems Act (Republic Act No. 11127), which assigns supervisory oversight of all payment systems to the BSP and establishes finality of settlement and close-out netting in law, adopted by the government. (2017 baseline: not applicable)

1.1 BTr, BSP, and SEC websites 1.2 Legislative report on Philippines Gazette

The government prioritizes other facets of legal reforms. Budget deficits increase beyond current levels and compromise the Philippines’ credit rating. Tax reform is altered or not pursued, which deters participation of international investors.

2. Liquidity and price discovery in the government bond market

2.1 The BTr identified and subsequently concentrated 100% of its 2018 issuance in specific benchmark securities (e.g., 2-year, 3-year, 5-year, 7-year, 10-year, and 20-year); the proportion of BTr’s issuance of treasury bills increased to x% of bonds. (2017 baseline: xx)

2.1 BTr internal reports

Appendix 1 7

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting

Mechanisms Risks

2.2 BTr launched the nRoSS to provide a more efficient and functional securities platform to meet international standards, reduce costs and provide seamless primary auctions, facilitate trading between the taxable and tax-exempt sectors, and rationalize the securities settlement process. (2017 baseline: PDEx platform)

2.2 BTr internal reports and press releases, and consultant reports

3. Institutional participation in the capital markets

3.1 The BSP, SEC, and PDEx eased regulatory hurdles and developed listing rules for banks to issue corporate bonds resulting in ₱46 billion in new corporate notes issued by just three banks in only 2 months under announced total borrowing plans aggregating ₱170 billion. (2017 baseline: not applicable) 3.2 The SEC issued regulations and guidelines to support the issuance of green bonds based on the ASEAN standards complied by the ASEAN Capital Markets Forum. Under these guidelines, RCBC issued ₱15 billion in green bonds, the first domestic listed green bond issued in the Philippines. (2017 baseline: no guidelines)

3.1 PDEx website and news releases 3.2 PDEx website and news releases

Budget Support Asian Development Bank: $300 million loan

ASEAN = Association of Southeast Asian Nations, BSP = Bangko Sentral ng Pilipinas (Central Bank of the Philippines), BTr = Bureau of the Treasury, GDP = gross domestic product, nRoSS = National Registry of Scripless Securities, PDEx = Philippine Dealing and Exchange Corporation, RCBC = Rizal Commercial Banking Corporation, SEC = Securities and Exchange Corporation. a Government of the Philippines, National Economic and Development Authority. 2017. Philippine Development Plan,

2017–2022. Manila. Source: Asian Development Bank.

8 Appendix 2

PROBLEM TREE

Core Problems The nonbank financial system is shallow and does

not encourage enough long-term savings and investment to meet economic development plans.

Intermediation is insufficient to meet economic development objectives of improving competitiveness and reducing poverty and income inequality.

Limited development of infrastructure reduces competitiveness and fosters inequality.

Financial exclusion helps restrain finance sector growth and leaves the poor vulnerable to economic shocks.

Addressed through the Bangko Sentral ng Pilipinas (Central Bank of the Philippines) financial inclusion program, supported by Asian Development Bank’s Inclusive Finance Development Program

The government’s planning and legal frameworks are not

supportive or enabling.

1.No coordinated efforts or mechanism have been adopted to systematically develop a vibrant capital market.

2.The Bangko Sentral ng Pilipinas Charter restricts its ability to assure financial stability.

3.The corporation code and securities regulation code are outdated.

4.The payment system is not regulated and exposes participants to settlement risks.

The capital market lacks diversity and

depth.

1.Activity in short-tenor instruments is too low to generate a reliable short-term benchmark rate to anchor hedging instruments.

2.Bond trading activity levels do not generate a level of “done-deals” sufficient to provide reliable pricing.

3.The current yield curve methodology is poor and introduces volatility in pricing.

4.Infrastructure is outdated and expensive, which inhibits activity.

The contractual savings sector is underdeveloped.

1.The tax framework is high cost and discourages domestic and international participation.

2.Local product offerings are limited and do not attract foreign institutional investors.

3.The legal and regulatory environment does not support growth in domestic contractual savings.

4.Market participants are not producing an ample supply of long-tenor investment products.

1. There are structural impediments, including lack of a national ID, lack of products tailored to low-income clients, and shallow financial literacy especially surrounding contractual savings.

2. Financial infrastructure is fragmented, including an underdeveloped credit bureau and the absence of a movable collateral registry.

3. The capacity of financial institutions is limited, including by a low penetration of fintech.

Financial inclusion and literacy are low, resulting in low participation in finance subsectors especially

insurance and pensions.

Effect

Causes

Appendix 3 9

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/LinkedDocs/?id=53047-001-ConceptPaper

1. Initial Poverty and Social Analysis

2. Sector Assessment (Summary): Finance