Report and Recommendation of the President to the Board of Directors

Project Number: 53047-001 May 2020

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

Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Access to Information Policy after excluding information that is subject to exceptions to disclosure set forth in the policy.

CURRENCY EQUIVALENTS (as of 4 May 2020)

Currency unit – peso/s (₱) ₱1.00 = $0.01974

$1.00 = ₱50.67

ABBREVIATIONS

ADB – Asian Development Bank ASEAN – Association of Southeast Asian Nations BBB – Build, Build, Build BSP – Bangko Sentral ng Pilipinas (Central Bank of the Philippines) BTr – Bureau of the Treasury COVID-19 – coronavirus disease DMF – design and monitoring framework DOF – Department of Finance GDP – gross domestic product nRoSS – National Registry of Scripless Securities PBL – policy-based loan PDP – Philippine Development Plan PERA – Personal Equity and Retirement Account SEC – Securities and Exchange Commission TA – technical assistance US – United States

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.

ASEAN+3 – A forum that functions as a coordinator of cooperation between ASEAN

and the three East Asian nations of Japan, the People’s Republic of China, and the Republic of Korea.

benchmark issue

– 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 a “bellwether issue”. Benchmark issues are typically used as the basis of yield curves.

bid–ask spread

– The amount by which the ask price exceeds the bid. This is essentially the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it. The wider the spread, the less “liquid” the market.

Build, Build, Build program

The plan of the Government of the Philippines to address the chronic infrastructure gap. The program, also known as “the golden age of infrastructure,” aims to spend ₱8.4 trillion by 2022 to finance infrastructure consistent with the Master Plan on ASEAN Connectivity. The program covers strategic infrastructure including roads, bridges, dams, railways, and airports. The program is expected to increase connectivity, ease congestion, and raise economic competitiveness, and thereby accelerate the economic growth of the Philippines.

Bureau of the Treasury

– An agency of the Department 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/aboutbtr/ mission_main.html.

Green Bonds – A green bond is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects. These bonds are typically asset-linked and backed by the issuing entity's balance sheet, so they usually carry the same credit rating as their issuers' other debt obligations (Investopedia).

primary dealers

– A set of preapproved financial institutions which all 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, 10-year, and 30-year United States 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.

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 (SEPF), SERD Kelly Bird, Country Director, Philippines Country Office, SERD

Team leaders Stephen Schuster, Principal Financial Sector Specialist, SEPF, SERD

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

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

Lei Wang, Senior Treasury Specialist, Treasury Client Solutions Unit, Treasury Department Satoru Yamadera, Principal Financial Sector Specialist, Office of the Chief Economist and Director General, 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 4

C. Impacts of the Reform 8

D. Development Financing Needs and Budget Support 8

E. Implementation Arrangements 9

III. DUE DILIGENCE 9

IV. ASSURANCES 10

V. RECOMMENDATION 10

APPENDIXES

1. Design and Monitoring Framework 11

2. List of Linked Documents 13

3. Development Policy Letter 14

4. Policy Matrix 18

Project Classification Information Status: Complete

PROGRAM AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 20012020110055204346 Generated Date: 06-Mar-2020 14:50:14 PM

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

Infrastructure Financing Program (Subprogram 1)

Department/Division SERD/SEPF

Country Philippines Executing Agency Department of Finance

Borrower Republic of the Philippines

Country Economic Indicators https://www.adb.org/Documents/LinkedDocs/?id=53047-001-CEI

Portfolio at a Glance https://www.adb.org/Documents/LinkedDocs/?id=53047-001-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million)Finance Finance sector development 250.00

Infrastructure finance and investment funds 28.00

Insurance and contractual savings 27.00

Money and capital markets 95.00

Total 400.00

3. Operational Priorities Climate Change InformationStrengthening governance and institutional capacity

Fostering regional cooperation and integration

Climate Change impact on the Project

Low

Sustainable Development Goals Gender Equity and MainstreamingSDG 1.bSDG 8.10SDG 9.1

No gender elements (NGE)

Poverty TargetingGeneral Intervention on Poverty

4. Risk Categorization: Complex .

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

6. Financing

Modality and Sources Amount ($ million)

ADB 400.00 Sovereign Program (Regular Loan): Ordinary capital resources 400.00

Cofinancing 0.00 None 0.00

Counterpart 0.00 None 0.00

Total 400.00

Currency of ADB Financing: US Dollar

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on (i) a proposed programmatic approach and (ii) a proposed policy-based loan (PBL) to the Republic of the Philippines for subprogram 1 of the Support to Capital Market-Generated Infrastructure Financing Program.

2. The program aims to deepen the domestic capital market to increase the supply of long-term finance to support investments. It will do so by addressing key constraints that have limited growth in the government and corporate bond markets. In addition, the program launches a focused effort to broaden the contractual saving subsector (e.g. pensions, insurance, and mutual funds). A vibrant and deep contractual saving sector provides a sustainable source of long-tenor infrastructure finance and increases the country’s resilience against external shocks. The program is consistent with the Philippine Development Plan (PDP) 2017–2022 and intersects with the first two pillars of the Asian Development Bank (ADB) country partnership strategy, 2018–2023: (i) accelerating infrastructure and long-term investments; and (ii) promoting local economic development.1, 2 The program is consistent with ADB’s Strategy 2030 (para. 17 and Table 1).3 The Design and Monitoring framework (DMF) is in Appendix 1 and the policy matrix is in Appendix 4. While the program had been planned since 2018, well before the coronavirus disease (COVID-19) pandemic, the budgetary financing under the program will help the government’s overall increased financing requirements due to the pandemic response.

II. PROGRAM AND RATIONALE

A. Background and Development Constraints

3. The Philippines’ economy has outperformed regional peers such as Indonesia, Malaysia, and Thailand, with economic growth exceeding 6% per year since 2012. Under the PDP, the government has set a strategic target to reach upper middle-income status by 2022, with an accompanying decline in the national poverty rate from 23.3% in 2015 to 14.0% in 2022 (footnote 1). However, the Philippines’ infrastructure deficit is large and acts as a constraint on achieving these goals. In response, the government increased public spending on infrastructure to more than 6% of gross domestic product (GDP) in 2017 and 2018 under its signature Build, Build, Build (BBB) program. Yet, the government still faces a large infrastructure deficit. Based on earlier work by ADB, the Organisation for Economic Co-operation and Development estimated that the Philippines will require ₱24 trillion–₱27 trillion, or roughly ₱2 trillion per year, through 2030 to bridge the infrastructure gap and sustain the country’s growth rate.4

4. Due largely to ongoing reforms to the government debt market, a diversified infrastructure funding mix has been utilized under the BBB program.5 Issuance of government debt increased to ₱1.1 trillion in 2018 from ₱810 billion in 2016, matching the increase in government spending

1 Government of the Philippines, National Economic and Development Authority. 2017. Philippine Development Plan,

2017–2022. Manila. 2 ADB. 2018. Country Partnership Strategy: Philippines, 2018–2023—High and Inclusive Growth. Manila. The program

is also included in ADB’s Country Operations Business Plan for 2019–2021. 3 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific.

Manila. 4 ADB. 2017. Meeting Asia’s Infrastructure Needs. Manila. 5 ADB. 2015. Report and Recommendation of the President to the Board of Directors: Proposed Programmatic

Approach and Policy-Based Loan for Subprogram 1 to the Republic of the Philippines for the Encouraging Investment through Capital Market Reforms Program. Manila; and ADB. 2017. Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan for Subprogram 2 to the Republic of the Philippines for the Encouraging Investment through Capital Market Reforms Program. Manila.

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on infrastructure (₱1.1 trillion in 2018 from ₱650 billion in 2016).6 Official development assistance adds another ₱100 billion per year, which leaves a gap of up to ₱1 trillion per year for the private sector to fund. When compared against these needs, the carrying capacity of the domestic capital market is quite limited. The domestic fixed-income market represented only 35.7% of GDP as of 31 December 2019, well below the Emerging East Asia peer average of 83.3% (Figure 1). Government debt outstanding is only half the size of the peer average, while the corporate debt market is only one-third the size of the peer average. Banks and private companies have been supplying private capital for infrastructure but have reached their limits. Bank credit–GDP ratio has increased, corporate leverage for listed firms now exceeds regional comparators, and the credit–GDP gap (capturing the build-up of excessive credit) is approaching early warning levels.7

5. The contractual savings subsector represents a natural repository for long-tenor investments, such as government debt and infrastructure finance. However, this subsector is underdeveloped and has only played a limited role (Figure 1).8 Within the subsector, the insurance industry is quite small and nascent. Premiums represented only 1.61% of GDP in 2016, a level which lags that of Thailand (5.20%) and Malaysia (4.10%). Similarly, pension funds are also small relative to GDP. The limited scope of intermediation through contractual savings has constrained not only the provision of long-term finance but also economic development. Research indicates that finance sector development drives economic growth. However, in more developed markets, it is growth in contractual savings—and insurance in particular—that provides the largest boost to growth in real GDP per capita relative to other finance subsectors.9 A strong contractual savings subsector provides not only critically needed long-term financing, but also a savings pool that can enable savers to build wealth and weather external shocks.

6. Impact of COVID-19. These development challenges have been recently compounded by the COVID-19 pandemic, which has serious economic and social consequences. GDP growth is projected to contract in 2020 as compared to the original estimate of 6.2% growth and the poverty level is likely to worsen to 20.7% in 2020 from 16.6% in 2018. The infrastructure funding gap (para. 4) is likely to be exacerbated by the government’s stimulus response to the COVID-19 pandemic. Measures to control the spread of the pandemic, both globally and domestically,

6 As of August 2019, debt issuances aggregated to ₱1.2 trillion, but infrastructure expenditures lagged at ₱446 billion

because of one-off delays in adopting the 2019 national budget. 7 International Monetary Fund. 2018. Article 4 Consultation. Washington, DC. 8 International Monetary Fund. 2013. Local Currency Bond Markets – A Diagnostic Framework. Washington, DC. 9 R. Levine and S. Zervos. 1998. The American Economic Review. Volume 88. No. 3 (June 1998). pp. 637–658; and

Marco Arena. 2008. The Journal of Risk and Insurance. Volume 75. No. 4. pp. 921–946.

Figure 1: Finance Sector Composition

GDP = gross domestic product. Sources: Asian Development Bank and World Bank.

0

100

200

300

400

500

600

700

800

Philippines Thailand Malaysia Indonesia Viet Nam Singapore

% o

f GD

P

Fixed Income Equity Banking Pension, Insurance and Mutual Funds

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combined with quarantine protocols in major cities in the Philippines, are expected to result in severe economic losses. Tax revenue may be up to ₱500 billion less than projected. To boost economic growth, increase financial resilience, and support the government’s expanding expenditure program—including the COVID-19 response and the ambitious BBB initiative—more must be done to deepen and broaden the finance sector to provide the needed public and private long-tenor debt capital.10

7. Development constraints. In previous programs (footnote 5), the government identified and addressed fundamental foundational constraints on the government debt market (para. 12). The government will now begin addressing the next set of higher-order constraints. Grouped into three categories, these constraints are elaborated below in paras. 8–10: (i) lack of strategic oversight and a weak enabling environment; (ii) low liquidity and transparency, and nascent price discovery in the government bond market; and (iii) limited institutional participation in the capital market.

8. Capital market development efforts in the Philippines have not been guided by any overarching framework as they have been in Malaysia and Thailand, where markets are now far more advanced. The existing Capital Market Development Council, which is driven largely by the private sector, does not provide a wider market development objective. More consensus-driven coordinated action is required amongst various institutions. A recently constituted informal working group comprising the Bangko Sentral ng Pilipinas (BSP), the Bureau of the Treasury (BTr), and the Securities and Exchange Commission (SEC) must be formalized and its activities—focused on developing the government bond market—successfully implemented. Looking forward, a more comprehensive planning effort will be needed to progressively introduce complex products, including in the contractual savings subsector. Further, the enabling environment needs to be strengthened. The charter of the BSP does not provide a mandate to ensure financial stability, a prerequisite for finance sector development. The payment system (a key foundation of the finance sector) has not been adequately regulated. The SEC’s funding has long been inadequate, and the Corporation Code has not been updated since 1980 and the Securities Regulation Code has not been updated since 2000. These constraints increase friction costs, inhibit product development, and limit competition.

9. Additional improvements to the government debt market are necessary to ensure that greater amounts of government debt can be issued to finance the nation’s long-term investment requirements including the much-needed infrastructure. A reliable yield curve must be developed to serve as a pricing benchmark for the private sector to raise financing including infrastructure-dedicated bonds. The government must (i) encourage more trading of government debt to generate market-based pricing data, and (ii) upgrade systems to use that data to build a reliable yield curve. The government must also intensify efforts to issue bonds in only those tenors that actively trade and are used by the private sector as benchmarks. System upgrades are needed to increase efficiency, reliability, and interoperability, and to support a wider variety of participants, including tax-exempt contractual savings entities. A new yield curve calculation methodology is needed as the current methodology is based on infrequently traded “bellwether” bonds. Reference to such bonds introduces volatility—price changes by as much as 50 basis points in a single day—which deters international investors and constrains the book-making process for corporate debt.

10. While institutional investors need to play a larger role in capital market development, the contractual savings subsector will take some time to mature. The insurance subsector faces limitations in what it can buy and sell, and a tedious approval process remains despite the relaxation of restrictive investment guidelines. The legal framework does not require private

10 Sector Assessment (Summary): Finance (accessible from the list of linked documents in Appendix 2).

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pensions to be fully funded. Public pensions have limited authority to raise contribution rates and face widespread noncompliance by employers who fail to fund the required contributions. Investment regimes are restrictive. Corporate bonds and notes represent just under 10% of total financial assets at each of the largest public pension funds. In contrast, the California State Teachers’ Retirement System in the United States (US) holds 30% of its financial assets in corporate bonds and private equity investments and only 8% in government bonds. Foreign-domiciled contractual savings institutions could provide an alternative source of demand for long-tenor infrastructure-linked investments. However, tax costs, including the final withholding tax applied to interest (which is typically not refunded), are high relative to comparator countries, which deters investors. In addition, the government has not taken the initiative to tap offshore climate or other specialty funds.

B. Policy Reform and ADB’s Value Addition

11. The government’s reform program. The PDP underscores the government’s emphasis on inclusive growth and reducing poverty. With the COVID-19 pandemic, efforts will need to be significantly scaled up to achieve these goals. Accordingly, primary emphasis has again been placed on investment. Prior to the current health emergency, the government announced plans to increase public spending on infrastructure to as high as 7.4% of GDP by 2022 and to encourage greater private sector participation in infrastructure. 11 With the COVID-19 pandemic, the government has launched a substantial response package while maintaining critical infrastructure spending. As such, it is imperative that the government (i) modernize and strengthen its debt issuance processes to fund its increasing expenditure and infrastructure needs, and (ii) provide more reliable price discovery to anchor the private sector’s efforts to raise complementary long-term infrastructure financing. Complementary reforms will also need to be undertaken to consolidate outstanding issues, boost liquidity, and reduce costs so as to establish a reliable term structure of interest rates (yield curve). In addition, the government will deploy integrated financial market infrastructure to promote efficiency in the trading, settlement, and delivery of securities.

12. The programmatic approach. The Encouraging Investment through Capital Market Reforms Program (footnote 5) set the stage for the proposed program by adopting a more structured and sequenced approach to developing the domestic capital market. Long-standing foundational reforms were addressed. The cash and investment management functions, as well as the technical capacity of the BTr, were strengthened. The BTr upgraded and modernized its operations, and initiatives were launched to improve the reliability of market-generated bond pricing data. The government also began improving the legal framework and engaging with the contractual savings subsector. The proposed programmatic approach now advances these foundational reforms, triggering a significant increase in government bond trading volumes and corporate issuance, and launches a more focused effort to include the contractual savings sector in the government’s development objectives. A programmatic approach provides for a long-term but flexible engagement, a modality well-suited to capital market development.

13. Proposed policy reforms. The program’s impact is aligned with the PDP and will help the government achieve its targeted public spending covering both the COVID-19 response and medium-term infrastructure development. The program will (i) help the government fund its expenditures at lower relative costs, and (ii) enable the private sector to fund infrastructure through the capital markets. The program will also help increase financial resilience by growing the contractual savings sector. The program consists of two subprograms and has three reform areas: (i) strategic oversight and the enabling environment; (ii) liquidity, transparency, and price

11 On 11 December 2019, the Development Budget Coordination Committee adopted a 6.5%–7.5% growth target for

2020–2022 with infrastructure appropriations expected to represent 5.9% of GDP.

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discovery in the government bond market; and (iii) institutional participation in the capital markets. A third subprogram may be added during processing of subprogram 2 (para. 24).

14. Strategic oversight and the enabling environment. Under this reform area, stronger strategic guidance has been provided by the government to market development, and the enabling environment has been improved. Under subprogram 1, the BSP, the BTr, and the SEC formalized their working group and implemented the Philippines’ first coordinated capital market development plan with an immediate focus on liquidity, price discovery, efficiency, and oversight of the government bond market. The charter of the BSP was amended in February 2019 to provide a mandate for financial stability, expand the BSP’s policy toolkit by restoring the central bank’s authority to issue its own debt papers as part of its regular monetary operations, and provide financial supervision staff with qualified immunity. Congress adopted a law to provide the BSP with the authority to supervise all payment systems. The corporation code was revised to simplify corporate actions and reduce associated costs. The revised code also provides for quasi-independent funding, and includes provisions allowing the SEC to revoke a corporation’s charter for corrupt practices. Under subprogram 2, the government plans to implement a broader, longer-term capital market development plan which includes the private and contractual savings subsectors. The BSP and the SEC plan to adopt implementing regulations to make operational the legal reforms completed under subprogram 1.

15. Liquidity, transparency, and price discovery in the government bond market. Under this reform area, increased priority spending—including infrastructure—was facilitated by enabling increased issuance of government debt at lower relative cost, and by providing a reliable yield curve for pricing private sector debt. Under subprogram 1, the BTr has reversed a 3-year decline in trading volumes and provided more reliable market-generated data. It concentrated 100% of the government’s domestic issuance into five key tenor buckets, encouraged competition through 10 “market makers” as part of its enhanced primary dealer system, and introduced hedging mechanisms to facilitate eventual two-way price quotes. To better utilize the data and to reduce transaction costs, the government replaced its outdated domestic trading platform with a vendor-supplied system (Bloomberg E-bond) and replaced the current yield curve calculation methodology (R2) with a globally accepted system which employs machine learning (Bloomberg Bval). Supplementing these reforms, the BTr launched the new National Registry of Scripless Securities (nRoSS) and associated primary auction system. The system is efficient and can implement the pending changes in tax law by facilitating the entry of new tax-exempt participants (international contractual savings institutions) in the government securities market. Under subprogram 2, the government plans to complete its transition to an over-the-counter self-regulated market by issuing the necessary market conduct guidelines. The BTr plans to require the primary dealers to publish and execute on firm two-way price quotes, and will expand nRoSS to accommodate new products, including repos and floating rate notes.

16. Institutional participation in the capital market. This reform area encourages greater participation by international institutional investors while concurrently launching the development of a domestic institutional investor base. Under subprogram 1, the government submitted a bill to Congress to reduce taxes to encourage more international investors and to remove tax arbitrage between finance subsectors. The SEC targeted pools of international investment funds by issuing regulations to support the issuance of “green bonds”. To encourage demand from domestic institutional investors, Congress amended the Social Security Act to increase the contribution rate, broaden membership, and provide more flexibility in investment decisions by the Social Security System. The Insurance Commission issued detailed guidance allowing insurance companies to invest in infrastructure projects included in the PDP. The BSP launched an initiative to streamline and modernize the Personal Equity and Retirement Account (PERA) by incorporating the

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seamless issue of tax exemptions by the Bureau of Internal Revenue and enabling mobile interfaces. On the supply side, the government eased regulatory restrictions, resulting in the issuance of ₱294 billion in notes under approved shelf registrations aggregating to ₱507 billion. This included the first issue of ₱15 billion in green bonds by a banking conglomerate (1 February 2019). Moreover, the SEC approved a ₱1 billion issuance by Aeon Credit Services Philippines, the first debentures issued in the Philippines under the Association of Southeast Asian Nations plus three (ASEAN+3) Multi-Currency Bond Issuance Framework. Under subprogram 2, the government will adopt and implement the revised tax code. The BSP plans to complete upgrades to the PERA and implement its growth plan. The Social Security System plans to issue implementing rules and regulations and the Insurance Commission plans to further encourage the insurance subsector to support infrastructure. The BSP and SEC will encourage additional corporate issuances and listings by foreign entities domiciled in the Philippines.

Figure 2: ADB’s Engagement in Capital Market Development in the Philippines

TA = technical assistance. Source: Asian Development Bank.

Table 1: Alignment with Strategy 2030

Strategy 2030 Priorities Program

Strengthening governance and institutional capacity

The program will improve the capacity of the government to run and administer its government debt market. The program will also strengthen the governance and operational framework of the contractual savings subsector.

Fostering regional cooperation and integration

The program will align the operations of the domestic capital market with regional and international norms and best practices. The program will also encourage investment from regional institutional investors and promote the ASEAN+3 Multi-Currency Bond Issuance Framework.

ASEAN+3 = Association of Southeast Asian Nations plus Japan, the People’s Republic of China, and the Republic of Korea. Source: Asian Development Bank.

17. ADB’s experience. ADB has supported finance sector reforms with five programmatic PBLs and substantial technical assistance (TA) (Figure 2). ADB initially focused on building the equity market. Responding to the 1997 financial crisis, ADB supported the government’s efforts to strengthen governance, improve the SEC, implement investor protection measures, and develop an anti-money-laundering function. Beginning in 2005, ADB supported the development of the fixed-income market but revised its focus to financial stability in response to the 2008 global financial crisis. Given the lessons learned and the government’s emerging focus on infrastructure, ADB instituted a coordinated and sequenced approach in 2013 (footnote 5) to further develop the domestic capital market. These reforms also sought to begin building a more diversified

1998–2001:

First Nonbank Financial Governance Program

TA: Strengthening Regulation and Market Governance

2001–2003:

Second Nonbank Financial Governance Program

TA: Support for Nonbank Financial Governance II

2013–2017:

Encouraging Investment through Capital Market Reforms Program

TA: Strengthening Treasury’s Liquidity Management

TA: Strengthening Treasury Operations and Capital Market Reform

1992–1998:

First Capital Market Development Program

TA: Stock Market Development

2005–2011: Financial Market Regulation and Integration Program TA: Capacity Development of Financial Regulators

2017–2021: Support to Capital Market-Generated Infrastructure Financing Program

7

institutional investor base to encourage the provision of long-term finance for infrastructure. This programmatic approach continues these reforms and introduces transition to a more focused effort to develop the contractual savings subsector as a natural buyer of the newly developing long-term financing instruments. The program is aligned with ADB’s Strategy 2030 (Table 1) and is fully consistent with ADB’s broader support to the government’s infrastructure agenda. For example, ADB has supported infrastructure development by supporting reforms to the public–private partnership framework, including policy-based financing,12 and TA.13 In addition, ADB has approved a TA loan to support the preparation of large, complex infrastructure projects, and ADB’s country operations business plan lists direct lending support to infrastructure of $2.6 billion in 2019 and $2.0 billion in 2020 (footnote 2). 14

18. Lessons learned. ADB’s long-term engagement helped inform the program through several key lessons learned. First, success in developing a local currency finance sector depends on (i) sound macroeconomic policies and debt management strategies, (ii) a diversified investor base, (iii) a sound legal framework, and (iv) modern, reliable, and efficient infrastructure. Given the wide variety of stakeholders involved in these areas, the use of coordinated planning and execution is likely to produce better results. Second, finance sector reforms are complex, have a medium- to long-term gestation period, and require proper sequencing. Programs should exhibit sufficient flexibility to accommodate a medium- to long-term development horizon and the inevitable changes which occur when dealing with complex reform areas. Third, the full development of a domestic capital market requires a large and vibrant contractual savings subsector to provide demand for longer-tenor financing instruments to match their longer-tenor liabilities. Given the unique characteristics of this subsector, dedicated programs will eventually be needed to address its unique development needs.

19. ADB’s value addition to the program. The engagement highlights the benefits of a One ADB approach with extensive development partner coordination. This coordination covers the drafting and implementation of the government’s first capital market development plan, the launch of the nRoSS, the PERA upgrade, enhancements to the payment system, green bond guidelines,15 and the repo market, all of which were supported by ADB’s Southeast Asia Regional Department and development partners (para. 20).16 ADB’s Economic Research and Regional Cooperation Department provided support through the ASEAN+3 Multi-Currency Bond Issuance Program, while ADB’s Philippines Country Office has been instrumental in supporting the completion of a comprehensive overhaul of the tax code. Finally, ADB’s Treasury Department, along with the Southeast Asia Regional Department, activated ADB’s existing tax exemption and collaborated to obtain approvals for an offshore issue of US dollar–peso-linked notes by ADB. This issuance allowed ADB to invest in and support the domestic currency bond market and to make local currency lending available to the government.

12 ADB. 2015. Report and Recommendation of the President to the Board of Directors: Proposed Programmatic

Approach and Policy-Based Loan for Subprogram 1 to the Republic of the Philippines for Expanding Participation in Infrastructure Program. Manila.

13 ADB. 2011. Technical Assistance to the Republic of the Philippines for Strengthening Public–Private Partnerships. Manila; and ADB. 2014. Technical Assistance to the Republic of the Philippines for Strengthening Evaluation and Fiscal Cost Management of Public–Private Partnerships. Manila.

14 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.

15 ADB. 2019. Technical Assistance for Southeast Asia Public Management, Financial Sector, and Trade Policy Facility. Manila.

16 ADB. 2013. Technical Assistance to the Republic of the Philippines for Strengthening Treasury’s Liquidity Management. Manila; and ADB. 2014. Technical Assistance to the Republic of the Philippines for Strengthening Treasury Operations and Capital Market Reform. Manila.

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20. Development partner coordination. Active development partners include the US Treasury and the International Monetary Fund. The anchor for the program is the medium-term capital market development plan. The development of this document represents a collaboration between the above development partners and the BSP, the BTr, and the SEC. The reform program, which has essentially been completed, is largely reflected in the reform areas (paras. 14–16). In supporting the implementation of the plan, a clear but cooperative delineation of responsibility has been maintained. The US Treasury Office of Technical Assistance provides support to the development of the primary and secondary government bond market and its supporting infrastructure. ADB complements this support with TA designed to complete the supplementary reforms necessary to develop the market. The International Monetary Fund is providing assistance on monetary management and liberalizing the foreign exchange regime.

C. Impacts of the Reform

21. The impact of the program is aligned with the country’s target for spending on public infrastructure of 7.4% of GDP and private sector participation in infrastructure increased. It will enlarge the government debt market, allowing the government to fund its priority programs while paving way to facilitate long-term financing in general. The effect of the reforms will be increased availability of long-term finance for infrastructure which will be demonstrated through the performance indicators in the DMF. Corporate bonds outstanding will increase to at least 12% of GDP, government bonds held by the contractual savings sector to 35% of the total outstanding, and corporate debt held by public pension funds to 15% of total financial assets held by the funds. Currently, corporate entities raise funding for infrastructure primarily through generic bond issues under the corporate name and do not disclose fund raising by use. This is expected to change over time which will provide better tracking mechanisms for use in the DMF. In the interim, the current performance indicators represent the best available proxies.

22. Empirical research produces a remarkably consistent narrative. Finance sector development exerts a first-order impact on long-run economic growth (footnote 9). The reform package of subprogram 1 increased the borrowing capacity of the government and the private sector, thereby allowing for a faster rate of investment and higher GDP growth. This will help the government achieve its targeted public spending and encourage greater private sector participation in infrastructure. Assuming a gradual increase in the size of the debt market, total capital investment is expected to grow at 11% per annum in real terms and deliver over ₱28 trillion in infrastructure expenditure over the next 10 years. The reforms will be instrumental in meeting the infrastructure deficit and help sustain higher GDP growth in the medium to long run. The larger base of infrastructure and private capital generated over this period will permanently raise productivity and potential output per capita, lifting potential income.17

D. Development Financing Needs and Budget Support

23. The government has requested a regular loan of $400 million from ADB’s ordinary capital resources to help finance subprogram 1. The loan will have a 15-year term, including a grace period of 3 years; an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a commitment charge of 0.15% per year; and such other terms and conditions set forth in the draft loan agreement. Based on the annuity repayment method, the average maturity is 12.1 years, and no maturity premium is payable to ADB. The indicative loan amount for subprogram 2 is $300 million. The Philippines’ total financing needs for 2018–2021 were expected to be substantial with annual budget deficits of 3.0% of GDP or larger. However, due to the adverse impact of COVID-19, the government’s 2020 financing requirement

17 Program Impact Assessment (accessible from the list of linked documents in Appendix 2).

9

is expected to increase to ₱1.9 trillion ($37.6 billion) from ₱1.4 trillion. Domestic borrowing will increase by ₱74.7 billion and foreign borrowing will increase by ₱129.2 billion ($2.6 billion) to finance its COVID-19 response program. The size of subprogram 1 reflects the government’s total financing needs, the strength of the program, and its economic benefits (para. 22).18

E. Implementation Arrangements

24. The Department of Finance (DOF) is the executing agency. The BSP, the BTr, and the SEC are the implementing agencies. The implementation period is July 2017–September 2019 for subprogram 1, and October 2019–December 2021 for subprogram 2. A steering committee chaired by the DOF, with the implementing agencies as members, will oversee the program. Based on the progress made, the quality of the next phase of capital development planning, and consultations with the government, a third subprogram may be added during the processing of subprogram 2. If added, this third subprogram will cover January 2022–March 2024 and will reflect and ensure a continuity of reforms within the contractual savings sector which provide for an immediate expansion of the sector or an increased uptake of long-term finance to support infrastructure. The proceeds of the PBL will be withdrawn in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time).

III. DUE DILIGENCE

25. Safeguards. The program does not trigger ADB’s Safeguard Policy Statement (SPS) policy principles and requirements for environment, involuntary resettlement and indigenous peoples. It is classified as category C for environment, involuntary resettlement and indigenous peoples following ADB’s SPS 2009.

26. Poverty and social. The program contributes to poverty reduction by increasing fiscal resources available for both infrastructure and social expenditures. Increased investment in infrastructure will lead to increased connectivity, in turn boosting employment and reducing inequality. Increased intermediation through the contractual savings subsector has been shown to boost real GDP per capita, especially in more developed countries such as the Philippines (footnote 9). The program complements an ADB’s ongoing efforts to increase financial inclusion and literacy and provides an entry point for coordinated reforms to encourage retirement savings through future engagements. The program is categorized as having no gender elements because of its focus on foundational capital market development, including infrastructure and debt issuance, which is widely beneficial to all stakeholders. However, the program clearly holds the potential to generate direct benefits for women. The revised Social Security Act provides additional benefits to overseas Filipino workers, 56% of whom are women.19

27. Governance. A public expenditure and financial accountability assessment conducted in 2017 found three of seven core public financial management areas (policy-based budgeting, transparency, and asset–liability management) have improved and are considered strong. Efforts to improve budget credibility, predictability, execution, and external scrutiny and audit are ongoing. The government is implementing a results-based anticorruption plan to strengthen the judicial branch of the government and the Office of the Ombudsman. Reforms under the program will continue to strengthen public financial management by improving cash and debt management within the BTr. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and the DOF.

18 The loan may be disbursed in one or more installments. 19 Summary Poverty Reduction and Social Strategy (accessible from the list of linked documents in Appendix 2).

10

28. Risks and mitigating measures. Major risks and mitigating measures are summarized in Table 2 and described in detail in the risk assessment and risk management plan.20 The overall inherent risk was assessed to be moderate. Substantial risks include the COVID-19 pandemic, global trade and macroeconomic conditions, increased budget deficits, and changes in key personnel. Key but potentially costly reforms, such as pre-funding pensions, may be resisted by vested interests and be difficult to achieve. Risks will be mitigated through macro fiscal measures, related legislative reforms, consensus building, and capacity building.

Table 2: Summary of Risks and Mitigating Measures Risks Mitigation Measures The COVID-19 pandemic lasts longer or causes a deeper contraction than expected.

The government has crafted a comprehensive COVID-19 response plan including economic support initiatives.

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

The government will mitigate these risks by maintaining a sound macroeconomic footing through pro-growth policies, control of inflation, and open trade policies.

Budget deficits increase beyond current levels and compromise the Philippines’ credit rating, reducing the attractiveness of its debt.

The government has mitigated this risk by strengthening debt management systems and closely monitoring debt levels, as well as the potential on the nation’s credit rating.

Personnel changes within the BSP, BTr, and SEC coupled with the broadening of the capital market planning effort complicate implementation.

This risk is being mitigated by utilizing the capital market planning group (BSP, BTr, SEC, key development partners, and the private sector) to guide and implement the reforms.

Pension reform is held back by vested interests because of the cost of the initiatives.

Risk mitigation will be provided by supporting an industry proposal for pension reform which has political sponsorship.

BSP = Bangko Sentral ng Pilipinas, BTr = Bureau of the Treasury, COVID-19 = coronavirus disease, SEC = Securities and Exchange Commission, TRAIN = Tax Reform for Acceleration and Inclusion Act. Source: Asian Development Bank.

IV. ASSURANCES

29. The government has assured ADB that implementation of the program shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in the loan agreement.

V. RECOMMENDATION

30. I am satisfied that the proposed programmatic approach and policy-based loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve:

(i) the programmatic approach for the Support to Capital Market-Generated Infrastructure Financing Program; and

(ii) the policy-based loan of $400,000,000 to the Republic of the Philippines for subprogram 1 of the Support to Capital Market-Generated Infrastructure Financing Program, from ADB’s ordinary capital resources, in regular terms, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 15 years, including a grace period of 3 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board.

Masatsugu Asakawa President

5 May 2020

20 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK Country’s Overarching Development Objective: Target for spending on public infrastructure of 7.4% of GDP achieved and private sector participation in infrastructure increased (Philippine Development Plan, 2017–2022).a

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting

Mechanisms Risks

Effect of the Reform Availability of long-term finance for infrastructure increasedb

By 2021: a. Corporate bonds outstanding increase to at least 12.0% 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

The effects of the COVID-19 pandemic last longer or causes a deeper contraction than expected. 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

Key Policy Actions By 2019: 1a. 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: No planning) 1b. The government adopted 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 (2017 baseline: No payment system oversight)

1a. BTr, BSP, and SEC websites 1b. Legislative report in Philippines Gazette

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

2. Liquidity, transparency, and price discovery in the government bond market

2a. The BTr identified and subsequently concentrated 100% of its 2018 issuance in specific benchmark securities (e.g., 3-year, 5-year, 7-year, 10-year, and 20-year) and the proportion of its issuance of treasury bills increased to 11% of bonds. (2017 baseline: 7%) 2b. BTr launched the National Registry of Scripless Securities to

2a. BTr internal reports 2b. BTr internal reports and press

12 Appendix 1

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting

Mechanisms Risks

provide a more efficient and functional securities platform to meet international standards, reduce costs, provide seamless primary auctions, facilitate trading between the taxable and tax-exempt sectors, and rationalize the securities settlement process. (2017 baseline: Not applicable)

releases, and consultant reports

3. Institutional participation in the capital market

3a. The BSP, SEC, and PDEx eased regulatory hurdles and developed listing rules for banks to issue corporate bonds resulting in ₱294 billion in new corporate notes issued during the program period under announced total borrowing plans aggregating ₱507 billion. (2017 baseline: Not applicable) 3b. The SEC issued regulations and guidelines to support the issuance of green bonds based on the ASEAN standards issued by the ASEAN Capital Markets Forum. Under these guidelines, the Rizal Commercial Banking Corporation issued ₱15 billion in green bonds, the first domestic listed green bond issued in the Philippines. (2017 baseline: No guidelines)

3a. PDEx website and news releases 3b. PDEx website and news releases

Budget Support Asian Development Bank: $400 million (loan)

ASEAN = Association of Southeast Asian Nations, BSP = Bangko Sentral ng Pilipinas (Central Bank of the Philippines), BTr = Bureau of the Treasury, COVID-19 = coronavirus disease, GDP = gross domestic product, PDEx = Philippine Dealing and Exchange Corporation, SEC = Securities and Exchange Corporation. a Government of the Philippines, National Economic and Development Authority. 2017. Philippine Development Plan,

2017–2022. Manila. b The current set of performance targets reflects the best available proxies for increased availability of long-term

finance for infrastructure. As prudential single borrower limits begin to force banks to rely on financing mechanisms such as investment vehicles (e.g., special-purpose vehicles), segregated and improved monitoring will become available and will be reflected by adding additional performance targets to the design and monitoring framework. This will allow identification of both specific-purpose bond issues and the purchase of these instruments by the contractual savings sector.

Source: Asian Development Bank.

Appendix 2 13

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=53047-001-3

1. Loan Agreement

2. Sector Assessment (Summary): Finance

3. Contribution to the ADB Results Framework

4. Development Coordination

5. Country Economic Indicators

6. International Monetary Fund Assessment Letter

7. Summary Poverty Reduction and Social Strategy

8. Risk Assessment and Risk Management Plan

9. List of Ineligible Items

Supplementary Documents

10. Program Impact Assessment

11. Public Financial Management Assessment

14 Appendix 3

DEVELOPMENT POLICY LETTER

Appendix 3 15

16 Appendix 3

Appendix 3 17

18 Appendix 4

POLICY MATRIX

Outputs Subprogram 1 Accomplishments

(Policy triggers in bold) July 2017 to September 2019

Subprogram 2 (Policy triggers in bold)

October 2019 to December 2021

Reform Area 1: Strategic Oversight and the Enabling Environment

1.1 Planning for capital market development strengthened.

o ADB TA, Strengthening Treasury Operations and Capital Market Reform (TA8718)

o U.S. Treasury Resident

Advisor program

The primary financial regulators and other key stakeholders have collectively agreed to provide stronger and more comprehensive leadership to support capital market development, starting with the government bond market, as a necessary precondition to more complex markets such as infrastructure finance. Accomplishments include: 1. To organize and provide comprehensive

direction to market development activities, the DOF, BSP, SEC, and BTr developed, adopted, and implemented the Philippines first coordinated government-driven medium-term local currency debt market development plan with an immediate focus on the government bond market.

Building on subprogram 1, the primary financial regulators and other key stakeholders collectively agree to provide more comprehensive support to capital market development plan to encourage the participation of institutional investors and introduce more complex long-term financing instruments. Accomplishments include: 1. To expand and strengthen the

comprehensive direction provided to market development activities, the DOF, BSP, SEC, BTr, and other key stakeholders draft, adopt, and begin implementing a broader capital market development roadmap.

1.2 The legal, regulatory, and monetary frameworks improved.

The government has accelerated and deepened its legislative reform agenda to provide a stronger foundation for capital market development. Accomplishments include: 2. To ensure prerequisite financial and monetary

stability, the government amended the charter of the BSP to include financial stability as a mandate, provide more effective monetary tools, strengthen supervision, limit injunctive relief, and provide qualified immunity for its staff.

The government advances its legislative reform agenda to provide a stronger foundation for capital market development. Accomplishments include: 2. The BSP implements the amended charter

through the adoption of implementing rules and regulations.

Appendix 4 19

Outputs Subprogram 1 Accomplishments

(Policy triggers in bold) July 2017 to September 2019

Subprogram 2 (Policy triggers in bold)

October 2019 to December 2021

o ADB TA, Financial Inclusion Framework Strengthening (TA9166)

o ADB TA, Capacity Development of Financial Regulators (TA8038)

3. To provide for increased security and efficiency in the payment system, the government adopted the National Payment Systems Act (Republic Act No. 11127) which establishes finality of settlement and close-out netting in law and assigns supervisory oversight of all payment systems to the BSP.1

4. To modernize and streamline the oversight of corporate affairs, and to improve the SEC’s funding, the government approved the revised corporation code which included provisions to reduce costs to business, strengthen supervision, and combat corruption.

3. To implement the National Payment Systems Act, the BSP requires registration of all operators of payment systems to enable the BSP to create a baseline inventory of these operators.

4. The government, through the SEC,

implements the revised corporation code by issuing regulations covering the establishment of OPCs; the number and qualification of incorporators; the dissolution, revocation, and revival of expired corporate existence; and the conversion from ordinary stock corporations to OPCs.

Reform Area 2: Liquidity, Transparency, and Price Discovery in the Government Bond Market

2.1 Primary dealer function, trading activity, and price discovery enhanced.

o U.S. Treasury Resident Advisor program

To increase long-term financing for infrastructure, the government introduced competition among market makers as well as key risk management tools which enabled (i) the issuance of higher levels of government debt at lower relative costs, and (ii) a more reliable yield curve as a pricing base for corporate and infrastructure related debt. Accomplishments include: 5. To increase trading levels of peso denominated

government securities, the BTr implemented its

The government successfully increases trading activity, leading to higher issuance volumes at lower relative costs and a more reliable yield curve which provides reliable price discovery for corporate and infrastructure related debt. Accomplishments include:

1 Payment systems include payment activities, instruments, conventions, rules, service providers, and operators, among other payment system components.

20 Appendix 4

Outputs Subprogram 1 Accomplishments

(Policy triggers in bold) July 2017 to September 2019

Subprogram 2 (Policy triggers in bold)

October 2019 to December 2021

o U.S. Treasury Resident

Advisor program

o ADB TA, Strengthening Treasury Operations and Capital Market Reform (TA8718)

enhanced primary dealer system by utilizing previously developed criteria to select 10 “market makers” who are responsible for participating in all auctions, maintaining 2% of secondary market activity, and posting two-way indicative market prices for benchmarks on a third-party information provider.

6. Using consolidation, the government, through

the BTr, built on efforts to increase trading volumes in key tenors by identifying and subsequently concentrating 100% of its 2018 issuance in specific benchmark securities (e.g. 3-year, 5-year, 7-year, 10-year, and 20-year) and increased its bills-to-bonds ratio to 0.12 from 0.08 by lifting issuance in 2018 by 80% over 2017.

7. To encourage firm price quotes on domestic government securities, (i) the BTr developed and launched a securities lender of last resort for the enhanced primary dealers and signed GMRAs with all 10 initial market makers, and (ii) the BSP implemented a zero-percent reserve requirement on GMRA-based repo transactions, which supports the development of a repo market

5. The government, through the BTr, maintains

its focus on building large benchmarks through reissuance and reinforces the obligations of market makers by requiring them to maintain firm bid/ask prices on each series through regular price quotes in a public forum.

6. To further support the development of firm two-

way markets, the government establishes the necessary controls2 and broadens participation in repo markers to include non-bank institutions and increases the efficiency of trading by linking Bloomberg’s repo trading platform to nRoSS.

2.2 Base infrastructure of the government securities market upgraded.

The government complemented its initiatives to increase trading activity and market-driven pricing data by upgrading its systems and infrastructure to

The government completed additional enhancements to its systems and infrastructure which elevate operations to international standards. Accomplishments include:

2 Broader participation in the repo market will require regular market surveillance as well as possible safety net measures to guard against potential risks to financial

stability.

Appendix 4 21

Outputs Subprogram 1 Accomplishments

(Policy triggers in bold) July 2017 to September 2019

Subprogram 2 (Policy triggers in bold)

October 2019 to December 2021

o ADB TA, Strengthening

Treasury Operations and Capital Market Reform (TA8718)

o ADB TA, Institutionalizing Capital Market Reforms (TA9424)

make better use of the market-sourced data to inform the yield curve. Accomplishments include:

8. The government, through the BTr, launched

the nRoSS scripless registry which provides a more efficient and functional securities platform to meet international standards (ISO 20022 compliant), reduce costs, provide seamless primary auctions, encourage trading between the taxable and tax-exempt sectors through a tax-tracking and tax reimbursement facility, and rationalize the securities settlement process to provide DVP.

9. The government, through the BTr, gained additional efficiencies and improved transparency in the government bond market by migrating physical trading of government securities to a modern vender platform (Bloomberg E-bond) which provides significant efficiencies, improved transparency, and price disclosure (Bloomberg BVAL), which in turn provided a more reliable yield curve.

10. The government, through the SEC, approved

and implemented the rules on government securities benchmark administration, completing the transition to a more efficient OTC government securities market, thereby providing reliable price disclosure and a yield curve.

7. The government, through the BTr, launches

version 2.0 of nRoSS to facilitate the introduction and trading of floating rate notes, repurchase agreements, and switch auctions.

8. The government, through the SEC,

approves and grants a license to a qualified and eligible benchmark administrator and ensures maintenance of a reliable yield curve and transparent price disclosures.

22 Appendix 4

Outputs Subprogram 1 Accomplishments

(Policy triggers in bold) July 2017 to September 2019

Subprogram 2 (Policy triggers in bold)

October 2019 to December 2021 11. The BTr’s launched an ordering platform for

Retail Treasury Bonds that provides retail customers and accounts with direct participation in the government bond market.

9. The BTr increases participation in the retail ordering platform and engages all market makers to connect to the online retails ordering platform of Retail Treasury Bonds to provide increased access to government bonds for retail investors.

Reform Area 3: Institutional Participation in the Capital Market

3.1 Demand-side constraints eased or eliminated.

o ADB TA, Strengthening Tax

and Fiscal Policy Capacity for Inclusive Growth (TA9250)

o ADB Regional TA, Enhancing Association of Southeast Asian Nations Capital Market Integration (TA8905)

To encourage international and domestic demand for longer-tenor infrastructure-linked investments, the government provided an enabling environment and more incentives to the contractual savings sector to increase its intake of long-tenor capital markets products. Accomplishments included: 12. To encourage capital market development

and more international participation, the government submitted the TRAIN Package 4 to Congress for approval to (i) reduce and harmonize withholding taxes across instruments at a more competitive 15%, (ii) provide for regionally competitive corporate tax rates, (iii) achieve tax neutrality across financial subsectors, and (iv) reduce friction costs by, among others, eliminating the IPO tax (unique to the Philippines among Southeast Asian countries).

13. To increase demand from specialized pools of

international investment funds, the SEC issued regulations and guidelines to support the issuance of green bonds, including bonds to support infrastructure, based on the ASEAN

To encourage demand for longer-tenor infrastructure-linked investments, the government continued to build an enabling environment for the contractual savings sector. Accomplishments included: 10. To provide a level playing field, the

government encourages more international participation, and implements the TRAIN Package to remove tax arbitrage between finance subsectors, the government.

11. To encourage additional demand from

specialized pools of international investment funds, the SEC issues regulations and guidelines to support the issuance of social and sustainable bonds based on the ASEAN

Appendix 4 23

Outputs Subprogram 1 Accomplishments

(Policy triggers in bold) July 2017 to September 2019

Subprogram 2 (Policy triggers in bold)

October 2019 to December 2021

o ADB TA, Institutionalizing Capital Market Reforms (TA9424)

standards complied by the ASEAN Capital Markets Forum.

14. To strengthen the public pension fund and increase its demand for a greater range of financial instruments, the government adopted the Social Security Act of 2018 which improved the fund’s governance, authorized scheduled increases in contribution rates, broadened membership by including OFWs of which 55.8% are women, and increased the level of allowable investments in private sector sourced long-dated risk assets.

15. To increase domestic demand for, and participation in infrastructure finance, the Insurance Commissioner issued regulations to authorize insurance companies to invest in the debt or equity securities of infrastructure projects included in the PDP including construction finance, project finance, or maintenance contracts.

16. To promote capital market development and savings mobilization, the BSP launched its “5 million accounts in 5 years” plan for PERA.

17. To widen demand for government debt, the BSP expanded the definition of admitted assets eligible for purchase by Unit Investment Trusts to include all government securities including long-tenor maturities. In addition, the SEC issued a

standards complied by the ASEAN Capital Markets Forum.

12. The government, through the SSS, adopts

operating guidelines and policies to implement the new Social Security Act, focusing on increased membership including women OFWs, contributions, and expanded investment powers.

13. The Insurance Commission further refines its

guidelines to encourage the insurance sector to make additional investments in long-tenor investments, including infrastructure related investments.

14. The BSP completes the upgrades to the

PERA system and issues guidelines to streamline the PERA investment process.

15. To strengthen credit ratings, and to facilitate an increase in investments eligible for purchase by the contractual savings sector, the BSP and SEC encourage entities to assign a credit rating to a wider variety of financial instruments.

24 Appendix 4

Outputs Subprogram 1 Accomplishments

(Policy triggers in bold) July 2017 to September 2019

Subprogram 2 (Policy triggers in bold)

October 2019 to December 2021 regulation which expanded the definition of the liquid/semi-liquid assets eligible to meet the liquidity requirement of investment companies.

3.2 Supply-side constraints eased or eliminated.

o ADB TA, Institutionalizing Capital Market Reforms (TA9424)

o Support for ASEAN+3 Bond Market Forum under the New Asian Bond Markets Initiative Medium-Term Road Map

To encourage the private sector to make greater use of the capital markets, the government implemented reforms to provide an enabling environment and issued first-of-kind securities to establish an issuance precedent. Accomplishments included: 18. To encourage the development of a corporate

bond market, and facilitate competition among domestic and foreign financial institutions, the BSP eased regulatory hurdles and the SEC developed listing rules for banks to issue corporate bonds to accelerate growth of capital market sourced corporate funding.

19. To encourage foreign listings, the SEC approved and the PDEx listed Aeon’s ₱1 billion in debentures, the first such issuance in the Philippines under the ASEAN+3 Multi-Currency Bond Issuance Framework and guaranteed by the Credit Guarantee and Investment Facility.

To encourage the private sector to make greater use of the capital markets, the government implemented additional reforms to provide an enabling environment. Accomplishments included: 16. To further encourage the development of the

corporate bond market, the BSP phases out the issuance and use of Long-Term Negotiable Certificates of Deposit which had previously provided banks a tax-arbitraged alternative to publicly listed corporate bonds.

17. The SEC approves and the PDEx lists

additional securities by foreign issuers either through direct issuance or through the ASEAN+3 Multi-Currency Bond Issuance Framework.

ADB = Asian Development Bank, ASEAN = Association of Southeast Asian Nations, BTr = Bureau of the Treasury, BSP = Bangko Sentral ng Pilipinas (Central Bank of the Philippines), DOF = Department of Finance, DVP = delivery versus payment, GMRA = Global Master Repurchase Agreement, IPO = initial public offering, nRoSS = National Registry of Scripless Securities, OFW = overseas Filipino workers, OPC = one person corporation, OTC = over the counter, PDEx = Philippine Dealing and Exchange Corporation, PDP = Philippine Development Plan, PERA = Personal Equity & Retirement Account, SEC = Securities and Exchange Commission, SSS = Social Security System, TA = technical assistance, TRAIN = Tax Reform for Acceleration and Inclusion Act, U.S. = United States.