Speech
of
His Excellency Fidel V. Ramos
President of the Philippines
At the Asia-Pacific Forum on Securities Market Regulation and Supervision

[Delivered in Asian Development Bank Building, 6 ADB Avenue, Mandaluyong City, July 11, 1994]

Mobilizing capital for
Asia-Pacific development

NO TRUER WORDS can be said of this Forum than to describe it as timely and fitting. Timely because many Asian economies today are making the transition from inward-looking and highly protected financial systems to more outward-looking, market-oriented systems.

And fitting because the liberalization of the financial sectors, of which the securities markets form an important part, clearly needs to be tempered by proper oversight and financial prudence if it is to reach the desired goal of mobilizing resources for development.

Regulation vs. deregulation

To describe this meeting in these terms is to underscore a paradox. Why, some will wonder, do our governments and the Asian Development Bank talk about regulation at a time when the fashionable call of the hour is deregulation, liberalization and market-freeing policies?

The answer of course is plain. However it may value freedom, the market economy first and last also needs a rudder or a steering mechanism in order to work properly. There are indeed many areas where business must be fully allowed to do its tiling, free from the interference of government. But there remain critical areas where, as Woodrow Wilson once put it, “without the watchful interference, the resolute interference of the government, there can be no fair play.”

Just as Government regulation has enabled us to confidently drink our water, eat our food, take our medication, drive our cars and perform countless tasks without thought of peril, so also do we need Government oversight over the transactions that daily take place in our securities.

This then is the paradox: as we free market forces in the economy, Government must also be more capable and effective in policing fraud and wrongdoing. As we encourage businessmen and investors to freely transact and do their business, we must guard against a free-for-all situation.

Developmental role

Experience tells us how painful and costly disruptions in securities markets can be. Many have been the times when stock markets have collapsed, wiping out fortunes overnight and driving people to poverty and hardship. The New York stock-market crash in 1929 may be the biggest ever and most memorable, but it is hardly the only one.

A deeper and better understanding of how the system can operate most effectively for the stability of markets is an imperative for government. But just as in economic management as a whole, stability is a key step toward sustained growth, so in our securities industry, stabilization forms part of a much larger process of developing the securities market to achieve the greater benefit for all.

The role of regulatory authorities is not limited to regulating the operation of markets. More important, especially in the context of an emerging market like the Philippines, they are a force for the development of the capital market itself.

This is, however, easier said than done. The achievement of a more efficient and effective system is a long, hard road. There are no quick formulas for success. Past practices die hard; faulty policies take time to change; and entrenched interests are never easily dislodged.

These are the reasons why governments must take the greatest care to establish regulatory authorities with the proper mix of experience and ideas, correct motivation and firm conviction, and the support and wherewithal to achieve national goals. In the last analysis, success requires the concerted effort of a determined government, an honest and disciplined business community, and an enlightened and educated investing population and workforce.

And then, of course, every country does well to try and learn from the happy experience of others.

This is why forums like this are very useful and necessary. And this is why we look forward to seeing the results of the regional study commissioned by the Asian Development Bank on regulatory and supervisory frameworks and practices in selected ASEAN member countries.

In discussing the study’s findings at this forum, each of our governments can take counsel and insight into how we can improve the regulation and supervision of our markets, including writing new and sound policies where need be.

The Philippine experience

In terms of age, as President Sato has pointed out, the Philippines has one of the oldest securities industries in the region, as well as one of the older regulatory agencies in the Securities and Exchange Commission. Yet despite its long years of existence, the Philippine securities industry still has to achieve its full potential.

With the hope of contributing to your discussions, let me describe here briefly some of the history and character of our securities industry.

The securities market in the Philippines may be categorized into three distinct types of securities issue: equity, fixed income and government. The early beginnings of the industry date back to the establishment of the Manila Stock Exchange in 1927, when the Philippines was still under the colonial

Up to the beginning of the thirties, about 15 common stocks were listed; by 1932 these had increased to 20. These stocks were concentrated in mining shares, principally gold, as the Philippines then was one of the main suppliers of gold in the world market. Much later, commercial and industrial issues were listed.

In 1963 the Makati Stock Exchange came into being. Mining issues continued to predominate in the 1960s. In fact, a copper mining boom in 1969 drove the market to unprecedented highs. In the financial sector, commercial and thrift banks, and insurance companies were the popularly accepted institutions.

During this period, a new form of financial intermediary—the investment house—emerged. The short-term money market, which was promoted actively by the investment houses, rapidly grew and developed an interbank market, allowing commercial banks to adjust their reserve positions.

The ambit of regulation

In 1965 an intercompany market was developed through which corporate borrowers were able to tap the funds generated by investment houses, which in turn issued their promissory notes directly to investors. As the investors became more sophisticated, issuers of debt securities sold their securities directly to investors with investment houses as the medium. Successively, new forms of instruments were floated: Government securities (such as Treasury bills), commercial papers and certain forms of bankers’ and trade acceptances.

In 1968 the repurchase agreement, a form of two-name paper which helped to match securities in the secondary market, came into full use. During this period, the underwriting of securities also started to flourish with several large issues being brought to market. Subsequently, trust certificates were issued by banks in reaction to the inroads being made by investment houses in their traditional markets.

Yet, not until 1974 was the money market brought within the ambit of regulation. In 1982 the Credit Information Bureau, a credit rating agency, was established, initially under the wings of the Philippine Central Bank, to provide an impartial source of credit information for investors and conduct an objective evaluation of securities issued.

Today, we have expanded commercial banks, also known as universal banks, which can engage in both commercial and investment banking. Also today, there are 180 companies listed on the stock exchange.

It would not surprise any of you that during the years of authoritarianism in the Philippines—particularly from 1980 to 1986—no new securities issues were offered to the public. The stock market was practically asleep.

Reforming the securities firms

Since 1986, however, after the EDSA revolution, new public offerings have helped to revive the market. In 1993 alone, some Pll billion (approximately $400 million) was raised through new issues. Market capitalization, although still small in comparative terms, had risen to more than P760 billion (about $28 billion) at the end of 1993, from just about P18 billion at the close of the seventies.

Behind this greater volume in resource mobilization are a number of reforms we have carried out in the long-term securities market. For more than three decades, this country had two stock exchanges which listed and traded practically the same security issues. After much discussion and debate, we in Government succeeded in marrying the two stock exchanges into what is now the Philippine Stock Exchange.

In addition, foreign financial institutions are now allowed to operate their own securities firms in the country and some 30 such firms have been registered. The trading of securities has been fully automated. The system of clearing, settlements and central depository is also being upgraded and modernized along the lines recommended by the Group of 30

The Asian Development Bank and other multilateral organizations have provided funding and other forms of assistance to these efforts at reform. The Bank has provided technical assistance m reviewing reforms which our stock exchanges could undertake. A bond market study was also prepared. It has helped, I am told, to set up the first major venture capital fund in the country and to analyze resource transfers through regional mutual funds which invest in the Philippines.

In our program to develop our domestic capital market, the Bank has been a key pillar of support. The program envisions:

The strengthening of the regulatory framework and the supervisory capabilities of the Securities and Exchange Commission;

The institution of mechanisms to ensure the fair, efficient and transparent trading and distribution of securities;

An increase in the supply of securities and a broadening of the investor base;

The establishment of a sound legal framework for the development of a mutual-fund industry.

A basic pillar for “Philippines 2000”

The program for developing the capital market is among the basic pillars that underpin our national vision of “Philippines 2000.” We cannot get anywhere in this far-reaching program for modernization unless we substantially improve our capacity for resource mobilization and the system’s allocative efficiency. To achieve its growth targets, Philippines 2000 will require substantial injections of capital, particularly in infrastructure, which an efficient capital market can help raise from both local and foreign sources.

For the program to work, the role of key players is clearly defined The Government will continue to play a central, although supportive, role. The modes of intervention need to shift from basically regulatory to a developmental one, and policies which foster market competition, a level playing field and the growth and development of private enterprise will be vigorously pursued.

It is also recognized that internal changes and reform to be effective must take full stock of development within the region as well as in the international markets. Linkages such as those provided by this forum and by more formal structures will continue to be established to improve the country’s know-how, capabilities and responsiveness.

On the whole, therefore, we in the Philippines are confident that we are now marching in step with the rest of the region. Though domestic and foreign investments are growing substantially now, we are still not satisfied with the numbers. We believe we can do better, and we will do better—especially as foreign investors see our country’s improved level of economic performance this year and in the corning years.

Asia-Pacific on the march

In the Asia-Pacific as a whole, the time is especially hopeful for stimulating private investment and encouraging capital flows to developing countries. The tide is rising because the capital flow is powered, not just by altruism, but more vitally by economic dynamism. Our peoples and governments are responding to the development challenge and showing results.

The improvement in regional peace and stability has greatly contributed to this happy turn of events. As nearly all our countries have turned their attention to development, and away from military competition and arms buildup, the Asia-Pacific is finally beginning to realize its real destiny—a progressive regional community at peace.

In this pragmatic effort of building and rebuilding, the Asian Development Bank has always been our steadfast ally and supporter. No institution could be more aptly named.

Your meeting here in our capital lays one more enduring building block in the edifice of the new Asia-Pacific. You tackle a vital facet of our economic horizons, and the answers you provide will doubtless spell incalculable benefits for our securities markets, our countries and our region.