Completion Report

Project Numbers: 48427-001 and 48427-002 Loan Numbers: 3334 and 3595 December 2019

Philippines: Encouraging Investment through Capital

Market Reforms Program

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

CURRENCY EQUIVALENTS

Currency unit – peso (₱)

At Appraisal At Project Completion Subprogram 1 (Loan 3334) (18 June 2015) (31 December 2016)

₱1.00 = $0.0221 $0.0200 $1.00

Subprogram 2 (Loan 3595) ₱1.00 $1.00

=

= =

₱45.2250 (2 October 2017)

$0.0196 ₱50.8900

₱49.8550 (15 February 2019)

$0.0192 ₱52.1000

ABBREVIATIONS

ADB – Asian Development Bank ASEAN – Association of Southeast Asian Nations BSP – Bangko Sentral ng Pilipinas BTr – Bureau of the Treasury DOF – Department of Finance GDP – gross domestic product IMF – International Monetary Fund IOSCO – International Organization of Securities Commission NRoSS – National Registry of Scripless Securities P3F – post-program partnership framework PDP – Philippine Development Plan PERA – Personal Equity and Retirement Account PSE – Philippine Stock Exchange SEC – Securities and Exchange Commission TA – technical assistance

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.

Bancassurance – Bancassurance is an arrangement between a bank and an insurance

company allowing the insurance company to sell its products to the bank's client base. This partnership arrangement can be profitable for both companies. Banks earn additional revenue by selling insurance products, and insurance companies expand their customer bases without increasing their sales force or paying agent and broker commissions. (Source: Investopedia. https://www.investopedia.com/ terms/b/bancassurance.asp)

Basel III – Basel III is an international regulatory accord that introduced a set of reforms designed to improve the regulation, supervision, and risk management within the banking sector. In comparison to Basel II, Basel III strengthened regulatory capital ratios, which are computed as a percent of risk-weighted assets. Basel III introduced new requirements with respect to regulatory capital for large banks to cushion against cyclical changes on their balance sheets. Additionally, Basel III introduced leverage and liquidity requirements to safeguard against excessive borrowings and ensure that banks have sufficient liquidity during financial stress. (Source: Investopedia. https://www.investopedia.com/terms/b/basell-iii.asp)

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 described in its website: http://www.treasury.gov.ph/?page_id=33.

Contractual savings

– Contractual savings institutions include national provident funds, life insurance companies, private pension funds, and funded social pension insurance systems. They have long-term liabilities and stable cash flows and are therefore ideal providers of term finance, not only to government and industry, but also to municipal authorities and the housing sector.

Money Market Association of the Philippines

– The Money Market Association of the Philippines is a non-stock, non-profit corporation organized to provide an institutional medium by and through which the membership can collectively assist and cooperate with one another, the national government, and its appropriate agencies and instrumentalities in the promotion, development, expansion, and regulation of a free and open market for debt, debt-securities, and debt-related instruments and products.

primary dealers – Pre-approved 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.

Repurchase Agreements

– A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also a common tool of central bank open market operations. For the party selling the security and agreeing to repurchase it in the future, it is a repo; for the party on the other end of the transaction, buying the security and

agreeing to sell in the future, it is a reverse repurchase agreement. (Source: Investopedia. https://www.investopedia.com/terms/r/repur chaseagreement.asp)

Shelf registration – Shelf registration is a method for publicly traded companies to register

new stock offerings without having to issue them immediately. Instead, the securities can be issued at any time within a two-year period, allowing a company to adjust the timing of the sales to take advantage of more favorable market conditions should they arise. (Source: Investopedia. https://www.investopedia.com/terms/s/shelfre gistration.asp)

Treasury single account

– An essential tool for government cash management. It is critical for ensuring that (i) all tax and nontax revenues are collected and payments are made correctly in a timely manner, and (ii) government cash balances are optimally managed to reduce borrowing costs (or to maximize returns on surplus cash). This is achieved by establishing a unified structure of government bank accounts via a treasury single account system.

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. (Source: Investopedia. https://www.investopedia.com/terms/y/yieldc urve.asp)

NOTE

In this report, “$” refers to United States dollars.

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

Division, SERD Team leader Stephen Schuster, Principal Financial Sector Specialist, SERD Team members Jenelyn Mendez-Santos, Project Analyst, SERD Joehanne Kristal Santos, Operations Assistant, 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

BASIC DATA i

I. PROGRAM DESCRIPTION 1

II. DESIGN AND IMPLEMENTATION 3

A. Program Design and Formulation 3 B. Program Outputs 4 C. Program Costs and Financing 7 D. Disbursements 7 E. Program Schedule 7 F. Implementation Arrangements 7 G. Technical Assistance 8 H. Monitoring and Reporting 8

III. EVALUATION OF PERFORMANCE 9

A. Relevance 9 B. Effectiveness 9 C. Efficiency 11 D. Sustainability 11 E. Development Impact 12 F. Performance of the Borrower and the Executing Agency 12 G. Performance of the Asian Development Bank 13 H. Overall Assessment 13

IV. ISSUES, LESSONS, AND RECOMMENDATIONS 14

A. Issues and Lessons 14 B. Recommendations 14

APPENDIXES

1. Design and Monitoring Framework 16

2. Status of Compliance with Loan Covenants 20

3. Status of Compliance with Policy Measures 24

BASIC DATA A. Loan Identification

1. Country Philippines 2. Loan number and financing source 3334 / Ordinary Capital Resources

3595 / Ordinary Capital Resources 3. Program title Encouraging Investment through Capital

Market Reforms Program 4. Borrower Republic of the Philippines 5. Executing agency Department of Finance 6. Amount of loan 3334: $300,000,000

3595: $300,000,000 7. Financing modality Policy-based loan

B. Loan Data

1. Reconnaissance – Date started – Date completed

26 February 2015 24 April 2015

2. Loan negotiations Loan 3334 – Date started – Date completed Loan 3595 – Date started – Date completed

27 July 2015 18 August 2015 7 September 2017 11 October 2017

3. Date of Board approval Loan 3334 Loan 3595

26 November 2015 21 November 2017

4. Date of loan agreement Loan 3334 Loan 3595

7 December 2015 6 December 2017

5. Date of loan effectiveness

Loan 3334 – In loan agreement – Actual – Number of extensions

Loan 3595 – In loan agreement

– Actual – Number of extensions

5 March 2016 18 January 2016 0 5 March 2018 7 February 2018 0

6. Program completion date

Loan 3334 – Appraisal – Actual Loan 3595 – Appraisal – Actual

30 June 2016 31 August 2016 30 June 2018 30 June 2018

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7. Loan closing date

Loan 3334 – In loan agreement – Actual – Number of extensions

Loan 3595 – In loan agreement

– Actual – Number of extensions

31 December 2016 31 August 2016 0 31 December 2018 15 February 2019 1

8. Financial closing date

Loan 3334 – Actual

Loan 3595 – Actual

31 August 2016 15 February 2019

9. Terms of loan

Loan 3334 – Interest rate – Maturity (number of years) – Grace period (number of years)

Loan 3595 – Interest rate – Maturity (number of years) – Grace period (number of years)

London Interbank offered rate (LIBOR)-based 15 3 LIBOR-based 15 3

10. Disbursements a. Dates

Subprogram 1 (L3334) Subprogram 2 (L3595)

Initial Disbursement 21 January 2016

23 July 2018

Final Disbursement 10 March 2016 7 January 2019

Time Interval 1.6 months 5.5 months

Subprogram 1 (L3334) Subprogram 2 (L3595)

Effective Date 18 January 2016 7 February 2018

Actual Closing Date 31 August 2016

15 February 2019

Time Interval 7.4 months

12.3 months

b. Amount ($’000)

Category

Original Allocation

(1)

Increased during

Implementation (2)

Canceled during

Implementation (3)

Last Revised

Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance (6 = 4–5)

Subprogram 1 Subprogram 2

$300,000 $300,000

0 0

0 0

$300,000 $300,000

$300,000 $300,000

0 0

Total $600,000 0 0 $600,000 $600,000 0

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C. Program Data 1. Program cost ($’000)

Cost Appraisal Estimate Actual

Foreign exchange cost Subprogram 1 (L3334) Subprogram 2 (L3595)

$300,000 $300,000

$300,000 $300,000

Total $600,000 $600,000

2. Financing plan ($’000)

Cost Appraisal Estimate Actual Implementation cost Borrower financed ADB financed

Subprogram 1 (L3334) Subprogram 2 (L3595)

$300,000 $300,000

$300,000 $300,000

Other external financing Total implementation cost $600,000 $600,000 Interest during construction costs Not applicable Not applicable Borrower financed ADB financed Other external financing Total interest during construction cost

ADB = Asian Development Bank.

3. Cost breakdown by program component ($’000)

Component Appraisal Estimate Actual

Subprogram 1 (L3334) First Installment Second Installment Subprogram 2 (L3595) First Installment Second Installment

$100,000 $200,000

$200,000 $100,000

Total $600,000

4. Program schedule

Item Appraisal Estimate Actual

Other milestones

Subprogram 1 (L3334) First Installment Second Installment Subprogram 2 (L3595) First Installment Second Installment

21 January 2016 10 March 2016

23 July 2018

7 January 2019

5. Program performance report ratings

Implementation Period Ratings

Development Objectives Implementation Progress

Subprogram 1 (From January 2013 to June 2015) No ratings in e-Ops for policy-based loans

Subprogram 2 (From July 2015 to June 2017)

iv

D. Data on Asian Development Bank Missions

Name of Mission Date No. of

Persons No. of

Person-Days Specialization of Membersb

Subprogram 1 (L3334) Reconnaissance 1 26 February 2015 1 1 a Reconnaissance 2 24 April 2015 5 1 a,g,h,i,j Loan negotiation 27 July–18 August 2015 3 22 a,b,c

Subprogram 2 (L3595) Fact finding 1 January 2017 to 31

March 2017 2 90 b,d

Loan negotiation 7 September 2017 4 1 c,d,e,f Project completion review 8 April 2019 1 10 d

a = senior financial sector specialist, b = counsel, c = senior financial control specialist, d = principal financial sector specialist, e = principal counsel, f = financial sector economist, g = director, h = country director, i = senior counsel, j = financial sector specialist.

I. PROGRAM DESCRIPTION 1. The Philippine Development Plan (PDP), 2011–20161 called for real gross domestic product (GDP) to grow by an average of 7.0%–8.0% per year, investment ratios reaching 22.0% by 2016 (2011–2013 average was 19.7%), and a corresponding reduction in extreme poverty to 17.0% (33.0% in 1991). In recognition of the role played by investment in meeting the broader goals of inclusive economic growth and poverty reduction, the PDP targeted public infrastructure spending at 5.0% of GDP with private infrastructure spending exceeding 1.0% of GDP, all by 2016.2 By the midway point in the plan, the government had achieved measured success in meeting these targets. As fiscal reforms initiated in 2010 began to take hold, public spending on infrastructure rose to 3.5% of GDP in 2014 from 2.2% of GDP in 2012, while private sector spending rose to approximately 1.0% of GDP. However, the nation’s infrastructure needs continued to balloon, with estimates calling for annual infrastructure spending of 6.0% of GDP. 2. Given these funding needs, the government recognized the constraints facing its traditional funding sources. First, intermediation provided by banks would not be sufficient to close this widening investment funding gap. Utilizing extensive and unmatched distribution networks, banks have amassed a sizable base of short-term deposits. However, these deposits are, by definition, unsuitable for supporting long-term financing. Further, loan portfolios were becoming concentrated as banks tended to finance a small number of top-tier domestic listed companies, including peers and affiliated organizations.3 Risks were amplified as these conglomerates broadly followed similar business models and the central bank of the Philippines, the Bangko Sentral ng Pilipinas (BSP), had selectively relaxed the single borrower’s limit.4 In response, the International Monetary Fund (IMF) expressed concern regarding the sector’s increasing exposure to real estate and large exposures to individual borrowers.5 At the same time, the BSP was implementing Basel III, which was expected to further curtail the sector’s ability to fund infrastructure development with short-term deposits. 3. Second, the nonbank financial sector was also facing constraints to its ability to intermediate an increase in infrastructure finance. While the Philippines enjoyed an investment-grade rating, its nonbank finance sector and government bond market had more in common with countries exhibiting a sub-investment grade rating. In the government bond market, liquidity was very low with bid-ask spreads (a fundamental measure of liquidity) higher than in all regional peers except for Indonesia and Viet Nam. Trading activity has declined consistently since 2014 due to an underdeveloped issuance process, fragmentation caused by too many outstanding issues, and high costs. As a result, reliance on low-volume issues produced a yield curve that did not provide a fully reliable pricing benchmark for corporate or infrastructure bonds. Moreover, the local currency bond market was small relative to regional peers, representing only 37% of GDP. Malaysia and Thailand reported local currency debt markets that exceeded 75% of GDP, and their local currency corporate debt markets were three to eight times the size of the Philippines’ market. The Philippine insurance sector represented an engine of demand for capital market

1 Government of the Philippines, National Economic and Development Authority. 2014. Philippine Development Plan,

2011–2016. Manila. 2 The Global Competitiveness Report, 2013–2014 identified that an inadequate supply of infrastructure was the most

problematic factor in doing business in the Philippines. 3 The International Monetary Fund (IMF) estimated that the average leverage ratio of listed companies was 100% in

2012, but that this leverage was not evenly distributed, with firms with leverage ratios greater than 200% accounting for one-third of all corporate debt.

4 The exemption for oil purchases had recently lapsed and the BSP added provisions that included affiliates in the single borrower’s limit restrictions. The exemption for public–private partnerships was slated to lapse in 2016.

5 IMF. 2014 Article IV Consultation. IMF Country Report No. 14/245.

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products, and in particular, long-tenor instruments. However, the sector remained small, constrained by financial literacy issues as well as restrictive investment guidelines coupled with narrow distribution channels.6 Finally, the financial sector itself suffered from a lack of diversity. Restrictions on foreign ownership of domestic financial institutions had led to a “one-way” market wherein the vast majority of participants practiced buy-and-hold strategies. As a result, those seeking transactions for hedging could not find speculators willing to serve as a counterparty at reasonable cost. In addition, the lack of alternative business models and institutions limited the development of more sophisticated business and trading strategies that are common to more developed markets (e.g. project finance). 4. To address these constraints, the government adopted a capital market blueprint covering 2011–2016. Initiatives included fundamental reforms to improve the function of and liquidity in the government bond market and the enlargement and diversification the domestic financial markets. To support these initiatives, the government requested a programmatic approach and technical assistance (TA) leading to the approval of the Encouraging Investment through Capital Market Reforms Program.7 The program consisted of two subprograms and was designed to help the government meet its targeted investment rate. The outcome of the program was a deeper nonbank financial sector and its three outputs were: (i) liquidity in the government bond market enhanced; (ii) long-term savings and long-term investment products encouraged; and (iii) market depth and diversity increased. Three TA grants aggregating $1,710,000 supported the program.8 5. The program’s overarching purpose was to launch a well-defined and sequenced approach to capital market development. The program (subprogram 1) began by addressing fundamental weaknesses in the operations of the Bureau of the Treasury (BTr), which were preventing the formation of a more active and liquid government bond market. These reforms— covering the BTr’s cash management, cash forecasting, and capacity—helped the BTr introduce more predictable auctions to reduce costs and increase participation. In addition, the program focused on completing foundation reforms to broaden and diversify participation in the financial sector, and to engage the contractual savings sector as a natural repository for long-tenor financial instruments, such as project finance. For example, the government liberalized the entry of foreign financial institutions into all finance subsectors, took steps to align local regulations with international standards, and strengthened corporate governance. It also revised the Insurance Code, expanding the types of allowable investments. 6. Subprogram 2 built on the accomplishments of subprogram 1 and further strengthened the BTr’s operations. Significant fiscal savings arising from efficiencies gained in both subprograms 1 and 2 were made available to drive infrastructure expenditure. In addition, more complex reforms were completed by the BTr to increase efficiencies and introduce competition into the government bond auction process, which led to higher issuance volumes at lower relative cost. The government continued to encourage long-term savings and long-term investment by introducing new products and expanding authorized investment parameters. Foreign banks and

6 Diversification of investments is further hampered by the practice of requesting authorization for investments, on an

instrument-by-instrument basis, from the Insurance Commission. 7 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. 2015. 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.

8 ADB. 2011. Technical Assistance to the Republic of the Philippines for Capacity Development of Financial Regulators. Manila; 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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insurance companies received approval to establish domestic operations, further diversifying the finance sector, and efforts were launched to consolidate and strengthen the insurance subsector. Finally, the government continued to close the regulatory gap between the Philippines and the international financial markets.

II. DESIGN AND IMPLEMENTATION A. Program Design and Formulation 7. The program was relevant and well-grounded in the PDP, 2011–2016 (footnote 1). The government’s primary focus was generating inclusive growth by creating jobs to reduce poverty. The PDP further recognized the lack of adequate infrastructure as a major development constraint. To achieve this objective, the government adopted a targeted investment rate of 20.1% of GDP in nominal terms and 22.0% of GDP in real terms by 2016. Over this same period, public spending on infrastructure was targeted to increase to 5.0% of GDP with private infrastructure spending exceeding 1.0% of GDP. The PDP also called for reforms to develop the financial sector by: (i) promoting a regionally responsive and inclusive financial system by institutionalizing savings generation and resource mobilization; (ii) developing an enabling environment for long-term investments; (iii) strengthening the governance framework of the financial system in line with best practices and standards; and (iv) establishing a strong legal framework for financial sector development.9 Within this framework, the program also reflected the objectives of the capital market blueprint (2013–2017) which contained more specific goals, including (i) increasing liquidity in the government bond market, (ii) encouraging increased issuance of corporate debt, (iii) providing a wider array of investment alternatives, and (iv) stepping up efforts to increase financial literacy.10 The blueprint also called for increasing competition, diversifying business models, and introducing new skill sets and avenues for financing. Finally, the program was consistent with the country partnership strategy, 2011–2016 of the Asian Development Bank (ADB) for the Philippines, intersecting in the following thematic areas: (i) infrastructure provision; and (ii) fiscal policy, public expenditure management, and judiciary.11 8. In addition, the design of the programmatic approach was based on a collaborative diagnostic of the government bond market completed in 2014 by ADB, the IMF, and the United States Treasury’s Office of Technical Assistance. This diagnostic confirmed that much had been achieved, but also illustrated that the reforms had not been integrated or modernized in step with the wider financial markets and advancements in international standards.12 The structure and technical capacity of the BTr did not receive sufficient attention. As a result, the development of the government bond market lagged behind that of the banking sector and equity market. A published program completion report also informed the program design, including the need to focus on key reforms in key subsectors backed by demonstrated political will.13 9. A programmatic approach, supported by TA grants, was deemed to be the most efficient modality to address the identified development constraints. The policy-based loans provided

9 The specific object of the PDP is a regionally responsive, development-oriented, and inclusive financial system that

provides for the evolving needs of its diverse public. 10 Government of the Philippines, Securities and Exchange Commission. 2013. Capital Market Development Plan

Blueprint 2013–2017. Manila 11 ADB. 2011. Country Partnership Strategy: Philippines, 2011–2016. Manila. 12 An automated debt auction processing system was established, a registry of scripless securities was introduced, a

nascent primary dealer system was created, and straight-through processing was implemented. 13 ADB. 2013. Program Completion Report: Financial Market Regulation and Intermediation Program in the Philippines.

Manila.

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flexible support to a series of sequenced reforms over a medium- to long-term time horizon. In addition, the use of a programmatic approach recognizes the longer gestation times necessary for the technically challenging reforms required to support financial sector development. The associated TA provides timely and well-targeted capacity development to the executing and implementing agencies to support implementation of the policy reforms. B. Program Outputs 10. The overarching purpose of this programmatic approach was to initiate a properly sequenced reform program to address the remaining constraints to capital market development. This included addressing fundamental weaknesses in the operations of the BTr that were preventing the formation of a more active and liquid government bond market. In addition, the program focused on completing foundation reforms to broaden and diversify participation in the financial sector, and to engage the contractual savings sector as a natural repository for long-tenor financial instruments such as project finance. To achieve these objectives, the program employed three outputs: (i) liquidity in the government bond market enhanced; (ii) long-term savings and long-term investment products encouraged; and (iii) market depth and diversity increased (Appendix 1). 11. Output 1: Liquidity in the government bond market enhanced. Under subprogram 1, a sequenced reform program was started with the long-range goal of developing a more reliable yield curve from which the private sector could price their debt issuances. In the short-term, the program improved the BTr’s cash management and forecasting to free up fiscal resources for infrastructure and to anchor the debt management process. For example, by establishing a treasury single account, switching from a float to a fee-based compensation scheme with its revenue collection banks, and by reducing the size of the bond sinking fund, BTr produced annual fiscal savings of ₱3 billion–₱4 billion a year. These reforms also helped the BTr introduce more predictable auctions, which helps increase participation. Complementary initiatives increased trading volumes by reducing fragmentation in the government securities portfolio—the number of outstanding issues declined from 204 in 2013 to 118 in 2015—and by facilitating trading between the taxable and tax-exempt sectors. The first trade between a taxable and tax-exempt entity occurred on 4 May 2015. To better implement the more technically challenging reforms to come, and to gain operational efficiencies, the BTr reorganized and established specialty divisions and signed contracts to upgrade its infrastructure. 12. Under subprogram 2, the BTr further strengthened its cash management and forecasting, and institutionalized the process through the creation of oversight committees, formal policies, and performance targets. The size of the bond sinking fund was further reduced, leading to additional fiscal savings. Efforts to increase trading volumes, which is needed to anchor the yield curve, continued with the number of government bond issues outstanding declining to 85 from 118 in subprogram 1. In addition, the BTr began efforts to introduce competition and increase trading activity in the government bond market by establishing an evaluation system as a foundation for a classic primary dealer system with both privileges and responsibilities. Market participants submitted applications to establish self-regulatory organizations, in place of the existing more costly arrangements, and the BTr initiated a project to upgrade its scripless registry and investment management systems with modern vendor-supplied software. Finally, the BTr established formal divisions to cover risk management, fund management, capital market strategy and planning, and debt strategy and planning. 13. Output 1 had three performance targets under subprogram 1 and three performance targets under subprogram 2. Under subprogram 1, the government consolidated 603 accounts

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into the BTr’s treasury single account, exceeding the target of 500. Risk management and fund management divisions were created, meeting the specific performance target, and 50 staff completed a special intensive bond market training program run by the Chartered Financial Analyst Society Philippines and supported by ADB. Under subprogram 2, the foundation for a primary dealer system was created, but the system itself was not established within the program period. The BTr utilized an extended qualification period wherein the actual trading activities of the candidate banks were used as qualification criteria. This resolved possible political economy considerations but delayed the launch of the primary dealer system until 2018. The number of discrete issues of government bonds outstanding declined from 204 at the beginning of the programmatic approach to 85 by the end of the program. This represents a decline in outstanding issues of 42% in subprogram 1 and 25% in subprogram 2, significantly exceeding the target of 20%. Finally, there were only 30 repo transactions in 2017, which fell short of the performance target of at least 100 per year. Repo transactions were not introduced until November 2017, which reduced the measurement period. Subsequently, activity continued into the first 6 months of 2018 with 33 transactions. However, excess liquidity in the financial system caused activity to decline through the second half of 2018 with only two repo transactions in December 2018. 14. In an effort to support the development of the repo market, the Money Market Association of the Philippines completed a survey of market participants. The survey results, which are being addressed under the follow-on programmatic approach, identified a number of constraints, including (i) unfamiliarity with booking short positions, (ii) lack of a lender of last resort to mitigate the risk of market squeezes, (iii) issues with repo pricing calculations, and (iv) the need to authorize additional finance subsectors to participate, including contractual savings. 15. Output 2: Long-term savings and long-term investment products encouraged. Under subprogram 1, the program began a long-term engagement with the contractual savings sector by addressing the enabling environment. To encourage the provision of long-term finance, the government revised the Insurance Code to expand the range of permissible investment alternatives (e.g. project-related debt) and to increase the number of delivery channels (e.g. bancassurance). At the same time, the government worked to make insurance products more attractive and available. The government tabled a bill in Congress to reduce the level of taxes applied to insurance products and established the foundation for a personal, tax-deferred, long-term retirement savings plan. In addition, the Securities and Exchange Commission (SEC) mandated professional management of collective investment schemes. Finally, the SEC reduced friction costs associated with business formations to encourage the establishment of capital market participants on both the demand and supply side. 16. Under subprogram 2, the government continued to encourage the demand for and supply of long-term finance. The Insurance Commission implemented the revised Insurance Code by authorizing life insurance companies to participate in infrastructure finance. In addition, the government launched the Personal Equity and Retirement Account (PERA)—a personal, tax-deferred, long-term retirement savings plan—to generate demand for long-term financial products. The government also introduced measures to provide a favorable environment for debt issuers. To further reduce friction costs, strengthen supervision, and improve the SEC’s funding, an updated Corporation Code was submitted to Congress for approval. Reforms were also implemented to ease listing rules for special-purpose companies (e.g. infrastructure) in the Philippine Stock Exchange (PSE), and to extend the effectivity of financial statements associated with public offerings in line with the harmonized Association of Southeast Asian Nations (ASEAN) disclosure standards.

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17. Output 2 had two performance targets under subprogram 1 and three performance targets under subprogram 2. Under output one, user acceptance testing of the PERA system was completed, meeting the stated performance target. In addition, based on a memorandum of understanding between the Bureau of Internal Revenue and the BTr, the documentary stamp tax on interbank Global Master Repurchase Agreement-based repo transactions was waived, meeting the performance target. Under subprogram 2, the PSE was not able to launch additional exchange-traded funds, and thus, a new exchange-traded fund focused on infrastructure could not be created. This performance target proved to be premature as wider demand for long-dated infrastructure-related debt has not yet been created. However, the government launched the PERA, meeting the stated performance target, and the Insurance Commission authorized insurance companies to purchase bonds issued in support of infrastructure projects. The bonds funded a public–private partnership for a school and a power plant. 18. Output 3: Market depth and diversity increased. Under subprogram 1, the government implemented reforms to diversify financial institutions and business models within the Philippines. The government liberalized the entry of foreign financial institutions into all finance subsectors. It also implemented measures to close the gap between domestic and international business practices and standards to ensure equal treatment for domestic and foreign firms. The government, through the SEC, submitted an application to join the Multilateral Memorandum of Understanding (Appendix A) of the International Organization of Securities Commission (IOSCO), signifying full information sharing with foreign securities regulators. In addition, the SEC eased (i) regulations to encourage the entry of foreign credit-rating agencies, (ii) adopted measures to strengthen corporate governance in line with international standards, and (iii) enhanced its own surveillance and supervisory capabilities. 19. Under subprogram 2, the BSP approved the establishment of domestically incorporated foreign banks. To strengthen the insurance sector, and to encourage consolidation, the Insurance Commission increased the required minimum capitalization and introduced risk-based capital standards. At the same time, the SEC strengthened corporate governance standards and encouraged foreign investment by issuing a corporate governance roadmap covering 2016–2020. Subsequently, the SEC issued a Code of Corporate Governance for publicly listed companies. 20. Output 3 had two performance targets for subprogram 1 and three performance targets for subprogram 2. Under subprogram 1, IOSCO began and completed a review of the government’s application to join Appendix A, exceeding the performance target. Likewise, the BSP received 12 applications from foreign banks to establish domestic subsidiaries, and ultimately granted 11 of them. This achievement, while stretching beyond the program period, significantly exceeded performance targets and market expectations. Under subprogram 2, the government identified impediments to joining IOSCO’s Appendix A and proposed a variety of solutions, including an amendment of the Securities Regulation Code. As a result, the Philippines has not yet been able to participate in ASEAN cross-border initiatives. However, the Philippines has achieved significant improvement in strengthening corporate governance. After placing no companies in the top 50 ranked ASEAN publicly listed companies in 2012–2013, the Philippines placed 11 companies in the top 50 in 2015, exceeding the target of five. Finally, the Insurance Commission has provided incentives, such as increased minimum capitalization, for weaker non-life insurance companies to merge. In fact, the number of domestic non-life insurance companies has declined to 50 in 2017, from 69 in 2012. However, only one merger appears to have been consummated over this period (Sterling Insurance Pty Ltd and the Industrial Insurance company) with the decline largely attributable to closures. Highlighting again the importance of gestation periods, the most recent step-up in minimum capitalization requirements appears to have

7

broached the ability of the subsector to adapt internally, triggering an increased interest in and level of merger activities. C. Program Costs and Financing 21. The programmatic approach and subprogram 1 for $300 million were approved on 26 November 2015 and became effective on 18 January 2016. The loan for subprogram 2 was approved on 21 November 2017 for $300 million and became effective on 7 February 2018. In general, the size of the program reflected the government’s financing needs, the strength of the reform program, and secondarily, the costs of implementation.14 At the time of subprogram 1, the Philippines’ gross financing needs were high. In 2015, the government reported a budget deficit target of 2% of GDP with a borrowing target of $15.6 billion, of which $1.65 billion was to be obtained through official development assistance. At the time of subprogram 2, the government’s total gross borrowing requirement was estimated at $12.6 billion, a fifth of which was to be sourced from foreign borrowing—including official development assistance in the form of program loans—estimated at $1.40 billion. D. Disbursements 22. Both subprograms were disbursed in two installments at the request of the government. Subprogram 1 became effective on 18 January 2016 and was disbursed as follows: (i) $100 million on 21 January 2016; and (ii) $200 million on 10 March 2016. Subprogram 2 was disbursed as follows: (i) $200 million on 23 July 2018; and (ii) $100 million on 7 January 2019. E. Program Schedule 23. The program period covered June 2013 to June 2017. Subprogram 1 covered June 2013 to July 2015. Loan negotiations for subprogram 1 commenced on 27 July 2015 and concluded on 18 August 2015 when the government issued the special power of authority. ADB’s Board of Directors approved the programmatic approach and loan for subprogram 1 on 26 November 2015. The loan was closed on 31 August 2016, 4 months before the expected closing date of 31 December 2016. Subprogram 2 covered July 2015 to June 2017. Loan negotiations for subprogram 2 commenced on 7 September 2017 and concluded on 11 October 2017 when the government issued the special power of authority. ADB’s Board of Directors approved the loan on 21 November 2017. The loan was closed on 15 February 2019—the original closing date was 31 December 2018—necessitating one extension. The program also contained a post-program partnership framework (P3F) covering 2017 to 2020, which served as a bridge to the next programmatic approach. F. Implementation Arrangements 24. The implementation arrangements remained unchanged for the duration of the programmatic approach. The Department of Finance (DOF) was the executing agency. The BTr and the SEC were the implementing agencies. A steering committee, chaired by the DOF with implementing agencies as members, oversaw the implementation of the program. The steering committee met semiannually to monitor progress in implementing reforms under the program and to provide guidance to the implementing agencies. The steering committee was to continue meeting semiannually to monitor the continuing implementation of reforms under the P3F.

14 ADB. 2013. Policy-Based Lending. Operations Manual. OM D4/BP. Manila.

8

G. Technical Assistance 25. Transaction TA attached to subprogram 2 supported the programmatic approach.15 The TA shares the program’s impact and outcome and contains two outputs. The first output was to support the creation and implementation of the government’s first capital market development plan covering 2017–2022. The second output provided support to complete specific key technical reforms called for in the P3F that were needed to develop a well-functioning domestic currency bond market. The BTr was the executing agency, and the BTr and the SEC were the implementing agencies. The TA cost $550,000, of which $500,000 was financed on a grant basis by ADB’s Technical Assistance Special Fund (TASF-other sources). The TA is being implemented from November 2017 to November 2020. 26. To date, four national experts have been engaged to support the BTr in (i) modernizing its National Registry of Scripless Securities (NRoSS), (ii) preparing the NRoSS operating guidelines and procedures, (iii) gathering and analyzing data to determine the impact of the latest version of the NRoSS, (iv) preparing a training program and developing operating guidelines and a framework to provide bond sinking fund managers with a working knowledge of repo transactions, and (v) reviewing the operational and financial experience of the Philippine Export-Import Credit Agency in terms of its insurance coverage. The TA has $201,320 in uncommitted funds. Of the $298,680 which has been contracted, $210,052 has been disbursed. The TA will be covered by a separate TA completion report within a year of its completion. H. Monitoring and Reporting 27. Subprogram 1 contained 20 policy actions, 10 of which represented policy triggers. All were fully accomplished. Subprogram 1 also established an indicative reform agenda for subprogram 2, which consisted of 22 policy actions, nine of which were policy triggers. Upon completion of subprogram 2, all nine policy triggers were fully accomplished. However, during the processing of subprogram 2, a new prior action was added to reflect the government’s commitment to liberalize foreign entry to the finance sector. Two policy milestones related to the development of unregistered bonds and the ongoing effort to harmonize finance sector taxes were shifted to the P3F at the government’s request. Two milestones were modified to reflect progress to date, and one was completed but dropped. As a result, subprogram 2, as completed, contained 21 reform actions (10 prior expected actions representing high-impact reforms and 11 policy milestones), all of which were fully accomplished.

28. The programmatic approach included a number of affirmative covenants attached to the loan agreements. The use of affirmative covenants encourages the borrower to perform specific functions in both actual and possible situations. As a result, compliance is not always physically demonstrated as no action may have been required. For example, ADB cannot assess if the borrower made all books and records available for audit unless an audit has been requested. Nevertheless, evidence indicates compliance with all covenants. All policy actions adopted under the program, as set forth in the development policy letter and the policy matrix, remained in effect for the duration of the program. The borrower informed ADB about policy discussions with other multilateral and bilateral aid agencies and has consistently exchanged views on sector issues, policy reforms, and additional reforms arising during the implementation of the program. No evidence of corrupt, fraudulent, collusive, or coercive practices has been noted and as such, no

15 ADB. 2014. Technical Assistance to the Republic of the Philippines for Strengthening Treasury Operations and

Capital Market Reform. Manila.

9

audits or investigations have been launched. The government is actively supporting the conduct of the program completion report.

III. EVALUATION OF PERFORMANCE A. Relevance 29. The program is considered relevant. It was well grounded in the PDP, 2011–2016, which emphasized inclusive growth by creating jobs to reduce poverty. The PDP recognized the lack of adequate infrastructure as a major development constraint and called for reforms to develop the financial sector through efforts to institutionalize savings generation and resource mobilization.16 In addition, the program incorporated the objectives of the capital market blueprint (2011–2016). The program was consistent with ADB’s country partnership strategy for 2011–2016, intersecting in the following thematic areas: infrastructure provision and fiscal policy, public expenditure management, and judiciary (footnote 10). However, and more importantly, the program was based on a wholistic multi-donor diagnostic, which identified existing constraints and set out a well-sequenced development plan for the next 2–3 years. This approach ensured that long-standing constraints to bond market development were addressed and established a foundation for the more technically challenging high-impact reforms to come in the subsequent programmatic approach. B. Effectiveness 30. Overall, the program achieved its intended objectives and is appraised as effective. Two of five outcome performance targets were achieved, and substantial progress was reported toward achieving an additional two performance targets, underscoring the need for adequate gestation periods. One of these performance targets (trading volume) will likely be achieved in 2019 and the other (growth in foreign bank assets) will likely be achieved in 2020 with no additional reforms necessary. The last performance target—growth in the PERA—was not achieved but activities have been included in the subsequent programmatic approach to address the remaining outstanding constraints.17 Moreover, the program served as a solid foundation for additive and sequenced reforms under the subsequent programmatic approach, which has achieved measurable improvements in bond market liquidity, corporate bonds outstanding, foreign participation, and support to infrastructure financing (footnote 17). 31. The program’s first outcome performance target called for corporate bonds outstanding to increase from the 2012 baseline of 4.9% to 7.9% of GDP by June 2019. At year-end 2018, corporate bonds outstanding had increased to 7.6% of GDP, essentially meeting the target of 8.0% and representing a significant increase over the baseline (Figure 1). The second performance target was achieved: 18 project bonds were issued, surpassing the target of “at least one”. These bonds provided funding for tollways, power plants, and telecoms. The third performance target called for trading volumes of government bonds to increase by at least 20% over the 2012 baseline of ₱5.0 trillion. This target was not met as trading volumes declined in 2018, continuing a 5-year decline that started in 2014, and were 61% below the 2012 baseline at year-end.18 However, substantial progress is noted as trading volumes rebounded strongly in 2019 as the program’s reforms were fully implemented and supported by an adequate gestation

16 The specific objective of the PDP is a regionally responsive, development-oriented, and inclusive financial system

that provides for the evolving needs of its diverse public. 17 The Support to Capital Market Generated Infrastructure Financing is scheduled for Board consideration in 2020. 18 The performance target called for a 25% increase in trading volumes over the baseline.

10

period (Figure 2). Annualized through August of 2019, trading volumes have increased to an annual rate of ₱6.0 trillion. This rate is now above the baseline of ₱5.0 trillion in 2012 and represents an increase of 205% over 2018, 125% over 2017, and 105% over 2016. This performance target also called for at least one government benchmark bond to be supported by two-way firm price quotes. Currently, bid-offer prices are published but remain largely indicative although again substantial progress is noted. An “expanded primary dealer system” was launched in 2018 with 10 dealers being assigned obligations and provided with privileges. This represents the completion of a necessary precondition for the next step, which is requiring the expanded primary dealers to make two-way markets on all active benchmark bonds. In time, this target will be achieved with no additional reform actions necessary.

32. The fourth outcome performance target was not achieved. Although the government launched the PERA, it has not expanded as anticipated. Only 1,000 registered accounts have been opened against the target of 100,000. There are several reasons for this shortfall. First, the initial launch of the system uniquely prioritized the prevention of multiple accounts in excess of the legal limits. This made the system slow and unwieldy, and with an absence of roll-out marketing or outreach, most potential users found the PERA too cumbersome to use. In addition, friction costs were high, including the standards for administrators, which were considered onerous. In response, the BSP has re-prioritized this effort and has adopted a “5 million users in 5 years” target. Beginning in 2019, the BSP will modify the PERA foundational software to accelerate and ease onboarding of clients. Furthermore, it will procure additional software to allow providers to utilize their own websites to facilitate the use of mobile devices to onboard, transact, and administer accounts. The BSP will also launch a marketing campaign to build awareness and generate interest. Finally, the PERA stands at the center of several larger proposals to grow contractual savings, including pension reform. 33. The fifth outcome performance target was partially achieved and will be achieved over time with no additional reform actions necessary. By year-end 2018, the BSP had granted banking licenses to 12 foreign banks to establish domestic operations.19 However, many of these banks

19 Cathay United Bank (Taipei,China), Yuanta Commercial Bank Company Limited (Taipei,China), Hua Nan

Commercial Bank Limited (Taipei,China), Chang Hwa Bank Commercial Bank Ltd. (Taipei,China), First Commercial Bank (Taipei,China), Industrial Bank of Korea (Republic of Korea), Shinhan Bank (Republic of Korea), Woori Bank

Figure 1 – Corporate Bonds Outstanding

GDP = gross domestic product. Source: Asiabondsonline.

27

27.2

27.4

27.6

27.8

28

28.2

28.4

0

1

2

3

4

5

6

7

8

2016 2017 2018

Govt

%

GD

P

Corp

% o

f G

DP

Corp Govt

Figure 2 – Bond Trading Volume

Source: Philippine Dealing and Exchange Corporation.

0.00

1,000,000.00

2,000,000.00

3,000,000.00

4,000,000.00

5,000,000.00

6,000,000.00

2015 2016 2017 2018 2019Annualized

(1st Quarter)

Bil

lio

ns o

f P

eso

s

Trading Volume

11

had been fully operational for only 6 months or less in 2018, which gave them limited time to expand their footprints. Therefore, asset growth has initially been slow. As of year-end 2018, the aggregate total assets of this group of banks—two of which have yet to begin operations—represented only 1% of total consolidated system assets. This is well below the target of 10% of consolidated system assets, but is considered realistic at this stage of their operations. 34. Within the outputs, there were 16 performance targets, 13 of which were met. One of the unmet performance targets—the number of insurance-companies’ mergers—will likely be achieved by 2020 because of a recent step-up in minimum capitalization required under the revised Insurance Law.20 A second performance target that was not achieved—an increase in the number of repurchase transactions to at least 100 per year—fell short of the target because additional upgrades to the scripless registry are required along with an industry-led effort to identify and resolve the remaining constraints. The third unmet target, which is the creation of additional exchange trade funds, is unlikely to be achieved in the near future because of a lack of depth and liquidity in the equity market. C. Efficiency 35. The program is rated efficient as it achieved a majority of its outcome and outputs, albeit with some delays. Both subprograms were presented to ADB’s Board of Directors in the time frame planned and without significant modification.21 Subprogram 1 was declared effective on 18 January 2016, which is earlier than the projected target date of 5 March 2016. Disbursement followed quickly with the first draw of $100 million completed on 21 January 2016, 3 days after effectiveness. The second and final disbursement of $200 million was completed 1.5 months later on 10 March 2016. Subprogram 2 was declared effective on 7 February 2018, also in advance of its projected target date of 5 March 2018. However, disbursements were slowed to coincide with refunding dates in line with the government’s overall funding plan. The first disbursement of subprogram 2 ($200 million) was on 23 July 2018, approximately 5 months after effectiveness. The second and final disbursement ($100 million) was completed 5.5 months later on 7 January 2019. D. Sustainability 36. The program is rated likely sustainable. The design of the project envisaged the start of a long-term engagement with the government to address foundational constraints to capital market development. By addressing these constraints, within the capital market infrastructure, money, and government bond markets, the government could then implement additional reforms to increase the supply and demand for private sector-led capital market activities.22 This, in turn, would eventually support long-term financing for infrastructure. While the program only achieved two of its outcome performance targets during the program period, two more performance targets are expected to be achieved by 2020. In addition, the foundational reforms accomplished under this program established a launching point for the government’s first published capital market

(Republic of Korea), Sumitomo Mitsui Banking Corporation (Japan), United Overseas Bank Limited Co. (Singapore), CIMB Bank Berhad (Malaysia), and Industrial and Commercial Bank of China Limited (People’s Republic of China).

20 Republic Act 10607 or an Act Strengthening the Insurance Industry further amending Presidential Decree No 612, otherwise known as the Insurance Code dated August 13, 2013.

21 Subprogram 1 was presented to the Board on 26 November 2015 and subprogram 2 was presented 24 months later, on 21 November 2017.

22 C. Karacadag, V. Sundararajan, and J. Elliot. 2003. Managing Risks in Financial Market Development, the Role of Sequencing. IMF Working Paper. WP/03/116. Washington, DC.

12

development plan. Launched concurrently by the BTr, the BSP, and the SEC, this plan completed the reforms initiated in the program, setting the stage for the next programmatic approach. This new program will introduce an increasing focus on the contractual savings sector as an engine of demand for long-tenor financial instruments such as infrastructure finance.23 E. Development Impact 37. The program’s development impact is considered satisfactory. A program impact assessment supported both subprograms. Under subprogram 1, the recurrent quantifiable benefits of the program were estimated to have a present value of $1.2 billion. Of this, approximately $890.0 million flowed to the government from more efficient use of liquid assets through improvements in cash forecasting and investment management, among others.24 A further $290.0 million flowed to the corporate sector from improvements to the corporate bond market, and individuals were expected to benefit from a $50.0 million efficiency improvement in the insurance market. Significant, if unquantifiable, benefits were also expected to flow from greater efficiency in the non-life insurance sector and from initiatives to deepen the markets in investment vehicles such as exchange-traded funds. Under subprogram 2, quantifiable net benefits of $437.0 million were expected in addition to the net benefits obtained under subprogram 1. These benefits arose largely from improvements to the bond and money markets, better integrity in the securities markets, and reforms to enable investment. The reforms also produced quantifiable gains to bank customers, and eased costs of compliance over the long run through legislative changes and liberalization of bank ownership. In addition to these gains, there were some less quantifiable improvements to the capital markets. For example, the introduction of risk-based capital for insurers will alleviate risks in that industry, and there were a number of necessary reforms to reduce corporate corruption. 38. Moreover, the program provided a solid base on which more advanced and substantial reforms could be delivered. The program provided a permanent uplift to the institutional capacity of the BTr. In addition, as noted in para. 37, significant costs savings and efficiencies were gained as a result of institutional changes to cash forecasting and investment management. Reforms to the government bond market, including defragmentation of outstanding issues, more disciplined issuance into identified high-volume benchmarks, the establishment of a competitive primary dealer system, and upgrades to the underlying infrastructure reduced the liquidity premium and established the preconditions necessary for the development of a reliable yield curve. These and parallel reforms to the corporate bond market, such as the rationalization of shelf registrations, have provided a significant uplift to corporate bond issuance. Given the degree of the program’s impact, and the extent to which stakeholders have benefited, these reforms will be difficult to reverse. In addition, the program provided a sound foundation for the government to begin a sequenced and more challenging engagement to enlarge and deepen the contractual savings sector. F. Performance of the Borrower and the Executing Agency 39. The borrower was the Republic of the Philippines, as represented by the DOF as the executing agency. The implementing agencies were the BTr and the SEC. Overall, the

23 The Philippine Roadmap: Local Currency Debt Market Development. http://www.treasury.gov.ph/wp-

content/uploads/2017/10/Local-Currency-Debt-Market-Development-Roadmap_ppt-1.pdf. 24 Enhanced cash management and forecasting provided an immediate fiscal savings, aggregating ₱5 billion–₱7 billion

a year, and established a basis for enhanced debt management overall.

13

performance of the borrower and executing agency is considered satisfactory. The DOF provided consistent and effective guidance.25 For example, donor support was highly coordinated and as a result, produced significant synergies. In addition, the direct involvement of the national treasurer, the SEC commissioner, and the BSP governor provided leverage and moral authority for the reforms. G. Performance of the Asian Development Bank 40. The performance of ADB is likewise considered satisfactory. ADB fully embraced the lessons learned and developed a more effective program that directly addressed the fundamental development constraints. The programmatic approach also incorporated a sequenced approach that recognized the hierarchal nature of financial sector development. The program itself, as well as the performance targets, were aligned with the government’s reform agenda. A smaller number of high-impact policy actions were utilized in direct consultation with the government. Comprehensive missions were fielded on a regular basis and close donor coordination led by ADB complemented these efforts and ensured the effective implementation of the reforms. H. Overall Assessment

Overall Ratings

Criteria Rating Relevance Relevant Effectiveness Effective Efficiency Efficient Sustainability Likely sustainable Overall Assessment Successful Development impact Satisfactory Borrower and executing agency Satisfactory Performance of ADB Satisfactory ADB = Asian Development Bank. Source: Asian Development Bank.

41. Overall, the program is rated successful. The program was aligned with the PDP (footnote 1) and ADB’s Country Partnership Strategy (footnote 11), incorporated the proper sequencing required for capital market development, and was informed by a collaborative multi-development partner diagnostic. Two of five output performance targets were achieved outright during the program period, with an additional two (trading volume and asset size of foreign banks operating in the Philippines) expected to be achieved by the end of 2020 without any additional inputs. Within the outputs, there were 16 performance targets, 13 of which were achieved. The program was implemented without any significant modifications and in a timely manner. Loan effectiveness followed closely after Board approval and funding was achieved without significant delay. The reforms are likely sustainable. Significant fiscal savings were achieved, and efficiencies were gained such that the policy changes are not likely to be rolled back. Further, the reforms established a foundation to begin a long-term engagement with the government to address the more difficult constraints to development. Subsequent to the program, the government developed and executed a capital market development plan that achieved higher trading volumes, a more reliable yield curve, and increased issuance by the corporate sector (footnote 23). Given these achievements, and the immediate impact of the program in terms of fiscal savings and efficiency,

25 The Insurance Commission and the BSP were committee members, reflecting ADB’s ongoing TA to each and the

key role of the BSP in financial sector development.

14

the development impact is considered satisfactory. The performance of ADB, and the executing agency is likewise considered satisfactory.

IV. ISSUES, LESSONS, AND RECOMMENDATIONS A. Issues and Lessons 42. The program and subsequent achievements have again confirmed the importance of sequencing in capital market development. By removing constraints to bond market development that had been bypassed by earlier efforts to develop the equity market, the program and activities under the P3F have been able to achieve a measurable increase in bond market liquidity, efficiency, and private sector issuance activity. However, the program has also confirmed that capital market development often requires an extended gestation period. In this case, a critical mass of reforms, including some completed under the P3F, were necessary to reverse a 5-year decline in trading volume. Thus, the choice of performance indicators in future programs may need to allow for more realistic gestation periods. 43. Second, the program highlighted the efficiencies gained from close collaboration both within ADB and across development partners. Within ADB, the joint efforts of the regional department and the Treasury Department operationalized ADB’s tax-exempt status and enabled ADB to invest in Philippine government debt denominated in local currency. In turn, ADB is now able to offer local currency financing to the government. Across donors, ADB, the IMF, and the United States Treasury provided collaborative and additive inputs that leveraged the sum total of their individual inputs. 44. Third, the program highlighted the importance of comprehensive and well-accepted diagnostics. In this case, the development partners (para. 8) provided a well-researched and thorough diagnostic. This diagnostic provided a clear roadmap, which anchored the priorities of the government, eventually supporting the adoption of the Philippines’ first government-initiated formal capital market development plan. Given the widespread acceptance of the diagnostic and action plan, no issues were encountered in maintaining cross-agency coordination. 45. Fourth, the program confirmed the importance of political will, and the need for the government’s close and continuous engagement. In the case of this program, a capital market working group composed of the national treasurer, the BSP governor, and the SEC commissioner provided clear and frequent guidance to market participants, which maintained a consistent focus on the reform agenda across the financial sector. Without this high-level support, it is unlikely the program would have achieved such favorable results. B. Recommendations 46. Performance indicators. When dealing with complex reforms of this type, traditional outcome indicators do not allow sufficient time to accurately identify or measure the program’s long-term development impact. If possible, the outcome targets should be dated 1–2 years after program completion. Alternatively, the program could adopt a set of medium- to long-term performance targets, which could be evaluated during the presentation of subsequent programmatic approaches. 47. Future monitoring. Close collaboration across a larger set of stakeholders will be necessary to continue deepening and enlarging the domestic capital market. In effect, foreign contractual savings entities may need to provide a supply of long-term finance while the

15

government builds out a domestic institutional investor base. As such, ADB will need to monitor conditions, and identify constraints across a wider cross section of the finance sector. 48. Further action or follow-up. The subsequent programmatic approach will include several activities that represent a natural follow-on from the program. First, the next programmatic approach will support the development of a wider capital market development plan that includes the private sector, and a focus on contractual savings. Within this effort, the government will relaunch the PERA with the intent of improving its accessibility, including delivery though mobile devices. Finally, the BTr will complete an upgrade of its newly launched scripless registry to accommodate additional products such as repo trades and stripped securities. TA should be prioritized towards these efforts. 49. Timing of the project performance evaluation report. The completion of the project performance evaluation report should be scheduled to allow for additional time for the government to meet its outstanding outcome targets. While global financial market conditions matter, and are not currently favorable, early to mid-2020 may represent an adequate gestation period.

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Indicators and Targets

Project Achievements

Impact The Government of the Philippines’ targeted investment rate achieved. (Philippine Development Plan, 2011–2016)a

Not applicable.

Outcome A deeper nonbank finance sector developed

Corporate bonds have increased to at least 8.0% of GDP. (2012 baseline: 4.9%) At least one domestic currency project bond has been issued. (2012 baseline: 0 [a project bond had not yet been issued]) Annual trading volume of government bonds has increased by at least 25%, and at least one government benchmark security has been supported by two-way firm quotes. (2012 baseline: annual trading volume = $156 billion and 0 [no securities were supported by two-way quotes]) The number of PERA accounts opened has exceeded 100,000, with aggregate balances greater than ₱14 billion. (2012 baseline: NA [the PERA had not yet been launched]) Foreign-owned domestic financial institutions accounted for at least 10% of the banking sector’s total assets. (2012 baseline: 0%)

Achieved. At year-end 2018, corporate bonds outstanding had increased to 7.6% of GDP, just under the target of 8.0%. Achieved. During the program period, 18 project bonds were issued, aggregating ₱97 billion, surpassing the performance target of at least one. These issues provided funding for tollways, power plants, and telecoms. Not achieved but substantial progress. Trading volumes declined in 2018, continuing a 5-year decline that started in 2014, and were 61% below the 2012 baseline at year-end. However, trading volumes rebounded strongly in 2019 as the program’s reforms were fully implemented and integrated. Annualized through the first quarter, trading volumes have increased to an annual rate of ₱4.8 trillion. While this rate is still below the baseline of ₱5 trillion in 2012, it represents an increase of 144% over 2018, 80% over 2017, and 64% over 2016. Not achieved but ongoing. Only 1,000 registered accounts have been opened against the target of 100,000. The initial launch of the system uniquely prioritized the prevention of multiple accounts in excess of the legal limits. This made the system slow and unwieldy, and with an absence of roll-out marketing or outreach, most potential users found the PERA too difficult to use. Partially achieved and ongoing. By year-end 2018, the BSP had granted banking licenses to 12 foreign banks to establish domestic operations. However, many of these banks had been fully operational for only 6 months, and as such still had a

Appendix 1 17

Design Summary Performance Indicators and Targets

Project Achievements

limited physical presence. Therefore, asset growth has initially been slow. As of year-end 2018, the aggregate total assets of this group of banks – two of which have yet to begin operations yet – represented only 1% of total consolidated system assets. This is well below the target of 10% of consolidated system assets but is considered realistic at this stage of their operations.

Outputs Liquidity in the government bond market enhanced

By 2015: Subprogram 1 At least 500 BTr cash accounts closed and consolidated into the Treasury Single Account (2012 baseline: 0 accounts consolidated) At least one trade of government securities occurs between a tax and tax-exempt counterparty. (2012 baseline: 0 trades) Risk management and fund management divisions created with at least 40 BTr staff trained in advanced bond math and trading strategies (2012 baseline: Not created and 0 staff trained) By 2017: Subprogram 2 Primary dealer system with formal privileges and responsibilities have been established. (2012 baseline: NA [primary dealer system not established]) The number of government bonds issued declined by at least 20%. (2012 baseline: 118) The number of repurchase transactions, based on the GMRA, increased to at least 100 per year.

Achieved. 603 accounts were closed and consolidated into the Treasury Single Account. Achieved. The first trade between a taxable and tax-exempt entity occurred on 4 May 2015. Achieved. These divisions were created, along with divisions dedicated to capital market development, and debt strategy and planning. Over 50 of the BTr’s staff were trained along with a select group of SEC staff. Achieved with delay. The foundation for a primary dealer system was created, but the system itself was not established within the program period. BTr utilized an extended qualification period wherein the actual trading activities of the banks were used as qualification criteria. However, the primary dealer system, with responsibilities and privileges, was established in 2018. Achieved. The number of discrete issues of government bonds outstanding declined to 85 from 204 at the beginning of the programmatic approach. This represents a decline in outstanding issues of 42% in subprogram 1 and 25% in subprogram 2. Not achieved. Repo transactions were not introduced until November 2017. This abbreviated measurement period

18 Appendix 1

Design Summary Performance Indicators and Targets

Project Achievements

Long-term savings and long-term investment products encouraged Market depth and diversity increased

(2012 baseline: NA [GMRA repurchase transactions do not yet exist]) By 2015: Subprogram 1 User acceptance testing for PERA support system completed and accepted by BSP. (2012 baseline: Not completed) Documentary stamp tax on GMRA based repos reduced to zero. (2012 baseline: ₱0.30 for every ₱200.00, equivalent to the rate of 0.15%) By 2017: Subprogram 2 Number of professionally managed exchange-traded funds listed on the Philippine Stock Exchange increased to three, of which at least one was a fixed income exchange-traded fund (including project bonds). (2012 baseline: 1 professionally managed exchange-traded fund, and 0 fixed-income exchange traded funds) The PERA was declared operational with the approval of a cash custodian and a securities custodian bank(s). (2012 baseline: NA [no custodians approved]) The insurance commissioner authorized at least one alternative investment modality to support project finance or public–private partnerships. (2012 baseline: NA [no alternative investment modalities authorized]) By 2015: Subprogram 1 IOSCO begins formal review of the government’s application to become a signatory to Annex A. (2012 baseline: not submitted)

limited the volume of transactions to 30. Subsequently, activity continued into first 6 months of 2018 with 33 total transactions. Due to excess liquidity in the financial system, activity declined through the second half of 2018 with no repo transactions until December when two transactions were recorded. Achieved. User acceptance testing of the PERA system was completed under the program, meeting the stated performance target. Achieved. Based on an MOU between the Bureau of Internal Revenue and the BTr, the documentary stamp tax on interbank GMRA-based repo transactions was waived, meeting the performance target. Not achieved. The Philippine Stock Exchange was not able to launch additional exchange-traded funds, and thus, a new exchange-traded fund focused on infrastructure could not be created. Achieved. The government launched PERA and approved a cash custodian bank (Landbank) and two securities custodians, which also served as administrators (BDO and BPI). Achieved. The IC authorized insurance companies to purchase bonds (two) issued in support of infrastructure projects. One project was a public–private partnership for a school, and the other funded the development of a power plant. Achieved. IOSCO began and completed a review of the government’s application to join Annex A, exceeding the performance target.

Appendix 1 19

Design Summary Performance Indicators and Targets

Project Achievements

At least one application received supporting the entry of a foreign financial institution into the Philippines. (2012 baseline: No applications) By 2017: Subprogram 2 The Philippines identifies impediments to joining IOSCO’s Annex A and proposes a legislative solution. (2012 baseline: NA [The Philippines has not identified or proposed specific legislative solutions to join Annex A) The Philippines placed at least five publicly listed companies in the top 50 ASEAN Corporate Governance Scorecard rankings. (2012 baseline: 0) The Insurance Commissioner approved at least three mergers of life and/or nonlife insurance companies within the insurance sector. (2012 baseline: NA [no mergers approved])

Achieved. The BSP received 12 applications from foreign banks to establish domestic subsidiaries of which 11 were ultimately granted. Achieved. The government identified impediments to joining IOSCO’s MOU Annex A and proposed a variety of solutions, including an amendment of the Securities Regulation Code. Achieved. The Philippines placed 11 companies in the top 50 ranked ASEAN publicly listed companies in 2015. Not achieved. The number of domestic insurance companies has declined to 90 in 2017, from 80 in 2012. However, only one merger appears to have been consummated over this period (Sterling Insurance Company and the Industrial Insurance company) with the decline largely attributable to closures.

ASEAN = Association of Southeast Asian Nations, BDO = Banco de Oro, BPI = Bank of the Philippine Islands, BSP = Bangko Sentral ng Pilipinas, BTR = Bureau of the Treasury, GDP = gross domestic product, GMRA = Global Master Repurchase Agreement, IC = Insurance Commission, IOSCO = International Organization of Securities Commission, MOU = Memorandum of Understanding, NA = not applicable, PERA = Personal Equity and Retirement Accounts, SEC = Securities and Exchange Commission. a Government of the Philippines. National Economic and Development Authority 2014. Philippine Development Plan, 2011–2016. Manila. Source: Asian Development Bank.

20 Appendix 2

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Reference in Loan

Agreement

Status of Compliance

Subprogram 1: The Borrower shall cause the Program to be carried out with due diligence and efficiency and in conformity with sound applicable technical, financial, business and development practices. In the carrying out of the Program, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 4 to this Loan Agreement. The Borrower shall make available, promptly as needed and on terms and conditions acceptable to ADB, the funds, facilities and services, as required, in addition to the proceeds of the Loan, for the carrying out of the Program and for the operation and maintenance of the Program facilities. The Borrower shall ensure that the activities of its departments and agencies with respect to the carrying out of the Program are conducted and coordinated in accordance with sound administrative policies and procedures. The Borrower shall maintain, or cause to be maintained, records and documents adequate to identify the Eligible Items financed out of the proceeds of the Loan and to indicate the progress of the Program. The Borrower shall enable ADB's representatives to inspect any relevant records and documents referred to in paragraph (a) of this Section. As part of the reports and information referred to in Section 7.04 of the Loan Regulations, the Borrower shall furnish, or cause to be furnished, to ADB all such reports and information as ADB shall reasonably request concerning (i) the Counterpart Funds and the use thereof; and (ii) the implementation of the Program, including the accomplishment of the targets and carrying out of the actions set out in the Policy Letter. The Program Executing Agency shall be responsible for the overall implementation of the Program. The Program Implementing Agencies shall be responsible for the day-to-day implementation of the Program.

Section 4.01. (a) Section 4.01. (b) Section 4.02. Section 4.03. Section 4.04. (a) Section 4.04. (b) Section 4.05. Schedule 4 (1) Schedule 4 (2)

Complied. Complied. Complied. Complied. Complied. Complied. Complied. Complied. Complied.

Appendix 2 21

Covenant Reference in Loan

Agreement

Status of Compliance

The Borrower shall ensure that the Program Steering Committee shall meet semiannually and if needed, on ad hoc basis, to: (a) monitor progress of the Programmatic Approach and the medium-term directions and expected results highlighted in the Policy Matrix; and (b) provide guidance and direction to the Program Executing Agency and the Program Implementing Agencies for the implementation of the policy actions under the Programmatic Approach and the medium-term directions and expected results highlighted in the Policy Matrix. The Borrower may invite ADB to participate in the meetings held by the Program Steering Committee as an observer. Policy Actions and Dialogue The Borrower shall ensure that all policy actions adopted under the Program, as set forth in the Policy Letter and the Policy Matrix, continue to be in effect for the duration of the Programmatic Approach. The Borrower shall keep ADB informed of policy discussions with other multilateral and bilateral aid agencies that may have implications for the implementation of the Program and shall provide ADB with an opportunity to comment on any resulting policy proposals. The Borrower shall take into account ADB’s views before finalizing and implementing any such proposal. Use of Counterpart Funds The Borrower shall ensure that the Counterpart Funds are used to finance the implementation of certain programs and activities consistent with the objectives of the Program. Governance and Anticorruption The Borrower, the Program Executing Agency, and the Program Implementing Agencies shall: (a) comply with ADB's Anticorruption Policy (1998, as amended to date) and acknowledge that ADB reserves the right to investigate directly, or through its agents, any alleged corrupt, fraudulent, collusive or coercive practice relating to the Program; and (b) cooperate with any such investigation and extend all necessary assistance for satisfactory completion of such investigation. The Borrower shall provide ADB with the opportunity to review and comment on relevant studies, draft legislation, decrees, orders, rules and regulations which may likely impact the objectives and implementation of the Programmatic Approach.

Schedule 4 (3) Schedule 4 (4) Schedule 4 (5) Schedule 4 (6) Schedule 4 (7) Schedule 4 (8)

Complied. Complied. Complied. Complied. Complied. Complied.

22 Appendix 2

Covenant Reference in Loan

Agreement

Status of Compliance

Subprogram 2: In the carrying out of the Program, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 4 to this Loan Agreement. As part of the information and reports referred to in Sections 7.01 and 7.04 of the Loan Regulations, the Borrower shall furnish, or cause to be furnished, to ADB all such reports and information as ADB shall reasonably request concerning (i) the Counterpart Funds and the use thereof; and (ii)] the implementation of the Program, including the accomplishment of the targets and carrying out of the actions set out in the Policy Letter and the Policy Matrix. The program executing agency shall be responsible for the overall implementation of the program. The program implementing agencies shall be responsible for the day-to-day implementation of the program. The Borrower shall ensure that the Program Steering Committee shall meet semiannually and if needed, on an ad hoc basis, to: (a) monitor progress of the Programmatic Approach and the medium-term directions and expected results highlighted in the Policy Matrix; and (b) provide guidance and direction to the Program Executing Agency and the Program Implementing Agency for the implementation of the policy actions under the Programmatic Approach and the medium-term directions and expected results highlighted in the Policy Matrix. The Borrower may invite ADB to participate in the meetings held by the Program Steering Committee as an observer. Policy Actions and Dialogue 4. The Borrower shall ensure that all policy actions adopted under the Program, as set forth in the Policy Letter and the Policy Matrix, continue to be in effect for the duration of the Programmatic Approach. The Borrower shall keep ADB informed of policy discussions with other multilateral and bilateral aid agencies that may have implications for the implementation of the Program and shall provide ADB with an opportunity to comment on any resulting policy proposals. The Borrower shall take into account ADB’s views before finalizing and implementing any such proposal.

Section 4.01. Section 4.02. Schedule 4 (1-3) Schedule 4 (4) Schedule 4 (5)

Complied. Complied. Complied. Complied. Complied.

Appendix 2 23

Covenant Reference in Loan

Agreement

Status of Compliance

The Borrower shall ensure that the Counterpart Funds are used to finance the implementation of certain programs and activities consistent with the objectives of the Program. The Borrower, the Program Executing Agency, and the Project Implementing Agency shall: (a) comply with ADB's Anticorruption Policy (1998, as amended to date) and acknowledge that ADB reserves the right to investigate directly, or through its agents, any alleged corrupt, fraudulent, collusive or coercive practice relating to the Program; and (b) cooperate with any such investigation and extend all necessary assistance for satisfactory completion of such investigation. The borrower shall provide ADB with the opportunity to review and comment on relevant studies, draft legislation, decrees, orders, rules and regulations which may likely impact the objectives and implementation of the programmatic approach.

Schedule 4 (6) Schedule 4 (7) Schedule 4 (8)

Complied. Complied. Complied.

24 Appendix 3

STATUS OF COMPLIANCE WITH POLICY MEASURES Subprogram 1

Component Policy Action Performance

Output 1 - Government Bond Market Depth and Liquidity Enhanced 1.1 Money market developed through improved cash management.

1. The BTr improved cash management by consolidating 603 government bank accounts aggregating approximately ₱30 billion into a TSA in line with international best practices.

Accomplished These reforms capture the effect of establishing and operationalizing a TSA. By consolidating control of cash balances, and revising the compensation schemes of depository banks, the BTr improved its cash forecasting ability and reduced the costs associated with cash management. This reform was a necessary pre-condition for a more dependable auction schedule and more consistent use of benchmark tenors.

2. The BTr switched from a float to a fee-based compensation scheme for its revenue collection banks, which strengthened BTr’s monitoring and control and reduced opportunity costs by approximately ₱1 billion a year.

3. The BTr reduced the cost of carry associated with maintaining the BSF by reducing its size by ₱127 billion yielding an estimated annual savings of ₱2 billion to ₱3 billion a year.

Accomplished The bond sinking fund is a legal structure which requires reserve balances to be maintained against outstanding peso denominated debt. By reducing the funds size to approximately 3 months of debt service, which is sufficient for a country with an investment grade credit rating, negative carry has been reduced freeing up substantial cash resources.

1.2 Trading volumes of government debt increased.

4. The BTr reduced the number of outstanding government bond issues from 204 to 118 by focusing on identified “benchmark” issues thereby increasing trading volumes in the remaining outstanding issues.

Accomplished To increase trading volumes, sound practice dictates reductions in the outstanding number of securities (issuance series in particular). This concentrates all trading in the remaining key tenor buckets contributing to a more reliable yield curve.

5. The DOF reduced market bifurcation by lifting the restriction to trading between taxable and tax-exempt sectors which allowed the 20% of outstanding government securities held by the tax-exempt sector to be traded in the secondary market.

Accomplished A key feature of the Philippine capital market has been the fact that trading conventions restricted trading between tax and tax-exempt entities. This reform addressed the underlying trading conventions making trading between the two sectors possible, thereby leading to increased trading volumes. Higher trading

Appendix 3 25

Component Policy Action Performance

volumes, all other things being equal, contribute to the development of a more reliable yield curve.

6. The BTr introduced standard internationally accepted GMRA which allows for an increased diversity of trading strategies including short positions, which will support two-way market making.

Accomplished This reform introduced the global standard “GMRA” to the Philippines. This began a sequenced adoption and start of repo trading in the Philippines after a long absence of this particular instrument. Repos are key to market-making and will be necessary to fully launch a competitive primary dealer system with firm obligations to deliver securities against quoted bid/ask prices.

1.3 Treasury operations enhanced.

7. The BTr reorganized and established: (i) Risk Management Division; (ii) Fund Management Division; (iii) Capital Market Strategy and Planning Division; and (iv) Debt Strategy and Planning Division.

Accomplished This reform paved the way to establish a more technically competent and efficient treasury department. Each of the new divisions represents an emerging priority for the BTr.

8. The BTr awarded a contract to modernize its core operations, and to improve data availability.

Accomplished The existing scripless registry was a custom design based on Windows 95. It had significant operational weaknesses which limited the treasury’s effectiveness. This reform recognizes the first step in fully replacing the scripless registry with a new, modern vendor supplied registry with enhanced capabilities.

Output 2 - Long Term Savings and Long-Term Investment Products Encouraged 2.1 Enabling regulatory environment provided.

9. The revised Insurance Code became effective in September 2013, which encourages long-term savings by expanding the types of allowable investments (e.g. project bonds), investment strategies (e.g. prudent man), and delivery channels (e.g. banc-assurance).

Accomplished This reform recognizes the efforts of the government to address constraints in the enabling environment. In this case, the Insurance Code contained fairly restrictive investment guidelines and limited the sector’s ability to reach consumers.

10. The government further encouraged long-term savings by installing the physical infrastructure to support the launch of tax-deferred personal retirement accounts (PERA).

Accomplished To further encourage long-term retirement savings, the government passed legislation authorizing the creation of a personal, tax-deferred, long-term saving plan (the “PERA”). This policy action captures ADB’s support to this initiative by funding the installation of the physical IT infrastructure.

26 Appendix 3

Component Policy Action Performance

11. The SEC, in conjunction with the PSE, encouraged professional management of collective investments by launching ETFs.

Accomplished To fully develop the domestic capital market, more needs to be done to build a professional investor base, and the supporting eco-system (analysts, financial coverage, and so forth). To provide a catalyst, this policy action was completed to encourage the development of the necessary ecosystem by increasing the number of professionally managed investment funds.

2.2 Costs of financial transactions reduced.

12. A bill is tabled in Congress which replaces the Value-added Tax of 12.00% with a Premium Tax of 2.00%, and changes the DST from 12.50% to a graduated scale rates from ₱10.00 to ₱100.00 (effectively less than 1%) depending on the sum insured.

Accomplished Taxation has long been a constraint for financial sector development. To address some of the more pressing issues, and to provide a catalyst for a broader rationalization of taxation in the financial sector, the first policy action recognizes the government’s micro-efforts to reduce taxes on insurance premiums, which harmonized taxes across finance subsectors, and to stimulate increased demand for insurance products. The second reform recognizes the government’s efforts to encourage the development of a repo market by reducing frictions costs. DST is particularly onerous for short-dated repo transactions.

13. The government exempts DST of ₱1 for every ₱200 of face value on GMRA based repos to encourage growth in the market.

14. SEC reduced regulatory costs by processing 70% of the total initial applications for the certificates of business registration in one day through the green lane.

Accomplished This policy action and reform captures the SEC’s emerging emphasis on ease of doing business. By encouraging business formation, the SEC provides an overall enabling environment and encourages business formation, all prospective capital market participants.

Output 3 - Market depth and diversity increased. 3.1 Barriers to entry eased.

15. The government allows foreign control of financial institutions in all subsectors which increases competition, capacity, and the diversity of market participants.

Accomplished This reform captures the government’s efforts to increase the number and diversity of participants in the financial sector. This liberalization crosses all three finance subsectors: banking, securities, and insurance.

16. The government (through the SEC) submits an application, and addresses requests for clarifications to join the IOSCO Annex A.

Accomplished The government’s inability to share information with other global and regional regulators represents a significant barrier to participation in ASEAN financial integration. This reform captures

Appendix 3 27

Component Policy Action Performance

the government’s efforts to achieve mutual recognition and two-way sharing of information on securities related crimes and investigations.

17. The SEC issued Guidelines on the Accreditation, Operations and Reporting of Credit Rating Agencies to increase transparency and improve the integrity of credit ratings.

Accomplished The lack of a reliable domestic credit rating agency inhibits broader participation by the contractual savings sector. This reform seeks to level the playing field by first establishing uniform standards and then by applying them to the sole existing domestic rating agency. The immediate intent is to improve its operations.

3.2 Corporate governance strengthened.

18. The SEC: (i) creates Corporate Governance & Finance Department; (ii) issues Template for Publicly Listed Companies’ Websites; and (iii) issues Guidelines mandating all listed companies to submit Annual Corporate Governance Reports.

Accomplished The intent of these reforms to improve corporate governance which in turn, increases investor interest and contributes to higher stock price multiples. 19. The SEC through the Institute of Corporate

Directors completed the ASEAN corporate governance scorecard assessment for 2013–2014, which provides a benchmark of performance and incentivizes ASEAN member states to collectively strengthen corporate governance.

20. The SEC introduced an automated market surveillance system for the equities market and begins to strengthen surveillance of the fixed income market.

Accomplished To strengthen investor confidence, the SEC began bolstering its own surveillance capacity to backstop and confirm the surveillance and enforcement performed by the industry SRO.

ASEAN = Association of Southeast Asian Nations, BSF = Bond Sinking Fund, DOF = Department of Finance, DST = Documentary Stamp Tax, ETF = Exchange Traded Funds, GMRA = Global Master Repurchase Agreement, IOSCO = International Organization of Securities Commission, IT = information technology, PERA = Personal Equity and Retirement Accounts, PSE = Philippine Stock Exchange, SEC = Securities and Exchange Commission, SRO = self-regulatory organization, TSA = Treasury Single Account.

28 Appendix 3

Subprogram 2

Component Policy Action Performance

Output 1 - Government Bond Market Depth and Liquidity Enhanced 1.1 Money market developed through improved cash management.

1. The BTr reconstituted and formalized a formal cash flow committee and improved the reliability of cash management and forecasts which enabled more efficient fund raising.

Accomplished These reforms continued and strengthened the reforms completed under subprogram 1. Specifically, the BTr provided a more formal structure to review, manage, and utilize the improved cash management and to better invest its now larger free cash balances.

2. To institutionalize improved cash management, the BTr operationalized the investment committee by adopting a formal investment policy manual and risk limits and a regular reporting protocol.

3. The BTr continued to restructure and reduce the size of the BSF to cover the larger of a rolling 2 years of debt service or 10% of outstanding debt, yielding additional savings of ₱2 billion to ₱3 billion a year in associated negative cost of carry, and lowering the government’s overall debt financing requirements by ₱252 billion over 3 years.

Accomplished This reform continued and strengthened a similar reform completed under subprogram 1. In this reform, the BTr further reduced the size of the BSF and realized additional fiscal savings which could be re-directed to social expenditure and infrastructure.

1.2 Trading volumes of government debt increased.

4. The BTr encouraged increased trading volumes by further reducing and consolidating outstanding government bond issues to 85 from 118 in subprogram 1.

Accomplished This reform continued and strengthened a similar reform completed under subprogram 1. To increase trading volumes, sound practice dictates reductions in the outstanding number of securities (issuance series in particular). This concentrates all trading in the remaining key tenor buckets contributing to a more reliable yield curve.

5. To encourage significant and sustained

participation in primary auctions, the BTr designed an evaluation system for top-ranked dealers with a set of responsibilities and privileges, including market soundings, participation in a web-based auction system and the ability to administer sponsor accounts.

Accomplished This reform builds on and expands earlier reforms and efforts within subprogram 1 which aimed to generate increased trading and liquidity in the government bond market. With this policy action, the government launched its initiative to install a competitive primary dealer system. This directs issuance and distribution of government bonds through a small number of participants, at competitive prices, which boosts trading volume.

Appendix 3 29

Component Policy Action Performance

6. To improve liquidity in the government bond market, support market-making, and encourage alternative trading strategies, the Money Market Association of the Philippines applied to the SEC to form a self-regulatory organization to support the introduction of a GMRA-based repo market for the inter-dealer market.

Accomplished This reform complements BTr’s initiatives to establish a primary dealer system, and to fully utilize the capabilities of the new scripless registry. Specifically, the government provided a mandate to industry to transform the government bond market to an “over-the-counter” format overseen by a self-regulatory body. This change is expected to improve efficiencies and reduce friction costs, leading to increased trading activity.

1.3 Treasury operations enhanced.

7. The BTr institutionalized risk management by operationalizing four divisions (e.g., risk management division, fund management division, capital market strategy and planning division, and debt strategy and planning division) by completing and distributing operations manuals, risk limits and structures, and exception reporting.

Accomplished This reform strengthens and operationalizes reforms implemented under subprogram 1. After creating and forming the new divisions, BTr staffed and fully operationalized them by adopting formal strategies, policies and operating guidelines. The objective is to improve the bureau’s overall capacity and capabilities.

8. The BTr further strengthened middle office risk management by installing a modern, vendor supplied treasury management system (Trasset International).

Accomplished These reforms represent actions taken to upgrade financial sector infrastructure. First, the government completed the installation of a new scripless registry to improve its function and reduce associated costs. In addition, the government installed a modern, vendor-supplied software system to improve treasury management overall, and to strengthen the investment and management of free cash.

9. The BTr increased market efficiency by replacing its Windows 95-based ROSS with a modern, off-the-shelf Montran registry of scripless securities (NRoSS).

10. To strengthen capacity, the BTr has formalized the use of the Treasury Certification Program for new staff to provide a structured introduction to treasury operations.

Accomplished As part of its ongoing efforts to strengthen its technical capacity, the BTr also implemented a structured training program for its staff.

Output 2 - Long Term Savings and Long-Term Investment Products Encouraged.

2.1 Enabling regulatory environment provided.

11. To increase the supply of long-term financing, the IC has authorized insurance companies to purchase infrastructure bonds with two deals approved to date covering a school project (PPP) and a power plant.

Accomplished Carrying forward reforms completed under subprogram 1, the IC issued guidelines to implement the revised insurance code and authorized insurance companies, under the law, to purchase project and project-related bonds.

12. To encourage long-term savings, the government launched PERA supported by vetted and licensed account administrators.

Accomplished Carrying forward a reform completed under subprogram 1, the government rolled out the PERA launch, supported by the hardware

30 Appendix 3

Component Policy Action Performance

and software provided by ADB. The intent of this reform is to encourage long-term savings by offering a tax-deferred savings platform.

13. To encourage additional financing of infrastructure projects, the SEC published listing rules for PPP companies and extended the effectivity of financial statements to 180 days in line with the harmonized ASEAN disclosure standards.

Accomplished As noted, the program focused on identifying and launching alternative channels for funneling long-tenor finance to support infrastructure. To meet this objective, the stock exchange and the SEC adopted listing rules to facilitate the listing of infrastructure financing vehicles. In addition, the SEC rationalized and relaxed listing and disclosure rules to encourage new listings.

2.2 Costs of financial transactions reduced.

14. The SEC commenced procurement of the XBRL based electronic submission of financial statements and other corporate disclosures.

Accomplished This reform represents a continuation of efforts begun in subprogram 1 to provide an enabling environment for business formation and operation. Moreover, this reform also encourages business activity, and facilitates growth in the institutional investor ecosystem by making financial data more accessible and usable.

15. SEC submitted the revised Corporation Code to Congress with provisions to reduce friction costs, strengthen supervision and improve the SEC’s funding.

Accomplished This represents the continuation of a reform in subprogram 1 and illustrates the government’s continuing commitment to provide an enabling environment for business, the ultimate users of the capital markets.

Output 3 - Market depth and diversity increased. 3.1 Barriers to entry eased.

16. The government implements Republic Act 10641, and BSP Circular No.858 by authorizing private foreign financial institutions to enter the domestic market.

Accomplished This reform represents the implementation of reforms begun in subprogram 1. To introduce alternative business models and to encourage competition, the central bank granted a banking license to 12 foreign banks.

17. The government encouraged the consolidation in the insurance sector by increasing the required minimum capitalization and introduced the risk-based capital standards.

Accomplished The insurance sector, and in particular the non-life subsector, has long been known for having a large number of under-capitalized insurance companies. To strengthen the sector, the insurance commission raised the minimum capitalization, in stages over time,

Appendix 3 31

Component Policy Action Performance

to drive consolidation. Risk-based capital was adopted to strengthen risk management.

18. SEC and IOSCO identified and agreed on the specific legislative provisions needed to become a signatory of the IOSCO multilateral memorandum of understanding concerning consultation and cooperation and the exchange of information.

Accomplished Moving forward from subprogram 1, the government continued its efforts to minimize the restrictions of the existing bank secrecy law and to formalize its ability to share information with global and regional regulators pertaining to financial crimes. This is a pre-condition to participate in several integration initiatives of the ASEAN Capital Markets Forum.

3.2 Corporate governance strengthened.

19. The SEC strengthened corporate governance standards and encouraged foreign investment by issuing, in conjunction with the PSE, a corporate governance roadmap covering 2016–2020 and subsequently issuing a Code of Corporate Governance for publicly listed companies.

Accomplished These reforms carry forward and strengthen the reforms begun under subprogram 1. The intent of these reforms to improve corporate governance which in turn, increases investor interest and contributes to higher stock prove multiples.

20. The SEC through the Institute of Corporate Directors completed the ASEAN corporate governance scorecard assessment for 2014–2015.

21. To build market confidence, the SEC established surveillance of the fixed income market.

Accomplished After establishing its own surveillance system to oversee the stock market, the SEC launched a surveillance system for the fixed income market, thereby improving market confidence.

ASEAN = Association of Southeast Asian Nations, BSF = bond sinking fund, BSP = Bangko Sentral ng Pilipinas, GMRA = Global Master Repurchase Agreement, IC = Insurance Commission, IOSCO = International Organization of Securities Commission, NRoSS = national registry of scripless securities, PPP = public–private partnership, PSE = Philippine Stock Exchange, SEC = Securities and Exchange Commission.