Since the 2008 global financial crisis, the Philippines has experienced strong GDP growth of over 6%, except for a sharp downturn in 2020. A solid recovery in tourism and key service sectors following the downturn has helped the economy rebound and set it on track to resume its growth path. Economic growth over the last decade has increasingly been boosted by capital investments, despite under-developed public capital markets. The size of market‑based financing remains subdued, as reflected in low activity in the equity and corporate bond markets. Overall, bank and market‑based financing to the non-financial corporate sector is low compared to more developed ASEAN peers, preventing many businesses from accessing external financing.

To deliver on the 6.5-8% GDP growth targets for 2024-28 of the Philippine Development Plan (PDP), the country needs to close the large infrastructure investment gap and raise the capital per worker to the level of peer countries. To achieve this, the Philippines requires a well-functioning capital market to mobilise and allocate resources efficiently in the economy. Moreover, reforms to boost pensions and savings can also work as a conduit for more inclusive growth as set out in the PDP.

Through empirical analysis and extensive consultations with stakeholders, this report identifies key impediments to capital market development in the Philippines and provides policy recommendations to address them. These recommendations are designed to strengthen the market framework and ultimately foster greater dynamism and sustainable growth in the broader economy. Chapter 1 focuses on five areas for which the key findings and recommendations are highlighted below. Chapter 2 summarises economic developments in the Philippines and describes the corporate sector, and Chapter 3 provides an overview of the use of market-based financing.

Key findings and recommendations

Improving corporate governance. Although the Securities and Exchange Commission (SEC) and the Philippine Stock Exchange (PSE) have taken important steps to improve corporate governance, it remains a key issue to improve investor confidence in the domestic capital market. The dominance of conglomerates containing within-group banks creates both financial risks and corporate governance challenges. Although the Philippine corporate governance code provides key provisions, enforcement is weak. Moreover, the SEC has a wide mandate, limiting resources available for supervision and enforcement.

Recommendations: The regulators should be provided with the resources and a clearer mandate to enforce corporate governance rules and guidelines, with a special focus on board and audit committee independence, related party transactions and cross-shareholdings. The authorities could consider updating the Philippine Code of Corporate Governance in line with the G20/OECD Principles of Corporate Governance revised in 2023. The authorities could also consider fully separating the stock exchange’s regulatory and commercial functions, and the focus of the SEC could be streamlined towards supervision. Finally, the authorities could consider strengthening the role of the public-private Capital Markets Development Council (CMDC).

Facilitating access to public equity markets and increasing their attractiveness. Since 2000, both the number of newly listed firms and the capital raised via initial public offerings have been the lowest among ASEAN peer countries. The listing process is long and suffers from organisational challenges, with requirements being less flexible than in peers. Meanwhile, there is a substantial number of unlisted large companies that both reach listing criteria and outperform listed ones. Regarding smaller firms, the SME Board only has 10 companies and the private equity market is nascent. Listing fees are relatively high and the fee structure is more complex than in peer countries. While tax reforms are being proposed, an IPO tax and stamp duty tax affect the appeal of IPOs.

Recommendations: The authorities could consider easing listing requirements to encourage the listing of companies with growth potential. To increase the focus on shareholder returns, the authorities could also consider establishing minimum payout ratios and incentives for companies to deliver higher value to shareholders. A single listing submission process and a three-month commitment for IPO approval could streamline the process. To encourage listings, efforts could be made to reduce fees, simplify their structure and lower the stamp duty tax. Introducing a special programme to support the listing of large unlisted companies and large SOEs could increase the attractiveness of the local stock market. To improve access to financing for smaller companies, requirements for the SME Board should be more flexible and proportional.

Increasing liquidity in the secondary public equity market. The Philippine stock market has markedly lower liquidity than peer countries. This is partly the result of the low free-float levels that adversely affect index inclusion and investor interest. Trading costs, especially on the sell side, are high by regional standards. Limited access to research and market makers also hamper liquidity. Derivatives are provided by banks OTC, although the PSE aims to develop a public market. The recently approved short selling and securities borrowing and lending programme is another step in the right direction but has yet to come into widespread use.

Recommendations: Efforts could be made to promote liquidity and the inclusion of Philippine companies in major indices, for example by incentivising higher free-float levels through easier and less costly follow-on offerings, and by allowing companies to deduct a notional interest on new equity issuance. Support for independent company research could be implemented, as could incentives for being a market maker. Regulators should ensure the regulatory framework is in place for the development of a derivatives market and support market participants to overcome barriers for using securities lending and borrowing. The authorities could also consider reducing the stock transaction tax on the sale of listed shares.

Facilitating market-based long-term financing via corporate bonds. The Philippine corporate bond market remains small - at the end of 2023 outstanding bonds amounted to only 11% of GDP. Corporate bond registration is burdensome, since the process has been copied from that of equities, and the issuance process is long. Costs are seen as high relative to bank financing. The transparency and quality of local credit rating agencies has been questioned by market participants. Liquidity issues persist, with bid‑ask spreads for corporate bonds the highest among peers at over 40 basis points.

Recommendations: The authorities should consider designing a registration process tailored to bond issuance and streamline the listing process. Moreover, serial issuers should be able to file and register without immediate issuance to allow them to time the market. The regulators could also consider designing a framework for bond issuance targeted at SMEs. They could implement stricter transparency rules for local credit rating agencies, provide alternative credit risk assessment options and encourage international rating agencies to participate in the domestic market. To expand the market and direct more investment towards infrastructure needs, the government could also promote the use of PPP bonds.

Deepening the investor base. Institutional investors remain small, with assets in pension funds, insurance corporations and investment funds representing only 18.6% of GDP. The regulation of investment funds is fragmented, and a lengthy process for setting up mutual funds and fixed liquidity requirements may have hampered their growth. A limited free-float in the domestic stock market, a lack of investment options and unfavourable tax policies might explain the limited interest from foreign institutional investors and uptake in global indices. Low income levels limit household financial assets holdings. While stock market participation is increasing, financial literacy and consumer protection remain key focus areas for the authorities.

Recommendations: The investment floors of the public pension funds could be relaxed, as could restrictions on investments in equities and corporate bonds. Meanwhile, trading audits of pension funds could be reevaluated. Authorities could also consider further promoting Personal Equity and Retirement Accounts, while removing outstanding frictions and broadening the administrator base. Regarding investment funds, the authorities should approve the laws to reconcile regulations and harmonise taxes. The SEC might also consider a single-step registration process for mutual funds. Introducing a wider range of products and ETFs could boost international investor interest. To boost household participation, the government should seek to facilitate access to low cost and easy-onboarding digital platforms that allow small minimum investments. Finally, efforts should continue to increase financial literacy and awareness of the consumer protection system in place.