ON DEC. 19, 2024, ANC News announced that “PSEI on track for 5th annual loss.” If so, this means that while the Philippine economy as well as the other ASEAN stock markets have recovered from the COVID-19 pandemic, the Philippine stock market is still bed-ridden. In fact, it first crossed the 6,000 index mark in 2013 and is now back to this level after 12 years of turmoil.
This dire condition of the Philippine stock market was the subject of a report by the Organization for Economic Co-operation and Development (OECD) entitled “OECD Capital Market Review of the Philippines 2024.”
The OECD report stated that:
“At the start of 2024, the PSE [Philippine Stock Exchange] had 269 listed companies on the Main Board and SME Board with a total market capitalization of $234 billion, equivalent to 52% of the country’s GDP (Figure 1.7, Panel A). Compared to peer countries, the Philippines has the lowest number of listed companies and ranks second to last in terms of market capitalization as a share of GDP. Additionally, the amount of capital raised through initial and secondary public offerings remains low compared to regional peers. Since 2000, 95 Philippine companies have collectively raised almost $13 billion through initial public offerings (IPOs) (Figure 1.7, Panel B). This is significantly lower than the least active market among peers, Vietnam, where 584 companies raised $36 billion. Between 2000 and 2023, the capital raised through IPOs in the Philippines represented only 0.2% of GDP, much lower than in all other peer countries except Indonesia.”
To revive the Philippine stock market, which the OECD considers not a problem of stimulating demand for stocks but rather the lack supply of listed companies, it made two major proposals: tap the large number of unlisted large private companies as well as State-Owned Enterprises (SOEs).
According to the OECD Report, there are 411 large unlisted companies (269 are now listed) which are suitable candidates for listing. Not only that, but many large unlisted companies also outperform the currently listed ones both in terms of size and profitability. Their listing will mean more attractive companies for the public to invest in.
One possible incentive for these companies to list is to exempt all listed companies from being audited by the Bureau of Internal Revenue (BIR).
The rationale for auditing the income tax returns of individuals and companies is their incentive to understate their income and so pay lower income taxes. With respect to listed companies, there is the other incentive to report higher income so that the market price of their shares will go higher. The increased value of their shares will more than offset the higher taxes they will pay for not understating their income.
And yet listed companies are regularly assessed billions in tax liabilities by BIR examiners only to prove after long and costly discussions that they are correctly paying their taxes. By exempting them from BIR audits, they could devote more time to improving the profitability of their companies and the BIR examiners could more productively spend their time auditing unlisted companies.
Providing this exemption does not require passing a new law. All that is needed is a Department Order issued by the Secretary of Finance directing the Commissioner of the Bureau of Internal Revenue to delete from its list of companies to be audited the listed companies.
The second source for new listed companies is State-Owned Enterprises (SOEs). The OECD Report notes there are no SOEs listed on the Philippine Stock Exchange, which contrasts with a number of peer countries where SOEs make up a substantial share of market capitalization.
The most notable example is Singapore, where the top three listed SOEs — DBS Group Holding, Singapore Telecommunications, and Singapore Airlines — account for 27% of total market capitalization. Similarly, the top three listed SOEs in Malaysia, Indonesia, Thailand, and Vietnam each represent 15-18% of the domestic stock exchanges’ market capitalization. These listed SOEs include banks, telecommunication companies, airports, and gas and petroleum production companies.
The OECD Report recommends that in the Philippines, public equity markets could be expanded by listing minority stakes of financially significant SOEs. At the start of 2023, there were 118 governments-owned or -controlled corporations (GOCCs) in the Philippines with total assets amounting to P11.6 trillion ($230 billion). Among these companies two banks stand out in terms of total assets, net worth, and income as potential candidates for a stock market listing: the Land Bank of the Philippines with total assets of P3.1 trillion ($61.5 billion) and the Development Bank of the Philippines with total assets of P1 trillion ($20 billion) (see Figure 1.11, Panel B; other potential candidates for a partial listing are shown on Panel B).
With respect to the listing of SOEs in the Philippine Stock Exchange, we would recommend that prior to listing, the shares of the SOEs be transferred from the government (Department of Finance) to the Maharlika Fund. This would immediately provide the Fund with seasoned stocks whose value can immediately be realized.
Listing the Philippine SOEs will be beneficial in so many ways. For one, listing will provide a source of funding other than that from the government for our SOEs. Accessing non-government funds will force our SOEs to learn how to tap the capital markets not only domestically but also internationally.
It would also allow Filipino investors to share in the earnings of these government-supported enterprises. This alternative will appeal not only to patriotic Filipino who will look upon these SOEs as national champions of the Philippines, but also to investment savvy Filipinos who will be aware that majority government ownership makes their stock more attractive.
Most importantly, SOEs as listed enterprises will be subject to scrutiny by an army of securities analysts. They will closely scrutinize their past performance, present operations, and their future plans. This will greatly assist the government as majority stockholder in assessing the competence and performance of the managers that were appointed to the key positions.
In sum, the OECD has provided the Philippine Stock Exchange with a viable strategy for reviving the Philippine Stock Market. All that is needed is for the President of the Philippine Stock Exchange to implement the plan.
This article is based on the research undertaken by the Research Team of Regina Capital Development Corp., a member of the Philippine Stock Exchange.
Dr. Victor S. Limlingan is a retired professor of AIM and a fellow of the Foundation for Economic Freedom. He is presently chairman of the Cristina Research Foundation, a public policy adviser and of Regina Capital Development Corp.
