ADB Approves Fresh Loan to the Philippines for Domestic Capital Markets

The Asian Development Bank (ADB) recently approved a $400-million loan to the Philippines. These funds are expected to help steer the economy towards sustainable growth following the devastating effects of the global pandemic, said ADB principal financial sector specialist for Southeast Asia Stephen Schuster. The Philippine government’s debt stock climbed for the past two years during the pandemic reaching  ₱12.7 trillion as of last March. This accounts for almost two-thirds of the domestic economy’s value.

The policy-based loan is aimed at increasing the supply of long-term finance and further deepening the country’s domestic capital markets. Schuster further noted that different sources of long-term financing are necessary to support the recovery of industries as well as micro, small, and medium-sized enterprises. A deeper, more diversified investor base could, likewise, help ease fiscal constraints, added Shuster in a statement. 

The ADB loan is meant to increase institutional participation in the market, especially from insurance and pension funds. Moreover, it is also set to aid in building an efficient domestic debt market. The national government has been spending beyond the budget at 6.4% of gross domestic product, which economic managers hope to bring down to the pre-pandemic level of 3%. More supply of long-term finance will help address the infrastructure financing gap, estimated at roughly ₱2 trillion ($40 billion) a year up to 2030. 

At the moment, pension funds and the insurance sector account for just 12% of GDP in the Philippines. Meanwhile, the same ratio is about 80% in Malaysia and 30% in Thailand. This suggests that there is huge potential in tapping this sector for long-term funds since they have long investment horizons and low leverage. With these, investors can offer better debt pricing and longer maturities in local currency. They are also less likely to sell or retreat during short-term market corrections. 

Ultimately, this would provide a reliable yield curve for the private sector, since ADB’s loan would support reforms geared to enhance liquidity, transparency, and price discovery in the government bond market. ADB has been a notably strong partner in the Philippines’ capital market development efforts. Prior to the approval of this loan, the ADB also aided in the development of the Philippines’ initial Local Currency Debt Market Development Roadmap. ADB has, likewise, been engaging with the Bangko Sentral ng Pilipinas, the Bureau of the Treasury, the Securities and Exchange Commission (SEC), and other partners.

Source: Inquirer