The Asian Development Bank (ADB) has approved a $400 million policy-based loan to help the Philippine government. The purpose of the loan is to further deepen the country’s domestic capital markets and increase the supply of long-term finance. Long-term finance is especially important for infrastructure development projects. In turn, infrastructure development is crucial for the country’s sustained economic growth.
The ADB loan is called the “Support to Capital Market-Generated Infrastructure Financing Program, Subprogram 2”. The program will help to build an efficient domestic debt market. It will also increase institutional participation in the market, especially from insurance and pension funds. More supply of long-term finance will help address the country’s infrastructure financing gap. Currently, ADB estimates this finance gap to be roughly Php2 trillion ($40 billion) a year up to 2030.
“As the Philippines steers its economy towards sustainable and resilient growth after the devastating COVID-19 pandemic, it will require various sources of long-term financing to support the recovery of its industries and micro, small, and medium-sized enterprises; provide social protection; and fund its infrastructure development priorities,” said ADB Principal Financial Sector Specialist for Southeast Asia Stephen Schuster. “A deeper, more diversified investor base can help ease fiscal constraints.”
ADB is assisting the development and growth of the insurance and pension sectors. These sectors will in turn drive economic growth and contribute to poverty reduction. The policy loan will also create an environment to launch a wider range of investment products suited for long-term investors.
ADB believes tapping on pension funds way to sustainable growth for the Philippines
Pension funds and the insurance sector currently account for a small portion of the Philippines’ domestic capital market. Their combined volume is equivalent to 12% of gross domestic product. This amount is small when compared to 30% in Thailand and almost 80% in Malaysia. There is huge potential in tapping this sector for long-term funds since they have long investment horizons and low leverage. 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.
ADB has been a strong partner in the Philippines’ capital market development efforts since 1992. Particularly in strengthening the operations, governance, and oversight of the domestic capital market. Under the loan, ADB is supporting reforms to enhance liquidity, transparency, and price discovery in the government bond market. The aim is to provide a reliable yield curve for the private sector. ADB also recently assisted in the development of the country’s initial Local Currency Debt Market Development Roadmap by collaborating with the Bangko Sentral ng Pilipinas, the Bureau of the Treasury, and the Securities and Exchange Commission, as well as with other development partners.