A country’s economic growth is hinged on an efficient financial sector that facilitates a healthy flow of domestic and foreign capital. Without a developed capital market that progressively promotes and protects investments, a country’s growth potential may be impeded.
With the Asean integration, the development of capital markets becomes all the more important. It is critical that respective capital markets develop in a manner that reaches common or similar regulatory environments which enable a smooth and flexible flow of domestic and foreign investments.
According to the Asean Capital Markets Forum (ACMF), the rationale for regional capital markets integration is to improve the competitiveness of the Asean capital markets in the global arena. The integration of capital markets will reduce the risk of marginalization, as individual markets in Asean may be too small with limited range of products and services, which lessen the competitiveness of Asean capital markets individually as compared to the more developed markets.
Further, the ACMF sees that an integrated Asean capital market will likely lead to increased visibility and attractiveness in the global arena.
Added to this, the ACMF sees the regional integration to improve the levels of market efficiency and provide for an expanded set of investment choices for local investors and issuers. With a larger pool of liquidity in the region as a result of the integration, investors will have the opportunity to diversify risk and have the flexibility of choosing across a wider variety of products that enables them to maximize potential investment gains.
In the Philippines we have seen much progress in the development of our capital markets over the last 10 years. Clear examples of structural reforms have been made in the equity and debt capital markets through the Philippine Stock Exchange (PSE) and the Philippine Dealings Exchange. Initiatives toward more transparent practices and strict compliance rules were enforced on publicly listed companies to help increase investor confidence. Disclosure and reportorial requirements were also improved to facilitate and promote professionalism and good corporate governance.
With more educated and well-informed set of local and foreign investors as a result of these structural reforms, the equity and debt markets have become successful investment tools for retail investors to increase their returns and, at the same time, manage market risks.
This paved the way for higher liquidity and more investment income, making the development of the capital markets as an engine for economic growth, fostering a strong and positive investor demand which propelled the PSE to several new highs and eventually peaking to a level of more than 8,100 and a total market capitalization of P8.9 trillion from only 4,000 five years ago, with the value of traded stocks expanding eight times from 2010 to the end of 2014.
This increased liquidity in the local market has led to further economic growth, spurring higher consumption and spending, fueling the growth of various industries, such as retail, food, automobiles and real estate. The impact of capital market development on the economy has been quite significant, creating a ripple effect that has sustained the Philippine economy’s solid growth.
Developing capital markets allows for investments to be less reliant on the banking system which provides for more flexibility to manage risks and increase returns. A critical step to sustaining our economic growth is to promote and work on the further improvement of our capital markets.
As long as we continue with these structural advancements, we are able to bring the Philippines to a level that is continuously competitive across the Asean region—fueling the engine for economic growth.
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The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of Finex. Free Enterprise is a rotating column of members of the Financial Executives Institute of the Philippines appearing every Wednesday and Friday.