PHILIPPINES: An Introduction to Banking & Finance
The Bangko Sentral ng Pilipinas (the Philippine central bank or BSP) expects that inflation peaked in Q4 2022 but will remain above the government’s target range of 2-4% until Q2 2023, and then approach the lower end of the target range in Q4 2023 to Q1 2024 before stabilising at the midpoint of the target range by Q2 2024. Major inflationary risks remain, however – such as the potential impact of higher fertiliser prices, trade restrictions and adverse global weather conditions on international food prices; increased prices of fruits and vegetables owing to domestic weather disturbances; petitions for fare hikes due to elevated oil prices; higher sugar prices; and the possible reinstatement of the full tariff rates on several imports such as pork and rice that were temporarily lowered in May 2022. Meanwhile, the impact of a weaker-than-expected global output recovery is the primary downside risk to the outlook.
In terms of economic growth, the Philippines expanded by 7.6% in Q3 2022, bringing the nine-month average to 7.7%. However, in a statement from World Bank’s President, a “sharp, long-lasting” slowdown in the global economy this year is expected to affect nearly all regions, particularly developing countries. Nevertheless, according to the World Bank, the Philippines' expected 5.4% GDP growth for 2024 is the second fastest in Southeast Asia in 2023, behind Vietnam’s 6.3%. The suggested approach by the World Bank for curbing the impact of a potential global recession is boosting investments to create jobs, increase output, improve the business environment, and promote greater debt transparency and sustainability.
Consistent with this, recently elected President Ferdinand Marcos, Jr vowed during his first State of the Nation Address in June 2022 to make infrastructure development a priority with a budget of 5% to 6% of GDP, driven by the government’s goal to “Build, Better, More.” A total of PhP1.196 trillion has been allocated for the government’s 2023 infrastructure programmes. The new administration will focus on developing the Philippines’ railway system, upgrading existing airports, and building more international airports. Major transportation infrastructure projects that are aimed to be implemented soon include the North-South Commuter Railway (costing PhP75.1 billion), Metro Manila Subway Project (PhP26.3 billion), and Light Rail Transit Line 1 Cavite Extension Project (PhP2.7 billion). In this connection, a recent amendment to the Public Service Act limits the industries that are considered “public utilities” (the operation of which is reserved for Philippine nationals) and opens up sectors (including transportation, except for the operation of public utility vehicles) to foreign investment.
It is also expected that the looming passage of the Passive Income and Financial Intermediary Taxation Act (PIFITA) will boost economic activity. This complements the recently passed Tax Reform for Acceleration and Inclusion Act (TRAIN) by making passive income and financial intermediary taxes simpler, fairer, more efficient, and more competitive regionally. PIFITA aims to simplify the taxation of passive income, financial services, and transactions. In its current version, the PIFITA bill seeks to reduce the number of tax rates from 80 to 36 and envisions the adoption of a uniform tax rate of 15% on interest, dividends, and capital gains derived from the sale of securities not traded in a local exchange or an organised marketplace. The proposed amendments also include the removal of the tax exemption that interest derived from “long-term deposit or investment certificates” is currently entitled to, and the removal of the documentary stamp tax on non-monetary transactions. With PIFITA, the Philippines can be more competitive in attracting capital and investments.
In addition to the PIFITA, the BSP launched its Sustainable Central Banking (SCB) Strategy which embodies the BSP’s commitment to championing the sustainability agenda in the Philippine financial system. Under the SCB Strategy, the BSP will foster a policy environment conducive to the adoption and growth of sustainable finance. It also commits to adhere to the same standards set for supervised financial institutions in managing risks and in making environmentally and socially responsible investment decisions.
The BSP has also demonstrated a degree of openness to the digitalisation of the Philippines’ financial ecosystem. According to the BSP, technological innovations have the potential to revolutionise the delivery of financial services and may further address the problem of a lack of financial inclusion (seven of ten adult Filipinos do not even have a transaction account). However, the BSP cautions that these benefits should be considered together with the risks of fraud, money laundering, terrorist financing, and similar issues that may arise, considering the higher degree of anonymity involved, the velocity of transactions, volatility of prices, and global accessibility of digital transactions.
Accordingly, in recent years, the BSP has issued regulations on digital banks, the operation of virtual currency exchanges, virtual asset service providers, e-money issuers, and operators of payment systems which aim to strike a balance between welcoming innovation in the financial services sector and protecting the public against risks. Although a challenge currently faced by potential investors in these fields is the moratoria imposed by the BSP on applications for new digital bank and e-money licences, the BSP has adopted a regulatory sandbox framework whereby parties that intend to deploy new or emerging technology in the delivery of financial products and services (eg, through the use of artificial intelligence/machine learnings and quantum computing) may, subject to prior approval and oversight, launch such new products for a period of 12 months even if, strictly speaking, such new products are not permitted by current regulations. The legislative and executive departments have also agreed to fast-track the passage of bills relating to e-Governance and e-Government bills so as to simplify digital transactions that have become the norm because of the COVID pandemic.
A recent legislative development of note is the enactment the Financial Products and Services Consumer Protection Act (Republic Act No. 11765), which adopts mechanisms that aim to protect the interests of consumers of financial products and services under the conditions of transparency, fair and sound market conduct, and fair, reasonable, and effective handling of financial consumer disputes. This new law also strengthens the regulatory powers of the BSP, Securities and Exchange Commission, Insurance Commission, and Cooperative Development Authority, and grants them increased powers of surveillance and examination, expanded enforcement powers, and certain adjudicatory functions. The new statute also imposed additional reportorial and other obligations on financial product and service providers to help ensure that consumers’ rights are protected. Other new regulations intended to further protect consumers impose ceilings on interest rates and other fees imposed by lending companies and financing companies (but not banks).
Recent months have seen several local private issuers postpone planned securities issuances until there is greater clarity in the market. It is hoped that with the 2022 national elections in the rear-view mirror, the eventual crystallisation of the new administration’s economic plans, and more stability in the global economy, more local issuers will push through with their transactions. Similarly, the relatively optimistic outlook on the Philippine economy and recent regulatory and legislative developments will hopefully spur more investment in the Philippines.