ASEAN Investment Flash Philippines April 2014 - …reciprocus.com/.../files/7-Reciprocus-Flash-Philippines-April-2014.pdf · Flash Philippines April 2014 ... below the government’s

© 2014 Reciprocus

ASEAN Investment

Flash

Philippines

April 2014

© 2014 Reciprocus

The IMF estimates that the Philippines will achieve a

8.8% GDP Growth Rate

by 2018

Chairman’s Message

Letter from the Editor

Demonstrating extraordinary resilience, the Philippines achieved

a 7.2% GDP growth rate for 2013, despite the Bohol earthquake

and the devastation of super Typhoon Haiyan, both of which

soon followed in the aftermath of the armed conflict in

Zamboanga City that left 100,000 displaced. Quarter four of

2013 was indeed a challenging period which left some investors

shaken, however overall economic losses are expected to be

mild as we continue to see strong bullish sentiment towards the

Philippines as well as the Southeast Asian region as a whole.

The degree to which the Philippine’s growth has outpaced that

of its regional neighbours since 2009 is largely attributable to a

string of reforms by President Benigno Aquino III which has

instilled greater levels of confidence among foreign investors.

Better macroeconomic management, reduced corruption, a

healthier fiscal position and growing external account surpluses

have improved credit ratings to investment-grade, leading to

greater levels of FDI. It seems the country is going through one

of its most successful reforms and is likely to experience a

prolonged period of continued growth.

But like its neighbour Indonesia to the southwest, the

Philippine’s sprawling archipelago faces similar challenges in

respect to infrastructure development among its 7,107 islands.

Success depends heavily on its ability to develop a

comprehensive land and sea transportation network to improve

logistic efficiencies, however the reality faced is that decrepit

infrastructure remains as one of the chief hindrances to

economic growth. In fact, HSBC earlier this March downgraded

their two year growth forecasts to between 5-6% annually,

below the government’s estimates of 6.5-8%, citing concerns

over infrastructure as the key reason behind the revision.

Notwithstanding those infrastructural challenges and potential

looming threats on the horizon, such as an escalation of political

disputes with China, the overall long-term outlook is highly

positive. As the country’s “demographic sweet spot” approaches

in 2015, the Philippines is geared to experience a phenomenon

that historically creates a prolonged period of high productivity

with growth rates of 7.3% over 10 years on average. We expect

these favourable demographics to indeed be an important

economic advantage, so long as continued growth translates

into continued job creation.

Manila’s move to improve the fundamentals over the past

decade, cutting debt to GDP from 74.4% in 2004 to 49% and

foreign debt from 80% of GDP in 2001 to 30% currently, has

transformed the Philippines from the once “sick man of Asia” to

“Asia’s bright spot”. As the Chinese economy slows, the

Philippines is especially well situated as an alternative for

manufacturers so long as investments continue to flow into new

infrastructure projects. The country stands much to gain

through this continued investment, reforms and strategic

positioning, with the IMF now predicting growth to hit 8.8% by

2018.

Robert MacPherson Vice President and Editor

Reciprocus International Pte Ltd

Dear readers,

It has been a busy first few months of the year here at

Reciprocus. We have had the honour of co-facilitating two US

Commerce Department certified trade missions to Asia,

where we introduced leading US private equity, real estate,

and venture capital funds to prominent local investors and

family offices in India and Hong Kong. We have now

completed research work for our first client in Japan and are

continuing the mandate with scouting activities. Meanwhile,

other projects introduced to us by our partner GlobeLink in

Tokyo are gaining momentum as well. We also are proud to

announce our newest client, the Singapore Precious Metals

Exchange, the world’s first peer-to-peer exchange for physical

precious metals, for which we are mandated to help the

exchange establish a truly global footprint spanning the USA,

Europe and Middle East. Although our firm has been

engaging in broader global activities recently, Southeast Asia

remains our core focus and we therefore hope that you will

find this latest report enlightening about opportunities in one

of the region’s important rising stars – The Philippines.

David Emery Founder and Chairman


http://www.facebook.com/reciprocus

http://www.linkedin.com/company/2752106?trk=tyah

© 2014 Reciprocus

Table of Contents

Introduction

Country Profile 1

Economy 2

Investing in Philippines

Factors Driving Investments 3

FDI in Philippines 5

Financial Markets in Philippines

Financial Markets 7

Micro Financing 10

Insurance Sector 12

Private Equity in Philippines

Private Equity Market 13

SWOT Analysis of the PE Industry

16

Appendix 17

Disclaimer: This report is an aggregation of available information gathered from extensive research done on the net. While Reciprocus endeavors to ensure accuracy of information, we do not accept any responsibility for the consequences of any actions taken on the basis of the information provided and any loss or damage to any person resulting from it.

© 2014 Reciprocus 1

Country Profile

Map

South-eastern Asia, archipelago between

the Philippine Sea and the South China

Sea, east of Vietnam

Figure: 1

About Philippines

Languages

Filipino (official; based on Tagalog) and

English (official); eight major dialects -

Tagalog, Cebuano, Ilocano, Hiligaynon or

Ilonggo, Bicol, Waray, Pampango, and

Pangasinan

Capital City - Manila

Religions

Catholic 82.9% (Roman Catholic 80.9%,

Aglipayan 2%), Muslim 5%, Evangelical

2.8%, Iglesia ni Kristo 2.3%, other Christian

4.5%, other 1.8%, unspecified 0.6%, none

0.1% (2000 census)

Administrative Divisions

80 provinces and 39 chartered cities

Provinces: Abra, Agusan del Norte, Agusan

del Sur, Aklan, Albay, Antique, Apayao,

Aurora, Basilan, Bataan, Batanes,

Batangas, Biliran, Benguet, Bohol,

Bukidnon, Bulacan, Cagayan, Camarines

Norte, Camarines Sur, Camiguin, Capiz,

Catanduanes, Cavite, Cebu, Compostela,

Davao del Norte, Davao del Sur, Davao

Oriental, Dinagat Islands, Eastern Samar,

Guimaras, Ifugao, Ilocos Norte, Ilocos Sur,

Iloilo, Isabela, Kalinga, Laguna, Lanao del

Norte, Lanao del Sur, La Union, Leyte,

Maguindanao, Marinduque, Masbate,

Mindoro Occidental, Mindoro Oriental,

Misamis Occidental, Misamis Oriental,

Mountain Province, Negros Occidental,

Negros Oriental, North Cotabato,

Northern Samar, Nueva Ecija, Nueva

Vizcaya, Palawan, Pampanga, Pangasinan,

Quezon, Quirino, Rizal, Romblon, Samar,

Sarangani, Siquijor, Sorsogon, South

Cotabato, Southern Leyte, Sultan Kudarat,

Sulu, Surigao del Norte, Surigao del Sur,

Tarlac, Tawi-Tawi, Zambales, Zamboanga

del Norte, Zamboanga del Sur, Zamboanga

Sibugay Chartered cities: Angeles,

Antipolo, Bacolod, Baguio, Butuan,

Cagayan de Oro, Caloocan, Cebu,

Cotabato, Dagupan, Davao, General

Santos, Iligan, Iloilo, Lapu-Lapu, Las Pinas,

Lucena, Makati, Malabon, Mandaluyong,

Mandaue, Manila, Marikina, Muntinlupa,

Naga, Navotas, Olongapo, Ormoc,

Paranaque, Pasay, Pasig, Puerto Princesa,

Quezon, San Juan, Santiago, Tacloban,

Taguig, Valenzuela, Zamboanga (2012)

Main Industries

Electronics assembly, garments, footwear, pharmaceuticals, chemicals, wood products, food processing, petroleum refining, fishing

Philippines


Flag

Figure: 2

Two equal horizontal bands of blue (top)

and red; a white equilateral triangle is

based on the hoist side; the center of the

triangle displays a yellow sun with eight

primary rays; each corner of the triangle

contains a small, yellow, five-pointed star;

blue stands for peace and justice, red

symbolizes courage, the white equal-sided

triangle represents equality; the rays

recall the first eight provinces that sought

independence from Spain, while the stars

represent the three major geographical

divisions of the country: Luzon, Visayas,

and Mindanao; the design of the flag

dates to 1897

Population

Figure: 3

Age Structure

0-14 years: 34% (male 18,339,398/female 17,607,472)

15-24 years: 19.1% (male 10,259,385/female 9,896,090)



65 years and over: 4.4% (male 2,023,118/female 2,664,085) (2013 estimates)

Economy

Figure: 4

World Bank Doing Business (2014)

Rank 108 out of 189 countries

Transparency International’s Corruption

Perception Index (2013)

Rank 94 out of 177 countries

International Organization Participation

ADB, APEC, APT, ARF, ASEAN, BIS, CD,

CICA (observer), CP, EAS, FAO, G-24, G-77,

IAEA, IBRD, ICAO, ICC (national

committees), ICRM, IDA, IFAD, IFC, IFRCS,

IHO, ILO, IMF, IMO, IMSO, Interpol, IOC,

IOM, IPU, ISO, ITSO, ITU, ITUC (NGOs),

MIGA, MINUSTAH, NAM, OAS (observer),

OPCW, PCA, PIF (partner), UN, UNCTAD,

UNDOF, UNESCO, UNHCR, UNIDO, Union

Latina, UNISFA, UNMIL, UNMISS, UNMIT,

UNMOGIP, UNOCI, UNWTO, UPU, WCO,

WFTU (NGOs), WHO, WIPO, WMO, WTO

Currency - Philippine Peso (PhP)


Factors Driving Investments

Location

Philippines is located right in the heart

of Asia – today the fastest growing

region

Situated at the crossroads of the

eastern and western business, it is a

critical entry point to over 500 million

people in the Association of Southeast

Asian Nations (ASEAN) market and a

gateway of international shipping and

air lanes suited for European and

American businesses

Workforce

The Filipino workforce is one of the

most compelling advantages the

Philippines has over any other Asian

country

With higher education priority, the

literacy rate in the country is 94.6%

Availability of Resources

It is the biggest copper producer in

Southeast Asia and among the top ten

producers of gold in the world

(Refer Appendix: Figure 5 - Exports of

common metallic minerals extracted

in the Philippines)

Cost of Doing Business

Wages are typically less than a fifth of

that in the US

Local communication, electricity, and

housing costs are also 50% lower

compared to the US rates

Foreign companies that are now

outsourcing programming and

business processes to the

Philippines estimate 30%-40%

business cost savings, 15%-30% call

center services and application

systems, and 35%-50% software

development

Figure: 6

Figure: 7

Figure: 8

INVESTING IN PHILIPPINES


Figure: 9

Liberalized and Business-Friendly

Economy

An open economy, like the Philippines,

allows 100% foreign ownership in

almost all sectors and supports a

Build-Operate-Transfer (BOT)

investment scheme

Government corporations are being

privatized and the banking, insurance,

shipping telecommunications, and

power industries have been

deregulated

Incentive packages include the

corporate income tax, reduced to a

current 32%, with companies in the

Special Economic Zones (ecozones)

subject to only 5% overall tax rates

Multinationals looking for regional

headquarters are entitled to

incentives such as tax exemptions and

tax and duty-free importation of

specific equipment and materials

Unlimited Business Opportunities

Asian economies integrate within the

vast framework of the ASEAN Free

Trade Agreement (AFTA), the

Philippines is the natural and most

strategic location for firms that want

access to the large ASEAN market and

its vast trade opportunities

Developing Infrastructure for Global

Growth

A well-developed communication,

transportation, business, and

economic infrastructure links the

three major islands — Luzon, Visayas,

and Mindanao — and distinguishes

the Philippine economy

Highly accessible by air, water, and

cyberspace, liberalization of inter-

island shipping and domestic aviation

further sparked improved facilities and

services

The container terminals are suited to

handle cargo traffic at the highest

levels of efficiency

Investment Climate in Philippines

The Government of the Philippines

(GPH) actively seeks foreign

investment to promote economic

development

The Philippine investment landscape

has some noteworthy advantages,

such as its free trade zones, including

the Philippine Economic Zone

Authority (PEZA)

Certain industries have experienced

impressive growth in recent years,

especially those that leverage

educated, English-speaking Philippine

labor


Philippine law generally treats foreign

investors the same as their domestic

counterparts, with important

exceptions outlined in the Foreign

Investment Act

The 1991 Foreign Investment Act (FIA)

requires the GPH to publish the

Foreign Investment Negative List

(FINL), which outlines sectors in which

foreign investment is restricted or

limited

Foreign Direct Investments

The Philippine Board of Investments

(BOI), an attached agency of

Department of Trade and Industry

(DTI), is the lead government agency

responsible for the promotion of

investments in the Philippines

Taking the lead in the promotion of

investments, BOI assists Filipino and

foreign investors to venture and

prosper in desirable areas of economic

activities. Investors are welcome to

experience the potential of the

booming Philippine Industry sectors.

Profitable business opportunities

abound in the food processing,

construction, metal products,

telecommunications, power and

infrastructure projects among others

Investment Priority Areas

o Business Process Outsourcing

o Electronics Industry

o Renewable Energy

o Shipbuilding

Incentives

Fiscal Incentives

Income Tax Holiday

Exemption from taxes and duties on

imported spare parts (NOLCO)

Exemption from wharfage dues and

export tax, duty, impost and fees (GIE)

Reduction of the Rates of Duty on

Capital Equipment, Spareparts and

Accessories by Virtue of EO 528

Tax exemption on breeding stocks and

genetic materials

Tax Credits

Additional deductions from Taxable

Income

Non-Fiscal Incentives

Employment of Foreign Nationals

Simplification of customs procedures

Importation of consigned equipment

Privilege to operate a bonded

manufacturing/trading warehouse

Total foreign investments (FI)

approved in the third quarter of 2013

by the seven investment promotion

agencies (IPAs), namely: Board of

Investments (BOI), Clark Development

Corporation (CDC), Philippine

Economic Zone Authority (PEZA), and


Subic Bay Metropolitan Authority

(SBMA) as well as the Authority of the

Freeport Area of Bataan (AFAB), BOI-

Autonomous Region of Muslim

Mindanao (BOI-ARMM), and Cagayan

Economic Zone Authority (CEZA)

amounted to PhP 33.1 bn, 87% higher

than the PhP 17.7 bn recorded in the

same period last year

Figure: 10

Source: AFAB, BOI, BOI ARMM, CDC, CEZA, PEZA,

SBMA

Sustained interest from domestic

investments registered PhP 345.39 bn

or 74% of the aggregate investment

figure with the remaining 26% or PhP

120.65 bn coming from foreign

sources which have continued to

remain bullish and upbeat, reflecting

an increase of 63% from 2012

The increase in domestic investments

came as a result of the approval of big

power projects like Redondo Peninsula

Energy, Inc. (PhP 62.86 bn), GNPower

Ltd. Co., Pagbilao Energy Corporation

(PhP 39.90B), San Miguel Consolidated

Power Corporation (PhP 25.84B), FDC

Misamis Power Corporation (PhP

31.94 bn), SMC Consolidated Power

Corporation (PhP 25.51 bn), First

Natgas Power Corp. (PhP 21.83 bn),

Minenergy Coal Corporation (PhP

14.55 bn) and Petron Corporation (PhP

11.18 bn), among others. These

projects largely made up the

electricity, gas, steam and air

conditioning supply sectors, which

recorded the biggest share of

investment commitments at PhP

331.10 bn or 71% of the total figure

The British Virgin Islands (BVI) topped

the foreign investments list with

committed investments worth PhP

61.51 bn or 51% share of the total

foreign investments in 2013. The

notable project from BVI is the

approval of Energy City Philippines

Holdings, Inc. (100% BVI) located in

Bataan, with investments worth PhP

45.65 bn

The US came in second with

investments amounting to PhP 41.76

bn or 35% of the total investment

approvals from foreign sources during

the period. The bulk of these

investments were from the approved

project of GNPower Limited Co. with

PhP 41.23 bn, a 100% American-

owned company, for the operation of

its 2X150MW coal-fired power plant

(GNPower Phase II project) in

Mariveles, Bataan

The Netherlands placed third with PhP

5.98 bn followed by South Korea (PhP

2.26 bn)


The Bangko Sentral ng Pilipinas (BSP)

is the central bank of the Philippines.

It is the sole governing authority

monitoring the entire banking system

Financial Market

The financial markets are classified under

five major segments by The Bangko

Sentral ng Pilipinas (BSP), the central bank

of Philippines:

1. Foreign Exchange Market

2. Stock Market

3. Fixed Income Exchange Market

4. Open Market Operations

5. Payment and Settlement System

Foreign Exchange Market

The BSP is in charge of maintaining a

floating exchange rate system

Supply and demand in the foreign

exchange market determines the

exchange rate

The BSP ensures the orderly

conditions in the market and the

market-determination of the exchange

rate is in line with the Government’s

commitment to bring forth market-

oriented reforms and bringing out

strategies of achieving

competitiveness through price stability

and increase efficiency

Stock Market

One of the oldest stock exchange in

Southeast Asia, incepted in 1927, the

Philippine Stock Exchange (PSE) is the

national stock exchange of the country

The PSE was formed from the

country’s two former stock

exchanges, the Manila Stock Exchange

(MSE), established on August 8, 1927,

and the Makati Stock Exchange

(MkSE), which was established on May

27, 1963

The main index for PSE is the PSE

Composite Index or PSEi

Although both the MSE and the MkSE

traded the same stocks of the same

companies, the bourses were separate

stock exchanges for nearly 30 years

until December 23, 1992, when both

exchanges were unified to become the

present-day Philippine Stock Exchange

Initially established as a non-stock,

member-governed organization, the

PSE has since then reorganized and

transformed into a shareholder-based,

revenue-generating corporation

following the enactment of the

Securities Regulation Code of 2000

Along with this restructuring came the

separation of the Exchange's

ownership and trading rights; this

opened the doors for the entry of new

market participants. On 15 December

2003, PSE shares were listed by way of

introduction

FINANCIAL MARKETS IN PHILIPPINES


The PSE currently maintains two

trading floors, one at its headquarters

at the PSE Plaza Ayala Triangle, Ayala

Tower One in Makati City's Central

Business District, and one at the

Philippine Stock Exchange Centre

(Tektite Towers), Ortigas Center in

Pasig City

The two trading floors were linked

electronically to enable brokers and

traders to execute orders and clear

transactions within the day, and

maintain a "one-price, one market"

exchange

In July 2010, the PSE relocated its

offices from PSE Centre to PSE Plaze.

The transfer was intended as a first

step before the PSE moves to a

permanent headquarters at the

Bonifacio Global City in Taguig by 2014

The PSE also launched its new trading

system called the PSETrade, on 26 July

2010 to replace the Maktrade System.

With the PSETrade, the PSE was able

to support new products like

derivatives and commodities

Presently, the PSE is the country's only

stock exchange with over 250 listed

firms and 134 active trading

participants

Companies are listed at the PSE on the

First Board, the Second Board or the

Small and Medium and Emerging

Board. Listed issues are then classified

into one of six sectors: Financials,

Holding Firms, Industrial, Mining and

Oil, Property, and the Services Sector

During the first eight months of 2013

the PSEi crossed the 7,000 mark for

the first time on 22 April 2013

Whole day trading was implemented

on the first trading day of 2012, aiming

to align the Exchange’s trading hours

with other Asian exchanges mainly to

increase market liquidity

Key market intermediaries include:

o 44 Investment Houses

o 174 Financing Companies

o 176 Broker- Dealer firms

o 19 Mutual Funds

o 15 Investment Management

Companies. Of this 7 Investment

Houses and 7 Financing Companies

can have a quasi-banking function,

defined under the General Banking

Law as an ability to raise financing

from over 19 creditors. The

Investment Houses are authorised

to conduct underwriting of new

issues of securities

The debt market is largely dominated

by government securities

Commercial papers (CP) are the

second most important instruments in

the market

Trading of government securities is

dominated by commercial banks while

investment houses trade in CPs

actively


Securities and Exchange Commission

(SEC) Philippines

The SEC is the primary regulatory

authority of the capital market and

their participants in Philippines

The Securities Regulation Code (SRC) is

the primary legal basis for the

regulation of the capital markets

Fixed Income Exchange Market

The Fixed Income Exchange (FIE) was

launched in March 2005 and is the

nation’s first centralized electronic

infrastructure for trading of fixed-

income securities

The FIE is a comprehensive financial

market infrastructure in Philippines

which aims to provide clearing and

settlement, electronic platform for

trading, and depository and

custodianship fixed-income securities

and its derivatives

Bankers' Association of the Philippines

(BAP) had initiated the creation of FIE

and is owned and managed by the

Philippine Dealing System Holdings

Corporation (PDS Holdings) and its

three subsidiaries - the Philippine

Securities Settlement Corporation

(PSSC), the Philippine Dealing &

Exchange System (PDEx) and the

Philippine Depository and Trust

Corporation (PDTC)

FIE plays a pivotal role in the nation’s

capital market development by

providing an online inter-dealer

trading platform along with the

secondary trading of government

securities

FIE also aims at improving the price

discovery process by providing

dealers-bankers the facility to scan for

the best available prices in the market

to manage their positions, yields and

risks

Open Market Operations (OMO)

OMO is a monetary tool which involves

the BSP publicly buying or selling

government securities from banks and

financial institutions in order to expand or

contract the supply of money. By

controlling the money supply, the BSP is

able to exert some influence on the prices

of goods and services and achieve its

inflation objectives

The BSP uses two instruments:

o Repurchase (repo)/reverse

repurchase (reverse repo)

agreements: The BSP purchases

government securities from a bank

with a commitment to sell it back at a

specified future date at a

predetermined rate. In effect, a repo

transaction expands the level of

money supply as it increases the

bank’s level of reserves. Under a

reverse repo, the BSP acts as the

seller of government securities, thus,

the bank’s payment reduces its

reserve account resulting in a

contraction in the system’s money

supply. For both repos, the BSP can

only affect the level of money supply

temporarily, given that the parties

involved commit to reverse the

transaction at an agreed future date.


At present, the BSP enters into repo

agreements for a minimum of one (1)

day (overnight) for both repos and a

maximum of 91 days and 364 days for

repo and reverse repo agreements,

respectively

o Outright purchases and sales of

securities: An outright contract

involves direct purchase/sale of

government security by the BSP

from/to the market for the purpose of

increasing/decreasing money supply

on a more permanent basis. In such a

transaction, the parties do not

commit to reverse the transaction in

the future, creating a more

permanent effect on the banking

system’s level of money supply

Payment and Settlement Systems

The BSP takes the lead in promoting an

efficient payments and settlements

system by providing the necessary

infrastructure through the operation of

the Philippines’ real time gross settlement

system or the PhilPaSS

Banking in Philippines

The banking industry reflected 8.6%

CAGR between 2006 – 2010

The banking landscape is largely

fragmented

Commercial and universal banks hold

90% the total resources of the banking

system in the nation

Universal banks include government

owned banks, as well as foreign banks

whereas commercial banks are either

private domestic institutions or

subsidiaries or branches of foreign

banks

The country has thrift banks which are

engaged in gathering deposits from

small time savers and investing them

The Philippines also houses Rural and

Co-operative banks which are

responsible for development of the

nation’s rural economy

Besides Rural and Co-operative banks,

there are several specialized banks as

well as non-banks

Micro Financing (MF)

There are several micro finance

institutions in the country.

Major players include rural banks,

micro finance institutions (MFIs),

NGOs and cooperatives, while external

agencies include BSP and the Asian

Development Bank (ADB)

In the Philippines, the ADB has

exposure in the micro finance sector

through the Peoples Credit and

Finance Corporation (PCFC)

In 1996, the ADB approved a loan of

US$ 20 mn equivalent from its Special

Funds resources to the Government of

the Philippines for the Rural

Microenterprise Finance Project. The

Project aimed to support the

Government’s efforts to strengthen

rural financial institutions by assisting


organizations that employed the

Grameen Bank approach (GBA) in

providing credit to the poor. The

objective of the Project was to reduce

poverty, create jobs, and enhance

incomes of the poorest of the rural

Poor. The International Fund for

Agricultural Development (IFAD)

provided joint financing for the Project

through a loan of US$ 14.7 mn. The

loan came to a close in December

2002; on evaluation, the Project was

found effective in reaching its

objectives, and the GBA was a cost-

effective methodology for reaching

the poor with microfinance services

Although the MF sector is fragmented,

compared to other microfinance

markets which have been mainly

reliant on foreign funding, the

country’s microfinance players have

been mainly funding their growth

through deposits or borrowings from

public financial institutions such as

PCFC, Small Business Corporation

(SBC), National livelihood

Development Corporation (NLDC) or

civil society organizations such as the

Foundation for a Sustainable Society

(FSSI), etc.

The drive for growth, increasing

competition and calls for increased

professionalization of the sector has

pushed some of the players to become

open to offshore funding

Over the years, the BSP has ensured that

an enabling environment exists for those

microfinance players that fall within the

loop of their regulation, notably the rural

banking sector. This has been

accomplished by having a clear definition

of microfinance, laying down clear

prudential ratios to maintain, promoting

wider outreach by allowing them to

establish micro-banking offices (MBOs) in

areas where microfinance banking

services are not yet available.

In terms of products and services, the

Philippines microfinance players offer one

of the widest ranges, especially NGOs,

compared to other counties in the region.

However, the Philippines’ geographical

location makes it prone to natural

disasters such as typhoons, earthquakes,

landslides, floods, etc., creating some

inherent risks for the microfinance sector.

Banking Sector Review - 2012

The country’s banking system

continued to whether the fragilities of

the global financial landscape in 2012

on sustained reforms to ensure

greater stability of the domestic

banking system

As of end-December 2012, the

banking system landscape was

characterized by a leaner physical

structure as a result of continuing

industry consolidation and bank

closures. This was, however, offset by

the system's wider branch network

that enabled it to provide more

inclusive financial services through

various delivery channels or financial

access points

During the year 2012, there were

9,410 operating banks (up from 9,050

in 2011) consisting of 696 head offices


(726 head offices in 2011) and 8,714

branches. and other offices (8,324

branches and other offices in 2011). Of

these branches, 35 banking offices are

domiciled offshore. Thus, a total of

360 banking offices were added in the

overall physical network but the

number of operating banks declined

by 30 banks year-on-year due to

ongoing industry consolidation,

acquisitions and the spate of bank

closures. Nonetheless, the current

banking landscape is more

streamlined and 300 banks less than

the peak of 996 operating banks

recorded in 1998.

(Refer Appendix: Figure 11)

Nonbank segments

Though the non-bank segment is relatively

underdeveloped they form an integral

part of the financial system. These

segments have grown unevenly. The

market lack liquidity, reflecting the small

free float of most companies

Insurance Sector

The Insurance Commission is the

insurance regulator. It is a government

agency under the Department of

Finance

The insurance industry is composed of

the life, non-life, mutual benefit

associations (MBAs) and the pre-need

sectors. The biggest contributors in

terms of earnings are the life and the

non-life sectors

In the first three quarters of 2012, the

life sector already surpassed the net

income registered for the whole of

2012. Total earnings were placed at

PhP 9.7 bn in 2012 while net income in

nine months of 2013 stood at PhP 11.2

bn

Total premium income from January

to September 2013 also surpassed the

2012 premium income. In 2012, life

insurers already registered PhP 120 bn

worth of premium income, which is

now overshadowed by the PhP 156.7-

bn premium income as of end-

September 2013

(Refer Appendix: Figure 12)

The non-life sector reported a net

income of PhP 2.66 bn in the first nine

months of 2013, roughly 70% better

than the PhP 1.57 bn in the same

period of 2012

Locally incorporated corporations

(domestic insurer) and branches of

foreign insurers and reinsurers

(foreign insurer) are permitted to be

licensed and carry on business in the

Philippines as an insurer, reinsurer or

pre-need company

There is no limit on foreign equity

ownership in a domestic insurer.

However, foreign equity affects the

applicable minimum paid-up capital

required for existing insurers


PRIVATE EQUITY IN PHILIPPINES

Introduction

Philippines historically has not proved

to be an attractive market for

investments, in particular the private-

equity industry. However, the country

is emerging as an upcoming market for

PE investments due to the

government’s efforts to attract foreign

investors

Over the past few years, PE activity

has been limited to a few large

transactions in listed companies

The corporate landscape has acted as

a barrier to substantial PE investment,

with a paucity of potential

transactions

Further, the economy is also

dominated by large family-controlled

conglomerates, which have not

generally considered PE capital as they

have ready access to capital from

bond markets or the stock market

Private equity firms have had a

fleeting interest in the country,

opening and closing representative

offices as needed. This was largely due

to political instability, but that is

changing. The current trend is seeing a

rapid shift away from corruption to

transparency, fostering a more

welcoming environment for

international businesses and creating

confidence among foreign investors

However, the current trend is seeing a

rapid shift away from corruption to

transparency, fostering a more

welcoming environment for

international businesses and creating

confidence among foreign investors

The way forward

A sector that could witness improved

activity is infrastructure as the country

lacks the same

Smaller deals are often funded by

entrepreneurs and wealthy

individuals, who in a more developed

market would invest in a PE fund, so

PE firms are more in competition with

them

Tax Implications

For tax purposes, dividends received

by a PE fund are exempt if both the

dividend income payor and payee are

domestic corporations. If the payee is

a non-resident foreign corporation,

dividend income is subject to 30%

regular corporate income tax, though

this may be reduced under tax treaties

In case of sale, transfer and/or

disposal of shares outside the stock

exchange, the applicable taxes would

be documentary stamp tax (DST) and

capital gains tax (CGT). CGT exemption

may be available under certain tax

treaties


Figure: 13

For shares sold, transferred and/or

disposed of through the local stock

exchange, the applicable tax is the

stock transaction tax of 0.5%

Foreign equity ownership is not

allowed or limited, generally at 40%, in

certain sectors for reasons of national

security, defence, public health, safety

and morals. No mechanism exists for a

waiver currently

Recent Deals

Asian Development Bank (ADB)

The ADB is dedicated to reducing

poverty in Asia and the Pacific through

inclusive economic growth,

environmentally sustainable growth

and regional integration. Established

in 1966, it is owned by 67 members –

48 from the region. In 2011, ADB

approvals including co-financing

totalled US$ 21.7 bn.

In the latter half of 2012, the ADB

announced that it had approved an

equity investment in a US$ 625 mn

private equity fund focused exclusively

on Philippine infrastructure projects –

the largest and first of its kind in the

country and well-timed to capitalize

on various public-private partnership

opportunities in the Philippines. ADB’s

investment in the Philippine

Investment Alliance for Infrastructure

(PINAI) fund is alongside commitments

from Philippines’ state-owned pension

fund Government Service Insurance

System (GSIS), Dutch pension fund

asset manager APG, and the

Macquarie Group. ADB’s participation

can help mobilize additional

investment in the Philippines from top

tier international partners, foster


competition in domestic infrastructure

finance and establish a secondary

market for well-performing

infrastructure assets. The success of

the PINAI fund will also spur more

private equity funds that will catalyze

additional foreign capital into the

country and further the development

of domestic capital markets.

The fund will invest in Philippine core

infrastructure assets with an initial

focus on existing projects that need

expansion or rehabilitation and will

also be in a position to support the

development of critical infrastructure

projects from the ground up.

According to the Philippine

Development Plan, around 12% of the

country’s US$ 120 bn investment

requirements need to come from the

private sector. PINAI will target five to

10 investments of approximately US$

50 mn to US$ 125 mn each to provide

for portfolio diversification.

PINAI will be managed by Macquarie

Infrastructure and Real Assets (MIRA),

the largest infrastructure fund

manager globally, with approximately

US$ 97 bn of assets under

management across 24 countries. The

value of the assets is based on

proportionate enterprise value,

calculated as proportionate net debt

and equity value at 31 March 2012 for

the majority of assets.

Brummer and Partners

Backed by Sweden based Brummer

and Partners along with 20 investors,

major international financial

institutions and family offices mostly

from Europe, the Navegar Fund.

Navegar aims to focus 100% of its

capital on Filipino private, non-listed

companies. Further, it plans to work

with enterprises requiring infusions of

between US$ 10 mn to US$ 20 mn

each in fresh equity to fund expansion

plans, develop new capabilities or

acquire other companies. Navegar has

a 10-year fund line, which means they

can hold an investment up to 10 years,

and is looking to looking to make eight

to 10 investments.

The Fund aims to tap the country’s

potential given its favorable

demographics, stable political

environment and lack of equity capital

providers. According to market

reports, it aims to invest in businesses

with a good track record both in

consumer (such as food, apparel,

retail, consumer finance, health care

and real estate) and service (like

business-process outsourcing, tourism,

education and manufacturing) sectors.

It also plans to inject capital into an

undisclosed food company.


SWOT Analysis

Strengths

The Philippines’ macroeconomic

indicators have improved over the

years reversing an era of recurrent

balance of payments crises

Improving governance in the country

will strengthen the foundations for

sound policymaking

In 2012, the Philippine economy

shrugged off weaknesses abroad to

grow by more than 6.5%, while

preserving internal and external

stability

Asset prices have risen rapidly

signalling ample liquidity and the low

interest rate environment

Weakness

High corruption levels, negative

international perceptions relating to

political instability, red

tape/bureaucracy, unclear policies on

labour and land ownership

Philippines’ physical infrastructure is

poor

Opportunities

In the wake of the recent natural

disaster, PE will play an important role

as the government looks to fund the

rebuilding work. This reconstruction

work will also require the active

participation of the private sector

Domestic consumption is stable and

businesses focusing on local

consumers offer good potential

Threats

The country is susceptible to natural

disasters like typhoons and

earthquakes. The quality of physical

infrastructure is poor which can be

disruptive for business

Major government changes can alter

the reception that major deals

involving foreign companies receive

and undermine confidence in contract

durability


APPENDIX

Exports of common metallic minerals extracted in the Philippines

Source: Bureau of Export Trade Promotion (BETP)

Figure: 5

Insurance Sector Performance as of the Quarter ending September 2013

Insurance Industry In Million Pesos % Increase/ Decrease 2013 2012

Total Assets

854,469.00

655,202.50 30.41

Total Liabilities

684,756.80

499,468.40 37.1

Total Net worth

169,712.20

155,734.10 8.98

Total Paid Up Capital

32,330.80

30,861.00 4.76

Total Investments

539,113.70

483,204.00 11.57

Total Premiums

156,792.30

99,180.00 58.09

Total Benefits Payment/Losses Incurred

46,572.10

38,068.00 22.34

Total Net Income (Loss)

13,946.50

10,704.40 30.29

Source: Insurance Commission

Figure: 11

Category Mineral FOB (in US$ mn)

% of Total Value

Precious Metals

Gold 16.62 5.35

Silver 2.55 0.82

Base Metals

Copper 7.41 2.39

Iron & Ferro-Alloy Metals

Nickel 276.42 89.06

Chromite 7.39 2.38


Philippines Banking System

Physical Composition at the end of December 2012

Distribution of Physical Network

Total Head Office

Branch/Other Office

Bank Category Number % Share Number % Share Number % Share

All Banks 9,410

100.00

696

100.00

8,714

100.00

All Domestic Banks 9,269

98.50

676

97.10

8,593

98.60

Universal Banks 4,147

44.10

12

1.70

4,135

47.50

Commercial Banks 432

4.60

6

0.90

426

4.90

Thrift Banks 1,586

16.90

66

9.50

1,520

17.40

Rural Banks 2,842

26.40

550

79.00

1,932

22.20

Cooperative Banks 164

1.70

39

5.60

125

1.40

Government Banks 458

4.90

3

0.40

455

5.20

All Foreign Bank Branches & Subsidiaries 141

1.50

20

2.90

121

1.40

Universal Banks 17

0.20

6

0.90

11

0.10

Commercial Banks 91

1.00

10

1.40

81

0.90

Thrift Banks 33

0.40

4

0.60

29

0.30

Source: Bangko Sentral ng Pilipinas

Figure: 12


For More Information Contact:

Robert MacPherson

Vice President


10 Anson Road, #10-22, International Plaza, Singapore 079903

Mobile: +65 9171 5768 Tel: + 65-6225-9986 Fax: +65 6225 8223

Website: http://www.reciprocus.com

http://www.reciprocus.com/

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