Stock markets are an uncertain guide to the direction of economies or even countries. Yet over time they tell a lot about the structure of an economy and even of society, and reflect the level of development of the financial sector and of the services sector more generally.
When this correspondent began to write about such things in Asia, having previously done the same in London and Sydney, the only stock markets that mattered apart from Japan were those in Hong Kong, Singapore and – the Philippines.
At the time the Kuala Lumpur exchange was only slowly getting on its feet after the divorce from Singapore. South Korea had a market of sorts for bonds – almost all government ones – which led as desultory existence in the Bank of Korea (central bank) building but no market in stocks. Taiwan was even less developed. Bombay had had an exchange for almost a century but it was moribund thanks to its modern economy, after a slew of nationalizations, being dominated by state enterprises and a handful of family-owned businesses. Thailand, Vietnam (capitalist South as well as communist North) and Indonesia had no markets at all.
Thus it was that when foreign brokers began to take an interest in Asian markets, after Hong Kong and Singapore/Malaysia they looked to Manila, or at least to the Makati exchange in the days before its 1992 merger with the Manila one to form the Philippine Stock Exchange. From what I recall London-based W.I. Carr and Vickers da Costa, were the first foreign brokers. Here was a market with a solid base in a few substantive companies, for example, San Miguel with its local brewing monopoly plus breweries in Hong Kong and Spain. There were a slew of mining companies – Atlas, Lepanto, Philex – old established groups like Ayala and newcomers arriving such as the companies of Henry Sy and John Gokongwei. And there were legal and accounting firms, including the noted Sycip, Gorres and Velayo (SGV) to provide outside investor comfort.
Yet the brutal fact now is that, as new PSE President Ramon Monzon recently lamented, the Philippines exchange has now fallen behind even the very late-coming Ho Chi Minh Exchange. Forget about comparisons with Korea and Taiwan or Bombay. Look at Thailand. Although the SET only dates to the late 1970s and did not take off till the late 1980s it now has an average daily turnover nine times that of the PSE’s meager US$138 million. By every measure, the PSE has fallen well behind and seems destined to fall further as Vietnam’s coming merger of the Ho Chi Minh and Hanoi exchanges, plus continuing listing of state enterprises, increases its listing and market capitalisation. On every measure – market capitalization, turnover, number of listings, capital raisings – the Philippines is at the bottom of the league.
What are the reasons for this massive relative decline from 40 years ago? The low average economic growth rate is an obvious cause. Another, at least compared with Vietnam, is the few state-owned enterprises that needed to be corporatized and listed. But beyond that appears to be the very slow growth of the modern, urban sector of the economy so that even in the cities a high proportion of people are in the informal sector. Elsewhere dependence on remittances keeps consumption growing but is not reflected in corporate sector formation.
Another issue is clearly the lack of competition in many areas dominated by a few major groups controlled by families and with limited need for outside capital. Another is the decentralisation of other businesses as a result both of fragmented geography and the quasi-feudal political power of local family interest groups. Yet another factor may be the proportion of manufacturing, other than in the food sector, owned by foreigners, meanwhile their exclusion from many service sectors is a drag on the broader economy.
This not to imply that entrepreneurship is entirely lacking or that the success of the BPO sector is not generating start-ups in the IT and related sectors. However, overall the steep decline in the international relevance of the PSE tells a lot about what is missing from the Philippines despite relatively strong GDP growth over the past decade. Mr Monzon is right to raise the issue of his institution’s poor performance. The financial sector in the Philippines is well run but can only alleviate not cure the deeper-rooted problems.