Philippines rewrites Panda playbook

It is hard to think of a more appropriate setting for this year’s Asian Development Bank annual meetings. Manila, the Philippines capital, has long been a case study for under-investment in infrastructure, but the current administration is doing its best to shake off that reputation with an ambitious development plan. The Philippines is growing fast, at close to 7% a year. It is investing heavily in infrastructure, reforming its capital markets and stamping out corruption. The buzzwords of inclusive growth, resilience and technology feature as prominently in the Philippines’ economic agenda as they do in the ADB’s own strategy documents. Yet the Philippines is also a microcosm of the development challenges facing Asia’s emerging markets. How will it fund its “golden age” for infrastructure? Where is the right balance between cheap power and climate change? What does the growth of digital technology and artificial intelligence mean for its booming outsourcing industry? Similar debates are ongoing across the region. And a new threat in the form of protectionist policies and trade tariffs is adding an extra frisson to the discussions. After benefiting from decades of open trade links with the West, could Asia rely on intra-Asian trade and greater regional integration to protect itself from a US-China trade war? This special report aims to highlight some of the key themes up for discussion at this year’s annual meeting. It also provides an update on the ADB’s continued evolution from a simple infrastructure lender to a financing partner capable of supporting development across the full range of Asian economies, from the very poor to the increasingly rich. The ADB and the region’s other multilaterals have an important role to play in mobilising funds for Asia’s continued growth. They must also ensure Asia focuses its resources on the projects and initiatives that deliver the broadest and most sustainable long-term outcomes. But the private sector must also play its part. Banks need to do a better job of supporting small and medium-sized companies and recycling their capital. Asia’s institutional investors have the funds to support the region’s long-term development, if they build the skills to look beyond the low-hanging fruit. Regulators also have a responsibility to develop their capital markets and increase investment and financing opportunities for their increasingly wealthy citizens. The Philippines has embraced these messages, though many challenges remain. ADB staff based in the bank’s Manila headquarters have a personal stake in getting it right. To see the digital version of this roundtable, please click here To purchase printed copies or a PDF of this report, please email gloria.balbastro@tr.com

Walking down one of the long corridors in the ADB’s headquarters in Manila, it is often difficult to make out who is coming in the opposite direction. With the bright sunlight streaming in from a distant window, faces are hidden in shadow until they are close up. In silhouette, the ADB’s profile today looks much the same as it did when Takehiko Nakao took over as president in 2013. On closer inspection, though, one thing quickly becomes clear: it’s bigger. Much bigger. The ADB has added a few notches to its belt under Nakao. Strengthening its balance sheet in early 2017 by bringing together its ordinary capital resources and concessional funding has given the bank extra financial firepower, with over US$19bn of loans and grants approved in 2017 – up 46% from US$13.1bn in 2012. It has also expanded into new areas, embracing the use of alternative financings such as equity investments and revamping its suite of knowledge and advisory services. Nakao is now overseeing the finishing touches to Strategy 2030, a long-term roadmap that will guide the bank’s objectives for the next decade. The latest draft, which is up for discussion during this year’s annual meetings on May 2-5 in Manila, encapsulates the changes. While the current Strategy 2020 called for “An Asia and Pacific Region Free of Poverty”, the updated framework adds a number of new elements to the agenda: “Under Strategy 2030, ADB will sustain its efforts to eradicate extreme poverty, given the region’s unfinished poverty agenda, and expand its vision to achieve a prosperous, inclusive, resilient, and sustainable Asia and the Pacific.” Nakao says a lot has changed since the previous document was written in 2008, before the global financial crisis. “There are so many changes,” he said. “We face the reality that we still live in such a volatile world, and capital movement often causes some volatilities, even crises. We know that. We should care more about disasters, and climate change is becoming more imminent. There are global goals – SDGs [Sustainable Development Goals] – and the Paris agreement. We should care about all these issues.” This does not mean the ADB is abandoning its roots. Nakao says Asia has made “remarkable progress” in poverty reduction, but that mission is not yet complete. Some 330 million people are still living below the poverty line of US$1.90 a day. ADB has the firepower to take on the expanded challenge. The merger of the concessional Asia Development Fund with the bank’s ordinary resources added US$30.7bn to the bank’s reserves at the start of 2017, taking its equity capital to US$50.3bn without the need to call on shareholders for a general capital increase – no easy task given the current US administration’s hostility towards the multilateral system. With an agreed minimum equity-to-loan ratio of 34% (a conservative number by any commercial bank capital standard), the new capital structure means the ADB can take its outstanding loans from the current US$100.9bn to close to US$150bn before it needs to ask for more money. That, according to Nakao, will fund the ADB’s operations to 2025. “Although it’s not realistic to keep up with the speed of growth of GDP in Asia … we at least want to increase our lending and grant operations without seeking a capital increase,” he said. DIFFERENTIATED APPROACH There is no doubt that the bank has the opportunity to do more to support Asian development. Finding a consensus around where those resources should be deployed, however, has been far harder. Some shareholders want it to prioritise lending to the poorest countries, in keeping with its traditional mission of eliminating poverty. Others want it to broaden its vision, to keep pace with new and emerging challenges across its entire membership. Nakao argues the bank can satisfy both camps. “Generally MDBs are (being) asked to do several things. One is to use our own equity more efficiently, which we did. Another is to make our system more efficient, including

The Asian Development Bank’s chief economist does not agree with the financial markets. Yasuyuki Sawada struck an upbeat tone at the launch of the bank’s Asian Development Outlook report in mid-April, even as fears of a US-China trade war were rocking risk assets across the world. The US stock market posted its worst week in two years in mid-March after US President Donald Trump announced tariffs on imports of steel and aluminium. Then a tit-for-tat round of tariff threats in early April caused further jitters, dragging Chinese stocks in Hong Kong to their lowest of the year. As well as steel and aluminium, Trump has announced tariffs targeting US$50bn of Chinese imports and threatened US$100bn more. China, in retaliation, has slapped duties on US$50bn of US goods and said it has more extreme measures up its sleeve. “The scale of the trade policy change is only 0.4% of GDP for China, 0.2–0.3% for the US. So it’s not really a fundamental change,” said Sawada. “So far these have not made a discernible dent in volume trade flows to and from developing Asia,” said Sawada, though he conceded that further US tariffs and retaliatory moves from partners “could undermine the region’s outlook”. A US-China trade war has emerged as one of the biggest risks to Asia’s continued economic expansion. So far, the consensus among analysts and economists is that the two superpowers will eventually come to a deal, keeping the region on track for another strong year of GDP growth. The ADB’s outlook report projects 6.0% growth for developing Asia in 2018, a revision from its latest forecast of 5.8%, on the back of stronger-than-expected trade flows last year. “We view US trade actions targeting China more as an opening gambit for negotiations than the start of a trade war,” wrote Richard Turnill, chief investment strategist at BlackRock, the US-based money manager. Chinese analysts at ICBC International agree that a “new Cold War” is an unlikely scenario. “China and the US are so interdependent that their relations are ‘too big to fail’ … Both will finally come to terms after negotiations,” wrote analysts led by Cheng Shi on March 27. Even if the immediate threat is modest, talk of tariffs is a significant change to the global trade environment. That, in itself, could have big implications for Asia, which has prospered in recent decades on the back of exports to the West. “Since the end of WW2, Asian countries’ continued growth – as well as global economic growth – has been generated by open trade and liberalised transactions of goods and services across borders. So I think we should really reaffirm the importance of a multilateral free trade system,” said Sawada. The ADB’s outlook report warns that Asia’s strong links with US manufacturing supply chains could be disrupted, or even severed, if US investors move out of the region. “While the direct tariff costs of the announced measures may be small compared with growth in trade forecast for 2018, their disruption to supply chains could sabotage business expansion plans in related industries, and uncertainty over the global environment could dampen currently strong consumption growth.” REGIONAL SAFETY NET The US-China spat is putting Asia’s own trade initiatives under the spotlight. In the event of further US tariffs, could intra-Asian trade and connectivity take up the slack? And how significant are alternative free trade agreements to the region? Sawada points to progress on the restructured Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership (RCEP) as positive steps. “There are other international and global trade regime changes ongoing,” said Sawada. “It’s very unbalanced to pick one particular policy change to talk about the negatives.” Following Trump’s rejection of the TPP in his first week in office, the remaining 11 countries signed a revised deal in Chile in March. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership, to give it its formal titl

Eleven countries, including Japan and Canada, signed a landmark Asia-Pacific trade agreement without the United States in early March in what one minister called a powerful signal against protectionism and trade wars. The deal came as US President Donald Trump vowed to press ahead with a plan to impose tariffs on steel and aluminium imports, a move that other nations and the International Monetary Fund said could start a global trade war. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP) will reduce tariffs in countries that together amount to more than 13% of the global economy – a total of US$10trn in gross domestic product. With the United States, it would have represented 40%. “Today, we can proudly conclude this process, sending a strong message to the international community that open markets, economic integration and international cooperation are the best tools for creating economic opportunities and prosperity,” said Chilean President Michelle Bachelet. Heraldo Munoz, Chile’s minister of foreign affairs, said he expected Chile’s trade with China, its top trading partner, to continue growing alongside trade with CP-TPP countries. Even without the United States, the deal will span a market of nearly 500 million people, making it one of the world’s largest trade agreements, according to Chilean and Canadian trade statistics. The original 12-member agreement, known as the Trans-Pacific Partnership (TPP), was thrown into limbo early last year when Trump withdrew from the deal three days after his inauguration. He said the move was aimed at protecting US jobs. The 11 remaining nations finalised a revised trade pact in January. That agreement will become effective when at least six member nations have completed domestic procedures to ratify it, possibly before the end of the year. “We are very hopeful like others that we will see the CP-TPP coming into effect about the end of the year or shortly thereafter,” said Australia’s Trade Minister Steven Ciobo. ‘THE WAY FORWARD’ The revised agreement eliminates some stipulations originally demanded by US negotiators, including rules to ramp up intellectual property protection of pharmaceuticals. Governments and activists of other member nations worry the changes will raise the costs of medicine. The final version of the agreement was released in New Zealand on February 21. The member countries are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. “We’re proud … to show the world that progressive trade is the way forward, that fair, balanced, and principled trade is the way forward, and that putting citizens first is the way forward for the world when it comes to trade,” Canadian Trade Minister Francois-Philippe Champagne said. In January, Trump, who also has threatened to pull the United States out of the North American Free Trade Agreement, told the World Economic Forum in Switzerland that it was possible Washington might return to the TPP pact if it got a better deal. However, on April 17, Trump appeared to put the idea to rest. “While Japan and South Korea would like us to go back into TPP, I don’t like the deal for the United States,” he tweeted. “Too many contingencies and no way to get out if it doesn’t work. Bilateral deals are far more efficient, profitable and better for OUR workers. Look how bad WTO is to U.S.” Trump vowed on March 8 to impose a 25% tariff on steel imports and 10% tariff on aluminium imports, although he said there would be exemptions for NAFTA partners Mexico and Canada. Mexican Economy Minister Ildefonso Guajardo, in Santiago for the CP-TPP signing, told Reuters he would not allow the United States to use the tariffs to pressure it in the NAFTA talks. Champagne told Reuters that Canada would not accept duties or quotas from the United States. (Reuters) To see the digital version of this roundtable, please click here To purchase printed copies or a PDF of this report, plea

Since Deng Xiaoping’s famous Southern Tour in 1992, when China’s paramount leader rekindled the country’s economic reforms, and particularly since China’s entry into the WTO in 2001, American consumers have gained significant purchasing power from low-cost imports from China. At the same time US manufacturers have lost competitiveness and market share against Chinese suppliers. Although this conflict often colours views of the recent rise in trade tensions between the two countries, it represents just one facet of a complex trade relationship. For much of the past two decades, the spotlight was on China’s exchange rate policy. Despite repeated complaints, particularly from the US, China kept the renminbi-US dollar exchange rate fixed for 10 years until 2005. Throughout this period, the renminbi was widely assessed as undervalued and China’s exports gained considerable advantage in the years leading up to and following its entry into the WTO. That said, China also won much praise for keeping its currency steady during the Asian financial crisis when other Asian currencies were devalued substantially. Successive American governments threatened to designate China a currency manipulator, but none of them carried out the threat. Eventually, China allowed a gradual appreciation of its currency from 2005 to 2014, raising its value cumulatively by 27%. This deflated much of the earlier criticism and many observers, including the IMF, concluded that the renminbi was no longer significantly undervalued. Last year, even the Trump administration refrained from labelling China a currency manipulator. In fact, during much of 2015, 2016 and even 2017, China struggled to keep its currency from sinking as its foreign-exchange reserves declined by nearly a fourth from US$4tr to US$3trn. Thus, on the charge of currency manipulation, we can argue that, whatever advantage China might have gained from its exchange rate in the past, it is no longer guilty. What, then, accounts for the massive and repeated trade surpluses that have turned China into the ‘factory of the world’ and inflated its massive foreign exchange reserves? The main reason is straightforward: China simply had a massive low-cost labour pool that could be moved to the urbanised coastal regions to support a huge build-up of manufacturing facilities. To that extent, it was a fair deal that lifted millions out of poverty in China and benefited western consumers through lower inflation and higher consumption. However, this cost advantage is no longer a given as rising wages in coastal areas and stricter implementation of environmental regulations have started denting China’s competitiveness. Although the country still rules global manufacturing with entrenched advantages, particularly of scale and infrastructure, its cost advantage is no longer formidable. Beside low labour costs, China has been accused of tilting the competitive field in favour of its own companies in a variety of ways. At a macro level, it has kept its financing costs low by trapping the savings of households at a low return. Through its dominant state-owned financial institutions, it has directed credit to sectors based not just on their intrinsic viability but on the need to generate growth and employment. Over time, these practices have bestowed a fairly big advantage on its manufacturing industries, sometimes leading to overcapacity, as in steel. Again, any complaints on that score must balanced against the praise China earned when the same state-directed lending fuelled the building of infrastructure in the years after the global financial crisis, adding to global demand when there was a dire need for it. It may also be argued that it is the Chinese banks, government and people who will eventually pay for supporting unviable industries and the accompanying build-up in debt to the extent of over 300% of GDP. Another common charge is that, while China has been eager to tap foreign markets for its exports, it has be

Growing global demand for responsible investments has created an opportunity for Asia to finance more sustainable, long-term projects through the institutional capital markets. Connecting issuers and investors, however is proving a frustrating task. Asian issuers see little benefit from “Green” financings that are just as expensive as conventional debt – or even more costly, given the additional opinions and monitoring required. And demand for responsible assets is yet to take off in the region’s emerging markets, where price and absolute return are the dominant drivers for investors. The ADB, which has been at the forefront of developing Asia’s local capital markets since the Asian financial crisis two decades ago, is taking up the challenge. “Green bonds are a natural fit for infrastructure financing,” said Avonechith “Noy” Siackhachanh, senior adviser to the Economic Research and Regional Cooperation Department. “In the context of more advanced markets like the US or Europe, you want to switch to new technology to promote cleaner development, but in our case we are starting from a low base, in terms of infrastructure. That’s why we are promoting Green bonds for infrastructure under the Asian Bond Market Initiative.” The ABMI, and the related Asian Bond Market Forum, is an initiative of the ASEAN+3 grouping covering the South-East Asian region, China, Japan and South Korea. The ADB, which acts as the secretariat, has welcomed the introduction of Green bond standards for the ASEAN region, signed in November last year. Noy at the ADB describes the growth of Green bonds as “very exciting”, both for the development of Asia’s financial markets and for the region’s push to reduce emissions. “We are looking at all aspects of the Green market in the region. We want to highlight to policymakers in our region (ASEAN+3) that you can’t just promote Green bonds on their own. You have to link it to national strategy in addressing climate change,” she said. “It has to be part of the climate initiative or else it doesn’t work.” The ADB and the ABMI are backing efforts to stimulate both supply and demand. On the buyside, Noy recognises that more education around environmental, social and governance (ESG) strategies can help create a broader base of investors for green assets. “We are recommending to ASEAN+3 that they must look at ESG. They should encourage responsible institutional investors to be more aware of ESG, including the benefits of what it does, and make ESG part of the requirement of licensing to become an institutional investor,” she said. Few Asian institutional investors have signed up to global responsible investment standards, such as the United Nations’ PRI programme, and absolute returns remain the primary focus for most of the region’s fund managers. That, Noy says, is not the main hurdle. “The demand side in our region is not too much of an issue, as there is so much demand for investments,” she said. “On the issuer side, they are not so comfortable with the costs and monitoring involved.” Green bonds rarely deliver lower borrowing costs for issuers, since they are also offered to conventional investors and are based on market pricing (although there have been some exceptions in Australia, where dedicated state funds add to demand). Instead, borrowers looking to meet global standards need to pay for an independent second opinion, which can run to around US$50,000 – small fry for a major issuer, but a significant barrier to Asia’s smaller companies. Singapore and Hong Kong have offered to help offset these costs through grants, in the hope of attracting more issuance and showcasing their own green credentials. Hong Kong this year announced a three-year grant scheme to cover half of the issuance costs for eligible first-time Green bond issuers in Hong Kong, capped at HK$2.5m (US$318,473). The Monetary Authority of Singapore has offered to cover 100% of the costs of an external review, up to S$100,000 (US$76,291) per issue.

Asia’s emerging capital markets offer a case study in the hurdles to regional integration. While local bond markets are now far deeper than they were before the Asian financial crisis of 1997-98, moving capital across borders remains a challenge. The ADB and the ASEAN+3 Bond Market Initiative are looking to change that. “We don’t just want to promote local bond markets, we also want to promote regional integration,” said Avonechith “Noy” Siackhachanh, a senior adviser at the ADB working closely with the ABMI. “Sometimes the bond market is way too small or not efficient, so if you have a more integrated market you can pool more resources. You can pull funds from where you have a surplus of savings to areas where you don’t have enough.” The ADB continues to promote standardised issuance across the ASEAN+3 region, to make it easier for issuers to sell bonds in another country – and for investors to buy them. The ASEAN+3 multi-currency bond issuance framework (AMBIF) got off to a slow start, with only one deal completed since the standardised format was first conceived in 2012 – for Mizuho Bank in Thailand in 2015. But its proponents say that interest is growing. Cambodia is considering the format as it looks to kick start a domestic capital market, and discussions are under way to issue a corporate bond with a guarantee from the Credit Guarantee and Investment Facility, another ASEAN+3 initiative. It is far from straightforward. Cambodia does not yet have a government bond market, so there is no obvious pricing benchmark, and even the choice of currency is far from clear. The country’s official currency is the riel, but the economy is heavily dollarised. There is also no custodian bank in Cambodia, so assets would need to be held in custody under the stock exchange system. “There are a lot of challenges,” said Tomo Yamadera, principal financial sector specialist at the ADB. Still, Yamadera believes the AMBIF format could be used to create a bond market for professional investors from scratch, and is hopeful of completing a first issue in Cambodia this year, perhaps before the end of the first half. “This would be a remarkable step in bond market creation,” he said. “If they can successfully introduce the concept, others could follow.” The concept of a professional-only bond market has caught on in Japan, where the Tokyo Pro-bond format allows overseas issuers to borrow in yen using their existing global documentation, avoiding the costs of translation and local legal services. Japanese buyers, meanwhile, get access to new credits that may offer higher yields that are available in the domestic market. The AMBIF format aims to do something similar in Asia’s local markets. It calls for bonds to be settled domestically and listed on a stock exchange, to ensure continuous disclosure and promote secondary trading. And to maximise cross-border participation, documentation must be in English. If the Cambodian experiment proves successful, the professional-only format under AMBIF documentation could play a key role in meeting the ASEAN region’s commitment to integrate its capital markets – especially after Malaysia, Singapore and Thailand pulled the plug on a plan to connect their stock exchanges last year. Yamadera acknowledges that many obstacles remain in place. Tight controls on currency speculation mean swap markets are thin, and regulators in many Asian markets place tight restrictions on investments from pension funds or insurance companies – even if a high-quality overseas credit may seem an appropriate fit. But he sees the region’s bond markets playing a bigger role in cross-border financing and infrastructure development. Higher compliance costs and capital charges are restricting bank financings, and more money is going to Asian institutional investors who need to generate steady returns. “Infrastructure funding has been a challenge because the local markets were too small. Now we see the growth of institutional investors in ev

Back in 1980, when automated teller machines were beginning to catch on in the US, a Wells Fargo executive predicted the end of the traditional branch network. Thousands of jobs would go as machines took over the tasks of handling money, since customers would no longer need to visit a physical branch. In fact, the reverse happened. ATMs did not replace bank branches; they made them more efficient. By taking away some of the routine tasks, the cash machines freed up bank staff to work on more profitable activities, and made the branches themselves cheaper to run. As a result, banks opened more branches. This often-cited example is still relevant today, at a time when Asian workers are facing the threat of disruption from new technologies. Will artificial intelligence replace business process outsourcing in India and the Philippines? Will textile workers in Bangladesh be replaced by robots? The ADB has devoted a considerable amount of its research efforts to answering these questions, including an extensive chapter in April’s flagship Asia Development Outlook report. The overall findings are encouraging. “Across history, automation has always resulted in displaced workers. This anxiety is as old as mankind’s first technological breakthrough,” said Yasuyuki Sawada, ADB chief economist. “However, displacement has always been accompanied by rising productivity, the emergence of new occupations and better-paid jobs.” Washing machines, refrigerators or electric cars may still be out of reach for many Asian workers today, but lower costs from more efficient production processes can stimulate demand in the future. DEMAND AND DISPLACEMENT The ADB calculates that, in job terms, higher demand has more than offset the disrupting impact of labour-saving technology. Whereas 101 million jobs a year might have been lost in 12 countries of developing Asia between 2005 and 2015 if output had stayed constant as productivity increased in line with technological progress, growing demand for goods and services instead led to the creation of a net 134 million jobs a year, equivalent to an 88% increase in employment, the ADB reckons. “This whole phenomenon of productivity going up sets in motion a number of different effects that actually leads to job creation,” said Rana Hasan, director of the development economics and indicators division, who worked on the report. “Henry Ford’s assembly line was able to reduce the number of workers per car produced, but the demand for cars skyrocketed so much that it cancelled out any displacement.” Improvements in technology can also increase earnings through productivity gains. Indonesian motorcycle taxi app Go-Jek is another popular example, raising income for moped owners by connecting them with nearby customers via their smartphones. “While there are growing concerns that new technology could lead to widespread job losses, there are compelling reasons to remain optimistic about developing Asia’s job prospects,” said Sawada. Sawada notes that automation only goes ahead when it is economically feasible. Across Asia, robots are found mainly in capital-intensive sectors that already employ relatively few workers, such as the electronics and automotive industries. Food and textiles, which together account for 31% of Asia’s manufacturing jobs, employ less than 1% of the region’s industrial robots. The unknown factor, however, is the pace of change associated with the digital economy – the fourth industrial revolution, as it is often called. Productivity gains in Asia have so far largely come from improvements in existing technologies within specific sectors. Smart irrigation systems, for instance, do not replace the job of growing rice. Nor do higher-quality fabrics displace textile workers. The digital transformation challenges these notions. Automating more complex tasks could displace entire industries, shifting manufacturing jobs to entirely new sectors where the existing workforce does not have the skills to com

Advancements in financial technology are opening up new opportunities for fast-growing Asian companies to finance trade and expansion, but pose new challenges for the region’s regulators. How can blockchain technology help power Asian development, and are Asia’s central banks ready to embrace virtual assets? The ADB has so far been quiet on the topic of blockchain technology or virtual currencies, but the 2018 annual meetings promise to change that. Discussions on the future of finance feature high on the agenda, and ADB President Takehiko Nakao is due to debate the topic in a joint seminar with the IMF and the Philippines central bank on May 3. The IMF, under Managing Director Christine Lagarde, is playing a leading role in calling for tighter regulation of digital finance. In a speech at the Boao Forum for Asia in April, in front of Chinese President Xi Jinping, she called on China to close a “regulatory gap” in the financial technology arena. “Here in Asia, we see a blossoming of fintech industries. Yet the rise of fintech is revealing regulatory gaps which, if not closed both domestically and on a cross-border basis, can lead to systemic risks. You do not want to risk that. Instead, transform safely, and be more inclusive!” Lagarde has warned repeatedly of the potential misuse of alternative financial systems – especially crypto-assets – for money-laundering and terrorist financing, and has put the IMF at the centre of efforts to coordinate a global regulatory response. But she has also advocated for even-handed regulation that permits innovation. “Just as a few technologies that emerged from the dot-com era have transformed our lives, the crypto-assets that survive could have a significant impact on how we save, invest and pay our bills,” she wrote in a blog post in April. “That is why policymakers should keep an open mind and work toward an even-handed regulatory framework that minimizes risks while allowing the creative process to bear fruit.” The most promising new technology to arrive in the financial sector is undoubtedly the blockchain, or distributed ledger technology, where a secure record of transactions is kept in ‘blocks’ of data and protected by cryptography. The technology can allow automated verification between parties in a supply chain, reduce the need for intermediaries in a trade financing, or power smart contracts that execute themselves. Commercial banks are already looking to use DLT to streamline their anti-money laundering checks and automate some transactions. Stock exchanges are studying its use for securities settlement. Steven Beck, who heads the ADB’s popular Trade Finance Programme, wrote in December that a lack of global standards was preventing blockchain technology from helping SMEs access financing. “The hype is fun and dreaming is important, but to catch up with reality we need to develop some basic infrastructure,” he wrote. Beck advocates the use of digital standards for trade and steps to encourage the digitisation of supply chains, and has called for “a global harmonized identity for all companies, large and small” to simplify transparency and due diligence processes. Central banks have also begun to explore the use of new technology for their own digital currencies. The People’s Bank of China is widely seen as the most likely Asian central bank to be first to launch a digital currency. The PBoC has been studying the idea since at least 2014, even as regulators have clamped down on trading in crypto-currencies and initial coin offerings. Then central bank governor Zhou Xiaochuan said in March that the digital currency would be used only for payments and would have no effect on monetary policy, heading off speculation that it would be an alternative virtual asset. Elsewhere, the Bank for International Settlements warned in a report in March that “a general purpose central bank digital currency could impact bank deposits, a major source of funding for commercial banks, with implications

The Philippines’ infrastructure problems are immediately apparent to anyone arriving in Manila’s main airport. The traffic slows metres from the ageing Ninoy Aquino International Airport terminal, and gets steadily worse throughout the ride to the gleaming new business district of Bonifacio Global City. The five-kilometre journey takes 45 minutes. President Rodrigo Duterte has run out of patience. A year after he took office, his administration had ramped up infrastructure spending to 5.4% of GDP, from 4.5% in 2016. It is set to hit 7.3% of GDP in 2022. The five-year “Build, Build, Build” programme has identified 75 flagship infrastructure projects totalling US$160bn–$180bn, including the expansion of Clark airport and Manila’s first mass transit subway. Already 23 of those are fully approved. The increased spending has lifted confidence in the economy, but Duterte’s infrastructure agenda also brings with it concerns and contradictions that have not gone down well with everyone. As well as spending more, the government has shelved many of the public-private partnerships that were in the works under the previous administration. Most of the projects on the new priority list are to be financed by the government, or through overseas development assistance (ODA) loans from richer nations, mostly Japan and China, leading to criticism that the government is piling on debt. Economists are mostly comfortably with the additional borrowing, noting that the Philippines’ solid growth and strong balance sheet (partly the result of under-investment by previous administrations) gives it some room to manoeuvre. But proponents of the PPP model are less impressed. Only two of the 75 projects on Duterte’s list involve private sector partners, and sponsors face an uncertain future for the projects that did not make it on the Build, Build, Build list. Unsolicited bids are allowed, but there are concerns of a lack of coordination. “The government says it is open (to unsolicited bids) but the entry points are not so well defined,” said Sol Castro, managing director at CFP Transaction Advisors, an independent consultancy. “Private sector partners need to create their own market.” Duterte’s list dropped the upgrade of NAIA, Manila’s main airport, in favour of the rehabilitation of the Clark airbase. But two bidders, Filipino-Indian venture Megawide GMR and a “super consortium” of seven of the country’s biggest firms, have since submitted unsolicited proposals to expand NAIA. The economic development agency has also accepted an unsolicited bid from San Miguel to build a mega, six-runway airport in Bulacan, north of Manila but south of Clark. A group backed by Henry Sy’s Belle Corporation has also proposed an airport at Sangley Point in Cavite, less than 20km south of NAIA. Unsolicited proposals, if accepted, are open to rival bidders via a Swiss challenge, but there is no government funding for feasibility studies, and officials are focusing their efforts on projects that can be completed under the current administration. That has led critics to claim that Duterte, having complained of delays under the PPP format, has himself caused unnecessary delays to projects that did not make the Build, Build, Build cut. NO MORE PPP? Funding for Duterte’s projects comes almost entirely from the national government and ODA loans. The first phase of the Metro Manila Subway project, for instance, is funded by a ¥575.7bn (US$5.3bn) loan from the Japan International Cooperation Agency and US$2bn from the Philippines. Despite Duterte’s well-publicised dislike of the PPP model, the government says it has not abandoned the concept. Finance Secretary Carlos Dominguez said in April that the government was following a “hybrid” PPP model, where projects use a combination of state funds, ODA loans and investment-grade bonds to speed up execution. Bankers remain hopeful that the financing markets will play a role. The ADB, and others, have pushed the bond market as a tool for pr

The Philippines has established itself in recent years as a favourite among global emerging-market investors. Its sovereign bonds are so popular in the US dollar market that its latest 10-year issue priced in January at 3.0%, a mere 37.8bp premium over US Treasuries. Strong economic growth and a prudent fiscal policy have lifted the country to a solid investment-grade rating from all three major credit agencies. Fitch raised its sovereign rating to BBB in December, falling in line with Moody’s (Baa2) and S&P (BBB). The ADB projects an acceleration in GDP growth to 6.8% in 2018 and 6.9% in 2019, up from last year’s 6.7%. The fiscal deficit shrank to 2.2% in 2017 from 2.4% a year earlier. The local capital markets, however, do not look so advanced. Investment and capital formation is weak, the corporate bond market is shallow, and liquidity on the stock exchange is poor. The market capitalisation of the entire stock market is barely half that of Indonesia, and far less than Thailand, Malaysia or Singapore. Outstanding local currency bonds – largely government debt – represent only 34.2% of the country’s GDP. Corporate bonds account for around 17% of all issuance, with 87% of that coming from the top 30 companies, according to ADB data. And weak money markets mean Philippines banks – and the national treasury – hold massive amounts of reserves that could be put to better use elsewhere: the government’s bond sinking fund sucks up 8% of GDP. The current administration is taking steps to address those failings, in part to finance its increase in infrastructure spending under President Duterte’s ‘Build, Build, Build’ initiative. The central bank, securities regulator, finance ministry and national treasury signed off on a sweeping package of reforms in August 2017 to revamp the domestic bond market. The measures are the latest under a policy-based programme agreed with the ADB in 2013, and came with a US$300m loan to support the second phase of the project. The reforms include a plan to consolidate sales of government bonds into six liquid tenors, to lower issuance costs and produce a more efficient yield curve. Primary dealers will also be required to make markets in an effort to boost two-way trading volumes, and the repo market is to be overhauled. The central bank, in particular, has welcomed the creation of an organised interdealer repo market, which aims to boost liquidity by allowing securities lending and two-way trading of government securities, in line with global standards. Officials hope the package will enhance liquidity in the government bond market and make the whole system more efficient. By reducing the vast pools of money currently held in reserve, the reforms aim to free up capital for real investment. In time, the improvements should filter down to the corporate bond market, supporting long-term financings and freeing up banks to lend to infrastructure. BANK LIQUIDITY There are other hurdles to stimulating the capital markets. Eduardo Francisco, president of BDO Capital, argues that corporate banks are the biggest obstacle. “The Philippines bond market is small, but it’s not underdeveloped. We have all the products,” he said. “It’s the banks that are holding it back. It’s a by-product of the liquidity in the banking system.” Local companies have little trouble accessing bank credit, and long maturities are available for the top names at low cost. That gives borrowers little incentive to make the extra effort to engage the capital markets. The banks are lending more, too. A spate of big rights issues from the country’s top banks points to rising credit growth, the result of booming confidence in the corporate sector. Bank credit to businesses increased 18.1% in January 2018, according to ADB data. Capital markets bankers, however, see reasons to be optimistic. Alongside the government bond reforms, market participants hope that broader changes to the tax system will make the capital markets more competitive. Pr