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Hans Sicat
Stock Exchange

We will start with the general overview on the business landscape of the Philippine economic growth. With the start of the new Administration, you have already managed to have some very modest growth with good, strong points, such as the credit upgrade of the Philippines from both Standard and Poor's and Moody's. Additionally, there is, of course, a 22-year high economic growth at 7.4% for the GDP (Gross Domestic Product). So, I think we are on the right track, and that is what everybody believes as well. Could we have your personal assessment on the current business environment in the Philippines, as well as on the capital market?

There is a very solid base for the real economy. The question of course, is whether we can repeat last year's 7.4%. Probably not, but the Philippines will have more than respectable growth this year. According to conventional wisdom, it will be above a 5% growth number despite all the external issues, such as Japan, the Middle East, etc.

I think these are what threw the ballpark figures and estimates off for some extent, especially with what happened with Japan.

Right. There will be peer and, of course, inflationary pressures, which is a situation we did not have for all of 2010. Consequently, there was not much inflation during most of last year, and that has obviously been very helpful for companies and the stock market. This year, however, we do have a few challenges and pressures. Having said that, I think there are two overriding issues that are good, which is why I say that the fundamentals of the real economy are quite stable. The first thing is the feel-good nature that we have by having President Aquino stepping in. His statement on how good corporate governance is something we need to live by has created a stronger sense of prosperity for both institutions and companies as long as they go about doing things the right way.

The external business community also has this view, so it is something positive. The second thing is that most of the companies operating in today's economy have grown and survived over the last 8-10 years. Interestingly, despite the fact that there has been political turmoil in the Philippines of one nature or another, essentially, we have had continuous growth, corporate or not, for the last 10 years.

It is actually 45 years.

Is it 45 years? The point about the 10 years is that it has been an unbroken positive growth each quarter, even during the darkest moments of the global financial crisis. The country grew about 0.5% when there was a 5, 6, 7, or even 10% negative growth everywhere else. That is an amazing thing. The overall feeling is that the country's entrepreneurial and professional spirit is alive, and that there is an ability to compete with global corporations, maybe in a small way.

With regards to the global financial crisis, everybody believes that perhaps the worst is over. Seeing that the Philippines has also relatively escaped from this crisis, how would you rate the investment aspect of the environment, in terms of what we can offer now to the international business community?

I believe that it is correct to say that the Philippines has come out of the most recent global crisis. It also goes to show how the reforms that the BSP (Central Bank of the Philippines) has been undertaking over the past few years have actually created a relatively strong banking system, unlike, interestingly enough, the Western banks in the US (United States) and the Western world that were truly affected. I think that the leveraging and reforms that had taken place before the crisis helped the Philippines weather the storm in a way. All this demonstrates that the country, if given the right opportunity, can be responsive to external shocks in a positive manner. I am very pleased, by the way, that Governor Tetangco has gotten reappointed.

I think there was a general clamor that he be reinstated again.

Exactly. He runs the BSP (Central Bank of the Philippines) in a very prudent manner, thus increasing confidence in it. Therefore, the argument would be that if the Philippines were as stable as some of the other developed economies in the political front, it could probably achieve an even higher and faster growth. So, what can we offer the world? There are many comparative advantages here. You have obviously seen what has been done in the BPO (Business Process Outsourcing) sector, and you may or may not know that, as of 2010, the Philippines has now overtaken India in terms of call centers. We are not on the other high-end sector yet, like KJO (7:45) or KPO (Knowledge Process Outsourcing). Clearly, India is ahead of us. In fact, they had the enviable head-start with a rumble for the Y2K (Year 2000 problem). However, if you take a look around, you could think of it as basic shared services. The Board Meeting has been approving more HR or accounting-related jobs to move into the country during the last couple of years, starting with all the big companies, such as IBM, Deutsche, or City Group. In other words, a venue has been created for semi-skilled and skilled professionals to stay in the country. Hopefully, this will reverse the Philippine Diaspora to consider the opportunities here in the Philippines. Obviously, talking has significantly changed what can be done. As for the stock market, I think we have a couple of very exciting things happening this year. It is all very helpful to get more companies listed.

What can you look forward to in terms of IPOs (Initial Public Offerings) or initiatives that you have?

Well, let me backtrack a bit. I think that for the stock market, clearly 2010 was a good year from a performance perspective. We actually had a record year in many respects, like the highest index level ever or the highest daily volume ever. Part of it, of course, had to do with some of the stuff that we had done earlier in the year. We changed our own trading platform after continuously having operated on an old legacy one. This upgrade allowed us to achieve the volumes that we saw in October, November, and up to early December, which are double of what our average daily volumes were for most of the year. This meant going from 4.5 billion Pesos to something about 9.3 or 9.5 billion Pesos. So, that was unprecedented. There are a number of things that we are working on right now. First, we have reinstated something called the Minimum Public Float, which means that, in order to remain listed, you need to have at least 10% of your capitalization in public hands or flowing through the stock market. Now, when we looked at the data as of the end of 2010, 46 out of 255 companies were either slightly or significantly below the minimum amount. Those companies obviously want to continue participating in the stock market for all the pluses, and we expect what we call follow-ons, where people just top off to comply with this. Compliance, though, is perhaps the last reason why they would do it. There are many reasons why you want to have a larger float, including the distribution of some of the wealth to the public or at least the ability to own part of these companies. Even from the government's perspective, this is something positive because you are giving a lay person the ability to own a piece of active companies, whether it is Ayala Corporation, Cebu Pacific, etc.

Therefore, by giving people this opportunity, it will enable them to have a say on the distribution of wealth from a capitalist point of view. Of course, this will also allow these companies to raise more money in the capital market through equities. Being listed also makes it easier for them to raise money in the debt markets, whether it is a bank loan or a bond issue. This is good because there is a certain level of disclosure that they provide to, let us say, an investing client. We have been working with the IFC (International Finance Corporation), the World Bank subsidiary, in terms of launching what we call the Maharlika Board. To describe it very simply, it is a listing board that shows the companies that are branded as Maharlika-Compliant, meaning, they have a higher level of disclosure for investors; they have a higher public float, and they probably practice the highest levels of good corporate governance.

The reason why we talk about this is because of the experience of Brazil. About 10-11 years ago, Brazil established what was then known as Novo Mercado or New Market. Again, this is about higher disclosure standards. What has happened over these 10 years is that, evaluation-wise, the index of companies in this Novo Mercado have all increased compared to companies that are just in the regular Bovespa (São Paulo Stock Exchange). The stock market and the Novo Mercado have demonstrated to investors and the world how they can invest in specific Brazilian companies with a type of gold standard in terms of practicing best global ways of corporate disclosure.

It is like a differentiator, really.

It is a differentiator. We hope that it will have the same effect for those companies that are starred Maharlika Board. In a way, it actually serves one additional purpose, which is to demonstrate that better corporate governance practices result in good and better evaluation for potential investors. The confidence level in the country will hopefully improve, as well. We are talking about a virtuous cycle here, because with more activity, the government will eventually collect more taxes. So, in a way it is all going in the right direction, and we hope to be part of that movement for change.

In terms of other IPOs (Initial Public Offerings), what can you look forward to?

There will be a lot of other sectors, including those that have not done enough IPOs (Initial Public Offerings), such as the mining sector. This is a very important sector, which, I think, has overcome the initial missteps.

It clearly is on the rebound.

Yes, it is on the rebound. About 4 years ago, the law changed, allowing investors to own natural resource companies. The new law was aimed at foreign investors because about 30 or 40 years ago, some misguided legislators here decided to keep it for themselves as it was a very rich industry. It became 100% Filipino-owned. It was a wrong move because in a high capital expense industry, when you cannot get enough capital, you cannot expand; you cannot do business. Consequently, the industry died and moved away to Australia, Brazil, and Chile. The government corrected this a generation later, after becoming aware of the mistake. Two years ago, there was an attempt to restart one of the gold mines, but there was an accident: the leaching owned by Placer Dome overflew onto the river. The mine was shut down, and rightfully so. This has been a positive experience because now companies involved in new mining projects are very mindful. They do not want to be the next bad boy.

Clearly. We spoke with Mr. Romaldez (18:36) about this and he is, of course, very pleased with the overturn of the Mining Act. Everybody knows that sustainable mining and conservation are clearly a priority. So, many more mining companies are showing interest in going public?

Yes, I think we will see more of them on that side. There is one highly successful construction company, Megaworld, who is doing IPO (Initial Public Offering). With all the PPP (Public-Private Partnership) projects online, a number of the smaller development and construction companies will require more capital, so going public is clearly one of the options. The BPO (Business Process Outsourcing) industry might be a bit difficult because, despite its huge growth, most of its companies here are what we call "captives", owned by J.P. Morgan. So, they do not necessarily want to go on an IPO (Initial Public Offering) to grow and maximize the benefits. Those types of companies are good for employment generation, and they are great for the real estate and technology markets. However, maybe they are not good candidates for listing because, in a way, J.P. Morgan is not going to want to explain exactly what their price differential is, or why HSBC (Hong Kong and Shanghai Banking Corporation) is hiring people at this level. Actually, there was only one company in the BPO (Business Process Outsourcing) sector that was listed, which went private again a few years ago.

By the way, some of the game and technology-related companies, along with their subsidiaries, are good candidates for listing. The other untapped area, and I have talked about this with Secretary Purisima and Secretary Domingo, is those companies that have been granted incentives by the Board of Investments. Basically, these companies have a lot of tax breaks, and the quick protocol was that they had to go public. The only problem with the previous regulation was that they had to go public without specifying by when. So, that kind of fell through the cracks, I think. Our discussion now along with some legislators is to maybe put some initiative guidelines to say that look, you have been operating during the last 5 years, but you have never reached a certain size; if you want to continue receiving the benefits of these tax breaks and all the other incentives, you will actually have to do a public offering by another year or two. So, this would occur in the medium-term. We know that those companies that started off as small BOI (Board of Investments)-incentivized companies have done relatively well, and have appropriate sizes.

What are the things that are currently in your agenda with respect to the stock market? What do you really want to see in terms of achievement for the PSE (Philippine Stock Exchange)?

Even though we lost two CEOs (Chief Executive Officers) in the span of 2010, the first order of business is just stabilizing everything internally. There is someone who is trying to calm things down by talking to his regulators, and, despite the fact that we are a private sector company, he is also making sure that we are working very much hand-in-hand with the general objectives of the government. In other words, improve transparency, have more activity, and try to assess what we can. Also, you may have heard of the effort to do REITs (Real Estate Investment Trusts) which are real estate investment costs, and we are finalizing those. We obviously need our regulators as well as the policy makers to be in sync with us and with what can be done in the market. There is another law that was passed, called the Parallel PRA (Philippine Retirement Authority) (26:44). It is very similar to the US (United States) 401(k) Savings. You get a portion of these people's incomes and invest it in some equities or equity index funds. That should only have a positive impact on both the market and hopefully the portfolios of these individuals. We have seen examples all over the place: Chile has done a great job of doing that. We need the help of policy makers and the government, and so we are trying to help them help us, and hopefully get things done correctly. Also, if we take a look at our plans, clearly we need more activity in the stock market, more liquidity.

One of the things is trying to increase the number of companies being listed and improving corporate governance, which, I think, will have a positive effect at least in the medium-term. The results will probably not be apparent in a month or two, but rather over time. The second item is having the ability to generate the same interest from within ASEAN (Association of Southeast Asian Nations). In one sense, that is the reason for the ASEAN (Association of Southeast Asian Nations) linkage, which essentially is about connecting our trading engines. This initiative also requires introducing a bank mechanism because, for example, an investor in Manila may want to buy Synctel, get a coded local currency through his computer or broker, and put in the order. This process does not deal with a bank providing foreign exchange and does not demand a second or third broker to get the code or use the trading engine. The idea is to avoid having, for instance, the PSE (Philippine Stock Exchange) and the Singapore Exchange pass the trade and the money back and forth, to only send it back to the original stock seller. The new process seems simple at first with the use of technology, but it is actually complex when we consider the regulations and all sorts of other things involved that go in the middle.

Trading does cost money, so what we are trying to do is bringing down the average cost for the day-to-day investor. That will hopefully create a lot of activity within the region, especially with trades with us that have Philippine names, whether they are buying or selling. Locally, we are trying to work a lot on many fronts with the Bankers Association. An example is getting more leverage into the system both for broker dealers and to expand the types of products that a bank can sell, which will hopefully include some index funds or trade of stocks. Banks already have their Internet networks in place, and while we are encouraging all brokers to go online as well, not everybody is as successful in this mode. There is one local company that has been extremely successful, Citisec Online, which started a long time ago. Actually, in the beginning they underwent a huge loss. Maybe that is the price for being the first ones and for paying for more expensive technology than necessary, but I understand that they are doing quite well now. This is an example of utilizing a plank permit (31:08). Now even local banks can do it. They can offer their Internet access system to their branch banking network, and extend that for one additional asset class (31:19) stocks. The idea is to improve that. Finally, and this is not just with the Maharlika Board, is improving the image of the Stock Exchange to that of being very transparent, above board, and professional. I guess history has been a bit muddy and, unfortunately, some exchanges in the late 1990s were a black eye. There was a huge scandal that brought down the President by his involvement in it.

As a consequence, sometimes people claim not to be investing in the stock market because they view it as a casino, as if funny things went on inside. We remind them that the scandal happened more than 10 years ago. In fact, we have been very serious about corporate governance and reforms. During my first months here, I delisted high companies that had been non-compliant for a few years. I am actually surprised they lasted that long. My predecessors could have done the same thing I did, but maybe they just could not focus on it at the time. After the celebrated case of the Bank of Philippines, I was shocked to find out that they were still listed. How can that be? They were in violation of so many things, including our own rules. What we are trying to demonstrate today is that we are following our own rules. If only to be fair to the other 255 companies who are following our own rules by paying dues and giving updated information to investors, why should we be giving special handling to those who are not? It is a disservice. Another example is how, for the first time, we also helped apprehend one of our own, so to speak.

There was a company called AHK Securities, which was a family-owned brokerage firm. To make a long story short, they unauthorized the use of securities or money of their clients without their consent. They bet on some stocks and went the wrong way: they lost money, clients asked for their money back, and the company went bankrupt. We not only shut it down, but we actually pressed 4 charges for the equivalent of racketeering in the US (United States), which is a premeditated fraud and a non-billable type of offense. We used some of the funding to actually get this guy with our NBI (National Bureau of Investigation), which is the FBI (Federal Bureau of Investigation) equivalent, and the trial is about to start now. A message had thus been sent out. Overall, we got very good comments from the public, commenting on how we really meant business. If only for that, I think this hopefully demonstrates that we are on the right path to increasing confidence in our system. Lastly, we also span off what we call our Market Regulatory Division. These are the ones who monitor the broker dealers. The comment about the PSE (Philippine Stock Exchange) was that certain broker dealers would appeal to their colleagues who also sat on the Board in order to scale down the punishment whenever they committed illegal actions. Whether or not that has happened, it has probably been the prevailing view from the public.

However, I think we have already disproved it. In addition, by spinning this division off to a separate, independent company, it will report directly to the SCC (Securities Clearing Corporation). We have implemented this for extra vigilance, but more importantly, to signal that we have less conflicts of interest within the PSE (Philippine Stock Exchange). These are all efforts to demonstrate that we are a professional, transparent organization where people can do their transactions. Hopefully, that will improve the view from investors not just locally, but globally, as well. I think this will do many wonders for the economy because we are a major part of the fundraising for companies.

I would like for you to relay your comments about what your role today is for the banking capital markets, and what it is that you would like to communicate as your vision towards the development of the PSE (Philippine Stock Exchange) here in the Philippines.

It is fair to say that as CEO (Chief Executive Officer) of the Stock Market, I want to promote the view that we are partners in development; partners in growth for not just companies, but also the government. As partners, we are trying to promote transparency; trying to promote professionalism. I hope that these two key parameters can help solve a couple of the issues in the Philippines, which is its limited liquidity with respect to our neighbors, and the problems that seem to revolve around the perception of bad corporate governance. With such efforts, we are an important leg of the economy. Banks are one, and the stock market is another one.

As a final message to those readers across USA Today, what is going to be your final message on behalf of the Philippines?

It would be great for them to participate in the new Philippines as an investor, a saver, or by coming here to contribute. There are a lot of opportunities here.

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