Sep 212014
Reference ID Created Released Classification Origin
2006-01-06 01:41
2011-08-30 01:44
Embassy Manila

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A
SUBJECT: Stock Exchange Growing But Reforms Needed to Boost Credibility

Sensitive but Unclassified – Not for Internet – Protect


¶1. (SBU) The Philippine Stock Exchange is implementing
reforms to restore investor confidence shattered from a
market manipulation scandal in 2001-02. The composite
index extended its three-year bull run with 15 percent
growth in 2005 and a significant rise in daily turnover.
PSE President Lim is working to increase small investor
participation in the market and tap the vast amount of
remittances by Overseas Filipino Workers. More
fundamental reforms are needed, however, to overcome
continued investor wariness. End Summary.

Stock Exchange Continues Bull Run

¶2. (U) The Philippine Stock Exchange composite index
(Phisix) continued its strong growth, ending 2005
substantially higher than it began in spite of political
turbulence the second half of the year. The Phisix,
which consists of 30 local blue chip companies, gained 15
percent, with an average daily turnover often double and
triple the 2004 level for much of the year. (Note: Even
at its peak of $34 million per day in early 2005,
however, the PSE’s turnover was just 15% that of the
Indonesian stock market and 5% that of Thailand’s. End
Note.) Analysts polled by a local business newspaper
predicted the Phisix would hit 2600 this year, reflecting
its three-year average growth rate of 28 percent.

¶3. (SBU) The renewed vigor of the Philippine Stock
Exchange (PSE) is reflected in the demand for shares of
newly-listed companies. The overwhelming success of the
initial public offering (IPO) by Manila Water in March
2005, the first in the Philippines since 1997, was
surprising. More than 120 international investors
demanded 15 times the offer size of $88 million. SM
Investment also drew keen interest for its $500 million
offering later in the year. (Note: Six other IPOs in the
pipeline for 2005, however, were postponed or canceled
unexpectedly, an issue Lim did not address. End Note.)
IPOs expected to attract significant investor interest
this year include the Lopez-owned power producer First
Generation, which will test the market for $200 million
in February, followed by Shell Philippines, National Book
Store, and United Laboratories. UBS Bank commented at a
recent investment conference in the Philippines that
equities listed on the PSE are undervalued and primed for
continued growth compared to other Southeast Asian

Restoring Investor Confidence

¶4. (SBU) In a meeting January 4, PSE President and CEO
Francis Lim told Econoff that the PSE was still suffering
a lack of credibility following market manipulation by
the company BWU, in 2001-02. BWU stock grew from 22
centavos to 107 pesos, nearly a 50-fold increase, in just
four months. Investor interest soared based in part of
false rumors that the Hong Kong shipping and gambling
magnate Stanley Ho was tipping BWU for a multi-million
dollar project. The investigation later uncovered links
to former President Joseph Estrada. Even today, the
Phisix and average daily turnover are still not even half
of their peak levels of the late 1990s. Lim said
investors are still concerned about insider trading and
market manipulation, especially since no one from BWU was
ever arrested and charged in this clear-cut case of
defrauding the public.

¶5. (U) Lim said the PSE has worked hard to restore
investor confidence by working with the Securities and
Exchange Commission (SEC) to revise Disclosure Rules.
Under the new rules, approved by the SEC in 2004, company
compliance officers must meet the “10 minute rule” in
informing the PSE about new information that could affect
share prices so it can be posted on the web
( In addition, the PSE prohibited
“selective disclosure” of material information to members
of a group without informing others. The PSE also
instituted a “blackout” provision on directors or
principal officers not to conduct security trading until
at least two full trading days after information becomes

¶6. (U) Lim noted that the PSE is still 52% owned by
brokers. Although down from 100% broker-ownership at its
founding in 1992, an executive order limits individual
company and single industry ownership of the PSE to no
more than 20%. As a result, the broker percentage of
ownership must be reduced much further in the coming

Reaching out to Small Investors

¶7. (U) Lim said another of his initiatives is to
increase the percentage of shares owned by small and
local investors. Foreigners make up 50-70% of the daily
turnover at the PSE. Although this indicates strong
interest from international portfolio managers of new and
emerging markets, the PSE would gain stability and
strength from greater domestic investment. To that end,
Lim has promoted programs for investor education and
investor protection, and marketed the efforts of the PSE
to safeguard rights. Through the Small Investor Program,
10% of the shares in a newly listed company must go to
small investors – those with share values less than
25,000 pesos ($500). The PSE also requires a minimum of
1000 shareholders for large company listings.

¶8. (SBU) Lim said he expanded the Marketing Department
and tasked it to find ways to attract investment from
Overseas Filipino Workers who are remitting over $10
billion annually to the Philippines but putting little of
it in the stock market. He also bemoaned the practice of
asset management firms of limiting investments in
equities to 10% or less of their account portfolios.
(For example, the Asset Management and Trust Group that
handles the investments for the U.S. Embassy’s FSN
Retirement Fund only added stocks to its investment
portfolio mix in August 2005 but kept the equities at 5%
of the total investment.)

¶9. (SBU) Another measure Lim encouraged during his
tenure at PSE is the emergence of a Market Integrity
Board to oversee broker compliance with stock exchange
rules. Lim said brokers are notorious worldwide for
cutting corners on certain regulations. The MIB
(jokingly referred to as Men in Black) has worked to
improve compliance by rewarding proper behavior and
meting out infractions. The MIB is composed of 12
individuals, including a former Supreme Court Justice and
a former chairman of the Securities and Exchange
Commission. Through the efforts of MIB, broker
compliance has increased by 60% since the program began
based on annual audits, Lim said.

¶10. (U) The Philippines used to have two separate stock
exchanges – one for Manila and one for Makati housed in
different locations. Lim said former President Fidel
Ramos forced their merger about ten years ago. The PSE
now consists of two trading floors with identical company
listings. Lim said he is trying to consolidate the two
trading venues into one to save over 13 million pesos a
month in overhead expenses. Eventually, he hopes to have
floorless stock exchange, but admitted it may be
difficult to convince brokers to go virtual.

Investment Board Requires Listing

¶11. (U) While the PSE is encouraging investment in the
exchange, the GRP, particularly the Philippines Board of
Investment (BOI), is trying to expand the number of
listings. According to BOI Attorney Marjorie Ramos,
under the Omnibus Investment Code (Executive Order 226)
the Board of Investment can require firms, “when
considered desirable and feasible,” to list their shares
on the PSE or offer them directly to the public or its
employees. There may be deferments, the requirement can
be suspended under certain conditions, and there may be
circumstances in which the firm has “substantially
complied” with the requirement. But in most cases the
firms must offer for sale or distribution a minimum of
10% of its shares within ten years after receiving
investment incentives.


¶12. (SBU) Despite the rising index and higher daily
turnover, the PSE is still on the periphery of investor
interest , dwarfed by investor interest in the government
bond market. While the PSE has made limited progress on
issues such as divestiture, it must undertake and
implement more fundamental reforms, such as implementing
a market surveillance program and requiring risk-based
capital management. The PSE must also strive to enhance
its role as an independent regulator with increased
autonomy of the Board of Directors. Although Lim should
be commended for the reforms instituted during his
tenure, PSE recalcitrance to push ahead with basic
reforms of how the stock exchange operates will cause
continued investor wariness and PSE domination by
institutional and large investors.



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