Speech

Opening Remarks by Mr. Agustín Carstens, Deputy Managing Director, IMF, at the Domestic Capital Market Development Seminar

May 10, 2005

Ladies and gentlemen,

It is my great pleasure and honor to be here in Manila and co-host today's seminar with the Bangko Sentral. I would like to begin by thanking the Bangko Sentral for their generous hospitality and for the excellent arrangements they have made.

As you all know, the Philippines and the IMF have been associated for many years in the context of a succession of lending arrangements. However, there has been no IMF program since 2000 and our role in recent years has been one of surveillance (under so-called Post Program Monitoring with which many of you will be familiar). Our involvement in this seminar is part of our fulfilling another of our roles, namely technical assistance. This seminar provides a vehicle for us to share international experience and to review the measures that have been succesful in developing capital markets in other countries.

The main themes of the seminar, namely, domestic capital market reform and developing government bond markets, are timely and important topics in many emerging market countries. In my view, their relevance is particularly high in the Philippines. Let me briefly explain why.

Our policy discussions with the Philippine authorities in recent years have centered around how to deal with fiscal vulnerabilities. Needless to say, the most effective way to address a country's fiscal vulnerabilities is to strengthen revenue, streamline expenditure, and thereby reduce fiscal deficits, and these are the policy advice we have been giving to the Philippine authorities. While welcoming the progress with reforms since the new administration took office last year, we have been making the case that fiscal consolidation efforts need to be more front-loaded, so as to send a strong signal to markets about the commitment to tackling the fiscal problem. This will require the passage of tax measures with a clear revenue impact, such as raising the VAT rate, and saving much of the additional revenue. We have also argued that power sector reforms and particularly privatization should be accelerated. In the financial sector, we have urged that passage of the amendments to the BSP Charter be expedited, so as to strengthen bank supervision and facilitate recapitalization of the banking sector. In our view, taking these steps will reduce the vulnerabilities of the economy and strengthen economic performance over time.

However, many actions that help reduce fiscal vulnerabilities can be taken outside of the policy areas we have primarily focused on so far. Creating an environment conducive to the development of domestic capital markets is one such action the Philippine authorities can take, which not only strengthens the government's funding base, but also has broader positive implications for the private sector, and the country's overall economic growth.

I will not go into specific benefits one can expect from deep and liquid domestic capital markets, as these will be explained by other speakers today. Suffice it to say that we, the IMF, have amply witnessed the gains that some emerging market countries have been able to derive from deeper and more liquid domestic capital markets. The main objective of this seminar is to share with you these countries' successful experiences, and to think about concrete steps to be taken in the Philippines, so that this country, too, can enjoy the same benefits.

With this objective in mind, we have organized today's seminar as follows. First, my colleague, Mr. Ferhani from the Monetary and Financial Systems Department, will present an overview of how the IMF sees the importance of domestic securities markets, and what is needed to facilitate the development of these markets. This will be followed by a presentation by the Philippine authorities on the current state of Philippine domestic capital markets, which will provide the context against which to assess the lessons learned from other countries' experiences.

After that, we look into country experiences. We have invited three distinguished speakers, Mr. Juan Fernando Lucio from Colombia, Mr. Gerardo Rodriguez from Mexico, and Ms. Oonagh McDonald from the United Kingdom. Mr. Lucio and Mr. Rodriguez will explain how a number of emerging market governments, which, some thought, could issue debt only in foreign currency, have succeeded in making their domestic currency funding attractive to foreign investors, while also developing their domestic capital market. Ms. McDonald will provide us with a perspective from the UK, a country with a fully developed capital market, and provide insights into international good practices.

Once country experiences are reviewed, we come back to the Philippines once again. I will chair a panel discussion in which we discuss what lessons can be learned for the Philippines from what other countries have gone through. This will be an opportunity for the audience to ask the country speakers questions about how they coped with any problems that you think the Philippines may be facing, now or in the future.

I will stop here, and ask Mr. Ferhani to start his presentation. I hope that you will find this seminar useful. Thank you very much.