The Philippines suffers from a stagnant equities market often ignored by wealth-chasing foreign investors mostly on account of cost considerations rather than on the quality of company stocks traded at the Philippine Stock Exchange (PSE).
This emerged in the sponsorship bill advanced by Albay Rep. Joey Salceda, also House ways and means committee chairman, who said House Bill 8958 seeks to cure this condition and pave the way for a domestic capital market that is deep, liquid, competitive and most of all free from the popular notion that stock market investing is only for the rich.
According to Salceda, cost considerations push away the investor, whether domestic or foreign, given the rather punitive tax system in place that at 0.6 percent for stock transactions, for instance, is the highest in the ASEAN versus only 0.1 percent in Vietnam or Indonesia.
While most countries exempt stock transactions from the tax, the levy succeeds in making local bonds and shares of stocks more expensive than its neighbors.
“In addition, the increase in stock transaction tax from 0.5 percent to 0.6 percent coincided with a 29.83 percent decline in the PSE Index. Together with broker’s commissions and other fees, the retail investor is already around 1.19 percent behind for every trade he makes,” Salceda said in explaining the country’s failure to attract stock market investors, particularly the short-term ones who create liquidity in the market.
“Clearly, the cause of stagnation in the PSEi isn’t the quality of our companies. One cause is the cost of trading Philippine stocks.”
Albay Rep. Joey Salceda
Salceda proposed an outright cut in the stock transaction tax to only 0.1 percent from 0.6 percent which will simplify the tax system as the distinction on the tax on trading of domestic shares whether in the local or foreign stock exchange will be removed.
He likewise proposed cutting the dividend tax rate of 25 percent, which is also the highest in the region, to only 10 percent to foster cross-border investments and greater foreign participation by non-resident investors.
“This increased participation can lead to improved liquidity, depth, and efficiency of the capital market,” Salceda said.
“This proposal will also help potential listings in the market, including the Maharlika Investment Fund and the proposed listing of shares of the Landbank of the Philippines. Once offered to the public, shares of these GFIs will create new resources for national development,” he added.
Salceda made the case there is little reason for Philippine stocks to be unattractive given superior dividend yields offered by local stocks where the bottom 25 percent of listed companies pay a dividend rate of 1.88 percent versus only 1.54 percent paid by companies grouped under S&P 500.
“Our stocks are also deeply undervalued. In the US, the stock market is 153.4 percent of GDP in market cap. In the Philippines, it is at just 75.2 percent. Among our neighbors, Singapore is 129 percent, Thailand is at 119 percent, Malaysia is at 91.6 percent.
“Clearly, the cause of stagnation in the PSEi isn’t the quality of our companies. One cause is the cost of trading Philippine stocks,” he said.
