Camacho cites need for legislative reforms to improve RP’s investment environment

As Congress tackles critical legislative reforms needed to improve the country’s investment environment, Finance Secretary Jose Isidro Camacho has blamed the lackluster capital market on the absence of a conducive legal and regulatory framework that would encourage investments.

Speaking before the annual conference of the Financial Executives Institute (Finex), Camacho said the lack of such an environment has long stymied the development of long-term capital with fixed interest rates and extended maturities.

Camacho said he was also changing his initial opposition to the elimination of the documentary stamp tax on stock market transactions, but only as a temporary measure while the stock market is in the doldrums and could little afford the burden of taxation.

Camacho said that the market’s primary problem at present is the utter lack of confidence in the face of growing pessimism. However, he said this was not unique to the Philippine capital market and was in fact prevalent among other markets as well.

"I just got back from Washington DC and the mood there was even bleaker," Camacho said. "There was so much gloom and doom around us that the Philippines began looking like an oasis in the global desert."

Camacho said the long-term problem of the capital market has been the result of the absence of the relevant regulatory framework for market development. As a result, issuers have had limited alternatives and have relied mostly on foreign capital and bank borrowings.

"In fact, bank borrowing has been the primary source of capital domestically and generally offers shorter maturity periods and floating interest rates," Camacho said.

According to Camacho, Congress needs to act on various initiatives on the legislative agenda, primarily the proposed elimination of the documentary stamp tax (DST) on the secondary trading of debt instruments. This move, he said, would help promote liquidity for debt instruments and should encourage financial institutions to push for long-dated instruments knowing that they would be able to tap the secondary market to provide liquidity.

According to Camacho, the elimination of the DST should also be extended to stock market transactions. "I had initially opposed this inclusion since i believed the bill was aimed primarily at debt instruments," Camacho said. "However, i am now inclined to include it but only for the short term and only as a temporary relief to the stock market in hopes of building the market’s confidence."

"Of course, the factors affecting the stock market go beyond the DST and are really more a function of confidence levels and global events," he added.

Camacho said the market is also waiting for Congress to get around to passing the Securitization Act intended to promote asset-backed securities. Although initially intended for the housing sector, he said this could extend to other forms of assets that could be securitized such as credit card receivables, loans and other financial assets.

Camacho said that these measures, among other legislative reforms that have languished in Congress, would provide the long-term and sustainable environment for investments that would be less vulnerable to external shocks that routinely shake the market.

Beyond regulatory concerns, however, Camacho admitted that a sound macro-economic environment is critical to holding the initiatives together. The market’s concern over the Arroyo administration’s gaping budget deficit, he said, has many dimensions.

"It cuts across issues surrounding tax collectors, taxpayers, the bureaucratic and structural constraints, lack of technology and the negative mindset shaped by years of poor implementation and observance of tax laws," he said.

Camacho chided financial executives that tax collection is also the responsibility of taxpayers, especially large corporations.