The Philippines is setting its sights on joining JPMorgan Chase & Co.'s local-currency emerging-market debt index in 2025, after missing the cut this year. The country has been in discussions with the US firm for several months, with a survey of investors held mid-year and the results released last month, according to Philippine Treasurer Sharon Almanza.

Unlocking Foreign Investment in the Philippine Debt Market

Reforms to Attract Foreign Investors

The Philippine government is now looking at several financial reforms to lure more foreign investors, with the goal of achieving index inclusion "hopefully next year," according to Finance Secretary Ralph Recto. The country's authorities are working to streamline the tax treaty procedure, making it easier for non-resident investors to claim tax treaty benefits. This move is part of the Bureau of the Treasury's efforts to boost offshore participation and strengthen the domestic capital market.Additionally, the Philippines has announced steps to revive its interest-rate swaps market and allow more participants in its bond repurchase agreements. These initiatives are aimed at boosting the liquidity of the country's debt and helping to develop the local capital market.

Addressing Liquidity Challenges

Non-residents currently hold only about 4% of the Philippines' outstanding bills and bonds, according to Almanza. This is significantly lower than the levels in neighboring countries like Indonesia (14%), Malaysia (20%), and Thailand (10%), as reported in the Asian Development Bank's regional bond monitoring report.The low foreign participation in the Philippine debt market has been a concern, as it can lead to illiquidity issues. The country's global peso notes dropped out of the JPMorgan index in January due to this problem.

Preparing for Index Inclusion

Prior to joining the index, countries are typically placed on a watch list and encouraged to implement market changes to address challenges faced by investors when investing in their debt securities. Almanza hopes the treasury's efforts will improve liquidity next year and raise the Philippines' chances of index inclusion, though she notes that the country "doesn't really have a target" but wants to "encourage more foreign participation."The inclusion of the Philippines in JPMorgan's benchmark index would be a significant milestone, as it typically attracts fresh inflows of overseas capital into the country's debt markets. This could provide a much-needed boost to the Philippines' financial landscape and help it further develop its domestic capital market.