Confidence

The Philippine Stock Exchange has been having difficulty holding above the 7,000-point level. This happens despite the liquidity of the domestic market.

There are a number of reasons analysts have offered for the unduly weak market sentiment. Investors are concerned over the slow vaccine rollout that will eventually translate into curtailed economic activity. Others point to low confidence in the way segments of our capital markets are governed.

The slew of scandals involving stock brokerages undermined market confidence.

In particular, the loss of P750 million worth of stocks in R&L Investments, one of our oldest brokerages, underscored the urgent need to upgrade regulatory procedures. By the Lee family’s version of what happened, blame is put on a lowly clerk and errand boy aptly named Marlo Moron for the loss of P750 million worth of shares.

According to the Lee family version of what happened, company treasurer Lucy Lee trusted the lowly employee so much she gave him the access codes to engage in the transaction of shares. The clerk was given the power to trade shares and at the same time function as checker for those trades. More than that, by Lucy Lee’s court admission, the clerk held all the clients’ books.

This relaxed arrangement went on for at least eight years. During those years, stocks were pilfered undetected by any audit until the losses accumulated. The irregular transactions so easily escaped the notice of what should be the eagle eyes of regulators.

From the standpoint of good corporate governance, there are more red flags raised here than one finds in a communist rally.

Stockbrokers are required to send their clients monthly statements of account. For years, R&L so cavalierly ignored this requirement. Neither the clients nor the regulators appear to have noticed the glaring lapse.

In the regular course of business, separate codes should have been used by the transaction maker and for the checker. This was obviously not observed. The auditors should have spotted this; but they did not.

A lot of the dubious transactions involved what in the business is called EQ (equity) trades. This involves transfer of shares from one broker to another involving the same beneficial owner. It is like transferring funds from one account to another of a single depositor.

What was recorded as EQ trades were actually sales of shares involving a third party. This was so easy to spot if R&L exercised due diligence in the conduct of its business.

More than just penalizing the culprits, it is important for the SEC and the rest of the industry to convince the public that more reliable regulation will be exercised henceforth. That is necessary to restore the public’s faith in the reliability and trustworthiness of our capital markets.

We need to broaden the base of our capital markets to attract small investors. That is the only way to both efficiently raise capital and make the economy more inclusive. Scandals like this one erode public faith in the system.

Delta

It is time, once again, to make a decision on the quarantine status of the NCR and surrounding provinces. The metropolitan region was kept in GCQ status with some restrictions from July 1 to July 15.

The infection numbers for the NCR have been quite encouraging the past few weeks. On those numbers alone, it should be easy to further relax restrictions to MGCQ levels. That will help restore the dynamism of the local economy.

But that is not likely. Our public health authorities are wary of the letting in the Delta variant of the COVID-19 virus. They would rather not take chances with this highly transmissible variant.

The Delta variant was first detected in India at the height of that calamitous surge in infections that completely overwhelmed that country’s health systems. The rapidly spreading variant is now the predominant one in both the US and the UK despite the high vaccination rates in those two countries.

East Asia is now experiencing a surge in infections attributed to this strain. South Korea experienced a new surge. Japan was put in a state of emergency that will curtail public attendance in the Olympics.

Both Thailand and Malaysia have enforced new restrictions to contain the spread of the Delta variant. In Indonesia, a surge in infections pushed the health system to its limits with widespread shortages of oxygen. Several million people have been pushed back to lockdown in Australia.

There is, as yet, no evidence of community transmission of the Delta variant in the Philippines. A few inbound Filipinos were found infected with it. They were duly isolated and treated, a credit to the strong border controls we chose to maintain despite the costs.

In fact, the latest disagreement between the IATF and local governments was on the matter of domestic border controls. The IATF yielded to the preference of local governments to maintain the highest restrictions on local travelers crossing domestic borders.

Last week, a sharp dip in the New York Stock Exchange was attributed to investors being spooked by the proliferation of the Delta variant. Israeli scientists have reported a significant drop in the efficacy of the Pfizer vaccines they used. A new surge is feared in Africa and Europe because of the new strain.

Maintaining current quarantine restrictions will extend the freeze on our economic recovery. But the IATF will choose an abundance of caution.

The daily infection rate remains high and widely dispersed across the archipelago rather than concentrated in the NCR. Nothing could be costlier than a third surge in infection rates.