US embassy cable - 05MANILA3156

UNCLAS SECTION 01 OF 02 MANILA 003156 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/PMBS, EAP/EP, EB/IFD, EB/TPP/BTA/ANA 
STATE PASS USTR FOR BWEISEL AND DKATZ 
STATE PASS USAID AND OPIC 
TREASURY FOR OASIA FOR AJEWELL 
USDOJ FOR MCRAWFORD 
USDOC FOR 4430/ITA/MAC/DBISBEE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EINV, PGOV, RP 
SUBJECT: PHILIPPINE MARKET JITTERS HEIGHTENING 
 
REF: Manila 3061 
 
1.  (SBU) Summary: Despite the Philippine Supreme Court's 
July 5 decision to move up the date of a hearing on the 
implementation of the recently-passed Expanded Value 
Added Tax (EVAT), the country's currency, equities, and 
bond markets remain shaky.  Markets are showing 
increasing signs of strain, as investors appear to be 
growing weary of continuing political noise, including 
the resignation of President Arroyo's economic team 
(septel).  Investors also remain concerned about the 
potential economic impact of the Supreme Court's July 1 
decision to place a Temporary Restraining Order (TRO) on 
the implementation of the EVAT and remain worried about 
soaring oil prices.  The Central Bank announced a hike in 
reserve requirements to help temper pressure on the peso. 
End Summary. 
 
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EVAT Hearing Moved Up 
--------------------- 
 
2.  (SBU) On July 5, the Philippine Supreme Court -- 
responding to the Government's July 4 petition 
immediately to lift the TRO on the implementation of the 
amended Expanded Value Added Tax (EVAT) -- voted to move 
up the date of the hearing of oral arguments from July 26 
to July 14 (reftel).  However, the Supreme Court did not 
lift the TRO on the law's implementation.  The earlier 
scheduled hearing date, although welcome, has done little 
to appease jittery financial markets that are worried 
about record-high international oil and protracted 
political controversies. 
 
----------------------------------- 
Local Currency Continues to Sputter 
----------------------------------- 
 
3.  (U) The local currency slipped to an intra-day low of 
PhP56.39/$1 on July 7 (not far off from the PhP56.45/$1 
all-time low posted before the May 2004 elections) before 
closing at PhP56.28/$1, the peso's weakest closing rate 
since mid-December 2004).  As of noon on July 8, the 
Philippine currency was trading in the PhP56.25- 
PhP56.44/$1 range in the interbank market, just shy of 
the PhP56.45 historic low seen in the run-up to the May 
2004 elections. 
 
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Central Bank Hikes Reserve Requirements 
--------------------------------------- 
 
4.  (U) On July 7, the Central Bank announced a two 
percentage point increase in banks' required reserve 
requirements, from 19% to 21%, effective July 15.  The 
Central Bank estimates the move to mop up more than PhP30 
billion (about $530 million) from the financial system. 
In media interviews, Central Bank Governor Amando 
Tetangco noted that excess financial system liquidity was 
finding its way into the foreign exchange market and 
contributing to the peso's weakness, potentially 
threatening price stabilization efforts.  Regular reserve 
requirements will rise from 9% to 10% and "liquidity" 
reserve requirements (i.e., reserves that earn market- 
based returns) from 10% to 11%. 
 
---------------------------------------- 
Stock Market Investors Increasingly Edgy 
---------------------------------------- 
 
5.  (U) The Philippine Stock Price Index (Phisix), which 
closed at a six-month low on July 4 (1,815.67) following 
five trading days of consecutive declines, edged up 
slightly on July 5 to 1,817.02 due to bargain-hunting for 
select blue-chip stocks.  However, the Phisix closed July 
6 at a fresh six-month low of 1,813.04 as investors 
cashed in on profits.  Bargain hunting again pushed up 
the Phisix to 1,847.32 on July 7.  At that level, the 
Phisix -- touted as Asia's best performer earlier this 
year -- was up barely 1.4% from the end of 2004 (after 
having climbed to a 5-1/2 year high of 2,166 in March, up 
nearly 19% from 2004's closing level).  The Phisix opened 
weaker on July 8 at 1,839.43 and slipped as far as 
1,813.99 before closing at 1,876.28, 1.6% higher than 
July 7's close. 
 
6.  (SBU) June still saw net foreign purchases in the 
stock market despite political jitters, but foreign 
investors have since turned net sellers in July, to the 
tune of PhP1.3 billion ($23 million) thus far.  On July 
8, net foreign sales (estimated at PhP129 million) 
continued for the sixth consecutive trading day.  The 
outflows in July are equivalent to about 10% of net 
foreign purchases during the first half of the year and 
indicate that investors are becoming increasingly 
apprehensive about current political and economic 
developments. 
 
------------------ 
Bond Spreads Widen 
------------------ 
 
6.  (U) Spreads for medium- to long-term sovereign bonds 
narrowed in May with the passage of the amended EVAT. 
Spreads for medium-term debt papers (i.e., those maturing 
over next five years) continued to narrow in June despite 
political disturbances, while spreads for longer-term 
maturities began to widen with the growing political 
noise.  As of July 7, spreads for government bonds 
maturing in 2008 had widened by 5 basis points and for 
bonds maturing in 2025 by 23 basis points, however. 
 
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Comment 
------- 
 
7.  (SBU) The suspension of the EVAT law created more 
uncertainties for financial markets, already shaken by 
political disturbances and worries over record-high world 
oil prices.  For now, international reserves remain 
comfortable -- having climbed to an all-time high of 
$17.7 billion in June.   Although one local 
trader/analyst described investors' sentiment as "not yet 
panicky, but increasingly wary," the situation remains 
volatile.  The disbanding of the country's economic team 
-- which many had cited as being the strength of the 
Administration -- only adds to the current volatility. 
The business sector, credit rating agencies, and other 
Philippine observers continue to urge a quick resolution 
to the current controversy, strongly warning that 
protracted uncertainties will deepen negative perception 
and increasingly harm the Philippine economy. 
 
Mussomeli