US embassy cable - 05MANILA3188

UNCLAS SECTION 01 OF 02 MANILA 003188 
 
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: MARKETS CAUTIOUS AS TRADING WEEK OPENS 
 
REFS: A) Manila 3167, B) Manila 3163, C) Manila 3156, 
 
D) Manila 3154 
 
1.  (SBU) Summary:  Markets opened the trading week on 
July 11 shaky on resurgent fears of protracted political 
controversies and escalating concern that the political 
turmoil will distract and/or paralyze President Arroyo's 
ability to move her Administration's reform agenda 
forward.  Recent reactions suggest that markets may be 
increasingly open to a transition to a constitutional 
successor, if only to put an end to the political 
disorder and impasse.  End Summary. 
 
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July 4-8 Trading Week Closes on Hopeful Note. . . 
--------------------------------------------- ---- 
 
2.  (U) July 8 was a particularly volatile day for the 
foreign exchange market following the resignation of key 
members of the Administration's economic team and calls 
by a number of formerly staunch political and business 
group supporters for President Arroyo to resign (Refs B 
and D).  The local currency traded at a high of 
PhP56.05/$1 and low of PhP56.44/$1, almost hitting during 
morning inter-bank trades the weakest historical rate of 
PhP56.45/$1 posted in the run-up to the May 2004 
elections.  However, the peso recovered to PhP56.10/$1 by 
day's end, up 0.3% from July 7 (although down 0.4% week- 
on-week). 
 
3.  (U) The stock market also opened July 8 on a jittery 
note after bargain-hunting on select blue chip stocks 
pushed up the benchmark Philippine Stock Price Index 
(Phisix) to a four-day high of 1,847.32 on July 7.  The 
Phisix slid to as low as 1,813.99 in the moments 
following the press conference where Arroyo's former 
economic team announced its resignation on July 8, but 
eventually closed stronger at 1,876.28, up for a second 
consecutive trading day (Ref C). 
 
4.  (U) Secondary market spreads on Government foreign 
bonds maturing over the next five years -- which narrowed 
on July 6 and 7 after rising markedly on July 4 and 5 -- 
threatened to widen on July 8.  However, like the 
currency and stock markets, bond spreads for Government 
medium-term debt papers eventually narrowed as the day 
progressed (by 9 basis-points for bonds maturing in 2008 
and 8 basis-points for bonds maturing in 2010).  Spreads 
for the longer-term maturities continued to rise.  As of 
July 8, spreads for Government bonds maturing in 2019 
(513 basis points) and in 2025 (560 basis points) had 
risen by 29 and 44 basis points, respectively, from the 
end of June. 
 
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. . .But Market Sentiment Changes Gears After the Weekend 
--------------------------------------------- ------------ 
 
5.  (SBU) Market jitters resurfaced with the opening of 
the July 11-15 trading week on resurgent fears of 
protracted political controversies, despite the decision 
by the Catholic Bishop's Conference not to call for the 
President's resignation (Ref A).  A number of local 
traders told econffs that investors are growing 
increasingly weary of the protracted political 
uncertainties. 
 
6.  (U) Fitch Ratings announced on July 11 that it had 
downgraded the outlook for the Philippines' long-term 
foreign and domestic currency debts from "stable" to 
"negative" because of the "heightened political 
uncertainty" and pending legal hearings on the 
implementation of the amended Expanded Value Added Tax 
(EVAT) law (the centerpiece of the GRP's fiscal reform 
program).  Fitch expressed serious concern whether "the 
weakened leadership will commit the necessary political 
capital to resolving the EVAT issue soon."  The agency 
warned that protracted delays in resolving the EVAT 
issue, a court decision that would prevent EVAT 
implementation, or continued political disorder could 
trigger a downgrade in the ratings themselves.  Late in 
the afternoon on July 11 Manila time, Standard & Poor's 
announced it also revised its ratings outlook from 
"stable" to "negative," citing the same concerns.  (Note: 
Before this latest action, Fitch -- which last lowered 
scores for Philippine sovereign bonds in June 2003 -- had 
upgraded its ratings outlook from "negative" to "stable" 
shortly after President Arroyo signed the amended EVAT 
law on May 24.  Standard & Poor's last cut credit ratings 
by a notch in January 2005.  End Note.) 
 
7.  (U) The Peso opened July 11 at PhP56.25/$1 and traded 
in the PhP56.18-56.30/$1 range.  It closed the day at 
PhP56.22/$1, 0.2% weaker than July 8's PhP56.10/$1 close. 
The Phisix ended July 11 at 1,852.78, weaker by 0.3%.  As 
of 1:30 in the afternoon Manila time, secondary-market 
spreads on Government bonds maturing in 2008 and 2010 had 
widened by more than 30 and 15 basis points, 
respectively, more than erasing the gains of the previous 
two days. 
 
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Comment 
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8.  (U) Fears are escalating that the political turmoil 
will paralyze the Administration's ability to move 
forward with necessary but painful economic reforms. 
Despite the many economic challenges still facing the 
Philippines, local and foreign fund managers had given 
the President credit for having helped improve economic 
fundamentals, especially praising efforts to address the 
public sector's chronic deficits.  The actions by the 
Administration in the next few days and weeks (among 
others, to fill key economic positions in the Cabinet and 
address legal challenges to the amended EVAT law) will be 
crucial to helping calm fears of the financial and 
investor community. 
 
Mussomeli