US embassy cable - 05MANILA3370

UNCLAS SECTION 01 OF 03 MANILA 003370 
 
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:  CALMER WEEK ON POLITICAL FRONT PROVIDES RESPITE 
FOR FINANCIAL MARKETS 
 
REFS: A) Manila 3279, B) Manila 3326, C) Manila 2878, 
 
D) Manila 2879, E) Manila 2881 
 
1.  (SBU)  Summary:  A relatively calmer week on the 
political front and positive fiscal news gave currency, 
stock, and bond markets some breathing space to partially 
recoup lost gains.  The peso traded above the 56 pesos/$1 
level throughout the July 18-22 trading week, but ended 
the week down slightly from the previous week's close. 
In the equities market, the stock price index rose to a 
four-week high and foreign buying more than offset net 
foreign sales during the first half of July.  After 
rising over the past several weeks, the loan-benchmark 91- 
day Treasury bill dipped to a 22-month low.  However, 
considering the Philippines' fractious political climate, 
few discount the possibility of more surprises ahead. 
Market players will closely watch President Arroyo's July 
25 State of the Nation Address and Supreme Court action 
on the suspended Expanded Value Added Tax law.  End 
Summary. 
 
--------------------------------------------- --- 
91-Day Treasury Bill Rates Slide to 22-Month Low 
--------------------------------------------- --- 
 
2.  (U) Rates for 91- and 182-day papers declined during 
the GRP's weekly Treasury bill auction on July 18.  The 
benchmark 91-day bills slid to an average rate of 5.452%, 
down by 72.1 basis points week-on-week.  The drop more 
than made up for successive increases since mid-June 2005 
and pulled down the average rate for the 91-day 
instrument to its lowest level since late-September 2003. 
Rates for 182-day bills also declined for the first time 
since mid-June 2005, though by a more modest 10.9 basis 
points to 7.431%.  As of July 18, the average 182-day 
Treasury bill rate was at a three-week low.  The rate had 
increased by 46.5 basis points from the end of May 2005 
(before the audio tapes linking President Arroyo to 
alleged election fraud surfaced), but was still down by 
39.5 basis points from the end of December 2004. 
Financial system liquidity, lessened political tension, 
and encouraging first-semester fiscal results that showed 
the National Government deficit (67.5 billion pesos) well 
below its programmed 98.5-billion pesos ceiling and about 
10% ahead of its financing program also helped ease rates 
down. 
 
3.  (U) Risk premiums continued to rise, however, for the 
longer-term 364-day bills because of hovering political 
uncertainties.  After rejecting all bids for the 364-day 
paper in each of its weekly auctions since mid-June as 
being "unreasonably high," the Government fully awarded 
its scheduled 2 billion peso offering on July 18.  The 
364-day paper fetched an average rate of 8.482%, 63.1 
basis points higher from when the Government last awarded 
these papers on June 6.  The July 18 average rate for the 
364-day bills represented an 11-week high.  It was 49.7 
basis points higher than at the end of May 2005, but was 
140.2 basis points lower than the 364-day rate during 
2004's last Treasury bill auction.  The average 
differential between the 91-day and 364-day papers 
widened to 303 basis points during the Government's July 
18 auction, from the 206.5 and 209.4 basis point 
differentials at the end of May 2005 and December 2004, 
respectively. 
 
--------------------------------------------- 
Peso Trades Above 56 pesos/$1 Throughout the Week 
--------------------------------------------- 
 
4.  (U) Since July 14, the local currency has traded at 
stronger than 56.00 pesos/$1 in the inter-bank market. 
Inter-bank trades ranged from 55.25-55.98 pesos/$1 during 
the July 18-22 trading week.  The peso opened July 22, 
the last day of the trading week, at 55.25 pesos/$1 -- 
the strongest intra-day rate posted since June 15 -- in 
reaction to the slight appreciation of the Chinese yuan. 
However, resurgent political jitters ahead of President 
Arroyo's July 25 State of the Nation Address capped the 
peso's recovery and the local currency ended the week at 
55.89 pesos/$1, slightly weaker than the previous 
Friday's 55.85 pesos/$1 close.  At July 22's closing 
rate, the peso was down 2.5% (1.37 peso) from the end of 
May 2005; and was 0.7% (0.39 peso) stronger than at the 
end of 2004. 
 
--------------------------------------------- ---- 
Investors Hunting Bargains; Foreigners Net Buyers 
--------------------------------------------- ---- 
 
5.  (U) The Phisix inched up to its highest closing level 
in nearly four weeks on July 21 (1,960.76) before 
declining somewhat on profit taking before closing the 
week at 1,954.40 on July 22.  At that level, the Phisix 
was up 1.3% from the end of May 2005 and up 7.2% from 
yearend 2004.  Foreign investors were net buyers of 
Philippine stocks during four of the five trading days 
this week.  Net foreign purchases during the week 
exceeded 1.7 billion pesos, more than offsetting net 
foreign sales of 1.2 billion pesos during the first half 
of July. 
 
---------------------- 
Sovereign Bond Spreads 
---------------------- 
 
6.  (U) As of July 21, sovereign bond spreads had 
narrowed for medium-term Philippine bonds maturing in 
2008 and 2010 but had widened somewhat for longer-term 
foreign debt instruments.  Spreads for Philippine bonds 
maturing in 2008 and 2010 closed 156 and 320 basis 
points, respectively, above comparable U.S. treasuries, 
tightening from the previous week's close of 157 and 324 
basis points.  Spreads for the 2019 and 2025 papers 
widened to 462 and 507 basis points, respectively, from 
454 and 500 basis points the week before.  As of July 21, 
the respective spreads for the 2008, 2010, and 2019 bonds 
were 47, 19, and 6 basis points narrower than at the end 
of May 2005, and, for the 2025 bonds, 3 basis points 
wider.  Compared with end-December 2004, spreads for 
these four bond maturities had tightened by 123, 80, 45, 
and 13 basis points, respectively. 
 
------- 
Comment 
------- 
 
7.  (SBU) A sense of calm appears to have settled over 
financial markets this week, but few local observers 
discount the possibility of more political surprises in 
the weeks ahead as the opposition works to impeach the 
President and the Palace tries to establish an 
independent "Truth Commission" (Ref B).  Investors, 
credit rating agencies, and other observers will also 
closely watch President Arroyo's State of the Nation 
Address on July 25 and the Supreme Court's decision on 
the currently suspended implementation of the amended 
Expanded Value Added Tax (EVAT) law.  The EVAT 
implementation will be an important test of the Arroyo 
Administration's political will and its ability to 
carryout economic reform and stabilize the deficit.  As 
Central Bank Governor Amando Tetangco underscored in 
recent remarks to the business community, non- 
implementation of this centerpiece tax measure would 
deepen fiscal problems and significantly limit the 
efficacy of monetary policy. 
 
8.  (SBU) Despite the media frenzy and oppositionists' 
claims, and although the country continues to face many 
important challenges (Refs C, D and E), the Philippines 
does not appear to be on the brink of economic 
dysfunction or financial insolvency.  The main financial 
and economic indicators have so far avoided immediate 
danger.  Managers at the Central Bank and the Finance 
Department deserve at least some credit for maintaining 
relative economic stability.  For now, international 
reserves appear adequate, the balance of payments is in 
surplus (nearly $2 billion as of June), and bankers tell 
us they see no sign of capital flight.  The situation 
nevertheless remains potentially volatile.  Until the 
EVAT and possible impeachment proceedings are settled, 
many foreign and domestic investors will be in a wait-and- 
see mode. 
 
Mussomeli