US embassy cable - 05MANILA3421

UNCLAS SECTION 01 OF 02 MANILA 003421 
 
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 FINANCIAL MARKETS POST-SONA 
 
REFS: A) Manila 3397, B) Manila 3370 
 
1.  (U) Summary:  Peso, stock, and bond markets have not 
reacted negatively to President Arroyo's State of the 
Nation Address on July 25.  Her promise to forge ahead 
with economic and fiscal reforms, whatever the political 
cost, helped send a positive signal (Ref A).  The stock 
market closed firmer on July 26 (Tuesday) after a three- 
day weekend capped by President Arroyo's SONA.  The peso 
closed at 56.00 pesos/$1, down only slightly despite 
hovering political uncertainties and seasonally stronger 
foreign exchange demand.  Rates for Treasury bills 
softened during the GRP's weekly dealers' auction on July 
26 and sovereign spreads for medium-term foreign debts 
tightened.  The business community will continue to watch 
the president and her new economic team closely for signs 
that they are implementing reforms and competently 
governing.   End Summary. 
 
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IT WAS OK 
--------- 
 
2. (SBU) According to local traders and analysts, markets 
were relieved that pro- and anti-Arroyo rallies during 
President Arroyo's July 25 State of the Nation Address 
(SONA) were generally orderly and peaceful.  Many local 
analysts considered her speech neither awe-inspiring nor 
entirely disappointing.  Although lacking in details, one 
brief statement did strike a cord -- her assurance that 
her Administration would not waver in its commitment to 
economic reform and fiscal discipline "whatever the 
political cost."  For now, markets appear to be willing 
to give her the benefit of the doubt, although the 
situation remains volatile as the political impasse drags 
on.  Many in the business community are cautiously 
optimistic that her endorsement of charter change will 
further calm the political waters and allow her 
maneuvering room to solidify economic reforms -- most 
importantly, to improve tax collection -- in the near 
term. 
 
------------------------- 
SHARE PRICES CLOSE FIRMER 
------------------------- 
 
3.  (U) The Philippine Stock Price Index (Phisix) closed 
July 26 at 1,959.58, up 0.3% from the July 22 close of 
1,954.40 (the most recent trading day because of the 
holiday on July 25 for the SONA).  At that level, the 
Phisix was up 3.9% from the end of May 2005 (before the 
audio tapes linking President Arroyo to alleged election 
fraud surfaced) and up 7.6% from year-end 2004.  The 
Phisix hit an intra-day high of 1,966.50 as investors 
continued to purchase selected stocks ahead of second- 
quarter profit reports, but profit taking retracted some 
of the Phisix's earlier gains.  Dealers had expected some 
investors to cash in on profits after the Phisix rallied 
more than 3% during the July 18-22 trading week.  After 
four consecutive trading days of net foreign purchases 
totaling 1.5 billion pesos, July 26 saw a modest amount 
of net foreign sales (10 million pesos).  Foreign net 
purchases from July 1 through July 26 totaled 224.2 
million pesos. 
 
------------------- 
T-BILL RATES SOFTEN 
------------------- 
 
4.  (U) Rates for 91-day bills inched up by 18 basis 
points to 5.632% during the GRP's weekly dealers' auction 
on July 26.  The increase was not unexpected after the 
average rate for the 91-day paper dropped by more than 72 
basis points on July 18 to its lowest level since 
September 2003.  The average rate for the 182-day paper 
softened by 3 basis points to 7.401% (a three-week low) 
and by 6.5 basis points for the 364-day bills to 8.417%. 
As of July 26, the average 91-day Treasury bill rate was 
28.8 basis points lower than at the end of May 2005 and 
215.8 basis points lower than at the end of 2004.  The 
average rate for the 182-day paper was down 43.5 and 
147.6 basis points from end-May 2005 and end-December 
2004, respectively.  As of July 26, the average rate for 
the 364-day paper had increased by 43.2 basis points from 
the end of May 2005 but had declined by 130.8 basis 
points from the end of 2004. 
 
--------------------------------------------- ------ 
CURRENCY BACK TO 56 PESOS/$1 ON STRONG FOREX DEMAND 
--------------------------------------------- ------ 
 
5.  (U) For the first time since mid-July, the local 
currency again hit the 56 pesos/$1 mark during inter-bank 
trades on July 26.  It opened at 55.85 pesos/$1, hit an 
intra-day high of 55.79 pesos, and closed at 56.00 pesos, 
0.2% weaker than its previous close on July 22.  At July 
26's closing rate, the peso was down 2.7% (1.48 pesos) 
from the end of May 2005; and was 0.5% (0.28 pesos) 
stronger than at the end of 2004.  As expected, the 
yuan's revaluation late last week has had little effect 
on the peso because of hovering political uncertainties, 
heavier corporate demand for end-of-month foreign 
exchange obligations, and the onset of the seasonally- 
high third quarter import season. 
 
--------------------------------------------- ------------ 
Sovereign Bond Spreads Tighten for Medium-term Maturities 
--------------------------------------------- ------------ 
 
6.  (U) On July 25, sovereign bond spreads narrowed for 
medium-term Philippine bonds maturing in 2008 and 2010 
but widened somewhat for longer-term foreign debt 
instruments.  Spreads for Philippine bonds maturing in 
2008 and 2010 closed 152 and 316 basis points, 
respectively, above comparable U.S. Treasuries, 
tightening from the previous close of 155 and 321 basis 
points.  Spreads for debts maturing in 2019 and 2025 
widened to 463 and 507 basis points, respectively, from 
460 and 504 basis points last Friday.  As of July 26, the 
respective spreads for the 2008, 2010, and 2019 bonds 
were 51, 23, and 5 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 127, 84, 44, 
and 13 basis points, respectively. 
 
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Comment 
------- 
 
7.  (SBU) President Arroyo seems to have reassured 
economic interests with her pledge to stay the course on 
reform.  In the weeks and months ahead, the business 
community will continue to watch the president and her 
new economic team closely to see if she can demonstrate 
the political will to move forward with reforms as she 
struggles for political survival.  For now, however, most 
are choosing to cautiously back her and her new economic 
team.  For many, this support may be a default position 
because palatable alternatives are hard for them to 
envision. 
 
Mussomeli