US embassy cable - 05MANILA3657

UNCLAS SECTION 01 OF 03 MANILA 003657 
 
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: JULY 27-AUGUST 5 UPDATE: PHILIPPINE FINANCIAL 
MARKETS HOLDING 
 
REFS: A) Manila 3456, B) Manila 3391, C) Manila 3458, 
 
D) Manila 3593, E) Manila 3421, F) Manila 3061 
 
Sensitive but Unclassified - Not for internet - Protect 
accordingly. 
 
1.  (SBU) Summary:  President Arroyo and her new economic 
team went on a media offensive shortly after the 
President's July 25 State of the Nation Address (SONA) to 
assure investors, creditors and other Philippine 
observers that the Administration remains focused on 
managing the economy and pursuing reforms despite current 
political challenges (Ref A).  While political 
uncertainties continue as the opposition works to impeach 
the President (Refs B and C) and new witnesses emerged to 
discredit her (Ref D), markets continue to hold thus far. 
The peso closed at 55.91 pesos/$1 on August 5, slightly 
stronger than on July 26 (Ref E).  The stock price index 
inched upward and foreign investors continued to purchase 
Philippine stocks.  Rates for Treasury bills softened and 
sovereign spreads for the GRP's medium- to long-term 
foreign debts continued to hold.  However, anxious 
markets will be looking for signs that President Arroyo 
remains focused on moving reforms and the economy 
forward, such as the fate of the amended Expanded Value 
Added Tax law currently pending with the Supreme Court. 
End Summary. 
 
--------------------------------------------- -- 
SHARE PRICES INCH UP; FOREIGNERS ARE NET BUYERS 
--------------------------------------------- -- 
 
2.  (U) The Philippine Stock Price Index (Phisix) rose 
over the past two weeks since President Arroyo's July 25 
State of the Nation Address, buoyed in part by generally 
positive second-quarter corporate earnings reports.  The 
Phisix broke the 2,000 mark to close the July 26-29 
trading week at a six-week high, before profit taking 
retracted some of the gains.  The Phisix closed the 
August 1-5 trading week at 1,975.60, up 0.8% from July 
26.  As of August 5, the Phisix was up 2.4% from the end 
of May 2005 (before the audio tapes linking President 
Arroyo to election fraud surfaced) and up 8.4% from year- 
end 2004.  Net foreign purchases of Philippine stocks, 
which resumed during the July 18-22 trading week (Ref E), 
generally continued since the SONA.  Net foreign stock 
purchases totaled 1.9 billion pesos from July 18-August 
5, more than offsetting 1.2 billion pesos in net foreign 
sales during the first half of July. 
 
3.  (U) GRP officials maintain that political 
disturbances have thus far not seriously eroded net 
foreign portfolio investments (which, in addition to 
stocks, includes investments in securities, money market 
instruments, and deposits.)  June saw net foreign 
portfolio inflows (estimated at over $300 million) 
despite the brewing political crisis.  The first week of 
July saw net foreign portfolio withdrawals (about $59 
million), followed by net foreign portfolio inflows 
during the second week of that month.  From January 1 to 
July 15, net foreign portfolio investments were estimated 
at about $1.9 billion, 12.4 times the level during 2004's 
comparable period. 
 
------------------- 
T-BILL RATES SOFTEN 
------------------- 
 
4.  (U) Rates for Treasury bills softened somewhat across 
all maturities during the GRP's weekly dealers' auction 
on August 1.  The average rate for the 91-day bills 
dropped by 4.3 basis points to 5.589%, the lowest 
recorded since mid-October 2003.  The average rate for 
the 181-day bills declined by 0.4 basis points to 7.397%, 
a four-week low.  The average rate for the 364-day bills 
dropped by 2 basis points to a three-week low of 8.397%. 
Although the Government's 6-billion peso offering was 
more than three times oversubscribed, securities traders 
commented that hovering political uncertainties prevented 
bids for the longer-term T-bill maturities from declining 
more markedly.  As of August 1, the average 91-day 
Treasury bill rate was 33.1 basis points lower than at 
the end of May 2005 and 220.1 basis points lower than at 
the end of 2004.  The average rate for the 182-day paper 
was down 43.1 and 148.0 basis points from end-May 2005 
and end-December 2004, respectively.  As of August 1, the 
average rate for the 364-day paper had increased by 41.2 
basis points from the end of May 2005 but had declined by 
148.7 basis points from the end of 2004. 
 
--------------------------------------------- ------------ 
PESO TRADES SIDEWAYS; BSP MAINTAINS NEUTRAL POLICY STANCE 
--------------------------------------------- ------------ 
 
5.  (U) The local currency, which again weakened to the 
56.00 pesos/$1 mark on July 26, traded in the 56.01- 
56.24/$1 range from July 27 to August 3.  Regional 
currencies reverted to pre-yuan revaluation levels after 
strengthening briefly.  Usually stronger month-end 
foreign exchange requirements and seasonally strong third- 
quarter import demand also exerted pressure on the peso. 
The peso weakened briefly to a four-week intra-day low of 
56.24 pesos/$1 on August 1 on new allegations that 
President Arroyo had personally witnessed payoffs to 
election officials.  The peso strengthened to a 55.86- 
56.00/$1 trading band on August 4-5 on more modest 
corporate demand and some weakening of the US$.  The peso 
closed August 5 at 55.91 pesos/$1, up from July 26's 
closing rate of 56.00 pesos/$1.  At August 5's closing 
level, the Philippine currency was down 2.5% (1.39 pesos) 
from the end of May 2005 and 0.7% (0.37 pesos) stronger 
than at the end of 2004. 
 
6.  (U) The Philippine Monetary Board -- the highest 
policy making body of the Bangko Sentral ng Pilipinas 
(BSP, the central bank) -- decided to maintain key policy 
rates at current levels (i.e., 7% for overnight borrowing 
and 9.25% for overnight lending) during its rate-setting 
meeting on July 28.  The Monetary Board has raised BSP 
policy rates only once (by a quarter of a percentage 
point in April 2005) despite successive increases by the 
U.S. Federal Reserve Board since mid-2004.  Senior 
Central Bank officials told econoffs that they have not 
yet seen disturbing shifts from pesos to foreign assets 
despite narrowing interest rate differentials but they 
continue to monitor the potentially volatile political 
situation closely. 
 
------------------------------ 
SOVEREIGN BOND SPREADS TIGHTEN 
------------------------------ 
 
7.  (U) Sovereign bond spreads narrowed between July 25 
and August 5 for the Government's medium- and long-term 
foreign bonds.  Spreads for Philippine bonds maturing in 
2008, 2010, 2019, and 2025 (the most actively traded in 
secondary markets) closed at 141, 286, 436, and 480 basis 
points, respectively, above comparable U.S. Treasuries, 
tightening from the July 25 closing spreads of 152, 316, 
463, and 507 basis points.  As of August 4, the 
respective spreads for the 2008, 2010, 2019, and 2025 
bonds were 62, 53, 32, and 24 basis points narrower than 
at the end of May 2005.  Compared with end-December 2004, 
spreads for these four bond maturities had tightened by 
138, 114, 71, and 40 basis points, respectively. 
 
------- 
Comment 
------- 
 
8.  (SBU) Immediate economic prospects remain stable. 
For now, businessmen and investors appear to be willing 
to give President Arroyo and her economic team the 
benefit of the doubt that reforms will continue. 
However, with more surprises likely on the political 
front as the political controversies drag in the weeks 
and months ahead, the business and investor communities 
will be increasingly anxious for concrete signs that 
President Arroyo and her Cabinet have not lost their 
focus on reforms and on the economy.  Many continue to 
cite the fate of the amended Expanded Value Added Tax 
(EVAT) law as the major litmus test of whether the GRP 
will be able to continue painful but necessary economic 
reforms.  The Supreme Court, which issued a Temporary 
Restraining Order (TRO) on the implementation of the 
amended EVAT law on July 1 (Ref F), is expected to issue 
a decision before the end of August.  Several senior GRP 
officials told econoffs they are confident that the 
Supreme Court will rule in the Government's favor and 
allow the EVAT law to go through, but private sector 
observers are less optimistic. 
 
Johnson