Philippine Markets: 23 November 2010

23 November 2010

USD/PhP: 44.20 + 0.25 PSEi: 4147.35 - 39.54
USD/JPY: 83.65 PFINC: 960.19 - 11.01
EUR/USD: 1.3581 BDO: 55.10 - 1.80
GBP/USD: 1.5940 BPI: 59.45 - 0.05
PDSTF3M: 1.7827 MBT: 71.80 - 1.35
Prices as of 4:00pm Source: Bloomberg, Reuters


Philippine Deficit Narrows as Aquino Trims Spending
By Karl Lester M. Yap and Max Estayo

Nov. 23 (Bloomberg) -- The Philippines’ budget deficit
narrowed in October as spending fell and tax revenue rose.
The shortfall was 10.5 billion pesos ($238 million) last
month, the government said in a statement in Manila today.
Spending decreased 4.5 percent in October from a year earlier
after a 3.6 percent decline previously reported for September,
and revenue rose 15.1 percent. The 10-month deficit was 270.3
billion pesos.
President Benigno Aquino, who took office in June, is
winning investors’ confidence as he goes after tax evaders and
corrupt officials to narrow a budget deficit that surged to a
record 298.5 billion pesos last year. Standard & Poor’s this
month raised the nation’s debt rating to the highest level in
more than seven years.
“The fiscal deficit is not a key market concern at the
moment,” Vincent Tsui, a Hong Kong-based economist at Standard
Chartered Plc, said before the report. “The focus of the
government should be on increasing collection efficiency” and
allocating more resources from the budget for infrastructure
developments, he said.
The shortfall this year may be less than the government
target of 325 billion pesos because of savings on debt payments,
Deputy Treasurer Eduardo Mendiola said Nov. 17. Aquino plans to
narrow the budget gap to 290 billion pesos next year.
S&P raised the Philippines’ credit rating on Nov. 12 to BB,
the second-highest non-investment grade and the same level as
Indonesia and Vietnam.

Smuggling Complaint

The Philippines last month filed a 24.5 billion-peso
smuggling complaint against the local unit of Royal Dutch Shell
Plc, saying it was shifting its drive against tax evasion “to a
much higher gear.” The unit’s chairman said the company has
never engaged in smuggling.
The Southeast Asian nation has run deficits in 21 of the
past 25 years, limiting state spending on infrastructure to less
than the 5 percent of gross domestic product recommended by the
World Bank. The $160 billion economy grew 7.9 percent in the
second quarter from a year earlier, the fastest pace in three
years.


Report: N. Korea fires on S. Korea, injuring at least 6
By the CNN Wire Staff

Seoul, South Korea (CNN) -- North Korea on Tuesday fired artillery into the sea near its tense western sea border with South Korea, injuring at least four South Korean soldiers and two civilians, the Yonhap news agency reported.

At least 200 rounds of artillery hit an inhabited South Korean island after the North started firing about 2:30 p.m. local time, Yonhap said.

South Korea's military responded with 80 rounds of artillery and deployed fighter jets to counter the fire, the report said.

The South Korean army also raised its alert condition, the report said.

Images of plumes of smoke were quickly broadcast on Yonhap television from the island of Yeonpyeong, but it was not immediately clear what the artillery had hit.

The island that was hit has a total of about 1,300 residents, a fisherman who lives on the island told Yonhap.

The South Korean government immediately called an emergency meeting of its security ministers.

Morning Brief: 23 November 2010

BSP bucks cut in reserve requirement Rate on special deposit accounts to stay The Bangko Sentral ng Pilipinas has thumbed down proposals to reduce interest rates and cut the reserve requirement, saying such moves would not necessarily push banks to lend more. The BSP instead urged banks to ease their credit requirements, especially for small and medium enterprises (SMEs), stressing this was the best way to boost demand for loans and spur lending. “Banks are not lending as much not because interest rates are high; interest rates are at historic lows, in fact. They are not lending because there is not enough demand for loans,” BSP Deputy Governor Diwa Guinigundo said. He said many SMEs found the credit requirements of banks too stringent. On the 19-percent reserve requirement, which is the proportion of deposit liabilities of banks that must be kept with the central bank as reserve, BSP Governor Amando Tetangco Jr. said monetary authorities did not find it prudent to reduce it at the moment. He described the reserve requirement as a “very potent measure” that could drastically reverse the liquidity situation if implemented. While the inflation environment was still benign, Tetangco said reducing the reserve requirement could lead to a sharp increase in liquidity that could eventually be inflationary. He noted that although prices were rising moderately at the moment, there were risks in the horizon that could lead to beyond-ceiling inflation levels if the reserve requirement would be tweaked unmindfully. The BSP preferred to be conservative, said the central bank chief. Bond swap gets green light from Monetary Board THE GOVERNMENT has obtained the central bank’s go-ahead to hold a domestic debt swap but still needs Malacañang’s approval before it can proceed with the exercise. "The Monetary Board issued its opinion on the monetary impact of the bond exchange last Thursday," National Treasurer Roberto B. Tan yesterday told BusinessWorld in a phone interview. He clarified that the government did not seek the approval of the Monetary Board, the Bangko Sentral ng Pilipinas’ (BSP) policy-making body, but needed its opinion about the impact of the exercise on liquidity. "Any bond issue will have an effect on the monetary aggregates in the system so before any domestic issue is made, the government will have to request the BSP for an opinion on its monetary impact," he explained. The government intends to swap shorter-dated papers for 10- and 25-year bonds before yearend as part of a program to lengthen the maturity profile of its outstanding debt. As of end-August, the national government’s debt amounted to P4.69 trillion. Mr. Tan said the Treasury was only waiting for the approval from the Office of the President to proceed with the swap. Presidential Communications Secretary Ricky A. Carandang told BusinessWorld in a text message: "the Palace has received the proposal for the debt swap but has not approved it yet." Mr. Tan declined to say the amount that would be involved in the bond exchange. "[I]t is subject on the actual execution of the transaction. It would depend on the market appetite by the time we start to launch the swap," he said. Last week, Deputy Treasurer Eduardo S. Mendiola said the volume could range from "P35 billion to P60 billion." "We hope to launch the debt swap by November and we hope to have the debt swap settlement by the second week of December," he said during the Treasury bill auction last Monday. Earlier reports have said that the government was considering the appointment of BPI Capital Corp., HSBC and Land Bank of the Philippines as arrangers for the bond exchange. The government last conducted a domestic debt swap in January 2009. It issued P144.5 billion worth of fresh five- and seven-year bonds. The Philippines completed a $3 billion dollar bond swap in September, raising $200 million from the issue of the fresh 10-year dollar bonds. Earlier that month, it raised $1 billion from the sale of local currency bonds. Growth likely slowed in Q3 July-Sept. result probably still ahead of full-year target THE ECONOMY likely slowed in the third quarter after a surprisingly strong first half, economists said ahead of the release of official data later this week. Six analysts offered forecasts ranging from 6.7% to 7.5% for July to September gross domestic product (GDP) growth, lower than the 7.9% average for the first six months of 2010 but still above the government’s full-year 5.0-6.0% target. Their 2010 outlooks also topped the official goal, which Cabinet officials have said will not be changed this late in the year despite indications that the range will be exceeded. Socioeconomic Planning Secretary Cayetano W. Paderanga, Jr., who last week told reporters he was hopeful that third quarter growth stayed above 6.0%, said results for the period would be discussed by National Economic and Development Authority officials today ahead of Thursday’s official announcement. He declined to provide details. HSBC economist Sherman W. K. Chan, in an e-mail, said: "After an exceptionally robust first half, growth momentum likely moderated heading into the second half. Government spending is expected to have slowed due to fiscal consolidation." Third quarter GDP likely slowed to 6.7%, he said. Joey Cuyegkeng of ING Bank in Manila, who offered a third quarter growth forecast of 7%, said the downside risk was the country’s weak agriculture sector. Farm output, which accounts for about a fifth of Philippine GDP, was down by 2.62% from a year earlier as of September. But Victor A. Abola of the University of Asia and the Pacific (UA&P) said strong exports and positive performances from other sectors such as mining would ease the drop in growth. He forecast a 7.2% uptick, within the 7.0-7.5% range forecast by fellow UA&P economist Cid L. Terosa who also cited exports, along with remittance-driven consumption, as drivers. Exports, already up 38.5% as of September, grew at a record 46.1% during that month alone. Remittances, meanwhile, rose 10.6% in the same month, bringing the nine-month tally to $13.8 billion. An identical 7.0-7.5% third quarter GDP growth outlook, meanwhile, was proposed by Arsenio M. Balisacan, dean of the University of the Philippines (UP) School of Economics. Ronilo M. Balbieran of the Research, Education and Institutional Development Foundation gave a 6.9% third quarter outlook. The UA&P’s Mr. Abola said full-year growth would likely hit 7.2% while Mr. Terosa had a lower 6.0-6.5% range. The UP’s Mr. Balisacan forecast a 7% uptick, Mr. Cuyegkeng a slightly higher 7.1% while Mr. Balbieran offered a 7.3-7.4% range. The Philippines grew by just 1.1% last year amid the global downturn.

U.S. Stocks Drop Amid Irish Bailout, Fund Raids in Insider-Trading Probe U.S. stocks fell, ending a three-day gain in the Standard & Poor’s 500 Index, amid speculation an Irish bailout will fail to stem Europe’s debt crisis and as federal agents raided hedge funds to probe insider trading. Bank of America Corp. and JPMorgan Chase & Co. led a drop in the Dow Jones Industrial Average, sinking more than 2.2 percent.Goldman Sachs Group Inc. slid the most in six months after a report the securities firm is also involved in the U.S. insider-trading investigation. Hewlett-Packard Co. rose 1.8 percent ahead of its earnings report. Amazon.com Inc. gained 3.4 percent, driving consumer companies higher before the start of the holiday shopping season. The S&P 500 lost 0.2 percent to 1,197.84 as of 4 p.m. in New York, after rising 1.8 percent over the last three days. The Dow slipped 24.97 points, or 0.2 percent, to 11,178.58. Treasuries Rally as Moody's Ireland Outlook Spurs Demand for Safest Assets Treasuries rose, pushing down the 10-year note yield down the most in almost a week, after Moody’s Investors Service said it may downgrade Ireland’s debt by more than anticipated, increasing demand for the relative safety of U.S. government securities. Moody’s Investors Service said it may make a multi-notch cut in Ireland’s credit rating as the aid plan from the European Union and the International Monetary Fund threatens to boost the country’s debt. The Federal Reserve bought $8.3 billion of Treasuries as part of an asset-purchase program aimed at stimulating economic growth. Two-year notes yields fell after higher-than-average bidding at a $35 billion auction of the securities as part of $99 billion of note sales this week. “The market has responded cautiously to the financial support for Ireland and that is being reflected in the stock market and the flow into Treasuries,” said Ward McCarthy, chief financial economist at Jefferies Group Inc. in New York. Jefferies is one of 18 primary dealers required to bid at Treasury auctions. “It’s like a never-ending piece of spaghetti. Nothing so far has addressed the root of these problems in any one of these countries.” The yield on the 10-year note fell seven basis points, or 0.07 percentage point, to 2.8 percent at 5:02 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 gained 19/32, or $5.94 per $1,000 face value, to 98 14/32.

Oil Advances After Analyst Estimates Show Drop in U.S. Stockpiles of Crude Oil climbed in New York for the first time in three days after analyst estimates showed that U.S. crude inventories dropped for a third week. An Energy Department report tomorrow will probably show U.S. supplies slipped 2 million barrels last week, according to the median of 11 analyst estimates in a Bloomberg News survey. Gasoline stockpiles probably declined 1.25 million barrels, the survey shows. The January delivery contract gained as much as 28 cents, or 0.3 percent, to $82.02 a barrel, in electronic trading on the New York Mercantile Exchange, and was at $81.99 at 10:43 a.m. Sydney time. Yesterday, the contract fell 24 cents to $81.74. Prices are up 3.3 percent this year. Brent crude for January settlement fell 38 cents, or 0.5 percent, to $83.96 a barrel on the London-based ICE Futures Europe exchange yesterday.

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001