Gov’t urged to issue rules for PPP projects
THE PRIVATE SECTOR wants the government to finalize rules for public-private partnership (PPP) deals, with banks and financial institutions eager to capitalize on the potential of infrastructure financing waiting in the wings.
"It’s great that the government is finalizing the feasibility studies and the roadshows but they also have to focus on the financing for the PPP projects. Without financing, you won’t be able to complete the projects," John Walker, chairman of the Korea arm of financial services giant Macquarie Group of Companies, told BusinessWorld in an interview at the sidelines of a Macquarie PPP conference yesterday.
The financing framework will also encourage the private sector, aided by their expertise in the field, to "take the lead" in funding the planned infrastructure projects, Mr. Walker said.
Banks, in particular, expressed their willingness to invest in the PPP deals, citing the steady cash flows involved through the long-term interest income.
"There is a high liquidity in banks and we are always looking for places to put our money in. PPP projects have heavy capital requirements and will need a lot of loans. As long as they are feasible and good projects, we are interested," Banco de Oro (BDO) Capital president Eduardo V. Francisco said in a telephone interview.
Mr. Francisco, also the chairman of the Capital Market Development Council of the Philippines, emphasized that he was "sure" that domestic banks had the appetite to provide the large sums of funding necessary for the PPP deals.
Macquarie’s Mr. Walker welcomed this, saying it would create competition among banks to give the lowest interest rates for PPP project loans.
He gave the example of South Korea where the Korea Development Bank could impose higher interest rates since they were the main debt provider for PPP deals. The entry of domestic banks, however, broke Korea Development Bank’s stranglehold and brought down costs for the government.
The Aquino administration earlier this month announced five PPP projects that will be auctioned off this year: five-year maintenance contracts for Metro Rail Transit Line 3 (P6.3 billion) and Light Rail Transit Line 1 (P7.7 billion) in Metro Manila, the Daang Hari-South Luzon Expressway link (P1.6 billion), Ninoy Aquino International Airport expressway (P10.59 billion) and the North Luzon-South Luzon expressway link (P21 billion).
Banks are awaiting further details regarding the allocation of project costs between the government and the private investors, BDO Capital’s Mr. Francisco said. "Once the bidding starts, the investors will need to have finalized their credit lines and lined up the banks [that will finance the project]," he explained.
Government financial institutions (GFIs) have also pledged P200 billion for a PPP fund, split equally among the Government Service Insurance System, Social Security System, Land Bank of the Philippines and the Development Bank of the Philippines.
The government has not yet released the rules on how the financing can take place.
Finance Undersecretary Rosalia V. de Leon told BusinessWorld that the Department of Finance was planning to release infrastructure bonds for the GFIs but was still waiting for an enabling executive order from the Palace. The Finance department is also considering infrastructure bonds for the private sector but this is still far from implementation.
"We are still studying the structure of the bonds, the business plan and the prospective buyers, such as hedge funds or insurance companies," Ms. de Leon said.
The diversification of the means of infrastructure financing is crucial to the success of PPP deals and the development of the Philippine capital market, Macquarie’s Mr. Walker said.
Rate hikes finally start
KEY INTEREST RATES were raised yesterday as expected, with monetary authorities warning of stronger inflationary pressures and the possibility of further tightening.
The move -- a 25-basis-point increase that pushed the Bangko Sentral ng Pilipinas’ (BSP) overnight borrowing and lending rates to 4.25% and 6.25%, respectively -- marked the first adjustment since July 2009.
Key rates had been trimmed by a total of 200 basis points starting December 2008 as the BSP’s policymaking Monetary Board sought to cushion the impact of the global financial crisis.
Other central banks have since reversed similar accommodative stances and the BSP, in delaying, has been criticized as being behind the curve.
"International food and oil prices have continued to escalate due to the combination of sustained strong global demand and supply disruptions and constraints," BSP Governor Amando M. Tetangco, Jr. yesterday said in a statement.
"The latest baseline inflation forecasts now indicate that the 3-5% inflation target range in 2011 could be at risk."
The rise in consumer prices accelerated to 4.3% last month from 3.6% in January. The latter result, up from 3% in December, had prompted the Monetary Board to raise its inflation forecasts for 2011 and 2012 during a Feb. 10 meeting. The forecast for this year was adjusted to 4.4% from 3.6% previously while that for 2012 was also increased to 3.5% from 3%.
Fresh outlooks were not issued yesterday but the 2011 outlook will be breached, BSP deputy governor Diwa C. Guinigundo said as he called the rate hike a "preemptive measure."
"The action is in response with public expectations on inflation given [global] developments especially in MENA (Middle East and North Africa) and Japan," he told reporters.
"Broadly speaking, now that we have raised rates the inflation will be within our target of 3-5% but will be higher than the [forecast of] 4.4%," Mr. Guinigundo added.
Analysts said further adjustments should be expected.
"There will be rate hikes in the future because inflationary pressures due to external events are picking up," University of Asia and the Pacific (UA&P) economist Cid L. Terosa said.
Rizal Commercial Banking Corp. (RCBC) senior vice-president Marcelo E. Ayes said the BSP would "continue to raise rates very gradually."
Some analysts expect rate hikes totalling as much as one percentage point this year.
"We have pencilled in another 50 basis point increase in the second quarter and 25 basis points in the third quarter," said Sherman Chan, economist at HSBC in Hong Kong.
"Inflation has clearly intensified in recent months, and the BSP has taken the prudent step of raising rates so as to curtail demand-driven pressures."
Simon Wong, economist at Standard Chartered Bank in Hong Kong, said: "The central bank has put out some hawkish comments that inflation pressure is stronger, and so we think this is only the beginning of the tightening cycle."
The BSP, said Mr. Guinigundo, "will continue to be guided by the inflation forecast, and increases in food and commodity prices," adding that it was also "waiting for more concrete signs of second round effects."
He had defended the delay in adjustments last week, saying the Philippines had more room given the relatively narrow 200-basis point easing implemented during the financial crisis.
Tightening, said Mr. Ayes, would have a "slight negative impact" on growth. Mr. Terosa concurred, saying that "As long as the inflation rate doesn’t skyrocket, GDP (gross domestic product) won’t decrease by more than 0.5%."
Mr. Tetangco, however, said: "Buoyant domestic demand conditions provide room for a policy interest rate hike without affecting the country’s economic growth prospects."
Macroeconomic targets for 2011 and 2012 are being reviewed. On Wednesday, Mr. Tetangco said achieving the current 7-8% growth goal was now "unlikely". A 5-6% expansion, he added, "is a reasonable figure."
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.U.S. Stocks Rally Amid Higher-Than-Estimated Corporate Profits
U.S. stocks advanced, sending the Standard & Poor’s 500 Index higher for a second day, after corporate profit topped analysts’ estimates and a government report showed a decline in jobless claims.
Micron Technology Inc. (MU), the biggest U.S. producer of computer-memory chips, rose 8.4 percent and Linux-software maker Red Hat Inc. (RHT) surged 18 percent after earnings beat analysts’ estimates. GameStop Corp. (GME) jumped 2.9 percent as the largest video-game retailer forecast profit above analyst’s projections.Amazon.com Inc. (AMZN) gained 3.5 percent after William Blair & Co. raised its rating for the world’s biggest online retailer.
The S&P 500 advanced 0.9 percent to 1,309.66 at 4 p.m. in New York, the highest level in two weeks. The Dow Jones Industrial Average advanced 84.54 points, or 0.7 percent, to 12,170.56. The benchmark measure of U.S. stock options completed its biggest six-day drop since November 2008.
“There’s no shortage of cheap stocks,” Leon Cooperman, chairman of hedge fund Omega Advisors Inc. said in an interview today with Bloomberg Television at the Strategas Global Macro Conference in New York. “You have good profits and good economic growth. You have good valuations and conservative posture.”
The S&P 500 has advanced 4.1 percent in 2011, extending last year’s 13 percent rally, amid government stimulus measures and as companies reported earnings that topped analysts’ estimates for the eighth straight quarter. The benchmark index is trading at 15.4 times reported earnings, compared with the average ratio of 19.7 at bull-market peaks.
Jobless Claims Drop
Fewer Americans filed applications for unemployment benefits last week, signaling the labor market is mending. Jobless claims declined by 5,000 to 382,000, Labor Department figures showed, in line with the median forecast of economists surveyed by Bloomberg News. The total number of people receiving benefits dropped to the lowest level in almost three years.
“The economy is improving and this is a good environment for corporate profits,” said David Kelly, who helps oversee $450 billion as chief market strategist at JPMorgan Funds in New York. “The latest numbers suggest an advance in the U.S. economy. Investors are buying the idea that even though there are many headwinds, if you believe the economy will grow, then stocks are cheap.”
Global stocks rose for a sixth day, the longest rally for the MSCI World Index since September, amid speculation the need for European Union bailouts may end with Portugal. European leaders meet in Brussels today after Portugal’s parliament rejected budget-cutting measures, pushing the country closer to needing an EU rescue.
Volatility Slumps
The VIX, as the Chicago Board Options Exchange Volatility Index is known, fell 6.1 percent to 18, extending its drop since March 16 to 39 percent. That’s the biggest drop over the same number of days in 28 months. The VIX needed to fall below 17.53 to beat the six-day record set two months after Lehman Brothers Holdings Inc.’s September 2008 bankruptcy sent stocks plunging.
Micron Technology jumped 8.4 percent to $11.50. Second- quarter sales and profit beat analysts’ estimates on increasing demand for chips used to store data on mobile phones and tablets. Revenue climbed 15 percent to $2.26 billion in the period that ended March 3. That compared with $2.1 billion, the average of predictions compiled by Bloomberg.
Red Hat gained 18 percent, the most in the S&P 500, to $47.26. The largest seller of the Linux operating systemposted a profit of 26 cents a share excluding some items, beating the 22 cent average of 22 estimates in a Bloomberg survey, as customers updating data centers to take advantage of cloud computing boosted billings.
GameStop Rallies
GameStop rose 2.9 percent to $21.73. The world’s largest video-game retailer forecast first-quarter profit excluding some items of at least 53 cents a share, beating the average analyst estimate of 52 cents in a Bloomberg survey.
Amazon.com added 3.5 percent to $171.10 after being raised to “outperform” from “market perform” at William Blair by equity analyst Mark Miller.
Bank of America Corp. (BAC) sank 1.3 percent to $13.48. The biggest U.S. lender was cut to “market perform” from “outperform” at FBR Capital Markets. The bank may not have the earnings power to be in compliance with the new capital requirements, analyst Paul Miller said in a note.
Trading in U.S. stocks, which fell to the slowest pace this year, is poised to contract because Citigroup Inc. (C)’s reverse stock split may take out about one-tenth of the volume, according to Birinyi Associates Inc. New York Stock Exchange volume declined to 3.75 billion shares on March 22 and 3.97 billion shares yesterday, the second and the sixth-slowest trading days this year, respectively, Bloomberg data show.
“We won’t be surprised when we read in a few weeks that volume is declining and how this is a negative signal for equities,” Jeffrey Yale Rubin, Birinyi’s director of research, wrote in a note yesterday. “Just be aware that it’s because of a structural change and not a ‘real’ decline in volume.”
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Oil Trades Near Two-Day Low on Signs European, U.S. Fuel Demand May Weaken
Oil traded near a two-day low in New York as signs of weakening demand in the U.S. and Europe overshadowed concerns that the conflict in Libya and unrest in the Middle East threaten crude supplies.
Futures dropped from the highest price in more than two years yesterday after Fitch Ratings cut Portugal’s credit ranking and U.S. durable goods orders unexpectedly fell. Allied warplanes carried out further strikes against ground forces loyal to Libyan leader Muammar Qaddafi. Regional unrest has toppled the leaders of Tunisia and Egypt and extended to Yemen, Bahrain and Syria.
“We can’t support $100 oil, and that’s becoming more and more evident as we see these economic figures come out from Europe and the U.S,” said Carl Larry, president of Oil Outlooks & Opinions LLC in Houston. “We saw the highs, and we couldn’t press through.”
Crude for May delivery traded at $105.55 a barrel, down 5 cents, in electronic trading on the New York Mercantile Exchange at 9:42 a.m. Sydney time. Yesterday, it slid 15 cents to settle at $105.60. The contract reached $105.75 on March 23, the highest since Sept. 26, 2008. Prices are up 4.4 percent for the week and 31 percent higher than a year ago.
Brent oil for May settlement gained 17 cents, or 0.2 percent, to $115.72 a barrel on the London-based ICE Futures Europe exchange yesterday. It was the highest closing price since March 9.
Fitch Downgrade
Fitch downgraded Portugal’s long-term foreign and local currency issuer default ratings by two levels to ‘A-’ and its short-term issuer default ratings to “good” from “highest” credit quality.
Portugal may require a bailout of as much as 70 billion euros ($99 billion), said two European officials with direct knowledge of the matter. The EU lent 177.5 billion euros last year to Greece and Ireland to avert defaults, triggering a backlash in Europe’s better-off countries, such as Germany.
Fitch announced its ratings cut as a summit of European Union leaders got under way in Brussels to discuss the situation. Portuguese Prime Minister Jose Socrates resigned before the meeting after plans to cut the budget were rejected by parliament.
Orders for long-lasting goods in the U.S. unexpectedly dropped 0.9 percent in February after a 3.6 percent gain the prior month that was higher than initially reported, the Commerce Department said yesterday in Washington.
Oil Boycott
German Chancellor Angela Merkel called for a boycott of Libyan crude as a way to stop finance flows to the regime of Qaddafi. There should be “no more oil exports from Libya to European countries,” Merkel told lawmakers in Berlin in a speech on the European Union summit that began yesterday.
Oil supplies from Libya, Africa’s third-largest producer, collapsed to a “trickle” last week from 1.6 million barrels a day in January and may be halted for months because of sanctions, the International Energy Agency estimates.
Shipments from the Organization of Petroleum Exporting Countries will drop to the lowest level since October as the fighting in Libya halts exports, according to tanker-tracker Oil Movements. Exports will fall to 23.03 million barrels a day in the four weeks to April 9, down 1.8 percent from 23.46 million in the period ended March 12, the consultant said in a report yesterday. The data exclude Ecuador and Angola.
OPEC members are more likely than at any time in the past two years to agree to a formal supply increase when they meet in June because of a forecast for a “sustained” supply disruption, according to David Kirsch, a Kansas City, Kansas- based analyst with PFC Energy.
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