Morning Brief: 24 November 2010

Gov’t sees 6.7-7.7% Q3 growth Range lower than 1st half result but above full-year target THE ECONOMY likely expanded between 6.7% and 7.7% in the third quarter, the government yesterday said, keeping the country on track to achieving above target growth this year. The range falls below the 7.8% and 7.9% upticks recorded in the first and second quarters, respectively, but is above the government’s full-year goal of 5.0-6.0%. Margarita R. Songco, deputy director general of the National Economic and Development Authority (NEDA), said a strong performance by the industry sector would offset a continued contraction in farm output. "GDP (gross domestic product) growth ... could have been limited by the negative impact of the prolonged El Niño phenomenon on the agriculture sector," Ms. Songco said at a briefing called ahead of Thursday’s official release of third-quarter growth data. "The industry sector is expected to be the main growth driver in the third quarter considering that strong external and domestic demand continued to fuel the manufacturing, construction and mining, and quarrying subsectors." Ms. Songco added the services sector "may have also contributed significantly." Economists polled earlier by BusinessWorld offered forecasts ranging from 6.7% to 7.5% for July to September GDP growth, also pointing to the industry sector as making up for weak farm output and reduced government spending. They also expect full-year growth to exceed the official 5.0-6.0% target, with their forecasts ranging from 6.0% to 7.4%. Analysts polled by Reuters, meanwhile, expect annual growth of 6.8% in the third quarter, at the low end of the government’s 6.7-7.7% outlook. The government is targetting growth of 7.0-8.0% in 2011 and beyond, but signs of an Asia-wide slowdown with stimulus spending fading and slowing manufacturing and exports puts Manila’s bullish forecast at risk. Figures on Monday showed Thailand, Southeast Asia’s second biggest economy, had slipped into a technical recession in the third quarter. Finance Secretary Cesar V. Purisima, speaking yesterday at a briefing at his department, said the government was sticking to the 5.0% growth goal used in setting next year’s budget. "We’ll be happy if we meet 5.0%. We’ll be happier to reach 7.0% to 8.0%," he said. Budget Secretary Florencio B. Abad said in the same briefing that 7.0-8.0% was a "fighting target." "The approach is really to have a conservative plan. We can ... have [a] better [performance], but we are sticking to original plan because the global economy is still volatile and [it would be] prudent on our part as economic managers to be not to aggressive," Mr. Purisima said. He said the government would "take advantage" of opportunities. "We can bid out more PPP (public-private partnership) projects next year [if that happens] and if the market is [seen to be] more receptive for more," he added. Deposits in BSP’s special facility hit P1T in Oct. Placements in the special deposit account (SDA) facility of the central bank have reached the P1-trillion mark as of end-October, manifesting the sharply growing liquidity in the country’s banking sector. The rising SDA deposit level, however, have prompted increased calls for the Bangko Sentral ng Pilipinas to reduce the interest rate on these deposits. Certain economists said banks would be encouraged to use more of their growing funds for lending to consumers and businesses if the SDA rates would be reduced. They said the liquidity of the banking sector should be used more productively by lending them to the public. Industry data showed that deposits placed by banks in the SDA facility grew by more than 50 percent year-on-year to reach P1 trillion by the end of October, a new high. The interest rate on SDA deposits was set at 4 percent across all tenors. BSP Deputy Governor Diwa Guinigundo said banks were not lending as much as they could not because the SDA rates were high but because there was not much demand for loans. However, he said demand for loan was low because small and medium scale enterprises found it difficult to meet the stringent lending requirements imposed by banks. Guinigundo said banks should relax their lending requirements while maintaining prudent lending standards to attract more borrowers. He said the SDA facility was one of the tools used by the BSP to manage liquidity in the economy and ensure benign inflation. Given the accelerated growth of the economy, the central bank believes that reducing its policy rates could flood the system with cash, which could be inflationary. In the meantime, the BSP said the growing deposits in the SDA served as one of the indicators of the banking sector’s stability. Banks are able to solicit more deposits from the public, which has shown confidence in the banking sector. Some of the funds are used for lending, while some are deposited in the BSP. Bank lending has shown a fairly decent growth so far this year. According to the BSP, loans extended by commercial banks reached P2.17 trillion as of end-September this year, registering a 9.8-percent expansion from P1.98 trillion in the same period last year. Economists said banks should lend much more to help the economy sustain a respectable growth. In the first semester, the economy, measured in terms of gross domestic product, grew by 7.9 percent. It is seen slowing down slightly in the second half of the year and in 2011. Banks may help prevent the deceleration by increasing their lending activities. Redesigned peso bills’ launch set next month -- BSP REDESIGNED peso bills are expected to be unveiled in three weeks and could be in circulation before the year ends, a Bangko Sentral ng Pilipinas (BSP) official yesterday said. "[They are] still being printed. Tentatively set for the 2nd week of December," central bank Deputy Governor Diwa C. Guinigundo said in a text message when asked when the new bills would be launched. An exact date for their issuance has not been set, Mr. Guinigundo said, adding that the launch will be followed by road shows in Manila, La Union, Cebu and Davao. He declined to give details on the new designs. BSP Deputy Governor Armando L. Suratos last September said the new bills would begin circulating in December. He also said the new 500-peso bill would have the image of former President Corazon C. Aquino with her husband, Benigno S. Aquino, Jr. Included in the redesign are new security features for the easier detection of fake money. The changes will be made to the 20-peso, 50-peso, 100-peso, 200-peso, 500-peso and 100-peso notes. The old peso bills, the central bank has said, will remain in circulation three years after the new bills are released. The BSP is also studying new designs for the one-centavo, five-centavo, 10-centavo, 25-centavo, one-peso, five-peso and 10-peso coins. Central banks regularly change the designs of money as a matter of practice to protect currencies from counterfeiters.

U.S. Stocks Decline for Second Day on Korea Clash, European Debt Crisis U.S. stocks dropped for a second day after fighting broke out among North and South Korea and concern grew that Europe’s debt crisis and China’s efforts to tame inflation will slow the global economic rebound. PulteGroup Inc. and D.R. Horton Inc., the two largest U.S. homebuilders, slumped at least 3.4 percent after a report showed existing home sales trailed estimates. Adobe Systems Inc. slipped 3.4 percent after Morgan Stanley said analysts’ estimates for the first half of fiscal 2011 may be too high. Brocade Communications Systems Inc. tumbled 10 percent as the biggest maker of switches for data-storage networks forecast earnings that missed analysts’ predictions. The Standard & Poor’s 500 Index slid 1.4 percent to 1,180.73 as of 4 p.m. in New York, and earlier fell 1.8 percent, the most since Aug. 11. The Dow Jones Industrial Average lost 142.21 points, or 1.3 percent to 11,036.37. Stocks also declined as the fallout from a federal probe of Wall Street insider trading continued into a second day. Treasuries Rise as Korea Clash, Irish Debt Crisis Spur Demand for Safety Treasuries rose as concern Ireland’s financial crisis will spread and a clash between North and South Korea encouraged demand for the safety of U.S. debt. The gain pushed the 10-year note yield to the lowest level in more than a week after North Korea fired artillery shells near the border with the South. Germany’s Chancellor Angela Merkel said the 16-nation euro is in an “exceptionally serious” situation. Yields pared their drops as the $35 billion auction of five-year notes drew the lowest demand since June. “We’ve responded to what’s going on in Ireland and with North and South Korea, so we’re seeing a bit of a reprieve,” said Kevin Flanagan, a Purchase, New York-based chief fixed- income strategist at Morgan Stanley Smith Barney. The yield on the benchmark 10-year note fell three basis points, or 0.03 percentage point, to 2.78 percent at 5:07 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 rose 8/32, or $2.50 per $1,000 face amount, to 98 22/32.

Crude Oil Falls as Europe Debt Concerns Outweigh Supply Decline Forecast Crude oil dropped for a third day on concern that Europe’s debt crisis will spread and hurt economic growth after German ChancellorAngela Merkel said the euro is in an “exceptionally serious” situation. Oil fell 0.6 percent as the dollar strengthened the most against the euro in three months. The move came a day after Ireland asked for a financial rescue from the European Union and International Monetary Fund. A stronger dollar curbs the appeal of investing in commodities. “The market’s concerned about European contagion with Portugal going next and Spain probably being the coup de grace,” said Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania. Crude for January delivery fell 49 cents to settle at $81.25 a barrel on the New York Mercantile Exchange. Prices have risen 4.8 percent in the past year. Brent crude for January settlement dropped 71 cents, or 0.8 percent, to $83.25 a barrel on the London-based ICE Futures Europe exchange.

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

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