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ELMER B. FRANCISCO
Past Trustee
Chairman, Communications Committee

Morning Brief: 14 July 2011

Customs misses 1st-half target by 8.6% Cash revenues up 13.5% from a year ago By: Ronnel W. Domingo Philippine Daily Inquirer THE BUREAU of Customs on Wednesday said its collections in the first six months were 8.6-percent below target due to a strong peso and partly as a result of slower imports following Japan’s twin disasters in March.The government’s second largest revenue agency had total cash revenue in January to June of P126.1 billion, 13.5 percent higher from a year earlier but below the target of P137.9 billion, the agency said in a statement. Customs Commissioner Angelito Alvarez said items such as petroleum products, cereals, plastics, iron and steel, paper products, fertilizers and cement were reclassified as duty-free products or carried reduced tariff from the start of the second half of 2010 due to free-trade deals and steps taken by the government to dampen inflation. Foregone revenues from free-trade agreements were estimated at P3.8 billion in January to May this year, Alvarez said. Tariff reduction was implemented pursuant to the Philippines’ commitments to various international, multilateral and bilateral agreements such as the Asean Free Trade Agreement, Asean-China FTA and the Philippine Japan Economic Partnership Agreement. “Nearly 2,000 products that, until June last year, were considered traditional big revenue sources now come in duty-free or with reduced tariff because of these FTAs as well as due to the government’s social amelioration initiatives,” Alvarez said. Alvarez said that because of the FTAs, six of the country’s biggest ports missed their respective first semester targets by as much as P6.07 billion. The biggest deficit was recorded in the Port of Batangas, which turned in P23.3 billion instead of the planned P29.3 billion. The Manila International Container Port missed its P38.4-billion target by more than P5 billion while the Port of Manila fell short of its P31.6-billion goal by P4.6 billion. “The earthquake and tsunami that hit Japan last March 11 also caused a drastic slowdown on the imports of completely built units from Japan,” he said. Still, Alvarez cheered the bureau’s performance compared to the same period last year. First semester performance “broke the bureau’s revenues in the first half of 2010 which was hailed at that time as the biggest in its history,” Alvarez said. He said cash collections averaged at P20.94 billion from January to June, showing a lowest at P18.58 billion in February and the highest at P21.38 billion in March. “In contrast, never did the bureau’s monthly cash collection during the same period last year exceed P20 billion,” he added. Despite slow revenues, the government has said it was confident of meeting its target of cutting the budget deficit to 3.2 percent of GDP this year from 3.9 percent in 2010. With a report from Reuters BSP readies policy move THE BANGKO SENTRAL ng Pilipinas (BSP) is prepared to raise both policy rates and banks’ required reserves in the next meeting of its Monetary Board to rein in inflation pressures that are expected to peak this quarter, a senior central bank official said yesterday. Noting that “upside risks like volatile oil prices and liquidity pressures remain” after the central bank’s policy measures earlier this year, BSP Deputy Governor Diwa C. Guinigundo said in his presentation at a forum sponsored by the Economic Journalists Association of the Philippines Inc. in Dusit Thani Manila hotel in Makati City that “addressing inflation may require the BSP to complement its previous move by increasing key rates or reserve requirement, or both.” Speaking to reporters at the sidelines of the forum, he said these options will be considered “in our next policy decision in the next two weeks.” “Everything is on the table,” he added. The central bank’s policy-making Monetary Board is scheduled to meet on July 28. Last month, the BSP increased banks’ reserve requirement -- composed of both deposits and deposit substitutes -- by one percentage point to 20%, in a move calculated to siphon from the system some P38 billion in deposits and 0.9% in domestic liquidity. The central bank had also raised key rates by 25 basis points each last March and May that brought them to 4.5% for overnight borrowing and to 6.5% for overnight lending. Mr. Guinigundo recalled in his presentation that “excess liquidity was blunting the policy rate actions of the BSP, that is why we raised the reserve requirement” last June 16. He had said late last week that inflation is expected to peak this quarter -- breaching 5% in some months -- though the full-year average will still fall within the central bank’s 3%-5% target for 2011. Inflation hit 5.2% in June, using new data series with 2006 as base year, though the previous series based on 2000 prices put the rate at a slower 4.6% that was still the fastest in 26 months. The central bank has also said it was closely watching the continuing flood of money from investors seeking higher returns than what troubled western markets now offer. Latest available BSP data showed foreign portfolio investments -- largely, money invested in the local bourse and peso-denominated government securities -- yielding $2.42 billion as of June 24, nearly four times the year-ago amount. In the same forum yesterday, private sector participants urged the government to mobilize excess funds in the financial system for big-ticket infrastructure and other development projects. “Liquidity is an opportunity,” Bert Hofman, World Bank country director for the Philippines, said in his presentation. “Funneling liquidity into investments in the government’s PPP (public-private partnership) and social development projects...could translate liquidity to better growth... [sic]” The view was shared by BDO Capital & Investment Corporation President Eduardo V. Francisco, who said separately: “Banks, awash with cash, are ready to take part in the PPP.” Excess funds, Mr. Francisco added, could be used to finance not only PPP projects but also “social infrastructure like school buildings and hospitals.” Project auctions still possible Speaking in the forum’s panel discussion, Finance Secretary Cesar V. Purisima insisted that the government is committed to auctioning off 10 PPP deals within the year, despite current delays in rollout. “We are confident PPP will take off. We committed to 10 projects. There are still six months left in the year,” Mr. Purisima said. Asked by reporters what project phase he was referring to, the Finance chief stressed, “We will bid out 10 projects.” The government had targeted to roll out five deals within the first semester. However, only the P15-billion operation and maintenance contract for the Light Rail Transit Line 1 and the Metro Rail Transit Line 3 had been offered to investors, so far. Project bidding had been initially set for last Monday. But even this first project has stalled, as newly appointed Transportation Secretary Manuel “Mar” A. Roxas II said he had to make sure the government could not do this work itself. Mr. Purisima defended the slow pace of PPP project rollout, saying the government wanted to make sure contracts could “withstand scrutiny.” “We are doing our homework. It is just taking longer than expected. We are looking at the bidding proposition and the sharing of risk and resources,” he explained, adding that the government did not want to repeat “mistakes in the past.” -- Antonio Siegfrid O. Alegado and D. C. J. Jiao

S&P 500 Futures Drop as Moody’s Reviews U.S. Credit Rating for Downgrade U.S. stock-index futures fell after Moody’s Investors Service said the American government may lose the Aaa credit rating it’s held since 1917.Standard & Poor’s 500 Index futures expiring in September dropped 0.4 percent to 1,306.60 at 7:25 a.m. in Tokyo. Moody’s began its first U.S. review since 1995 as talks to raise the $14.3 trillion debt limit stall, adding to concern political gridlock will lead to a default. Even a temporary default would likely have “large systemic effects” on the economy and Treasury finances by disrupting money funds, the repurchase-agreement market and foreign investor willingness to buy the government’s debt, according to JPMorgan Chase & Co. “This is somewhat unprecedented,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “It just creates all kinds of questions about how do you play it? Nobody thinks they will actually default, but a downgrade could mean maybe higher rates.” Global equities rallied yesterday after Federal Reserve Chairman Ben S. Bernanke said he’s prepared to provide more stimulus if needed and China’s economic growth beat estimates. The MSCI All-Country World Index of shares in 45 nations advanced 1.1 percent as of 4:31 p.m. in New York yesterday. Moody’s said it was reviewing the U.S. rating at 5 p.m. The equity index slumped 3.4 percent during the prior three days. The S&P 500 rose 0.3 percent as of the 4 p.m. close of U.S. exchanges, trimming its gain from 1.4 percent after the Associated Press reported that House Speaker John Boehner said it’s a “crapshoot” whether the federal debt limit will be boosted if an agreement isn’t reached by Aug. 2. AP then updated its story, quoting Boehner as saying “it’s a crapshoot” to determine what would happen if the limit isn’t increased. “The market took the reported information for what it is worth and traded off sharply on it,” said Philip Orlando, the New York-based chief equity market strategist at Federated Investors Inc., which oversees $354.9 billion. Moody’s Downgrade Warning Increases Pressure on U.S. Debt Deal Moody’s Investors Service raised the pressure on U.S. lawmakers to increase the government’s $14.3 trillion debt limit by placing the nation’s credit rating under review for a downgrade. The U.S., rated Aaa since 1917, was put on review for the first time since 1995 on concern the debt threshold will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low, Moody’s said in a statement yesterday. The rating would likely be reduced to the Aa range and there is no assurance that Moody’s would return its top rating even if a default is quickly cured. President Barack Obama is considering summoning congressional leaders to Camp David this weekend to work on a plan to raise the debt ceiling after yesterday’s negotiations on a deficit-cutting plan of at least $2 trillion stalled, according to two people familiar with the matter. A failure to raise the debt limit that causes a default may lead to slower economic growth and another financial crisis. “It’s obviously very serious in so many different ways,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of 20 primary dealers that trade bonds with the Federal Reserve. “Most people still believe there will be some type of an agreement struck to avoid all this stuff, and that’s what the market’s banking on.”

Oil Trades Near Four-Day High as U.S. Supplies Counter Debt Rating Concern Oil traded near a four-day high in New York after signs of rising crude demand in the U.S. countered speculation the world’s biggest consumer of the commodity may face a credit rating downgrade.Futures were little changed, after slipping as much as 0.5 percent, as Moody’s Investors Service put the U.S. under review for a rating downgrade as talks to raise its $14.3 trillion debt limit stall. Prices advanced 0.6 percent yesterday after the Energy Department said oil supply fell 3.1 million barrels last week. They were projected to drop 1.5 million barrels. Crude for August delivery was at $98.07 a barrel, up 2 cents, in electronic trading on the New York Mercantile Exchange at 9:03 a.m. Sydney time. The contract yesterday rose 62 cents to $98.05, the highest close since July 7. Prices are 27 percent higher the past year. Brent oil for August settlement advanced $1.03, or 0.9 percent, to $118.78 a barrel on the London-based ICE Futures Europe exchange yesterday. The European benchmark contract settled at a premium of $20.73 a barrel to U.S. futures, compared with a record $22.29 on June 15.

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

BDO UNIBANK INC. 

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher 
(632) 858-3001 

Morning Brief: 13 July 2011

Exports post 1st annual drop since October ‘09 MERCHANDISE EXPORTS in May contracted annually for the first time since October 2009, as electronics shipments plunged by more than a quarter -- a decline that industry officials and economists said placed full-year targets at risk.A total of $4.104 billion worth of goods were shipped out in May, 3.2% less than last year’s $4.241 billion, the National Statistics Office (NSO) reported on Tuesday. On a monthly basis, export receipts dropped 4.6% from April’s $4.302 billion, the NSO said. In comparison, exports grew 19.1% annually in April. Electronics shipments, which made up 46% of total export sales in May, plunged by 26.2% to $1.886 billion from $2.554 billion a year earlier. The decline was due largely to semiconductor exports, which fell 25.1% to $1.408 billion in May. Aside from electronics, exports of wiring sets and metal components also plunged in May, by 35.6% to $57.69 million and 21.9% to $53.42 million, respectively. But the contraction in these items was cushioned by increases in the second to fifth biggest products, namely: woodcrafts and furniture rose 98.1% to $186.33 million; apparel and clothing accessories, 6% to $159.93 million; coconut oil, 9% to $119.99 million; and petroleum products, five times up to $114.25 million. For the five months to May, total merchandise exports were still up, by 7.51% to $20.625 billion. The Semiconductor and Electronics Industries in the Philippines, Inc. (SEIPI) said it would review its 8%-12% annual growth target for the year. “May was bad... this was primarily the effect of the Japan disaster as supply was disrupted... making our full-year 8-12% growth target unattainable at this time,” SEIPI President Ernesto B. Santiago said in a telephone interview yesterday. “A 5% growth is more doable and appropriate at the present time; but it is still up for review, seeing that we are still expecting a stronger performance in the second half.” Sergio R. Ortiz-Luis, Jr., president of the Philippine Exporters Confederation, Inc., said he would wait for a clearer trend. “Although there is a bit of difficulty in attaining our 10% growth target for 2011 due to problems in the Middle East and Japan, we are still keeping it until there is a clear trend that the decline will persist.” The government echoed the view, saying it would keep its 9%-10% full-year growth projection for now. “We will look at the next one to two months [to see] whether the trend holds up,” Socioeconomic Planning Secretary Cayetano W. Paderanga, Jr. said. “But, as of now, we will not change our growth target.” But University of the Philippines economist Benjamin E. Diokno said separately by phone that “the contraction was not a surprise, as world economic recovery is still weak and consumer demand for electronic products remains tepid, placing the 9%-10% export growth (target) at risk.” “Full-year growth would likely be around 5%-6%, since I expect export growth to be negative up to September,” Mr. Diokno added. Cid L. Terosa, senior economist at the University of Asia and the Pacific, was similarly cautious. “The export target of the government can still be attained if the semiconductor export market will show signs of improvement in the second half, which are [sic] normally the stronger periods in terms of sales and revenues.” The United States was the top export market in May, followed by Japan and China.

U.S. Stocks Drop as Ireland Credit Rating Cut Smothers Rally A late rally in U.S. stocks faded, dragging the Standard & Poor’s 500 Index to a third straight loss, after Ireland’s downgrade to junk added to concern Europe is losing control of the credit crisis and overshadowed evidence the Federal Reserve hasn’t ruled out more stimulus.Semiconductor-related shares slumped, with Intel Corp. falling 1.8 percent after Novellus Systems Inc. (NVLS) forecast lower- than-estimated third-quarter earnings. Alcoa Inc. (AA) slipped 1.3 percent after second-quarter profit missed analyst estimates.Cisco Systems Inc. (CSCO) jumped 1.1 percent after two people familiar with the matter said it would announce job cuts. The S&P 500 dropped 0.4 percent to 1,313.64 at 4 p.m. in New York, after the index fluctuated between gains and losses throughout the day. The Dow Jones Industrial Average lost 58.88 points, or 0.5 percent, to 12,446.88. “There’s not a whole lot of conviction in the market,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $80 billion in assets. “Most investors are following Europe, and they are waiting to see if the earnings season will be good enough for them to get excited about equity prices. If that doesn’t happen, then you can add corporate performance to the ugly mix.” The benchmark index for U.S. equities gave up 2.5 percent during the previous two sessions, the most for the S&P 500 since March, as concern grew that Europe’s debt crisis will spread and American lawmakers failed to agree on cutting the deficit. The gauge had climbed 5.9 percent over the previous two weeks, its biggest gain since October 2009. The rebound in July came after the S&P 500 tumbled 3.2 percent in May and June amid disappointing economic data. Ireland Cut to Junk Rating by Moody’s Ireland joined Portugal and Greece as the third euro-area nation to have its credit rating reduced to below investment grade as European Union finance ministers struggle to contain the region’s sovereign debt crisis. Moody’s Investors Service cut Ireland to Ba1 from Baa3, citing the probability that Ireland will need additional official financing and for investors to share in losses before it can return to the private market to borrow. The outlook remains “negative,” Moody’s said in a statement yesterday. The euro fell to a four-month low against the dollar as European finance ministers failed to present a solution to the financial contagion that’s threatening to spread to Italy from Greece, Ireland and Portugal. In Spain, Finance Minister Elena Salgadosaid the nation might need to endure even deeper spending cuts in 2012 than those currently planned. Ireland, which had a top Aaa rating just over two years ago, has suffered after a real-estate boom collapsed, fueling bank bailouts and a surge in the country’s debt. “The downgrade underlines the need for something more radical in terms of a European solution,” said Austin Hughes, chief economist at KBC Ireland Plc in Dublin, which publishes a monthly index of consumer sentiment. “You really need Europe to come up with a solution rather than pushing it into the future. A solution needs to be found sooner than later.” Ireland’s government criticized the Moody’s downgrade, Dublin-based broadcaster RTE reported, citing a finance ministry spokesman. Ireland has met the targets so far under its bailout program and the downgrade is a “disappointing development,” the spokesman was cited as saying.

Crude Oil Advances Most in Two Weeks as Europe Works to Ease Debt Crisis Oil climbed the most in two weeks in New York as European governments worked to halt the region’s credit crisis.Futures increased as Italian and Spanish bonds rose amid speculation the European Central Bank bought the debt of the euro-region’s most-indebted nations to stabilize markets and ease concern that the credit crisis is worsening. Crude also gained after failing to sustain a move below the 200-day moving average and on forecasts that U.S. supplies fell last week. “The European Union is looking for some type of solution, and that’s tided us over for now,” said Carl Larry, director of energy derivatives and research with Blue Ocean LLC in New York. “Nobody wants to see the European Union fail, so everyone’s looking for some signs of competence.” Crude for August delivery rose $2.28, or 2.4 percent, to settle at $97.43 a barrel on the New York Mercantile Exchange in the biggest one-day gain since June 28. Prices have risen 30 percent in the past year. Prices pared gains from the settlement and after the American Petroleum Institute reported at 4:30 p.m. that U.S. crude-oil stockpiles increased 2.34 million barrels to 359.4 million. August oil rose $1.68, or 1.8 percent, to $96.83 a barrel in electronic trading at 4:31 p.m. Brent oil for August settlement increased 51 cents, or 0.4 percent, to $117.75 a barrel on the ICE Futures Europe exchange inLondon. The spread between the benchmark New York and London contracts narrowed to $20.32 a barrel from $22.09 at the settlement yesterday.

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

BDO UNIBANK INC. 

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher 
(632) 858-3001