Finance dep't seeks to cut VAT exemptions

The Department of Finance wants Congress to cancel at least six value-added tax (VAT) exemptions, including those enjoyed by doctors and lawyers that were legislated only last year. It has proposed to the House of Representatives a bill that will limit the number of exempted transactions, in a bid to increase VAT collection. But the bill has yet to find a sponsor. "VAT can be a buoyant and stable source of revenue. Any increase in the tax base is certain to translate to an increase in VAT revenues," the bill's explanatory note read. "Any exemption from VAT collection is a distortion in the system and a break in the VAT chain, upon which lie the self-policing mechanism of the VAT," the Finance department said. Finance department data show the government lost PhP144 billion in potential VAT last year because of collection inefficiency and numerous exemptions.

In its proposed bill, the Finance department seeks to repeal Section 109 of the 1997 Tax Code, to remove VAT exemptions granted to the following activities:

• sale or importation of coal, natural gas and petroleum products;
• sale or importation of raw materials used in the manufacture of petroleum products by the buyer or importer himself;
• importation of passenger and/or cargo vessels of more than 5,000 tons, whether coastwise or ocean-going, including engine and spare parts of said vessel to be used by the importer himself as operator;
• sales and importation of cooperatives, excluding lending activities of credit and multi-purpose cooperatives;
• sale, importation, printing and publication of books; and
• services rendered in the exercise of the medical and legal professions.

VAT exemptions for lawyers and doctors were okayed by Congress only last year. Section 109 of the Tax Reform Act also exempts from VAT the following activities:

• sale of nonfood agricultural products, cotton, copra, marine and forest products;
• sale or importation of agricultural marine food products in their original state, livestock, breeding stock and genetic materials;
• sale or importation of fertilizers, seeds, seedlings, fish, prawn, livestock and poultry feeds;
• importation of professional instruments, wearing apparel, and domestic animals, among others.
• services by persons subject to percentage tax; agricultural contract growers; those engaged in medical, dental, hospital, veterinary and educational services;
• sale by the artist of his art, literary works, and musical compositions; and
• services rendered by regional or area headquarters of multinational corporations in the country that act as supervisory, communications and coordinating centers for their branches in the Asia-Pacific region and do not earn income from the Philippines.

"The capacity of a broad-based VAT to address the revenue requirements of government should these exemptions be kept to the minimum can be substantial," the Finance department said. VAT accounts for as much as 20% of BIR's annual tax collection. It was adopted locally in 1988, replacing 12 indirect taxes like annual fixed taxes and sales tax from manufacturers. It initially covered only the sale and importation of goods, but in 1996 it was expanded to include most types of services. The VAT rate is 10% of the gross selling price in the case of sale of taxable goods, or of gross receipts in case of taxable services. The Finance department has also proposed to Congress a two-step increase in the VAT rate: to 12% in 2006, and to 14% in 2007. -- Karen L. Lema

PEA fails to sell reclamation lots

By CECILLE S. VISTO, Sub-Editor

State-run Public Estates Authority (PEA) has failed to sell a five-hectare, 11-lot block at the Manila Bay reclamation area for apparently being too expensive. Prospective buyers tendered bids "much lower" than the PhP40,000 to PhP55,000 per square meter floor price set by PEA. The bidding last Wednesday attracted only two private individuals, who offered not more than PhP30,000 per square meter. Another auction has been set for November 11, and PEA hopes to atrract more bidders. PEA general manager Teodorico C. Taguinod told BusinessWorld that if the next auction were to fail, the government was authorized to negotiate the sale of the lots. "There are actually a number of interested parties, but they find the floor price set by our appraisers to be too high. They are waiting for the negotiated sale, perhaps in the hope that government will be willing to lower the price," he said. PEA, the government's realty arm in charge of the sale and development of Bay City, formerly Boulevard 2000, expects to make at least PhP1.4 billion from the sale.

Of the 11 lots, three lots with an aggregate size of nearly 30,000 square meters were offered for either sale or lease. Eight other lots were offered for sale only. All 11 lots can be developed for residential, office, or mixed-use or other commercial purposes. Wednesday's bidding was the first time that PEA attempted to sell Bay City lots after the Supreme Court ruled last year that PEA could not directly sell reclaimed lands to private corporations. Following the precedent-setting ruling, PEA can sell only to private individuals, as well as to government financial institutions and corporations. Lessees must also be Filipino citizens or partnerships, associations or public or private corporations that are at least 60% Filipino-owned.

The Supreme Court last year voided the joint venture deal between PEA and Amari Coastal Bay Development Corp., ruling that the Constitution "prohibited private corporations from acquiring any kind of alienable land of the public domain." When asked whether the two individual bidders were developers or brokers, Mr. Taguinod could not be sure. "They could be representing corporations, we don't know, and we will never have the chance to find out since there was a failed bid," he said. Commissioned appraisers of PEA set the PhP40,000 to PhP55,000 per square meter price. Under the law, government must sell its properties based on appraised value. Offering a lower price would open officials to possible graft charges for giving unwarranted benefits to buyers.

Earlier this week, PEA said it was looking for a partner to develop a commercial area -- tentatively named Esplanade -- through a lease, joint venture, or build-operate-transfer arrangement. Mr. Taguinod said mall developer SM had expressed interest in working with PEA on the project. But he said, "Just because the property will be at the back of The Mall of Asia does not mean the SM Group will be given preference. It must join the bid." A pre-bidding conference will be held on October 8. Groundbreaking is expected next year.

Transco bidders told to revise offers

By BERNARDETTE S. STO. DOMINGO and ELIZA P. OSORIO, Reporters

The government has asked five investors keen on gaining control over the country's nationwide network of electricity transmission lines to make new offers today. This was after the Department of Justice in effect removed all legal impediments to the privatization of state-run National Transmission Corporation (Transco), which operates the transmission line network of another government-controlled company, National Power Corporation (Napocor).

In a September 20 legal opinion, Justice Secretary Raul M. Gonzales said Transco's privatization no longer required additional legislation since approval by the Malacañan presidential palace would be enough. He also said the Palace's okay would be necessary because the privatization process would deviate from the terms of the power reform law. The Power Sector Assets and Liabilities Management Corporation (PSALM), the government company tasked to privatize both Napocor and Transco under that law, must likewise get the endorsement of the Joint Congressional Power Commission, he added.

Energy Secretary Vincent S. Perez Jr. said PSALM would review the new term sheets to be submitted by Transco bidders. "PSALM raised questions and they were asked to submit revised term sheets for clarification," he said. Last month, five groups expressed interest in the government's transmission assets. Transco president Alan T. Ortiz had said his company had expected to name a private concessionaire by yearend. Mr. Perez yesterday expressed optimism this deadline would be met. "Awarding will be on December 2004 and closing will be during the first quarter of next year," he said.

Transco's privatization is part of the government plan to raise $4 billion to $5 billion to reduce its budget deficit. Also for privatization until the end of 2005 are Napocor-owned power plants. Mr. Perez declined to name the firms that submitted nonbinding term sheets for the concession agreement to operate Transco, but said their offers exceeded government expectations. Last June Mr. Perez said US firm AES Corp. and Australia's Trans Grid have expressed interest in leasing Transco's transmission assets. The winning bidder will operate Transco for 25 years. The contract will be renewable for another 25 years, subject to the concessionaire's performance. The government had said it would require the winning firm to pay at least 25% of the enterprise value of the Transco business upon the close of the transaction.

As an incentive, investors have the option to pay the balance in installments over a period of up to 25 years. The winning bidder is expected to pay around $500 million, and assume about $1.5 billion of debts. Under the power reform law, "the President of the Philippines...shall direct PSALM Corp. to award, in open competitive bidding the transmission facilities, including grid interconnections and ancillary services [of Transco] to a qualified party." But after two failed biddings since October 4, 2002, when PSALM was first directed to privatize Transco, the government has decided on a negotiated with the single bidder, Singapore Power. This decision was backed by Department of Justice in its September 20 legal opinion, as well as by the Office of the Government Corporate Counsel last September 12, 2003, when it said government-owned and -controlled corporations had the "full and sole authority and responsibility for the divestment of property and other assets." The Government Accounting and Auditing Manual also allows negotiated sale in meritorious cases.

BIR chief questions tax amnesty bill provisions

Bureau of Internal Revenue (BIR) Commissioner Guillermo L. Parayno, Jr. yesterday questioned the decision of the House of Representatives ways and means committee to include taxpayers with pending court cases and tax assessments in a proposed tax amnesty program. The committee approved last week House Bill No. 2933 entitled, "An Act Granting a One-Time Tax Amnesty on All Unpaid National Internal Revenue Taxes Imposed by the National Government for Taxable Year 2003 and Prior Years."

Under the proposed measure, those who would volunteer to avail themselves of amnesty would be required to pay 3% of their net worth instead of their outstanding tax deficiencies. The bill is expected to generate at least PhP9 billion in additional revenues for the government. But Mr. Parayno said the House bill would not generate much revenues if compared to the expected collection if BIR would pursue all tax cases in court, and strictly assess all delinquent taxpayers. "Quite frankly, we got worried that certain of our efforts might be rendered null. We believe we have very strong cases here, and three percent [amnesty rate] would not help our revenues," Mr. Parayno said in a briefing in the Malacañan presidential palace. The commissioner hopes that the Lower House will amend its version of the tax amnesty bill, and adhere to the proposal of the Finance department to exclude from the amnesty program all taxpayers with pending court cases and assessments. If lawmakers will insist on including such taxpayers, Mr. Parayno said, the bill must require those with pending BIR assessment to pay 20% of their net worth. Those with pending cases in court must pay 30% of their net worth, he added.

President Gloria Macapagal-Arroyo on Monday certified as urgent the proposed tax amnesty program, which was among eight tax measures aimed at generating PhPhP80 billion in additional revenues and PhP20 billion in savings for the government. The other proposed tax measures include the use of the gross income tax system, a tax on telecommunication companies' income, higher tax on sin products such as cigarettes and alcohol products as well as petroleum products, rationalization of fiscal incentives, and creation of a performance-driven system for revenue agencies. Mr. Parayno admitted that while new revenues were needed, he said the government was losing revenues from evasion of payment under existing tax laws. He said the government lost as much as PhP171 billion in 2000 from evasion of payments of individual and corporate taxes, value-added tax, and excise tax. But he also said that based on a report of the state-run Philippine Institute of Development Studies, 47% of the tax evasion was committed because of the government's faulty tax policies. He also said BIR has been haled to court for conflicting interpretations of at least 38 provisions of the National Internal Revenue Code of 1997. He cited the case of the excise taxes imposed on cigarette, alcohol and other "sin products."

Mr. Parayno said the failure of the Tax Code to automatically adjust sin taxes against inflation has led to "substantial losses" for the government. But he declined to blame Congress for crafting vague laws, and instead vowed that BIR would increase its tax effort to boost revenues for the cash-strapped government. "We can only show by the improvement of our performance that we are doing what we can in so far as factors that are within our control," he said. He cited the tax agency's raffle contest dubbed "Bayan I-Text and Resibo," which encouraged the public to ask for receipts. This, he said, enabled the government to monitor the sales of establishments. In exchange, those who would text to BIR the numbers of their receipts would have a chance to win as much as PhP1 million in the grand draw on Christmas Day. -- Jeffrey O. Valisno

House priority measures being readied for LEDAC

By JUDY T. GULANE, Reporter

The House of Representatives is drafting its priority legislative measures for the 13th Congress, which will be presented to the Legislative-Executive Development Advisory Council (LEDAC) for possible adoption. At the Land Bank Plaza in Malate, Manila yesterday, members of the House attended a Legislative Agenda Planning Conference that aimed to identify priority legislative measures in the following areas: the country's fiscal situation; agricultural modernization, rural development and food security; use of natural resources for sustainable growth; education and employment generation; economic competitiveness; governance and public service delivery; the Millennium Development Goals; and "Creating New Wealth for the Philippines."

The last area pertains to House Speaker Jose C. de Venecia, Jr.'s 12-point program to "create new wealth," which he unveiled at the same conference. Rodolfo Vicerra, the director-general of the Congressional Planning and Budget Department, which organized the conference, said round-table discussions were held with legislators two weeks prior to the conference yesterday. These round-table discussions distilled the issues and concerns that needed legislative action; the conference output would be used to choose which issues and concerns should be given priority.

Among the suggested preliminary legislative action that would address the looming fiscal crisis were new tax measures, improvements to tax administration and the rationalization of fiscal incentives. The matter of government-owned and -controlled corporations (GOCCs), legislators said, should also be given attention. Their proposals for new tax measures include the indexation and rationalization of sin tax, that is, to reform the multi-tier structure to a single-tier structure; the increase in the excise tax on automobiles; tax for nonessentials; excise tax on telecommunication services including text messaging; additional PhP2 excise tax on petroleum products, but excluding liquefied petroleum gas; and increase in the road users' tax. The House ways and means committee is presently deliberating on bills that propose to increase the excise tax or index the tax rate to inflation.

To improve tax administration, legislators suggested that smuggling should be classified a criminal offense, that is, economic sabotage; establish an Independent Revenue Authority; review claims for input VAT (value-added tax); and impose deductions for fees paid to professionals such as doctors and lawyers. In the granting of fiscal incentives, they suggested that this be made on the basis of whether an industry has a high export potential or high revealed comparative edge, will generate employment opportunities, among others. They also said incentives laws that are being implemented by different agencies should be consolidated into an Omnibus Investment and Incentives Code to be implemented by the Board of Investments of the Department of Trade and Industry.

Regarding GOCCs, they said the automatic guarantee provisions in their charters should be removed to make them fiscally responsible. These guarantee provisions make the National Government a repository of these GOCCs' debts once they default on these debts. The Department of Finance, based on a preliminary inventory, said the National Government has contingent liabilities of PhP1.039 trillion, half of which would likely be assumed by the National Government. Mr. Vicerra said the outcome of yesterday's conference would be presented to the House committee on rules, which would then present it to the plenary for approval, after which the measures would be presented to the LEDAC.

De Venecia offers 'new wealth' program

House Speaker Jose C. de Venecia Jr. presented President Gloria Macapagal-Arroyo yesterday his 12-point program "to create new wealth for the country." The program, Mr. de Venecia said, would create a "buffer of resources in the future" on top of addressing the country's immediate financial needs. He detailed his 12-point program in a letter he presented to Ms. Arroyo during the Legislative Agenda Planning Conference at the Land Bank Plaza in Malate, Manila yesterday. Mr. de Venecia noted that the country has relied on the same revenue measures instituted 20 years ago when the Philippine population was smaller. But now that the population had ballooned to 84 million, the "existing wealth" was no longer adequate.

First on his 12-point program is a revival of the mining industry. He said the country's mineral wealth had an estimated value of $800 billion to $1 trillion, more than enough to pay the country's $57-billion foreign debt. "A policy decision -- including a favorable decision from the Supreme Court -- to rebuild this industy would open its enormous economic potential, employ hundreds of thousands of people, and create the beginnings of a tiger economy for the country," the Speaker said. The Supreme Court had ruled that certain provisions of the Mining Act were unconstitutional, particularly on the foreign ownership of mining firms.

Second on Mr. de Venecia's 12-point program, which is corollary to his proposal of reviving the mining industry, is the development of the Mt. Diwalwal mining area in Davao. Third on his program is the exploration and development of oil and gas wells like the Malampaya oil and natural gas field in Palawan. Mr. de Venecia noted that Shell Philippines Exploration BV, which invested $4 to $5 billion when it took over the Malampaya project from US Occidental Petroleum, would have fully recovered its investments next year. This means the government, which has a stake in Malampaya, will earn more than the current $500 million a year. The PNOC (Philippine National Oil Co.) Exploration Corp. holds a 10% stake in Malampaya, the country's largest natural gas project, on behalf of the Philippine government.

His other proposals are:

• relaunch of a reclamation program in Manila Bay, Cebu, Mindanao and Northern Luzon, minus the mistakes of the Public Estates Authority-Amari reclamation project;
• nationwide reforestation program;
• reinvigoration of the tourism sector;
• creation of a consolidated national infrastructure program, specifically directed at building airports, seaports, railways, dams, irrigation systems and expressways, which are vital to economic growth;
• jumpstarting of the housing sector, which has the potential to contribute PhP166 billion of economic activity to the country out of PhP10 billion worth of housing units;
• development and enlargement of the information technology sector;
• a program for the poor to facilitate their entry into the formal sector;
• securitization of certain portions of Subic and Clark to give investors freedom from political interference; and
• support for farmers and fishermen by shifting to production of high value vegetables and fruits and engagement in aquaculture.

Monetary Board keeps rates steady

... says Fed hike impact manageable

The Bangko Sentral ng Pilipinas (Central Bank of the Philippines, or BSP) yesterday kept policy interest rates steady despite a US Federal Reserve decision to raise its overnight rates. The BSP's policymaking Monetary Board agreed that higher interest rates will not address rising inflation since pressures are mostly supply-side, like rising oil prices and higher transport fees. Monetary authorities also said the interest rate differential between peso and dollar-denominated securities is still manageable. "The impact of the recent 25-basis point increase in the US Federal funds rate target on inflation is not expected to unduly affect the domestic inflation path, whether through the exchange rate or other channels," BSP officer-in-charge Armando L. Suratos said in a press release yesterday. The BSP's key interest rates, which it uses to siphon off inflation-causing liquidity from the financial system, remains at a 12-year low of 6.75% since 2001 for overnight borrowing and 9% for overnight lending.

The US Fed on Tuesday increased for its federal funds rate -- which influences economic activity and global interest rates -- to 1.75% from 1.5%. In the past, Fed rate hikes had prompted investors to shift to higher yielding dollar-denominated bonds, which has often resulted in a weakening of the peso. The BSP usually matches a move by the US Fed to prevent investors and fund managers from shifting to dollar-denominated securities which could result in a depreciating peso. The peso has weakened against the dollar, closing at PhP56.36 yesterday compared to PhP56.32 on Wednesday. The BSP has been trying to hold off any rate increase to help spur economic growth by encouraging credit activity. Banks use the BSP's policy rates in pricing their loans. Credit lending by the country's banks remains sluggish. Latest central bank data shows loans by commercial banks grew just 3.6% in the year through July and were down less a percentage point from the previous month.

BSP officials conceded that oil prices could push the yearend average inflation rate to anywhere between 5.19%-5.51%, higher than the central bank's target of 4%-5%. "Monetary tightening reduces inflation mainly by lowering private demand for goods and services, while supply-side factors such as increases in world oil prices affect mainly the cost of producing goods and services," Mr. Suratos said. Inflation, or the general rise in consumer prices, has been creeping faster than expected since the start of the year. Inflation stood at 6.6% in August, the highest in almost three years, mainly because of rising oil prices.

In the long-run, however, the BSP also expects pressure from the demand-side, such as wage increases next year. The BSP has factored in a 4% wage hike by 2005. This means a higher increase may prompt the BSP to tighten monetary policy to control consumer demand. The BSP hinted it may adjust policy rates later depending on the inflationary environment. "The BSP, if necessary will undertake a well-timed adjustment in monetary policy settings to arrest the buildup in inflation expectations and prevent inflation persistence," Mr. Suratos said. -- Iris Cecilia C. Gonzales

RP balance of payments posts surplus

The country's balance of payments (BOP) posted a surplus of $447 million in the second quarter, a marked reversal from the year-ago $99-million deficit. This helped reverse the overall BOP position to a surplus of $68 million in the first half from a deficit of $609 million last year. BSP Assistant Governor Diwa C. Guinigundo yesterday said the performance of trade, investments and services -- major components of the BOP -- has been improving steadily. "There's been an improvement because of the recovery in the world economy," he said.

The BOP is the record of the country's transactions with the rest of the world and is influenced by two items. One is the current account that reflects movement in trade and the other is the capital and financial account that mirrors the flow of investment and borrowings. A BOP deficit means there are more dollar outflows than inflows as a result of trade, investment and borrowings. A strong payments position helps stabilize the local currency as it staves off demand for dollars. Mr. Guinigundo reported that the current account -- which includes trade of goods and services -- stood at $1.116 billion in the second quarter from $555 million in the same period last year. BSP data showed the trade balance narrowed to $329 million in the second quarter from a deficit of $730 million in the same period last year. The deficit in the services account also narrowed from $391 million in the second quarter last year to $182 million in the second quarter of 2004. "This favorable outcome led the current account to post a significantly higher surplus of $1.926 billion in the first half of the year compared to $782 million last year," BSP officer-in-charge Armando L. Suratos said.

The BSP expects the current account to remain in surplus at $1.483 billion by yearend on expectations that exports will further improve. The government expects exports to meet a projected 10% growth despite a likely decline in electronics shipments. Meanwhile, the capital and financial account -- which includes long-term and short-term capital flows -- reversed to a net inflow of $240 million from a net outflow of $2.384 billion in the same period last year. This resulted to a reduction of the net outflow in the first half to only $256 million from a high of $2.749 billion in the same period last year. For the full year, the net outflow in the capital and financial account is expected to narrow further on the back of expected inflows of big-ticket investments. Investors keep a close watch on the BOP position as it indicates a country's ability to settle its obligations. Despite the rosy figures, the BSP is sticking to a its projected $505-million deficit for 2004 because of projected outflows due to maturing debts. -- Iris Cecilia C. Gonzales

Higher oil prices to have minimal impact on 2005 growth?

The National Economic Development Authority (NEDA) estimates economic growth for next year to suffer a "minimal" decline if oil prices average $40 per barrel. NEDA said it disagrees with the estimate of the Asian Development Bank (ADB), which recently said the country's gross domestic product (GDP) could fall by 1.9 percentage points for 2005 if oil prices were to average $40 per barrel. "That's too high. If oil prices average $40 per barrel from the baseline of $30 per barrel, we see GDP declining minimally by 0.6 percentage points," NEDA assistant director for the National Policy and Planning Staff Scholastica D. Cororaton said. Ms. Cororaton said the NEDA expects higher oil prices to have a less adverse mpact on the economy next year as she expects the Philippines to be more "self-sufficient" in energy. "We think the impact would be smaller since as of 2003, our energy self-sufficiency is already at 53.9%," she said.

The ADB earlier said increases in international oil prices and interest rates will have an important bearing on whether targets will be met given the country's high dependency on energy imports and large foreign debt. The government has stressed it will gradually move away from heavy reliance on imported petroleum products, pointing to an energy independence package which includes, among others, an expansion in the use of alternative sources of energy such as wind, solar, geothermal and the use of natural gas from the Malampaya field in Palawan. Higher oil prices are also expected to contribute to inflationary pressures next year as the NEDA earlier estimated that for every 1% increase in oil prices, the corresponding increase in inflation will be 0.67 percentage points. The ADB has said inflation could rise by 1.4 percentage points for 2005 if Dubai crude oil will average $40 per barrel. The NEDA and the Bangko Sentral ng Pilipinas (Central Bank of the Philippines, or BSP) have admitted that the inflation target of 4% to 5% for 2004 may be breached owing to the continuous increase in the price of oil.

For his part, former NEDA director-general and Ateneo de Manila University economist Cielito F. Habito said oil prices will also weigh heavily on the country's economic growth for next year. He projects at least a 0.5-percentage point decline in the country's GDP if oil prices were average $40 a barrel next year. -- Jennifer A. Ng

Palace vows to match Congress OK of taxes

President Gloria Macapagal Arroyo yesterday vowed to go after tax cheats and intensify the government's revenue collection efficiency in return for the legislature's approval of her set of eight comprehensive tax bills. In a speech at the House of Representatives' Legislative Agenda Planning Conference in Malate, Manila, the President directed the Bureau of the Internal Revenue (BIR) to use all the powers in its command, including the power to garnish the bank accounts of notorious tax evaders, to improve tax collection and help solve the country's budget deficit. "We in the executive branch ... will remain vigorous in going after tax cheats, in enforcing fiscal discipline and sharpening tax collection efficiency," the President said. Ms. Arroyo also said she signed an executive order giving the Customs commissioner powers used to be exercised by the defunct Economic Intelligence and Investigation Bureau to combat smuggling. Ms. Arroyo added that she would personally examine the performance of each customs collector starting coming Tuesday, when she will call a command conference of the Bureau of Customs.

The President also pledged the government's commitment to adhere to austerity measures aimed at sharply cutting government costs. She reiterated her warning to the officials of government-owned and -controlled corporations (GOCCs) to observe cost-cutting programs or face removal. "The board members who are unable to accept the burden of sacrifice must surrender their positions now," she said. The Chief Executive has announced that she will be issuing an executive order slashing the salaries of GOCC executives and directed the imposition of a salary cap for those corporations exempted from the Salary Standardization Law.

The Legislative Agenda Planning Conference, sponsored by the United Nations Development Program, was attended by 85 congressmen of different political affiliations. The President yesterday took the opportunity to ask lawmakers to support her proposed tax measures, saying the government needs to raise revenues to curb the budget deficit and avert a fiscal crisis. "I wish we did not have to enact taxes at a time of hardships for the poor, but it is time to act now, rather than when it is too late," Ms. Arroyo said. "It is time to act now while we are still creditworthy in the eyes of our creditors. It is time to act now, while we can still grow at 6.2% as we did in the last quarter."

Tracking the impact of world oil prices

Gasoline prices have been making news again, as the spate oil price increases had precipitated much protest from the public. Conventional economic reasoning presumes that large oil price hikes will necessarily cut oil demand and economic growth, perhaps resulting in zero economic growth, or recession. Aside from reducing growth, higher oil prices could also generate stock exchange panic and could cause higher consumer prices which could in turn lead to monetary and financial instability. The higher the rise of oil prices, the faster 'price elastic' responses will play. Or will they?

An industry official, who wished to remain unnamed, said rising oil prices have an impact on oil companies' profitability. "You incur higher acquisition cost. Everything is imported -- finished products and crude oil are imported," the official from a major oil firm said in an interview. He also noted that oil is a "social necessity," which prevents companies from matching every price increase in the world market. "In fact, the small oil [participants] claim that they have yet to fully recover their costs as a result of the recent oil price increases in the world market," the official noted.

According to the Department of Energy (DoE), Republic Act No. 8479, or the Downstream Oil Industry Deregulation Act, was enacted primarily based on the guiding principle of ensuring a truly competitive market under a regime of fair prices, adequate and continuous supply of environmentally clean and high quality petroleum products. With the deregulation of the oil industry, the requirements for prior licenses and permits have been replaced by prior notice, thereby encouraging the entry of more than 60 new participants bringing in a total of P13 billion worth of investments in various projects. These include local and foreign investors engaged in varied activities such as retailing, bulk marketing and distribution of fuels and LPG (liquified petroleum gas), as well as operation of depots and storage facilities.

Initially, it said, the public gauged the success of oil deregulation in terms of the number of gasoline stations that have been put up by companies other than Petron Corp., Caltex Petroleum Corp. and Pilipinas Shell Corp. But since it requires much time to engage in retail marketing in terms of putting up a gasoline station most players have opted to engage in bulk marketing which involves simple facilities requirements. The reseller/retail sector, meaning sales through gasoline stations, constitute less than half of the total oil demand, or approximately 43% as of end-2000, and is where the new participants have captured approximately 5%. It is in the remaining 57% of total oil demand, comprised of wholesale sales to industrial and commercial accounts (32%), LPG sales (10%) and sales to the National Power Corporation (9%), where the new participants have captured a considerable share of about 15%, 24% and 2%, respectively. Still, gasoline stations owned by the new participants have increased from a mere 65 stations in June 1999 to 112 in December of the same year and 213 as of June 2000. Roughly, this may be translated to a semiannual growth of almost 100%. However, by the end of 2000, the number of stations had only increased to 276 stations. "Partly, this may have been the result of the unstable business environment in the country, as well as the uncertainties on whether government will retain its policy of deregulation," the DoE said.

The competition brought in by the new companies, it added, have resulted in better quality in terms of product and facilities, improved service at the gasoline stations, and a shift to a new image of service stations providing amenities within the facility's premises such as convenience stores, rest rooms, and automated teller machine counters. It also said deregulation does not guarantee lower prices but fair prices. Small oil companies put on hold their scheduled oil price increase last week while they review requests to maintain current price levels. Ramon Villavicencio, president of the Independent Philippine Petroleum Companies Association (IPPCA), said they would continue to operate on an under-recovery of more than PhP2 per liter. IPPCA members, who account for 20% of the market share, earlier said they might increase prices for diesel by PhP0.60 to PhP0.70 a liter and maintain prices for gasoline. "We are taking the hit instead of passing on the landed price of diesel to consumers. But for how long we can absorb the shock, I do not know," IPPCA chairman Fernando L. Martinez said. Messrs. Villavicencio and Martinez head Flying V and Eastern Petroleum Corp., respectively.

Oil companies said global prices of crude oil and refined petroleum products remain volatile despite promises made by oil ministers of oil-exporting countries that they may start pumping out one million barrels more of oil by November to serve global demand. They also said continued attacks on oil pipelines in Iraq and the suspension of refining operations in the United States due to a hurricane had caused a spike in oil prices last week. Despite a drop in crude prices, diesel prices remained volatile, IPPCA said. Following the lead of Pilipinas Shell Petroleum Corp., Total Philippines, Corp. raised the price of its LPG last week. Also last week, the Organization of Petroleum Exporting Countries (OPEC) lifted oil supply quotas by one million barrels a day, or 4% of total production, in a renewed bid to force down stubbornly high crude prices. The pact is designed to underscore the intent among its members to exert downward pressure on prices that last month neared $50 a barrel. With the increasing recognition that energy prices are placing a drag on the economy, the total household bill also becomes relevant.

In August, consumer confidence reversed its big improvement in July and fell to its lowest for the year as spiralling oil prices resulted in lower incomes and higher expenses for many households. Increased levels of pessimism were reflected in the latest consumer confidence index (CCI), as shown by the August 7-20 perceptions poll done for BusinessWorld by NOP World Asia Pacific that surveyed 300 Metro Manila consumers. Likewise, unrestrained oil price increases amid a looming fiscal crisis have left businessmen more critical about their present condition and less optimistic about their future, pulling down the business confidence index in August to its lowest level for the year.

Businessmen said they were inclined to postpone hiring and investing decisions over the next six months as they remained pessimistic about the peso and the stock market. Part of the increase in energy prices is paid by businesses. They may seek to recover these cost increases from consumers in the prices of goods and services they sell. However, a substantial part of the energy price increases are paid directly by consumers for their household energy costs -- gasoline and heating oil; natural gas, for heating, cooking and hot water; and electricity, which is increasingly produced with natural gas. Experts generally agree that oil has become a commodity that is subject to cyclical developments or regular ups and downs. "Any long-term depressed oil price is likely to provoke over a time new demand and relaxation of energy-savings measure," Thomas Wülde of the Center for Energy, Petroleum and Mineral Law and Policy of the University of Dundee, Scotland, said in his paper. "Similarly, marginal operations will be closed, often forever, and new projects be at least delayed and sometimes suspended. This is what happened since 1998," he added. Oversupply then hit lack of demand exacerbated by the financial crisis in Asia. Prices dropped to a low not seen since 1986, but then the price recovery started. Mr. Wülde noted that, to a large extent, the rebound in oil prices is a natural event, reflecting the cyclical nature of oil prices since price control both by producing countries, oil companies and governments have been disappearing.

Unlike in industrialized countries that are much less energy intensive than they used to be, developing nations like the Philippines are the most affected by rising fuel costs. Thus, the country continues to strive after energy efficiency policies and increasing oil prices have given it an additional impetus towards lesser use of oil in private and public transportation. In his paper, entitled "Record prices, record oil company profits: The failure of antitrust enforcement to protect American energy consumers", author Mark Cooper noted that examining price and income elasticities leads to the conclusion that energy is a necessity of daily life. "Recognizing this fact leads to policy choices that can have the greatest impact while imposing the least cost and inconvenience on consumers," he said. He said the amount of gasoline people consume is dictated in large part by the kinds of buildings in which they live and work and the energy efficiency of the appliances they use. Gasoline demand, he added, has been proven "inelastic," or when prices increase by 10%, demand declines by only 2%. This, he said, renders energy markets volatile and vulnerable to abuse. When demand is inelastic, consumers are vulnerable to price increases, since they cannot cut back on or find substitutes for their use of the commodity. Supply and demand in the oil market are roughly in balance and current high prices are due to the possibility of disruptions rather than any shortage. Political tensions in many producing countries had bumped up prices, which touched an all-time high at $49.40 a barrel for US crude on August 20. Any possible disruption or threat of disruption affects the market psychology and has produced these higher prices. Consumers are, thus, paying a high premium for oil.

Oil prices are now 35% higher than at the end of 2003 as producers pump almost at full tilt to sate a surge in demand, which is growing at the fastest pace in 24 years. OPEC, which controls more than half of global crude exports, is pumping close to 30 million barrels daily, the highest level since the late 1970s and only top exporter Saudi Arabia has any significant spare capacity. It is estimated that the world oil market is running with surplus supply of about 1.5 million barrels per day despite strong demand from China, India, and the US. -- Norman P. Aquino

NTC ready to revoke Piltel license if fees not settled

By ANNA BARBARA L. LORENZO, Reporter

Just as it starts reaping income after seven years of losses, Pilipino Telephone Co. (Piltel) may again find itself in a bind as the National Telecommunications Commission (NTC) yesterday warned the firm could lose its license to operate as a carrier if it continues to refuse paying PhP1.3 billion in arrears in supervision and regulatory fees. Piltel is insisting it doesn't owe the regulator any fees, while the NTC is equally insistent the telco must pay the fees before the Sept. 30 deadline for all firms under NTC's regulation. "We could impose additional penalties, fines, or even revoke their license. But this is one big balancing act. We have to think of the subscribers. If you revoke Piltel's license, what will happen to its subscribers?" NTC Commissioner Ronald Olivar Solis told reporters yesterday.

Piltel though is unfazed by the warning. Piltel legal head Rogelio Quevedo said the NTC can't just cancel the telco's license. "This is public service you can't just revoke an ongoing public service," he said in an interview. Piltel has refused to pay the fees, saying the NTC's computations are not accurate. In fact, the company is seeking a refund from the regulator for overcharges for years prior to 1997, Mr. Quevedo said. "The [fee] is supposed to reimburse the government for what it spent to supervise telecom firms. It collects PhP180 million from Piltel. The NTC's budget does not even reach that amount," he said. Mr. Solis said the regulatory body's budget for the year is only PhP147 million. Still, he insists that the NTC's computation is valid as decided by the Supreme Court. The row comes as all government agencies are directed to improve revenue collections to ease pressure on the fiscal deficit. The NTC earlier said it targets to generate PhP1.02 billion this year, bulk of which is expected to come from overdue regulatory fees. Mr. Solis said he is willing to sit with Piltel officials to find a middle ground on the issue. He added that the NTC is even willing to accept staggered payments so the firm can settle the dues.

PILTEL COMEBACK

In reaction, Mr. Quevedo said Piltel "is also willing to accept staggered payment from the NTC for the refund" of excess collections. Meanwhile, the NTC said the partial settlement of the PhP1.3 billion will also allow Piltel to apply for new services. The telecom firm has a pending application for additional public calling offices. "As a matter of policy, you must pay the appropriate [fees] for you to be able to offer a new service," Mr. Solis said. He added that he wants the case resolved before the Sept. 30 deadline for the payment of the 2004 fees of all firms under NTC's regulation. Aside from telecommunication firms, the NTC also regulates radio operators, cable and broadcast firms. "Piltel is asking for the reconsideration on the computation of the [fees]. We have yet to decide on that but at the moment, that decision [on the computation] remains, and that is the way the Supreme Court said it should be computed," Mr. Solis said.

As for the refund Piltel is seeking, Mr. Solis said the firm should make a presentation and justify the claims. Mr. Quevedo said, however, that he has sent several letters to the NTC, even when it was still under former commissioners Armi Jane Borje and Eliseo Rio, to get a chance to present Piltel's stand, but did not get a response from the regulatory body. Piltel, which has been booking losses over the past seven years, is regaining ground in the telecommunications industry as it posted PhP810 million in net income for the first half. Manuel V. Pangilinan, chairman of Piltel's parent firm Philippine Long Distance Telephone Co., projected a net income of PhP1.1 billion to PhP1.2 billion for Piltel. Piltel has 3.5 million subscribers for its cellular phone operations, Talk'NText, as of June.

East West Bank not keen on Maynilad proposal to convert loan into equity

By CECILLE S. VISTO, Sub-Editor

A bank with a relatively high exposure in debt-saddled Maynilad Water Services, Inc. will not accept preferred shares in the utility unless it gets the approval of the Monetary Board. In a pleading, East West Banking Corp. said it has to get the nod of the policymaking arm of the Bangko Sentral ng Pilipinas (Central Bank of the Philippines, or BSP) first before it approves the revised rehabilitation plan of Maynilad. Maynilad had proposed to convert into equity debts worth PhP1.42 billion owed to local banks, including East West.

East West accounts for PhP65 million of the PhP1.42 billion. Based on Maynilad's proposal, PhP1.17 billion will be converted into equity in the form of preferred shares while the remainder will be turned into convertible voting shares. "If ever creditor [East West] has to accept this scheme of payment, it must have assurance from the petitioner [Maynilad] that the Monetary Board approves it. Without such assurance, it would be safer to assume that the plan is legally not feasible, at least insofar as [we] are concerned," the bank said. Other banks with considerable exposure in Maynilad include the Development Bank of the Philippines, Rizal Commercial Banking Corp., Equitable PCI Bank, and Chinatrust (Phils.) Commercial Bank Corp. East West said that it will only take in the Maynilad shares if no other acceptable alternatives are offered.

NOT FEASIBLE

"Firstly, one cannot overemphasize that no individual of sound mind would like to invest in a financially distressed company. Secondly, this repayment scheme is not legally feasible, or at least creditor [East West] cannot accept preferred shares on its own accord, and without preconditions," the bank said. It noted that under the General Banking Law of 2000, banks are prohibited from investing in so-called non-allied financial undertakings unless approved by the Monetary Board.

Specifically, banks are only allowed to invest in equity in warehousing, storage and safe deposit box companies; companies primarily engaged in the management of mutual funds but not in the mutual funds themselves; management corporations engaged in an activity similar to the management of mutual funds and companies engaged in providing computer services. Investments in insurance agencies or brokerages; companies engaged in home building and home development; firms providing drying and/or milling facilities for agricultural crops such as rice and corn are likewise acceptable.

Equities in bank service corporations all of the capital of which is owned by one or more of the banks and organized to perform for and in behalf of the banks and services; the Philippine Clearing House Corp. and Philippine Central Depository, Inc. are also permitted. "A water company such as Maynilad is not included among other non-allied financial undertakings where a commercial bank such as [East West] may own equities in," the bank said. East West said the corporate recovery blueprint needs to be "refined" to take "take into consideration the different legal situations of all parties concerned." It said it is the only local commercial bank-creditor of Maynilad while others have been converted into universal banks. Thus, it said it deserves better terms than other local lenders. Quezon City Regional Trial Court judge Reynaldo B. Daway is expected to rule by Oct. 4 on the merit of the revised rehabilitation plan submitted by Maynilad early this month. If acceptable, the documents will be referred to court-appointed rehabilitation receiver, Rosario S. Bernaldo, for review. Other than banks, Maynilad owes government nearly PhP8 billion in unpaid concession fees and some PhP6 billion to major shareholder, French company, Ondeo Services Philippines, Inc.

New stock clearing tack to benefit investors

By ROULEE JANE F. CALAYAG

Investors stand to benefit in terms of reduced transaction costs once a new clearing and settlement system becomes fully operational in January. Sources said that through the automated system, trades done at the Philippine Stock Exchange (PSE) will be processed in such a way that will reduce operational risks and processing time and will translate to lower costs. At present, stock deals are settled after three days.

Officials at the Securities and Clearing Corp. of the Philippines (SCCP), who refused to be identified, told BusinessWorld that the implementation of the system will cut transaction costs significantly. By how much will the new system improve transaction expense has yet to be known. Even the efficiency that the system would deliver is still unclear. An SCCP official told BusinessWorld they are still in the process of gathering statistics on the efficiency of the new system. The SCCP, a wholly owned subsidiary of PSE, serves as the clearing and settlement agency for depository eligible trades. As a clearing house, the SCCP bought the system to assume all its functions and introduce various reforms, an official said. But Joseph Roxas, president of Eagle Equities, Inc., said he does not know if the new system will be better than the one currently in use. "It [the present system] is still working fine," he said, adding that the system "is the least of the [investors'] worries." However, he welcomes the introduction of the system if this will bring down transaction costs. "Since the charges are passed on minimally to investors, this will be good for everyone," he added.

Aside from reduced transaction costs, the ownership of the shares will be introduced at a later stage of the system's implementation. One of the officials said this will boost the confidence of investors, as this will eradicate complications arising from doubts on who actually owns the stock that they plan to buy. "Investors can now trust the [new] system, especially as proper safeguards are in place," said PSE Chairman Alicia Rita M. Arroyo in an earlier interview. "The system will have a macro effect on the equities market. It will be a more efficient system that will make foreign investors more comfortable and [in sync] with global markets," an SCCP official added. Rommel Macapagal, chairman of Westlink Global Equities, Inc., said the system will be acceptable if this will make clearing and settlement more efficient. He added that the market's acceptance of the system depends on sentiment. "If the market is bullish, [the new system] will not be a big issue but if it is bearish, this may cause worry to buyers and sellers," Mr. Macapagal said.

ADDITIONAL REVENUES

The new system will also generate additional revenues for the PSE as a listed firm, especially as brokers comprise majority of its stockholders. The fees that brokers pay for their transactions will be rechannelled back to the coffers of PSE under the new system. "The benchmark of revenues of settlement and clearing in other Asian bourses is between 300% and 400% more than listing revenues. As volume grows, the chance [for the PSE] to break even is high," Ms. Arroyo said. The system, patterned after the one used at Indonesia's Central Clearing and Central Settlement, is currently undergoing customization for PSE. "The system is currently undergoing customization and enhancement for it to be tailor fit to the local system," an SCCP official explained. Once this is done, the next phase will be the training of all trading participants which is expected to take some time. "From September to December, training and link-up of other participants are being done," one of the SCCP officials said, adding that with the system, there will be a "real-time delivery versus payment." Another official said that it takes at least six months to ensure the system is run accordingly and will not confuse those using it. The study on the functionality and the requirements of the system began in 2000. "It is a long-term project," one of them said.

The system was purchased from Capital Markets Co. (Capco), a Belgium-based technology solutions provider for the financial services industry, for about $1.2 million or roughly PhP50 million. The actual cost charged for the license and consulting was $710,000. Three months after the contract to purchase the system was signed last December, Capco installed it in March. The Jakarta Stock Exchange, Indonesia Clearing House and Indonesia Depository System are all using the same system. At this time, the stock exchange in Indonesia is going through "a phase of migrating from scrip-based to scripless trading" in which certificates are no longer issued like in other advanced bourses. By using the same system used by Indonesia and other Asian bourses, the PSE hopes to shed processes that hamper trading. "We are trying to be at par with international best practices by overcoming certain technical limitations," an SCCP official said.

RISK-BASED CAPITAL ADEQUACY

Meanwhile, about 300 compliance officers and accountants from brokerage houses completed a two-day seminar on the proposed framework for Risk-Based Capital Adequacy. The SEC and the PSE sponsored the event on Sept. 22 and 23 whicih aims to enable stockbrokers understand the rules and principles of Risk-Based Capital Adequacy or RBCA. The proposed RBCA framework was developed by consultants from the Asian Development Bank and patterned after the Kuala Lumpur and the Australia stock exchanges. In recent years, other markets such as the US and Singapore have already shifted to RBCA.

RBCA refers to the minimum levels of capital that have to be maintained by firms which are licensed or securing a broker dealer license, taking into consideration the firm's size, complexity and business risks. Risks that are considered in determining the capital requirement include operational, position or market, and credit risks. "Changes like these can be painful to most of us. It requires thorough preparations, consultations, adjustments, patience and an open mind if they are necessary to boost liquidity and renew and sustain investors' confidence in our market," PSE President Francis Lim said.

Stocks up as key rates remain unchanged

By ROULEE JANE F. CALAYAG

Philippine share prices yesterday ended higher for a fourth time in a row, buoyed by the central bank's decision not to raise interest rates despite the recent quarter-point adjustment of the United States Federal Reserve. Dealers said this encouraged investors, boosting their confidence in the Philippine market. Astro del Castillo, managing director of First Grade Holdings, Inc., said the decision of the Monetary Board to keep interest rates steady strengthened the market. "The market remains bullish based on technical indicators," said Mr. del Castillo, noting that this was in step with expectations of a bull run during the last four months of the year.

PHISIX

Despite the over 100-point slump of the Dow Jones Industrial Average in the US, the stock market remained strong, with the Philippine Stock Exchange composite index (Phisix) rising by 14.68, or 0.85%, to 1,742.56. Last Monday, the United States Federal Reserve raised its benchmark interest rate by another 25 basis points to 1.75%. Deciding on a different course, the Bangko Sentral ng Pilipinas kept its policy rates steady at 6.75% for overnight borrowing and 9% for overnight lending. Traders previously said monetary authorities should consider a rate hike to keep investors in Philippine shores. The central bank said it will try to hold off a rate hike until yearend.

OTHER FACTORS

Meanwhile, Mr. del Castillo cited two other major reasons that accounted for the renewed interest in the market. These are the gains in the American Depositary Receipts (ADRs) of Philippine Long Distance Telephone Co. (PLDT) in New York and the positive outlook of the Asian Development Bank (ADB) on the Philippine economy. PLDT's ADR rose $0.07 or .29% to $23.92 overnight, spurring positive sentiment for the telecommunications giant. "[The ADR gain] brought positive influence to the market," said Mr. del Castillo. PLDT was the top actively traded stock, up at PhP1,370.

Another factor was the adjustment in the economic growth forecast of ADB for the country this year, raising it to 5.5% from 5%. ADB expects the country's agriculture, industry and services to remain robust for the remaining four months of the year. "The [positive] ADB forecast most likely galvanized belief that the country is in rebound," said Mr. del Castillo. He added that this played an important role in easing the nerves of investors.

INDICES

The all shares index slipped 0.22 to 1,091.90. The commercial-industrial was bullish, up 21.98 at 2,775.60. Banks and financial services, however, dropped 0.18 to 488.69 despite the enthusiasm on the initial public offering (IPO) of International Exchange Bank (iBank). Mining also declined 6.56 to 1,803.79. Oil was unchanged at 1.59 while property moved up 9.65 to 598.57. The 2,700 trades in yesterday's session saw 1.48 billion shares exchanging hands for PhP621.3 million. Gainers were slightly ahead of losers, 33-30 but those unchanged were ahead at 58. Mr. del Castillo noted that despite the uptick in world crude prices and other developments that could weaken investor sentiment, the Philippine market moved ahead as bargain hunting continued. "They accumulate favorite stocks with strong fundamentals," he said.

Gauging the market's performance in the coming sessions based on its gains over the past four days, Mr. del Castillo said it will hover between 1,720 and 1,750. "It will consolidate a little," he added. Resistance is seen at 1,750 and support at 1,720. In other developments, foreign investors' confidence in the country is slowly picking up.

IFC

A testament to this is the possibility of fresh investment from the International Finance Corp. (IFC), the private sector financing arm of the World Bank. IFC said on Wednesday that it may invest about $90 million to $100 million in the Philippines this year. The investments will be made mainly in the areas of infrastructure, the financial sector, and small- and medium-scale enterprises. IFC's Philippine country manager Vipul Bhagat said the firm would be closing a deal soon for $25 million to $30 million in combined financing and equity investments in an asset management firm led by an affiliate of Germany's Deutsche Bank. Foreign investors are also taking their cue from President Gloria Macapagal Arroyo. The President, through her spokesman Ignacio Bunye, said the government will no longer tolerate money-losing state firms. Mr. Bunye said funding for these firms will be halted if they cannot be rehabilitated. "Inveterate losers in the fiscal scenario will be pared off from the system if these cannot be effectively rehabilitated," Mr. Ignacio said.

ADB raises RP growth forecast

By JENNIFER A. NG, Reporter

The Asian Development Bank (ADB) yesterday raised its economic growth forecast for the philippines for 2004 to 5.5% from 5%, given its expectations that agriculture, industry and services would remain robust for the rest of the year. In its "Asian Development Development Outlook 2004 Update," ADB also said it was upgrading its economic growth forecast for the Philippines for 2005, also to 5.5% from 5%. "Agriculture will show stronger growth than forecasted, at 4.7% to 5.7% as a result of rapid expansion in the first quarter of 2004 and continuing good weather. Industry is forecast to grow by 4% to 5% led by exports," the report said. "The services sector is expected to maintain its growth of 5.5 to 6.3% and exports look likely to grow by 10% in 2004," it added.

ADB's positive outlook for Philippine exports was attributed mainly to the first-half recovery of semiconductor shipments, as well as income from information technology-related services, call centers, and business outsourcing services. The report warned, however, that rising oil prices could lead to higher inflation rates that could threaten the growth of the economy for the rest of the year as well as next year. "Increases in international oil prices and interest rates will have an important bearing on whether targets will be met given the country's high dependency on energy imports and large stock of foreign debt," the report said. ADB also said that if global oil prices remained at $40 per barrel for the whole of 2005, the economy's projected growth rate could fall by 1.9 percentage points, and inflation could rise by an average of 1.4 percentage points. ADB also said the lack of national consensus on government reforms to be immediately undertaken could also adversely impact economic targets for 2004 and 2005. "Achieving early consensus on reforms is critical for the economy's prospects. The longer the consensus building takes, the less likely the macroeconomic targets will be met," the ADB report said.

Thomas Crouch, ADB's country director, said reforming the power sector was most important and should immediately be undertaken. "Fiscal consolidation depends very much on what happens to the power sector when you look at the consolidated deficit position of the government," he said. While the ADB upgrade of its forecast for gross domestic product (GDp) growth is positive, University of the philippines economist Ernesto Pernia said the 5.5% anticipated growth for 2004 actually indicated a possible slowdown in the second half.

"This is because the election season is over, and given the continuing increase in the price of oil," he said. The May election, he said, provided the "kick" that boosted economic growth for the first half of 2004, when GDP growth was 6.3% year on year.

University of Asia and the Pacific economist Victor Abola, for his part, said high oil prices would dampen growth for the second half. "While the growth we registered in the first half of 2004 has a multiplier effect and is expected to contribute to the growth for the second half, we will grow at a slower pace," he said. ADB also raised its 2004 economic growth forecast for the Asian region to 7% from 6.8% also due to surging exports, but cut its 2005 estimate as it sees China's expansion slowing. Asia would suffer worse strains if oil prices stay high through 2005, the bank said. Despite the impact of pricier oil in the second half of this year, ADB said it expects Asian economies, excluding Japan, to grow at a faster pace in 2004 than it had projected in its annual outlook in April. The fall in the 2005 forecast to 6.2% from 6.7% reflected "some levelling off of the expansion in major industrial countries and a slowdown in (China)."

India and South Korea were also given "more subdued growth predictions" for next year. The region's economies grew by 6.5% last year, powered by China's 9.1% rise. "The risks are not negligible. However, the underlying strong regional growth momentum could also create tremendous opportunities if they can be channelled into improving regional competitiveness," ADB said. "Regional governments should focus on enhancing resilience to external shocks andfostering domestic growth." ADB also raised its expectations for the region's imports and exports this year. It now expects exports to rise 18.1% in 2004 compared with the previous forecast of 12.4%. Imports were seen growing 20.8% compared with April's forecast of 14.8%. If oil stays around $40 per barrel through the end of next year, the ADB said, Asia would see 0.8 of a percentage point shaved from its growth. At $50, the drop would be 1.5 points. The region's major oil importers -- including China, Hong Kong, India, South Korea, the Philippines, Singapore and Thailand -- would be worst hit. "The duration of the shock is more an issue for Asian trade balances than the extent of the price increase," ADB said.

Policy responses to high oil prices would vary from country to country. But ADB said some may need to tighten monetary policy to tame inflation, while others may have to adopt a more flexible exchange rate policy. Nations with sizeable fuel subsidies may have to make some policy adjustments in the short term, the bank said. It said risks identified in April -- such as the threat of terror, outbreaks of Severe Acute Respiratory Syndrome (SARS) and avian flu, and uneven domestic demand -- remained in place. ADB also warned of accelerating inflation in East and South Asia, partly due to higher oil prices, and stressed "the importance of deepening financial sector reforms." "Many regional governments should use the current opportunity of robust economic growth projected in 2004-2005 to undertake reforms to consolidate their fiscal situation and reduce public sector indebtedness," the bank said.

China, with its voracious appetite for Asia's exports, will continue to be the engine of regional trade. But ADB said a potential interest rate rise and slackening growth could lead to a surge in nonperforming loans, possibly affecting China's medium-term economic outlook ADB raised its 2004 growth projection for China to 8.8% from 8.3%, but trimmed its 2005 forecast to 8% from 8.2%. South Korea may stumble to growth of just 3.6% next year, lower than the previous forecast of 5.2%, as its key technology sector shows signs of cooling, household debt cramps consumer demand, and China's pace slackens. Southeast Asia was now seen growing faster than expected next year at 5.7% against the previous forecast of 5.4% -- led by Thailand, Malaysia and Vietnam.

India's 2005 forecast was cut to 6% from 7.6%. Besides the chance of a weak monsoon, it faces risks from higher-than-assumed interest rates and oil prices, and "inadequate progress in fiscal consolidation," ADB said. The region is driven by export growth, robust domestic demand and -- for the first time since the 1997 Asian crisis -- "the return of strong business investment in Asia", chief ADB economist Ifzal Ali said. The region's expected growth this year will be equal to that of 2000, which was the fastest after the financial crisis. Mr. Ali said this was helped by the synchronized economic upturns in the United States, the European Union and Japan -- the region's main trading partners -- which he said may lose steam next year.

ADB also expects high oil prices to be sustained over time with strong demand from the US, China and India a key factor, which could stoke inflation and force central banks to tighten monetary policy. Mr. Ali also said China's 9.8% GDP growth in the first quarter and 9.6% in the second were not sustainable, suggesting that the results of Beijing's efforts to cool the red-hot economy have been modest. "As a result, a hard landing in China is still possible," with grave implications to the rest of the region due to growing inter-regional trade, he said. Thailand continued to show healthy growth, while Indonesia and the philippines were described as growing below their full potential. -- with Reuters and AFP reports

Gov't to cease funding money-losing state firms

The government will halt funding to money-losing state firms if they cannot be rehabilitated, President Gloria Macapagal-Arroyo's spokesman said yesterday. But 14 of these firms are expected to do better next year, with the Department of Finance projecting their combined deficits to fall to below PhP100 billion by 2005, from about PhP125 billion this year. "Inveterate losers in the fiscal scenario will be pared off from the system if these cannot be effectively rehabilitated," Press Secretary Ignacio Bunye said. "It is the intent of the administration to get rid of government liabilities and turn nonperforming GOCCs [government-owned and -controlled corporations] and GFIs [government financial institutions] into useful and profitable ones," he added. This is part of the government's effort to sharply cut expenditures and raise revenues to cope with a chronic budget deficit and ballooning debts.

Ms. Arroyo has previously warned that the government was already in a "fiscal crisis" and faced certain "economic death" in two to three years should Congress fail to pass new tax laws. However many legislators and much of the public are opposed to new taxes and attention has turned instead to money-losing state firms. Economists, however, have pointed out that many government firms are not intended to make a profit but to provide subsidized services. But Mr. Bunye said, "It is not fair to call for sacrifice among the people and at the same time let them suffer the burden of subsidizing inefficiency." He said the government would also see to it that GOCCs and GFIs that would be spared would attain maximum margin of efficiency and profitability.

Many GOCCs and GFIs have been identified as operating at a loss, including the National Power Corporation (Napocor), and the Light Rail Transit Authority. Eighty GOCCs and 10 GFIs are now undergoing performance review by Budget Secretary Emilia T. Boncodin, in compliance with the President's order to scrutinize the financial condition of these firms and the salaries of their executives. Malacañang said the review included the scrutiny of any unliquidated cash advances to executives. Also yesterday, the Department of Finance said the combined deficits of 14 monitored GOCCs, including Napocor, were expected to go down to PhP91.86 billion in 2005, from this year's ceiling of PhP125.51 billion. This would be the result of fiscal discipline measures as well as price increases.

Except for the National Food Authority, deficits are expected to drop for Napocor, Philippine National Oil Company, Philippine Ports Authority, Metropolitan Waterworks and Sewerage System, Local Water Utilities Administration, Home Guaranty Corp., National Housing Authority, Light Rail Transit Authority, Philippine National Railways, National Irrigation Administration, and National Development Company.

Only National Electrification Administration and Philippine Economic Zone Authority are expected to register a surplus of PhP211 million and PhP399 million, respectively, next year. Napocor sees a decline in its deficit to PhP59.7 billion from this year's projected full-year deficit of PhP80.34 billion. It was recently allowed a provisional price increase of an average 98 centavos per kilowatthour, which would become effective September 26. The rate hike will give Napocor PhP37 billion in additional income, and will allow it to cut its projected loss to PhP106 billion from PhP113 billion. Napocor losses form a big chunk of the country's consolidated public sector deficit, which totaled PhP253 billion as of end-2003. That deficit takes into account the government's budget shortfall, as well as the financial shortfalls of the 14 GOCCs and other public entities.

A higher deficit will result in higher debts, with the government and GOCCs borrowing money to finance budget deficiencies. International creditors are closely watching the country's consolidated deficit figure as it reflects the government's ability to generate funds to finance spending and repay borrowing. Ms. Arroyo recently ordered heads of GOCCs to cut their huge salaries, which were partly blamed for the large debts of their companies. She is also expected to issue a series of directives aimed at rationalizing GOCCs and strengthening supervisory powers of department agencies over state-owned firms, to ensure that their finances are well managed. The national government aims to trim down the public sector deficit through a package of administrative and legislative reforms. -- Jeffrey O. Valisno and Karen L. Lema with AFP

IFC to invest $100M in RP

The International Finance Corporation (IFC) may invest about $90 million to $100 million in the philippines this fiscal year, mainly in infrastructure projects, the financial sector, and small- and medium-scale enterprises. Vipul Bhagat, Philippine country manager of the IFC, the private sector financing arm of the World Bank, said it would soon close a deal to infuse $25 million to $30 million in combined financing and equity investments in an asset management firm headed by an affiliate of Germany's Deutsche Bank. The asset firm to be set up by DB Real Estate Global Opportunities would buy soured low-income housing loans of the state-run National Home Mortgage Finance Corporation valued at PhP13.4 billion. "We expect to close the transaction in the next four to six weeks," Mr. Bhagat said, adding that IFC was also negotiating with other banks on the sale of their nonperforming loans. "It will be an SPV [Special Purpose Vehicle] structure. The company will be purchasing the loan. We think it is a good thing," he said.

IFC's contribution will be a combination of equity investment in the SPV company and financing for the acquisition of loans. It has taken banks more than a year since the passage of an SPV law to finalize deals with asset management firms wanting to buy their bad loans. Conflicting asset valuations between buyers and sellers have held up the process. "The longer the banks wait, the worse things get. So you can wait for a better price but in the long run it doesn't benefit you because you have this overhang that continues to increase and put a drag on your ability to do business," Mr. Bhagat said. The country has one of the highest bad loan portfolios in Asian emerging markets outside of China, he said. Mr. Bhagat said that while there was private sector interest in investing in Philippine infrastructure, most investors were wary of the unpredictable regulatory framework in the country. "At the moment, the interest is not very strong. people are much more interested in going into China, into Thailand, going into Indonesia," he said.

As of end-June, IFC has invested $430 million in the Philippines, $739 million in China, $468 million in Thailand, and $467 million in Indonesia. Philippine investments for fiscal year 2004 was 35% more than last year's $66.5 million. Mr. Bhagat said IFC hoped to increase its investments in the country coming years, but this would depend on government efforts to improve the business environment. "The Philippines used to rank very high as an investment site. It pains me to say this is no longer the case. Investors are very cautious," he told reporters in a press briefing. "The appetite of investors will depend a lot on the environment."

IFC principal investment officer Jesse O. Ang also said that government should address its fragile fiscal position. "An uncontrolled budget deficit will drag us down for the rest of the decade," he said, adding that the Philippines could not afford a financial crisis similar to the one in 1983, when the government declared a debt moratorium. Mr. Bhagat also said the government needed to stay on its schedule for privatizing ailing state-run National Power Corporation (Napocor) to convince investors that it was serious about restructuring the power sector. Of the $90 million to $100 million in investment for 2004, $30 million went to Ayala-led Manila Water Company as a loan, and another $15 million as equity stake in its expansion projects. IFC also provided another Ayala-led company, Globe Telecom Inc., a swap facility that would allow it to hedge up to $140 million of its long-term dollar denominated liabilities. IFC also committed to provide a $22-million, eight-year loan to Land Registration Systems, a private company that would computerize and connect the 160 offices of the Land Registration Authority.

In the domestic capital market, IFC is working with the Philippine Stock Exchange (PSE) by providing a third party assessment and analysis of the bourse's current situation. "The project will help the PSE work more effectively with outside parties to help make the stockmarket a more effective funding and investment tool in the philippines," Mr. Bhagat said. "In order to improve the vibrancy of the stock market, we need more companies to list such as institutional investors." He cited the need for the Department of Trade and Industry to force companies getting tax incentives to list at the stock market, as required by law. "Getting more companies to list in the stock market is good for a start," he said. He added that regulators such as the Securities and Exchange Commission should also increase the 10% minimum requirement for listing shares. -- Iris Cecilia C. Gonzales with Reuters

NGOs to sit as observers in Public Works biddings

To guard against anomalies in government purchases, representatives of cause-oriented groups will now sit as observers in biddings for public works projects. Under Department Order No. 125 signed last August 16 by Public Works Secretary Florante Soriquez, nongovernment organizations (NGOs) will be represented in regional Bids and Awards Committees of the Department of public Works and Highways (DPWH), to ensure transparency in procurement. Pursuant to Republic Act No. 9184 or the Government Procurement Reform Act, the order provides that:

"... to further enhance transparency in the department's procurement process, all Bids and Awards Committees in the DPWH Central, Regional and District Offices shall each invite at least one representative from any of the registered NGOs in their respective areas to sit as observer(s) in all stages of the procurement process, i.e., pre-bid conference, opening of bids, postqualification, contract award and special meeting(s)"

In Metro Manila, bid committees can invite groups such as procurement Watch Inc., Transparency and Accountability Network Foundation, Konsensyang Pilipino, Evelio B. Javier Foundation, Inc., Transparency International Philippines, Ateneo School of Government, Philippine Chamber of Industrial Estates and Ecozones, and Philippine Institute for Supply Management. DPWH deputy spokesman Antonio Molano said accredited NGOs were those trained by Procurement Watch Inc., a nonprofit, nonpartisan group that convened to bring about reforms in the government's purchase of goods, supplies, materials, and services. More than 20 NGOs in various regions are on DPWH's list of observers. Mr. Molano said regional bid committees could invite NGO representatives from the nearest locality.

Last Tuesday, the Senate committee on public works questioned DPWH officials on alleged irregularities in three bridge projects: La Huerta Bridge in paranaque, Sevilla Bridge in Mandaluyong, and Tullahan Bridge on MacArthur Highway, Valenzuela. Senator Ramon Revilla, Jr., committee head, also questioned subcontracting practices and overpricing at the department, which were allegedly causing delays in projects. In a statement last Wednesday, Mr. Soriquez said, "I will not allow any alleged corruption and other forms of illegal activities to take place under my leadership, much as we had already achieved significant changes in the reform programs taking shape." DPWH assistant secretary Raul Asis said the department has been improving policies and maximizing technology to ensure transparency in the bidding and awarding of infrastructure contracts. -- Beverly T. Natividad

US gov't says cigarette firms lied for 50 years

... $280-B biggest anti-trust case in history begins

'This case is about a 50-year pattern of misrepresentation, half-truths and lies by the defendants that continues to this day.' -- US Justice department attorney Frank Marine

WASHINGTON -- Cigarette makers lied and tried to confuse the public about the dangers of smoking for 50 years, the US government said on Tuesday as, its $280-billion case against the industry went to trial. In opening arguments in the biggest and most ambitious racketeering case in history, the government said a 1953 meeting of tobacco industry executives at New York's Plaza Hotel was the starting point for a conspiracy designed to cast doubt on links between cancer and cigarettes. "This case is about a 50-year pattern of misrepresentation, half-truths and lies by the defendants that continues to this day," US Justice department attorney Frank Marine told a federal court.

The 1999 lawsuit launched under President Bill Clinton targets:

• Altria Group, Inc. and its Philip Morris USA unit;
• Loews Corp.'s Lorillard Tobacco unit, which has a tracking stock, Carolina Group;
• Vector Group Ltd.'s Liggett Group;
• Reynolds American, Inc.'s R.J. Reynolds Tobacco unit; and
• British American Tobacco Plc. unit British American Tobacco Investments Ltd.

The companies have denied the government's allegations and say they have drastically changed their marketing practices since 1998, when they signed a landmark settlement with state attorneys general that severely restricts marketing and subjects cigarette makers to oversight. Tobacco companies say the past misconduct alleged by the government does not mean that they are likely to commit fraud in the future, a showing they say is necessary to justify the $280-billion financial penalty sought by the government. "Cigarettes are not sold the way they were sold in the past," Philip Morris attorney William Ohlemeyer said outside the court house after the government made its presentation. "The best way to predict the future is to look at how cigarettes are sold today."

As the trial's first day continued, stocks of tobacco companies were mostly lower, including Altria, down 1.9 percent to $46.19 a share on the New York Stock Exchange and Reynolds American Inc., down 2.4 percent at $68.24 a share. The trial is expected to last about six months and feature more than 100 witnesses. In its opening arguments, the government said it would prove that the industry constructed a huge public relations operation designed to sow confusion about the health affects of smoking. Justice department attorney Sharon Eubanks cited a 1964 memo from a Philip Morris executive that said the industry had to provide "a psychological crutch and a self rationale to continue smoking." In January, 1964 the US Surgeon General issued a landmark report outlining the risks of smoking that briefly cut into tobacco sales.

MASSIVE DECEPTION

Citing dozens of similar internal industry documents, government attorneys charged that the cigarette makers misled the American public about whether tobacco was addictive, and whether it caused cancer and other diseases. They also said they would show that the industry manipulated nicotine levels and marketed cigarettes to teenagers, even as they publicly denied both practices, and that the companies suppressed and destroyed potentially incriminating documents and research. Justice department officials want the industry to give up $280 billion worth of past profits and seek tougher rules on marketing, advertising and warnings on tobacco products. Cigarette makers say a $280-billion penalty would put them out of business and have challenged the government's demand.

An appeals court is scheduled to hear oral arguments in November on the penalty issue and some industry analysts think settlement talks could follow if the government loses. Mr. Marine, of the Justice department, said the figure represents only a third of what the government could have sought. "If it's money obtained by fraud, it's not their money," Mr. Marine said. Lawyers for the cigarette makers are scheduled to respond with their opening statement after the government's presentation. "We're prepared to offer a very detailed response to what you saw today," Mr. Ohlemeyer said outside the courthouse.

Later in the week, the government is scheduled to call former Food and Drug Administration (FDA) Commissioner David Kessler as its first witness. In testimony already filed with the court, Mr. Kessler has described how the FDA found that tobacco companies were manipulating levels of nicotine in cigarettes. The former FDA commissioner is not related to US District Judge Gladys Kessler who will hear the case. Some anti-smoking groups fear the administration of President George W. Bush may want to settle the case, but Attorney General John Ashcroft said in a statement that the Justice department looked forward to recapturing industry profits and preventing the marketing of cigarettes to young people. -- Reuters

Dollar reserves expected to hit $16B next year

The Bangko Sentral ng Pilipinas (BSP) expects thee country's gross international reserves (GIR) to hit $16 billion next year, slightly higher than the $14 billion to $15 billion targetted for 2004, latest central bank projections show. This is based on expectations that improvements in the local and global economies will increase the foreign exchange liquidity in the market. A BSP official said this would allow BSP to accumulate more reserves. "Hopefully, the investment climate will improve," the official said, adding this would depend largely on government efforts to contain the budget deficit and convince investors that it is serious in addressing its fiscal woes. BSP projections show that the GIR is likely to increase to $17.8 billion in 2006 and $19.7 billion in 2007, still on expectations of continued improvements in the global economy.

The GIR, consisting mostly of US dollars, accounts for the total foreign currency holdings of the central bank. It includes gold and special drawing rights, gross foreign currency holdings and gold reserves. It is seen as an indicator of the country's ability to service the foreign exchange requirements of the economy. Central banks likewise dip into their GIR when they defend their local currencies against speculative attacks. The BSP accumulates its international currency stock through participation in the foreign exchange market and from interest it earns abroad.

Latest BSP data showed that in August, the GIR stood at $15.964 billion, $11 million higher than the $15.953 billion in July, because of proceeds from government's fresh foreign borrowings. Net deposits of the government placed with the BSP during the month stood at $451 million, comprised mostly of proceeds from the government's bond offering in July. The figure could have been higher, had it not been for the debt service needs of the government and the central bank for loans that matured last month. -- Iris Cecilia C. Gonzales

iBank eyes Tier 2 after Dec IPO

By RUBY ANNE M. RUBIO, Reporter
ROULEE JANE F. CALAYAG

The International Exchange Bank (iBank) is mulling to tap the debt market next year to raise additional capital under the Tier 2 scheme to hasten its expansion and boost earnings, bank officials said yesterday. "Sometime next year, we might also go to another exercise and raise additional equity in the form of Tier 2 capital," iBank president and chief executive officer Ramon Y. Sy said in a media briefing yesterday. The capital-raising plan -- which calls for the issuance of bonds that count toward the bank's Tier 2 capital and sit low in repayment hierarchies -- will come after iBank's initial public offering (IPO), scheduled in December this year. "We can significantly expand our branch network, increase the bank's earning assets with minimal incremental cost and therefore maximize the returns to our stockholders," Mr. Sy said. Through its stock market debut, iBank expects to increase its network to between 100 and 120 branches from the current 71. It expects to receive listing approval from the Philippine Stock Exchange in mid-October.

Antonio C. Moncupa, Jr., iBank's executive vice-president and chief finance officer, said, "We are looking at the capital market as part of our expansion program. It is important especially as we want to take advantage of any opportunity that may present so in the future." Since its opening as a full-service commercial bank in September 1995, iBank has established a history of above-industry growth by focusing on the needs of the middle market, transactional deposit customers, and large and mid-sized investors for its distribution of fixed-income securities business. "While we continue to give rightful emphasis in improving our business generation capabilities, we are very conscious in putting in place the parameters by which our business expansion will have to operate. We have to protect our efforts and maximize our resources. We will continue to improve our risk management capabilities and capital management by improving our performance management ability. We have to make sure the investments we do in our people and chosen businesses and infrastructure maximize the present value of our shareholders capital," he added.

Mr. Sy said going public has always been on the bank's agenda. "The plan was we will plan on the fifth year of operations in the stock market. However, because of the financial crisis, it has to be deferred. We believe it is the time to do it," he said. He said investors will be assured that the bank is professionally managed. "No representatives and relatives of the stockholders are working in the bank," he said. The bank is offering 4.42 million to 8.35 million primary common shares at the price range of PhP16 to PhP19 apiece. The shares will have a par value of PhP10 and their listing awaits the approval of the Bangko Sentral ng Pilipinas and the Securities and Exchange Commission. These will represent 15% to 20% of iBank's post-IPO outstanding shares. The bank has not specified a timeline for its planned expansion but Mr. Sy said branch acquisitions from the Philippine Deposit Insurance Corp. are possible. It will look into buying existing bank branches. "We are sounding out other banks," he said. iBank paid PhP8 million each for the licenses of the four banks it purchased in Metro Manila and PhP5 million for each provincial branch.

Peso hardly stirs after US Fed decision to raise key rates

The Philippine peso was little changed yesterday against the dollar, closing at PhP56.32 after merely range-trading after the price-setting move of the US Federal Reserve. It went against most Asian currencies that headed toward multi-month highs after a widely expected US rate rise removed uncertainty for markets. "The market already expected that the PhP56.35 level would stay, [the trading] range should remain tight within PhP56.25 in the next few days," a trader said, adding that others expected a central bank intervention at PhP56.35 after coming in to halt a further slump.

Asian currencies started the day higher and extended gains. The US dollar initially weakened and then recovered, staying within familiar ranges after the Federal Reserve raised rates by 25 basis points on Tuesday and said the US economy was regaining momentum but inflationary pressures had eased. "More or less, market has already anticipated that the [Bangko Sentral's] Monetary Board would not increase rates to match the Federal Reserve. Even interest rates at the bond market are merely correcting now." Even the total volume of transacted dollars at $113 million indicated a cautious market, another trader said. It came from $253 million the other day.

At the Philippine Dealing System, the country's electronic currencies exchange, the peso averaged at PhP56.32, weaker by nearly three centavos from PhP56.295 the other day. It hit an intraday low of PhP56.35 per dollar, lower than its opening value of PhP53.30. Hitting a high of PhP56.295, it closed at PhP56.32, little changed from Tuesday's PhP56.325. The total volume of transacted dollars decreased to $113 million, or more than half the previous day's $253 million. -- I. P. Pedrasa with Reuters

T-bill investment scheme for consumers set in Nov

First Metro Investment Corp., the investment banking arm of the Metrobank Group, is planning to relaunch its small investors program in time with the Bureau of the Treasury's anniversary on November 4. Technical difficulties on the front-end desk hampered the supposed relaunch last August. "We already have a technical meeting going on. We expect that [the system] will be completed by the middle of October, and the launching will be on [the Treasury's] anniversary," First Metro executive vice-president Roberto Juanchito Dispo told BusinessWorld.

Earlier, the bureau's Deputy Treasurer Eduardo S. Mendiola said the implementation of the program was awaiting First Metro's move. He said the plan also involves the Development Bank of the Philippines (DBP) and the Land Bank of the Philippines. "We are developing our own in-house system. I think DBP is developing its own too," Mr. Dispo said, adding that the system can be used by other markets eventually.He said as the program matures, other banks may be invited. "We intend this to be expansive -- on a nationwide scale," he said. Similar to the Treasury Direct Program of the US Fed Reserve Bank, a special window will be set up as a savings mobilization program, allowing retail investors to purchase Treasury bills for as low as PhP5,000.

At present, minimum requirements for T-bills as an investment medium range from PhP50,000 to as high as PhP1 million. Investing in T-bills is an attractive alternative to placing one's money in bank accounts as it allows investors to get a fixed and higher yield for their money. Mr. Dispo earlier said First Metro-accredited Metrobank branches will forward clients' orders to the Treasury via the internet. These orders, in turn, will be serviced by the government through the Registry of Scripless Securities under the Treasury and the settlement facility of the central bank, he said. The program started in 1998 during the Estrada administration. It was suspended due to technical problems a few months after President Gloria Macapagal Arroyo assumed the post. -- Ira P. Pedrasa

Landbank lending to priority sectors up 16.3% as of July

State-owned Land Bank of the Philippines yesterday reported its lending to priority sectors went up 16.3% to PhP74.8 billion in the first seven months of the year from PhP64.3 billion in the same period last year. Julio D. Climaco, Jr., Landbank's vice-president for strategic planning, said the amount that went to its target sectors -- namely, farmers, fisherfolk, livelihood loans, microenterprises, agribusiness, agriculture infrastructure and environment-related projects -- was around 59.8% of the bank's PhP125 billion loan portfolio for the period. "The loan releases particularly for farmers and fisherfolk benefited more than 250,000 of them nationwide," Mr. Climaco told reporters in a briefing.

Loan releases to farmers and fisherfolk reached PhP9.7 billion as of July, or 24% higher than last year's PhP7.8 billion, and was coursed through more than 900 farmer-cooperatives and 300 community financial institutions and the Quedan and Rural Credit Guarantee Corp. Total outstanding loans to farmers and fisherfolk were at PhP15 billion while aggregate lending to small and medium enterprises, and microenterprises were at PhP16.6 billion during the seven-month period. As such, the bank has already hit five months ahead of schedule its end-2004 target of allocating 60% of its aggregate portfolio for priority sectors, said Landbank president and chief executive officer Margarito B. Teves.

Of the other priority sectors, outstanding loans for farm ventures stood at PhP17.8 billion or 19% higher than PhP14.9 billion in 2003; livelihood loans were at PhP2.6 billion; agri-infrastructure at PhP10.5 billion; farm-related projects at PhP9.9 billion; and environment-related projects at PhP2.4 billion. Mr. Teves said the bank is looking at expanding the number of bank-funded cooperatives and enhancing the capacity of current cooperative-clients in handling larger loans. -- Rommer M. Balaba

National Steel creditors fret over Global payment

By FELIPE F. SALVOSA II, Reporter

Creditors of National Steel Corp. are becoming restive over the sale of the revived steel firm to Indian-owned Global Infrastructure Holdings Ltd., as it is still not clear whether the buyer has delivered the entire PhP1-billion down payment. A source from one of the creditor-banks said Global was to remit funds to Manila yesterday night. Another reliable source said "as far as the banks are concerned," Global has not delivered the down payment, pointing out that the PhP1-billion ($17.857 million) amount earlier agreed upon was a "prerequisite" for the deal to close. Documents, meanwhile, showed that while Global's apparent representative, London-based steel firm Stemcor has readied roughly PhP750 million in funds at the Australia and New Zealand (ANZ) Banking Group, Ltd. in Singapore, the eventual remittance is tied to the satisfaction of a number of "conditions."

Creditor-banks and Global forged an asset purchase agreement last Sept. 10, with Global depositing $6.5 million (PhP365 million) in escrow out of the $17.857-million down payment. Global also executed a PhP250-million standby letter of credit which the banks could withdraw in case the Indian firm reneged on its obligations. While the financing agreement with Stemcor has yet to be perfected, ANZ Banking Group assured the lead creditor, the Philippine National Bank (PNB), that it was reasonably "confident" the remittance would push through.

In a transmittal to PNB, ANZ Banking Group said it expected the "conditions" to be fulfilled by the end of business hours yesterday in Singapore. The Singapore bank said the remittance would constitute a downpayment as stipulated in the Sept. 10 asset purchase agreement. The deal with Global did not close last Sept. 10 as two "pre-closing conditions" needed to be met, PNB Senior Vice-President John Deveras had said. The two "pre-closing" conditions are a certificate of eligibility from the Bangko Sentral ng Pilipinas (Central Bank of the Philippines) on the deal's compliance with the Special Purpose Vehicle Law; and an agreement among secured creditors and the National Power Corp. on how outstanding liabilities to the power firm would be paid. When these are met, the parties will sign the last two documents: an omnibus agreement which will secure all payments to be made by Global, and a sharing agreement which will outline how proceeds of the sale will be apportioned among the creditors banks. Global, whose mother company Ispat Industries Ltd. owns one of India's biggest private steel operations, won the bid for National Steel at PhP13.25 billion payable in eight years.

Maynilad creditors not keen on equity conversion of loan

By CECILLE S. VISTO, Sub-Editor

Bank-creditors of Maynilad Water Services, Inc. are not too keen on converting into equity at least $60 million in loans to the debt-saddled company as this may violate the constitutional limitation on foreign ownership of public utilities. In a pleading, the consortium of banks that guarantees the payment of the $120-million performance bond of the Lopez-led firm said it is still studying the implication of the proposed debt-to-equity conversion before approving the revised rehabilitation plan. Of the $60 million, $33 million in Maynilad debts to the consortium of banks that issued standby letter of credit has been set for conversion. "[We are] still studying the implications of whether such option is valid under the law," said the banks, through counsel Oliver L. Pantaleon.

Under the 1987 Constitution, at least 60% of the outstanding capital stock of a public utility must be owned by a Filipino citizen or a domestic corporation. Maynilad, as concessionaire that provides water and sewerage service to the west zone, is covered by the charter restriction. Public utilities are protected industries under the law. This foreign ownership limitation is also embodied in the 1997 concession agreement between Metropolitan Waterworks and Sewerage System (MWSS) and Maynilad. It specifically provides that 60% of Maynilad's equity must be owned by Filipino citizens or corporations.

Benpres Holdings Corp. now controls 60% of Maynilad with French partner, Ondeo Services Philippines, Inc., formerly Suez N.A. accounting for the remaining 40%. "As the [standby letter of credit] banks are composed primarily of foreign banks which may be affected by the constitutional restriction on foreign ownership of a public utility and the restriction in the concession agreement, the debt-to-equity conversion, as well as any agreement implementing such conversion, is a matter that deserves a more thorough study by the [standby letter of credit] banks," Mr. Pantaleon said. Aside from Hong Kong-based Citicorp, other foreign bank-guarantors are Calyon Corporate and Investment Bank (formerly Credit Lyonnais), the Singapore branch of Credit Industriel et Commercial, Fortis Bank, KBC N.V., ICBC, Bangkok Bank Public Co., Ltd., CDC Finance-CDC Ixis, Chang Hwa Commercial Bank Ltd., Singapore, Citibank N.A., Cathay United Bank and J.P. Morgan International Finance Ltd.

REHABILITATION PLAN

In the revised rehabilitation plan submitted to the Quezon City Regional Trial Court, Maynilad proposed the consortium that will pay the $120-million performance bond will collect $48 million from Ondeo, which guaranteed the payment of up to 40% of the bond. Maynilad will pay $39 million over a period of seven years with one year grace, while the remaining $33 million will be converted to equity in Maynilad. If the shareholdings of the foreign banks in the firm will exceed the maximum 40%, the guarantor-banks said they instead prefer to be paid over a period of seven years. They added the debt-to-equity conversion could not be forced on them. "The revised rehabilitation plan should state that the debt-to-equity conversion is solely at the option of the [standby letter of credit] banks. And in the event that the banks do not take the option of debt-to-equity conversion, the banks should at least be treated similar to bridge loan banks," Mr. Pantaleon said.

The bridge lenders, including foreign financial institutions like BNP Paribas, will be reimbursed based on cash flow over a period of seven years with one-year grace period. It should be noted that even the release of the $120-million performance bond of Maynilad to state-run MWSS still hangs as the banks have yet to be paid their premium. If Maynilad failed to remit the premium, which is required for protection, then the government cannot expect to get even a single centavo from the unpaid insurers.

In its latest pleading, the banks reiterated that the premium, or the standby letter of credit issuance fee, is an administrative expense that Maynilad should pay immediately. Nonpayment of the premium, they added, gives the banks a basis to unilaterally revoke the ineffective insurance policy. Maynilad has not been paying its concession fees to MWSS since March 2001. The unpaid fees have ballooned to nearly PhP8 billion. MWSS wanted to withdraw the $120 million to service some of its debts. Maynilad should have paid the premium to renew the performance bond before its lapse on July 31. However, there was a delay in the payment and thereafter, former Justice Secretary Manuel A.J. Teehankee recommended the extension of payment from between seven to 15 years "given the enormity of the amount."

MWSS said it will fully draw the bond on Oct. 4, or shortly after the trial court approves the referral of the rehabilitation plan to receiver Rosario S. Bernaldo for review. "The [standby letter of credit] banks are not waiving and have never agreed to waive their right over the issuance fees. The issuance fees are payment for the service and the risk assumed by the banks in issuing the $120-million [standby letter of credit]." Notwithstanding this, the banks and the parties continue to discuss arrangements with regard to other fees that may become payable in the future as well as penalties," Mr. Pantaleon said.

Retired justice Vitug named head of PSE integrity board

Retired senior associate Supreme Court Justice Jose C. Vitug was named chairman of the market integrity board of the Philippine Stock Exchange (PSE). The announcement was made yesterday after the Securities and Exchange Commission (SEC) and PSE agreed on the final composition of the board. Former SEC Commissioner and PSE independent director, lawyer Monico Jacob was appointed vice-chairman. Lawyer Tadeo Hillado was named alternate vice-chairman.

Other members of the integrity board are PSE independent director Peter Favila and stockbrokers William Ang and Ignacio Jimenez. Alternate members are PSE independent director and University of the Philippines College of Law dean Raul Pangalangan, former PSE president, lawyer Ramon T. Garcia and former PSE Governor David Go. "The fact that the [board] is chaired no less than by a retired senior justice of the Supreme Court and vice-chaired by a highly respected former associate commissioner of the SEC is a concrete indication that the management and board of the PSE are serious in their efforts to promote integrity in the stock market," said PSE President Francis Lim.

Justice Vitug served as acting chief justice of the Supreme Court in May this year and had been associate justice in the Supreme Court for the past 11 years. While serving as Supreme Court justice, he chaired several committees such as the committees on legal education and bar matters, house electoral tribunal and the 1997 and 2003 bar examinations. He was also a graduate professor in advance corporation law, corporate business and finance and international law. Mr. Jacob joined the government in 1986 as SEC associate commissioner. The integrity board will replace the governance committee, currently a committee of the PSE board of directors, and will oversee the operations of PSE's police unit, the compliance and surveillance group which had been restructured and renamed as market regulatory office. -- Roulee Jane F. Calayag

San Miguel to spend PhP15B to boost domestic operations

By ROULEE JANE F. CALAYAG

San Miguel Corp. has earmarked PhP15 billion in capital expenditure from 2004 to 2006 to strengthen its domestic operations. The expansion is unprecedented in scale in the firm's 114 years of operation, it said in a statement. The outlay will be used to finance the set up of new facilities, expansion and modernization programs. San Miguel said it expects to spend PhP5 billion to set up new facilities for food and feed products, a segment that accounts for close to a third of total revenues. San Miguel said it will put up two Pure Foods Hormel facilities in Batangas this year. It said it will also inaugurate its Pure Foods Hormel plant in Cavite. The food and beverage giant will also put up feed mill plants in Bataan and Misamis Oriental, a broiler farm in Bulacan and hog farms in Bukidnon and Tarlac. It will also set up a pet food plant and a veterinary medicine facility in Tarlac. An industrial park will also be established in Laguna to host the company's manufacturing plants for value-added food products.

The food and beverage giant is also pursuing highly integrated agro-industrial zones as its growth model. These will link with San Miguel's manufacturing and distribution channels to ensure the lowest possible cost for its products. San Miguel will also put in investments to tap the expected continuing uptrend in beverage consumption. The company is expanding and modernizing its breweries in Polo, Valenzuela and San Fernando, Pampanga. "These particular expansion projects are growth platforms that will boost San Miguel's export earnings capability particularly from liquor. They will also contribute substantially in our raw material import substitution and help save foreign exchange for the country," said Chairman and Chief Executive Eduardo M. Cojuangco, Jr. in a statement.

There is also a plan to expand the capacity of the Distileria Bago of liquor unit Ginebra San Miguel, Inc. in Negros Occidental. The site development for another alcohol distillery at Phividec site in Mindanao is also nearing completion. Mr. Cojuangco said the consistent focus to grow the home market reflects the company's continuing confidence in the economy, especially with the sustained growth of economic growth and expenditure in the past years. "The Philippines' fundamentals remain sound; increasing consumption, remittances of overseas workers and higher exports continue to prime the country's growth. What we have to find and avail of are the present opportunities and potentials for the future amid the current economic and market challenges," Mr. Cojuangco said.

The company said in a statement that the expansion will equip it "to aggressively pursue new opportunities and potentials within its core businesses." This will also enable it to stimulate local growth and propel the country towards further growth. Mr. Cojuangco said a significant portion of the expansion will be in the countryside to generate employment and livelihood. " Further increasing San Miguel's presence in the countryside should help draw other businesses to locate their enterprises in the rural areas where development is needed most," he said.

ADB keen on backing SPVs

The Asian Development Bank (ADB) yesterday said it is willing to extend financial and technical assistance to a project that will help speed up the creation of special purpose vehicles (SPVs). ADB Country Director Thomas Crouch said the project may be financed through the bank's Private Sector Development Strategy program. Through the program, ADB provides technical assistance and loans to the private sector of its member-countries. "We remain very interested in SPVs. We see that as an important way of improving the financial intermediation capacity of commercial banks which are burdened by non-performing loans," Mr. Crouch said. However, he said no proposals have yet been formally presented to the ADB. "But there are some private sector proponents who came to us and asked if we will be interested," Mr. Crouch said.

Earlier, banks have asked the Senate to extend for at least two years the deadline to set up SPVs or entities that buy banks' idle assets at deep discounts. ADB earlier expressed concern over the bad loan ratio of Philippine commercial banks. ADB estimates that banks in the country have the highest nonperforming loans in the region -- about 15% of their loan portfolio compared to neighboring countries' single-digit rates. The Philippine banking system's bad loan ratio peaked at 18.81% in October 2001 from a single-digit level before the 1997 Asian financial crisis. -- Jennifer A. Ng

Stocks end higher after Fed move

By ROULEE JANE F. CALAYAG

The Philippine stock market closed higher for the third day yesterday. News of the initial public offering (IPO) of International Exchange Bank (iBank) in December seemed to have added some spark to the market. It would be the country's first IPO this year. But what made a stronger impact on the market was the statement of the United States Federal Reserve that its economy was regaining some traction while it raised benchmark interest rates by a quarter point. "Philippine stocks advanced, pushing share prices higher for a third straight session. Investors cheered the US Federal Reserve's comments that the US economy is regaining some traction. The Fed also increased its benchmark interest rate by a quarter-point, but this was expected," noted Jose Vistan, Jr., research director of AB Capital Securities, Inc. in his online commentary.

Since the Philippine bourse patterns its movements and draws inspiration from the US, this statement warmed investors who leapt out of the sidelines and began snapping up shares. The surge in confidence spilled over to the market which was experiencing follow-through bargain hunting on selected blue chips, pushing these stocks to the forefront. The Philippine Stock Exchange composite index (Phisix) closed 7.20 or 0.42% at 1,727.88.

ACTIVE STOCKS

Ayala stocks Globe Telecom and Ayala Corp. followed the lead of tycoon Henry Sy's SM Prime Holdings, Inc. (SMPH). SMPH ended strong at PhP6.20 with 27.5 million shares traded for PhP170.7 million. Its market share was 17.5%. Second most actively traded stock was Ayala Corp. which finished lower at PhP6.40. It was followed by sister company Globe, up at PhP1,085. Philippine Long Distance Telephone, Co. (PLDT) failed to hold on to its lead. It slipped three notches down to the fourth slot, unchanged at PhP1,330.

Expectations that the Bangko Sentral will keep its interest rates steady despite the rate hike in the US pushed property stocks such as Megaworld Properties, Inc., Ayala Land, Inc., SMPH and Filinvest Land, Inc. to finish higher. The continued gains of the market, however, did not result in a positive breadth. Losers still outranked gainers, 43-37 while issues that clung to their previous prices totalled 47. However, the turnover value jumped to PhP975 million. Cross sales amounted to PhP438 million while block sales were lesser at PhP42 million. Net foreign buying remained the trend yesterday. Research firm BPI Securities said with expectations of strong third quarter earnings, investors may likely continue to accumulate stocks.

NEW DEVELOPMENTS

In other news, San Miguel Corp. (SMC) earmarked PhP15 billion for capital expenditures for 2004 to 2006. The amount will be used to finance the establishment of new facilities. Southeast Asia's food and beverage giant will also upgrade existing facilities and expand its domestic operations. SMC chairman and chief executive officer Eduardo Cojuangco, Jr. said his firm's consistent focus to grow the home market reflects its continuing confidence in the domestic economy. A significant portion of SMC's expansion will be in the countryside, to generate employment and livelihood.

Meanwhile, iBank sets its IPO in December. It hopes to raise PhP1.4 billion by selling as much as 25% of its total capital stock. The bank expects to get PhP1.2 billion from the sale of 44.2 million to 62.5 million primary common shares at a target price range of PhP16 to PhP19 per share. It also has the option to sell 21 million more shares or another 5% of the bank's capital. iBank reduced the par value of the primary common shares to ten pesos from PhP100 previously, to keep its share price at par with other banking stocks. Proceeds from the share sale will be used to fund the bank's expansion which includes a plan to increasing the number of branches from the current 71 to 100 up to 120 branches. iBank president and CEO Ramon Sy said the bank is also looking at raising more funds through the issue of Lower Tier 2 fixed-rate subordinated debt notes.

Manuel Tordesillas, chief executive of ATR Kim Eng Capital Partners, Inc. which is the issue manager and lead underwriter, said iBank's IPO is timely because the buoyancy of the stock market indicates that it is primed for a bull run. "[The IPO] is an exceptional opportunity because of the favorable outlook of foreign investors in banks, especially as the industry consolidates. iBank has a consistent track record of growth in its nine-year history, exhibiting agility and increased profitability and assets despite the challenging environment," said Mr. Tordesillas, adding that the bank is "well-positioned to grow faster." Marcelito Ordoñez, managing director of ATR Kim-Eng Capital Partners, said the IPO's success is assured because of the bank's management team and culture of service excellence. "It's worthwhile and profitable," said Mr. Ordoñez.

Major shareholders of the bank include JTKC Equities, Inc., Razon Industries, Greenhills Properties, Inc. and listed firms Philippine Realty & Holdings Corp. and iVantage Corp. These developments coupled with the government's improving fiscal performance are expected to further boost the sentiment of investors.

Electronics, oil weigh on July trade deficit

The Philippines' trade deficit rose by 37% in July from a year earlier as the value of imports outpaced lackluster exports, raising concerns about the impact of high oil prices and waning global electronics demand. The National Statistics Office (NSO) yesterday said merchandise exports totalled $3.416 billion in July, up 5.6% from the $3.236 billion in the same month last year and just slightly lower than the $3.455 billion in June. Exports in July, announced earlier this month, were $3.106 billion, up 3.2% from a year earlier. The trade gap grew to $310 million from $226 million a year ago. In the first seven months of the year, the deficit stood at $1.515 billion, narrowly lower than the $1.57 billion in the same period last year.

The country's balance of trade in goods -- exports minus imports -- has been in a deficit position for five consecutive months since March. "The import figure will remain volatile in the coming months because of the price of energy and an uncertain environment due to moderating tech demand for certain products ... like chips and telecommunications products," said Song Seng Wun, regional economist at G.K. Goh Securities in Singapore.

While imports and exports posted positive growth rates in recent months, both have advanced at a decreasing pace. The 5.6% July import growth was lower than the 18% posted in June. The July export growth of 3.2%, meanwhile, paled in comparison to the 8.2% posted in June. Elena R. Ponceca, research chief at Unicapital Securities, Inc., said "it is a widely known fact that after the election period companies are encouraged to import or export more. However, the Philippines was hit by several external developments ... expectations were not realized." She pointed out that some external considerations caused the course of the country's external trade to contradict the post-election scenarios. "The biggest of which was the volatility of the international oil prices. Because of this, we've encountered slack [in the imports and exports volume." "But if you look closely, the oil price uptick in the world market is not because of supply factors but rather more of geopolitical developments. Hence, correction should be expected any time soon and, once this happens, we might see some normalization in the manufacture industry [and] eventually in trade," she said.

Another thing that may have put pressure on the country's trade performance is the slowdown of the electronics sector in the global market. While still the top import item, electronics experienced a 2.74% reduction in value year on year to $1.485 billion from $1.527 billion. Among the sector's poor performers in July were components/devices (semiconductors), electronic data processing, consumer electronics, communication/radar, and automotive electronics. "In the past two weeks, the output of the electronics sector remains soft and this is quite unfortunate," Ms. Ponceca said. "Nevertheless, the recovery of major economies like the United States and Japan, which both drive the sector, would give a boost to the global electronics market," she added.

Because of these external developments, Ms. Ponceca said the trade figure should be interpreted carefully as certain "lag factors" might affect the outcome. Analyzing the three-month average of the trade data -- a measure that eliminates volatility and lag factors -- Ms. Ponceca said the "Trade outlook should still be on the positive side." The second top import category during the month was mineral fuels, lubricants and related materials like coal and petroleum crude. The import bill for these commodities reached $356.15 million, up by 19.61% from last year's $297.77 million. Third was industrial machinery and equipment, with import value increasing 7.75% to $153.14 million from $142.13 million.

In fourth was transport equipment, although value actually fell by 10.21% year on year to $114.54 million from $127.57 million. Fifth was textile yarn, fabrics and made-up articles, with a lower value as well of $89.35 million in July, down by 5.07% from $94.12 million, previously. Rounding up the list of top imports for July were telecommunication equipment and electrical machinery ($84.28 million); iron and steel ($78.42 million); plastics in primary and non-primary forms ($72.49 million); cereal and cereal preparations ($63.61 million); and organic and inorganic chemicals ($60.98 million). Imported raw materials and intermediate goods, both unprocessed and semi-processed, added up to $1.297 billion in July, up 6.54% from the prior $1.218 billion while the bill for imported consumer goods grew by 10.65% to $271.17 million from $245.06 million. For special transactions including articles temporarily imported and then exported, payments increased by 70.36% to $183.79 million from $107.88 million.

Capital goods imports plunged by 4.38% to $1.307 billion from $1.367 billion the year before. These comprised 38% of all imports and include power generating machines, telecommunications equipment, land transportation equipment except passenger cars and motorcycles, and aircraft, ships and boats. In July, Japan cornered 18.6% of the month's import bill as goods from the country totaled $635.14 million. Japan has been the country's biggest source of imported products. Exports figured $594.2 million, for a two-way trade of $1.229 billion and a trade deficit of $40.95 million for the Philippines. The country enjoyed a $204.82-million trade surplus with the United States with total trade at $1.307 billion. Exports to the US hit $755.68 million while imports totaled $550.86 million. The exchange of goods with Singapore hit $483.33 million, with exports at $209.46 million and imports at $273.87 million, for a trade deficit of $64.41 million. Total trade with the People's Republic of China, Taiwan and Hong Kong hit $431 million, $387 million and $370 million, respectively.

The National Economic Development Authority (NEDA), meanwhile, said consumer demand remains firm in the third quarter despite the slower pace of growth for merchandise imports for July 2004. Socioeconomic Planning secretary Romulo L. Neri said consumer demand remain remains strong as shown by the 10.7% increase in consumer goods imports for the month. "The slower growth in imports for (July) can be traced to the fall in capital goods imports, which pulled down the growth in other major groups like raw materials and intermediate goods," Mr. Neri said in a statement. He also noted that imports of crude, electronics, textiles and embroideries declined for the period. "Crude petroleum declined 26% as demand likely declined due to the high price. Imports of textiles and embroideries probably declined due to production slowdown with the abolition of the quota system in 2005," Mr. Neri said.

As for the decline in the importation of semiconductors, the NEDA said it can be attributed to the excess inventories and slower demand for personal computers in the United States and China on account of higher oil prices and monetary tightening. Former NEDA director-general and Ateneo de Manila University economist Cielito F. Habito said in a telephone interview that the month-on-month decline may signal a slowdown in manufacturing activities. "Although, we should consider also consider the factor of seasonality. But if this kind of slowdown will continue, we can expect slower economic growth in the second half," Mr. Habito said. -- Reuters and Rizzarene S. Manrique with a report from Jennifer A. Ng

Lower July budget deficit recorded

By KAREN L. LEMA, Reporter

The National Government incurred a budget deficit of PhP11.7-billion in August, lower than last year's PhP18.17 billion and bringing the total shortfall for the eight-month period to PhP111.1 billion, PhP2.5 billion less than the deficit recorded during the same period in 2003. Data from the Investors Relations Office (IRO) of the Bangko Sentral ng Pilipinas (Central Bank of the Philippines, or BSP) showed that the government spent PhP71.4 billion against the PhP59.7 billion it earned in terms of revenues last month. Total revenues for the eight-month period stood at PhP462.4 billion while expenditures hit PhP573.5 billion. Based on Department of Finance (DoF) data, the government must generate a total of PhP676.41 billion in revenues and limit its spending to PhP874.225 billion to meet its deficit target for the year of PhP197.8 billion or 4.2% of gross domestic product (GDP). With the deficit currently at PhP111.11 billion, the government has to keep the monthly fiscal gap for the last four months at PhP21 billion to meet the full-year deficit goal.

The Department of Finance said it is confident the government will not breach its full year deficit target. "We are on track," Finance undersecretary Eric O. Recto said. The Bureau of Internal Revenue has just met PhP43-billion goal for August and the Bureau of Customs exceeded its monthly target by PhP1.1 million. Part of the government's fiscal policy objectives is to gradually reduce the deficit over the next six years and totally wipe it out by 2010. Only by doing so can the government reduce the amount of its debts, which reached PhP3.5 trillion as of June 2004. The government has been forced to borrow to bridge the budget shortfall, Repeated borrowing mean a bigger debt stock and increased interest payments. More than one third of the budget goes to debt servicing, leaving little for vital services like education and health.

The government has set the deficit ceiling for next year at PhP184 billion. However, budget officials have said the deficit can go higher as the government aims to absorb PhP500 billion in National Power Corporation (Napocor) debts. Budget officials said absorbing the state-owned utility's debts would mean an additional PhP36.7-billion interest expense next year, PhP45.5 billion in 2006, PhP48.8 billion in 2007, PhP53.2 billion in 2008, PhP61.2 billion in 2009 and PhP66.3 billion in 2010. They admitted that the national government's deficit reduction schedule may have to be extended in case the government absorbs Napocor's debt and if none of the Palace-proposed revenues are passed by Congress. The additional interest expense for next year will raise the government's deficit to PhP220 billion from the PhP184-billion target. The Arroyo administration's proposed PhP907.6-billion budget for 2005 already covers PhP301.69 billion in interest payments, excluding those of Napocor. Including this year's expected shortfall, the Philippines would have run budget deficits in 10 of the last 14 years, largely due to weak tax collection and corruption.

Central bank sees inflation topping target

Consumer prices will continue to creep up faster than expected even if the benchmark Dubai crude stabilizes at $35 per barrel through next year, the Bangko Sentral ng Pilipinas (Central Bank of the Philippines, or BSP) said yesterday. In a presentation on Monday, the Development Budget and Coordinating Committee (DBCC) said inflation next year could stay within the four percent to five percent target if Dubai crude -- the benchmark for local oil prices -- stabilizes at $35/barrel. BSP officials, however, yesterday said there are other inflationary pressures that could push next year's inflation rate past the target. BSP Assistant Governor Diwa C. Guinigundo said monetary authorities expect inflation to rise above the 4%-5% target for 2004 and 2005 on the back of higher transport costs, food and commodity prices. "It is not only fuel, there are other factors such as higher transport fare," he said. Even if oil price adjustments were to slow down in the latter part of the year and next year, there are still inflationary pressures that could push prices of basic goods and commodities higher, Mr. Guinigundo said.

BSP Deputy Governor Amando M. Tetangco, Jr. said that while Dubai oil prices could stabilize at $35/barrel next year, it is also too early to say whether the 4%-5% inflation target could still be achieved. Oil prices in the world market have been increasing since the early part of the year because of limited spare capacity by oil producing countries, tensions in the Middle East and financial woes of a major Russian oil producer. Oil prices went up to more than $40/barrel from a high of $33/barrel in June.

The government has blamed rising oil prices as the major culprit pushing inflation upward, but Mr. Guinigundo said transport fare adjustments and increase in electricity charges are also causing inflationary pressures. These pressures, coming from the supply side, are still outside the influence of monetary policy, he said. The BSP's policy-making Monetary Board has kept key policy rates at a 12-year low of 6.75% for overnight borrowing and 9% for overnight lending. "Demand side pressures on prices are likely to be limited," Mr. Guinigundo said. In a September 20 briefing paper for the House of Representatives Committee on Appropriations, the BSP said unemployment rate is still relatively high at 11.7% in July. "This indicate that demand-side influences on prices are likely to be limited," the BSP said. The National Statistics Office reported that inflation in August went up 6.3%, its highest since September 2001. The latest inflation rate was within the central bank's forecast for the month of 6%-6.6%. BSP officials, in conceding that inflation for 2004 and 2005 will likely exceed the 4%-5% target, said the average inflation rate could shoot to as high as 6%.

Senate defers action on new taxes

The Senate has decided to delay its decision on eight Palace-proposed tax measures and instead agreed to meet again starting October 23 to pick which among the new taxes will be enacted into law. Senate President Franklin M. Drilon said administration and opposition senators have crossed party lines and agreed to come up with a common reform agenda focused on six areas. Specific legislative measures to be included have yet to be identified. "The majority and minority senators agreed on a proposed reform agenda that the Senate as a whole will discuss during a two-day workshop wherein we will have a discussion of our situation and propose reforms that we should undertake," Mr. Drilon told reporters after the all-senators caucus last Monday night.

The six priority areas are:

• fiscal reforms (efficient tax collection);
• financial reform;
• education;
• health (preventive health, immunization, maternal and child health care, killer diseases);
• peace, security, law and order; as well as
• job and income generation (investments, agricultural reform, tourism, infrastructure, energy).

"We did not go into specifics. What was agreed upon is that the six reform items in the agenda will be discussed during the two-day workshop. On the second day, we will discuss the priority legislative measures, which will be borne out of the discussion of the agenda items that we have agreed upon," Mr. Drilon said. He added that representatives from the academe and private sector will be invited to discuss the present financial position of the national government to add to earlier explanations given by the economic managers in various Senate committee hearings on the government's fiscal plan. "We all admitted that the problems and suggested reforms have been discussed before. They were, in fact, exposed and discussed during the committee hearings in the Senate. But we will try to think out of the box. We will build on what we have. We will be identifying the short-term, medium-term and long-term reforms that we have to undertake," Mr. Drilon said.

The Senate chief earlier said four new tax measures will likely be enacted by Congress within the year. These are the indexation to inflation of sin taxes, tax amnesty, performance-related lateral attrition system, and rationalization of fiscal incentives. The four other revenue measures the Executive department wants Congress to pass are the 2% increase in value added tax (VAT), franchise tax on telecommunication companies, shift to gross income taxation from net income taxation, and increase in the excise tax of petroleum products. Mr. Drilon earlier noted that there is an emerging consensus on the need to pass the "sin" taxes on tobacco and alcohol products to raise revenues. "'Sin' taxes, for example, is one form of tax that we can look at favorably because also of the burden on the financing on public health. There is no question that cigarette smoking and alcohol take would be causes of illness which become the obligation of the state to provide for health services. It is logical that those engaged in these habits should pay more. Secondly, there will be less resistance where we will earmark the 'sin' taxes to specific projects like hospitals, education," he said.

Senate ways and means committee chairman Ralph G. Recto the 'sin' tax is a good revenue policy but the measure still has to be weighed carefully. "The government should not use taxation to choose winners and losers. We do not want to kill the industry or encourage smuggling. We still have to study the proposed measure," Mr. Recto said. He added that given the fragile fiscal position of the government, Congress is amenable to giving the Executive department "management tools" such as the performance-based lateral attrition system, tax amnesty and rationalized fiscal incentives program. The lawmaker, however, bucked the increase in excise tax of petroleum products, VAT hike, reimposition of franchise tax of telecommunication companies and shift to gross income taxation from net income taxation. Mr. Recto also expressed concern that the imposition of eight new taxes will adversely affect the economy. "Definitely, it will constrict the economy but by how much, we still do not know, because we will not have consumer spending. The government is insensitive to the political economy which means they want to raise electricity rates and do a double whammy by increasing taxes."

Economic managers are open to amending the government's fiscal plan, particularly the proposed tax measures, to take into consideration lawmakers' suggestions The Senate committees on trade and commerce and economic affairs have asked the Department of Finance (DoF) to refine the new revenue measures to ensure that it will not be the poor who will be hit the hardest.Some senators oppose the Malacañan presidential palace's proposed two-step increase in the value added tax (VAT) rate and instead suggested the lifting of numerous exemptions provided under the VAT regime such as those being enjoyed by the doctors and lawyers. The DoF has also been asked to study the imposition of a uniform rate on cigarettes before indexing the tax to inflation. "It is an idea that is well to be taken positively ... [the] Senate wants to improve on a plan that we will admit is not as comprehensive and detailed as we want it to be," Finance undersecretary Eric O. Recto told reporters yesterday. "The plan is free for anyone to take potshots at. They could look at it and help us refine it," Mr. Recto added.

Finance undersecretary Nieves L. Osorio has said that the economic managers are "open" to changing the fiscal plan to ensure its viability. At present, they have reportedly agreed to retain the four-tiered system of taxing cigarettes and will only recommend changes to the tax rates. In defense of the proposed two-step VAT increase, Mr. Recto said it actually provides a "penalty-reward situation" aimed at motivating revenue agencies to expand the VAT base by running after those who have been evading payments and for the taxpayers to religiously comply with their obligations. "We hope that this will result in an increase in the VAT collection that will negate the need to increase the VAT rate," Mr. Recto said. Under the proposal, the government will increase the VAT rate to 12% in 2006 if a VAT effort of 3.6% in 2005 is not reached. The VAT rate will be increased by another two percentage points in 2007 if a ratio of VAT collection to gross domestic product of 4.1% is not met in 2006. The measure is expected to earn the government PhP20 billion in annual revenues. -- Karen L. Lema

Monetary Board may ignore Fed hike

The Monetary Board may ignore an expected US Fed rate hike and keep local policy rates steady in its meeting on Thursday. "We can still afford to keep rates steady, but it will be up for the Monetary Board to decide," Bangko Sentral ng Pilipinas (BSP) Assistant Governor Diwa C. Guinigundo told reporters yesterday. The US Federal Reserve is widely expected to take another small step in raising interest rates, the third since it began monetary tightening in June. It is expected to raise overnight borrowing costs, which influence global interest rates, by a quarter percentage point to 1.75% to head off inflation in the growing US economy.

The BSP usually matches a move by the US Fed to prevent investors and fund managers from parking their funds in economies such as the US that offer higher interest rates. Mr. Guinigundo, however, said it is not only the US Fed that influences monetary policy. He said monetary authorities are also keeping a close watch on the interest rate differential between peso- and dollar-denominated bonds. A narrower differential gives investors incentives to shift to dollar bonds. "The Philippines and US interest rate differentials have narrowed but remain comfortable at 400 basis points," he said. The BSP has been trying to hold off any rate increase to help spur economic activity in the country through increased credit lending. Banks use Bangko Sentral's policy rates in pricing their loans.

For the 14^th straight month, the BSP's policy-making Monetary Board has kept interest rates steady at a 12-year low of 6.75% for overnight borrowing and 9% for overnight lending. In a September 20 briefing paper for the House of Representatives Committee on Appropriation, the BSP said it is still better to maintain policy rates "despite perceptions of need for monetary tightening." The BSP pointed out that money and credit activity remain moderate despite the low interest rates. Hence, the BSP said it wants to keep interest rates at present levels to encourage more borrowing activities. "Money supply growth was 6.4% in July from 5.6% in June," the BSP said in the paper. Mr. Guinigundo added that growth in commercial bank lending also slowed to 3.6% in July from 3.8% in June. "We still need to see growth in commercial bank lending and money supply," he said.

The National Economic Development Authority (NEDA), for its part, expressed hopes that the BSP will keep interest rates unchanged at least for the rest of the year to keep the economy conducive to business. "We support the BSP position to keep interest rates steady. Higher interest rates will result to higher unemployment rate," a NEDA official said. -- Iris Cecilia C. Gonzales

RP economy fares badly in ASEAN

The Philippine economy continues to fare badly when compared to most other member countries of the Association of Southeast Asian Nations (ASEAN), a government official noted. "We are in bad shape and we will be worse off if we do not wake up," Dr. Romulo A. Virola, National Statistical Coordination Board (NSCB) secretary general said in a statement. NSCB is an agency attached to the National Economic Development Authority (NEDA) that is in charge of tabulating government economic data, particularly the national income accounts. Mr. Virola noted that among the 10 members of the ASEAN, the country's current economic indicators are the most "discouraging."

In his analysis of 10 ASEAN economies including the Philippines, Mr. Virola noted the following findings:

• The Philippines' gross domestic product was the fourth lowest in 2003;
• Because of the size of the population and the high growth rate, GDP per capita of the Philippines was the second lowest in 2003;
• The Philippines placed seventh in terms of merchandise exports;
• In terms of employment rate, the Philippines had the lowest among seven countries in 2001;
• Last year, the Philippines placed fifth in terms of its fiscal balance; and
• Food production per capita was the fifth lowest in 2002.

Mr. Virola said that government officials need to buckle down to work and implement the necessary reforms within six years to reverse the further decline in the country's economy. ASEAN, of which the Philippines is a founding member, groups together Thailand, Malaysia, Indonesia, Singapore, Brunei, Vietnam, Laos, Cambodia and Myanmar. -- J. A. Ng

Industry group unearths 1993 Customs order vs used vehicle imports

The importation of used clothing and right-hand drive vehicles through the country's freeport areas and economic zones is actually prohibited by law, as provided for in a 1993 Bureau of Customs (BoC) order, the Federation of Philippine Industries (FPI) said yesterday. FPI president Jesus L. Arranza said in a statement that the group would ask President Gloria Macapagal Arroyo to immediately order the Customs bureau to implement its own 1993 order. He said Customs Administrative Order (CAO) No. 4-93, issued in August 10, 1993, clearly provided that "any kind or class and articles" may be brought into the country "except articles prohibited under the laws of the Republic of the Philippines."

Republic Act (RA) No. 4653 prohibits the importation of rags and used clothes for commercial purposes, while RA 8506 bans the entry of right-hand drive vehicles, Mr. Arranza said. Ecozones, however, were allowed to import used clothing by virtue of an opinion by the Finance department during the Estrada administration. Subic Freeport, meanwhile, was allowed to import right-hand drive vehicles through an opinion issued by former Justice chief Hernando B. Perez. "Those who issued opinions that allowed the importation of used clothing and right-hand drive vehicles despite the existence of laws prohibiting such importation and [the Customs order should] be investigated by proper government authorities," FPI said. Mr. Arranza said the "discovery" of CAO 4-93, which was signed by then Finance Secretary Ernest Leung, then Subic Bay Metropolitan Authority chief Richard J. Gordon, and then Customs Commissioner Guillermo L. Parayno, Jr., effectively removes the basis for the importation of used clothing and right-hand drive cars. He also said it was "questionable" why customs collectors assigned to ecozones and the Subic Freeport did not implement the Customs order. "The error has caused the government millions of pesos in lost revenues and has driven the local textiles and garments industries, and the car manufacturing industry to the ground, laying off thousands of workers and further eroding the revenue base of the government," Mr. Arranza said.

The President over the weekend gave the Customs bureau two months to curb smuggling in the country as the National Government struggles to raise revenues to finance its ballooning budget deficit. -- F. F. Salvosa II

USDA bullish on RP's agriculture prospects

An official from the United States Department of Agriculture (USDA) is confident of a continued expansion in the Philippine economy despite the country's current fiscal woes. Proof of this confidence was the decision of the US government to set up an Agricultural Trade Office (ATO) in the country, the only such office in Southeast Asia. "From our standpoint, our trade office is new. Usually these offices are [only located] in bigger markets like Japan, Singapore and Hong Kong but the fact we have one here [means] we see growth in the Philippine market which is a testament to the growing economy here," newly-appointed ATO director Dennis Voboril said in an interview with BusinessWorld. The setting up of the office is aimed to further facilitate increased agricultural trade between the two trading partners. Mr. Voboril, who arrived about seven weeks earlier to assume his new position, also noted the increasing trade figures between the two countries, especially in agricultural products.

The National Statistics Office yesterday (NSO) reported that total two-way trade between the two countries reached $1.307 billion in July, with the Philippines importing $550.78 million worth of US goods and exporting $755.68 million worth of goods to the US. This gives Manila a $204.82-million trade surplus. Mr. Voboril said that, within his three-year stint, he plans to implement capacity-building measures not only for local end-users of US-produced farm commodities but also for those who export agricultural products to the US. The more common farm produce imported from the US are beef, corn, frozen chicken, wheat, soybean and rice. "We would want to further develop markets for US products," Mr. Voboril added. However, he admitted he still has to familiarize with the nature of Filipino businesses, particularly retail, hotel and restaurants which use US products in their day-to-day operations. "By working with the Philippine government we hope to develop local industries [who are] importing US goods," he said. -- Jennifer A. Ng

Body formed to oversee quota for tuna exports to EU

A body to manage the Philippines' quota for tuna exports to the European Union (EU) has been formed, the Department of Trade and Industry (DTI) said yesterday. "With the tuna quota export monitoring body now operational, the quota allocation of canned tuna exports to the EU will now be systematically managed," DTI undersecretary for International Trade Thomas G. Aquino said in a statement. The European Commission, through its Council Regulation No. 975/2003 dated June 5, 2003, awarded the Philippines a Most-Favored Nation or MFN-based tariff quota of 9,000 metric tons. The in-quota rate of 12% ad valorem, which took effect in July last year, has been lowered from 24% after a vigorous campaign waged by Philippine trade officials before the EU. Lower tariffs also meant PhP112 million a year in savings as well as "a better competitive position for our tuna exporters in the EU market," Mr. Aquino said. Still, out-of-quota exports will be charged 24%. This is the same tariff treatment accorded to Thailand and Indonesia, Mr. Aquino said.

The EU is the Philippines' biggest market for canned tuna, accounting for 40% of the total. Canned tuna exports reached $111.75 million last year, a 20% increase against 2002. Canned tuna accounts for 26.27% of the Philippines' total marine exports. The Tuna Export Quota Monitoring Unit, formed at the request of the Tuna Canners Association of the Philippines, was placed under the DTI's Bureau of Export Trade Promotion. It will set up an electronic-based barcode system to authenticate all certificates of origin, which will be processed and forwarded to the Bureau of Customs within one day. The body will also set up an internet portal that will serve as the Web site of the local canned tuna industry.

DTI officials said the quota is "evenly distributed" among members of the association, namely: Alliance Tuna International, Inc., Celebes Canning Corp., General Tuna Corp., Miramar Fish Company., Permex Producer and Exporter, Philbest Canning Corp., Ocean Canning Corp., and Seatreade Canning Corp. The DTI, meanwhile, announced that General Tuna, the export subsidiary of Century Canning Corp., and Celebes Canning are set to expand operations and will pour in a combined PhP347 million in investments. Both projects are expected to generate about 2,264 new jobs. General Tuna has earmarked PhP289 million for additional capacity as well as the launching of full-scale operations for pouched tuna to meet a shift in consumer preferences.

Pouched tuna is preferred for fresher-tasting and firmer-texture tuna as well as the package's easy tear-open top, the DTI said. The environment-friendly pack can also be used in a microwave oven. General Tuna's pouched tuna will make use of aluminum polyethylene foil packs. Celebes Canning, a 100% Filipino-owned firm, is also investing PhP58 million to double its capacity to 15,600 metric tons in response to growing export demand, DTI said. Trade Secretary Cesar A.V. Purisima noted that tuna is considered one of the most traded seafood products in the market with a total trade value of $5 billion annually. He also pointed to a huge potential for increased exports with seven of nine tuna processing and canning factories located in General Santos City, nestled on the Pacific Ocean's fishing ground which supplies 45% of the world's tuna. "We expect more companies to locate and expand in the tuna business now that the European Union has lifted its ban on Philippine tuna exports," Mr. Purisima said. -- F. F. Salvosa II

Gov't to sell plans on building coco-diesel plants

The geothermal arm of the Philippine National Oil Company (PNOC) will distribute and sell plans on how to build coco methyl ester or coco-diesel plants to help coconut farmers develop their own coco-diesel products. PNOC-Energy Development Corporation president Paul A. Aquino said the state-owned firm will launch the plan within the month. "It's a pilot plan for making coco-diesel plants. We will be selling plans on how to make coco-diesel plants," he said in a recent talk with reporters. Mr. Aquino did not specify how much the plans would be sold. He added that the proposed coco-diesel plants will have a 200-liter capacity. "In the future, these plants may be used by coco farmers so they can make their own coco-diesel which they can sell. They won't have to throw away anything, they can even earn extra income," he said.

President Gloria Macapagal Arroyo earlier unveiled her five-point plan to cut the country's dependence on imported fuel. She stressed the government should increase the use of alternative fuels such as compressed natural gas (CNG) and coco-diesel to help the transport sector decrease reliance on expensive fossil fuels. "We can significantly reduce our dependence on oil imports by making natural gas our fuel of choice. It is not only indigenous, it is also a cleaner fuel," she said.

By 2005, Ms. Arroyo said the government expects to see 60% of the targeted 1,500 buses plying Metro Manila to run on CNG.She also proposed the conversion of inactive power plants in Sucat, Limay, Malaya and Bataan into gas-fired facilities by next year to augment CNG capacity in Luzon. For coco-diesel, she said 5% of all land vehicles must use biodiesel by 2006. Government vehicles are now using a 1% blend of coco-diesel for their diesel requirements. Ms. Arroyo also said apart from decreasing imported fuel dependency by 3%, the use of coco-fuel as an alternative diesel fuel will pave the way for the creation of more jobs and income for coconut farmers and improve air quality. She also suggested that part of taxes on oil be allocated to develop alternative transport fuels. The government is also looking at strengthening strategic alliances with oil producing countries such as Thailand, Indonesia, Saudi Arabia, China, and Russia. -- Bernardette S. Sto. Domingo

Central Mindanao aims to be RP's main oil palm plantation

KORONADAL CITY -- Central Mindanao is gearing to take up the lead in oil palm plantation development in three years. Mamutur Cariga, chief of the Department of Environment and Natural Resources (DENR) regional forest resource development division, said the region is targeting to become the leading oil palm planter in the country by 2007. Previous estimates place between 20,000 hectares to 30,000 hectares of oil palm plantations are now operating in Mindanao with roughly 50% to 60% located in the Caraga Region. However, most areas covered with near- to medium-term oil palm development plans are located in Central Mindanao.

The Philippine Palm Oil Development Council is scheduled set to discuss ways issues hounding the sector during the second National Palm Oil Investment and Financing Forum that will start today in this city. Mr. Cariga, a member of the council, said the forum aims at gathering potential oil palm entrepreneurs, local government executives, farmers and other sectors. Currently, two palm oil mills -- Kenram in Tacurong City, Sultan Kudarat and Agusan Mill in Trento Agusan del Sur -- have signified their intent to absorb oil palm nuts produced in Central Mindanao.

Oil palm nurseries are now existing in North Cotabato and Sultan Kudarat and are expected to supply the needs of at least 4,000 hectares of plantations now under development in Central Mindanao within the next 12 months. The Philippines, said Mr. Cariga, needs 75,000 hectares of oil palm plantations to meet the local demand. He said at least 19,000 hectares of land under community-based forest management agreements and 3,000 hectares of industrial forest management agreement lands were identified as potential plantation areas in South Cotabato. -- Roel P. Osano

Banks' interest in SPV scheme doubted

By KAREN L. LEMA and JUDY T. GULANE, Reporters
and IRA P. PEDRASA

The Department of Finance wants banks to first prove that they are keen on disposing their idle assets through the SPV scheme before it pushes for the extension of the tax perks and reduced fees offered under Republic Act No. 9182 or the Special Purpose Vehicle Act. "We need to be convinced first that the banks are really going to take advantage of this," Finance Undersecretary Eric O. Recto told reporters yesterday.

Banks are asking the Senate to extend for at least two years the deadline to set up special purpose vehicles (SPVs) or entities that buy banks' idle assets at deep discounts. Mr. Recto said the government has not seen that interest being exhibited since Congress passed in December 2002 the legislation offering incentives to clean up banks' balance sheets. As of now "we are unconvinced," he added. Banks that want to take advantage of tax perks and other benefits under RA 9182 had until September 18 to establish and register their SPVs with the Securities and Exchange Commission. The law grants tax privileges to SPVs that purchase the idle assets of banks as well as to third parties that purchase these from SPVs. The tax privileges -- which include exemption from paying documentary stamp taxes and creditable withholding income taxes and value added taxes -- are given in the course of transfer of the assets from banks to SPVs or from SPVs to third parties. These will expire on March 19, 2005.

Before the deadline could be extended, Mr. Recto said banks must be able to show proof that they are indeed interested. He said banks should not come crying back if the law lapses since they were given ample time to take advantage of the incentives. The biggest problem in SPV efforts has been the inability of banks and would-be idle asset buyers to agree on the pricing of the properties. Senate President Franklin Drilon, meanwhile, said the extension would not sit well with the public given the government's move to initiate more tax measures. "The mood right now is to try to collect more revenues. I don't think that it will be a good policy to try to collect taxes from some sectors at the same time grant extension to one industry such as the banking industry. So, as a matter of policy, this will not apply," Mr. Drilon told BusinessWorld on the sidelines of the opening ceremonies of the ASEAN Insurance Congress. "There's nothing in our calendar which would indicate an extension of the tax exemption. It's not because of any defect in the SPV law but banks can't come up with an agreement with prospective purchasers of its nonperforming assets before," Mr. Drilon said. "The extension was brought up by [Bankers Association of the Philippines] president Cesar Virata in one meeting at the Malacañang but no one was supportive for a further extension," he said. Mr. Drilon added that the government has given banks enough time to set up SPVs.

Philippine banks have the highest nonperforming loans in the region -- about 15% of their loan portfolio compared to neighboring countries' single-digit rates, according to the Asian Development Bank. Meanwhile, the chairman of the House committee on banks and financial intermediaries is amenable to the extension of a deadline for SPVs to register with the securities regulator. Manila Rep. Jaime C. Lopez said the deadline should be extended so that banks saddled with nonperforming assets can dispose of these. Mr. Lopez essentially agreed with Senator Edgardo J. Angara, chairman of the Senate committee on banks, financial institutions and currencies, who said on Monday that the life of such law should be extended for two to five years.

In a recent policy advisory on the SPV law, the Congressional Planning and Budget Department of the House of Representatives noted that the extension of the September 18 deadline can only be made with new legislation. The department also noted of proposals that banks establish their own SPVs and register these with the securities regulator should efforts to extend the deadline fail. The think tank, however, said this move might violate Section 3 of the SPV law that disallows banks from having direct or indirect management of SPVs. It suggested that for government to help banks address their idle assets, it should shorten the time period required to recognize these assets. This places the loans in lenders' watchlists sooner, requiring them to address the problem loans before these start to escalate. Citing central bank data, it said commercial banks' nonperforming assets as of June totaled PhP446.8 billion, or 12.3% of their total assets. The pre-Asian crisis level was only 2.4%. Nonperforming loans, meanwhile, was 13.8% of total loans, or lower than the 15.2% recorded a year ago. But this has not been brought down to a single-digit level since the July 1998 ratio of 9.6%, the department said.

Four-year Treasury bond rate at 11.89%; peso breaks resistance level

Traders demanded a higher rate for government bonds yesterday as they factored in higher inflation and a likely rise in key interest rates. At the auction yesterday, the four-year Treasury bond fetched a yield-to-maturity rate of 11.892%, up by 14.2 basis points when it was last auctioned on Aug. 24. "Bids really came in, it was oversubscribed. The rate [they asked] was better than the secondary market. At these rates, the market has priced in the inflation, the rise in United States interest rates. All have been priced in already," National Treasurer Mina C. Figueroa said.

At the secondary market, the four-year debt instrument was at 12.1717%. Total tenders reached PhP10.468 billion against the public offering of PhP4.5 billion. The auction committee fully awarded all bids. "The high debt yield is already a given; the [rate] levels are good. You still have the inflation to think of. It's essentially on the uptick. Secondly, the Federal Reserve is set to increase US benchmark rates. While it's already expected and priced in, you have the central bank meet this Thursday," a trader said.

The central bank's policy-making Monetary Board will hold its regular meeting tomorrow. It has said several times in the past that it will hold off an increase in key rates. It has left unchanged for 14 months straight the overnight borrowing at 6.75% and overnight lending rate at 9%. Traders are one in saying that the central bank should now increase benchmark rates to keep differentials between the local and foreign market healthy. "There are also threats from ratings companies that we might be downgraded again. Plus, you still have the widening budget deficit," another trader said.

In eight months to August, the budget deficit reached PhP111.1 billion against a target of PhP197.6 billion for the rest of the year. "It has further widened. But while we still have four months to go, I think we may be able to cap it at those levels, perhaps sideways," the trader added. While market liquidity has been driving the large volume of bids in the last few auctions, the market is also "testing the Bureau of the Treasury over and over again, if they still had the capacity to reject and temper the rise in interest rates."

Meanwhile, the Philippine peso broke its PhP56.25 resistance level against the US dollar yesterday while the market awaited central bank's next move. "While the [US] Fed increase is already a done deal. [Bangko Sentral's] move would be risky for the peso. We might touch the historical low again at PhP56.45," a currency trader said. The peso opened at PhP56.25 but one trader said the market's "pent-up demand pushed the resistance even as the central bank came in to sell around PhP20 million to PhP30 million at the PhP56.25 level." The trader also said the market was forced to buy "since they saw that it would not correct soon. We were range-trading between PhP56.05 to PhP56.25 for two weeks now." Total volume of transacted dollars jumped to $253 million from $76 million the other day.

At the Philippine Dealing System, the country's electronic currencies exchange, the peso slipped by almost seven centavos to an average of PhP56.295. It capped its intraday high at PhP56.25. Moving within an eight-centavo range, the peso slipped to as low as PhP56.33 against the greenback. It closed nine centavos weaker at PhP56.325 from PhP56.235 previously. -- Ira P. Pedrasa

Hutchison, Philippines hit by profit-taking

HONG KONG -- Hutchison Wham-poa and Philippine dollar bonds succumbed to profit taking yesterday ahead of an expected quarter percentage point rate hike in the United States later in the day. But Indonesian credits rallied as a presidential vote count showed market favorite Susilo Bambang Yudhoyono set to become the country's first directly elected leader. With half the votes tallied, Yudhoyono was leading incumbent president Megawati Sukarnoputri by 60% to 40%. The final result is expected to be announced on Oct. 5. Spreads on Indonesia sovereign dollar bonds due in 2014 have tightened since Monday by 10 basis points (bps) to 308 bps above 10-year US Treasuries.

Spreads on Indosat's bonds due in 2010 have narrowed by 14 basis points to 379 bps over, while Excelcomindo '09s moved in by nine bps points to 493 basis points over. But dollar bond traders said most market activity was focused on Hutchison Whampoa Ltd. and Philippine sovereign bonds. "We're seeing some professional selling on Hutchison Whampoa and the Philippines and generally seeing some weakness there, and the rest of the stuff is pretty much quiet compared to those two sectors," said a trader at a European bank in Hong Kong. Hutchison '14s widened about three bps from the open to trade at 168/165 bps over Treasuries by midmorning.

In the Philippines, traders said that some local accounts were taking profits in the hope that they could buy back at a lower level. "Some of the holders have been waiting to see a further rise in prices given the fact that all other emerging markets have risen," said a trader in Manila. "US Treasuries have been climbing upwards, and the Philippines have continued to lag this uptick, so what has happened is that some of them have become disillusioned and have decided to get out and hope to just push it down and rebid at lower levels. I would assume at a point lower they'll be back in." Philippine sovereign bonds due in 2025 were trading down about half a point from the open at 107.5/108 in price terms, while the ROP '14s were down about a quarter of a point at 97.875/98.375. The US Federal Open Market Committee is expected to raise federal funds rate by 25 bps to 1.75% later on Tuesday. -- Reuters

Toyota to invest additional PhP7B in next 2 years

By FELIPE F. SALVOSA II, Reporter

SANTA ROSA, Laguna in Southern Luzon -- The Toyota Group expects additional investments in the country to reach PhP7 billion in the next two years with the Philippines becoming the Japanese auto maker's production base for auto parts and components aside from assembling and marketing motor vehicles, officials yesterday said. Toyota has so far invested PhP15 billion in the country, said Toyota Motor Philippines Senior Vice-President Serafin M. Pantaleon.

Out of the PhP7 billion in new investments, PhP3.6 billion will be earmarked for more than a dozen companies under the Toyota Group, Mr. Pantaleon told reporters following ceremonies here marking the start of the company's export of transmission assemblies to Japan. The amount includes expenses for plant modernization, plant expansion for capacity increase, quality improvement, and investments in new technology, he said.

Last year, Toyota committed to pour in PhP3.4 billion for its 25-hectare special economic zone, covering new production lines and the construction of a new storage room for completely built-up vehicles, including a new administrative service center as well as other buildings. Toyota had said the additional production lines would be allotted for the assembly of leading models such as Corolla Altis, Camry, and the Toyota Revo Asian utility vehicle. Toyota also projected exports to reach $380 million to $400 million this year, $415 million in 2005, and $428 million in 2006. As of the first quarter, exports have totaled $55 million, Toyota said. Toyota Autoparts Philippines, Inc. is currently Toyota's largest manual transmission plant outside Japan, exporting to Thailand, Vietnam, Malaysia, Indonesia, Taiwan, India, Pakistan, and South Africa. Two million transmission assemblies have been manufactured since 1992, aside from some 900,000 constant velocity joints or CVJs.

With President Gloria Macapagal Arroyo as guest of honor, Toyota officials yesterday began the export of Philippine-made transmission assemblies to Japan, on top of CVJs which were exported starting last year. "One primary task that we have set for ourselves is to enhance our contribution to the Philippine economy by expanding exports from the Philippines," said Shoichiro Toyoda, honorary chairman of Toyota Motor Corp. of Japan. "To fulfill this aim, we have now decided to start exporting automotive transmissions to Japan, on top of CVJs that are already shipped there," he said in his speech.

George S.K. Ty, chairman of Toyota Motor Philippines and Toyota Autoparts, said increased exports could enhance the country's role as an industrial hub for auto parts manufacturing. The start of transmission exports to Japan was in fulfillment of a commitment to new investments made in October 2002 by Toyota Japan President Fujio Cho to Mrs. Arroyo, Mr. Ty said. "Since then, Toyota has embarked upon new investments for plant modernization and production of new transmission models. These transmissions are now a major part of the Toyota Global Supply Network," he added.

Waterfront has until Oct. 17 to pay PhP457.4-M debt to SSS

By CECILLE S. VISTO, Sub-Editor

Listed Waterfront Philippines, Inc. is in danger of losing to government two large parcels of land valued at PhP194 million and some PhP315 million worth of shares if it fails to pay nearly half a billion in debts to Social Security System (SSS) by next month. The company -- controlled by plastics king William Gatchalian -- has until Oct. 17 to remit PhP457.3 million to the state pension fund. Failure to do so will allow government to foreclose the properties due to inability of the Wellex Group to redeem them on time. SSS successfully bid for the lots on Oct. 17, 2003 but gave the Wellex Group one year to buy these back. Waterfront recognized the foreclosure sale as valid, thus, has no choice but to turn over the land to SSS. However, it said the PhP235-million Waterfront shares owned by The Wellex Group, Inc. and PhP80 million shares owned by Wellex Industries, Inc. -- although offered also as collateral to SSS -- have not been foreclosed by the agency. "[We are] currently negotiating with SSS for the further restructuring of its remaining obligations," said Waterfront, in its second-quarter report. But in earlier disclosure to the Philippine Stock Exchange, it claimed SSS's claim "appears to have no valid and factual basis."

Waterfront obtained a PhP375-million, five-year term loan from SSS in 1999 to finance the completion of the construction of the 562-room deluxe Waterfront Cebu City Casino Hotel in Lahug, Cebu City. Several lots owned by Wellex Industries, Inc. and over PhP200 million worth of common shares in Waterfront have been mortgaged to secure the obligation. The shares have been placed in escrow and in possession of an independent custodian selected by the parties. As of Aug. 7, 2003, the total indebtedness of Waterfront to SSS has reached PhP605 million, including penalties and interests. SSS initiated foreclosure proceedings on Wellex' mortgaged lots on Aug. 7, 2003. SSS won the lots in a foreclosure sale, offering the highest bids at PhP74 million for the first lot and PhP124 million for the second lot. The 2003 financial statement of Waterfront showed its total loan obligations to SSS stood at PhP438 million as of Dec. 31, excluding other expenses and payable legal fees.

NTC to telcos: submit more evidence versus fly-by-night carriers

The National Telecommunications Commission (NTC) is asking local carriers to hand in more evidence on their allegations there are fraud operators who bypass their facilities. NTC Commissioner Ronald Solis said carriers have already submitted a position paper saying they are losing millions due to the fly-by-night carriers. "Telcos are calling for a stronger regulation on bypass. They presented a common stand to the Commission," Mr. Solis said. The NTC earlier asked carriers to present types of bypass operations and how these affect their bottom line.

Mr. Solis said among the carriers which signed the position papers are Philippine Long Distance Telephone Co. (PLDT), Smart Communications, Inc., Globe Telecom, Inc., Bayan Telecommunications, Inc. and Digital Telecommunications (Philippines), Inc. "We asked them to present more evidence proving that bypass is illegal," he said. Sources earlier said fly-by-night carriers offer long-distance calls at lower cost, undercutting legitimate telcos. Reports said legitimate telecom firms lose PhP3.50 to PhP4.50 for every call terminated through bypass facilities.

A source from Globe said these kinds of operations may be done through voice over internet protocol system (VOIP), or through leased lines. He said some firms have leased lines which allow unlimited calls overseas. This service is then offered to the public at a cost which is lower than that offered by legitimate telecom firms. "We combat that because it kills the industry. This is an illegal operation because under the law, only authorized carriers are allowed to provide public utility service," the source said. -- Anna Barbara L. Lorenzo

SEC keeps closer watch on boiler rooms

By ROULEE JANE F. CALAYAG

The fight against boiler room operators intensifies as the compliance and enforcement department of the Securities and Exchange Commission (SEC) tightened monitoring of suspect companies. Lawyer Hubert Guevara, director of the compliance and enforcement department, told reporters operatives had been assigned to closely investigate boiler room operations in preparation for a planned raid in the next few months. "We are looking at the violations of three corporations and hopefully, in a week or so, we will [complete it]. We will conduct one raid operation within the next two months -- in November," he said. He said suspect companies conduct dubious operations "within the area," although he refused to identify whether it is within the Ortigas district. At least two people reportedly sought the SEC's assistance last week concerning these boiler rooms, so-called for the high-pressure tactic used in coercing unsuspecting clients to accept their offers.

A foreigner, who was duped, even travelled to the Philippines to file a case, Mr. Guevara said. Police have said boiler room operations are often disguised as call centers, taking advantage of the growing importance given by the government on the industry. Often used as dummies by foreigners that set up illegal businesses, these boiler room operations victimize Filipinos seeking jobs and foreigners. Job seekers are offered telemarketing positions, working "based on a script and a need-to-know basis" and often summoned at either midnight or the wee hours to call supposed would-be clients overseas.

The operators also front as management consultants. However, their request for numerous phone lines often give them away to authorities. "One suspect company requested for 54 lines," Mr. Guevara said. But he assured the SEC is on top of the case. "I am going to draft a memorandum of agreement with the National Telecommunications Commission for provisions in regulating call centers. We need to touch base with concerned government agencies," he said. "It seems to be loosely regulated."

Mr. Guevara said telephone companies should know the actual operations of entities, especially businesses, applying for phone lines. "We have to look at the macro level and the impact of these [boiler room operations" to foreign investors. We need to project an image to the international market that we are a pro-active regulatory [body] -- to increase the confidence of foreign governments. This should be an initiative of regulators," he said.

Stocks extend gains on good leads

By ROULEE JANE F. CALAYAG

Bargain hunting and good news from the government scene boosted the stock market's performance for a second day. Investors were encouraged yesterday to snap up shares, taking advantage of the market's gains the other day. Dealers attributed this to follow-through buying on select stocks. Mylene Crucena Mercado, investment analyst at 2tradeasia.com, said the investors continued to hunt for bargains.

TAX MEASURES

Updates on tax revenue measures renewed optimism in the market. Senator Francis Pangilinan, in a radio interview, said the Senate is willing to back three taxes to generate additional revenues. These include the "sin" taxes, rationalization of fiscal incentives, and the proposed lateral attrition law which is a reward system for government revenue-generating agencies. Senate backing for three of the eight proposed measures sent a strong signal to the business community which was waiting for cues. Investors welcomed this development, noting that this would help stabilize the shaky confidence of foreign markets in the Philippine bourse.

CHRISTMAS SHOPPING

The pre-Christmas spirit also boosted sentiment. September ushers in the three-month-long preparation for Christmas in the country. Domestic sales are improving, soaring to highs not observed in the past eight months as the public began stocking up for the season. The surge in sales is expected to translate to better gains for listed companies and for the stock market. The benchmark Philippine Stock Exchange composite index (Phisix) continued to move forward by 18.47 or 1.08% at 1,720.68. The 30-company Phisix reached an intra-day high of 1,715 and intra-day low of 1,703.

INDICES

With some investors still cautious in choosing stocks, some indices failed to sustain their momentum. The all shares index lost 1.34 at 1,081.78. Mining gave went down by 22.82 to 1,817.41. But Ms. Mercado said although mining was down, some investors took to a number of mining stocks. The commercial-industrial stood strong, still cornering the largest gains, rising 28.05 or 1.03% to 2,743.18. The banks and financial services followed with 7.05 or 1.46% at 491.93. Property moved in the same direction, up 2.74 at 579.90. More than 908 million shares exchanged hands for PhP880.2 million on 2,503 trades. Advancers lagged behind decliners at 29-32. Unchanged issues still dominated the trades at 46.

ACTIVE STOCKS

Telecommunications heavyweight Philippine Long Distance Telephone Co. remained the most actively traded stock, although it dipped to PhP1,330. Its market share was 22.42%. Aboitiz Equity Ventures outranked the rest, sealing its place in the second spot as it rose to PhP3.40. The Sys' SM Prime Holdings, Inc. advanced to the third position. But the stock price of the mall developer and operator was unchanged at PhP6.10. The Ayala-led Bank of the Philippine Islands jumped two notches up at the fourth slot, up at PhP45. Another banking stock, Metropolitan Bank and Trust Co., completed the magic five, up at PhP28.50. "Telcos and select properties [performed well]," said Ms. Mercado. But it is not certain whether the recovery will last.

Dismissing the possibility of a replication of last week's performance, some dealers said the market's movement is dependent on many factors. "It depends on developments such as the [decision on the proposed] revenue tax measures," said Ms. Mercado, adding that a positive result to this matter "will boost confidence of investors."

FOREIGN BUYING

Net foreign buying was back at PhP97.5 million. Total foreign buying was higher at PhP527.7 million while total foreign net selling closed at PhP430.2 million. Odd lots, or transactions below the set minimum for shares, totalled 1.03 million valued at PhP241.8 million. More than 69 million main board cross transactions occurred, amounting to PhP425.7 million. Ginebra San Miguel, Inc. had a special block transaction, selling over two million shares at PhP27 equivalent to PhP54.9 million or 6.24% of the market.

HOUSE OF INVESTMENTS

Meanwhile, the Securities and Exchange Commission approved last Monday the reduction in the authorized capital stock and par value of the common shares of listed holdings firm House of Investments. With the approval, the firm's authorized capital stock decreased to PhP2.88 billion from PhP3.5 billion and the par value of its common shares to PhP1.50 from two pesos.

In line with the rule that trading suspensions will be lifted two days after the release of the approval, the Philippine Stock Exchange said trading of House of Investments shares will resume today. The resumption of trading was only a part of the improved and bigger picture for the stock market. After the securities regulator gave the go signal for the initial public offering of International Exchange Bank (iBank), the bank is set to make some announcements today. The market has long been waiting for the public listing, and iBank is expected to open the doors for more listings in the last few months of the year.

In the meantime, while the market tries to settle at a new level, criticism on the government's savings scheme may pull the trigger for another downturn. The country's low savings rate is blamed for the fiscal crisis plaguing the nation of over 80 million Filipinos.