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July 2009

MARKET CALLThe

Capital Markets Research

FMIC and UA&P Capital Markets Research

Macroeconomy 2 Fixed-Income Securities 8 Equities Market 13

Special Feature 20 Recent Economic Data 24 Contributors 26

The Market Call - July 2009

2

Macroeconomy

“Green shoots” are becoming more visible in the Philippine economy. Fiscal spending continues to grow at record levels while keeping the deficit according to program; the inflation rate, at below 2%, has dropped to a 22-year low; exports are moving up on a monthly basis; and OFW remittances have remained positive. The bond and, more especially, stock markets remained robust.

A shift in risk appreciation in the financial markets all over the world reflects the view that the worst may be over, and the recovery whether weak or strong is already ongoing. But more optimistic sentiment alone cannot bring about a good recovery. And so we continue to be cautiously optimistic that the Philippines will post a positive growth, despite the contrary opinion of the World Bank.

NG Spending Up by 38% in JuneSurprising its critics—who claim that it is not spend-ing enough or that it is allowing the deficit to get out of control—the National Government (NG) spending rose by 38% in June (over a year ago), bringing the 2nd quarter to rise by 26.2% (also, over a year ago), while keeping the first semester deficit to P153.4 B or slightly lower than the programmed P155.1 B. Notably, the 2nd quarter expen-diture jump was accelerating from the 1st quarter, which increased only by 21.4%.

Actual expenditures for the first half was P37.4 B less than the NG program, which may appear to support critics’ charge that the government’s “stimulus package” is simply not there. However, when we look closely at the details, we find that P14.1 B of that was due to savings on interest payments, leaving P23.3 B unspent. However, this is only 4% of the budgeted non-interest spending. This can easily be explained by the overprovision for inflation when the budget was approved last year. Real spending of nearly 20% in the second quarter can hardly be called “insignifi-cant” in the local context.

The shortfall in spending, likely due to lower inflation, was roughly in line with the weakness in tax revenues. Collec-tions of the Bureau of Internal Revenue (BIR) were 3.3% off from its revenue target. This is due mostly to the tax relief laws passed in 2008. These includes the exemption of individuals earning only the minimum wage. These al-low even corporate taxpayers a standard optional deduc-tion of 40% of gross income, without the need to give doc-umentary support for the deduction, and the cut in the corporate tax rate from 35% to 30% (which was part of the VAT Reform Law of 2005). The BIR’s improved tax take in June of 11.7% was a pleasant surprise.

The Bureau of Customs (BOC) revenues were down in June by 18.7% (year-on-year, y-o-y), pulling the first semester’s fall of 10.4%. For the first half, therefore, the BOC was off its target by P20.1 B, a few billions less than the BIR’s shortfall. A good part of this can be attributed to the deep plunge of imports, led by crude oil’s 52% slump.

As the economy is expected to improve in the second half, the U.S. recovers, and election spending going at a faster clip, the pessimistic forecasts of the deficit exceeding P300 B are unlikely to materialize.

Meralco Electricity Sales Improve in MayMeralco electricity sales, although posting yet another negative growth, slightly improved with a growth of -0.8% for the month of May from the -1.4% registered last April. Although base effects may be at work in the growth exhib-ited last April, it can still be observed that there has been a very minimal improvement as the drop in electricity sales, to some extent, slowed down.

For the month of May, commercial and streetlights elec-tricity sales decelerated to 0.6% and 0.9% from 1.9% and 6.4% respectively. Residential sales edged a little from 0.01% in April to 0.6% in May. However, some light at the end of tunnel may be seen in industrial sales. While still on the negative, its decline slowed down significantly from -7.7% to -4.2%. Thus, although electricity sales may still be in the negative growth territory, it can be seen that it is slowly creeping out of it given the slight improvement in residential and industrial sales.

“Green Shoots” Sprout in Philippine Economy


3

Macroeconomy

June headline inflation slowed down to a 22-year low of 1.5%.

The slow economic activity for the month of April is sup-ported by the -15.5% decline (y-o-y) in Manufacturing ac-tivity reflected in the Volume of Production Index (VoPI). However, given the slowdown in decline posted by the in-dustrial sales for the month of May, we hope to expect an uptick in manufacturing activity in May.

Given the unimpressive improvements of these produc-tion indicators, it can be seen that economic activity is in a slow recovery mode so far.

It can be observed that base effects are at work in this slowdown in headline inflation. This low headline inflation was brought about by slower y-o-y growth rates registered by all commodity groups, most noticeably by Food-Bev-erages-Tobacco (FBT) and Services. The heavily-weighted FBT grew only by 2.7% in June (y-o-y) from May’s 5.9%. As can be recalled, last year’s rice crisis brought FBT prices into record highs. Meanwhile, the Services index turned negative at -1.1% in June from May’s 0.4%. The 47.9% plunge in crude oil prices (West Texas Intermediate, WTI) from last year’s $133.88/barrel to just $69.75/barrel last June significantly contributed to the entrance of Services index into the negative growth territory. These two notice-able y-o-y declines, especially that of FBT, led the headline inflation rate further southward.

Although we may be experiencing decelerating headline inflation, on a monthly basis, inflation inched up by 0.6% in June primarily due to the oil price increases and seasonal factors related to school opening. Aside from the Housing and Repairs (H&R) index which stayed on the same level in June, other commodity groups showed relatively rapid growth. This faster pace of inflation in June compared to May was fuelled by the faster growth in FBT, FLW and Ser-vices.

Source: Meralco, National Statistics Office (NSO)

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Figure 1 - Meralco Sales & Volume of Production Index Growth Rates (year-on-year)

Inflation Slides to 22-year Low in June

Following the trend of record-low inflation rates, June headline inflation slowed down to a 22-year low of 1.5% from 3.3% in May (y-o-y). Likewise, core inflation, which shows the underlying trend in consumer prices as it ex-cludes volatile food and energy items, supports this de-celeration in consumer price increase as it settled to 3.9% from 4.4% recorded in May.

Figure 2 - Inflation Rates Annualized (2006-2009) Seasonally Adjusted Vs. Year-on-Year

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Monthly S.A. Inflation Annualized

Year-on-Year Inflation Rate

Source: NSO


4

Macroeconomy

For the 8th straight month, merchandise exports recorded a double-digit decline.

Unfavorable weather disturbances, which affected agri-cultural production, pushed FBT prices up by 0.3% (m-o-m) from just 0.1% in May. Meanwhile, albeit still in the negative, FLW rates rose -0.16% from May’s -1.85% due mainly to the uptick in kerosene and LPG prices together with higher water rates in some of the country’s regions. From May to June, increases in tuition fees, plane fares and other medicines were experienced. These, together with uptick in gasoline prices due to the 18.2% rise in crude oil prices, drove Services index upward by 2.4% in June from 0% in May.

The seasonally adjusted annualized rate (SAAR), however, edged up by only 0.96% in June from -2.56% registered in May. While food items posted a deceleration of the nega-tive pace in June, the up tick in non-food items at 2.18% (SAAR) pulled up the overall SAAR to a slightly positive rate. The latest figures and the average (2.8%) for the first semester of SAARs show minimal inflation pressure.

This 2-decade low headline inflation moved the BSP to cut its policy rates by 25 basis points, bringing it to 4.0% in order to stimulate the economy. In the coming months, inflation rate may post further record lows as we expect inflation to be lower than 1% due mainly to the record high consumer prices last year. The inflation outlook re-mains positive for the rest of the year as crude oil prices have stabilized, and unlikely to stage a major recovery un-til mid-2010. Food prices may have a slight upward bias due to an early rainy season that could have slowed down agricultural output. Although a gradual rise in year-on-year inflation rates are expected starting September, we maintain our forecast of 3.3% for the full year of 2009.

Exports Post Good 14% Monthly Rise in MayFor the eighth straight month, merchandise exports re-corded a double-digit (y-o-y) decline. After a deep plunge of -35.2% last April, total exports of the country registered -27.0% in May, following months of seemingly decelerating declines. April marks the first time this year that exports plummeted above the -30%-mark. Given that the month of May is not really a strong month for the country’s ex-ports, its 14% gain from April is a marked improvement in

the country’s exports.

This slight improvement is primarily due to the decelera-tion in drop of electronics exports which make up 58.7% of the country’s total exports. As can be seen, total exports then follows the movement of electronics exports. The plummeting of electronics exports held back to -29.83% from April’s -36.11%. In addition, slower drops posted by other non-electronic manufactured exports of the coun-try (Garments, Machinery and Transport Equipment, etc.) contributed to the improvement shown by exports for the month of May.

Likewise, other major exports of the country followed the same trend. Total agro-based products and mineral prod-ucts showed slower declines, posting plunges of -26.95% and -49.63% from -47.9% and -51.2% respectively. How-ever, continuing drop in oil prices weigh down on petro-leum exports as it further plummeted to -62% from -44% in April.

Figure 3 - Monthly Exports Growth Rates (y-o-y)

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-35%

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Source: NSO


5

Macroeconomy

OFW remittances may not post the usual large growth rates that it has show in the past.

May exports data clearly shows an improved performance of our exports. Given that the third quarter is the season of inventory-building for the December holiday season, we may see our exports showing further signs of deceler-ating drops in the coming months. However, we must not be easy to think that exports will perform the same as last year, especially given the fact that global consumer spend-ing has not really recovered yet.

OFWs Continue to Confound Doomsayers OFW remittances continued to give the country a reason for optimism as it posted yet another positive growth of 3.7% in May from a year ago, a record-high of $1.48 B. For the first five months of the year, OFW remittances al-ready totaled $6.98 B. It is a 2.8% increase from last year’s levels, still on course for a flat to slightly positive growth this year.

The month of May is known to be a strong month for OFW remittances as migrant workers send in their money to their beneficiaries here in the country for enrollment ex-penses as classes open in June. As such, it may be seen that a 3.7% growth in times of global economic recession is enough for the country to keep faith in the ability of OFWs to maintain a steady inflow. Continued demand for our professional and skilled OFWs has contributed signifi-cantly to the positive growth being shown by the remit-tances.

For its part, the government has been aggressively market-ing the services that our migrant workers can offer. It has been involved in forging several hiring agreements with several countries (e.g. Saudi Arabia, Japan, Australia, etc.). More recently, the Department of Labor and Employment reached an agreement with South Korea that will allow up to 5,000 deployment within the next 10 months. This, to-gether with the expanded access of both OFWs and their beneficiaries to remittance-linked services, continues to offset the drop in domestic employment brought forth by the ongoing global economic crisis. Moreover, the hir-ing agreements being pushed forth by the government with other countries will make possible for a sustainable growth in remittances in the coming months.

OFW remittances is the most closely watched economic indicator today as this is known to fuel domestic con-sumption. However, it must be noted that it is the peso equivalent of these remittances that is more important for domestic consumer spending. For the month of May, OFW remittances in peso terms grew by 17.1% from 17.9% in April. Although below the 20%-mark, it can be seen that its double-digit growth in peso terms can still keep the economy afloat as its year-to-date growth stands high at 18.8%. It can be noticed that the year-to-date growth may slightly be weakening. This is mainly due to a lower rate of depreciation (y-o-y) in the coming months as the peso’s weakness started to accelerate in the second half of 2008.

OFW remittances may not post the usual large growth rates that it has shown in the past. Nonetheless, given the sustained demand for our migrant workers and the hiring agreements that are still to take effect, we can still expect steady levels of OFW remittances in the coming months.

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Source: Bangko Sentral ng Pilipinas (BSP)

Figure 4 - OFW Remittances Growth Rates (y-o-y) in US$ and Php Terms


6

Macroeconomy

The peso finally went slightly below the 48-per-dollar mark last July 21.

Peso On Narrow Trading RangeWith risk aversion resulting to a net outflow of foreign portfolio investments at $77 M, we have seen the peso-dollar rate on a depreciation bias in June. But likely in-terventions by the BSP may have kept the exchange rate trading within the P48.00 to P48.50 band for most of July.

A more free market view, however, is that the market has been subjected to alternating bouts of risk-taking and risk aversion.The movement of the foreign exchange rate de-pended mostly on the dollar’s strength and weakness rath-er than on domestic concerns. Risk aversion, prompted by the decline in US consumer confidence, positive existing home sales and rise in unemployment rate in several large economies (eg. US, Japan, Germany), strengthened the dollar’s safe haven appeal. As such, the peso weakened relative to the dollar. However, improved manufacturing activity in US and China and the better-than-expected sec-ond quarter earnings of several large US companies (e.g. Goldman Sachs, Intel, etc.) increased the risk appetite of investors. This contributed to the strengthening of the peso as investors put their money in riskier markets.

Moreover, concerns over ballooning deficit may have been tempered as year-to-date budget deficit of P153.4 B was slightly lower than the planned P155.1 B deficit ceil-ing. This together with ultra low inflation rates suggests that domestic concerns may not be putting much pres-sure on the peso. With risk appetite improving as the US economy shows signs that the recession is nearing its end, while Europe and Japan appear to still be in a deeper hole, the dollar may still continue to have appeal in the second semester.

The peso finally went slightly below the 48-per-dollar mark last July 21. However, it was not sustained as the dol-lar regained strength due to talks of potential rate hikes of the Federal Reserve Board (Fed). The peso’s rally was also tempered by the strong demand for dollars due to the coming third quarter import season and suspected BSP in-tervention. It appears that the BSP got burned when it let the peso strongly appreciate (2005-2007) and has been buying dollars in the market, while doing a swap in order to keep more pesos entering into the banking system. It is reported that from nearly zero BSP swaps now exceed $4 B. Thus, the market will likely move sideways, except in November-December, when OFW remittances usually surge. But for most of the second half, despite the vibrant domestic stock market, foreign banks taking profit and re-patriating most of their capital in order to shore up their liquidity positions.

OutlookWith the U.S. economy on the recovery mode, and do-• mestic demand boosted by high growth rates in govern-ment spending and construction activity; we think GDP growth is likely to accelerate to between 3-4% for the last two quarters of 2009.

Inflation continues its downward path (year-on-year • basis), reaching 0.3% for July and August, and gradually rising towards 4% by December 2009. We do not see much upside for crude oil, commodity and international rice prices, as demand remains extremely soft.

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Figure 5 - Daily Peso-Dollar Exchange Rates (Feb to Jun 2009)



7

Macroeconomy

Interest rates will trend downward for the rest of the • year, as NG increases its foreign borrowings, and infla-tion remains low and on a secure footing. A likely last 0.25% BSP rate cut in this quarter will make this scenario more accentuated.

The National Government spending will continue to be • high, although decelerating slightly, as tax collections recover with the real economy. We continue to think that the P250 B revised deficit is likely to be met, or only slightly exceeded.

Growth in OFW remittances may slowdown in the 3nd • quarter but pick up in the 4th quarter, resulting in flat to modest growth. Despite gains in the stock market, foreign fund managers and banks will see the surges in the stock market as selling opportunities, and that they will likely take profits and repatriate more capital in the second half of the year. These forces will tend to move in the same direction, and so BSP intervention is likely to occur. Nevertheless, a slight weakness in the peso overall is still likely.

Forecasts

Rates Jul Aug Sep Oct

Inflation (y-o-y%) 0.31 0.31 1.06 1.82

91-day T-bill (%) 4.08 3.75 3.50 3.60

Peso-dollar (P/$) 48.15 48.35 48.63 48.87

10-year T-bonds (%) 8.00 7.43 7.14 7.09

Source: Authors’ Estimates

Interest rates will trend downward for the rest of the year.


8

Fixed Income Securities

A Mix of Fundamentals and Fears

The Philippine fixed-income market was mixed during the period. Bond yields, except long-term notes, had been volatile in mid-June because of budget deficit fears and unclear financing strategy of the government. In addition, an overly pessimistic forecast on the global economy by the World Bank and downgrades of twenty-two US banks by Standard and Poor had also contributed in the volatility of yields. However, for the rest of the period, rates have stabilized because of these factors: (1) the easing of supply woes, (2) the 22-year low inflation of 1.5%, and (3) the 25-bps policy rate cut of the BSP.

The demand for government securities bounced back, as shown by NG’s excess demand for its $-bond worth $750 M, and its T-bills and T-bonds during the period’s auctions (June 23 to July 13). Impending recovery in the global eco-nomic recession made investors flock into short-term pa-pers while selling their long-term bonds on hand.

Primary MarketFor the period, the T-bills and T-bond auctions were well received, with tenders overwhelming offers by a ratio of 2.2:1. Yields took a downward drift after the announce-ment of 1.5% inflation for June and the BSP’s 25-bps policy rate cut. Since the government did not accept bids in the previous auctions, limited offers on shorter-term T-bills put downward pressure on short-term yields than in the long-term.

The result of the June 23 10-year T-Bond auction was fairly positive, considering consecutive rejections in the previ-ous period. Despite the 7.30 bps increase in yields, the government accepted P8.5 B, as planned, since the bids were slightly below the secondary market rates.

Signs of more excess liquidity can be seen as the following auction (June 29) received bids 176% greater than the of-fered amount. The market was comfortable in bidding, as the difference between the highest and lowest bids were between 0-11 bps. The average bid was closer to the high-est bid, as banks took chances in further increasing the rates. Some eyebrows were raised because all the bids clustered at exactly 4.50% on the 91-day T-bill. The de-mand for it was four times more than the offered amount, signaling a clear preference for shorter tenors. This was a

T-Bills and T-Bonds Auction Results (* If Accepted)

Date T-Bond/

T-Bill

Offer

(Php B)

Tendered

(Php B)

Awarded

(Php B) Tendered ÷

Offered Average Yield Change bps

23-Jun 10-year 8.50 11.87 8.50 1.40 8.00 7.30

29-Jun 91-day 2.00 4.61 2.00 2.31 4.50 0.60

182-day 3.00 3.70 1.38 1.23 4.66 8.40

364-day 3.50 6.65 1.95 1.90 4.79 6.00

7-Jul 5-year 8.50 19.43 8.50 2.29 6.09 (8.50)

13-Jul 91-day 3.00 7.65 2.00 3.82 4.30 (20.20)

182-day 3.00 8.17 3.00 2.72 4.48 (18.00)

364-day 3.50 12.44 3.50 3.55 4.55 (24.40)

Source: Bureau of Treasury (BTr)


9


While the rates in June continuously increased, the reverse happened in July.

logical strategy, as the uncertainty on whether the govern-ment would issue retail treasury bonds (RTBs) remained unsettled. Investors were also probably reducing the term risk by focusing on short-term tenors. Nonetheless, they pushed rates upward by at most 8.40 bps in June.

While the rates in June continuously increased, the reverse happened in July. The drop in rates were due to the in-creased demand because of the tightening of debt supply, the inflation rate of 1.5% in June, and the 25-bps policy rate cut of the BSP. Even though the developments were made public after the auction date, investors had already discounted them; and so the 5-year T-bond issue yielded 6.09%, down by 8.50 bps from the previous similar auc-tion. The 5-year notes issued by Robinson’s Land totaling P5 B hardly had any impact on the tenders.

Secondary MarketThe trade volume for June-July came close to the year-to-date (YTD) average of weekly trading for the whole year. Thus, market trading can still be considered active, as the YTD average was only pulled up by exceptionally bullish trading in January and February. Moreover, the trading volume in July showed a strong 111% year-on-year growth. Trading was concentrated more in the belly of the yield curve, as investors waited for issuances of long-term GS and got cautious in buying current long-term bonds.

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Figure 6 - Trade Volume

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Figure 7 - FXTN Yields

Source: First Metro Investments (FMIC)

The yield curve continued to steepen on July 15. Investors hustled for more short-term papers because rates were at their lowest since January. Before that, yields of some bonds were rebounding around with the yield range of the next maturing benchmark bond. For example, the high-est rate of 3-16 for the month of June was 5.50%, which rested within the yields of 5-62 that ranged from 5.0% to 5.55%. The same thing can be observed in 5-62 bonds, as it traded at 5.55%, which was within the trading yields of the 7-43 issue—5.35% to 6.25%.

Movements in yields were practically driven by budget deficit fears in June and some trace of selling, as inves-tors prepared for the 10-year and 5-year new issuances of NG. Faint signs of risk aversion in the global market were visible due to the assessments of Standard and Poor and World Bank. Towards the end of the month, yields started to stabilize as the quarter ended and expectations of sig-nificantly lower inflation settled in.


10


ROPs had weakened in mid-June in anticipation of the new supply coming to the market.

At the start of July, yields began to stabilize. The fixed-in-come market traded sideways as investors assessed their current position. The initial abnormality of yields, as seen in June, corrected when the market turned its focus on the coming inflation report and the extent of the BSP policy rate cut. Improvements in economic indicators caused short-term and long-term yields to drop to April levels.

Even after the announcements, trading had been concen-trated in the curve’s belly. The decrease in the short-term yields were not felt in the long-term yields, as the 10-48 FXTNs remained within a very tight range of 7.95% - 7.98%. Demand for the longer tenors was tepid, as outlook for the global economy remained unclear. The unclear outlook for the global economy was brought by the release of both negative and positive figures in the United States.

The large yield spread (nearly 200 bps) between the 5-year and the10-year FXTNs makes the long end look very cheap. It could warrant a correction and we may see a significant flattening in the longer end of the curve. We can expect a slight decline in long-term yields as more investors grow more comfortable with yields below 8% in the long end.

ROPsAs the local bond market was mixed for the period, so was the market for RP $-bonds (ROPs). ROPs had weakened in mid-June in anticipation of the new supply coming to the market. The 5-year CDS spreads widened sharply from early June levels of 210-220 to 250-270 bps. At the same time, ROP-19 was pushed to 6.8%, which was 122 bps higher than its average yield in the second quarter. This made the rates of short-term and medium-term $-papers stable and that of the long-term ROPs more volatile. The upward move was reinforced by NG’s decision to issue new 10-year $-bonds.

The dismal unemployment figures in the United States 0

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Figure 8 - ROP Yields

Source: FMIC

strengthened the view of an extended low interest rate regime and helped build up the demand for the new ROP issuance. As the issuance of the new ROP 20 neared, the yields of ROP 19 traded within +/- 3 bps of 6.90% levels. The issuance of new 10-year $-bond was well received by investors. The $750 M offer of the government was six times oversubscribed. Its yield was only at 6.625%, 275 bps lower than the yield of ROP 19—another signal of the overwhelming demand it received. However, this initial positive development has taken a breather as trading of ROPs has thinned. Volatility after the issuance of the new $-bond is likely to set in, as the market adjusts and awaits further news and figures regarding the global economic conditions and the NG deficits.

If no negative developments surface in the Philippines, re-newal of confidence in emerging markets will result to fur-ther positive outlook for the ROPs. The easing of foreign currency issuance of Indonesia will also help foster de-mand for ROPs. Spreads are likely to narrow again. How-ever, the overall yields may not decline much because the U.S. Treasury’s yield curve has become steeper with re-newed concerns about the inflationary effects of the Fed’s quantitative easing program, and the economic recovery by the last quarter of this year.


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Indonesia’s bond market remained resilient amidst different pressures coming from both local and global environment.

ASEAN+1 Market Economic fundamentals and political environment were the primary determinants of the performance of fixed-in-come markets of neighboring countries, even though dif-ferent perspectives regarding the global economy arose.

Indonesia’s bond market remained resilient amidst differ-ent pressures coming from both local and global environ-ment. The financing strategy of the country was consid-ered stable and sustainable. This resulted to the country’s consecutive oversubscription or excess demand for gov-ernment securities. The seemingly appropriate financing strategy of the country, which is tapping both the local and foreign markets, eased the supply pressures in both its domestic and foreign currency bond markets. The bomb-ing and foreseen inflation pressure coming from soaring commodity prices did little to contract the demand for the country’s debt papers. Despite the attractiveness of the country’s bond market, a slowdown of debt issuances is expected as the Indonesian government has already ac-cumulated more than 70% of its financing needs for the year.

Towards the end of June and start of July, the yields in Ma-laysian market plunged. This was driven by the slowdown of inflation in the country. However, on the third week of July, the yields increased by at most 8.7 bps. This was brought about by the downward revision of their forecast GDP growth, from -2.2% to -4.2%, while recovery is ex-pected to be seen only in the fourth quarter. Given this, the budget deficit of the country is expected to be around 8% of its GDP. The increased financing need of the country has pushed yields upward.

Withdrawals were seen to increase in the banking sector of Thailand. Even though the central bank seems unfazed, banks already made some measures to restore its liquid-ity. Recently, Thai banks issued bonds to elderly people, as they are the ones who have the savings. The bond issued was targeted to accumulate Bt15 B in a week long trad-ing. Within the first day of trading, the bond was already 2x oversubscribed. Despite favorable inflation figures, the central bank opted to stop further policy rate cuts,

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United States China, People's Rep. ofIndonesia MalaysiaThailand Philippines

Figure 9 - Asian Markets

Source: Asian Development Bank (ADB)

CountryCurrent Policy

Rate (%)

Expected Cut

until Dec 2009

United States 0.125 0

Indonesia 6.750 0

Thailand 1.250 0

China 5.310 0

Malaysia 2.000 0

Philippines* 4.000 25

Source: Morgan Stanley, *Authors’ Estimates

as monetary authorities felt the rate was low enough at 1.25%. The effects of previous cuts were already being felt in the economy.

Auctions of Chinese government securities received insuf-ficient demand due to worries that the central bank will increase interest rates. The fear was warranted due to the speculation of bubbles in the stock market and property sector. Their three-month security, for example, auctioned in the second week of July, rose by 122 bps from 1.046% of the previous week. In the auction of the third week of the month, the country gathered its offered amount com-pletely. The government was forced to accept significantly higher bids brought about by speculative fears.

In the following weeks, optimism regarding global mar-ket would be the main driver of Asian bond markets, as a number of figures are to be released.


12


Regarding corporate bonds, no further major issuances are expected as the stock market

regained its health.

Outlook:With RP headline inflation expected to continue to slow • down until August, yields will remain on the easy side. In September, however, yields may begin to rise marginally because of slightly higher inflation and more issuance of more government debt. By that time, a large amount of GS will mature, giving more pressure to the financing needs of the government.

Regarding corporate bonds, no further major issuances • are expected as the stock market has regained its health; the exception, perhaps, is the property sector, given its below average performance.

The issuance of Samurai bonds is still under reconsidera-• tion because of the pressure of competition from Indo-nesia. Nonetheless, an RP issue of $0.75 B in Samurai bonds is still likely to materialize.

A continuation of active trading in the short-tem seems • likely, as investors are still cautious of betting too far into the future, with uncertainties in the deficit and inflation outlook. This, however, is inconsistent with the risks be-ing taken by investors who are flocking into the stock market.

Spread in the ROP will narrow further as confidence on • EM continues to improve. Also, the easing of competi-tion pressures from Indonesia should push down the rates of ROPs.


13

Equities Market

Signs of economic stabilization have become more apparent as we see signs that the global recession is ending. The equity market rally that moderated in June started to pick up again, as US bellwether equities (Goldman Sachs and IBM) posted better-than-expected 2nd quarter earnings. Improved outlook for global trade and investment growth encouraged the International Monetary Fund (IMF) to raise its 2010 world GDP growth outlook to 2.5% from 1.9%. Deflation fears from rising excesses in global capacity may have temporarily subsided, as crude oil prices significantly rose during the 2nd quarter, and agriculture and other commodity prices also moved up. Although confidence is rising due to the prospect of a U.S. recovery starting as early as 4th quarter, we are still cautious, as economic fundamentals remain weak.

So Far... So Good...

US EquitiesThe rebound in global equities during the 2nd quarter fea-tured emerging markets (EM) as the center of attraction, with China as the main protagonist. In developed markets (DM), the US equities market was the star. The Dow Jones Industrial Average (DJIA) was 11% up from April to June, the biggest quarterly gain since 4th quarter of 2003. But the high beta rally from the depressed levels in March had petered out a month before the end of the 2nd quarter, as investors rotated into defensive stocks. We view the stall in the uptrend in US equities to be sound because of negative seasonality in the summer, weak underlying fun-damentals, focus on earnings, and less compelling valua-tions.

Among major US equities indices, it seems that the DJIA is the only one at fair value with most US equities on the upper band of the price-to-earnings (PE) expansion. Our view is that earnings will have to deliver in the 2nd quarter before any further appreciation in the market occurs. So far, earnings from industry barometers have done so.

As of this writing, 2nd quarter earnings reports point to upside risks. Better-than-expected profits from Goldman Sachs ($3.4 B), Citigroup ($4.3 B), and Bank of America ($3.2 B) indicate that the healing process of the US finan-cial sector is progressing well. However, we remain cau-tious of the toxic assets that plague banks since they have not yet reported how they have treated these assets. The $3 B rescue of CIT Group by private investors is a positive improvement in the financial sector. It signals the end of dependence on government. But we refrain from being overly optimistic, as high unemployment remains a head-wind. We may likely see credit card and mortgage defaults accelerate if more workers lose their jobs. Also, US banks will have to eventually replenish their loan-loss reserves that were depleted by write-downs.

Among the companies that reported earnings on the 3rd week of July, Intel seemed to be the brightest spot. The company posted a net loss of $398 M because of a $1.45 B antitrust fine levied by European Commission. Without the fine, Intel would have posted a net profit of around $1 B with Sales of about $8.5 B, beating analysts’ estimates of $7.28 B. Given the weak discretionary spending, Intel’s increase in sales was quite a surprise. Strong personal computer (PC) sales, especially in China, led the rebound of Intel’s products. Although analysts have revised Intel’s future earnings upwards, it would be prudent to keep an eye on employment figures.

0

10

20

30

40

50

60

70

80

90

100

DJIA S&P 500 Nasdaq

7/17/2009 Year Ago Estimate

Figure 10 - P/E of US Indices

Source of Basic Data: Wall Street Journal


14

Equities Market

So far, the rally from March-lows was led by high beta stocks.

Philippine Equities Local equities continued to trade better after a correc-tion in mid-June which gave the market a much needed breather. The pullback was shallow as investors positions appeared to be very light. They used the dip to increase market exposure as earnings expectations for the 2nd quarter have risen due to better-than-expected US 2nd quarter earnings.

So far, the rally from March-lows (PSEi at 1,759.33 on March 17) was led by high beta stocks. (We consider stocks with betas of 1.24 and higher to be high beta stocks.) Prices of companies with betas less than 1.24 have stalled while firms with higher than 1.24 betas seem to have sustained their rallies. Investors’ risk appetite has increased as signs of recovery emerge. Excess liquidity and investors hunt-ing for opportunities in the stock market were the main drivers for the high beta rally. And unlike in the US, where the rally from March-lows had shifted to the defensive sectors, the rally in the local equities markets was in high risk stocks, implying that current growth prospects for the Philippines are relatively upbeat.

In our view, short-term risks, at this time, should be differ-entiated from long-term risks. Short-term risks take into account price volatility while long term risks consider fun-damental risks. And with long-term investment sentiment likely to continue (see Technical Analysis), price volatility may not offset long-term prospects.

Given that returns on high beta stocks are greater than low beta ones, investors have gravitated to riskier stocks given the excess liquidity in the money markets. Investors, however, should be careful not to allow greed to overtake the prospects of higher returns. It is always wise to diver-sify portfolios by including defensive stocks to your selec-tion.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

March - April April - May May - June June - July

High Beta Low Beta

Figure 11 - Monthly Stock Gains

Source of Basic Data: Reuters

Ticker Beta March 17

June 16

% Change

Ayala Land Inc. ALI 1.42 5.2 8.7 67.31%

Filinvest Land Inc. FLI 1.74 0.35 0.79 125.71%

Megaworld Corp. MEG 1.8 0.48 1.1 129.17%

Alliance Global Inc. AGI 1.36 1.28 3.85 200.78%

Ayala Corp. AC 1.4 192 277.5 44.53%

Manila Electric Co. MER 1.24 78.5 175 122.93%

First Phil. Holdings FPH 1.42 25 35 40.00%

Metropolitan Bank

& TrustMBT 1.28 21.5 32.5 51.16%

Rizal Commercial

BankingRCB 1.33 9 15.5 72.22%

Lepanto Cons. &

MiningLC 1.95 0.07 0.24 269.23%

Sectoral PerformanceLocal investors appear constructive in their outlook even as the PSEi and most sub-indices have stabilized. The Min-ing & Oil sector has been consistent in its uptrend, increas-ing by 30% in the last two months influenced strongly by Philex and other mining stories. Correction occurred dur-ing the 3rd week of June without affecting over-all positive sentiment.


15

Equities Market

Property firms are still ahead in this rally.

Monthly Sectoral Performance

16-Jul-09 16-Jun-09

Index % Change Index % Change

PSEi 2,553.96 1.58% 2,514.17 8.90%

Finance 5,66.61 1.01% 560.94 -1.89%

Industrial 3,674.92 6.80% 3,440.89 11.28%

Holdings 1,394.94 0.61% 1,386.46 14.49%

Property 856.75 1.30% 845.72 13.34%

Services 1,338.39 -2.17% 1,368.11 6.29%

Mining and Oil 6,474.11 15.13% 5,623.22 15.97%

Source of Basic Data: PSE Quotation Reports

The financial sector came out of the red in July but only growing by 1.01%. Financial stocks look cheap as of this writing. Values may rise soon, as banks benefit from the 25-bps rate cut of the BSP. Bank costs of funds have still to hit rock bottom; the rate cut should lower their costs consequently widening net interest margins. Historically, declining interest rates had led to lower profitability for banks, but seeing that the long end of the yield curve has been slow to react, we should see further improvements in margins until the curve stabilizes at lower levels

Meanwhile, EDC looks intent to win the upcoming bid on the Palinpinon (which supplies up to 20% of electricity in Visayas) and Tongonan geothermal. Aboitiz Power will probably bid aggressively to compete with EDC.

In the services sector, telecom companies TEL and GLO may underperform due to lowering of charges arising from regulatory changes although we do not think it will alter mobile phone usage.

Company Symbol6/16/09

Close7/16/09

Close%

Change

Metrobank MBT 32.50 32.50 0.0%

Banco de Oro BDO 32.50 32.00 -1.5%

Bank of the Philippine

IslandsBPI 44.00 45.00 2.3%



Close07/16/09

Close%

Change

Meralco MER 140.00 175.00 25.0%

San Miguel Corp. SMC 63.00 59.50 -5.6%

First Gen Corporation EDC 3.90 4.10 5.1%

Manila Water MWC 14.25 14.50 1.8%

Aboitiz Power AP 3.90 5.70 46.2%

First Philippine Holdings FPH 32.50 35.00 7.7%



Close07/16/09

Close%

Change

Ayala Corp. AC 287.50 277.50 -3.5%

SM Investments Co. SM 317.50 305.00 -3.9%

Aboitiz Equity Vent. AEV 6.50 6.60 1.5%


In the Industrial sector, MER share price reached a record-high closing price of P201.00 on July 24. Profits estimates for MER have been re-rated to P13-15 B due to a rate in-crease for the first time in 6 years. However, with EPS of negative 18.22 (trailing twelve months,TTM) and P/E ra-tio of 71.94 (TTM), investors should be extremely careful. Similarly, with the completion of the purchase of stake of Meralco, Lopez-firms have increased in value as these highly-indebted companies are seen to benefit from the proceeds of the sale.

The holdings sector posted dismal growth in the past month. SM is still looking towards the consumer market in China for further expansion. Capital spending for SM will increase by a third from last year’s. SM share-price has gained about 61% this year.

Property firms are still behind in this rally (see Local Equi-ties). But the sector is seen to benefit from the increase of 17.1% in remittances (in peso terms) of overseas work-ers. Lower interest rates should also be advantageous for property firms due to lower mortgage loan rates.


Close07/16/09

Close%

Change

Ayala Land Inc. ALI 8.60 8.70 1.2%

SM Prime Holdings SMPH 9.30 9.20 -1.1%

Megaworld MEG 1.04 1.10 5.8%



16

Equities Market

After a mild pullback in mid-June, the PSEi is on track with its uptrend.


Close07/16/09

Close% Change

Philippine Long Distance Tel. Co.

TEL 2,445.00 2,385.00 -2.5%

Globe Telecom GLO 965.00 940.00 -2.6%


Rising oil prices have kept the Mining & Oil sector increas-ing and in the green. PX metal shipments for June amount-ed to P895 M, about 25% higher than May (P714 M). An affiliate of PX has also reportedly discovered a major oil and gas field in Vietnam, the first in Asia for this year. PX’s diversification into oil exploration may have proven profit-able for the company.


Close07/16/09

Close% Change

Philex Mining Corporation PX 6.40 7.80 21.9%

Semirara Mining Corp SCC 39.50 40.00 1.3%


Monthly TurnoverTurnover for this month declined with all sectors plunging about 46%. The market saw net foreign selling as foreign funds sold shares to service client withdrawals. Notewor-thy is the special block sale on July 14 of P20 B upon com-pletion of the sale of Meralco to Piltel (volume of the sale was 88.44% of the market at said date) which skewed the value turnover picture of the market.

Monthly Turnover (in Millions)

15-May to 16-June Total Turnover Average Daily Turnover*

Sector Value % Change Value % Change

Financial 7,411.9 -2.9% 370.60 -7.7%

Industrial 93,582.0 161.2% 4,679.10 148.2%

Holdings 8,812.4 42.0% 440.62 34.9%

Property 12,698.3 16.9% 634.92 11.1%

Services 15,014.3 15.0% 750.71 9.2%

Mining and Oil 3,826.4 54.9% 191.32 47.1%

Total 141,345.4 85.8% 7,067.27 76.6%

Foreign Buying 65,132.4 40.9% 3,256.62 33.9%

Foreign Selling 64,045.2 182.3% 3,202.26 168.2%


PSEi Technical Analyses After a mild pullback in mid-June, the PSEi is on track with its uptrend. Recent improvements in economic indicators and optimism in future corporate earnings have caused global indices to rise in mid-July fueling further optimism in the PSEi. Long-term investor sentiment will likely con-tinue as the 200-day moving average (MA) and the PSEi continue to positively diverge.

Figure 12 - PSEi

Source: Yahoo Finance


17

Equities Market

The PSEi is officially on a long-term upward momentum with the 200-day MA below the 50-day and 100-day MA.

Trend – The 200-day MA is already flat and appears ready to change direction. Barring any adverse shocks, we may see all three MAs sloping upwards, indicating a short to long-term uptrend. So far, the Directional Movement In-dex (DMI) supports an uptrend view as the positive DMI remains above negative DMI and diverging positively. Al-though not as strong as last month, Average Directional Index (ADX) is indicating an increase in strength with its slope still pointed upward.

Volatility (see graph) – Volatility decreased in mid-June as seen in the tightening Bollinger Bands. The increasing di-vergence between positive and negative DMI, combined with a weak ADX, signals an impending increase in volatil-ity. We expect the volatility to pick up in the near-term because of the earnings season.

Source: Wall Street Journal

Momentum (see graph) – The PSEi is officially on a long-term upward momentum with the 200-day MA below the 50-day and 100-day MA. After briefly falling into the negative territory, Momentum is again positive and will likely remain positive as long 2nd quarter earnings do not disappoint.

Last month, the crossover between the Moving Average Convergence Divergence (MACD) (12, 26) and MACD EMA (9) led to a change in direction. Now, we find ourselves again in a similar situation except this time, the change in direction does not appear adverse indicating an upward momentum. MACD’s direction will be supported by 2nd quarter earnings reports in the near-term.



18

Equities Market

While we hold an upward bias for equities in the longer-term horizon, we foresee short-term risks

and pullbacks if earnings disappoint.

Oversold or Overbought – Favorable change in investors’ sentiment on upbeat earnings have brought back the PSEi to overbought levels again. Ultimate Oscillator (UO) and Relative Strength Index (RSI) near of above level 70 indi-cate the local index to be overbought. The PSEi trading closely to the upper band of the Bollinger Band confirms this (see graph).

Technical ObservationThe rebound of the PSEi from its moderate pullback in mid-June has made valuations expensive and less compel-ling. Resistance at 2,626 was broken on the 24th suggest-ing that investors are willing to live with higher valuations. We are not sure about its sustainability because, in our view a healthy correction is needed to allow new investors to broaden the base of the rally. A profit taking correction will allow this to happen.


Outlook Even if the global recession is abating, we are not out of the woods yet. The global economy, sales/revenue growth, and visible future earnings over bottom line earn-ings should show improvement before we make a final call on a recovery. While we hold an upward bias for equities in the longer-term horizon, we foresee short-term risks and pullbacks if earnings disappoint. Despite visible signs of improvements on leading indicators, we remain cau-tious about the strength of any recovery. We warn against over optimism because weak consumer demand, unem-ployment, and further deleveraging remain as headwinds in the major economies particularly in the U.S.

In local equities, investors may have taken into account that the US economic recovery will be weak, or at the best, modest. Rallies of the PSEi in the past months have been mainly due to excess domestic liquidity. Also, inves-tors have been focusing more on developments in Philip-pine soil. In addition, recent optimistic news such as the 1.5% inflation in June (a 20-year low), 3.7% increase in OFW remittances in May (from 2.2% in April), and -27% decline in exports (from -35.2% year-on-year) may have influenced certain sectors positively. Here are some other points to take note of:


19

Equities Market

With the market continuously going up, some investors might think that they are already late in entering the market.

Disclosure of 2nd quarter earnings reports• – better-than-expected profit earnings in the second quarter for local firms may dictate the soundness of firms leading investors to focus more on future rather than baseline earnings.

Upcoming elections• – deadline for filing of candidacy is set for November of this year. Stocks connected with potential candidates such as Vista Land and Lifescapes (VLL) may be affected. Even if vacation months in the US, Europe and HK usher in a decrease in foreign inves-tor activity, the positive effects of election spending on some companies may offset any decline even that which is related to the “hungry ghost month.”

Persistent rally of high beta stocks• – if earnings report and macroeconomic indicators are “better-than-expect-ed,” risk appetite would likely increase and the high beta rally should continue.

Attractiveness of the property sector?• – With increas-ing remittances from overseas workers and low interest rates, property stocks should be a sure pick for investors. Investors should, nevertheless be cautious and keep an eye on changes in domestic demand.

Longer term trend• – With the market continuously going up (and stocks becoming more expensive), some inves-tors might think that they are already late in entering the market. Investors should, therefore, examine the longer term outlook (see Technical Analyses). Prices of some stocks such as AC and TEL may appear to have moved significantly, but looking at the long term, they may be considerably cheap compared to what they were when the economy was growing faster.


20

Special Feature

By: Cristina S. Ulang, FMIC Investment Advisory Group

Could it be Energy Development Corp.’s (EDC) great leap forward? This coming August 12, 2009, the government will be bidding out the 305 MW geothermal plants Palinpinon and Tongonan, which opens up an expansion path for those keen on renewable energy (RE) generation. The bidding, where EDC is participating, is likely to attract also the likes of Aboitiz Power Corp. (AP). Both EDC and AP are building their RE asset portfolio. Recall that AP’s RE vehicle is newly acquired 462 MW Tiwi-Macban. For its part, EDC bought a 60% stake in 112 MW FG Hydro from its parent First Generation Corp. in late 2008. Valuing each MW at $1 M, the 305 MW power generation facility could fetch a high P14.6 B at a dollar rate of P48:00, with a 40% downpayment requirement nine months after a winning bid or by May 2010 and the balance under deferred payment semi-annually for seven years.

Tongonan Bidding: EDC’s Great Leap Forward?

Unlike other bidders, EDC has more to lose if it doesnt manage to snag the Tongonan and Palinpinon geother-mal projects. Winning the bid, after all, would significantly improve its profit margins, its operational efficiency, and industry position. Yet the road to a winning bid can be an uphill climb as challenges abound. If it wins in the bidding, the required 40% downpayment almost coincides with the bullet payment of EDC’s yen loan worth P11.5 B that is due in June 2010. On the other hand, some of EDC’s other concerns are continuing losses in Northern Negros estimated at P800-900 M in 2009 and yen-loan related foreign exchange risk (in case the weak yen reverses and the peso dips further vs. USD). While EDC had been quick to go for a P7.5 B bond float last June, the lingering ques-tion in investors’ minds stays: Will EDC’s cash be enough to fund a winning bid?

Profit BoostEBITDA Boost. EDC management sees through the acquisi-tion a 60% EBITDA margin yield from the ensuing link-up (integration) of an equivalent steamfield capacity with the steam fuel-consuming Tongonan and Palinpinon geother-mal plants. Based on EDC’s long experience in geothermal technology, the EBITDA margin of the steam fuel business of 40% is enhanced to 60% by taking the production pro-cess one step further, which is electricity production. That yield is unique to EDC’s experience and may not necessar-ily be the outcome for any other potential owner such as AP.

Recall that AP has just gotten involved in geothermal tech-nology with the purchase of Tiwi-Makban which runs on an independent steam fuel source, operated and maintained by Chevron Philippines Inc. As Chevron’s steam prices are indexed to coal based on a Geothermal Resource Service

Contract (GRSC) that kicks in three years from now, Tiwi’s fuel prices may prove to be a lot more volatile than EDC. This is because EDC, in case it acquires the power plants, will, in effect, be supplying itself with steam fuel at cost, being the singular owner of both the steamfield and geo-thermal plants.

Operational EfficiencyGreater Control Thru Integration. The acquisition will also increase EDC’s integrated power generation capac-ity, those linked or matched-up against steam fuel capac-ity, which stands at 63% or 755 MW out of the 1198 MW installed capacity for the power plants. The advantage of integration is the enhanced operational control it will give EDC over maximizing steam fuel supply, usage and de-mand by the newly acquired power plants.

Simplicity of Singular Ownership. EDC has faced not a few complications under the present set-up of separate own-ership of the steamfield (owned by EDC) and the geother-mal plants (owned by NAPOCOR). There was the recently concluded arbitration proceeding over some inefficiencies in actual steam fuel utilization by some NAPOCOR plants on the one hand, and alleged gaps in EDC’s demonstrated capacity to supply steam to these plants on the other. Sep-arate ownership also gave rise to the issue of whether EDC should share in the cost of energy lost through the state-run transmission lines. Whether such complications will be totally avoided after the privatization of these power plants remains to be seen, but EDC management has hint-ed its optimism that similar issues are less likely to arise if it were to become the sole owner of both the steam and the geothermal plants.


21

Special Feature

By acquiring the plants, EDC will be in the best position to fill the power supply gap in Southern Philippines.

Favorable Industry DynamicsPower Supply Shortage. By acquiring the plants, EDC will be in the best position to fill the power supply gap in Southern Philippines, since the majority of EDC’s cur-rent generation assets supply power to the Visayas and Mindanao grids. Furthermore, limited new capacity in the regions, will only become operative over the next two to three years, guarantees dispatch for existing generators such as EDC. EDC expects that its current plants will con-tinue to be dispatched at baseload especially due to their low marginal cost, the next lowest to hydropower.

Strong Demand Growth. Based on EDC’s internal esti-mates, average annual peak demand growth for the pe-riod of 2007-2016 in the three key island grids of the coun-try are as follows: 4.8% for Luzon; 5.7% for Visayas and 4.7% for Mindanao. Average system peak demand in 2016 is expected to reach 8,884 MW, 1,576 MW, and 1,645 MW in Luzon, Visayas and Mindanao, respectively.

The Palinpinon geothermal facility, located in Valencia, Negros Oriental, utilizes steam supplied by EDC with an installed capacity of 112.5 MW and was commissioned in 1983. An additional 80 MW was added from 1993 to 1995, bringing its total capacity to 192.5 MW. The Palinpinon power plant supplies 18-20% of the electricity demand in the Cebu-Negros-Panay-Bohol-Leyte-Samar grid. The Ton-gongan geothermal facility, located in Lim-Ao, Kananga, Leyte, was also commissioned in 1983 and also uses steam supplied by EDC.

ChallengesMore Volatile Revenue Stream. Once it acquires the power plants, EDC has to shop for bilateral contracts with cooper-atives for the whole generation capacity since the electric-ity spot market is yet to go live in Visayas in the 2nd quar-ter of 2010. In the absence of an off-take contract, these newly acquired power plants will lack the stability of EDC’s long-term contracted cash flow from its 755 MW power generating capacity that are covered by Power Purchase Agreements (PPA) with NAPOCOR. These PPAs will expire in 2024, excluding NN and FG Hydro which are geared to ILECO and Luzon WESM, respectively.

Beefing Up Cash. EDC’s end-cash as of 1Q09 stood at P7.6 B. To further beef this up, EDC raised P7.5 B in long-term debt last June. This will form part of the capital expendi-ture budget aimed at the bidding, which will require a 40% downpayment. But since the downpayment is required only nine months after the winning award, there is leeway for additional fund raising in case EDC’s operating cash flow proves insufficient.

IFC Loan in 4Q09. The abovementioned scenario seems • to be widely anticipated as EDC, this early, is already eyeing another $100 M loan from the International Fi-nance Corp., which it tapped for $100 M or P4.8 B long-term loans last January. That IFC loan helped repay the so-called 12 B yen Miyazawa I worth P5.4 B.

Increased Authorized Capital. Last June, EDC stockhold-• ers approved to double the authorized capital stock of the company to P30 B to create room for an equity call should debt financing approach the 70% debt and 30% equity limit set under the World Bank loan covenant with the power company. Nevertheless, company man-agement had some $600 M headroom toward that limit given a debt-to-equity ratio of slightly above 1:1 at end-08 and even lower at 0.54:1 as of 1Q09.

Figure 12 - Debt to Equity

Source: EDC


22

Special Feature

Our cash flow forecast indicates that EDC will require additional financing of P5.8 B to be able to

make the downpayment.

Cash flow Forecast. Our cashflow forecast indicates that EDC will require a minimum of P10.4 B to satisfy the down-payment for Tongonan and Palinpinon, in case it wins in the bidding. This scenario includes its repayment of the Yen loan of P11.5 B maturing in mid-2010 and interest expenses worth P1 B in 1H09, on the basis of projected net operating cash flows, and the P7.5 B bond float in June 2009. In case of failure to win the bid, EDC will still have a cash shortfall of P4.8 B. Please see Table 1 and Table 2.

Losses from Northern Negros. Northern Negros is expect-ed to remain in the red until next year as full capacity op-eration of 50 MW will only be reached in the first quarter of 2011. Estimated loss for 2009 is P800-900 M, as the power plant slowly increases its capacity utilization from only 15% after its recommissioning last May.

Foreign Exchange Risk. A strong yen and a weak peso against the US dollar wrought havoc on EDC’s net income last year as exchange rate losses on yen loans bore a hole on an otherwise robust topline growth of 8% to P20.5 B. As a result, net income sharply dropped by 83% to P1.3 B in 2008. This year’s profit outlook improved with a weaker yen and a lighter yen loan burden with the full payment of Miyazawa I. Still, there are plans to hedge Miyazawa II should the yen prove volatile anew. Recall that the yen ap-preciated by 18.9% to ¥90.64 by end-08 from 2007 closing of ¥111.75 and this was aggravated by the peso deprecia-tion of 15.2% against the US dollar for the same period. In

Source: FMIC IAG Estimate based on information provided by EDC

EDC Cashflow Forecast 31-Dec 31-Mar 31-Dec 30-Jun

(in mn PHP) 2006 2007 2008 2009 2009 2010

Cashflow from operating activities 6,871.9 5,120.8 8,949.2 3,307.8 3,408.0 2,556.0

Cashflow from investing activities (4,236.8) 2,243.4 (4,315.4) (346.8) (2,500.0) (7,150.00)

Cashflow from financing activities 2,951.2 (14,059.3) (6,975.6) 3,657.4 (1,800.0) (12,500.00)

Net in cash and cash equi. 5,586.3 (6,695.0) (2,341.8) 6,618.4 (892.0) (17,094.00)

Effect of fx rate on cash (37.2) (7.6) 2.3 4.0 0 0

Cash and Cash Equivalent, beg. 4,450.1 999.2 3,296.6 957.1 7,579.5 6,687.5

Cash and Cash Equivalent, end 999.2 3,296.6 957.1 7,579.5 6,687.5 (10,406.5)

Table 1 - EDC Cashflow Forecast

contrast this year, the yen has strengthened as of July 16 (YTD) to ¥93.5, a positive development for the yen loan on which EDC had booked gains of P1.28 B in 1Q09. The weak yen also helped raise net income by 53% to P2.27 B in 1Q09 versus the year-ago base.


23

Special Feature

EDC Chronological Cash Flow Events 2008 - 2009 in Mn PHP

Beginning Cash - (End-March 09 Cash) 7,579.5

Add: April to May Operating Cash Generation 1,500.0

(Monthly operating cash generation at PHP750/mo.)

Less: Monthly working capital req. Apr.-May 09 at 324m/mo 648.0

Sub-total Prior to Miyazawa Payment in June 09 8,431.50

Less: Miyazawa I bullet payment in June 09 5,400.00

Dividend Payment Paid in June (31% of 08 Net Income) 1,900.00

Sub-total Post Dividend Payment 1,131.50

Add: Bond float June 09 7,500.00

Sub-total Post Bond Float 8,631.50

Less: Operating Capex (FY09) 1,000.00

Expansion Capex (Unified Leyte MW expansion-09) 1,500.00

Full year debt service 09 2,000.00

Sub-total Post Debt Service Burden 4,131.50

Add: June to Dec Operating Cash Generation 4,500.00

Less: Monthly working capital req. June- Dec. 09 1,944.00

End-December 31, 2009 Cash 6,687.50

Beg. Cash 2010 6,687.50

Jan-June2010 Operating Cash Generation @750m/mo 4,500.00

Jan-Jun 2010 Monthly Working Capital Req. @390m/mo 1,944.00

Less: 40% Downpayment for Winning Bid in May 2010 5,900.00

Less: Half-year 2009 Operating Capex 500.00

Expansion Capex (Unified Leyte MW expansion-2010) 750.00

Bullet Payment Miyazawa II, June 2009 11,500.00

Half year debt service 2010 1,000.00

End-Cash 2Q 2009 (EDC Wins in the Bid and Makes a Downpayment) (10,406.50)

End-Cash 2Q 2009 (EDC Lost in the Bid, No Downpayment is Made) (4,506.50)

Preemptive Debt Raising: IFC loan of $100m eyed by 4Q08 4,800.00

Table 2 - EDC Chronological Cash Flow Events 2008 - 2009

Source of Basic Data: EDC and Bloomberg


24

NATIONAL INCOME ACCOUNTS CONSTANT PRICES (in P millions)2007 2008 Q4 2008 Q1 2009

LevelsGrowth

RateLevels

Growth Rate

LevelsQuarterly

G.R.Annual G.R. Levels

Quarterly G.R.

Annual G.R.

PRODUCTIONAgri, Fishery and Forestry 251,272 4.9% 259,406 3.2% 77,956 34.3% 2.8% 65,739 -15.7% 2.1%Industry Sector 445,486 7.1% 465,107 5.0% 123,629 5.2% 5.0% 101,941 -17.6% -2.1%Service Sector 671,883 8.1% 694,529 3.3% 194,110 14.7% 4.9% 166,651 -11.0% 1.4%

EXPENDITUREPersonal Consumption 1,058,176 5.9% 1,107,569 4.7% 310,475 14.9% 4.6% 255,794 -18.0% 0.8%Government Consumption 92,293 8.3% 93,746 3.2% 20,553 -20.4% 4.7% 23,886 14.9% 3.8%Capital Formation 249,121 11.2% 256,244 1.7% 60,350 -0.9% -9.0% 55,142 -2.5% -16.5%Exports 677,697 5.6% 663,324 -1.9% 141,158 -29.6% -7.5% 118,806 -12.5% -18.2%Imports 626,745 -4.5% 643,572 2.4% 158,993 -6.0% -1.2% 117,402 -31.0% -19.2%

GDP 1,368,641 7.2% 1,418,952 3.8% 395,696 14.7% 4.5% 334,376 -14.0% 0.4%NFIA 134,172 16.5% 168,846 30.8% 42,222 -1.3% 28.0% 51,536 4.1% 40.8%GNP 1,502,004 8.0% 1,587,798 6.2% 437,918 13.0% 6.4% 385,912 -12.0% 4.4%

Source: National Statistical Coordination Board

NATIONAL GOVERNMENT CASH OPERATIONS (in P millions)

2006 2007 May-09 Jun-09

LevelsGrowth

RateLevels

Growth Rate

LevelsMonthly

G. R.Annual

G. R.Levels

MonthlyG. R.

AnnualG. R.

Revenues 978,729 23.0% 1,134,642 15.9% 104,212 -10.6% -2.5% 89,550 -14.1% 2.3%Tax 859,195 25.5% 932,004 8.5% 94,458 -13.8% -5.7% 81,649 -13.6% 1.6%BIR 651,936 22.0% 711,591 9.2% 73,338 -15.8% -5.6% 60,427 -17.6% 11.7%BoC 198,175 39.9% 210,524 6.2% 19,799 -8.4% -8.0% 20,282 2.4% -18.5%Others 9,084 9.9% 9,889 8.9% 1,321 54.9% 46.3% 940 -28.8% -32.1%Non-Tax 119,351 7.3% 202,488 69.7% 9,728 38.2% 44.5% 7,853 -19.3% 9.0%

Expenditures 1,040,927 10.5% 1,144,064 9.9% 115,596 6.4% 15.8% 119,797 3.6% 38.0%Allotment to LGUs 174,713 8.8% 193,712 10.9% 20,821 -2.3% 3.8% 27,892 34.0% 42.1%Interest Payments 310,104 3.4% 266,833 -14.0% 11,831 -25.3% -15.6% 10,752 -9.1% -34.9%

Overall Surplus (or Deficit) -62,198 -57.6% -9,422 -84.9% -11,384 -244.0% -262.0% -30,247 165.7% -4,033.3%

Source: Bureau of the Treasury

POWER SALES AND PRODUCTION INDICATORS Manila Electric Company Sales (in gigawatt-hours)

2007 2008 May-09

Annual Levels Growth Rate Annual Levels Growth Rate LevelsAnnual

G.R.YTD

TOTAL 26,219 4.6% 26,808 2.3% 2,296 -1.4% -1.3% Residential 8,655 3.3% 8,623 -0.3% 765 0.6% 1.1% Commercial 10,021 6.0% 10,482 4.6% 903 0.6% 1.8% Industrial 7,405 4.2% 7,563 2.1% 616 -4.2% -8.4%

Source: MERALCO

Recent Economic Indicators


25

BALANCE OF PAYMENTS (in US millions)

2006 2007 4th Quarter 2008 1st Quarter 2009

Levels Growth Rate Levels Growth Rate LevelsAnnual

G. R.Levels

AnnualG. R.

I. CURRENT ACCOUNT 5897 150.5% 6351 7.7% -546 -154.3% 2,168 -69.2% Balance of Trade -6817 9.7% -8236 -20.8% -4,105 64.7% -1,365 -38.0% Exports of Goods 46526 15.7% 49321 6.0% 13,088 4.3% 7,744 -37.0% Import of Goods 53343 11.7% 57557 7.9% 17,193 14.3% 9,872 -34.4% Balance of Services 333 123.9% 1077 223.4% -108 -133.5% 763 37.0% Exports of Services 6453 44.6% 8448 30.9% 2,430 10.3% 2,672 7.1% Import of Services 6120 4.5% 7371 20.4% 2,538 34.9% 1,909 -1.5% Current Transfers & Others 13180 15.6% 13977 6.1% 3,984 2.7% 3,841 4.5%

II. CAPITAL AND FINANCIAL AC-COUNT

-1467 -270.6% 3928 367.8% -3,262 540.9% -758 -249.5%

Capital Account 138 245.0% 24 -82.6% 5 -58.3% 17 -19.0% Financial Account -1605 -295.7% 3904 343.2% -3,267 527.1% -775 -259.5% Direct Investments 1983 104.4% -514 -125.9% 201 -45.8% -8 -102.9% Portfolio Investments 2360 -16.8% 3088 30.9% -1,500 -542.5% -146 -127.0% Financial Derivatives -138 220.9% -288 108.7% -198 65.0% 30 -134.1% Other Investments -5810 14.7% 1618 160.1% -1,770 59.3% -651 173.5%

III. NET UNCLASSIFIED ITEMS -661 18.1% -1703 -157.6% -471 -171.4% 322 -529.3%

OVERALL BOP POSITION 3769 56.6% 8576 127.5% -1,451 -177.8% 1,732 1.1% Use of Fund Credits -402 25.2% 0 100.0% 0 o 0 o Short-Term -433 11.3% -7 98.4% 593 -3,806.0% 20 42.9%Memo ItemsChange in Commercial Banks Net Foreign Assets -4623 -186.1% -909 80.3% -501 -1,352.5% -1,493 -202.8%Basic Balance 5241 110.0% 8111 54.8% 2491 56.5% 2,708 34.1%

Net Unclassified Items as percent-age of Total Trade

-0.61 94.2% -20.57 -32.6% -2.1 1.8


MONEY SUPPLY (in P millions)

2007 2008 May-09 Average Levels Growth Rate Average Levels Growth Rate Levels Annual G.R.

RESERVE MONEY 763,698 54.7% 838,517 13.3% 900,734 7.2%

Sources: Net Foreign Asset of the BSP 1,287,178 19.7% 1,602,362 24.5% 1,799,572 15.0% Net Domestic Asset of the BSP n.a. n.a. n.a. n.a. (898,838) 23.6%

MONEY SUPPLY MEASURES AND COMPONENTSMoney Supply -1 808,449 25.3% 912,265 12.4% 1,063,516 19.4%Money Supply-2 2,914,295 17.4% 3,164,345 8.0% 3,485,725 14.5%

MONEY MULTIPLIER (M2/RM) 3.62 -25.4% 3.78 -1.0% 3.87 6.8%%

Source: BSP

Roberto Juanchito T. DispoDr. Victor A. Abola

Reuben Mark A. AngelesRonilo M. Balbieran

Czen Alfie Q. BicoMa. Katrina Patricia G. Mercado

Ghia Paula L. YusonAugusto M. Cosio, Jr.

Executive Vice President, FMICSenior Economist, UA&PEconomist, UA&PEconomist, UA&PResearch Assistant, UA&PResearch Assistant, UA&PResearch Assistant, UA&PConsultant

CONTRIBUTORS

Views expressed in this newsletter are solely the responsibilities of the authors and do not represent any position held by the FMIC and UA&P.

July 2009

The Market Call - Capital Markets Research

FMIC and UA&P Capital Markets Research

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