PHILIPPINE FINANCIAL MARKETS POST-SONA

UNCLAS SECTION 01 OF 02 MANILA 003421

SIPDIS

SENSITIVE

STATE FOR EAP/PMBS, EAP/EP, EB/IFD, EB/TPP/BTA/ANA
STATE PASS USTR FOR BWEISEL AND DKATZ
STATE PASS USAID AND OPIC
TREASURY FOR OASIA FOR AJEWELL
USDOJ FOR MCRAWFORD
USDOC FOR 4430/ITA/MAC/DBISBEE

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV RP
SUBJECT: PHILIPPINE FINANCIAL MARKETS POST-SONA

REFS: A) Manila 3397, B) Manila 3370


1. (U) Summary: Peso, stock, and bond markets have not
reacted negatively to President Arroyo's State of the
Nation Address on July 25. Her promise to forge ahead
with economic and fiscal reforms, whatever the political
cost, helped send a positive signal (Ref A). The stock
market closed firmer on July 26 (Tuesday) after a three-
day weekend capped by President Arroyo's SONA. The peso
closed at 56.00 pesos/$1, down only slightly despite
hovering political uncertainties and seasonally stronger
foreign exchange demand. Rates for Treasury bills
softened during the GRP's weekly dealers' auction on July
26 and sovereign spreads for medium-term foreign debts
tightened. The business community will continue to watch
the president and her new economic team closely for signs
that they are implementing reforms and competently
governing. End Summary.

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IT WAS OK
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2. (SBU) According to local traders and analysts, markets
were relieved that pro- and anti-Arroyo rallies during
President Arroyo's July 25 State of the Nation Address
(SONA) were generally orderly and peaceful. Many local
analysts considered her speech neither awe-inspiring nor
entirely disappointing. Although lacking in details, one
brief statement did strike a cord -- her assurance that
her Administration would not waver in its commitment to
economic reform and fiscal discipline "whatever the
political cost." For now, markets appear to be willing
to give her the benefit of the doubt, although the
situation remains volatile as the political impasse drags
on. Many in the business community are cautiously
optimistic that her endorsement of charter change will
further calm the political waters and allow her
maneuvering room to solidify economic reforms -- most
importantly, to improve tax collection -- in the near
term.

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SHARE PRICES CLOSE FIRMER
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3. (U) The Philippine Stock Price Index (Phisix) closed
July 26 at 1,959.58, up 0.3% from the July 22 close of
1,954.40 (the most recent trading day because of the
holiday on July 25 for the SONA). At that level, the
Phisix was up 3.9% from the end of May 2005 (before the
audio tapes linking President Arroyo to alleged election
fraud surfaced) and up 7.6% from year-end 2004. The
Phisix hit an intra-day high of 1,966.50 as investors
continued to purchase selected stocks ahead of second-
quarter profit reports, but profit taking retracted some
of the Phisix's earlier gains. Dealers had expected some
investors to cash in on profits after the Phisix rallied
more than 3% during the July 18-22 trading week. After
four consecutive trading days of net foreign purchases
totaling 1.5 billion pesos, July 26 saw a modest amount
of net foreign sales (10 million pesos). Foreign net
purchases from July 1 through July 26 totaled 224.2
million pesos.

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T-BILL RATES SOFTEN
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4. (U) Rates for 91-day bills inched up by 18 basis
points to 5.632% during the GRP's weekly dealers' auction
on July 26. The increase was not unexpected after the
average rate for the 91-day paper dropped by more than 72
basis points on July 18 to its lowest level since
September 2003. The average rate for the 182-day paper
softened by 3 basis points to 7.401% (a three-week low)
and by 6.5 basis points for the 364-day bills to 8.417%.
As of July 26, the average 91-day Treasury bill rate was
28.8 basis points lower than at the end of May 2005 and
215.8 basis points lower than at the end of 2004. The
average rate for the 182-day paper was down 43.5 and
147.6 basis points from end-May 2005 and end-December
2004, respectively. As of July 26, the average rate for
the 364-day paper had increased by 43.2 basis points from
the end of May 2005 but had declined by 130.8 basis
points from the end of 2004.

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CURRENCY BACK TO 56 PESOS/$1 ON STRONG FOREX DEMAND
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5. (U) For the first time since mid-July, the local
currency again hit the 56 pesos/$1 mark during inter-bank
trades on July 26. It opened at 55.85 pesos/$1, hit an
intra-day high of 55.79 pesos, and closed at 56.00 pesos,
0.2% weaker than its previous close on July 22. At July
26's closing rate, the peso was down 2.7% (1.48 pesos)
from the end of May 2005; and was 0.5% (0.28 pesos)
stronger than at the end of 2004. As expected, the
yuan's revaluation late last week has had little effect
on the peso because of hovering political uncertainties,
heavier corporate demand for end-of-month foreign
exchange obligations, and the onset of the seasonally-
high third quarter import season.

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Sovereign Bond Spreads Tighten for Medium-term Maturities
-------------- --------------


6. (U) On July 25, sovereign bond spreads narrowed for
medium-term Philippine bonds maturing in 2008 and 2010
but widened somewhat for longer-term foreign debt
instruments. Spreads for Philippine bonds maturing in
2008 and 2010 closed 152 and 316 basis points,
respectively, above comparable U.S. Treasuries,
tightening from the previous close of 155 and 321 basis
points. Spreads for debts maturing in 2019 and 2025
widened to 463 and 507 basis points, respectively, from
460 and 504 basis points last Friday. As of July 26, the
respective spreads for the 2008, 2010, and 2019 bonds
were 51, 23, and 5 basis points narrower than at the end
of May 2005 and, for the 2025 bonds, 3 basis points
wider. Compared with end-December 2004, spreads for
these four bond maturities had tightened by 127, 84, 44,
and 13 basis points, respectively.

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Comment
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7. (SBU) President Arroyo seems to have reassured
economic interests with her pledge to stay the course on
reform. In the weeks and months ahead, the business
community will continue to watch the president and her
new economic team closely to see if she can demonstrate
the political will to move forward with reforms as she
struggles for political survival. For now, however, most
are choosing to cautiously back her and her new economic
team. For many, this support may be a default position
because palatable alternatives are hard for them to
envision.

Mussomeli