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April 2013

MARKET CALLThe

Capital Markets Research

FMIC and UA&P Capital Markets Research

Macroeconomy 2 Fixed-Income Securities 9 Equity Markets 16Recent Economic Indicators 19 Contributors 21

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The Market Call - April 2013

2

Macroeconomy

Footings Impeach of Fundamentals

Fitch Lifts PH Debt Papers to Investment Grade, Outlooks StableThe long-awaited first credit rating upgrade of the Philippine government’s foreign debt papers (ROPs) to investment grade has finally arrived. On March 27, Fitch Ratings lifted the country’s Long-term Foreign-Currency Issuer Default Rating (IDR) to ‘BBB-’ from ‘BB+’ and the Long-term Local-Currency IDR to ‘BBB’ from ‘BBB-’, with stable outlooks for both ratings, on the back of strong macroeconomic fundamentals. Likewise, Fitch laid down the conditions that could possibly lead to another upgrade or downgrade.

Fitch did not rule out possible further upgrades conditioned on the following factors—individually or collectively—being achieved: (a) Sustained GDP growth—“that narrows income and development differentials with ‘BBB’ range peers,” and “an uplift in the investment rate that enhances growth prospects without the emergence of macroeconomic imbalances; (b) Fiscal sector improvement – in terms of “broadening of the fiscal revenue base, as well as further improvements in the structure of the Philippine sovereign debt stock.” Moreover, the rating agency noted that the Philippines

Fitch Ratings lifted the Philippine foreign debt papers (ROPs) to investment grade (‘BBB-’ from ‘BB+’), first in Philippine history, as it has been able to continue flexing its economic muscles amidst external headwinds. Although the latest economic data have bequeathed new insights for the reassessment of the outlook for the country’s economy, the downside risk to GDP outlook remains benign, and thus the outlook fairly remains stable and sanguine.

The country’s Human Development Index (HDI) inched upward, while it has already achieved three out of its eight Millennium Development Goals (MDGs). Likewise, given the election in May, new jobs for the year-ending January 2013 increased by 456,000 while the government spending rose to its five-year record high of 12.4% to P282.0 B as of end-February. Peso appreciation slowed down also due to improvement in the US employment and the financial woes in Cyprus.

Meanwhile, Meralco sales, which is used as proxy for GDP, has sketched a downward trend--from 3.9% in January to a six-month low of 1.3% in February--implying that we may not be off to a good start. Also, exports remained weak in January amid weak global demand. On the other hand, the outlooks for inflation and stimulative effect of Overseas Filipino Workers (OFWs) remittances remain vibrant despite the upward trend of the former and the downward trend of the latter in peso terms, as global demand for crude oil is likely to lower and peso to further soften with the rise in imports.

has to catch up with other BBB-rated countries in terms of per capita income, revenue collection and governance. These general conditions need to be met for the country to be more at par with other BBB-rated countries in these areas.

The Fitch Report, however, cautioned the country that this rating may be downgraded if individually or collectively, the following would occur: (a) “A reversal of reform measures and deterioration in governance standards,” (b) “Sustained fiscal slippage, leading to a higher fiscal debt burden,” (c) “Deterioration in monetary policy management that allows the economy to overheat,” and (d) “Instability in the banking sector, leading to a crystallisation of contingent liabilities on the sovereign balance sheet”.

The coveted investment grade is first time in the Philippine history. The country got its first credit rating from Moody’s and S&P in 1993 and from Fitch in 1999. Since then, the best it had received was one notch below investment grade (BB+/Ba1)—that was before 2003 and in 2012. For the historical credit ratings of the Philippines, kindly refer to the figure below.


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Macroeconomy

Figure 1 - Credit Rating Agencies’ Credit Rating for the Philippines, 1993-2011

Source: Human Development Report 2013

The Philippines’ Human Development Index (HDI) showed improvement in 2012, in the same way that it has already achieved three of its eight Medium Development Goals (MDGs).

PH HDI Inches Upward, Headway in the MDGsHuman development in the Philippines showed some improvement in 2012 from the previous year’s level. According to the 2013 Human Development Report, the 2012 Millennium Development Goals (MDGs) Regional Report and the National Statistical Coordination Board (NSCB), the country is making headway in the attainment of the MDGs.

The Philippines’ Human Development Index (HDI) gained by 0.003 from previous year level and reached 0.654—positioning itself at 114 out of 187 countries. This is despite the improvements seen in the indices of Life Expectancy and GNI Per Capita while the other two HDI indicators remained fixed. Life expectancy rose by 0.3 years due to improvements in health spending, while GNI per capita accelerated by 2.8% to $3,752 on account of robust OFW remittances inflows and sustained economic growth in 2012. The table below shows comparative figures. Note, however, that making cross-section time series analysis may be misleading due to the underlying data and methods have changed since 2011.

Comparatively, the Philippines’ 2012 HDI of 0.654 is above the average of 0.64 for countries in the medium human development category but below the average of 0.68 for countries in East Asia and the Pacific. From East Asia and the Pacific, countries which are close to Philippines in 2012 HDI ranking and population size are Thailand and Indonesia, with HDI rankings of 103rd and 121st, respectively.

The HDI is a summary measure for assessing long-term progress in three basic dimensions of human development: a long and healthy life, access to knowledge and a decent standard of living.

Meanwhile, the Philippines has already achieved three of the eight Millennium Development Goals (MDGs) and nine out of 22 indicators way before the 2015 target. The country has met the targets in the areas of gender equality, disease control, and environmental sustainability.

On women empowerment, the Philippines has a Gender Inequality Index (GII) value of 0.418, ranking it 77 out of 148 countries in the 2012 index. In the country, 22.1% of parliamentary seats are held by women, and 65.9% of adult women have reached a secondary or higher level of education compared to 63.7% of their male counterparts. For every 100,000 live births, 99 women die from pregnancy related causes; and the adolescent fertility rate is 46.5 births per 1,000 live births. Female participation in the labor market is 49.7% compared to 79.4% for men.

Philippines’ HDI Based on Consistent Time Series Data, New Component Indicators and New Methodology

Life Expectancy

Expected Years of

Schooling

Mean Years of

Schooling

GNI Per Capita (2005 PPP$)

HDI Value

1980 63.2 10.4 6.1 2,786 0.561

1990 65.2 10.7 7.1 2,506 0.581

2000 66.8 11.4 8 2,694 0.610

2010 68.5 11.7 8.9 3,568 0.649

2011 68.7 11.7 8.9 3,649 0.651

2012 69.0 11.7 8.9 3,752 0.654

Sources: Moody’s, Fitch and S&P


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Macroeconomy

The Meralco sales, which is used as a proxy for GDP, has sketched a downward trend calling analysts to re-assess their

GDP growth outlook for Q1.

On combating HIV/AIDS, malaria and other diseases, the Philippines has been successful in reducing the prevalence of malaria and tuberculosis, while containing the spread of HIV/AIDS remains a challenge. The MDG target for tuberculosis incidence has already been met while the target on tuberculosis prevalence is well within reach. The same can be said in the case of incidence and prevalence of malaria.

Meanwhile, the Philippines’ performance in achieving targets on food poverty, child mortality, and access to safe drinking water by 2015 was reported to be lagging behind other MDGs. However, NSCB official statistics showed considerably high likelihood of meeting the MDGs in these areas before the end of 2015.

Based on the National Statistical Coordination Board’s (NSCB) 2009 Family Income and Expenditure Survey, extreme poverty declined to 10.8% from 16.5% in 1991 bringing the level closer to the 2015 target of 8.25%. The preliminary data for 2012 will be known later this year.

Also, under-five year old mortality fell by 37.5% to 30 deaths per 1,000 lives in 2011 from 1990’s 80 deaths per 1,000 lives. Likewise, the percentage of Filipinos with access to safe water supply also improved to 84.8% in 2010 from 73% in 1991, a notch below the 86.5% MDG target.

More rapid economic growth starting 2012 should provide the needed boost to attain most, if not all, the MDGs.

Meralco Sales Signals We’re Not Off to A Good Start

The bullish outlook for the country’s GDP growth in Q1 2013 may be held back for a moment as Meralco electricity sales volume, which is used as the GDP proxy, has sketched a downward trend—from 3.9% in January to a six-month low of 1.3% in February.

Figure 2 - Meralco Sales and VoPI Year-on-Year Growth, 2009-2013

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40

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-5

0

5

10

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Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12

Meralco Sales % Δ (Left Axis)

VoPI - Total Manufacturing % Δ (Right Axis)

Source: National Statistics Office (NSO)

All the three major sectors mirrored the trend. Industrial sales slowed to 2.7%, reflecting the -31.5% decline in exports in February, although the Volume of Production (VoPI) remained positive at 8.7% growth for the same month. Commercial sales were only 2.1% higher than the previous year. Meanwhile, seasonal factors such as cold weather caused the Residential sales to suffer the most, slipping by -1.4% y-o-y growth. While the figures confirmed the difficulty to match the Meralco electricity sales performance in 2012, the outlook for the country’s GDP growth for Q1 is still likely to hit over 6%, while for the rest of the year, seasonal factors (i.e. summer season and start of school year) and the long list of infrastructure projects will likely find its way to impact on the electricity sales in the remaining quarters.

Food and Sin Tax Hike Push Inflation to 3.4% in February As expected, headline inflation rate in February rose to 3.4% from 3.0% in January. Inflation rates accelerated in all regions, except for the NCR which eased by 1%. The February figure should be no cause for concern because


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Macroeconomy

Inflation continued its ascent in February as it climbed to 3.4% from 3.2% in January; but upside risk to inflation outlook remains unalarming as it is expected to recede in Q2 with lower global demand for crude oil.

(-1.3 percentage points) and Housing, Water, Electricity, Gas, and Other Fuels (-0.8 percentage point) partly due to the 9% cut in electricity generation charge.

Seasonally Adjusted Annual Rates (SAAR) accelerated to 4.6% from 3.7% in January as ABT pushed food items index up to 162.3%, while non-food rose a mere 2.2%.

Fuel-related inflation should ease in Q2 as international crude oil prices are lower than year ago levels, while domestic pump prices are seeing weekly cuts. Moreover, the sequester in the US and the back-to-back debt crisis in the Eurozone may provide a new ceiling on inflation expectations as both issues would likely lower demand for oil.

the figure came from a record low base of 2.7% in 2012, and the rise in commodity prices is likely to subside in Q2 with the expected sharp drop in crude oil prices after the winter season.

What brought about the 0.4% point increase was the heavily-weighted Food and Non-Alcoholic Beverages (FNAB) and Alcoholic Beverages and Tobacco (ABT) rising by 2.9% from 2.3% in January due to a significant rise in the price indices of vegetable, rice, meat and fish. ABT continued to rise due to higher excise taxes that took effect on January 1, 2013. The price increases in ABT, which soared to 29% from a record-high of 17.3% in January, was done in stages in areas outside the NCR, where demand is more sensitive to price changes. Meanwhile, Communication; Recreation & Culture; and Furnishing, Household Equipment & Routine Maintenance of the House (FHERMH) bucked the inflation trend in February with a 1-2 percentage points increase from January. The table below provides comparative figures.

Inflation Year-on-Year Growth Rates Feb Jan YTD

All items 3.4% 3.0% 3.2%

Food and Non-Alcoholic Beverages 2.9% 2.3% 2.6%

Alcoholic Beverages and Tobacco 29.0% 17.3% 23.2%

Clothing and Footwear 4.8% 4.9% 4.8%

Housing, Water, Electricity, Gas, and Other Fuels 2.6% 3.6% 3.1%

Furnishing, Household Equipment and Routine Maintenance of the House 5.0% 4.9% 5.0%

Health 3.2% 3.3% 3.3%

Transport 1.1% 1.2% 1.2%

Communication 0.7% 0.5% 0.6%

Recreation and Culture 2.2% 2.0% 2.1%

Education 4.4% 4.4% 4.4%

Restaurant and Miscellaneous Goods and Services 2.8% 2.8% 2.8%


Figure 3 - Inflation Rates Annualized (2009-2013) Seasonally Adjusted vs. Year-on-Year


-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Feb-09 Feb-10 Feb-11 Feb-12 Feb-13

Monthly S.A. Inflation Annualized

Year-on-Year Inflation Rate

On a month-on-month (m-o-m) basis, inflation eased to 0.3% from 0.5% in January. The slowdown was broad-based as all commodity group price indices, except for Health and Recreation & Culture, fell relative to their respective bases. The largest decline was observed in ABT

Job Creation in the Year-Ending January Still Not Enough Job creation has started to reverse the downward movement in 2012 as the Philippines heads towards the election in May 2013. Job creation for the year ending January 2013 rose by 456,000 well short of the 1.1 M new jobs recorded in January 2012. However, when viewed in the context of poverty reduction, the January figures


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Macroeconomy

As election is already around the corner, both the government spending and the fiscal deficit climbed to their record high.

were not encouraging as three-digit decline was observed in the Agriculture sector, where around 70% of the poor have livelihoods tied up. Moreover, the unemployment rate rose to 7.1% from 6.8% in October signaling a faster increase in the labor force relative to job creation.

On a sectoral basis, the annual drop in job creation in Agriculture sector was broad-based as all the subsectors posted declines. New jobs in Agriculture, Hunting and Forestry fell by -354.1% and Fishing slumped by -202.1%. Both were due to environmental conservation concerns.

Meanwhile, job creations in Industry and Services, which comprised 69.6% of the total employment, surged to double-digit growths. For the Industry, its 63.7% rise was due to the growth in all its subsectors, except in Mining and Quarrying which contracted by 3.9%. As expected, Construction grew the highest at 86.2%, on account of robust spending on both private and pulic construction. Jobs generated in Services rose by 25.4% as majority of the subsectors posted positive growths.

By type of occupation, the worst condition of farmers and fishermen was magnified as jobs in the Farmers, Forestry Workers; and Fishermen category took a nosedive from -48,200 to -940,300 in terms of job losses. Meanwhile, Service Workers and Shop and Market Sales Workers; and Officials of Government and Special Interest Organizations, Corporate Executives, Managers, Managing Proprietors and Supervisors were the most in demand registering a 1,196.6% and 640.9% y-o-y increase, respectively.

In the next two quarters, we expect employment to trend upward given the spill-over effects of election spending. Moreover, if sustained, economic growth may impact positively the employment in the Agriculture sector through technological innovations and higher food demand.


NG Spending, Fiscal Deficit Climb to Record-High As of End-February In February, the revenue collection was proven to remain volatile while the government spending confirmed it is poised for more improvement. Total government spending jumped to its five-year record high of 12.4% to P282.0 B in the first two months of 2013, while overall revenue collection slowed to 2.1% on the same period. The revenue-spending tandem, together with the anemic spending in January to February 2012, brought the fiscal deficit to P31.380 B or 491.5% y-o-y escalation as of end-February.

Growth in government expenditure as of end-February was led by spending on Local Government Units (LGUs), which rose by 9.2% to P47.6 B, and infrastructure and capital outlays, which grew by 40.8% to P32.2 B. Meanwhile, interest payment jumped a little by 2.7%.

The sluggish revenue performance was due to a mixture of high base effect and tepid -5.7% revenue collections in February this year. The total tax revenue landed back to single-digit y-o-y growth of 6.2% as the collection from the

Figure 4 - Net New Jobs Created (‘000) Year Ending Survey


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Macroeconomy

To stem the sharp peso appreciation, policy rates remained on neutral grounds, while Special Deposit Accounts was further slashed by 50 basis points (bps).

Bureau of Customs (BoC) flattened at 0.2%. The Bureau of Internal Revenue’s (BIR) collection, even though high at 8.5%, is still lower when compared to the series of double-digit growths in the recent quarters. Meanwhile, seasonality undermine the collection from the Bureau of the Treasury (BTr) causing the non-tax revenue to fall by 47.1%.

Improvements in expenditure performance is expected to reach new heights in the coming months until Q2 2013 given the election in May and the investment grade rating from Fitch will boost the government’s expenditure strategy for investments in strong performing sectors such as business process outsourcing and agri-fishery. Meanwhile, revenue performance is more likely to improve this year given the tax compliance campaign among the self-employed, businesses and professionals, and a better economic growth prospects.

Policy Rates on Neutral Ground, SDA Slashed Amid Strong Peso As investors’ appetite for the Philippine peso remained positive, the Monetary Board (MB) of the Bangko Sentral ng Pilipinas (BSP) kept the policy rates unchanged in its meeting last March 14. Overnight borrowing and lending rates remained at 3.5% and 5.5%, respectively, across all tenors. At the same time, the MB further slashed the interest rates on the Special Deposit Accounts (SDA) facility by 50 bps to 2.5% across all tenors. The BSP’s decision highlights two important points: first, the MB does not expect a recovery of advanced economies in the medium term; and second, the impact of the earlier 50 bps cut in SDA rates was feeble as these were still higher than 91-day T-bill rates in the secondary markets.

In January, various money measures continued to track an upward trend. Money infusion into the banking system in the form of Reserve Money (RM) inched up to 13.7% from 11.6% in December. The expansion of RM was double-sided. Net Foreign Assets (NFA) rose by 4.5% on the back of the growth in Gross International Reserves, while Net Domestic Assets (NDA) were contained in negative growth.

Meanwhile, M2 and M3 registered growth of 11.6% and 10.8%, respectively. The spread between absolute values of RM and M2 widened from December indicating a boost in bank lending activity bringing the M2 multiplier in January to 3.52x. The outstanding loans of universal and commercial banks (UKBs), net of their reverse repurchase placements with the BSP, hit P3.183 Tr in January, 15.4% higher than the recorded loans in January 2012. Of this total, the largest recipients were real estate (18%), manufacturing (17%), and wholesale and retail trade (14%).

Figure 5 - NG Revenue Performance Growth Rates Year-on-Year of BoC and BIR

Source: Bureau of the Treasury (Btr)

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Feb

-12

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-12

Ap

r-12

May

-12

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-12

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12

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g-12

Sep

-12

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-12

No

v-12

Dec

-12

Jan

-13

Feb

-13

Tax Revenue

BIR

BOC

Ave. 12.7% Tax Revenue Growth


8

Macroeconomy

Exports performance was sluggish in January yet outlook for its recovery remains sanguine given the recent

developments in the major electronics production hubs.

Electronics Exports Plunge Dragging Total Exports to -2.7% in January In January, Electronics exports plunged 31.9% and dragged overall exports y-o-y growth which slipped to -2.7%. These figures came from low bases of 3.1% and 0.4%, respectively, and were in sharp contrast to expectations of a sound export recovery in 2013. Although the January data may have been a disappointment, it does have positive characteristics.

Firstly, the decline in the growth of Electronic Products was not reflective of the most recent developments in Singapore, China, Japan and the US--the major electronics production hubs. The weak 0.4% expansion of the US economy in Q4 2012 as well as the issues on fiscal cliff and unabated job creation weakness in the US dampened their demand for raw electronics in January. In the same month, the dispute between Japan and China over the Senkaku Island took a rising toll on their respective electronics industry as trade growth between the two countries fell significantly. Positive news on the ensuing months, however, has caused demand for semiconductors to rise. In fact, more orders for semiconductor parts/

assemblies suggested by improvement in the book-to-bill ratio in these countries imply that orders may now be exceeding delivery.

Secondly, the January data revealed the continued resilience of manufacturing products exported. Metal Components and Woodcrafts and Furniture continued to be in the top 10 exports with 56.7% and 52.0% increases in January. Meanwhile, Chemicals rose by 333% after four months (Sept-Dec 2012) of negative growth.

Finally, Other Manufactures registered a series of significant growth rates until January (67.7%) when it regained its position in the top 10 export products of the country. Combined, they represent about 25% of the earnings from Manufactured Products, second only to Electronic Products.

On a m-o-m basis, the overall export growth was positive at 1.0%. Although six of the top 10 exports were in the red territory, the losses had become less pronounced. Electronic Products fell by a mere 2.7%, a big improvement from the 13.2% decline in the previous month. The declines of the other exports—Metal Components; Other Manufactures; Articles of Apparel & Clothing Accessories; Ignition Wiring Set & Other Wiring Sets Used in Vehicles, Aircrafts & Ships; and Machinery & Other Transport Equipment—came from relatively high base of above 10% upticks, except for Articles of Apparel and Clothing Accessories.

It is too early to tell whether or not the export sector will be able to achieve the country’s 11% growth target for 2013. We just have to follow how the sector performs in the coming months.

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12

M1

M2

M3

Source: Bangko Sentral ng Pilipinas (BSP)

Figure 6 -M2 and M3 Money Supply Growth Rates (Year-on-Year)


9

Fixed Income Securities

Figure 7 - OFW Remittances Growth Rates (Year-on-Year in US$ and PhP Terms)

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50.00%

60.00%

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

US$

PhP


Growth of the Peso Value of Remittances Takes a NosediveIn spite of an 8% rise of OFW remittances in US dollar terms, the peso value slowed to a 0.8% growth in January from 4.1% in the same period last year as the peso appreciated by 6.6% y-o-y. What would be a cause for concern is the decreased stimulative effect on domestic consumption.

Nevertheless, dollar-remittances inflow proved to be as robust as what was expected for two main reasons. On the demand side, there was a sustained demand for skilled and professional workers abroad. Citing the preliminary data from the Philippine Overseas Employment Administration (POEA), for full-year 2012, the total number of deployed overseas workers rose by 6.7% to 1.8 M indicating an expanding base of remitters. In the same year, workers with processed contracts and awaiting deployment reached 2.083 M, 12.6% higher than the level recorded in 2011. For the first two months of 2013, the expansion of the economies of Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, and Taiwan has called for the processing of 29,533 job orders that were mostly for services; production; and professional, technical and related works.

Top 10 Philippine Exports for All Countries in January 2013

(Year-on-Year Growth in Percent)

Gainers

Metal Components 100.2

Gold 40.6

Copper Concentrates 38.5

Woodcrafts and Furniture 23.9

Losers

Articles of Apparel and Clothing Accessories -55.4

Coconut Oil -50.5

Bananas (Fresh) -15.4

Electronic Products -14.9

Pineapple and Pineapple Products -4.2

Ignition Wiring Set and Other Wiring Sets Used in Vehicles,

Aircrafts and Ships-0.9


On the supply side, the banking sector and the government have joined forces to address the remittance needs of overseas Filipinos and their beneficiaries. While the former continued its innovative effort in introducing new financial products and services, the government strengthened diplomatic relations to expand global market coverage of remittance service providers.

The growth of the peso value remittances may ease slightly over the next two months given the 4.7% and 5.0% y-o-y peso appreciation recorded in February and March, respectively. Meanwhile, we remain optimistic that dollar-remittances will take a higher path in Q1 2013, and would fall within our full year projections of 4-5%.

Peso Slightly Softens in MarchThe weakness of the peso had let up in March with the improvement in US employment figures and risk-aversion temporarily caused by the draconian financial moves in Cyprus. The peso had lost ground closing at P40.94/$, a loss of 20 centavos from the February level. The Peso traded at a wider range of P40.59/$ to P40.94/$. In terms

The strength of the peso in January continued to paralyze the stimulative effect of remittances of Overseas Filipino Workers (OFWs).

Macroeconomy


10

Macroeconomy

of y-o-y average, the easing was slight compared to the 5% appreciation from the level a year ago, averaging P40.71/$, near the P40.67/$ average in February.

The Peso appears weak in the near term having crossed over the 30-day moving average (MA). The Fitch Rating’s upgrade of the Philippines to investment-grade has not shown any reversal signs to the peso weakness.Nevertheless, the 200-day MA remains above the daily exchange rate keeping the longer term trend intact.

Figure 8 - Daily Peso-Dollar Exchange Rate

40

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42.5

43

43.5

44

44.5

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Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13

Peso/Dollar Exchange Rate 30-Day Moving Average

200-Day Moving Average


OutlookWhile the recent Fitch Ratings upgrade of the Philippines to investment-grade rating (BBB-) can give the country a ride towards its targeted economic growth, it may also push the peso to undesirable levels. Note that S&P is also seen to raise the country’s credit rating to investment grade.

• The inflation outlook in March looks better than in February, and it is in Q2 when it is likely to fall back to below-3% as crude oil prices trend lower in March, and

inventories continue to bulge, while the second crop of rice harvest is quite promising. The rise in ABT index is possible to remain at its current level.

• Fiscal spending is likely to be robust. Aside from the conventional reason (i.e. election spending), the call of the BSP to boost the demand for dollar may propel the increase in NG spending. The call was made to temper the sharp peso appreciation that has already incurred negative effects on the country’s Gross International Reserves.

• The BSP may tweak reserve requirement and further slash SDA rates (by at least 50 bps) to stem the peso appreciation. Given the new rating of the country, the BSP is also expected to be more vigilant (with more stringent macro-prudential measures) with respect to the upside risk of asset price bubbles given very low interest rates.

• The political and economic turmoil in advanced economies may continue to challenge the Philippine export industry; however, signs of recovery in the demand for electronics, particularly semiconductors, are already being seen. Moreover, the country plans to export rice this year.

• The country’s fresh investment-grade rating is likely to heighten the peso’s appreciation bias, but the BSP and the Department of Finance (DOF) are prepared to carry out strong measures to prevent this from becoming a reality, given its disastrous effects on the real economy. Moreover, the planned infrastructural development will incur dollar demand helping to soften the peso.

ForecastsRates March April May June

Inflation (y-o-y %) 3.2 2.9 2.9 2.9

91-day T-Bill (%) 0.13 0.13 0.03 0.06

Peso-Dollar (P/$) 40.71 40.56 41.08 41.46

10-year (%) 3.35 3.08 2.98 2.89

Source: Authors’ Estimates

In March, peso slightly softened as investors shifted away from currency carry trade into shorting the dollar index,

amid the financial concerns in Cyprus and the improvement in US employment.


11


Primary Market: Demand at the Tail-endLong-term T-bonds led the drop in yields with the most recent 20-year T-bond taking up the top slot with a yield plunge of 220.50 bps. A cut in the SDA rate in March 15 signaled investors to take advantage of the issuance of the 20-year T-bond, four days after the rate reduction. Its record low average yield of 3.517% reflected a shift in investment preference from SDAs to bonds especially since the current SDA rates are below the recorded inflation in February of 3.4%.

Yields of the 7- and 10-year T-bonds also trended lower being consistently oversubscribed as inflation continued to be manageable within the 3-5% target range (lower end) and growth expectations became heightened with earlier upward revisions by institutions like the IMF and the S&P. Hopes are high for the rest of the credit rating agencies, Moody’s and S&P, to follow Fitch’s move to solidify the country’s grounding as an investment hotspot. Moreover, hopes for good GDP growth records this year

Yields Confirm Upgrade and Expect Another?

In the midst of a weak global economy, the Philippine economy was resilient enough to merit a credit rating upgrade from Fitch Ratings Services echoing the earlier views articulated by the celebrated economist, Dr. Nouriel Roubini. In fact, the credit markets had moved ahead of the rating agencies by pricing Philippine debt at spreads narrower than countries with investment grade ratings.

In the weeks and months prior in Q1 2013, yields in the local debt market had already plummeted to historic lows. Another cut in SDA rates by 50 bps to 3.0% pulled yields of longer-dated securities significantly lower bringing the 20-year bond yield down by 220.50 bps. While local investors did not ignore international events such as the freezing and taxing of bank deposits in Cyprus and the US issues of sequestration and ending of QE3, the huge amount of domestic liquidity continued to send yield lower.

A 25% increase in the National Government’s borrowing requirement in Q2 2013 from the previous quarter, and its decision to abstain from issuing long-dated bonds should hold yields in the long end at bay especially after the investment grade rating.

T-Bills and T-Bonds Auction Results

Date T-Bond/T-Bill Offer (PhP B) Tendered (PhP B) Awarded (PhP B) Tendered ÷ Offered Yield Change - (bps)

7-Jan 91-day 2.00 12.99 2.80 6.50 0.05 -14.80

182-day 5.00 27.30 5.00 5.46 0.30 -22.00

364-day 8.00 22.33 8.00 2.79 0.763 15.70

22-Jan 7-year 25.00 79.78 25.00 3.19 3.876 -10.40

2-Feb 91-day 2.00 9.12 2.00 4.56 0.05 0.00

182-day 5.00 11.75 5.00 2.35 0.33 3.00

364-day 8.00 13.5 8.00 1.69 0.768 0.50

19-Feb 10-year 25.00 97.49 25.00 3.90 3.410 -63.60

4-Mar 91-day 2.00 4.96 2.00 2.48 0.800 75.00

182-day 5.00 11.94 5.00 2.39 0.270 -6.00

364-day 8.00 21.70 8.00 2.71 0.570 -19.80

19-Mar 20-year 25.00 118.33 25.00 4.73 3.517 -220.50

Totals 120.00 431.20 120.80 3.56 - -

Source: Bureau of the Treasury (BTr)


12


The Bureau of the Treasury’s (BTr) announcement of the auction schedule in Q2 2013 came with the surprise message

that there would be less preference for long-dated bonds.

on the back of improved government and consumer spending, especially with the nearing of the mid-term elections contributed to the bustling demand for T-bonds.

Tenders exceeded offers also for T-bill auctions, evidencing increased demand for government securities generally brought about by limited auction frequencies and the hunt for secure assets with decent yields. The 364-day T-bill yields had an uptick in the January and February, but eased in the last month of the quarter, as expectations for a policy rate cut by the Monetary Board and a possible end to Fed’s QE in the last quarter of the year were more fairly solidified by increased inflation expectations in the Philippines for 2013, and a relative improvement in the US economy in the following quarters.

Spreads between the short- and long end widened. The one year to ten year spread went from 264.7 bps in January to 284 bps in March.

Secondary Market: Downward Shift and Aggressive Positioning Due to Tighter SupplyThe Bureau of the Treasury’s (BTr) announcement of the auction schedule in Q2 2013 came with the surprise message that there would less preference for long-dated

bonds. This induced investors to scuttle and place more aggressive bids for longer-dated securities in the secondary market, thus further accelerating the downward pace in yields already stimulated by the migration from the SDAs. The Fixed Treasury Note (FXTN) 25-08 recorded the steepest decline with a 107.50 bps dip. This was followed by the 20-17 with a decline of 96.50 bps. Yields at the belly of the curve with the 10-52 and the 10-42 followed the trend, plummeting by 72.50 bps and 46 bps, respectively. The 4-43 and 5-67 FXTN remained barely unchanged and served as the yield curve’s pivot.

Source: Philippine Dealing and Exchange Corporation (PDEx)

Figure 9 - FXTN Yields

Average weekly trading volume in Q1 2013 was recorded at P222.07 B, a huge jump from P70.19 B in the same quarter last year and P127.76 B in the previous quarter. Likewise, the year-to-date (YTD) weekly average for 2013 was P257.06 B, or almost 4x higher than the weekly average for 2012 which was just at P66.85 B. The third week of March had the highest volume recorded during the first quarter with P364.59 B. This was due to investment repositioning and window-dressing at the end of the quarter, prior to the limited trading days in the last week of the Lenten season and of March. This can be contrasted to the first week of January trade volume valued at a measly P89.20B due to limited trading days of the week.


Figure 10 - Weekly Traded Volume

-46.00-72.50

-96.50-107.50

-140.00

-120.00

-100.00

-80.00

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

-14

-12

-10

-8

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0

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8

7-43 5-67 10-42 10-52 20-17 25-08

28-Dec-12 31-Jan-13

28-Feb-13 27-Mar-13

0 50 100 150 200 250 300 350 400

Mar Wk 4Mar Wk 3Mar Wk 2Mar Wk 1Feb Wk 4Feb Wk 3Feb Wk 2Feb Wk 1Jan Wk 5Jan Wk 4Jan Wk 3Jan Wk 2Jan Wk 1 2012 YTD (Mar 30)=

P66.85B

2013 YTD (Mar 27)= P257.06B


13


This corporate volume surge from 2012 can be attributed to firms taking advantage of the low but declining interest rate environment.

Total corporate trade volume in February eased 31.3% to P4.705 B, a value 11.66x greater than the P403.43M YTD value. This corporate volume surge from 2012 can be attributed to firms taking advantage of the low but declining interest rate environment, backed up by the strong macroeconomic fundamentals of the country.

SM Investments Corporation (SMIC) had the highest turnover with P1.296 B traded, an increase of 732% from the January 2013. San Miguel Brewery (SMB) traded higher this month with P382.84 M changing hands while Ayala Land Inc. (ALI) traded P248.83 M, lower than its previous trade volume. Power Sector Assets and Liabilities Management (PSALM) slumped in turnover with P238.43 B from its volume high of P4.813 B. Ayala Corporation (AC), like its property subsidiary ALI, turned over P232 M, down from P618 M in January 2013.

Corporate Issuances:

• Petron Corporation completed the issuance of $250 M worth of US dollar-denominated subordinated capital securities which resembles preferred stocks. The new securities would be consolidated and would form a single series with the $500 M undated subordinated capital securities the company issued last month. The fund will be used for the expansion of the company’s refinery in Limay, Bataan together with other general corporate purposes.

• A unit of Filinvest Development Corp. (FDC), Filinvest Development Cayman Islands, completed the offshore debt market sale of $300 M worth of dollar-denominated notes, which marked its return to the international debt market since the 1990s. The Gotianun-led firm said that this fund was raised from the sale of 7-year notes carrying an interest rate of 4.25%.

• San Miguel Corporation (SMC) cancelled effective March 26 nearly half of the $600 M bonds it bought back from creditors. Last month, SMC’s buyback plan worth $600 M of convertible bonds was announced as part of its refinancing strategy in favor of the company’s monetary position. The principal amount of the bonds cancelled amounted to $60 M. The outstanding principal amount of the bonds after the cancellation was $259 M.

• Energy Development Corporation (EDC) plans to issue a P7 B bond sale to support the company’s capital intensive projects and spending. It plans to issue P5 B worth of securities, with oversubscription option of up to P2 B. The


Figure 11 - Corporate Trading Volume


Figure 12 - Trading by Issuer (Million Pesos)

0

1000

2000

3000

4000

5000

6000

7000

8000

December January February

2011 2012 2013

0

1000

2000

3000

4000

5000

6000

PSALM SMB ALI AC SMIC

December 2012

January 2013

February 2013


14


SDA levels hit a record high at P1.86 Tr in February despite the MB’s decision to cut the SDA rates by 100 bps across

all tenors.

issuance will offer bonds in two tranches: 7-year bond due in 2020 and the 10-year fixed rated bonds due in 2023. Earlier, local credit rater Philippine Rating Services Corp. (PhilRatings) gave its highest rating of PRS Aaa for the planned bond sale.

• Vista Land and Landscapes, Inc. (VLC), the Villar-led firm, plans to tap the local debt market to raise as much as P5 B. The additional capital will be used to support VLC’s plan to launch projects worth P25 B this year.

• Rizal Commercial Banking Corporation (RCBC), the Yuchengco-led bank, awaits for BSP approval of its plan to offer as much as $130 M worth of hybrid notes eligible as core or tier 1 capital under the Basel 3 capital adequacy ratio (CAR) framework. Getting approval from the BSP, RCBC’s perpetual bond issuance would make it just the third Philippine company to raise funds from hybrid instruments, following Petron Corporation and International Container Terminal Services, Inc. (ICTSI).

ROPs:

The US could not keep its hopes high with some positive US economic data, as the threat of the effects of the sequestration in the coming months loomed. Fed

chairman, Bernanke, fortunately kept anxiety at ease by keeping its stance to continue with QE3 which attempted to stimulate the struggling US economy. Additionally, SDA levels hit a record high at P1.86 Tr in February despite the MB’s decision to cut the SDA rates by 100 bps across all tenors. This indicated that the cut was insufficient to discourage the use of the facility, thereby pushing the MB to slash rates again by 50 bps in March. The yield curve barely moved. Yields for the ROP16 eased slightly by 0.21 bp. Yields of the ROP 32, however, increased by 8.29 bps together with the ROP 14 which also marched up by 3.3 bps. ROP19 had a slight uptick of 0.1 bp.

ASEAN Market + 1

US: The initial fruits of its QE may have temporarily ripened, as signs of improved job prospects in the US, an increase of retails sales and an improvement in inventory replenishment backed optimism over a possible early recovery of the US economy this year. Pessimism remained the headline, however, as these signs may have to be offset by sequestration which became effective March 1. Because of this, the US economy would have to withstand the $85 B budget cuts for 7 months and the estimated losses would be 1 million jobs. The news that unemployment weakened to 7.7%, a four-year low, did not help as job creation remained anemic. Chairman Bernanke announced the Fed’s firm decision to continue with QE3 until the US economy shows stronger gains, especially in employment. Month-to-date (MTD), all tenors except the 1-year bond had an uptick in yields, led by the 10-year which rose by 22.75 bps. This was followed by the 5-year and the 2-year T-bonds at 15.53 bps and 1.5 bps, respectively. The 1-year yield declined by 0.51 bp.

PRC: Purchasing Managers’ Index (PMI) and the Consumer Price Index (CPI) in PRC slightly weakened due to the seasonality factor of the Spring Festival Holiday. PMI fell to 50.1 in February from 50.4 in January, and the CPI hit a 10-month high, increasing to 3.2% y-o-y from 2% in January. This news, however, was offset by improved signs of long-term economic liberalization in PRC as analysts expect new Chinese leaders to further loosen interest-Source: Bloomberg

Figure 13 - ROPs Yield Curve

3.3

-0.21

0.1

8.29

-10

0

10

20

30

40

50

-1

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1

2

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31-Dec 30-Jan

26-Feb 29-Mar


15


Analysts expect new Chinese leaders to further loosen interest-rate controls this year, pulling up greater hopes for the country’s financial liberalization.

rate controls this year, pulling up greater hopes for the country’s financial liberalization. Recently, PRC made the move to bring the country closer to having a freely traded currency as the China Securities Regulatory Commission issued regulations expanding the Renminbi Qualified Foreign Institutional Investor (RQFII) program for financial institutions in Hong Kong, China. MTD, yields of the 5- and 10-year bonds had an uptick of 2 bps. The 2-year yield decline slightly by 1 bp, and the 1 year yield had no change.

Indonesia: The rupiah fell to its weakest levels since January after investors became cautious on concerns regarding the government’s plan to adjust fuel subsidies. Uncertainty with the government’s decision triggered the selling of assets, on account of a possible wider budget deficit and current account deficits that may be caused by government decision to increase oil prices. Yields of longer-dated bonds increased, with the 5- and 10-year yields coming up 2 bps and 13.8 bps, respectively. The 1- and 2-year yields, however, declined by 1.3 bps and 5 bps, respectively.

Malaysia: Uncertainty brought about by the coming elections still remains a concern, as the outcome of polls still leaves a big question mark in the political front. Despite this, S&P projects Malaysia to continue dominating global sales of sukuk this year, as the ringgit remains to be the currency choice for sukuk issuers. The Bank Negara Malaysia (BNM) kept policy rates steady, despite a slight acceleration of CPI in February to 1.5% from 1.3% in January. This decision was made on the back

of upward projection in the country’s growth by the BNM from a 4.5% to 5.5% range to a 5% to 6% range. The 1- and 5-year yields slipped slightly by 0.5 bp and 1.2 bps, respectively. The 2-year yield , however, increased by 1 bp and the 10-year yield also had an uptick of 1.4 bps.

Thailand: Driven by inflows from abroad, the Thai baht rose to its strongest levels since July 1997 while government bonds advanced. Fitch, similar to the case of the Philippines, raised Thailand’s Long-term Foreign Currency (FCY) issuer default rating to “BBB+” with stable outlook, after downgrading it in 2009, as political unrest beset the country with the leadership of Prime Minister Thaksin Shinawatra. Yields across all tenors increased, led by the 10-year yield which had an uptick of 18.9 bps. This was followed by the 5-year yield increasing 3.9 bps. The 1- and 2-year yields also marched upwards by 1 bp and 3 bps, respectively.

Philippines: Yields decreased across most of the tenors. The 5-year yield led the decline by 30.39 bps, followed by the 2-year which marched down by 28.93 bps. The 10-year yield as well slipped by 21.99 bps. The 1-year yield, however, moved the opposite direction with an uptick of 33.32 bps. The limited supply of long-term bonds for Q2 2013 and with the SDA rate slashed by 150 bps in two consecutive MB meetings, the market shifted demand to the long end.

Spreads between 10-year and 2-year T-Bonds

Country 2-year rate 10-year rate Projected Inflation

RatesReal 10-year

yield

10 year to 2-year Spread (bps) Spread Change (bps)

Latest Policy RateMar. 1, 2013 Mar. 26, 2012

US 0.246 1.909 1.8 0.11 161 166 5 0.25

PRC 3.090 3.600 4.3 -0.07 50 51 1 6

Indonesia 4.461 5.575 5.5 0.08 109 111 2 5.75

Malaysia 3.014 3.482 2.2 1.28 44 47 3 3

Thailand 2.827 3.502 3.1 0.40 76 67 -9 2.75

Philippines 2.350 3.100 3.9 -0.80 162 75 -87 3.5Source: Asian Development Bank (ADB)


16


Ample liquidity of foreign funds in the domestic market can increase prospects for offshore market bonds reallocation.

Outlook:

The investment grade status of the Philippines may result to a relative increase in portfolio investments, sustaining demand for securities which offer security and decent yields. Investors are expected to have a “wait-and-see” attitude in the coming months as they seek confirmation from Moody’s and S&P. Moreover, further buying activity is expected in the secondary market as investors hunt gains for longer dated bonds which the BTr limited for auction in Q2 2013.

Greater intervention from the BSP is expected, especially in Q2 2013, through the implementation of the Non-Deliverable Forwards (NDFs), the imposition of a ban on foreign funds from being invested in its overnight borrowing facility and more aggressive foreign debt buybacks, all to curb speculative capital from coming into the country.

The SDA rate may be brought down to the range of 1.5% to 2.5%, across all tenors as the cumulative 100 bps rate cut may have not provided significant effects to reduce continued short term capital inflows. Considering the country’s new investment grade status, there is reason to expect long term capital inflows. External shocks continue to rattle the Philippine economy such as 1) effects of the Cyprus bailout deal to further dampen economic prospects in the Eurozone, and 2) US struggle against employment losses due to the sequestration. Judging from investor behavior, both domestically and internationally, these are just noises that at present can be ignored.

Source: Asian Development Bank (ADB)

Figure 14 - ASEAN Market + 1 (as of March 26, 2013)

0

1

2

3

4

5

6

1 2 5 10

US PRC Indonesia

Malaysia Thailand Philippines


17

Equity Markets

Valuations Come to Fore

In mid-March, weaknesses have emerged in the Philippine equity market’s somewhat impregnable armor. Investors have begun to recognize the market’s expensive valuations (relative to neighbors and history) and took profits. But with the Philippines attaining the much coveted investment grade rating, euphoria was back in style at least in the near-term. Fitch Ratings upgraded the country to ‘BBB-‘ from ‘BB+’. We expect S&P to affirm the investment grade rating in the next 3 months. Moving forward, Philippine equity market investment backdrop has changed and requires reassessment. At the start of 2013, we started with two points underpinning our constructive market outlook. First, the Philippine economy will sustain its robust growth and be the catalyst for earnings growth. Second, market valuations will play second fiddle to foreign fund inflows, peso appreciation, and lower Philippine bond yields.

Our first point is still valid with the Philippine growth story remain intact (see Macroeconomy). However, for the second point, we are now entering a phase where the market has started to put more emphasis on valuations. While Philippine bond yields remain at record lows, peso’s strength appears to be waning and foreign fund inflows have lost momentum. The market environment this created, where investors now take in hand fair valuations, may cause the market to struggle in the interim.

We think a degree of caution is legitimate, given higher probability of price-to-earnings (P/E) ratio contraction in the near-term. P/E levels for both MSCI Philippines and PSEi are demanding (vs. peers and history) and have more than

priced in expected positive risks events (robust economic and earnings growth, credit rating upgrade, and mid-term elections). Moreover, fund inflows into General Emerging Market (GEM) Funds have slowed down as the US market picks up steam. With these in mind, we maintain our PSEi year-end target of 7,200 at a fair value of 18.8x times P/E.

Outlook and StrategyDespite the investment grade status, we think the market will suffer setbacks over the next few months. As valuations come to the fore, perception on fair value of Philippine equities would carry the headlines to investors’ strategies. It is important to have rational and process oriented investment approach. Avoid being overwhelmed by one’s emotions in this difficult backdrop. In the next 12 months, we remain constructive and will stay focused on opportunities ahead.

Source of Basic Data: PSE Quotation Reports

Quarterly Sectoral Performance28-Dec-12 27-Mar-13

Sector Index % Change Index % Change

PSEi 5,812.73 7.16% 6,847.47 17.80%

Financial 1,525.95 11.00% 1,780.95 16.71%

Industrial 8,877.29 3.99% 10,274.29 15.74%

Holdings 5,150.76 11.36% 5,959.38 15.70%

Property 2,304.63 9.36% 2,831.61 22.87%

Services 1,724.65 -1.69% 2,014.38 16.80%

Mining and Oil 19,408.38 -2.53% 21,504.34 10.80%

Figure 15 - MSCI Philippines P/E

Source: Bloomberg


18

Equity Markets

Robust economic fundamentals and strong foreign flows continue to support the local bourse.

The local bourse recorded sterling growth this quarter surging 1,034.74 points driven by strong foreign flows, better-than-expected corporate earnings results, and robust economic fundamentals. The surprise credit rating upgrade to investment grade by the New York-based credit watcher Fitch Ratings also propelled the index up but it appeared to be short-lived as evidenced by the market’s recent decline. Valuations remain stretched. The Philippine stock market is currently trading around 20x P/E. For the period in review, all sectors posted gains with the Property sector leading the rally.

The strength of the economy continues to spur growth in the Financial sector buoyed by the increase in loans. Commercial bank loans rose by 15.1% y-o-y in February, slightly off the 15.8% uptick in January. This, complemented by banks’ adequate capital resources, surely warrants viable growth for the banking sector. Moreover, the Bangko Sentral ng Pilipinas’ (BSP) initiative of encouraging mergers and acquisitions makes the growth of the sector more resilient. Share prices of the top banks all rose amid solid core business performance, reflected in the double digit growth in net income (please see March 2013 issue).

Company Symbol 12/28/12 Close

03/27/13 Close

% Change

Metrobank MBT 102.00 117.00 14.7%

Banco de Oro BDO 72.80 89.75 23.3%

Bank of the Philippine Islands BPI 95.00 110.00 15.8%


SM Investments Corporation (SM) continued to lead the pack, registering a robust gain of 26.4%. The gains were anchored on FY2012 net income growth of P24.7 B, higher than expected with BDO’s strong performance accounting for the largest share. Better performance was also driven by its other operations (i.e. mall operations and property development). Share price of Metro Pacific Investment Corporation (MPI) nearly matched this performance as it continued to impress investors with its expansion and acquisition efforts. GT Capital (GTCAP) shares, likewise, went up. The company saw its net income surged by 97% resulting from the consolidation of Global Business Power Corp. (GBPC) and higher net income contributions from its subsidiaries. Meanwhile, prospects for DMCI Holdings, Inc. (DMC) remain constructive as it steps up mining acquisitions and property development projects.

Except for the Energy Development Corporation (EDC), all stocks in the Industrial Sector proved to be supported by strong domestic demand. Manila Electric Co. (MER) and Jollibee Foods Corp. (JFC) had the highest growth of 25.3% and 23.5%, respectively. The Pangilinan-led power distributor (MER) is now keen on regional expansion targeting our neighbors (i.e. Singapore, Myanmar, Thailand, and Vietnam). Likewise, JFC also pushes for global expansion, targeting 4,000 outlets worldwide by 2020 (50:50 split between domestic and overseas sales). The FirstMetroSec Research Team projects its share price at a premium backed by strong growth prospects with FY2013 net income increase projected at 12.1%. On the other hand, share prices of EDC continued to slump due to the unprecedented suspension in the operations of its Bacman Units 1 and 2, due to accidents.


03/27/13 Close

% Change

Meralco MER 260.60 326.60 25.3%

Aboitiz Power AP 36.95 37.00 0.1%

Energy Development Corp. EDC 6.75 6.46 -4.3%

San Miguel Corporation SMC 105.40 115.50 9.6%

Jollibee Foods Corp. JFC 102.00 126.00 23.5%



03/27/13 Close

% Change

Ayala Corp. AC 517.00 566.00 9.5%

Metro Pacific Investments

Corp.MPI 4.45 5.58 25.4%

SM Investments Corp. SM 882.00 1,115.00 26.4%

DMCI Holdings, Inc. DMC 53.95 55.00 1.9%

Aboitiz Equity Ventures AEV 52.95 55.15 4.2%



19

Equity Markets

The change in the investment backdrop in the Philippine equity market requires a reassement of investment strategies, a degree of caution is warranted.

For Q1 2013, the Property sector appeared to have benefited the most with the country’s favorable economic conditions (i.e. stable economic growth, low interest rate, huge inflows of remittances and foreign investments, and expansion of BPOs). All these drove the steadily rising demand in the local property market. Companies under this sector all recorded hefty gains on the back of higher residential sales (please see March 2013 Issue).

Due to its constituents’ over-performance, the Service sector had a sharp increase from its previous low in the last quarter. Lucio Co’s retail grocery store operator (PGOLD) again reached record highs as investors foresee better prospects in the company. PGOLD is serious in its expansion plans as seen in its aggressive acquisitions. The company’s president, Leonardo Dayao, said that the company is planning to open 25 more stores in 2013 and another 25 in 2014. Share prices of Pangilinan-led telephone company (TEL) also rose following the credit upgrade of its foreign debt papers to BBB. Fitch raised PLDT’s ratings on account of the company’s strong financial profile and high market penetration in the wireless, fixed-line, and broadband segments.


03/27/13 Close

% Change

Ayala Land, Inc. ALI 26.45 32.70 23.6%

SM Development Corp. SMDC 5.89 8.47 43.8%

SM Prime Holdings, Inc. SMPH 16.50 19.10 15.8%

Robinsons Land Corp. RLC 20.75 25.50 22.9%

Megaworld Corp. MEG 2.77 3.89 40.4%



03/27/13 Close

% Change

Philippine Long Distance Tel. Co. TEL 2,530.00 2,988.00 18.1%

Globe Telecom GLO 1,092.00 1,200.00 9.9%

Puregold PGOLD 33.00 40.05 21.4%



03/27/13 Close

% Change

Philex Mining Corporation PX 14.98 17.82 19.0%

Semirara Mining Corp. SCC 233.40 267.40 14.6%

Lepanto Consolidated Mining

Co.LC 1.00 1.06 6.0%


Shares in the Mining and Oil sector continued to advance. The notable equity gainer was Semirara Mining Corporation (SCC), which made a sudden spike after it was granted a signal to resume operations at its Panian coal mine in Antique. Nonetheless, Philex Mining Corporation (PX) still takes the lead, also due to resumed operations at the Padcal mine after it paid a P1 B fine for the spill in a tailings pond due to excessive rains last year.

Quarterly Turnover (in Million Pesos)Total Turnover Average Daily Turnover

Sector Value % Change Value % Change

Financial 101,610.01 9.3% 1,665.74 -1.5%

Industrial 125,900.97 30.7% 2,063.95 17.9%

Holdings 167,327.03 74.6% 2,743.07 57.4%

Property 108,603.58 71.9% 1,780.39 54.9%

Services 91,250.96 18.2% 1,495.92 6.6%

Mining and Oil 28,786.17 85.1% 471.90 66.9%

Total 623,481.39 41.3% 10,221.01 27.4%

Foreign Buying 334,823.06 51.8% 5,488.90 36.9%

Foreign Selling 293,437.42 41.8% 4,810.45 27.9%


Total Turnover

Total turnover was up by 41.3% on the back of weighty trading due to stable economic outlook supported by good corporate earnings results. PSEi took a breather in the second week of March but price pullbacks have been short-lived. Nevertheless, as stated earlier, a degree of caution is warranted as there was a change in the Philippine equity market investment backdrop hence, requiring reassessment. Foreign participation stood at 41.8% of total market activity with net foreign buying at P41.4 B. However, the bulk of this net buying activity was in January when it hit P27.2 B. After a slowdown in February to P5.9 B, it recovered a little to P8.3 B.


20

Recent Economic Indicators

NATIONAL INCOME ACCOUNTS, CONSTANT PRICES (in P millions)2011 2012 3rd Quarter 4th Quarter

Levels Annual G.R. Levels Annual

G.R. Levels Quarterly G.R.

Annual G.R. Levels Quarterly

G.R.Annual

G.R.Production Agri, Hunting, Forestry and Fishing 663 (0.2%) 678 2.4% 159 (2.2%) 4.2% 205 29.2% 4.8% Industry Sector 1,860 11.6% 1,577 (15.2%) 482 (5.5%) 7.6% 505 14.8% 8.5% Service Sector 3,179 7.2% 2,537 -20.2% 887 (4.0%) 7.5% 926 6.8% 6.9%

ExpenditureHousehold Final Consumption 3,946 3.4% 4,186 6.1% 1,053 (3.7%) 6.3% 1,091 21.2% 6.6%Government Final Consumption 570 4.0% 567 (0.6%) 157 (17.2%) 12.0% 188 (12.0%) 11.0%Capital Formation 1,184 31.6% 1,340 13.2% 305 8.6% 4.3% 268 26.3% (0.9%) Exports 2,886 21.0% 2,765 (4.2%) 786 (7.2%) 6.9% 847 (22.9%) 6.0% Imports 2,884 22.5% 2,968 2.9% 788 (5.0%) 8.3% 784 -8.8% 1.4%

GDP 5,702 7.6% 5,921 3.9% 1,525 (4.4%) 7.1% 1,594 11.8% 6.8%NPI 1,860 10.0% 1,849 (0.6%) 466 (4.9%) 4.9% 490 5.7% 0.9%GNI 7,561 8.2% 7,770 2.8% 1,992 (4.5%) 6.6% 2,084 10.4% 5.4%

Source: National Statistical Coordination Board (NSCB)

NATIONAL GOVERNMENT CASH OPERATION (in P million)2011 2012 Jan-2013 Feb-2013

Levels G r o w t h Rate Levels G r o w t h

Rate Levels M o n t h l y G.R. Annual G.R. Levels M o n t h l y

G.R. Annual G.R.

Revenues 1,359,942 12.7% 1,534,932 14.2% 138,368 9.5% 9.5% 112,348 (18.8%) (5.7%)Tax 1,202,055 9.8% 1,360,849 13.6% 120,438 5.4% 11.5% 98,155 (18.5%) 6.2%BIR 924,146 12.3% 1,057,716 14.9% 94,718 6.9% 11.2% 74,519 (21.3%) 8.5%BoC 265,108 3.6% 289,866 9.7% 24,540 (3.9%) 11.6% 22,471 (8.4%) 0.2%Others 11,885 n.a. 12,833 8.0% 1,180 502.0% 32.0% 1,165 (1.3%) (8.7%)Non-Tax 157,612 45.8% 173,980 36.6% 17,930 48.8% -31.3% 14,167 (21.0%) (47.1%)

Expenditures 1,557,696 2.8% 1,777,977 14.0% 157,899 (34.8%) 11.0% 124,097 (21.4%) 14.3%Allotment to LGUs 315,114 13.12% 298,322 (4.8%) 26,006 5.0% 10.4% 25,954 (0.2%) 8.1%Interest Payments 278,996 1.3% 312,799 13.8% 54,842 80.0% 9.1% 17,920 (67.3%) (12.9%)

Overall Surplus (or Deficit) (197,754) (281.3%) (243,045) (13.1%) (19,531) (83.1%) 22.5% (34,854) (39.8%) (210.3%)

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

2012 January-2012 February-2012

Annual Levels Growth Rate Levels Growth Rate YTD Levels Growth Rate YTD

TOTAL 32,471 7.2% 2,523 .1 3.9% 3.9% 2,652.8 1.3% 2.5% Residential 9,775 4.8% 792.8 2.7% 2.7% 751.9 (1.4%) 0.7% Commercial 12,602 6.1% 982.1 3.2% 3.2% 1,040.7 2.1% 2.6% Industrial 9,964 11.5% 737.2 6.1% 6.1% 849.4 2.7% 4.3%

Source: Meralco


21BALANCE OF PAYMENTS (in US millions)

2011 2012 3rd Quarter 2012 4th Quarter 2012

Levels Growth Rate Levels Growth Rate Levels Annual G. R. Levels Annual G. R.

I. CURRENT ACCOUNT 7,078 (20.7%) 7126 2.2% 3,079 33.6% 2,208 (0.8%) Balance of Trade (11,857) (44.1%) (12046) (5.6%) (1,435) 40.7% (3,031) (15.4%) Balance of Goods (15,450) (40.9%) (15205) 10.4% (2,619) 27.8% (4,701) 4.2% Exports of Goods 62,681 (3.3%) 46284 20.9% 13,212 7.3% (10,991) 27.4% Import of Goods 74,538 2.0% 61489 11.3% 15,831 (0.7%) (15,692) 16.0% Balance of Services 3,593 31.4% 3905 31.4% 1,184 (2.0%) (1,441) (15.7%) Exports of Services 15,450 9.6% 18600 9.6% 4,620 11.6% (5,121) 5.3% Import of Services 11,857 4.4% 14695 4.4% 3,436 17.1% (3,680) 16.8% Current Transfers & Others 17,642 6.0% 4,598 2.6%

II. CAPITAL AND FINANCIAL AC-COUNT 5,228 -29.2% (5,995) 9.4% 1,962 (21.0%) 2,494 (54.5%)

Capital Account 171 74.5% 136 4.6% 30 (43.4%) 48 60.0% Financial Account 5,057 (30.6%) (6131) (9.3%) 1,932 (20.5%) -2542 (158.5%) Direct Investments 1,253 83.7% (952) 25.5% 90 215.4% -92 73.3% Portfolio Investments 5,524 26.6% (3523) 19.7% 349 (51.7%) -1851 (311.5%) Financial Derivatives 1,002 624.6% (13) 98.7% (18) 58.1% 27 130.7% Other Investments (2,722) (211.8%) (1643) (255.1%) 1,511 (17.4%) -626 (116.0%)

III. NET UNCLASSIFIED ITEMS (2,127) 6.2% (2127) (217.3%) (526) 0.0% -1393 (154.7%)

OVERALL BOP POSITION 10,179 (28.9%) 10179 (19.0%) 4,515 (4.0%) 3405 643.4% Use of Fund Credits 0 0.0% 0 0.0% 0 0.0% 0 0.0% Short-Term (1) 0.0% (1) 0.0% 11 10.0% (11) 0.0%Memo ItemsChange in Commercial Banks Net Foreign Assets 5622 11.7% (4,049) 19.9% 2,627 34.2% 249 479.1%Basic Balance 8655 (25.5%) n.a. n.a. 3,268 30.9% n.a. n.a.


MONEY SUPPLY (in P millions)

2012 Jan-2013 Feb-2013Average Levels Annual G. R Average Levels Annual G. R. Average Levels Annual G. R.

RESERVE MONEY 1,279,614 13.9% 1,393,446 13.65% 1,321,395 8.49%

Sources: Net Foreign Asset of the BSP 3,323,054 9.5% 345,1041 4.51% 3,391,527 2.64% Net Domestic Asset of the BSP (2,043,440) 6.9% (2,057,595) -0.89% (2,070,132) -0.78%

MONEY SUPPLY MEASURES AND COMPONENTSMoney Supply-1 1,464,490 13.5% 1,560,220 8.39% 1,578,796 11.35%Money Supply-2 4,584,972 9.3% 4,877,268 11.03% 4,902,158 10.74%

MONEY MULTIPLIER (M2/RM) 3.58 -3.58% 2.50 -2.31% 3.5 2.07%


Roberto Juanchito T. DispoDr. Victor A. Abola

Viory Yvonne T. JaneoTyrone Dale R. Agas

Julia Gilleane V. AltunaReuben Mark A. Angeles

Augusto M. Cosio, Jr.

President, FMICSenior Economist, UA&PResearch Associate, UA&PResearch Assistant, UA&PResearch Assistant, UA&PDepartment Head — Research, FMSBCPresident, FAMI

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.

April 2013

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