Vol. XXI, No.

112
Tuesday, January 8, 2008 | MANILA, PHILIPPINES

Today’s Headlines
Reserves hit record $33.7B
Bangko Sentral cites its aggressive dollar-buying, investments abroad
THE COUNTRY’S FOREIGN RESERVES hit a record $33.71 billion at the end of last
year, the Bangko Sentral ng Pilipinas (BSP) yesterday said, largely due to aggressive
dollar-buying operations, income from investments abroad, and a gold price rally.

The gross international reserves (GIR) tally for 2007 exceeded the target of $33-33.5
billion, and compares to the previous year’s $22.97 billion.

For 2008, the central bank has said it expects reserves to hit $35-37 billion.

"The significant accumulation of reserves in December 2007 was attributed mainly to

inflows from the Bangko Sentral’s net foreign exchange operations and income from its
investments abroad," central bank Governor Amando M. Tetangco, Jr. said.

The national government’s deposit of proceeds from a $75-million program loan also
helped buoy the reserves, he said. The loan, granted by the Asian Development Bank,
was to aid the Philippine microfinance sector.

A BSP source also said the appreciation of gold, whose strong price gains towards the
end of 2007 reflected investors’ fears of oil-led inflation, also gave the GIR a boost.

Gold accounts for around 10% of the country’s reserves, which also consists of special
drawing rights with the International Monetary Fund, foreign investments that are mostly
triple AAA-rated, and foreign exchange.

Red-hot dollar inflows from Filipinos abroad, as well as portfolio and direct investments,
prompted monetary authorities last year to step up intervention in the foreign exchange
market, as these flows drove the peso to multi-year highs.

The local currency gained by more than 18% in 2007, making the peso Asia’s best-
performing currency.

While enabling the central bank to beef up its reserves, the sterilization activities, which
included currency swaps, cost the monetary authority dearly. The BSP clocked a net
deficit of P46 billion in its balance sheet in the ten months to October, as foreign
exchange losses ballooned by 39% to P67 billion.

Central bank officials have argued that the move addressed volatility in the currency
market and took advantage of the increased liquidity.
A healthy GIR position ensures a steady supply of hard currencies to meet current and
near-term obligations, such as import payments.

In the case of the Philippines, its current reserves are enough to pay for 5.9 months of
imports of goods, services and income, Mr. Tetangco said.

It could also cover 4.9 times the country’s short-term external debt based on original
maturity.

Payments of maturing foreign exchange obligations, meanwhile, partly offset the dollar
inflows, the BSP chief said.

In December, the central bank paid $22 million in interest payments alone, while the
national government shelled out $175 million for debt servicing, a BSP source said. —
M. E. I. Calderon with a report from Reuters

Vol. XXI, No. 112

Tuesday, January 8, 2008 | MANILA, PHILIPPINES

Banking & Finance

RP dollar bonds recover, buck declining debt paper in Asia
HONG KONG — Philippine bonds yesterday rebounded as new supplies were no longer
thought imminent.

These bucked other Asian bonds that were jittery amid fears of a recession in the United
States, the region’s most important export market.

Philippine bonds due in 2032 were bid at 98.75/99.125 cents to a dollar, up by about a
quarter point from the US close of trade on Friday.

Philippine five-year credit default swaps (CDS) — insurance-like contracts that protect
against defaults and restructuring — were steady at 176/186 basis points (bps).

Meanwhile, Indonesian bonds remained under pressure on news of investor presentations

for a global bond issue that could raise as much as $2 billion in a two-tranche deal.

"I don’t think the Philippines will issue if Indonesia beats [it] to the punch. They will wait
as it is not a good idea to issue at the same time," a Manila-based trader said.

Last week, bonds from Indonesia and the Philippines, the region’s major sovereign
borrowers, had fallen amid fears they could both offer new issues during the week.

Indonesian five-year CDS widened by around 10 bps to 183/188 bps.

Traditionally, the risk premium on the two countries, both rated BB-minus by Standard &
Poor’s, has been similar. But the possibility of a bigger issue from Indonesia has created
a pricing differential, analysts said.

"The Philippines has definitely outperformed because of the smaller issuance size," a
Hong Kong trader said.

Last month, the Philippine finance department said it would borrow just $500 million
from the overseas debt market in 2008, half of the original plan of $1 billion.

The road show for the Indonesian deal will start today and end on Friday, targeting cities
in Europe, Asia and the United States, and an offering is likely to consist of a 10-year and
a 30-year tranche.

Meanwhile, the wave of risk aversion in the broad market widened the iTRAXX Asian
high-yield index, which excludes Japan, to around 380 bps from Friday’s 353/356.

Elsewhere, sentiment remained edgy as investors gauged the likely impact of weak US
economic data.

Friday’s US payroll report showed an employment rise of just 18,000 in December and
the jobless rate posted a surprisingly big rise to a two-year high of 5%, stoking fears the
world’s largest economy is headed for a recession.

Benchmark bonds from ports-to-telecoms conglomerate Hutchison Whampoa Ltd due in

2033 were 2 to 3 bps wider at 198/188 bps over US Treasuries.

Traders said the spreads on high-grade bonds were 4 to 5 bps wider on average while
high-yield spreads had moved out broadly by 10 to 12 bps. — Reuters

Vol. XXI, No. 112

Tuesday, January 8, 2008 | MANILA, PHILIPPINES

Today’s Headlines
Stanchart says buy peso vs Taiwan dollar; currency hits P40.99:US$1
SINGAPORE/MANILA — Investors should buy the Philippine peso against the Taiwan
dollar in the offshore forward market to profit from the former’s relative strength,
strategists at Standard Chartered Bank said.

"Strong inflows, attractive valuations and the authorities’ tolerance for gradual currency
strength continue to provide fundamental support for the peso," analysts Thomas Harr
and David Mann said in a note to clients.

"On the contrary, Taiwan would be much more vulnerable to a sharper US slowdown,"
the analysts said.
They recommended the trade be executed through three-month nondeliverable forwards
(NDFs).

The peso, Asia’s top performer versus the US dollar in 2007 with a gain of over 18%,
could rise further rise this year as the economy should be helped by rising consumption
and its limited exposure to a US slowdown, they said.

It was near P1.26 to the Taiwan dollar yesterday, up 11% from about P1.40 in mid-
September, when the peso gained momentum against the US dollar after the Federal
Reserve started cutting interest rates.

The currency yesterday hit a fresh seven-and-a-half year high of P40.99 per US dollar
yesterday, bucking generally weak regional currencies.

Currency dealers traced the peso’s continued rally to strong economic growth, a heavy
flow of remittances from Filipinos overseas and central bank tolerance of currency
appreciation.

The peso gained a centavo to close at P41 from P41.01 per Us dollar on Friday. Traders
expect it to reach P37-38 in the long term.

Regional currencies weakened against the US dollar yesterday except for the peso and the
Thai baht, which rose to a five-and-a-half month high of 33.33.

Meanwhile, HSBC strategist Richard Yetsenga suggested that operators should sell the
Taiwan dollar against the US dollar via one-month NDFs in anticipation of near-term
weakness.

The Taiwan dollar hit a one-week low of 32.5 to the US dollar yesterday, under pressure
from falling domestic share prices and fears of foreign fund outflows.

It was one of the worst performers in 2007, gaining a mere 0.5%. — Reuters with a report
from CSSV

http://www.bloomberg.com/apps/news?pid=20601009&sid=afFetWex_2iE&refer=bond

Treasuries Fall, Snapping Eight-Day Rally, on Inflation Concern

By Wes Goodman

Jan. 9 (Bloomberg) -- Ten-year Treasury notes fell, snapping an eight-day rally, as rising
commodity prices and a weaker dollar sparked speculation that inflation will quicken.
Longer maturities, those more sensitive to inflation, led the decline after gold climbed to
a record and crude oil traded near $100 a barrel. Federal Reserve Bank of Philadelphia
President Charles Plosser indicated increasing concern about inflation in a speech
yesterday. William Poole, head of the St. Louis Fed bank, is due to speak today.

``We have high energy prices, high food prices and a weaker U.S. dollar,'' said Roger
Bridges, who helps oversee the equivalent of $5.3 billion of debt at Tyndall Investment
Management in Sydney. ``Given what's happening with inflation, we may start cutting
our positions.''

The benchmark 10-year yield rose 4 basis points to 3.81 percent as of 7:01 a.m. in
London, according to bond broker Cantor Fitzgerald LP. The price of the 4 1/4 percent
security due in November 2017 fell 10/32, or $3.13 per $1,000 face amount, to 103
18/32. Two-year rates increased 4 basis points, or 0.04 percentage point, to 2.71 percent.

Tyndall holds 10-year Treasury futures contracts and is considering trimming the
investment, Bridges said.

TIPS Sale

The U.S. is scheduled to sell $8 billion of 10-year Treasury Inflation-Protected Securities,

or TIPS, tomorrow. The securities pay interest at lower rates than conventional
Treasuries, while the principle amount rises in tandem with gains in the Labor
Department's consumer price index.

Yields indicate inflation concern hasn't yet spread through the bond market. Ten-year
TIPS yield 2.29 percentage points less than regular Treasuries, compared with an average
of 2.37 percentage points for the past year.

The next inflation report is scheduled for Jan. 15, when the Labor Department issues its
producer price index. Prices rose at an annual pace of 7.9 percent in December,
quickening from 7.2 percent in November, according to the median forecast in a survey
of economists by Bloomberg News. It would be the fastest since September 1981. The
consumer price index, scheduled for Jan. 16, rose 4.1 percent, another survey showed.

Plosser, speaking in Gladwyne, Pennsylvania, said faster inflation would put the Fed's
credibility at risk. ``If inflation expectations continue to rise, it will be difficult and costly
to the economy to deliver on our goal of price stability,'' he said.

Plosser also said interest-rate cuts may be needed should the outlook for U.S. economic
growth become ``substantially weaker.''

Fed Bank of Atlanta President Dennis Lockhart said he wouldn't rule out another rate cut
because he is ``equally or more concerned'' about risks to growth than inflation, speaking
to reporters after a speech yesterday. Plosser votes on monetary policy this year while
Lockhart and Poole do not.

Energy Costs

Rising fuel prices will curtail economic growth, and that will overshadow the inflation
risk, said Naruki Nakamura, who helps oversee $32.1 billion at Fischer Francis Trees &
Watts Inc.'s office in Tokyo. Higher energy costs leave people with less money to spend
on other goods.

The rally that sent Treasuries to their best annual return last year since 2002 may slow,
though it isn't over, he said.

``For 2008, we have much more to go,'' Nakamura said. Ten- year yields will decline to
3.5 percent this year, he predicts.

Futures contracts on the Chicago Board of Trade indicate the Fed will lower its target for
overnight bank loans by half a percentage point at its Jan. 30 meeting and by a quarter
point on March 18, The odds of a third reduction in April, bringing the rate down to 3.25
percent, are 51 percent.

Treasuries extended their decline as stocks advanced. The MSCI Asia Pacific Index rose
1.1 percent, its biggest gain since Dec. 21.

Gold began the best start to a year since at least 1980. Crude oil gained, after reaching a
record $100.09 a barrel last week. The dollar has fallen against an index of six major
currencies that includes the euro and British pound each day this year except one.

To contact the reporter on this story: Wes Goodman in Singapore at

wgoodman@bloomberg.net .
Last Updated: January 9, 2008 02:32 EST

RP bonds tumble; Indonesian prices slump

HONG KONG — Bonds from the Philippines, rumored to be considering a sale of $500
million worth of dollar-denominated debt, tumbled yesterday.

Philippine five-year credit default swaps — insurance-like contracts that protect against
restructuring or default — widened by about 10 basis points (bps) to around 190.

"Pricing in the Indonesian bonds appears very cheap compared to the ROP," a Manila-
based trader said, referring to the Philippines.
"I think with Indonesia announcing the pricing and pushing their issue very soon, the
Philippines will be waiting a little bit longer since they don’t want to crowd each other,"
he added.

Indonesia is in the middle of a four-day road show for its bond, set to end on Friday.

"The official launch will probably come later today, I would presume in the London
morning," a source involved in the deal said.

"We hope to get this wrapped up by this week, depending on the response, but I’m
cautiously optimistic that the response will be good."

Analysts and bankers said the Indonesian deal could be crucial in setting the tone this
year, since it would indicate how willing investors are to put riskier new issues in their
portfolios.

Indonesian bond prices tumbled ahead of the launch of a new issue of up to $2 billion
that could come later in the day and that is expected to offer a substantially higher yield
than existing Indonesian debt.

Traders said Indonesia had discussed selling a 10-year tranche at a yield of 6.95% and a
30-year tranche at 7.75%, which they estimated at roughly half a percentage point higher
than comparable bonds from the country.

Indonesia’s 2017 bonds fell to around 100/102 from 104.125/105/125 on Wednesday,

while its 2037 bonds fell to 89/90 cents to the dollar from 95.375/96.375, one trader said.

"We are seeing a lot of sellers because of these whispers that the new bonds will offer a
decent concession," a Hong Kong trader said.

Asian bonds have continued to tumble this year, extending the weakness seen in the
second half of 2007 amid concerns about a slowdown or even a recession in the United
States.

Spreads widened on Thursday after Goldman Sachs said a day earlier it expected a US
recession this year, predicting the Federal Reserve would slash its benchmark rate by an
additional 1.75 percentage points to 2.5%.

The widely followed iTRAXX Asia ex-Japan high-yield index moved out by around 10
bps to 388/392, about 50-60 bps wider than at the end of last year.

High-yield bond spreads in the region had already widened by almost 200 bps in 2007,
underlining the risk aversion that is gripping investors in Asia.

"This remains a very challenging time, but we still think some of these upcoming deals
could get done," a syndicate banker in Hong Kong said. — Reuters