MANILA, December 19, 2005
 (STAR) PHILEQUITY CORNER By Ignacio B. Gimenez - The strengthening of peso and the recent decline in oil prices from its peak in August have been stabilizing factors which allowed the Monetary Board (the policy setting body of the Bangko Sentral ng Pilipinas) to maintain its key policy rates.

Thus, despite the interest rate hikes by the US Fed and the European central bank, the Monetary Board voted last Thursday to keep its overnight borrowing and lending rates unchanged at 7.5 percent and 9.75 percent, respectively. This move is aimed to provide support to the ongoing economic recovery, which showed some signs of slowing down in 3Q05, particularly in consumer spending.

The Monetary Board noted, however, that it remains committed to the inflation objectives of the Bangko Sentral ng Pilipinas (BSP) and that its previous monetary tightening will be allowed to run its course.

In April of this year, the Board tightened its overnight policy rates by 25 basis points. In July, the regular and liquidity reserve requirement ratios was increased by 100 basis points each to 10 percent and 11 percent, respectively in July. This was then followed by 25 basis points increases in the overnight policy rates in September and in October.

While the Monetary Board seemed satisfied with near-term inflationary expectations, we are sure that they are watching monetary conditions very closely. Any sign of peso weakening or inflationary pressures building up (in case oil prices rise again or from the short-term but significant impact of the EVAT’s 2nd phase implementation) may prompt the Monetary Board to tighten its monetary stance further.

The Monetary Board is also aware of the actions of other central banks, specifically the US Fed which continue to raise their interest rates. Further rate hikes by other central banks without a corresponding hike by the BSP could lead to capital flight resulting from the decline in interest differentials. The effect would be negative for the peso, which in turn could lead to a rise in inflation and inflation expectations.

It is a difficult balancing act for the BSP. On one hand, it wants its policy to be accommodative in order to spur aggregate domestic demand given that the pace of economic activity may be slowing down. But on the other hand, monetary policy should be tight enough to address the various risks to inflation and potential capital flight due to the narrowing interest rate differentials. Kudos to BSP – they are doing a good job. Major currencies rally against the US dollar As we have mentioned in a previous article, one of the catalysts for further strength in the peso is a reversal of the US dollar strength against major currencies.

Last week marked an intermediate top for the US dollar which dropped 4.1 percent week-on-week against the Japanese Yen and 2.5 percent week-on-week against the Euro.

Although the peso closed at 53.45 last Friday or slightly weaker against the US dollar compared to the previous weekís 53.42, it reached an intra-day high of 53.175. Longer-term, we expect the reversal in the overall US dollar strength to further aid in the appreciation of the peso.

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Credit card receivables up 22% to 76% as of Q3 By Des Ferriols The Philippine Star 12/19/2005

Credit card users are still having trouble coping with their personal debts as past due receivables of the credit card industry rose sharply due to the continued growth in the use of plastic currency.

The Bangko Sentral ng Pilipinas (BSP) reported yesterday that the credit card receivables of the entire banking sector amounted to P76.1 billion at the end of the third quarter, up by 21.9 percent from P62.5 billion over the same period last year and by 4.9 percent compared to the previous quarter this year.

These numbers indicated a significant increase in credit card purchases as banks launched aggressive campaigns to widen their respective subscriber base.

Along with the widening use of credit cards, however, the BSP said the credit card industry also reported that past due receivables amounted to P14.8 billion, equivalent to 19.4 percent of total credit card receivables.

This year’s past-due receivables, however, showed marked improvement compared to the previous quarter and last year, due mainly to the faster increase in total credit card receivables.

Last year, past due receivables over the same period amounted to P14 billion, largely unchanged in terms of absolute amount. The proportion, however, dropped dramatically this year as last year’s ratio was recorded at 22.5 percent.

As the total loan portfolio of banks declined, however, the proportion of past due credit card receivables to the combined non-performing loans of universal/commercial banks and thrift banks (including their subsidiaries) increased to 7.2 percent, significantly higher than the 4.8 percent recorded last year.

Comparisons between the second and third quarter, however, showed that banks have been able to rapid increase the in past due receivables.

As a proportion of total credit card receivables, the BSP reported that past due receivables actually improved to 19.4 percent at the end of September compared to 19.6 percent in the previous quarter.

These numbers mean that more credit card holders are having difficulties settling their credit card payments and these delinquent holders are habitual, with past due accounts lasting over six months and more.

Banks have been getting more and more aggressive in the consumer banking segment where risks are inherently bigger but spread over a wider base.

Chief News Editor: Sol Jose Vanzi

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