Saturday, 12 September 2009

PAL to get new Boeing aircraft

Kristine Jane R. Liu

Flag carrier Philippine Airlines, Inc. (PAL) will receive two new Boeing aircraft in November and January under lease deals, executives said Friday, but will postpone the purchase of four more aircraft.

The new aircraft are expected to extend the reach of the Lucio C. Tan-led airline while at the same time cut costs.

The delivery of four planes, meanwhile, has been postponed to 2012 and 2013, officials said, noting that the downgrade of the local aviation sector by the United States two years ago for failing to adhere to international safety standards has yet to be lifted.

Scheduled to be delivered this November would be PAL’s first Boeing 777-300 ER, said to be the most technologically advanced aircraft. A Boeing 777-300 ER can carry 365 passengers to a distance comparable to flying to Los Angeles and back to Manila non-stop without refueling. The second Boeing 777-300ER will be delivered in January.

Richard Miller, PAL’s chief commercial group adviser, said the company has yet to determine the destinations to be serviced by the new plane arriving in November, but said it might go to countries where PAL has existing operations, such as Japan, Australia, Canada and Hong Kong.

"We are currently monitoring the market. These initial aircraft were originally planned to operate in the US [but right now] we are looking at countries where we have existing operations," Mr. Miller told reporters.

The airline had agreed to buy four planes for almost $1 billion under financing from US Export-Import Bank. PAL officials pointed out that the downgrade of the airline industry in 2007 has restricted the addition of more flights.

"We are fortunate that the Philippines is doing [well]; the Asian market tends to hold up pretty well and we are optimistic on our outlook for the [industry]," Mr. Miller said.

"The market is changing quickly and fuel prices tend to tether ... The Boeing 777-300ER is the most sufficient airplane against fuel price volatility [and] is also quite suited for long-distance routes," he said.

Mr. Miller said PAL has been working with the Tourism department to attract more foreign tourists in the country, noting that international travel has been hit badly by the global economic crisis.

"That is the way to overcome the downturn. [We] want to increase our market share ... and we will come up with more budget flights," Mr. Miller said.

Randy J. Tinseth, Boeing Commercial Airplanes vice-president for marketing, said the strong ties between the Tourism department and the travel industry would fuel the growth of the airline industry.

Mr. Tinseth said travel demand should start stabilizing by 2012. "The Asia Pacific region will also rank as the world’s largest aviation market over the next 20 years, requiring 8,960 new commercial jets valued at $1.1 trillion," he said. "Twenty years from now, more than 40% of the world’s airline traffic will also begin, end or take place within the region."

Boeing expects the Asia Pacific region, which now accounts for more than 8,300 flights and 1.2 million travelers daily, to be the largest air travel market in the world in less than a decade.

Asia Pacific’s travel industry is likewise expected to grow at an average annual rate of 6.5% over the next two decades.

"This is clearly a difficult time in the aviation market but we do expect the growing Asia markets to lead the industry to recovery," Mr. Tinseth said, pointing out that strong economic growth in China, India and other emerging Asian nations would contribute to high demand for single-aisle airplanes.

Thursday, 10 September 2009

Teaching OFWs to Save and Invest


ECONOMIC officials and economists would often say the remittances from overseas Filipino workers (OFWs) have been keeping the economy afloat. This is true, because the spending of families that receive remittances is driving the economy with their consumption, from building a house to the purchase of cars and durable goods.

It is said that OFWs’ remittances account for about 10 percent of the country’s gross domestic product (GDP), which is nothing to sneeze at. About 10 percent of Filipinos have opted for working abroad to support their families back home. Last year they sent home $16.4 billion in remittances. During the first half of this year, they sent home $8.5 billion, or 2.9 percent higher than the figure in the same period last year, thus proving wrong the predictions by experts that remittances will decline this year because of the global recession.

Now, monetary authorities are looking to harness the remittance funds for productive endeavor, such as investments. They are now encouraging OFWs to save money for investments, instead of going into indiscriminate consumption. OFWs will now be a partner in nation-building with their investments in, say, time deposits, treasury bills, corporate bonds and stocks. They can also invest in franchising or become entrepreneurs themselves. It will have a tremendous effect on the economy if remittances are channeled to savings and investments.

But first, OFWs have to be taught how to save and invest. This has become the advocacy of the Bangko Sentral ng Pilipinas under Governor Amando Tetangco Jr., who launched the Financial Literacy Campaign for OFWs in October last year. Some banks have lent a helping hand to the campaign, among them the Land Bank of the Philippines, Development Bank of the Philippines (DBP) and the Philippine National Bank. Central bank officials and fund managers would visit countries where there is a high concentration of OFWs, with the message of the importance of saving and investments. They have so far visited Saudi Arabia, South Korea, Hong Kong and Singapore, seeking out Filipinos there. Locally, people from Security Bank and DBP would also tour the countryside to raise awareness on the importance of savings.

The campaign has apparently made a significant headway, with about a third (32 percent) of the families of OFWs saving some of the money sent home, as against only 15 percent before the campaign was launched.

The key here, of course, is financial literacy, as has been pointed out by Tetangco. This involves teaching OFWs and their families how to handle and manage their money. And for those going into business like franchising or entrepreneurship, they have to be taught how to run a business. Many of these OFWs and their families have neither the training nor the experience in running a business. That’s where the campaign for financial literacy becomes so important. It is important that OFWs be taught to become financially sophisticated, as Tetangco has said. It would be a waste of money for OFWs to go into businesses and not be able to make money out of them or, worse, go bankrupt.

When more OFWs and their families go into businesses, they can create jobs and then the government can collect more taxes. The multiplier effect would no doubt be tremendous. With jobs available here, fewer Filipinos would be opting to work abroad.

When the businesses grow, perhaps OFWs need not stay long abroad. They could then come home to be with their families, with their businesses sustaining them and their families till old age.

Indeed, remittances can be used to create businesses here and jobs, with the government collecting more tax revenues. There is every reason to make them work as such, and every reason to knock down all disincentives to the OFWs’ transforming part of the remittances to sustainable ventures.

The peso and other predictions

John Mangun
Outside the Box
Business Mirror

Actually the title of this column should perhaps be “What’s really behind the numbers.” Because it is only by looking at what makes up the numbers that you can truly understand what is going on. For example:

Yesterday, the business headlines from the other dailies told us that the Philippine international foreign reserves hit a record high of $41 billion. Wow, isn’t that great? Except for one thing. As usual, only BusinessMirror told the true and full story. Reserves rose to this level because of the takedown of $1 billion worth of SDR or special drawing rights.

SDR are an interesting monetary instrument. It is sort of an interest-free loan given to a country by the International Monetary Fund (IMF). But it is not a loan. SDR are more of an accounting entry that is put on the books of a central bank. The purpose of the SDR is to allow a country to pay off foreign obligations such as for trade purposes using the SDR instead of hard currency or gold. The SDR represent an amount of money that the Philippines, for example, could draw down from the International Monetary Fund (IMF) to pay its foreign bills without having to actually put cash on the table to settle the transaction. The IMF might or could loan money to a country to settle the SDR obligation. Call it sort of a credit line that you never have to use.

This allocation of SDR to nations around the world occurred August 28 and was the first since 1981. The IMF is increasing global monetary liquidity.

So what does it matter to you and me? Although the Bangko Sentral carries the value of these SDR on the books in US dollars, they are not convertible just to dollars. An SDR is made up of a basket of currencies; 44-percent dollar, 34-percent euro, 11- percent pound and 11-percent yen. So if you used this IMF SDR credit line, you would receive the hard asset of all these currencies, not just the dollar. In effect the Philippines has just taken a standby line of credit that is denominated 56-percent nondollar. But SDR can be used other ways than as a line of credit.

Countries can buy SDR from other countries using hard cash. Therefore, a nation could buy multi-currency SDR using dollars and in so doing move out of dollars and into euros, yen and pounds without reducing their net reserves and also not showing the world that they were selling dollars.

Here is where these SDR get really interesting. The peso is way too cheap regardless of what you read in the newspapers. Foreign currency is flowing into the Philippines at a fast rate; our balance-of-payments surplus will top $1 billion in 2009 as compared to a surplus of $89 million in 2008.

But an appreciating peso will put a value squeeze on $16 billion in remittances and on the $8 billion coming in from outsourcing. And consumers are not being hurt by a 49-to-the-dollar exchange rate. But no country wants to hold massive amounts of dollars. China has turned against the dollar and is trying to reduce its dollar reserves by about $50 billion per month this year.

However, for the Bangko Sentral ng Pilipinas (BSP) to reduce its dollar holdings, it normally would buy pesos and in that way making the peso appreciate, which it does not want to happen.

The IMF quota for the Philippines is about $879 million. But we took down $1 billion in SDR. Also in August, the amount of hard foreign currency held by the BSP decreased by $260 million. It looks to me that the BSP dumped a quarter of a billion worth of dollars to reduce exposure as the dollar heads down the drain, while at the same time keeping the peso at a remittance/foreign investor-friendly level.

Also interesting is that since March 2008, the BSP has increased the amount of its gold holdings from $3.8 billion to $4.8 billion. Note that in March 2008, gold traded at $920 per ounce, so the increase in value is not due to the increase in the price of gold.

Notice that no matter what the exchange rate of the peso is, near 40 or near 50, the Department of Finance and the BSP always seem to say that the peso is fairly valued and is being moved only by market forces. Nonsense. They are pricing the peso the same way prices are fixed at any wet market. And they are doing it to protect the peso value of inbound foreign money while at the same time dumping dollars.

What does that tell us? Reduce dollar holdings at this great peso rate. Move into hard assets like stocks, real estate, and gold. Expect the value of the dollar to drop even farther against the major world currencies.

By the end of first-quarter 2010, it will be almost impossible to hold the peso artificially low. By then the Christmas remittances will be in. Pesos will be actively flowing for the election season. Gold will be heading to $1,250 and the stock market will be looking at historic high prices.

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Wednesday, 9 September 2009

Philippine reserves rises to record high

Bangko Sentral
Media Releases
End-August 2009 GIR Rises to a Record High of US$41.3 Billion


The country’s gross international reserves (GIR) climbed to a new record high of US$41.3 billion as of end-August 2009, up by US$1.1 billion from the end-July 2009 level of US$40.2 billion, Bangko Sentral ng Pilipinas Governor Amando M. Tetangco, Jr. announced today.

The large increase in the preliminary end-August 2009 GIR level was due mainly to the general allocation of Special Drawing Rights (SDR) which was made available by the International Monetary Fund (IMF) to its members, including the Philippines, to boost their reserves and provide liquidity to the global economic system. 1 Other factors contributing to the increase in the reserves level were inflows from the BSP’s net foreign exchange operations and income from investments abroad. These receipts were partly offset by outflows arising from the repayment of maturing foreign exchange obligations of the National Government (NG) and valuation losses in the BSP’s gold holdings on account of the lower price of gold in the international market in August 2009.

The current GIR level could cover 7.1 months of imports of goods and payments of services and income. It was also equivalent to 6.6 times the country’s short-term external debt based on original maturity and 3.3 times based on residual maturity. 2

The level of net international reserves (NIR), which includes revaluation of reserve assets and reserve-related liabilities, likewise increased by US$1.1 billion to US$40.5 billion as of end-August 2009 from the previous month’s level of US$39.3 billion. NIR refers to the difference between the BSP’s GIR and total short-term liabilities.


1 The Special Drawing Rights (SDR) is an international reserve asset created by the IMF in 1969 to supplement the existing official reserves of member countries. SDRs are allocated to member countries in proportion to their IMF quotas. The latest SDR allocation is part of the US$283 billion in SDRs injected by the IMF into the global economy to support growth in emerging market and developing countries.

2 Short-term debt based on residual maturity refers to outstanding external debt with original maturity of one year or less, plus principal payments on medium- and long-term loans of the public and private sectors falling due within the next 12 months.

Philippine Inflation Drops Further to 0.1 Percent in August

Bangko Sentral
Media Release

Headline inflation continued to fall in August, dropping to 0.1 percent year-on-year from 0.2 percent in July, the lowest in more than 22 years. This brings the year-to-date average down to 3.7 percent, well within the target range of 2.5-4.5 percent for 2009. Likewise, core inflation, which excludes specific food and energy items to measure generalized price pressures, was lower at 2.9 percent year-on-year in August from 3.6 percent in July. Month-on-month headline inflation was also lower at 0.2 percent in August compared to 0.3 percent in July.

Most major commodity groups registered either lower or negative inflation rates in August. Among food items, rice and corn inflation rates remained negative, while fruits and vegetables as well as meat registered lower inflation rates. Services inflation turned more negative, driven by transportation and communication services inflation. Light inflation was also more negative while fuel inflation remained negative.

Governor Amando M. Tetangco, Jr. noted that the inflation outturn was within the -0.3 percent to +0.6 percent forecast of the BSP for August. He added that base effects from record-high commodity prices last year continued to drive the inflation downtrend. He observed, however, that inflation could have already hit bottom in August and could pick up, but still within single-digit levels, in the coming months. He said the BSP will continue to monitor monetary developments to ensure that policy settings remain supportive of non-inflationary economic growth.

Tuesday, 8 September 2009

Bad moon rising

John Mangun
Outside the Box
Business Mirror

In 1969 John Fogerty wrote the following lyrics:

“I see the bad moon arising.

I see trouble on the way.

Looks like we’re in for nasty weather.

I see bad times today.”

I feel exactly the same way. Over the last two months, and, in particular, during the last two weeks, the situation seems to be tipping in the USA that forecasts major problems ahead.

An amazing announcement came out of China on August 29 that the Chinese state-owned enterprises, or SOEs, “may unilaterally terminate derivative contracts with six foreign banks.” The subprime-lending crisis in 2008 was, in part, based on the fact that many of these bad loans were packaged into derivative contracts. These contracts are highly leveraged and highly speculative instruments that allow the buyer to “bet” on the value movement of the underlying assets, be it a loan, commodity price, or a stock.

The major banks put these contracts together to encourage speculation and when the subprime loans collapsed, the buyers of these contracts saw the value go to nothing. In order to save the banks from these defaulted contracts, the US government spent billions bailing the banks out, creating even more global financial problems.

The subprime crisis has passed, but the derivatives mess is still with us. The Chinese SOEs were sold these dangerously speculative contracts by the banks, appealing to their greed, as prices of commodities like oil, coal, metals, jumped, especially in the first quarter of 2009. Many of these contracts are now in losing positions, and the Chinese government is saying it has no intention of honoring the losses by the SOEs, leaving the foreign banks holding a very large bag of losing positions.

If, or perhaps when, the Chinese SOEs default on the derivative contracts, it may be necessary for another very large bank bailout as it is likely that Russia, India and Brazil (the BRIC nations) will follow suit. And if there is another government bailout...,which brings us to the next point.

Gold attempted another breakthrough, the third this year, of the crucial $1,000-per-ounce level. Conventional thinking might say that there is no reason gold should reach historic highs, as inflation is not currently a factor. Not true.

Gold has never been a hedge against inflation, except in the sense that inflation is usually a function of bad government-money policy. The price of gold is a reflection of the trust and confidence in a government, as that confidence relates to economic policy and, more specifically, the value of the currency. As gold is priced in US dollars, the price of gold is directly influenced by the confidence in the US government economic polices. And what the current price of gold is telling us is that confidence is falling rapidly, forecasting a much weaker US dollar.

The data coming from the United States are terrible. Unemployment continues to rise and the prices of goods are falling. Manufacturers are still producing, albeit at a historic low level, and cannot find buyers for their goods, hence they are dropping prices. But increasing fear of more unemployment is keeping the consumers’ wallets tightly closed. The government has pumped billions into the system, but it is not stimulating anything but speculation in stocks and commodities. If you can borrow money for almost zero interest, why not borrow to speculate. But speculation does not grow the economy. Further, these low interest rates discourage foreign companies and governments from buying US government debt.

At some point, the US Federal Reserve is going to have to raise interest rates as they will run out of money because no one will loan to them. This will further hamper any economic recovery.

An important offshoot of the bad US economy is that oil supplies continue to increase, while demand continues to decrease. Oil, now at $67 a barrel, is at least $10 overpriced due to cheap money, fueling commodity price speculation as potentially with others like copper and certain agriculturals like cocoa and soybeans.

The next six months forecast a much weaker dollar, high gold prices as confidence erodes further, and the likelihood of falling commodity prices

What does all this mean to countries like the Philippines? If borrowed money is cheap and the dollar is going to fall, then the best strategy is to borrow in dollars and then convert to another currency. So then where to invest?

China is a question mark right now. Last week that stock market took a large hit when it was announced that the government was going to reduce bank lending. If the Chinese government is going to reduce domestic spending, there may be a pause in international placements there. Brazil, India and Russia have economic problems of their own that may create more investor caution with India, with its falling exports, and Russia, with the potential of falling oil prices. Brazil is the exception with a very strong recovery there, because the nation is not dependant on exports to the United States and Europe. However, Brazil is still facing negative growth in 2009 and is dependant on strong commodity prices, which may falter.

Countries like the Philippines with real economic growth, a currency poised to appreciate as the dollar drops in value, and steady domestic-fueled growth stand to attract cheap Western capital. With interest rates higher here than in the West, even conservative, guaranteed investments like Philippine government debt is looking very attractive.

The bad moon is not rising over this nation.

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