November 5, 2001

My Perspective

It's been more than a month since the attacks in the US took place. From that time up to present, the Phisix has dropped about 300 points. Is it already a time to buy?

That doesn't seem to be the case. The US just reported that its economy contracted in the third quarter, following the lead of its industrial sector which is already in recession. How will this affect the Philippine economy and the earnings of domestic companies?

For sure, electronics exports will continue to suffer. With exports contracting by 14% in the first nine months of the year, the country's trade balance is placed in a precocious situation. This would depress the GIR level, which from P15bn has already dwindled to just +P13bn.

With the country's obligations falling due and the peso in a currently weak state, it would be prudent for the government to have a higher level of GIR. This is especially true with concerns that Argentina may default on its external debt. About P100bn of its debts will fall due this month.

Now the yields for Philippine bonds have been rising, partly because there have been parallels cited between Argentina and the Philippines. Should investors perceive that Philippine sovereign risk be too high for their taste, we could see a shift into dollar-denominated instruments. Dollar outflows would further weigh against the peso. Should such a case happen, we can expect the BSP to try and intervene again. But with lower GIRs, speculators may be emboldened.

Whether these fears and more real or more imagined, expect it to affect the stock market negatively.

On the aftermath of the Sept. 11 attacks, the government has virtually conceded that it will overshoot its P145bn budget deficit target for 2001. That's why the wily banks are trying to push up the T-bill rates. The government has been rejecting the bids though, citing the lower-than-expected inflation. Bad corporate performances, as indicated by lower earnings, more business closures and layoffs, will surely result in lower tax collections.

Speaking of poor corporate results, even the biggest listed issues have been reporting debt repayment problems. With the international capital markets much tighter now because of the attacks in the US, companies like PLDT, BPC and recently MPC will have to be really creative to survive near term cash flow problems. This will also be a problem for banks. Already faced with dwindling loan demand, banks face a real threat of defaults from even big borrowers. As is, NPLs are hovering above 18%. As is, banks' capital levels are already artificially high due to their reluctance to price down their non-performing assets, including real properties. When the moment of truth does come however, it may be a good time to buy a house.

So basically, I am a doomsayer at this point even as the Index lies below 1000.

Nonetheless, if you just have to invest, I think the potential survivors here would be SMC, SMPH, SMDC, JFC and perhaps even SPI. LTDI would also be a defensive issue once it sells its non-liquor businesses. In a time of crisis, cash is king after all.