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Republic of the Philippines · 424B4 · On 1/9/03

Filed On 1/9/03, 11:17am ET   ·   Accession Number 1145549-3-26   ·   SEC File 333-91176

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 1/09/03  Republic of the Philippines       424B4                  1:710K                                   RR DONN..FundSuiteArc/FA

Prospectus   —   Rule 424(b)(4)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Republic of the Philippines                          198   1.26M 


Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Republic of the Philippines
3Table of Contents
"Introductory Statements
4Summary of the Offering
7Use of Proceeds
8Recent Developments
"Recent Political Developments
10Terrorist Attacks in the United States and Related Events
"Criminal Charges Against Estrada
11Recent Economic Developments
12Arroyo Administration Economic Policy
15Services
16Balance of Payments
18Universal Charge
19Privatization of the National Power Corporation
23Description of the Global Bonds
26Global Clearance and Settlement
29Taxation
"Philippine Taxation
30United States Taxation
31Underwriting
34Legal Matters
"General Information
37Certain Defined Terms and Conventions
"Forward Looking Statements
38Data Dissemination
39Potential Change in the Senate Leadership
42Review of Financial Contingency Plan
47Prices, Employment and Wages
48Electric Power Industry Reform Act
49Issues Relating to the Purchased Power Adjustment Charge and the Universal Charge
50Anti-Money Laundering Act of 2001
51Debt
"Core Policies of the Arroyo Administration
58History, Land and People
59Government and Politics
61Privatization
63Government
64Philippine Economy
66GDP and Major Financial Indicators
69Principal Sectors of the Economy
"Agriculture, fishery and forestry
70Manufacturing
71Construction
"Electricity, gas and water
73Trade
"Finance and housing
79Balance of Payments Performance
104Notes
106Monetary System
109Foreign Exchange System
113The Philippine Financial System
"Structure of the Financial System
120Foreign Currency Loans
"The Philippine Securities Markets
"History and Development
122Public Finance
128The Government Budget
140Brady Bonds
142Description of the Securities
"Description of the Debt Securities
"General Terms of the Bonds
143Global Securities
"Registered Ownership of the Global Security
145Additional Amounts
"Status of Bonds
146Negative Pledge Covenant
149Fiscal Agent
"Governing Law
"Further Issues of Debt Securities
"Jurisdiction and Enforceability
150Glossary of Certain Defined Terms
151Description of the Warrants
"Limitations on Issuance of Bearer Debt Securities
154United States Tax Considerations
"United States Holders
"Payments or Accruals of Interest
156Original Issue Discount
158Short-Term Debt Securities
"Premium and Market Discount
159Non-US Holders
160Information Reporting and Backup Withholding
161Plan of Distribution
162Validity of the Securities
"Authorized Representative in the United States
"Experts; Official Statements and Documents
"Further Information
163Index to Tables
164Guaranteed External Debts of the Republic of the Philippines
169United States
193Government Guaranteed Corporate Bonds
194Total
197Issuer
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Filed pursuant to Rule 424(b)(4) under the Securities Act of 1933 Registration No. 333-91176 PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JULY 11, 2002 [REPUBLIC OF THE PHILIPPINES LOGO] US$500,000,000 REPUBLIC OF THE PHILIPPINES 9.00% GLOBAL BONDS DUE 2013 ---------------------- The Republic will pay interest on the global bonds each February 15 and August 15. The first interest payment on the global bonds will be made on February 15, 2003. The global bonds will constitute a further issuance of, are fungible with and are consolidated and form a single series with, the 9.00% Global Bonds due 2013 issued by the Republic on November 25, 2002. The total principal amount of the previously issued global bonds and the global bonds now being issued is $1,000,000,000. The Republic may not redeem the global bonds prior to their maturity. The offering of the global bonds is conditional on the receipt of certain approvals of the monetary board of Bangko Sentral ng Pilipinas, the central bank of the Republic. The global bonds are being offered globally for sale in the jurisdictions where it is lawful to make such offers and sales. We have applied to list the global bonds on the Luxembourg Stock Exchange. [Download Table] PER BOND TOTAL -------- ------------ Price to investors(1)............................. 96.75% $483,750,000 Underwriting discounts and commissions............ 0.22% $ 1,100,000 Proceeds, before expenses, to the Republic........ 96.53% $482,650,000 --------------- (1) Plus accrued interest from November 25, 2002. Neither the US Securities and Exchange Commission nor any state securities commission nor the Luxembourg Stock Exchange has approved or disapproved of these securities or determined that this prospectus supplement or the prospectus to which it relates is truthful or complete. Any representation to the contrary is a criminal offense. We expect to deliver the global bonds to investors in registered book-entry form only through the facilities of The Depository Trust Company, Clearstream Banking, societe anonyme, and Euroclear Bank, S.A./N.V., as operator of the Euroclear System, on or about January 13, 2003. Joint Lead Managers and Joint Bookrunners [Download Table] CREDIT SUISSE FIRST BOSTON JP MORGAN MORGAN STANLEY ---------------------- The date of this prospectus supplement is January 8, 2003.
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[MAP OF THE REPUBLIC OF THE PHILIPPINES]
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TABLE OF CONTENTS [Download Table] PROSPECTUS SUPPLEMENT PAGES ------------------------------------- ----- INTRODUCTORY STATEMENTS.............. S-3 SUMMARY OF THE OFFERING.............. S-4 USE OF PROCEEDS...................... S-7 RECENT DEVELOPMENTS.................. S-8 DESCRIPTION OF THE GLOBAL BONDS...... S-23 GLOBAL CLEARANCE AND SETTLEMENT...... S-26 TAXATION............................. S-29 UNDERWRITING......................... S-31 LEGAL MATTERS........................ S-34 GENERAL INFORMATION.................. S-34 [Download Table] PROSPECTUS PAGES ------------------------------------- ----- CERTAIN DEFINED TERMS AND CONVENTIONS........................ 2 FORWARD LOOKING STATEMENTS........... 2 DATA DISSEMINATION................... 3 USE OF PROCEEDS...................... 3 REPUBLIC OF THE PHILIPPINES.......... 4 DESCRIPTION OF THE SECURITIES........ 107 TAXATION............................. 118 PLAN OF DISTRIBUTION................. 126 VALIDITY OF THE SECURITIES........... 127 AUTHORIZED REPRESENTATIVE IN THE UNITED STATES...................... 127 EXPERTS; OFFICIAL STATEMENTS AND DOCUMENTS.......................... 127 FURTHER INFORMATION.................. 127 INDEX TO TABLES...................... T-1 ------------------------ YOU SHOULD READ THIS PROSPECTUS SUPPLEMENT ALONG WITH THE PROSPECTUS THAT ACCOMPANIES IT. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS DOCUMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY BE ACCURATE ONLY ON THE DATE OF THIS DOCUMENT. ------------------------ INTRODUCTORY STATEMENTS The Republic accepts responsibility for the information contained in this prospectus supplement and the prospectus that accompanies it. To the best of the knowledge and belief of the Republic (which has taken all reasonable care to ensure that such is the case), the information contained in this prospectus supplement and the accompanying prospectus is in accordance with the facts and does not omit anything likely to affect the import of such information. The Republic of the Philippines (the "Republic" or the "Philippines") is a foreign sovereign state. Consequently, it may be difficult for you to obtain or realize upon judgments of courts in the United States against the Republic. See "Description of the Securities -- Description of the Debt Securities -- Jurisdiction and Enforceability" in the accompanying prospectus. The distribution of this prospectus supplement and the accompanying prospectus and the offering of the global bonds may be legally restricted in some countries. If you wish to distribute this prospectus supplement or the accompanying prospectus, you should observe any applicable restrictions. This prospectus supplement and the accompanying prospectus should not be considered an offer, and it is prohibited to use them to make an offer, in any state or country in which the making of the offering of the bonds is prohibited. For a description of some restrictions on the offering and sale of the global bonds and the distribution of this prospectus supplement and the accompanying prospectus, see "Underwriting" on page S-31. Unless otherwise indicated, all references in this prospectus supplement to "Philippine Pesos", "Pesos" or "P" are to the lawful national currency of the Philippines and those to "dollars", "US dollars" or "$" are to the lawful currency of the United States of America. S-3
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SUMMARY OF THE OFFERING The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus supplement and the prospectus to which it relates. ISSUER........................ Republic of the Philippines. BONDS......................... $500,000,000 aggregate principal amount of 9.00% global bonds due 2013. The global bonds constitute a further issuance of, and upon issuance will be fungible with and consolidated and form a single series with, the 9.00% Global Bonds due 2013 issued by the Republic on November 25, 2002, in the amount of US$500,000,000. Upon issuance, the global bonds will rank pari passu with the previously issued global bonds in all respects. The total principal amount of the previously issued global bonds and the global bonds now being issued is US$1,000,000,000. INTEREST...................... The global bonds will bear interest at 9.00% per annum from November 25, 2002, payable semi-annually in arrears commencing February 15, 2003. INTEREST PAYMENT DATES........ February 15 and August 15 of each year, commencing on February 15, 2003, payable to the persons who are registered holders thereof at the close of business on the preceding February 1 or August 1, as applicable, whether or not a business day. ISSUER REDEMPTION............. The Republic may not redeem the global bonds prior to maturity. STATUS OF BONDS............... The global bonds will be direct, unconditional, unsecured and general obligations of the Republic. Except as otherwise described, the global bonds will at all times rank at least equally with all other unsecured and unsubordinated External Indebtedness (as defined in the accompanying prospectus) of the Republic. The full faith and credit of the Republic will be pledged for the due and punctual payment of all principal and interest on the global bonds. See "Description of the Securities -- Description of Debt Securities -- Status of Bonds" in the accompanying prospectus. NEGATIVE PLEDGE............... With certain exceptions, the Republic has agreed that it will not create or permit to subsist any Lien (as defined in the accompanying prospectus) on its revenues or assets to secure External Public Indebtedness (as defined in the accompanying prospectus) of the Republic, unless at the same time or prior thereto, the global bonds are secured at least equally and ratably with such External Public Indebtedness. The international reserves of Bangko Sentral ng Pilipinas ("Bangko Sentral") represent substantially all of the official gross international reserves of the Republic. Because Bangko Sentral is an independent entity, the Republic and Bangko Sentral believe that the international reserves owned by Bangko Sentral are not subject to the negative pledge covenant in the global bonds and that Bangko Sentral could in the future incur External Public Indebtedness secured by such reserves without securing amounts payable under the global bonds. See "Description of the Securities -- Description of Debt Securities -- Negative Pledge Covenant" in the accompanying prospectus. S-4
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TAXATION...................... The Republic will make all payments of principal and interest in respect of the global bonds free and clear of, and without withholding or deducting, any present or future taxes of any nature imposed by or within the Republic, unless required by law. In that event, the Republic will pay additional amounts so that the holders of the global bonds receive the amounts that would have been received by them had no withholding or deduction been required. See "Description of the Securities -- Description of Debt Securities -- Additional Amounts" in the accompanying prospectus. For a description of certain United States tax aspects of the global bonds, see "Taxation -- United States Taxation" in this prospectus supplement and "Taxation -- United States Tax Considerations" in the accompanying prospectus. CROSS-DEFAULTS................ Events of default with respect to the global bonds include (i) if the Republic fails to make a payment of principal, premium, prepayment charge or interest when due on any External Public Indebtedness with a principal amount equal to or greater than $25,000,000 or its equivalent, and this failure continues beyond the applicable grace period; or (ii) if any External Public Indebtedness of the Republic or the central monetary authority in principal amount equal to or greater than $25,000,000 is accelerated, other than by optional or mandatory prepayment or redemption. See "Description of the Securities -- Description of the Debt Securities -- Events of Default: Cross Default and Cross Acceleration" in the accompanying prospectus. LISTING....................... The Republic is offering the global bonds for sale in the United States and elsewhere where such offer and sale is permitted. The Republic has applied to have the global bonds listed and traded in accordance with the rules of the Luxembourg Stock Exchange. The Republic cannot guarantee that the application to the Luxembourg Stock Exchange will be approved, and settlement of the global bonds is not conditioned on obtaining the listing. FORM, DENOMINATION AND REGISTRATION.................. The global bonds will be issued in fully registered form in denominations of $1,000 and integral multiples thereof. The global bonds will be represented by one or more global securities registered in the name of a depositary, its nominee or a custodian. Beneficial interests in the global securities will be shown on, and the transfer thereof will be effected only through, records maintained by the depositary and its direct and indirect participants. Settlement of all secondary market trading activity in the global bonds will be made in immediately available funds. See "Description of the Securities -- Description of the Debt Securities -- Global Securities" in the accompanying prospectus. FURTHER ISSUES................ The Republic may from time to time, without notice to or the consent of the registered holders of global bonds, issue further bonds which will form a single series with the global bonds. See "Description of the Securities -- Description of the Debt Securities -- Further Issues of Debt Securities" in the accompanying prospectus. S-5
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USE OF PROCEEDS............... The Republic will use the net proceeds from the sale of the global bonds for the general purposes of the Republic, including for budgetary support. FISCAL AGENT.................. JPMorgan Chase Bank. GOVERNING LAW................. The fiscal agency agreement, the supplemental fiscal agency agreement and the global bonds will be governed by and interpreted in accordance with the laws of the State of New York. The laws of the Republic will govern all matters governing authorization and execution of the global bonds by the Republic. S-6
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USE OF PROCEEDS The Republic will use the net proceeds from the sale of the global bonds for the general purposes of the Republic, including for budgetary support. S-7
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RECENT DEVELOPMENTS The information included in this section supplements the information about the Republic that is included in the accompanying Prospectus dated July 11, 2002. RECENT POLITICAL DEVELOPMENTS CHANGES IN THE ARROYO ADMINISTRATION. On December 30, 2002, President Gloria Macapagal-Arroyo announced that she would not seek another term as president. The next presidential election is required, under the Philippine Constitution, to take place by the end of 2004. In her announcement Arroyo explained that she wanted to be unburdened by politics and further concentrate her efforts on her administration's economic reform plans. See "Arroyo Administration Economic Policy". Recently, there have been several resignations among senior members of the Arroyo administration. The Secretary of Justice, Hernando Perez, resigned on January 2, 2003, amid allegations that he had extorted money from a Manila congressman. On December 19, 2002, the Presidential Anti-Graft Commission charged Perez with obstruction of justice for prohibiting the Bureau of Immigration from divulging the travel records of high-ranking government officials, including himself. Since November 26, 2002, when Perez took a leave of absence to confront the allegations, Undersecretary of Justice Merceditas N. Gutierrez has served as officer-in-charge of the Department of Justice. The Arroyo administration has named Simeon Datumanong, former Secretary of Public Works and Highways, to replace Perez as Secretary of Justice. The President has also re-arranged the assignments of some of her cabinet members. In January 2003, Ignacio Bunye, the President's Press Secretary, was appointed as the President's spokesperson in place of Rigoberto Tiglao, who was named as the President's Chief of Staff. Also in January 2003, Hernani Braganza, Secretary of Agrarian Reform, was appointed as the new Press Secretary. In December 2002, President Arroyo announced several changes in her cabinet. In particular, the President replaced Secretary of Socio-Economic Planning Dante B. Canlas with Romulo Neri, former director-general of the Congressional Planning and Budget Office. President Arroyo also announced the replacement of the Secretary of Agriculture, Leandro Montemayor, with Luis Lorenzo, Jr., a former businessman and presidential adviser on job creation. The President also announced the replacement of the Secretary of Environment and Natural Resources, Heherson Alvarez, with Elizea Gozun, an environmental consultant. Vice-President Teofisto Guingona resigned from his position as Secretary of Foreign Affairs, effective July 15, 2002, citing, among other things, his objection to the presence of US military troops in the Philippines. Education Secretary Raul S. Roco resigned on August 13, 2002 after learning that the President had endorsed a complaint accusing him of corruption. The Commissioner of the Bureau of Internal Revenue ("BIR"), Rene G. Banez, resigned on August 19, 2002, citing pressure from subordinates who were resisting reforms at the BIR. President Arroyo has appointed Senator Blas F. Ople as the new Secretary of Foreign Affairs, Dr. Edilberto C. de Jesus as the new Secretary of Education, and former Customs Commissioner Guillermo Parayno as BIR Commissioner. It is unclear whether President Arroyo's decision not to seek reelection or these recent changes in leadership positions will materially affect the stability or effectiveness of her administration. In December 2002, it was announced that the president and officer-in-charge of National Power Corporation ("NPC"), Roland S. Quilala, would be replaced with Roger Murga. The same month, the president of the National Transmission Corporation ("Transco"), Asisclo Gonzaga, announced his retirement from government service. The Arroyo administration will replace Gonzaga with Dr. Allan Ortiz, former chair of the Development Bank of the Philippines. The new appointments will take effect on February 1, 2003. It is not known whether or how the changes in leadership of NPC and Transco will affect the planned privatization of these companies. See "Recent Economic Developments -- Privatization of the National Power Corporation". S-8
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INTERNAL CONFLICT WITH REBEL GROUPS. Armed conflict has continued between the Government and rebel groups, mainly communist guerillas and Muslim separatists. In the first three weeks of October 2002, the Philippines suffered six bombing attacks which together killed at least 20 people and injured at least 150 more. Four of the bombing attacks occurred in western and central Mindanao and two of the bombing attacks, one of which resulted in several fatalities, occurred in Metro Manila. On December 24, 2002, another explosion in the province of Maguindanao killed 13 people, and on January 1, 2003, a grenade attack in southern Mindanao killed 9 people and injured at least 32 others. Government officials have indicated that they suspect either Moro separatists, Abu Sayyaf guerillas or communist rebels are responsible for the recent attacks. As part of the Government's response to these terrorist activities, a number of anti-terrorism bills have been proposed in Congress. President Arroyo has certified these proposed bills as "urgent" and has urged the Congress to pass a law quickly which would give the military and the police increased power in fighting terrorism. The draft bills include, among other items, measures increasing the state's ability to intercept communications, conduct surveillance, freeze bank accounts and extend detentions. In early August 2002, the United States placed the Communist Party of the Philippines (the "CPP") and the CPP's armed affiliate, the New People's Army (the "NPA"), on its list of "foreign terrorist organizations", freezing the groups' funds and barring their members from entering the United States. On October 31, 2002, the European Union followed in declaring each of the CPP and the NPA a "terrorist organization". The Dutch government froze the financial accounts of Jose Ma. Sison, the founding chairman of the CPP, who currently lives in the Netherlands. In response to several recent bombings and kidnappings attributed to the CPP, the Armed Forces of the Philippines (the "AFP") have initiated a military offensive to end the insurgency, and security has been fortified in all vital public facilities. The Government continues to be open to peace negotiations with the National Democratic Front ("NDF"), the political organization of the NPA. The Government also announced, in early November, that it was willing to offer amnesty to communist rebels who surrendered to the Government. CPP leaders rejected the offer of amnesty. Since September 2002, formal peace talks between the Arroyo administration and the NDF have been in suspension by order of the President. As part of the recent heightened cooperation between the Republic and the United States in the fight against terrorism, the US sent troops and military advisers to assist the AFP in eradicating the Abu Sayyaf guerrilla group. Under a terms of reference entered into between the Republic and the US on February 13, 2002, about 1,000 US Special Forces troops participated in joint military exercises with the AFP. The US Special Forces operated in the Zamboanga and Basilan provinces of Mindanao where the Abu Sayyaf are located. The US Special Forces observed and trained the AFP on counter-terrorist strategy and techniques to improve the capability of AFP troops in combating terrorism. The terms of reference officially ended on July 31, 2002. The United States and the Republic announced on July 2, 2002 that they had entered into a sustained military cooperation agreement providing for continued joint military exercises, training and other cooperation between US forces and the AFP. This agreement has replaced the terms of reference that expired on July 31, 2002. Since the termination of joint military exercises in Basilan on July 31, 2002, military operations by the AFP have moved to the Province of Sulu in response to several Abu Sayyaf kidnappings. As a result of these kidnappings, two Filipino hostages were killed and four Filipinos and three Indonesians remain in the custody of the Abu Sayyaf. Pursuant to the sustained military cooperation agreement, in October 2002 more than 200 US Marines arrived at Clark Air Base, Luzon, to train with Philippine Air Force troops. The AFP has announced that at least 50 US military advisers will arrive in the Philippines in January 2003 to train Filipino soldiers in light infantry and light reaction tactics as part of the anti-terrorism campaign. Joint military exercises are also planned to be conducted in central Luzon, central Visayas, and western Mindanao. According to the AFP, 5,000 soldiers are currently in pursuit of the Abu Sayyaf, and heavy fighting between the AFP and members of the Abu Sayyaf has continued in areas of Mindanao in the southern Philippines. On December 31, 2002, Abu Sayyaf guerillas attacked a military outpost on the southern island of Jolo, killing one Filipino soldier. S-9
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As of December 2002, the Moro Islamic Liberation Front ("MILF"), the largest Muslim separatist group in the Philippines, was continuing to pursue peace talks with the Government. However, the Government is also pursuing several MILF members who are suspected of involvement in the recent terrorist attacks in Zamboanga, Maguindanao and Manila. The Philippine National Police believe that the MILF has ties to the Indonesian group Jemaah Islamiah, which is widely believed to be responsible for the terrorist bomb attack in Bali, Indonesia (see -- "Terrorist Attacks in the United States and Related Events") and to be linked to the al-Qaeda terrorist organization. MILF leaders have denied that the group is responsible for the recent bombings in the Philippines and have denied any link to Jemaah Islamiah or al-Qaeda. TENSIONS WITH IRAQ AND NORTH KOREA. Increased tension between the United States and Iraq has led to uncertainty about the world economy as a whole. US President George W. Bush and other US officials have indicated that the US may attack Iraq and attempt to remove the regime of Iraqi President Saddam Hussein if Iraq does not eliminate chemical, biological, and nuclear weapons programs as required by the United Nations. A US-led war in Iraq may affect, among other things, the stability of international financial markets, the Republic's imports and exports, the exchange rate between the peso and the US dollar, prices for energy and manufactured goods, foreign investment in the Republic, and remittances from overseas Filipino workers. In particular, the potential war in Iraq has fueled uncertainty about the supply of oil from the Middle East and global oil prices. The Government is seeking to negotiate oil assurance agreements with Indonesia, Russia, Iran and Saudi Arabia in an effort to ensure a stable oil supply. North Korea's recent announcement that it would reactivate its nuclear weapons program has drawn harsh criticism and further economic sanctions from the United States. The government of South Korea has indicated that it hopes to use diplomatic efforts to defuse the crisis. It is unclear how any potential military action by or against North Korea will affect the international financial markets or the Philippine economy. TERRORIST ATTACKS IN THE UNITED STATES AND RELATED EVENTS. The evolving response of the United States and other nations to the terrorist attacks of September 11, 2001 in New York City and Washington, D.C. has resulted in continuing political and economic uncertainty and in increased volatility in the world's financial markets. The US-led military action in Afghanistan, which began in October 2001, successfully defeated the Taliban government and weakened the al-Qaeda forces blamed for the September 11 attacks. However, the US government has indicated that al-Qaeda continues to operate in countries around the world and continues to threaten and plan additional terrorist attacks. In October 2002, a terrorist bombing in Bali, Indonesia killed at least 190 people, including many foreign tourists. It is not known whether those responsible for the Bali attack were connected to previous attacks in the Philippines. It is unclear how the Philippine economy or the international financial markets will be affected in the future by terrorism-related events either inside or outside the Philippines. CRIMINAL CHARGES AGAINST ESTRADA. The criminal charges for perjury, illegal use of an alias, and plunder filed against former President Joseph Estrada by the Ombudsman continue to be tried in the Sandiganbayan, a special court with jurisdiction over criminal and civil cases involving graft and corruption. On August 30, 2002, the Sandiganbayan issued a writ of preliminary attachment of all assets of Mr. Estrada, his son, Jose Estrada, and others accused in the P4 billion plunder case, including funds in the account of "Jose Velarde" which Mr. Estrada admitted publicly to owning but subsequently claimed to belong to a business acquaintance. In response to the writ of preliminary attachment, Mr. Estrada claimed that he did not purchase any property while he was president and denied ownership of certain funds frozen by the Sandiganbayan. Mr. Estrada has complained about the alleged bias of the Sandiganbayan against him. Claiming that he will not be treated fairly by the Philippine courts, he has dismissed all of his lawyers. Since Mr. Estrada is not in a position to defend himself, the Sandiganbayan appointed several counsel de officio for him. S-10
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Hearings on the perjury, plunder, and illegal alias charges are ongoing. Government prosecutors are expected to complete presenting evidence against Mr. Estrada in early 2003. The defense will present its evidence after the prosecution rests its case. On November 13, 2002, the prosecution's star witness, Ms. Clarissa Ocampo, took the stand, reprising her account at Mr. Estrada's December 2000 impeachment trial. Ms. Ocampo, who was at the time a bank senior vice president for trust, positively identified Mr. Estrada as having signed as "Jose Velarde" on various documents for opening an investment management account. RECENT ECONOMIC DEVELOPMENTS With respect to interim period indicators of economic performance for any particular year set out in this section "Recent Economic Developments" for GNP, GDP, domestic credit growth and balance of payment indicators (including exports, imports, goods, services, trade and income), unless otherwise noted, the indicators set out are comparisons to the corresponding interim period of the immediately prior year; or year-on-year comparisons. BACKGROUND. Economic growth was sustained in 2002 although growth momentum was weakened due to a series of adverse developments such as: - the resignation of several key members of the Arroyo administration and the ongoing trial of former president Estrada; - the rapid increase in the Government's budget deficit, which stood at P200.6 billion in November (compared to the original full-year forecast for 2002 of P130 billion), and is expected to have increased further through the remainder of 2002 (consistent with the Republic's revised deficit forecast for 2002 of P223 billion), caused by higher than expected expenditures and lower than expected revenue collections from the BIR; - the ongoing conflict with rebel groups in Mindanao, the conflict with communist rebels, the bombings and bomb threats in the Republic, the recent terrorist bombing in Bali, Indonesia, the recent response to terrorism by the Government, the US and other countries and the threat of war in Iraq; and - Standard & Poor's Rating Service's and Fitch Ratings' revised outlooks on the Republic's long-term foreign currency sovereign credit ratings from stable to negative. Despite these challenges and the generally weak global conditions, for the first nine months of 2002, real GNP grew by 4.2% and real GDP grew by 4.1%, compared with GNP growth of 3.6% and GDP growth of 3.0% for the first nine months of 2001. The increased growth rates are, in part, a result of lower interest and inflation rates, and in the Government's view reflect the success of the administration's macroeconomic strategy implemented in 2001. S-11
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RECENT ECONOMIC INDICATORS. The following table sets out the performance of certain of the Republic's principal economic indicators for the periods indicated. [Enlarge/Download Table] 2000 2001 2002 --------- --------- -------- Real GDP growth (%)......................................... 4.4 3.2 4.1(1) Real GNP growth (%)......................................... 4.8 3.4 4.2(1) Inflation rate (%).......................................... 4.4(2) 6.1(2) 3.1(2) Unemployment rate (%)....................................... 11.2(3) 11.1(3) 11.8(3) 91-day T-bill rate (%)...................................... 9.86(2) 9.86(2) 5.45(4) External position Balance of payments ($ million)........................... (513) (192) 751(1) Trade-in-goods/GNP (%).................................... 8.7 3.7 2.1(1) Export growth (%)...................................... 9.0 (16.2) 8.8(1) Import growth (%)...................................... 3.8 (6.2) 9.3(1) External debt ($ billion)................................. 52.1 52.4 53.6(5) International reserves Gross ($ billion)...................................... 15.0 15.7 15.7(6) Net ($ billion)........................................ 11.3 11.4 12.4(6) Months of retained imports(7).......................... 4.4 5.0 5.0(6) Domestic debt (P billion)................................... 1,068 1,248 1,398(8) Domestic credit growth (%).................................. 8.55 0.89 (0.32)(9) --------------- (1) First nine months of 2002. (2) Full year average. (3) Average of the January, April, July and October applicable statistics based on the January, April, July and October labor force surveys for the relevant year. (4) Average of first eleven months of 2002. (5) As of September 30, 2002. (6) As of November 30, 2002. (7) Number of months of average imports of merchandise goods and payment of services and income that can be financed by gross reserves. (8) As of June 30, 2002. (9) July-September 2002. ARROYO ADMINISTRATION ECONOMIC POLICY. In October 2002, President Arroyo outlined an eight-point work program of the Government for the following six months. The program includes: - keeping transportation fares down; - reducing transport costs from Mindanao to Luzon; - stimulating small- and medium-scale enterprises; - stimulating housing developments; - encouraging private investments in agriculture; - continuing to build infrastructure to decongest Metro Manila; - ensuring that the Presidential Commission on Good Government contributes to fiscal resources; and - making Makati City a specific tourist destination. S-12
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In addition, in December 2002, President Arroyo announced the following additional measures to enhance productivity: - increasing government credit for small- and medium-scale enterprises to P10 billion in 2003; - forming a new anti-smuggling task force; and - improving the oversight system for government procurements. In January 2003, after announcing that she would not run for re-election, President Arroyo announced that her administration would focus on the provisions of the Medium-Term Philippine Development Plan, originally set out in the National Socio-Economic Summit of 2001, in conjunction with the eight-point program announced in October 2002. GOVERNMENT REVENUES AND EXPENDITURES. Government revenues for the first eleven months of 2002 totaled P506.6 billion, of which P442.8 billion were from tax revenues and P63.8 billion were from non-tax revenues. Total revenues from January to November 2002 decreased 0.4% from total revenues for the same period in 2001. Of total tax revenues during the first eleven months of 2002, the BIR accounted for P356.8 billion and the Bureau of Customs accounted for P86.0 billion. Treasury remittances accounted for P36.8 billion in revenue during the first eleven months of 2002, and other government offices accounted for the remaining P27.0 billion. The BIR's collection of P356.8 billion over the first eleven months of 2002 was slightly more than the P354.9 billion collected over the first eleven months of 2001. The lower than expected amounts collected for 2002 have been mainly attributed to the BIR's continued difficulty of generally enforcing the Republic's tax laws as well as the relatively low interest rate environment. However, the BIR's collection of P40.8 billion for the month of November 2002 was a 17.6% increase over the P34.7 billion collected in November 2001. Under the recently appointed BIR Commissioner, Guillermo Parayno, the BIR has implemented new technology to enable the BIR to identify, report, and prosecute taxpayers and companies that under-declare their value added taxes ("VAT"). A BIR program for voluntary assessment and availment of unpaid VAT and other income taxes has been put in place to collect unpaid taxes that were discovered by the BIR. The BIR has concluded that underreporting of income from businesses has resulted in P10 billion in uncollected tax revenue. The BIR is making a concerted effort to recover as much of this revenue as possible. In addition, in order to encourage better tax compliance, the BIR under the new Commissioner has simplified the filing process and the payment of taxes. Government expenditures for the first eleven months of 2002 were P707.2 billion, compared to P653.5 billion over the same period in 2001. The increase in expenditures from last year was due in part to higher expenditures for infrastructure, personal services, and allotments to local government units for anti-poverty programs and security measures. The deficit for the first eleven months of 2002 was P200.6 billion, which exceeded the Government's target of P130 billion deficit for the entire year. The budget deficit is expected to increase for the remainder of 2002. This rapid increase in the budget deficit has been caused by lower than expected revenue collections from the BIR, and higher than expected expenditures. The Government has revised its budget deficit forecast for the full year 2002 to P223 billion. A plan by the Government to sell a 10% stake in Manila Electric (Meralco), the Republic's largest power distributor, is in jeopardy due to a Supreme Court order for Meralco to return an estimated P11 billion of excess charges to customers. The Government planned on the sale of an interest in Meralco to reduce the deficit. CREDIT RATINGS. On January 8, 2003, Moody's Investors Service changed its rating outlook on the Republic's local-currency rating for government bonds to negative from stable, while affirming each of the Republic's foreign-currency ratings. Moody's recognized that revenue collections have improved in recent months, but noted that poor revenue collection in prior periods has weakened long-term fiscal prospects. On November 25, 2002, Fitch Ratings downgraded the Republic's ratings outlook from stable to negative. Fitch indicated that further evidence of falling tax revenues had undermined the Government's fiscal credibility and raised concerns about rising public indebtedness. Fitch noted that the persistence of the current account S-13
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surplus has prevented the appearance of an external financing gap. On October 29, 2002, Standard & Poor's Rating Service revised its outlook on the Republic's long-term foreign currency sovereign credit ratings from stable to negative. Standard & Poor's focused on the growing fiscal deficit, the Government's high debt burden and poor revenue collection by the BIR (which Standard & Poor's noted must be strengthened to meet the Government's long-term fiscal goals). The increased budget deficit has put pressure on the value of the Peso, which will raise debt servicing costs, as more than half of the Republic's debt is denominated in foreign currencies. Standard & Poor's explained that the change reflects diminishing prospects for the fiscal consolidation that is necessary to stabilize and reduce the Government's high debt burden and sustain investor confidence. PHILIPPINE STOCK EXCHANGE. From its close of 1,156.4 at the end of June 2002, the Philippine Stock Exchange declined to 1,018.4 at the end of December 2002. The Stock Exchange closed at 1,040.4 as of January 8, 2003. The higher budget deficit, concerns of a global economic slowdown, increased crime and kidnappings, the accounting scandals that affected certain large corporations in the United States and the proposed partial sale by First Pacific Company Limited of its 24.4% controlling stake in Philippine Long Distance Telephone Company to the Gokongwei Group contributed to a decline in the composite index. GNP/GDP. For the first nine months of 2002, real GNP grew 4.2% and real GDP grew 4.1%, compared with GNP growth of 3.6% and GDP growth of 3.0% for the first nine months of 2001. The increased growth rates are, in part, a result of lower interest and inflation rates, and in the Government's view, reflect the administration's macroeconomic strategy implemented in 2001. Growth in the first nine months of 2002 was driven primarily by the service sector which grew 5.1% compared to 4.2% in the first nine months of 2001. All subsectors of the service sector, except finance and real estate, showed strong growth during the first nine months of 2002, particularly transportation, communication and storage, which grew primarily because of increased computerized operations for Government services, and trade, which grew primarily because of increased regional operations by the larger domestic retailers. Growth in the finance subsector was sluggish during the first three months of 2002, but improved significantly in the second and third quarters because of increased earnings by banks from fee-based services. Agriculture, Fishery, and Forestry. In the first nine months of 2002, the agriculture, fishery, and forestry sector grew 2.3%, compared to 2.8% for the first nine months of 2001. Favorable weather conditions in the first three months of 2002 and the Government's efforts to improve productivity, particularly for palay and corn, improved performance in the poultry, livestock and fishery industries, and the elimination of tariffs on fertilizer helped offset weather-related declines in food production during the second and third quarters of 2002. Meteorologists have reported that the weather system effect known as E1 Nino could extend into and worsen in the first part of 2003, leading to drier weather conditions, which could have an effect on crop harvests. The E1 Nino effect is expected to be moderate compared to the prolonged drought of 1997. Industry. For the first nine months of 2002, the industry sector grew 3.8%, compared to growth of 1.5% for the first nine months of 2001. The growth in industry was driven by substantial increases in the mining and quarrying and construction subsectors. All industry subsectors except for electricity, gas, and water experienced sustained or increased rates of growth from the previous year. In the first nine months of 2002, the mining and quarrying subsector rebounded from previous declines, with growth of 39.8%. Most of the growth in the mining and quarrying subsector was attributable to production from the Camago-Malanpaya Gas Project. The annual growth rate in the manufacturing subsector was 2.8% for the first nine months of 2002, the same annual growth as for the first nine months of 2001. Food processing, textiles, footwear and apparel, non-metallic mineral products and electrical machinery showed improved results while output declined in cosmetics, plastic products, rubber products, leather products, petroleum and coal products and non-electrical machinery products. Growth in the construction subsector rebounded to grow 2.8% during the first nine months of 2002 compared to a contraction of 4.2% for the first nine months of 2001. The electricity, gas and water subsector grew by 1.8% for the first nine months of 2002, compared to growth of 3.6% for the first nine months of 2001. S-14
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Services. The service sector remains the largest contributor to GDP, having contributed approximately 45.1% of GDP at constant market prices from 1997 to 2001. In the first nine months of 2002, the services sector grew by 5.1% and contributed approximately 44% to the GDP for the period. Growth in the service sector was driven mainly by expansion of the transport, communications and storage subsector. The transport, communications and storage subsector posted 8.9% growth in the first nine months of 2002 compared to 8.2% growth for the first nine months of 2001. The trade subsector grew 5.5% for the first nine months of 2002, compared to growth of 5.5% for the first nine months of 2001. Growth in the trade subsector decreased from the second to third quarter of 2002 due to the decline in agricultural production. The finance subsector grew by 2.6% for the first nine months of 2002 compared to growth of 1.7% in the first nine months of 2001. The ownership of dwellings and real estate subsector grew by 1.4% for the first nine months of 2002 compared to a contraction of 1.1% during the same period of 2001. The private services subsector grew 5.1% in the first nine months of 2002 compared to growth of 4.3% in the first nine months of 2001. The Government services subsector grew by 3.8% for the first nine months of 2002 compared to growth of 2.4% for the first nine months of 2001. DEBT PROCEEDS. In November 2002, the Republic received the proceeds from the issuance of $500 million 9.00% global bonds due 2013. In September 2002 the Republic received the proceeds from the issuance of $300 million 7.5% bonds due 2007. In June 2002, the Republic received the proceeds from the issuance of $300 million 8.375% global bonds due 2009. In November 2002, the Republic received P11.52 billion through the issuance of three- and five-year peso-denominated notes. These proceeds are intended to finance the budget deficit. The Government is also planning to sell at least P500 million in small denominations of treasury bills in January 2003 to finance the budget deficit. EXTERNAL DEBT OF THE REPUBLIC. The Republic's external debt amounted to $53.6 billion as of September 30, 2002, a 2.4% decrease from the $54.9 billion recorded as of June 30, 2002 and a 2.3% increase from the $52.4 billion recorded as of December 31, 2001. The decrease in external debt in the third quarter of 2002 was attributed to an increase in the purchases by Filipinos of Government dollar-denominated bonds, currency revaluation adjustments and direct repayment of debt. The increase in debt in the first nine months of 2002 was due to upward foreign exchange revaluation adjustments on third-currency denominated debt resulting from the continued depreciation of the US dollar against third-currencies, net loan availments, upward adjustments to reflect audited results and late reporting of transactions which occurred in prior periods. The Government has also borrowed to pay for financial and economic reforms, power and energy development projects, and manufacturing, transportation, and communications infrastructure. The average cost of fixed rate credits was about 6%. For liabilities with floating interest rates, the margin over base rate ranged from 3.5% to 4.4%. The average interest rates for 91-day Treasury bills decreased from 6.4% as of March 31, 2002 to 4.8% as of June 30, 2002, following the decline in global interest rates, then rose to 5.32% as of January 7, 2003. As of September 30, 2002, approximately 56% of the country's external obligations were denominated in US dollars while 26% were denominated in Japanese yen. As of March 31, 2002, multi-currency loans from the World Bank and the Asian Development Bank accounted for 11.9% of national debt. INFLATION. The national inflation rate averaged 3.1% in 2002 compared to an average inflation rate of 6.1% in 2001. Inflation for the month of December 2002 was 2.6%, compared to 3.0% for June 2002. Inflation continues to be benign despite the recent adjustments in domestic oil prices, which have increased by more than 10% (in part because the adjustments have not been passed on to transport charges), and despite an increase in food prices due to weather-related reductions in supplies of rice, fruits, and vegetables. Reductions in Bangko Sentral's policy interest rates and efforts to maintain fiscal discipline, which have led to lower market lending rates and lower costs of capital for businesses, also had a favorable impact on inflation. Equally important, inflationary pressures caused by more demand than supply continue to be subdued due in part to current levels of unemployment and spare capacity as well as restrained, though increasing, domestic demand. The reduction in the Purchased Power Adjustment of National Power Corporation, effective May 2002, and S-15
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the decision of the Manila Waterworks and Sewerage System to delay petitions for water rate increases have also helped to keep inflation rates relatively low. EMPLOYMENT. In October 2002, the unemployment rate rose slightly to 10.1% from 9.8% in October 2001. In October 2002, Metro Manila had an unemployment rate of 16.7%, the highest of any region in the country. The total number of unemployed persons in the country increased to 3.1 million in October 2002, a 6.0% decline from 3.3 million unemployed in October 2001. INTEREST RATES. Currently, the Bangko Sentral overnight borrowing rate is 7.0% and the overnight lending rate is 9.25%. These are the lowest interest rate levels in ten years. After being cumulatively lowered by the Monetary Board of Bangko Sentral by 800 basis points starting December 2000, the rates have remained unchanged since March 15, 2002. Although market interest rates followed a steady downtrend in the first six months of 2002, they rebounded slightly over the next three months. From an average of 8.9% in December 2001, the 91-day Treasury bill rate decreased to 4.8% in June 2002 and then increased to an average 5.3% in the January 7, 2003 auction. Following a similar trend, the lending rates of commercial banks declined from a range of 12.7%-14.2% in December 2001 to a range of 7.9-9.6% in June 2002 and then increased to a range of 8.2%-10.0% in October 2002. BALANCE OF PAYMENTS. The Republic's overall balance of payments recorded a surplus of $751 million for the first nine months of 2002, compared to a $1.3 billion deficit for the first nine months of 2001. The year-on-year turnaround was mainly attributed to higher remittances from overseas workers and the growth in exports. The Republic has disclosed that the reported current account surplus likely has been overstated due to monitoring problems giving rise to underreported imports. An inter-agency task force on the balance of payments has been considering the effects of this problem on the Republic's consolidated financial position, specifically the Republic's current account and capital and financial account. The inter-agency task force is reviewing years 2000 to the present, but is not reviewing prior years due to incomplete information. The inter-agency task force includes representatives of the Bangko Sentral, the National Statistics Office, the National Economic and Development Authority, the National Statistics Coordination Board, the Bureau of Customs and the Philippine Export Zone Authority. The task force has evaluated a number of methodologies for calculating the level of imports and is in the final stages of its evaluation. The inter-agency task force is working within the guidelines of the IMF's reporting system. It expects to release revisions to the Republic's balance of payments data in the near term. Although the preliminary results of the task force's review indicate that the current account surplus likely has been overstated, the Republic believes this will not have any effect on its overall balance of payments, because the increase in reported imports has an offsetting effect on the Republic's capital and financial account, since there will be a lower outflow of short-term capital. Accordingly, the statistical revisions should have no impact on the gross and net international reserves level of the Republic. Certain rating agencies have cited the Republic's current account surplus as a key strength supporting the Republic's current ratings. The Republic has discussed the underreporting and ongoing efforts to improve reporting of imports with the credit rating agencies. The revisions to the reported historical current account surplus could lead to an increased perception of risk by rating agencies and investors. Current Account. Subject to the likely adjustment due to the underreporting of imports, the Republic's current publicly available information indicates that the current account recorded a surplus of $3.9 billion for the first nine months of 2002, nearly twice the $2.1 billion surplus of the first nine months of 2001. Largely contributing to this development was the higher surplus in the trade-in-goods account and the higher net inflow in the income account. The trade-in-goods and services accounts posted a combined surplus of $361 million for the first nine months of 2002. The increase in the net income account surplus to $3.2 billion for the first nine months of 2002 also helped strengthen the current account balance. Exports. Total exports of goods for the first nine months of 2002 were $25.4 billion, or 9.3% higher than in the first nine months of 2001. Higher demand for Philippine goods from the Netherlands, Singapore, Taiwan, Hong Kong, South Korea, Malaysia and China made up for a decrease in exports to the United States and Japan, which together account for approximately 41% of the country's export S-16
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market (26% for the United States and 15% for Japan in the first nine months of 2002). The Republic's exports were led by solid growth in overseas shipments of electronics products, clothing accessories and apparel. Overall, the Government has maintained its growth target for exports of 4% for 2002. Imports. In September 2002, imports of goods climbed for the ninth consecutive month due to increased purchases of raw materials and capital goods, which, taken together, account for more than four-fifths of total imports. Imports for the first nine months of 2002 were up 9.2% at $24.2 billion. This was a reversal of the 2.9% decline for the same period in 2001. The import growth reflected sustained domestic demand. Services. The trade-in-services account in the first nine months of 2002 posted a net outflow of $857 million. The 40.9% narrowing of the deficit from the same period in 2001 was caused by lower net payments for transportation services and for miscellaneous business, professional and technical services. Net receipts from travel services were $581 million in the first seven months of 2002, due to a relative decline in travel payments. Lower travel payments reflected in part the weaker peso and the government program to promote domestic tourism among local residents. Income. Remittances from overseas Filipino workers amounted to $5.4 billion in the first nine months of 2002, an increase of 21.2% from the same period in 2001. The income account recorded a surplus of $3.2 billion, or an increase of 54.0% from the first nine months of 2001. Behind this development was the 3.5% rise in the number of overseas Filipino workers, especially in the Americas, Europe, and Asia. However, as the global economic slowdown affects some of the countries where Filipinos are working, the Government has intensified its marketing efforts to increase hiring of Filipinos abroad. Capital and Financial Account. Subject to the likely adjustment due to the underreporting of imports, the Republic's current publicly available information indicates that the net outflow in the capital and financial account was $3.7 billion during the first nine months of 2002. This was caused by higher net outflow of other investments and lower net inflows of direct investment, despite the reversal of the portfolio investment account to a net inflow of $692 million for the first nine months of 2002 from a net outflow of $208 million for the first nine months of 2001. Portfolio investments for the first nine months of 2002 reversed to a net inflow of $692 million, from a net outflow of $208 million in the first nine months of 2001, following increased non-residents' investments in resident-issued foreign denominated debt securities, particularly government-issued medium-term bonds. Non-residents' investments in equity capital more than doubled to $903 million during the first nine months of 2002 due mainly to the investment of $544 million worth of shares by a Japanese firm in the San Miguel Corporation, a local brewery company, in March 2002. The remaining investment was directed to other manufacturing companies, financial institutions and transport and storage services. Other major sources of direct investments were the United States, Singapore, the United Kingdom and the Netherlands. The net outflow in the other investment account expanded by 12.6% to $5.1 billion during the first nine months of 2002. This was due in large part to the higher net deposits abroad by resident non-banks, a majority of which were corporations involved in build-operate-transfer arrangements, to cover foreign-related obligations. INTERNATIONAL RESERVES. Bangko Sentral's gross international reserves, including the reserve position in the International Monetary Fund, decreased to $15.8 billion at the end of November 2002 from $17.1 billion at the end of May 2002, and compared to $14.8 billion at the end of November 2001. The end-October level is equivalent to 4.9 months of imports of goods and payments of services and income and was 1.3 times the amount of short-term external obligations of the Republic based on residual maturity or 2.7 times the amount of short-term external debt of the Republic based on original maturity. Bangko Sentral's net international reserves decreased to $12.5 billion at the end of November 2002 from $13.7 billion at the end of May 2002. PESO/US$ EXCHANGE RATE. After reaching P49.48 on May 20, 2002, the Peso began depreciating to an average of P50.60 per US dollar in July 2002 and further to P51.79 per US dollar in August 2002. This two- S-17
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month depreciation was due mainly to increased corporate demand for dollars (to service foreign obligations arising from increased imports) as well as banks' covering their short dollar positions in anticipation of a slowdown in dollar remittances. For the month of September 2002, the average exchange rate declined further to P52.13 per US dollar and for the month of October 2002, the exchange rate averaged P52.91 per US dollar. The depreciation of the Peso in September and October 2002 has been attributed to the devaluation of Asian currencies and to increased demand from banks for US dollars. The Peso depreciated further to an average of P53.30 per US dollar in November 2002. On January 8, 2003, the exchange rate was P53.45 per US dollar. The recent weakness of the Peso was also generally attributable to uncertainty over a potential war in Iraq, declining investor confidence due to concerns over the rising fiscal deficit, recent terrorist attacks in the Philippines and Indonesia, the possibility of war in Iraq and the vulnerability of emerging markets, including the Philippines, to the South American debt contagion. BANKING SYSTEM NON-PERFORMING LOANS. As of September 30, 2002, the ratio of non-performing loans to total loans in the commercial banking system had decreased to 16.5% from 17.6% as of August 31, 2002 and 17.9% as of September 30, 2001. The improvement in the NPL ratio was due in part to a redefinition of "non-performing loan" which took effect September 19, 2002 and authorized banks with certain unsound valuation reserves and capital adjustments to exclude from their non-performing loan classification loans that meet certain conditions, provided interest is not accrued on such loans and such loans are deducted from the banks total portfolio computation. However, even under the previous definition of "non-performing loan", the NPL ratio at the end of September would have decreased to 17.0%. The decrease in the non-performing loan ratio was also attributable to increased foreclosure, restructuring proceedings, and generally improving performance of the commercial banking sector. The non-performing loan coverage ratio (loan reserves to non-performing loans) declined to 48.2% in September 2002 from 49.2% in August 2002, but increased from 43.5% in September 2001. In December 2002, Congress approved the Special Purpose Asset Vehicle ("SPAV") bill. The SPAV bill provides the legal framework for the creation of private asset management companies that are expected to relieve a major portion of the banking system's non-performing assets and thereby promote bank lending to support economic growth. President Arroyo is expected to sign the bill into law in January 2003. The SPAV bill's implementing rules and regulations are expected to be passed by Congress in February 2003. THE ELECTRIC POWER INDUSTRY AND REFORM ACT. On February 27, 2002, pursuant to the Electric Power Industry Reform Act of 2001 (the "EPIRA"), the Joint Congressional Power Commission approved the EPIRA's implementing rules and regulations (the "IRRs") which currently govern the restructuring of the electric power industry and the privatization of NPC. NPC's privatization will occur following (i) the restructuring of the electric power industry's various sectors, (ii) the creation of a new regulatory framework for the electric power industry, (iii) the establishment of certain transition mechanisms to minimize economic dislocation, and (iv) the establishment of various open market devices to promote free and fair competition. Universal Charge. Under the EPIRA, NPC will be allowed to impose on all end-users of electricity, subject to certain exceptions which are not expected to be material, a "Universal Charge" to cover the payment of stranded debt and stranded contract costs. Stranded contract costs of NPC refers to the excess of the contracted cost of electricity under eligible contracts (including contracts with distribution utilities as well as contracts with independent power producers) over the actual selling price of the contracted energy output in such contracts in the market, to the extent such stranded costs are not assumed by the Government under the EPIRA; and stranded debt costs refers to NPC's unpaid financial obligations which have not been liquidated by the proceeds from the sales of NPC's assets and will include unpaid financial obligations which are refinanced by Power Sector Assets and Liabilities Management Corporation ("PSALM"). Stranded contract costs will consist of costs associated with contracts with independent power producers that were approved by the ERC as of December 31, 2000. The Universal Charge, which will be calculated by the Energy Regulatory Commission ("ERC"), will effectively replace the Purchased Power Adjustment ("PPA"). The PPA is an automatic cost adjustment mechanism that allows NPC to pass on increased costs associated with its US dollar obligations under its contracts with independent power producers. Costs associated with power purchased from independent power producers have increased significantly because of the devaluation of the S-18
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Peso and the fact that NPC's price for such power is based in US dollars while NPC's income is principally received in Pesos. Proposed Amendments to the EPIRA. On May 21, 2002, the majority coalition introduced a bill in the Senate which would amend various provisions of the EPIRA. This bill, if passed by Congress, would among other things: - clarify that the Universal Charge would not be imposed on electricity output produced by a self-generation facility owned and operated by an end-user solely for its own consumption; - exempt certain of NPC's customers from imposition of the Universal Charge and limit the Universal Charge to P0.42 per kWh; - clarify that NPC, PSALM, Transco, and any other entity created to privatize NPC's assets will not be subject to national taxes, charges, fees or other assessments arising from the privatization; - extend the life of PSALM from 25 years to 35 years; and - clarify that the Republic may guarantee the payment of NPC's obligations assumed by PSALM from NPC and that such guarantees will not count against the maximum amount that the Republic is authorized to guarantee under existing laws. The majority coalition's bill to amend the Act remains pending in Congress. The minority coalition has introduced legislation which differs in certain material respects from the majority party's bill introduced on May 21, 2002. Most importantly, the minority coalition's bill would eliminate the Universal Charge altogether. While we expect an amendment to the EPIRA to be passed in the future, neither the Republic nor NPC can predict the final form of the amendment or its effects on the restructuring of the electric power industry, or on the results of operations of NPC. Wholesale Electricity Spot Market. Under the EPIRA, the Department of Energy ("DOE") is required to establish the Wholesale Electricity Spot Market ("WESM"), which is expected to provide an efficient, competitive, transparent and reliable market for the sale and purchase of electricity in the Philippines. A working group chaired by the DOE recently determined that an interim spot market, which is intended to test WESM systems and procedures, educate energy industry participants, and establish bid benchmarks, can be established by April 2003. Transco expects the WESM to be fully implemented by the fourth quarter of 2003. In October 2002, the PSALM Board of Directors approved the provision of financial and project-management assistance to the DOE in establishing the interim market, and approved the establishment of an electricity trading and risk management group. PSALM has requested that the interim WESM and the trading group be financed from a development project fund from Kreditanstalt fur Wiederaufbau ("KFW"). An endorsement from the Department of Finance and approval from KFW are both necessary for the KFW funds to be used for the interim WESM. PRIVATIZATION OF THE NATIONAL POWER CORPORATION. Pursuant to the EPIRA, on December 14, 2001, PSALM submitted a privatization plan for both the transmission and generation businesses for endorsement by the Joint Congressional Power Commission. The plan to privatize the transmission business was endorsed by the Joint Congressional Power Commission in March 2002 and the plan to privatize the generation business was endorsed by the Joint Congressional Power Commission in August 2002. The President approved the transmission and generation privatization plans in October 2002. The current target dates for finalizing the privatization processes are the mid-2003 for the transmission business and the late-2003 for the generation business. Transfer of Transmission Franchise. The EPIRA provides for the transfer of NPC's nationwide franchise for the operation of the transmission system and the grid to Transco. However, the EPIRA is silent on whether Transco could transfer the franchise to the concessionaire, or private investor, without Congressional approval. The uncertainty in obtaining Congressional approval for the transfer of the franchise may affect the price of the bids that will be submitted and may affect the winning concessionaire's ability to source financing. On September 3, 2002, the House of Representatives passed a bill that would grant a separate S-19
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franchise to Transco and allow Transco to assign its franchise rights to the winning concessionaire without Congressional approval. The bill is currently awaiting approval in the Senate. Although the Arroyo administration has strongly supported this bill, it has faced opposition from some Senators in initial hearings because it would constitute delegation of the Congressional power to grant franchise. There is no assurance that the bill will be passed by the Senate in its current form or at all. NPC Restructuring Plan. On November 18, 2002, the NPC Board of Directors passed a restructuring plan that is expected to reduce the NPC workforce by approximately 40% in early 2003. In December 2002, a group of NPC employees announced that they would seek an injunction from the Supreme Court to stop the implementation of the restructuring plan, which the group alleges was approved in violation of procedural provisions of the EPIRA. Separation Pay to NPC Employees. NPC has agreed to provide its employees with a separation package in connection with its privatization. NPC expects the total cost of separation pay to be approximately P13 billion, all of which will be paid by NPC. Consents from NPC Creditors. NPC has commenced discussion with its bank creditors and bondholders (including the World Bank, the Asian Development Bank and the Japan Bank for International Cooperation ("JBIC")) regarding a number of contractual provisions that restrict NPC's ability to carry out the privatization. These can be broadly categorized as (i) provisions restricting the transfer of NPC's debt obligations to PSALM, (ii) covenants restricting NPC's ability to transfer NPC's generation and transmission assets to PSALM and Transco (and therefore also restricting PSALM's ability to sell such assets to private investors) and (iii) project-specific covenants relating to the construction and operation of particular generation and transmission facilities that NPC's creditors have funded. As a result, to allow for the transfer of NPC's assets and liabilities to PSALM and Transco, NPC will need consents from its lenders to either waive any defaults or amend the relevant provisions. Consents to waive or amend the relevant restrictions on privatization will have to be obtained from NPC's creditors including public bondholders, commercial banks and bilateral and multilateral creditors and bondholders. The process of obtaining these consents is underway. On December 13, 2002, PSALM announced that NPC's commercial lenders, which together account for approximately 20% of NPC's debt, had approved the transfer of debt to PSALM. NPC's other lenders have yet to consent to the transfer of NPC's debt to PSALM. If and when the consents have been obtained, NPC's assets and debt obligations will be transferred to PSALM. To the extent that consents from the transfer of certain assets or liabilities cannot be obtained, such assets will remain on NPC's balance sheet, and such liabilities will be treated as stranded debt. Issues Relating to the Purchased Power Adjustment and the Universal Charge. Recently, the PPA and the proposed Universal Charge have come under intense public and political scrutiny as electricity rates in the Philippines have risen to among the highest in Asia. This scrutiny led President Arroyo, by presidential directive, to reduce the current average PPA charge from P1.25 per kWh to P0.40 per kWh, effective May 8, 2002. The ERC, through an order issued on September 6, 2002, affirmed the presidential directive. Unless the ERC issues a superseding order or the legislature changes electricity rates by law, the PPA will remain at P0.40 per kWh. The reduction of the PPA contributed P9.3 billion to NPC's revenue losses from May 8, 2002 to August 31, 2002. While the Arroyo administration has announced that the Universal Charge needs to be implemented as a matter of policy, various members of Congress and of the public continue to oppose the imposition of any Universal Charge. If the Universal Charge is significantly lower than the expected P0.40 per kWh, or if it is eliminated, NPC's financial condition will continue to deteriorate and NPC will need to obtain additional financing to continue operations. S-20
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OTHER RATE REDUCTIONS AFFECTING NPC'S REVENUES. In addition to the reduction of the PPA from P1.25 per kWh to P0.40 per kWh mandated by the President in May 2002 and affirmed by the ERC in September 2002, the following reductions in NPC's basic electricity rates have been imposed: The EPIRA. The Electric Power Industry Reform Act of 2001 mandated an overall rate decrease of P0.30 per kWh in June 2001. ERC Orders. In June 2002, the ERC, in connection with NPC's unbundling rate petition, denied NPC's request to revise NPC's rates upward by P0.17 per kWh, and instead ordered NPC to reduce NPC's rates by P0.07 per kWh before September 26, 2002. On September 6, 2002, the ERC ordered NPC to disregard its June 2002 ruling and to reduce generation rates by P1.10 per kWh in Visayas, P0.27 in Luzon and P0.40 in Mindanao. The ERC also stated in the September 6th order that a ruling on transmission rates would follow. The September 6th order has also called into question NPC's ability to charge for foreign exchange and fuel and purchased power costs not recoverable through the PPA that NPC has traditionally been allowed to recover from its customers. NPC has filed a motion for reconsideration and clarification of this order. ISSUES RELATING TO INDEPENDENT POWER PRODUCER CONTRACTS. Pursuant to the EPIRA, an inter-agency committee was formed to review each of NPC's 35 contracts with independent power producers. On July 4, 2002, this inter-agency committee submitted a report to President Arroyo identifying independent power producer contracts with financial and legal provisions which are onerous or grossly disadvantageous to the Government. With respect to the independent power producer contracts which contained financial issues, NPC has commenced renegotiation of the financial terms. Although NPC does not plan to impose unilateral changes to the contracts with financial issues, NPC expects to reduce certain of its obligations under these contracts through the renegotiation process. ANTI-MONEY LAUNDERING EFFORTS. In June 2002, the Republic presented a progress report to the Financial Action Task Force (the "FATF"), which was established by the Organisation for Economic Cooperation and Development to combat money laundering, to demonstrate how the Anti-Money Laundering Act of 2001 was being administered in the hope of being removed from FATF's list of "non-cooperative countries and territories". Despite recognizing that the Republic has made progress in combating money-laundering, the FATF, in its report identifying non-cooperative territories dated June 21, 2002, decided that the Republic should remain on the list for further monitoring. The FATF asked the Republic's Anti-Money Laundering Council to consider reducing the threshold amount for bank deposits subject to inspection, which currently stands at P4 million, as a prerequisite to being removed from the blacklist. A bill to amend the Anti-Money Laundering Act to address the FATF's concerns is currently pending in Congress. The FATF did not remove the Republic from its "non-cooperative" list at its November 2002 meeting. The president of the Senate has expressed his hope that the bill to amend the Anti-Money Laundering Act will be passed in January 2003, and the Republic hopes to be removed from the "non-cooperative" list in February 2003. THE CONSOLIDATED FINANCIAL POSITION. For the first half of 2002, the consolidated financial position of the Republic (not including Bangko Sentral) recorded a deficit of P117.5 billion, 60.7% higher than the P73.1 billion target for the period. The Government recorded a P119.7 billion deficit, the Central Bank restructuring accounted for an P8.4 billion deficit, and the monitored Government-owned corporations accounted for a P7.1 billion deficit. The total public sector borrowing requirement of P131.1 billion was offset in part by a combined surplus of P13.6 billion for the other public sector entities during the first six months of 2002. Of the surplus, P10.6 billion was attributable to the social security institutions. GOVERNMENT BUDGET FOR 2003. In August 2002, the Arroyo administration submitted to Congress its proposed 2003 budget. The 2003 budget submitted in August sought a 3.0% increase in appropriations to P804.2 billion from the P780.8 billion budgeted for 2002. The most recent version of the budget calls for P804 billion in expenditures, revenue collections of P602 billion, and a deficit of P202 billion. The 2003 budget is currently under consideration in Congress and is expected to be approved in early 2003. RELATIONSHIP WITH THE ADB. The Asian Development Bank ("ADB") announced in November 2002 that it plans to pay up to $815 million in loans to the Philippines over the next three years for projects focused on alleviating poverty. The priority sectors are education, urban development, power, roads, environment S-21
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management, financial markets, and small and medium-sized enterprise development and focuses on Mindanao and the southern Philippines. The ADB noted that the current budget deficit could affect the release of the proposed loans. The ADB also agreed to extend the terms of its $174 million grain sector development program with the Philippines government until December 2003. The program, aimed at liberalizing the pricing and importation of rice and corn and restructuring the National Food Authority, is tied to the implementation of a number of reforms by the Government. RELATIONSHIP WITH IMF. The IMF maintains a close dialogue with the Government, within the framework of a post-program monitoring arrangement ("PPM"). The PPM involves program assessments which are based on a regular review of economic developments and policies rather than the attainment of specific quantitative targets. This arrangement does not involve a financing component. On September 25, 2002, the Executive Board of the IMF concluded an Article IV consultation with the Republic. The report explained that although over the past 15 years the Republic made progress in establishing a market-oriented economy, underlying policy progress recently has begun to slip. The report cites problems with the implementation of the power sector reform and passage of the Asset Management Corporations bill, low revenue collection, the budget deficit and asset price volatility. On December 15, 2002, the IMF completed a 10-day review of the Philippine economy as part of the PPM. The IMF emphasized the need for the Philippines to reduce the fiscal deficit through increased revenues. In particular, the IMF recommended additional taxes on telecommunications, "sin" products, and automobiles, and measures to improve the efficiency of tax collection. The IMF also recommended improvements in energy regulation, including a stronger and more independent ERC and the passage of the Transco franchise bill. MONETARY POLICY. The Republic's money supply, as measured by domestic liquidity, expanded 9.5% in October 2002, up from 9.0% in October 2001. Domestic liquidity in October 2002 was P1.596 trillion, up from P1.587 trillion in September 2002. S-22
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DESCRIPTION OF THE GLOBAL BONDS GENERAL The global bonds will be issued under a fiscal agency agreement, dated as of October 4, 1999, as amended by a supplement to the fiscal agency agreement to be dated as of January 13, 2003, between the Republic and JPMorgan Chase Bank, as fiscal agent. The global bonds and the previously issued global bonds due 2013 referred to below constitute a single series. The global bonds are a series of debt securities more fully described in the accompanying prospectus, except to the extent indicated below. The following statements are subject to the provisions of the fiscal agency agreement, the supplemental fiscal agency agreement and the global bonds. This summary does not purport to be complete and the description below may not contain all of the information that is important to you as a potential investor in the global bonds. The Republic has filed forms of these documents as exhibits to the registration statement numbered 333-91176. You should refer to the exhibits for more complete information. Capitalized terms not defined below shall have the respective meanings given in the accompanying prospectus. The global bonds will: - be issued in an aggregate principal amount of US$500,000,000; - bear interest at 9.00% per year from November 25, 2002; - mature at par on February 15, 2013; - pay interest on February 15 and August 15 of each year, commencing February 15, 2003; and - pay interest to the persons in whose names the global bonds are registered on the record date, which is the close of business on the preceding February 1 or August 1 (whether or not a business day), as the case may be. Interest will be calculated on the basis of a 360-day year, consisting of twelve 30-day months. The global bonds constitute a further issuance of, are fungible with and are consolidated and form a single series with, the 9.00% Global Bonds due 2013 issued by the Republic on November 25, 2002 in the amount of $500,000,000. Upon issuance, the global bonds will rank pari passu with the previously issued global bonds in all respects. The total principal amount of the previously issued global bonds and the global bonds now being issued is US$1,000,000,000. The Republic has applied to the Luxembourg Stock Exchange for listing of, and permission to deal in, the global bonds in accordance with the rules of the Luxembourg Stock Exchange. BOOK ENTRY The Republic will issue the global bonds in the form of fully registered global securities. The Republic will deposit the global securities with DTC, and register the global securities in the name of Cede & Co. as DTC's nominee. Beneficial interests in the global securities will be represented by, and transfers thereof will be effected only through, book-entry accounts maintained by DTC and its participants. CERTIFICATED SECURITIES In circumstances detailed in the accompanying prospectus (see "Description of the Securities -- Description of the Debt Securities -- Global Securities -- Registered Ownership of the Global Security"), the Republic could issue certificated securities. The Republic will only issue certificated securities in denominations of $1,000 and integral multiples of $1,000. The holders of certificated securities shall present directly at the corporate trust office of the fiscal agent, at the office of the Luxembourg paying and transfer agent or at the office of any other transfer agent as the Republic may designate from time to time all requests for the registration of any transfer of such securities, for the exchange of such securities for one or more new certificated securities in a like aggregate principal amount and in authorized denominations and for the replacement of such securities in the cases of mutilation, destruction, loss or theft. Certificated securities S-23
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issued as a result of any partial or whole transfer, exchange or replacement of the global bonds will be delivered to the holder at the corporate trust office of the fiscal agent, at the office of the Luxembourg paying and transfer agent or at the office of any other transfer agent, or (at the risk of the holder) sent by mail to such address as is specified by the holder in the holder's request for transfer, exchange or replacement. REGISTRATION AND PAYMENTS The Republic will pay the principal amount of a global bond on its maturity date in immediately available funds in the City of New York upon presentation of the global bond at the office of the fiscal agent in the City of New York or, subject to applicable law and regulations, at the office outside the United States of any paying agent, including the Luxembourg paying agent (if the global bonds are accepted for listing on the Luxembourg Stock Exchange and the rules of the exchange so require). The Republic will appoint the fiscal agent as registrar, principal paying agent and transfer agent of the global bonds. In these capacities, the fiscal agent will, among other things: - maintain a record of the aggregate holdings of global bonds represented by the global securities and any certificated securities and accept global bonds for exchange and registration of transfer; - ensure that payments of principal and interest in respect of the global bonds received by the fiscal agent from the Republic are duly paid to the depositaries for the global securities or their respective nominees and any other holders of any global bonds; and - transmit to the Republic any notices from holders of any of the global bonds. If the global bonds are accepted for listing on the Luxembourg Stock Exchange, and the rules of the Luxembourg Stock Exchange so require, the Republic will appoint and maintain a paying agent and a transfer agent in Luxembourg, who shall initially be Dexia Banque Internationale a Luxembourg societe anonyme. Holders of certificated securities will be able to receive payments thereon and effect transfers thereof at the offices of the Luxembourg paying and transfer agent. For so long as the global bonds are listed on the Luxembourg Stock Exchange, the Republic will publish any change as to the identity of the Luxembourg paying and transfer agent in a leading newspaper in Luxembourg, which is expected to be the Luxemburger Wort. REDEMPTION AND SINKING FUND The Republic may not redeem the global bonds prior to maturity. The Republic will not provide a sinking fund for the amortization and retirement of the global bonds. REGARDING THE FISCAL AGENT The fiscal agent has its principal corporate trust office at 450 West 33rd Street, 15th Floor, New York, New York 10001-2697. The Republic will at all times maintain a paying agent and a transfer agent in the City of New York which will, unless otherwise provided, be the fiscal agent. The Republic may maintain deposit accounts and conduct other banking transactions in the ordinary course of business with the fiscal agent. The fiscal agent will be the agent of the Republic, not a trustee for holders of any global bonds. Accordingly, the fiscal agent will not have the same responsibilities or duties to act for such holders as would a trustee, except that monies held by the fiscal agent as payment of principal, premium or interest on the global bonds shall be held by the fiscal agent in trust for the holders of the global bonds. The fiscal agency agreement and the supplemental fiscal agency agreement are not required to be qualified under the US Trust Indenture Act of 1939. Accordingly, the fiscal agency agreement and the supplemental fiscal agency agreement may not contain all of the provisions which could be beneficial to holders of the global bonds which would be contained in an indenture qualified under the Trust Indenture Act. S-24
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NOTICES All notices will be published in London in the Financial Times, in the City of New York in The Wall Street Journal and, so long as the global bonds are listed on the Luxembourg Stock Exchange, in Luxembourg in the Luxemburger Wort. If the Republic cannot, for any reason, publish notice in any of these newspapers, it will choose an appropriate alternate English language newspaper of general circulation, and notice in that newspaper will be considered valid notice. Notice will be considered made as of the first date of its publication. S-25
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GLOBAL CLEARANCE AND SETTLEMENT DTC, Euroclear and Clearstream, Luxembourg have established links among themselves to facilitate the initial settlement of the global bonds and cross-market transfers of the global bonds in secondary market trading. DTC will be linked to JPMorgan Chase Bank, a New York banking corporation, as depositary of the Euroclear System ("Euroclear"), and Citibank, N.A. as depositary for Clearstream Banking, societe anonyme ("Clearstream, Luxembourg") (the "Clearing System Depositaries"). Although DTC, Euroclear and Clearstream, Luxembourg have agreed to the procedures provided below to facilitate transfers of global bonds among participants of DTC, Euroclear and Clearstream, Luxembourg, they are under no obligation to perform such procedures. In addition, such procedures may be modified or discontinued at any time. Neither the Republic nor the Fiscal Agent will have any responsibility for the performance by DTC, Euroclear or Clearstream, Luxembourg or their respective participants or indirect participants of the respective obligations under the rules and procedures governing their operations. THE CLEARING SYSTEMS THE DEPOSITORY TRUST COMPANY. DTC is: - a limited-purpose trust company organized under the New York Banking Law; - a "banking organization" under the New York Banking Law; - a member of the Federal Reserve System; - a "clearing corporation" under the New York Uniform Commercial Code; and - a "clearing agency" registered under Section 17A of the US Securities Exchange Act of 1934. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between its participants. It does this through electronic book-entry changes in the accounts of its direct participants, eliminating the need for physical movement of securities certificates. DTC is owned by a number of its direct participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. DTC can act only on behalf of its direct participants, who in turn act on behalf of indirect participants and certain banks. In addition, unless a global security is exchanged in whole or in part for a definitive security, it may not be physically transferred, except as a whole among DTC, its nominees and their successors. Therefore, your ability to pledge a beneficial interest in the global security to persons that do not participate in the DTC system, and to take other actions, may be limited because you will not possess a physical certificate that represents your interest. EUROCLEAR AND CLEARSTREAM, LUXEMBOURG. Like DTC, Euroclear and Clearstream, Luxembourg hold securities for their participants and facilitate the clearance and settlement of securities transactions between their participants through electronic book-entry changes in their accounts. Euroclear and Clearstream, Luxembourg provide various services to their participants, including the safekeeping, administration, clearance and settlement and lending and borrowing of internationally traded securities. Euroclear and Clearstream, Luxembourg participants are financial institutions such as underwriters, securities brokers and dealers, banks, trust companies and other organizations. The underwriter for the global bonds may be a participant in Euroclear or Clearstream, Luxembourg. Other banks, brokers, dealers and trust companies have indirect access to Euroclear or Clearstream, Luxembourg by clearing through or maintaining a custodial relationship with a Euroclear or Clearstream, Luxembourg participant. INITIAL SETTLEMENT If you plan to hold your interests in the securities through DTC, you will follow the settlement practices applicable to global security issues. If you plan to hold your interests in the securities through Euroclear or Clearstream, Luxembourg, you will follow the settlement procedures applicable to conventional Eurobonds in registered form. If you are an investor on the settlement date, you will pay for the global bonds by wire transfer S-26
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and the entity through which you hold your interests in the global bonds will credit your securities custody account. SECONDARY MARKET TRADING The purchaser of securities determines the place of delivery in secondary market trading. Therefore, it is important for you to establish at the time of the trade where both the purchaser's and seller's accounts are located to ensure that settlement can be made on the desired value date (i.e., the date specified by the purchaser and seller on which the price of the securities is fixed). TRADING BETWEEN DTC PURCHASERS AND SELLERS. DTC participants will transfer interests in the securities among themselves in the ordinary way according to the rules and operating procedures of DTC governing global security issues. Participants will pay for these transfers by wire transfer. TRADING BETWEEN EUROCLEAR AND/OR CLEARSTREAM, LUXEMBOURG PARTICIPANTS. Euroclear and Clearstream, Luxembourg participants will transfer interests in the securities among themselves in the ordinary way according to the rules and operating procedures of Euroclear and Clearstream, Luxembourg governing conventional Eurobonds. Participants will pay for these transfers by wire transfer. TRADING BETWEEN A DTC SELLER AND A EUROCLEAR OR CLEARSTREAM, LUXEMBOURG PURCHASER. When the securities are to be transferred from the account of a DTC participant to the account of a Euroclear or Clearstream, Luxembourg participant, the purchaser must first send instructions to Euroclear or Clearstream, Luxembourg through a participant at least one business day before the settlement date. Euroclear or Clearstream, Luxembourg will then instruct its depositary to receive the securities and make payment for them. On the settlement date, the depositary will make payment to the DTC participant's account and the securities will be credited to the depositary's account. After settlement has been completed, DTC will credit the securities to Euroclear or Clearstream, Luxembourg, Euroclear or Clearstream, Luxembourg will credit the securities, in accordance with its usual procedures, to the participant's account, and the participant will then credit the purchaser's account. These securities credits will appear the next day (European time) after the settlement date. The cash debit from the account of Euroclear or Clearstream, Luxembourg will be back-valued to the value date, which will be the preceding day if settlement occurs in New York. If settlement is not completed on the intended value date (i.e., the trade fails), the cash debit will instead be valued at the actual settlement date. Participants in Euroclear and Clearstream, Luxembourg will need to make funds available to Euroclear or Clearstream, Luxembourg in order to pay for the securities by wire transfer on the value date. The most direct way of doing this is to preposition funds (i.e., have funds in place at Euroclear or Clearstream, Luxembourg before the value date), either from cash on hand or from existing lines of credit. Under this approach, however, participants may take on credit exposure to Euroclear and Clearstream, Luxembourg until the securities are credited to their accounts one day later. As an alternative, if Euroclear or Clearstream, Luxembourg has extended a line of credit to a participant, the participant may decide not to preposition funds, but to allow Euroclear or Clearstream, Luxembourg to draw on the line of credit to finance settlement for the securities. Under this procedure, Euroclear or Clearstream, Luxembourg would charge the participant overdraft charges for one day, assuming that the overdraft would be cleared when the securities were credited to the participant's account. However, interest on the securities would accrue from the value date. Therefore, in many cases the interest income on securities which the participant earns during that one-day period will substantially reduce or offset the amount of the participant's overdraft charges. Of course, this result will depend on the cost of funds to (i.e., the interest rate that Euroclear or Clearstream, Luxembourg charges) each participant. Since the settlement will occur during New York business hours, a DTC participant selling an interest in the securities can use its usual procedures for transferring global securities to the Clearing System Depositaries of Euroclear or Clearstream, Luxembourg for the benefit of Euroclear or Clearstream, Luxembourg participants. The DTC seller will receive the sale proceeds on the settlement date. Thus, to the DTC seller, a cross-market sale will settle no differently than a trade between two DTC participants. S-27
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Finally, day traders that use Euroclear or Clearstream, Luxembourg and that purchase global bonds from DTC participants for credit to Euroclear participants or Clearstream, Luxembourg participants should note that these trades will automatically fail on the sale side unless one of three steps is taken: - borrowing through Euroclear or Clearstream, Luxembourg for one day, until the purchase side of the day trade is reflected in their Euroclear account or Clearstream, Luxembourg account, in accordance with the clearing system's customary procedures; - borrowing the global bonds in the United States from a DTC participant no later than one day prior to settlement, which would give the global bonds sufficient time to be reflected in the borrower's Euroclear account or Clearstream, Luxembourg account in order to settle the sale side of the trade; or - staggering the value dates for the buy and sell sides of the trade so that the value date of the purchase from the DTC participant is at least one day prior to the value date for the sale to the Euroclear participant or Clearstream, Luxembourg participant. TRADING BETWEEN A EUROCLEAR OR CLEARSTREAM, LUXEMBOURG SELLER AND A DTC PURCHASER. Due to time zone differences in their favor, Euroclear and Clearstream, Luxembourg participants can use their usual procedures to transfer securities through their Clearing System Depositaries to a DTC participant. The seller must first send instructions to Euroclear or Clearstream, Luxembourg through a participant at least one business day before the settlement date. Euroclear or Clearstream, Luxembourg will then instruct its depositary to credit the securities to the DTC participant's account and receive payment. The payment will be credited in the account of the Euroclear or Clearstream, Luxembourg participant on the following day, but the receipt of the cash proceeds will be back valued to the value date, which will be the preceding day if settlement occurs in New York. If settlement is not completed on the intended value date (i.e., the trade fails), the receipt of the cash proceeds will instead be valued at the actual settlement date. If the Euroclear or Clearstream, Luxembourg participant selling the securities has a line of credit with Euroclear or Clearstream, Luxembourg and elects to be in debit for the securities until it receives the sale proceeds in its account, then the back-valuation may substantially reduce or offset any overdraft charges that the participant incurs over that one-day period. S-28
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TAXATION GENERAL The Republic urges you to consult your own tax advisors to determine your particular tax consequences in respect of participating in the offering, and of owning and selling the global bonds. PHILIPPINE TAXATION The following is a summary of certain Philippine tax consequences that may be relevant to non-Philippine holders of the global bonds in connection with the holding and disposition of the global bonds. The Republic uses the term "non-Philippine holders" to refer to (i) non-residents of the Philippines who are neither citizens of the Philippines nor are engaged in trade or business within the Philippines or (ii) non-Philippine corporations not engaged in trade or business in the Philippines. This summary is based on Philippine laws, rules, and regulations now in effect, all of which are subject to change. It is not intended to constitute a complete analysis of the tax consequences under Philippine law of the receipt, ownership, or disposition of the global bonds, in each case by non-Philippine holders, nor to describe any of the tax consequences that may be applicable to residents of the Republic. EFFECT OF HOLDING GLOBAL BONDS. Payments by the Republic of principal of and interest on the global bonds to a non-Philippine holder will not subject such non-Philippine holder to taxation in the Philippines by reason solely of the holding of the global bonds or the receipt of principal or interest in respect thereof. TAXATION OF INTEREST ON THE GLOBAL BONDS. When the Republic makes payments of principal and interest to you on the global bonds, no amount will be withheld from such payments for, or on account of, any taxes of any kind imposed, levied, withheld or assessed by the Philippines or any political subdivision or taxing authority thereof or therein. TAXATION OF CAPITAL GAINS. Non-Philippine holders of the global bonds will not be subject to Philippine income or withholding tax in connection with the sale, exchange, or retirement of a global bond if such sale, exchange or retirement is made outside the Philippines or an exemption is available under an applicable tax treaty in force between the Philippines and the country of domicile of the non-Philippine holder. Under the Philippine Tax Code, any gain realized from the sale, exchange or retirement of securities with an original maturity of more than five years from the date of issuance will not be subject to income tax. Since the global bonds have a maturity of more than five years from the date of issuance, any gains realized by a holder of the global bonds will not be subject to Philippine income tax. DOCUMENTARY STAMP TAXES. No documentary stamp tax is imposed upon the transfer of the global bonds. A documentary stamp tax is payable upon the issuance of the global bonds and will be for the account of the Republic. ESTATE AND DONOR'S TAXES. The transfer of a global bond by way of succession upon the death of a non-Philippine holder will be subject to Philippine estate tax at progressive rates ranging from 5% to 20% if the value of the net estate of properties located in the Philippines is over P200,000. The transfer of a global bond by gift to an individual who is related to the nonresident holder will generally be subject to a Philippine donor's tax at progressive rates ranging from 2% to 15% if the value of the net gifts of properties located in the Philippines exceed P100,000 during the relevant calendar year. Gifts to unrelated donees are generally subject to tax at a flat rate of 30%. An unrelated donee is a person who is not a (i) brother, sister (whether by whole or half blood), spouse, ancestor, or lineal descendant or (ii) relative by consanguinity in the collateral line within the fourth degree of relationship. The foregoing apply even if the holder is a nonresident holder. However, the Republic will not collect estate and donor's taxes on the transfer of the global bonds by gift or succession if the deceased at the time of death, or the donor at the time of donation, was a citizen and resident of a foreign country that provides certain reciprocal rights to citizens of the Philippines (a "Reciprocating Jurisdiction"). For these purposes, a Reciprocating Jurisdiction is a foreign country which at the time of death or donation (i) did not impose a S-29
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transfer tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country or (ii) allowed a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. UNITED STATES TAXATION If you are a US holder of the global bonds and you receive additional amounts representing withholding or other taxes imposed by the Republic (see "Description of the Securities -- Description of Debt Securities -- Additional Amounts" in the accompanying prospectus), you will include such additional amounts in income as interest income at the same time and in the same manner as other interest payments (see "Taxation -- United States Tax Considerations -- United States Holders -- Payments or Accruals of Interest" in the accompanying prospectus). Subject to certain limitations, the withholding or other taxes imposed by the Republic should be allowed as a credit or deduction for US federal income tax purposes. The debt securities to be issued pursuant to this offering should form part of a "qualified reopening" for US federal income tax purposes of the issue by the Republic on November 25, 2002 of 9.00% Global Bonds due 2013. Accordingly, the discussion under "Taxation -- United States Tax Considerations -- United States Holders -- Original Issue Discount" notwithstanding, any discount on the debt securities to be issued pursuant to this offering that would otherwise be "original issue discount" should be treated as "market discount". For a description of certain "market discount" and other United States tax aspects of the global bonds, see "Taxation -- United States Tax Considerations" in the accompanying prospectus. S-30
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UNDERWRITING Subject to the terms and conditions contained in an underwriting agreement, which consists of a terms agreement dated January 8, 2003 and the underwriting agreement standard terms filed as an exhibit to the registration statement, the Republic has agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated are acting as the representatives. In the underwriting agreement, the Republic has agreed to sell to the underwriters, and the underwriters have agreed to purchase from the Republic, global bonds in the principal amount of $500,000,000. Each of the underwriters, severally and not jointly, has agreed to purchase from the Republic, the principal amounts of the global bonds listed opposite its name below. [Download Table] UNDERWRITERS PRINCIPAL AMOUNT ------------ ---------------- Credit Suisse First Boston Corporation...................... $163,333,334 Eleven Madison Avenue New York, New York 10010 United States of America J.P. Morgan Securities Inc.................................. $163,333,333 270 Park Avenue New York, New York 10017 United States of America Morgan Stanley & Co. Incorporated........................... $163,333,333 1585 Broadway New York, New York 10036 United States of America Deutsche Bank AG London..................................... $ 5,000,000 Winchester House 1 Greater Winchester Street London EC2N 2DB England The Hongkong and Shanghai Banking Corporation Limited....... $ 5,000,000 Level 16, One Queen's Road, Central Hong Kong ------------ Total.................................................. $500,000,000 ============ The underwriting agreement provides that the underwriters are obligated to purchase all of the global bonds if any are purchased. The underwriting agreement also provides that if an underwriter defaults, the purchase commitment of the non-defaulting underwriters may be increased or the offering of the global bonds may be terminated. The Republic has agreed to indemnify the underwriters against liabilities under the US Securities Act of 1933 or contribute to payments which the underwriters may be required to make in that respect. The underwriters have agreed to reimburse the Republic for certain expenses. COMMISSIONS AND DISCOUNTS The underwriters have advised the Republic that they propose to offer the global bonds to the public initially at the public offering price that appears on the cover page of this prospectus supplement. After the initial public offering, the underwriters may change the public offering price and any other selling terms. The Republic estimates that its out-of-pocket expenses for this offering will be approximately $50,000. In connection with this offering of the global bonds, the underwriters may engage in overallotment, stabilizing transactions and syndicate covering transactions in accordance with Regulation M under the Securities Exchange Act of 1934. Overallotment involves sales in excess of the offering size, which create a short position for the underwriters. Stabilizing transactions involve bids to purchase the global bonds in the S-31
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open market for the purpose of pegging, fixing or maintaining the price of the global bonds. Syndicate covering transactions involve purchases of the global bonds in the open market after the distribution has been completed in order to cover short positions. Stabilizing transactions and syndicate covering transactions may cause the price of the global bonds to be higher than it would otherwise be in the absence of those transactions. If the underwriters engage in stabilizing or syndicate covering transactions, they may discontinue them at any time. The Republic has been advised by the representatives that they intend to make a market in the global bonds, but the representatives are not obligated to do so and may discontinue any market-making activities at any time without notice. No assurance can be given as to the liquidity of or the trading market for the global bonds. UK SELLING RESTRICTIONS The underwriter represents and agrees that it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the global bonds in, from or otherwise involving the United Kingdom. FEDERAL REPUBLIC OF GERMANY SELLING RESTRICTIONS The underwriter represents and agrees that the global bonds have not been and will not be offered, sold or publicly promoted or advertised in the Federal Republic of Germany other than in compliance with the German Securities Selling Prospectus Act (Wertpapierverkaufsprospektgesetz) of December 13, 1990, as amended, or any other laws applicable in the Federal Republic of Germany governing the issue, offering and sale of securities. HONG KONG SELLING RESTRICTIONS No offer to sell the global bonds has been or will be made in Hong Kong, by means of any document, other than to persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32) of Hong Kong, and unless permitted to do so under the securities laws of Hong Kong, no person has issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purpose of issue, any advertisement, document or invitation relating to the global bonds other than with respect to the global bonds intended to be disposed of to persons outside Hong Kong or to be disposed of in Hong Kong only to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. SINGAPORE SELLING RESTRICTIONS This prospectus supplement and the prospectus to which it relates have not been registered as a prospectus with the Monetary Authority of Singapore (the "MAS") under the Securities and Futures Act 2001 (Act 42 of 2001) of Singapore (the "Securities and Futures Act"). Accordingly, the global bonds may not be offered or sold or made the subject of an invitation for subscription or purchase nor may this prospectus supplement and the prospectus to which it relates or any other document or material in connection with the offer or sale, or invitation for subscription or purchase of such global bonds be circulated or distributed, whether directly or indirectly, to the public or any member of the public in Singapore other than (1) to an institutional investor or other person falling within Section 274 of the Securities and Futures Act, (2) to a sophisticated investor (as defined in Section 275 of the Securities and Futures Act) and in accordance with the conditions specified in Section 275 of the Securities and Futures Act or (3) otherwise than pursuant to, and in accordance with the conditions of, any other applicable provision of the Securities and Futures Act. JAPAN SELLING RESTRICTIONS The global bonds have not been and will not be registered under the Securities and Exchange Law of Japan. The underwriter has represented and agreed that it has not offered or sold, and it will not offer or sell, directly or indirectly, any global bonds in Japan or to, or for the account or benefit of, any resident of Japan or S-32
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to, or for the account or benefit of, any resident for reoffering or resale, directly or indirectly, in Japan or to, or for the account or benefit of, any resident of Japan except (i) pursuant to an exemption from the registration requirements of, or otherwise in compliance with, the Securities and Exchange Law of Japan and (ii) in compliance with the other relevant laws and regulations of Japan. REPUBLIC OF THE PHILIPPINES SELLING RESTRICTIONS The global bonds qualify as exempt securities under Section 9.1(a) of the Philippine Securities Regulation Code, and the sale, offer for sale or distribution thereof in the Philippines is not subject to registration requirements with the Philippine Securities and Exchange Commission. Accordingly, each underwriter, on behalf of itself and each of its affiliates that participates in the offering of global bonds, represents and agrees that it has not, and will not, sell or offer for sale or distribution any global bonds in the Philippines, except through registered salesmen or registered brokers or dealers in securities. SETTLEMENT AND DELIVERY The Republic expects that delivery of the global bonds will be made against payment therefor on or about the closing date specified on the cover page of this prospectus supplement, which will be the 3rd business day following the date of pricing of the global bonds. RELATIONSHIP OF UNDERWRITERS WITH THE REPUBLIC The underwriters have in the past and may in the future provide investment and commercial banking and other related services to the Republic in the ordinary course of business for which the underwriters and/or their respective affiliates have received or may receive customary fees and reimbursement of out of pocket expenses. S-33
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LEGAL MATTERS The validity of the global bonds will be passed upon on behalf of the Republic as to Philippine law by the Secretary of the Department of Justice of the Republic, and as to US and New York State law by Allen & Overy. Certain matters will be passed upon for the underwriters by Cravath, Swaine & Moore, United States counsel for the underwriters, as to matters of US and New York State law, and by Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles, Philippine counsel for the underwriters, as to matters of Philippine law. GENERAL INFORMATION 1. The global bonds have been accepted for clearance through The Depository Trust Corporation, Euroclear and Clearstream, Luxembourg. The Common Code number is 015862807, the International Securities Identification Number is US718286AT41 and the CUSIP number is 718286AT4. 2. The issue and sale of the global bonds was authorized by the Full Powers signed by the President of the Republic dated January 6, 2003. 3. Except as disclosed in this prospectus supplement and the accompanying prospectus, there has been no material adverse change in the fiscal condition or affairs of the Republic which is material in the context of the issue of the global bonds since July 11, 2002. 4. Application has been made to list the global bonds on the Luxembourg Stock Exchange. Copies of the following documents will, so long as any global bonds are listed on the Luxembourg Stock Exchange, be available for inspection during usual business hours at the specified office of Dexia Banque Internationale a Luxembourg societe anonyme in Luxembourg: - copies of the Registration Statement, which includes the fiscal agency agreement and the form of the underwriting agreement as exhibits thereto; and - the Full Powers signed by the President of the Republic dated January 6, 2003 and the resolution of the Monetary Board of Bangko Sentral adopted on January 3, 2003, authorizing the issue and sale of the global bonds. In addition, so long as the global bonds are outstanding or listed on the Luxembourg Stock Exchange, copies of the Philippines' economic reports for each year in English (as and when available) will be available at the offices of the listing agent in Luxembourg during normal business hours on any weekday. The underwriting agreement, the fiscal agency agreement and the supplement to the fiscal agency agreement shall also be available free of charge at the office of the listing agent and any paying and transfer agent in Luxembourg. 5. Dexia Banque Internationale a Luxembourg societe anonyme has been appointed as the Luxembourg paying agent. For so long as the global bonds are listed on the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so require, the Republic will maintain a paying agent in Luxembourg. S-34
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PROSPECTUS (REPUBLIC OF THE PHILIPPINES LOGO) REPUBLIC OF THE PHILIPPINES 1,200,000,000 DEBT SECURITIES AND/OR WARRANTS The Republic will provide specific terms of these securities in supplements to this prospectus. You should read this prospectus and any supplement carefully before you invest. This prospectus may not be used to offer or sell securities unless accompanied by a supplement. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This prospectus is dated July 11, 2002.
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TABLE OF CONTENTS [Download Table] PAGE ---- Certain Defined Terms and Conventions....................... 2 Forward Looking Statements.................................. 2 Data Dissemination.......................................... 3 Use of Proceeds............................................. 3 Republic of the Philippines................................. 4 Recent Political Developments............................. 4 Recent Economic Developments.............................. 8 Core Policies of the Arroyo Administration................ 16 History, Land and People.................................. 23 Government and Politics................................... 24 Philippine Economy........................................ 29 GDP and Major Financial Indicators........................ 31 Principal Sectors of the Economy.......................... 34 Prices, Employment and Wages.............................. 40 Balance of Payments....................................... 44 Monetary System........................................... 71 The Philippine Financial System........................... 78 The Philippine Securities Markets......................... 85 Public Finance............................................ 87 The Government Budget..................................... 93 Debt...................................................... 94 Description of the Securities............................... 107 Description of the Debt Securities........................ 107 Description of the Warrants............................... 116 Limitations on Issuance of Bearer Debt Securities......... 116 Taxation.................................................... 118 Philippine Taxation....................................... 118 United States Tax Considerations.......................... 119 Information Reporting and Backup Withholding.............. 125 Plan of Distribution........................................ 126 Validity of the Securities.................................. 127 Authorized Representative in the United States.............. 127 Experts; Official Statements and Documents.................. 127 Further Information......................................... 127 Index to Tables............................................. T-1 1
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CERTAIN DEFINED TERMS AND CONVENTIONS Statistical information included in this prospectus is the latest official data publicly available at the date of this prospectus. Financial data provided in this prospectus may be subsequently revised in accordance with the Republic's ongoing maintenance of its economic data, and that revised data will not be distributed by the Republic to any holder of the Republic's securities. All references in this prospectus to (a) the "Republic" or the "Philippines" are to the Republic of the Philippines, (b) the "Government" are to the national government of the Philippines and (c) "Bangko Sentral" are to Bangko Sentral ng Pilipinas, the central bank of the Philippines. Government owned corporations are corporations at least 51% of the capital stock of which is owned by the Government directly or indirectly through its instrumentalities. The fiscal year of the Government commences on January 1 of each year and ends on December 31 of such year. Unless otherwise indicated, all references in this prospectus to "Philippine Pesos", "Pesos" or "P" are to the lawful national currency of the Philippines, those to "dollars", "US dollars" or "$" are to the lawful currency of the United States of America and those to "Yen" or "JPY" are to the lawful currency of Japan. This prospectus contains conversions of some Peso amounts into US dollars for the convenience of the reader. Unless otherwise specified, the conversions were made at the exchange rate as stated by the Bangko Sentral Reference Exchange Rate Bulletin published by the Treasury Department of Bangko Sentral on the relevant date. No representation is made that the Peso amounts actually represent the US dollar amounts or could have been converted into US dollars at the rates indicated, at any particular rate, or at all. Any discrepancies in the tables included herein between the amounts listed and the totals thereof are due to rounding. FORWARD LOOKING STATEMENTS Some of the statements contained in this prospectus under "Republic of the Philippines" are forward-looking. They include statements concerning, among others, - the Republic's economic, business and political conditions and prospects; - the Republic's financial stability; - the depreciation of the Peso; - changes in interest rates; - governmental, statutory, regulatory or administrative initiatives; and - an adverse change in economic conditions in the Republic. Actual results may differ materially from those suggested by the forward-looking statements due to various factors. These factors include, but are not limited to: - Adverse external factors, such as high international interest rates and recession or low growth in the Republic's trading partners. High international interest rates could increase the Republic's current account deficit and budgetary expenditures. Recession or low growth in the Republic's trading partners could lead to fewer exports from the Republic and, indirectly, lower growth in the Republic. - Adverse domestic factors, such as a decline in foreign direct and portfolio investment, increases in domestic inflation, high domestic interest rates and exchange rate volatility. Each of these factors could lead to lower growth or lower international reserves. - Other adverse factors, such as climatic or seismic events and political uncertainty. 2
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DATA DISSEMINATION The Republic is a subscriber to the International Monetary Fund's Special Data Dissemination Standard, which is designed to improve the timeliness and quality of information of subscribing member countries. The Special Data Dissemination Standard requires subscribing member countries to provide schedules indicating, in advance, the date on which data will be released or the so-called "Advance Release Calendar". For the Philippines, precise dates or "no-later-than-dates" for the release of data under the SDDS are disseminated three months in advance through the Advance Release Calendar, which is published on the Internet under the International Monetary Fund's Dissemination Standards Bulletin Board. Summary methodologies of all metadata to enhance transparency of statistical compilation are also provided on the Internet under the Dissemination Standards Bulletin Board. The Internet website is located at "http://dsbb.imf.org/country/phlcats.htm". USE OF PROCEEDS Unless otherwise specified in the applicable prospectus supplement, the net proceeds from sales of securities will be used for the general purposes of the Republic, including for budget support and to repay a portion of the Government's domestic borrowings. 3
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REPUBLIC OF THE PHILIPPINES RECENT POLITICAL DEVELOPMENTS POTENTIAL CHANGE IN THE SENATE LEADERSHIP. On June 3, 2002, Senator John Osmena, previously a member of the coalition supporting the administration of President Arroyo, announced that he was resigning from the coalition and joining the opposition. As a result, both the opposition and the administration coalition currently have 12 senators in the 24-member Senate. The Philippine Constitution provides that a majority vote of all the members of the Senate is needed to elect a Senate President. It is unclear, however, what number of Senators constitutes a quorum for purposes of conducting legislative business and electing the other officers and chairs of the various committees of the Senate. Relying on a 1949 Supreme Court decision, the opposition senators argued that senators who are not physically present in the Philippines should not be counted for purposes of determining a quorum. These senators claimed that because 23 senators were in the Philippines on June 3, 2002, 12 senators constituted a quorum. The 12 member opposition relied on this position in calling a session on June 3, 2002 to elect a new Senate President Pro Tempore and Majority Floor Leader as well as new committee chairs. The incumbent Senate President, Senator Franklin Drilon, questioned the legality of such session, reasoning that under the Senate rules only he, the Senate President Pro Tempore, the Majority Floor Leader, or his designated representative can call a session into order. The opposition argued that since the Senate President refused to open the session, they, as the new majority, could suspend the Senate rules and call a session under "exigent circumstances". In response to the actions of the opposition senators, Senator Drilon decided to adjourn the session on June 3, 2002, earlier than the scheduled adjournment date of June 6. In a gesture of support for Drilon, the House of Representatives, led by Speaker Jose De Venecia, also decided to adjourn its session. Sessions of both houses were scheduled to resume on July 22, 2002. However, the opposition in both houses protested the early adjournment and continued to hold sessions. In mid-June 2002 Senator Ramon Revilla, a member of the coalition supporting the administration of the President and the Senator absent from the Philippines on June 3, 2002, returned to Manila. It is currently unclear what impact the return of Senator Revilla will have on this dispute, as the opposition senators claim their actions taken on June 3, 2002 still stand. If the Senate is unable to resolve this dispute internally, the matter may have to be referred to the Supreme Court for final adjudication. Unless and until it is resolved in favor of the administration, it is uncertain whether several important administration bills, including the Special Asset Vehicle (SPAV) bill, the granting of a franchise to the National Transmission Corporation ("Transco") and proposed amendments to the Electric Power Industry Reform Act, or any other legislation that does not have broad support, will be signed into law. If the opposition succeeds in taking control of the Senate leadership, it is uncertain whether the bills would be passed in their current form. Any significant delay in the passage of, or material revision to, the administration's proposed legislation could adversely affect the Government's economic program. It is impossible to predict at this time what effects, if any, the dispute and its ultimate resolution will have on the Philippine economy, but such effects could be material. CRIMINAL CHARGES AGAINST ESTRADA. Criminal charges for perjury, illegal use of an alias, and plunder have been filed against Mr. Estrada by the Ombudsman (the office mandated under the Constitution of the Republic to investigate and prosecute all complaints of corruption against public officials and government employees) with the Sandiganbayan, a special court with jurisdiction over criminal and civil cases involving graft and corruption. Under Republic Act No. 7080, as amended by Republic Act No. 7659, or the Plunder Law, a public officer commits the crime of plunder when he or she, alone or by connivance with others, accumulates or acquires ill-gotten wealth, through a combination or series of overt or criminal acts described in the Plunder Law, in an aggregate amount of at least P50 million. Plunder may be punished by reclusion perpetua (the equivalent of life imprisonment) or death. Mr. Estrada was charged with plunder arising from several acts, including the malversation of tax levy funds, the use of pension funds for private gain and the acceptance of kickbacks on illegal gambling. 4
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A special division was specially created by the Supreme Court to expedite the hearing of these cases. On the first charge of perjury, relating to Mr. Estrada's 1999 statement of assets and liabilities, the Sandiganbayan has disallowed evidence regarding some of Mr. Estrada's alleged bank accounts and holdings in certain companies, ruling that such evidence was not included in the information filed against Mr. Estrada and therefore was not admissible. The Ombudsman has appealed this evidentiary decision to the Supreme Court. A second charge of perjury, relating to Mr. Estrada's 1998 statement of assets and liabilities, is also currently pending before the Sandiganbayan. The first of four charges of plunder is being heard by the Sandiganbayan and refers to profits and commissions that Mr. Estrada is said to have derived from his alleged directives to the heads of the Social Security System and the Government Service Insurance System to invest in certain companies listed on the Philippine Stock Exchange. On February 27, 2002, Mr. Estrada refused to enter a plea on his arraignment for the charge of illegal use of an alias and similarly, on April 12, 2002 he refused to enter a plea on his arraignment for charges of perjury. This prompted the Sandiganbayan to enter a "not guilty" plea on his behalf on both occasions. Recently, Mr. Estrada publicly admitted that the money in certain bank accounts identified as belonging to "Jose Velarde" actually belonged to him. He later retracted this statement claiming that he did not fully understand the question asked of him and that the money actually belonged to a close friend. Recently, Mr. Estrada has complained about the alleged bias of the Sandiganbayan against him. Claiming that he will not be treated fairly by the Philippine courts, he recently dismissed all of his lawyers. Since Mr. Estrada is not in a position to defend himself, the Sandiganbayan appointed several counsel de oficio for him. Hearings on the perjury charges are ongoing. PEACE PROCESS. Over the past three decades, groups of disaffected Muslims have periodically fought with Government forces. Peace negotiations with the Moro Islamic Liberation Front (the "MILF") are being revived, after they collapsed in the wake of the previous administration's all-out war policy. Discussions between the Government and the MILF have resulted in the following agreements: - Peace Agreement signed on June 22, 2001 in Tripoli, Libya, establishing the agenda for the negotiations; - Implementing Guidelines on the Security Aspect of the Tripoli Agreement of 2001 (otherwise known as the GRP-MILF Ceasefire Agreement of 2001); and - Manual of Instructions for the Coordinating Committee on Cessation of Hostilities and the Local Monitoring Teams. The above agreements pertain to the security aspects of the peace negotiations and provide for the rules and regulations governing the cessation of hostilities between the two sides as well as the mechanisms to implement and monitor the observance of the ceasefire. One significant feature of these agreements is the establishment of local peace monitoring teams in 13 provinces covering 155 municipalities within the conflict-affected areas that empower the local leaders and civil society groups to participate actively in conflict prevention and resolution. A Joint Communique between the Republic and the MILF and the Implementing Guidelines on the Humanitarian Rehabilitation and Development Aspects of the GRP-MILF Tripoli Agreement were signed in Malaysia on May 6, 2002. The two documents have helped to decrease hostilities between the two parties. The Republic and the MILF have agreed that: (i) the MILF will set up a body to implement Government-funded aid projects; (ii) the Republic will pay reparations for destroyed or damaged property; and (iii) both sides must allow refugees to return to their homes. Some members of Congress have vowed to oppose the payment of reparations to the MILF. Pursuant to the agreements, 145 ex-MILF rebels were promised amnesty and were given aid to help in the transition to civilian life. The Moro National Liberation Front (the "MNLF"), the largest of the ideologically-oriented armed groups, signed a peace agreement with the Government in September 1996. The peace agreement provided for an end to hostilities, the establishment of a development region in southern Mindanao and elections in 1999 to 5
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decide whether the residents of any of the provinces in the region would want to join a Muslim autonomous region. This agreement was enacted by Congress as the Muslim Autonomy Act. On August 14, 2001, a plebiscite was held in the four province Autonomous Region in Muslim Mindanao on whether to expand the Muslim autonomous region and in 15 other provinces and 10 cities on whether to join the Muslim autonomous region. However, only one city, Marawi, and one province, Basilan, voted to join the four other provinces that currently comprise the Autonomous Region in Muslim Mindanao, namely Lanao del Sur, Maguindanao, Sulu and Tawi Tawi. The first regular elections for the new autonomous region officials were held on November 26, 2001. In the days prior to the November 26, 2001 elections in the Autonomous Region of Muslim Mindanao (the "ARMM"), Nur Misuari, then governor of the ARMM, and his supporters allegedly conducted a series of bombings and other acts of violence with the goal of postponing the elections. Despite Mr. Misuari's alleged actions, the first regular elections for the ARMM officials were held as scheduled with no significant disruptions. On December 4, 2001, the Commission on Elections announced the results of the elections and the new leaders of the ARMM, many of whom were backed by the Arroyo Administration, including the new Regional Governor, Dr. Parouk Hussin and the new Regional Vice-Governor, Dr. Mahid Mutilan. The MNLF Interim Chairman Hatimil Hassan was elected as a member of the Regional Legislative Assembly of the ARMM. Meanwhile, Malaysian authorities arrested Mr. Misuari when he fled to Malaysia. On January 7, 2002, Malaysia deported Mr. Misuari to the Republic where he currently remains in custody. Mr. Misuari was charged with rebellion against the Republic. In accordance with Republic Act 9054, President Arroyo approved the establishment of the Regional Security Force (the "RSF"), which is responsible for peace-keeping in the ARMM. The RSF, composed of 1,423 former members of the MNLF, is under the effective control of the regional government. Meanwhile, a total of 1,744 MNLF forces who were not absorbed into the military and police were provided socio-economic assistance in the form of skills training, income-generating projects, resettlement housing, and study grants. The Government conducted informal talks with the National Democratic Front (the "NDF") in September 2001 to convey its serious concerns relating to the continuing acts of political assassination committed by the Communist Party of the Philippines and the New People's Army, both affiliates of the NDF, against non-combatants and civilians, particularly the assassination of Mayor Jose Libayao of Talaingod, Davao del Norte on September 5, 2001. The Government also informed the NDF that it was ready to resume formal talks if the NDF would make a public declaration renouncing acts of political assassination. In response, the NDF expressed its strong protest to what it deemed to be the Government's unilateral replacement of the formal talks with informal talks and rejected the Government's position. In December 2001, informal talks between the Government and the NDF resulted in a draft document of understanding, which provides, among other things, that if talks are resumed, they should be completed within the next five to six months. Another round of informal talks was held in January 2002, at which the Government presented a formula for a final peace agreement. The peace talks remain indefinitely suspended despite the Government's offer to continue informal negotiations. The NDF has rejected this offer and seeks to formalize talks with the Government. Military operations against the Abu Sayyaf have been conducted in the provinces of Basilan, Sulu, Tawi-Tawi and the Zamboanga peninsula since the abduction of guests and employees at a resort in the province of Palawan on May 27, 2001. Between that date and December 31, 2001, a total of 108 recorded encounters have taken place between the Armed Forces of the Philippines (the "AFP") and Abu Sayyaf militants, 97 of which were initiated by the AFP. President Arroyo has now ordered the AFP to initiate an all-out offensive to eradicate the terrorist group. Through the recently heightened cooperation between the Republic and the United States in the fight against terrorism, the US has sent military advisers to assist the AFP in eradicating the Abu Sayyaf. About 1,000 US Special Forces troops are participating in joint military exercises with the AFP. The US Special Forces have operated in the Zamboanga and Basilan provinces where the Abu Sayyaf operates. In accordance with a terms of reference entered into between the Republic and the US, the US Special Forces have observed and trained the AFP on counter-terrorist strategy and techniques to improve the capability of AFP troops in 6
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combating terrorism. The Government has stated that the joint military exercises are to train the AFP and US forces for their mutual benefit and are not a means for the US to intervene in operations against the Abu Sayyaf. Two Supreme Court cases brought against the Government requesting the termination of the joint military exercises were dismissed on April 11, 2002. On May 29, 2002, the U.S. Government offered a $5 million reward for the capture of Abu Sayyaf leaders. Additionally, on June 2, 2002, President Arroyo approved "a more active and realistic role" for American training exercises with AFP troops, which role specifically includes training the lowest ranking AFP troops and placing more US troops closer to the combat zone and on June 28, 2002 the U.S. Government authorized a total of $10 million in equipment and other materials to be provided to the AFP. The United States and the Republic announced on July 2, 2002 that they had entered into a sustained military cooperation agreement which will replace the terms of reference set to expire on July 31, 2002. Vice President Teofisto Guingong resigned from his position of Secretary of Foreign Affairs, effective July 15, 2002 citing, among other things, differences of opinion with President Arroyo concerning the presence of US military troops in the Philippines. TERRORIST ATTACKS IN THE UNITED STATES AND RELATED EVENTS. On September 11, 2001, several terrorist attacks occurred in the United States, which resulted in the destruction of the World Trade Center towers and several nearby buildings in New York City and part of the Pentagon in Washington D.C. The terrorist attacks in the United States disrupted securities markets worldwide, adversely affected economic conditions in the United States and elsewhere and have resulted in increased political and economic uncertainty worldwide. The evolving response of the United States and other nations has resulted in continuing political and economic uncertainty, and in increased volatility in the world's financial markets. It is unclear how the US economy, the international financial markets or the Philippine economy will be affected in the future. The response to these attacks has included the US-led military action against al Qaeda and the Taliban government in Afghanistan, which began in October 2001 and is ongoing. In response to the events of September 11, 2001, President Arroyo issued a 14-point program of action that emphasized the need for a regional consensus to effectively combat terrorism. In December 2001, in line with the Association of Southeast Asian Nations ("ASEAN") Declaration on Joint Action to Counter Terrorism adopted at the Seventh ASEAN Summit held in November 2001, the Republic hosted a trilateral meeting with Indonesia and Malaysia to complete a draft of the Agreement on Exchange of Information and Communication Procedures. In addition, the Republic continues to monitor actions on the Asia-Pacific Economic Cooperation ("APEC") Statement on Counter Terrorism issued in China in October 2001 and President Arroyo's proposals at the APEC Leaders' Meeting, which included the strict enforcement of anti-money laundering laws to prevent the supply of funds to terrorists, increased security in all seaports and airports, combating cyber-crime and enhancing customs enforcement. In November 2001, the Republic became a signatory to the International Convention for the Suppression of the Financing for Terrorism. Bangko Sentral has circulated among banks the United Nations Security Resolutions and the terrorist lists supplied by the US government for their information, guidance and appropriate action. Within the range permitted by the Anti-Money Laundering Act, Republic authorities would have the ability to cooperate. On April 21, 2002, President Arroyo offered a P5 million reward for information leading to the arrest of suspected terrorists. On May 6, 2002, the Philippines formally entered into a trilateral agreement with Malaysia and Indonesia aimed at facilitating mutual cooperation in combating cross-border terrorism and other transnational crimes. REVIEW OF FINANCIAL CONTINGENCY PLAN. In light of the recent terrorist attacks in the United States, on September 14, 2001, Standard & Poor's reviewed the financial contingency plans of policy makers in emerging market countries. In particular, Standard & Poor's reviewed plans of sovereign issuers, including the Republic, who may have large external funding gaps in relation to their foreign exchange reserves and may be vulnerable to a decline in foreign financing. On September 26, 2001, Standard & Poor's announced that it did not expect any substantial changes in the ratings of Asia-Pacific sovereign issuers as a direct result of the terrorist attacks, but that any future ratings actions would only be considered where adverse policies are adopted by governments in response to the attacks. 7
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RECENT ECONOMIC DEVELOPMENTS BACKGROUND. Economic growth was sustained in 2000 and 2001, although growth momentum was weakened due to a string of adverse developments such as: - a potential power shift in the Senate and the ongoing trial of the former president. See "-- Recent Political Developments -- Potential Change in the Senate Leadership and -- Criminal Charges Against Estrada"; - the ongoing conflict in Mindanao and the US response to terrorism. See "-- Recent Political Developments -- Peace Process and -- Terrorist Attacks in the United States and Related Events"; and - a stock market scandal. See "-- Philippine Securities Markets -- History and Development". Despite these challenges and the generally weak global conditions, the Philippine economy grew by 3.4% in 2001, surpassing the 3.3% target for the year. The average inflation of 6.1% was at the lower end of the 6.0-7.0% target range. The benign inflation environment allowed for cautious monetary easing, which supported the economy's growth objectives. On the external front, the current account, which measures the Republic's trade in goods and services and transfer payments, remained in surplus despite lower exports. The capital and financial account recorded a lower net outflow of $3.8 billion as compared to 2000. The overall balance of payments deficit of $192.0 million was only 37.4% of the previous year's level. Reserves were maintained at comfortable levels in terms of import cover and as a ratio to short-term debt. See "-- Balance of Payments -- Balance of Payments Performance". Meanwhile, the Peso remained broadly stable even as it experienced depreciation pressures in 2001 due to domestic and external factors. 8
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RECENT ECONOMIC INDICATORS. The following table sets out the performance of certain of the Republic's principal economic indicators for the periods indicated. [Enlarge/Download Table] 2000 2001 2002(1) ---- ----- ------- Real GDP growth (%)......................................... 4.4 3.2 3.8(2) Real GNP growth (%)......................................... 4.8 3.4 4.9(2) Inflation rate (%).......................................... 4.4(3) 6.1(3) 3.6(4) Unemployment rate (%)....................................... 11.2(5) 11.1(5) 12.1(4) 91-day T-bill rate (%)...................................... 9.86(3) 9.86(3) 5.74(4) Fiscal position Consolidated public sector fiscal position/GDP (%)........ (4.6) (4.1) -- External position Balance of payments ($ million)........................... (513) (192) 2,157(2) Trade(6)/GNP (%).......................................... 8.7 3.7 5.9(2) Export growth (%)...................................... 9.0 (16.2) 2.7(7) Import growth (%)...................................... 3.8 (6.2) (3.0)(8) External debt ($ billion)................................. 52.1 52.4 53.4 International reserves Gross ($ billion)...................................... 15.0 15.7 17.1(9) Net ($ billion)........................................ 11.3 11.4 13.7(9) Months of retained imports(10)......................... 4.4 5.0 5.6(9) Domestic credit growth (%).................................. 8.55 1.05 2.94(2) --------------- (1) Some 2002 data is preliminary. (2) First three months of 2002. (3) Full year average. (4) Average of first six months of 2002. (5) Average of the January, April, July and October applicable statistics based on the January, April, July and October labor force surveys for the relevant year. (6) Represents goods trade. (7) First five months of 2002. (8) First four months of 2002. (9) As of May 31, 2002. (10) Number of months of average imports of merchandise goods and payment of services and income that can be financed by gross reserves. NATIONAL SOCIO-ECONOMIC SUMMIT OF 2001. On December 10, 2001, President Arroyo convened the National Socio-Economic Summit of 2001 in which over 1,000 leaders of Government, business, labor organizations and civil society participated. President Arroyo called the summit in recognition that the September 11 terrorist attacks on the United States had given rise to new uncertainties and decreased the prospects of a global recovery initially anticipated by the Government to start in the latter part of 2001. The Government was concerned that these uncertainties, together with the delay in the recovery, could adversely affect the welfare of the Philippine people and the domestic economy, particularly export-oriented sectors, tourism-related industries and the financial markets. Towards this end, the Government recognized the need to take immediate steps to safeguard jobs and social services, enhance competitiveness and productivity of the economy and strengthen investor confidence by improving peace and order and governance, and eliminate the structural and implementation bottlenecks in agriculture, industry and services. 9
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The specific items agreed upon during the summit and which the various Government agencies committed to implement in the first half of 2002 include: Peace, Order and Security. - Accelerate the integration and coordination of intelligence activities and resources of law enforcement and security agencies; maximize all mechanisms to identify, locate and neutralize kidnap for ransom groups, drug syndicates, terrorists, smugglers, and coup plotters; and improve the reward system for information on these groups; and - Mobilize the peace and order councils more actively and organize self-defense units, which will be authorized to carry firearms and effect citizen's arrests pursuant to existing laws and under close supervision of the Department of Interior and Local Government and the Philippine National Police. Financial and Fiscal Reforms. - Increase Bureau of Internal Revenue collection through administrative measures with a focus on industry benchmarking, review of big contract items in the budget with significant tax leakages, monitoring of local government unit remittances, undertaking measures to improve the collection of value-added tax and the 2% minimum corporate income tax and the passage of legislation on the indexation of the excise tax; - Strictly implement seizure orders and stop issuances by Government agencies of documents legitimizing smuggling and other measures to combat smuggling; - Pass legislation needed to facilitate the recovery of the financial sector and enhance access to credit such as the Special Purpose Vehicle Act, the Securitization Act, new legislation removing documentary stamp taxes on secondary trading transactions, amendments to the Bangko Sentral and Philippine Deposit Insurance Corporation charters, the Corporate Recovery Act and the Personal Equity Retirement Act; and - Enhance private sector access to official development assistance including for Build-Operate-Transfer projects, railway and other private sector-initiated infrastructure projects and private education institutions. Agriculture. - Achieve food security and generate jobs by using hybrid and certified seeds in rice and corn production and facilitating marketing contracts between agricultural producers and business corporations; - Enhance the effectiveness of the Government fund set up to increase agricultural competitiveness and ensure that appropriate tariffs are transferred to this fund; - Reform lending procedures at the Land Bank of the Philippines to increase the number of loans made for agricultural purposes; and - Maintain budgeted funding for programs on agriculture, fisheries, indigenous peoples, agrarian reform, community based forest management and watershed protection and management. Trade and Industry. - Pass amendments to existing legislation to rationalize the country's investment incentives scheme to match those of other Asian nations and ensure that appropriate incentives will be granted to information technology services; - Support small and medium enterprises by streamlining business documentation requirements, strengthening the guarantee fund system and developing on-line credit application; - Promote micro-finance banks in all provinces; and 10
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- Modernize the cargo transport system by reviewing existing legislation and passing new legislation on air cargo liberalization. Tourism-related Industries. - Amend existing legislation to allow for rechanneling of 40% of travel tax collections to tourism-related projects and programs; - Improve access to tourist-generating markets by liberalizing visa requirements and fees for Chinese tourists; - Institutionalize a mechanism to allow for an automatic increase in frequency of flights once a carrier's current flights achieve a 70% load factor; and - Aggressively promote programs geared towards domestic and international tourism. Telecommunications and Information Technology. - Facilitate granting of permits and licenses for increased deployment by private sector telecommunications service providers of broadband services and other telecommunications facilities in key locations, such as industrial parks and regional centers, to develop and encourage e-commerce and e-business; - Increase the demand for information technology services by accelerating the implementation of an e-development program for small, micro and medium enterprises; and - Expand the implementing rules and regulations of the Build-Operate-Transfer Law to address specific requirements of information technology projects, consistent with the law. Labor and Employment. - Address the needs of workers by providing assistance in terms of employment facilitation services such as job matching and referrals, guidance counseling and livelihood and entrepreneurship development; - Implement a job corps program by January 2002 to promote, among other things, entrepreneurship among workers and generate local jobs and facilitate overseas employment; and - Conduct skills training, retraining and upgrading to meet the requirements of fast changing technologies and equip workers with in-demand skills. On January 25, 2002, a memorandum of agreement was released implementing a job corps program promoting volunteerism, civic consciousness among the country's youth, community development and employment projects. Infrastructure. - Unlock bottlenecks for the implementation of identified solid waste disposal projects in Metro Manila and other urban centers; - Reduce traffic congestion in Metro Manila and other urban centers by close coordination among the Metro Manila Development Authority and other implementing agencies, utilities, malls and private contractors; and - Utilize more labor-based construction methods, especially for small rural infrastructure projects to generate employment. Housing. - Streamline housing permits and processes by prescribing time periods for the issuance of housing related permits and clearances and instituting a mechanism to monitor compliance with the new processes; 11
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- Promote rent-to-own and other similar schemes; and - Pass legislation to index sin taxes and earmark P5 billion of the Government's share of those taxes to subsidize a targeted socialized housing program. Health and Other Social Services. - Expand coverage of services under the National Health Insurance Program and accelerate the rollout of areas for the indigent health program; - Reduce by one half the prices as of July 2002 of medicine commonly used by the poor by increasing the number and type of distribution points; and - Pass legislation on domestic violence and anti-trafficking of women. A monitoring body composed of presidential advisers and assistants will provide quarterly status reports on the above action items to the Legislative-Executive Development Advisory Council. The first review commenced in March 2002 and a status report is expected to be released at the end of July 2002. PHILIPPINE STOCK EXCHANGE COMPOSITE INDEX. In January 2002, due to increased investor participation, the Philippine Stock Exchange Composite Index finished the month at 1,361.94, or 16.6% higher than December 2001. In February 2002, growing optimism for an economic recovery, the announcement of better- than-expected gross domestic product ("GDP") and gross national product ("GNP") growth for 2001 and the improvement of the US economy during the fourth quarter of 2001, resulted in the composite index finishing the month at 1,406.22, or 3.2% higher than January 2002. However, an increase in inflation to 3.6% year-on-year in March from 3.5% in February, which ended seven consecutive months of decreasing inflation, and increasing world crude oil prices brought on by rising tensions in the Middle East, contributed to a decline in the composite index to 1,346.09 at the end of April 2002. Weaker than expected corporate earnings and continuing volatility of the Peso contributed to a further decline in the composite index in June 2002, which ended the month at 1,156.4. GNP/GDP. In the first quarter of 2002, real GDP grew at a rate of 3.8% compared to a rate of 2.9% during the same period in 2001. Real GNP grew at a rate of 4.9% in the first quarter of 2002 compared to 3.4% in the first quarter of 2001. These growth rates reflect the current administration's macroeconomic strategy implemented last year which includes a budget deficit reduction program, as well as lower interest and inflation rates. INFLATION. From 3.8% in January 2002, the year-on-year inflation slowed to 3.0% in June 2002. Inflation continues to be benign despite the recent adjustments in domestic oil prices, in part because the adjustments have not been passed on to transport charges. Food prices also remained soft given ample supply, and the nominal exchange rate remained broadly stable given improving inflows. Reductions in Bangko Sentral's policy interest rates and efforts to maintain fiscal discipline, which have led to lower market lending rates and lower cost of capital for businesses, also had a favorable impact on inflation. Equally important, demand-pull inflationary pressures continue to be subdued due in part to current levels of unemployment and spare capacity as well as restrained, though improving, domestic demand. On January 1, 2002, Bangko Sentral officially adopted inflation targeting as the framework for monetary policy in the Republic, replacing the previous framework of monetary targeting. Under this new framework, Bangko Sentral will be committed to achieving the Government's average annual inflation targets of 4.5% to 5.5% for 2002 and 2003. PRICES, EMPLOYMENT AND WAGES. The consumer price index ("CPI") increased by an average of 6.1% to 161.6 in 2001 from 152.3 in 2000. The CPI increased by 1.2% to 166.3 in June 2002 from December 2001. In April 2002, the unemployment rate rose to 13.9% compared to 13.3% in April 2001. The total number of unemployed persons increased to 4.9 million in April 2002, from 4.5 million in April 2001. The average national unemployment rate for 2001 was 11.1% while the average unemployment rate for Metro Manila for 2001 was 17.2%. Eleven of the Republic's administrative regions have adopted increases in the minimum wage ranging from P3 to P20 per day. Metro Manila adopted an increase to the minimum wage in the amount of P30 per 12
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day. The P30 per day increase in the minimum wage for Metro Manila was in the form of an emergency cost of living allowance and was divided into two P15 per day increases that became effective in November 2001 and February 2002, respectively. INTEREST RATES. Currently, the overnight borrowing rate is 7.0% and the overnight lending rate is 9.25%. These are the lowest interest rate levels in ten years and have been cumulatively lowered by 800 basis points since December 2000. For 2001, the 91-day Treasury bill rate averaged 9.86%. As of the last auction held on June 10, 2002, the 91-day Treasury bill rate was 4.78%. The 91-day Treasury bill rate averaged 5.89% for the first six months of 2002 compared to 10.12% for the first six months of 2001. Bank lending rates averaged 10.58% for the first four months of 2002. PESO/US$ EXCHANGE RATE. Following the stabilization of market conditions towards the end of 2001, the Peso strengthened against the US dollar during the first five months of 2002. In January 2002, the Peso averaged P51.410/US$1 and continued to appreciate to reach an average of P50.99/US$1 in April 2002. The local currency broke the P50.0/US$1 barrier on 7 May 2002, ending the day at P49.903/US$1, due mainly to sustained remittances by OFWs combined with stronger regional currencies, particularly the Japanese yen and Thai baht. As of June 24, 2002, the exchange rate was P50.210/US$1. BANKING SYSTEM NON-PERFORMING LOANS. Non-performing loans as a percentage of total loans of commercial banks was 18.8% in October 2001, 18.8% in November 2001 and 17.4% in December 2001. The non-performing loan ratio increased to 18.3% in January 2002, 18.4% in February 2002 and decreased to 18.0% in March 2002. As of December 19, 2001, Equitable PCI had fully repaid its P30 billion in loans from Bangko Sentral. As of January 9, 2002, Philippine National Bank ("PNB") had repaid P1.1 billion of its P25 billion in loans from Bangko Sentral. On May 3, 2002, a Memorandum of Agreement was signed between the Lucio Tan group, PNB, the Philippine Deposit Insurance Corporation ("PDIC") and the Government on a program of reorganization and rehabilitation of PNB. Among others, the agreement includes the conversion of the Government's loans to PNB preferred shares which would increase the stake of the Government in PNB to 44.98% and decrease the stake of the Lucio Tan Group to 44.98%. ELECTRIC POWER INDUSTRY REFORM ACT. On February 18, 2002, the Joint Power Commission, comprised of 14 members of Congress tasked to perform certain oversight functions in connection with the Electric Power Industry Reform Act (the "EPIRA"), approved the implementing rules and regulations for the EPIRA. Pursuant to Section 34 of the EPIRA, the Energy Regulatory Commission ("ERC") was given the task of calculating a "Universal Charge" to cover payment of stranded debts in excess of the amounts assumed by the Government under EPIRA as well as other qualified stranded costs which include costs associated with IPP contracts. See "-- Issues Relating to the Purchased Power Adjustment Charge and the Universal Charge". The implementing rules and regulations, as formally signed on February 27, 2002, include: - an exemption from the Universal Charge for households, hospitals and other medical facilities that have their own power generating facilities; - an exemption from the Universal Charge for four years for industries or firms with self-generating plants; and - the elimination of value-added tax on the sale of electricity. In addition, the National Power Corporation's ("NPC") power supply contracts with the distribution utilities and electric cooperatives will be respected. On May 21, 2002, a bill was introduced in the Senate which would amend various provisions of the EPIRA. This bill, if passed, would, among other things: - Give the power of eminent domain to the buyer/concessionaire of NPC's transmission business; - Clarify that the Universal Charge would not be imposed on electricity output produced by a self-generation facility owned and operated by an end-user solely for its own consumption; 13
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- Exempt certain NPC customers from imposition of the purchase power cost adjustment charge and create a ceiling of 42 centavos per kilowatt hour for the amount that may be approved as the amount of the Universal Charge; - Clarify that NPC, the Power Sector Assets and Liabilities Management Corporation ("PSALM"), Transco and any other entity created to privatize NPC's assets will not be subject to national taxes, charges, fees and other assessments arising from the privatization of such assets; - Extend the life of PSALM from twenty five years to thirty five years; and - Clarify that the Republic may guarantee the payment of obligations assumed by PSALM from NPC and that such guarantees shall not count against the maximum amount which the Republic is authorized to guarantee under existing laws. PRIVATIZATION OF THE NATIONAL POWER CORPORATION. A plan for the privatization of NPC was prepared by PSALM and its advisers and was submitted to the Joint Power Commission on December 21, 2001. The plan envisions the privatization of NPC in two stages as called for under the EPIRA. Initially, the transmission business of NPC will be privatized by Transco, an entity established solely for this purpose, followed at a later stage by the privatization of NPC's power generation business by PSALM. Pursuant to Section 8 of the EPIRA, which provides for the transfer of all of NPC's transmission and subtransmission facilities and all other assets related to its transmission operations, including NPC's nationwide franchise for the operation of the transmission system and the grid to Transco, a deed providing for such transfer has been executed by NPC's President and the President of Transco. The effective date of the transfer will be the date of fulfillment or waiver of all the conditions precedent contained in the deed of transfer. Pursuant to Section 49 of the EPIRA which provides for the transfer of all of NPC's existing generation assets, liabilities, independent power producer contracts, real estate and other disposable assets to PSALM, a deed providing for such transfer was executed by NPC's President and the President of PSALM. The effective date of the transfer will be the date of fulfillment or waiver of all the conditions precedent contained in the deed of transfer. Under the terms of the EPIRA, the Joint Power Commission is required to approve the privatization plan. In April 2002, the Joint Power Commission endorsed the plan to privatize the transmission business, however the approval of the plan for the privatization of the generation business has not yet been granted. The target dates for finalizing the privatization are fourth quarter of 2002 and first quarter of 2003 for the transmission business and the generation business, respectively. ISSUES RELATING TO THE PURCHASED POWER ADJUSTMENT CHARGE AND THE UNIVERSAL CHARGE. In an attempt to recover costs incurred in connection with contracts that NPC signed beginning in the early 1990's with various independent power producers ("IPPs"), NPC imposed a purchased power adjustment ("PPA") charge on all of its customers that has increased the price of electricity. NPC's contracts with the IPPs contain various "take or pay" provisions that require NPC to pay for a contracted amount of electricity even if it does not take delivery of it. Because demand for electricity has not reached the levels expected when the contracts were signed, and because of the significant movement in the US dollar - Peso exchange rate since that time, NPC has incurred significant losses relating to these IPP contracts. It is envisioned that the Universal Charge will replace the PPA charge. Recently, the PPA and the proposed Universal Charge have come under intense public and political scrutiny. This scrutiny led President Arroyo to reduce the current average P1.25 PPA/kWh charge to P0.40/kWh on May 8, 2002 until the passage of a law or ERC decision that will lower the average PPA charge. The reduction of the PPA is expected to cause NPC to suffer significant additional losses. While the Arroyo administration recently announced that as a matter of policy the Universal Charge would need to be implemented, there is still opposition from various members of the legislative branch and from the public as to any imposition of a PPA or a Universal Charge. There has also been legislation introduced by the opposition in the Senate that seeks to reduce, and in some instances remove, the Universal Charge. It is unclear whether any of the currently proposed legislation will be passed. See "-- Recent Political Developments -- Potential Change in the Senate Leadership." If the PPA or Universal Charge is significantly lower than the expected P0.40/kWh or eliminated, NPC will need to rely on funding from other sources to continue operations. 14
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Pursuant to the EPIRA, the Government is currently attempting to reduce the burden on NPC imposed by the unfavorable IPP contracts by renegotiating such contracts and the Arroyo administration has announced that certain IPP contracts which the Government has determined to be flawed, may result in legal action against the relevant IPPs. ANTI-MONEY LAUNDERING ACT OF 2001. On December 14, 2001, the Financial Action Task Force (the "FATF") wrote to the Republic noting positively the efforts taken by the Republic to strengthen its anti-money laundering system. As a result, the FATF decided not to impose additional counter measures on the Republic at that time. In the letter the FATF also noted certain areas for improvement, including a reduction in the P4 million threshold amount for covered transactions, the expansion of the list of predicate offenses and expansion of the instances for access to deposit accounts. During the FATF Asia-Pacific meeting held in January 2002, the Republic presented its position paper to the FATF addressing the FATF's concerns with the Anti-Money Laundering Act. The Republic plans to address the FATF's concerns through the Act's implementing rules and regulations. While the FATF has welcomed the continued progress made by the Republic to combat money laundering, the FATF has stated that the progress had not yet been enough to remove the Republic from the list of "non-cooperative countries and territories". Further to its efforts to combat money laundering, Bangko Sentral issued a circular in January 2002 endorsing a Model Anti-Money Laundering Manual for banks and other covered institutions. The Manual adopted guidelines to support governments, law enforcement agencies and international bodies, such as the FATF, in their efforts to combat money laundering. On March 13, 2002 the implementing rules and regulations (IRRs) of the Anti-Money Laundering Act of 2001 were signed by the Congressional Oversight Committee and took effect on April 2, 2002. The IRRs address the four concerns raised by the FATF relating to the efficacy of the Act. The Republic presented a progress report to the FATF in June 2002 to demonstrate how the Act is being administered in the hope of being removed from the list of "non-cooperative countries and territories". Despite recognizing that the Republic has made progress in combating money-laundering, the FATF, in its report identifying non-cooperative territories dated June 21, 2002, decided that the Republic should remain on the list for further monitoring. THE CONSOLIDATED FINANCIAL POSITION. For the first quarter of 2002, preliminary figures indicate that the consolidated financial position (not including Bangko Sentral) recorded a deficit of P57.7 billion, or 6.0% of GDP at current market prices. The Government accounted for P61.2 billion of the deficit. GOVERNMENT REVENUES AND EXPENDITURES. Government revenues for the first quarter of 2002 were P125.1 billion, of which P108.6 billion were tax revenues and P16.5 billion were non-tax revenues. Revenue collections were P10.6 billion lower than the budgeted amount, primarily due to a P12.9 billion revenue shortfall at the Bureau of Internal Revenue which was partially offset by the Bureau of the Treasury which collected P3.4 billion more than was expected. The Bureau of Internal Revenue shortfall was caused primarily by the reduction in interest income caused by lower interest rates and lower corporate income tax collections resulting from the introduction of certain aspects of the Compensation Tax Reform Program. The Bureau of Customs had a P2.5 billion shortfall because of the decline in imports. Government expenditures for the first quarter of 2002 were P186.3 billion, P2.3 billion less than the budgeted amount. Savings to the Government resulting from lower interest rates partly offset increased accounts payable and capital expenditures. Non-interest expenditures were P7.5 billion higher than the budgeted amount. The deficit for the first quarter of 2002 was P61.2 billion compared to the budgeted deficit of P52.9 billion. The monthly deficit for April 2002 was P21.8 billion, which increased the cumulative deficit to P82.9 billion as of April 30, 2002, as a result of increased spending and lower tax collection. In 2001, the Bureau of Internal Revenue implemented improvements to tax administration including the use of audits and documentary stamp tax metering machines and a revised withholding tax system. For 2002 the Bureau of Internal Revenue is studying new measures for implementation including: - Improving the excise tax administration system by establishing electronic links with the country's 20 largest excise taxpayers; and 15
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- Redefining "gross income" for the taxation of certain enterprises and individuals to limit the scope of allowable deductions. - Expanding the scope of audits to include firms whose performance falls below established industry benchmarks. In light of the larger than expected budget deficit, the Government has announced that it will consider expenditure reductions for 2002. A first semester performance review will be undertaken jointly by the Department of Budget and Management and the relevant agencies in July and August 2002, the results of which will be used to determine which programs, activities or projects will be discontinued or downscaled in the second half of 2002. RELATIONSHIP WITH THE IMF. The IMF maintains a close dialogue with the Government, within the framework of a post-program monitoring arrangement ("PPM"). The PPM involves program assessments which are based on a regular review of economic developments and policies rather than the attainment of specific quantitative targets. This arrangement does not involve a financing component. On March 6, 2002, the Executive Board of the IMF concluded a PPM discussion on the Republic and issued a Public Information Notice detailing its findings on April 9, 2002. The IMF stated its support for the Government's adherence to its fiscal deficit targets, its monetary policy, its power industry deregulation program and its proposed legislation relating to the banking industry, such as the Corporate Recovery Act and amendments to the New Central Bank Act. In a review of the Government's fiscal policy, the IMF stated that a rebuilding of Government revenues will be required to restore fiscal balance while maintaining adequate outlays for the Government's socio-economic reform program. The IMF supported a program of strengthened tax administration, but also suggested selective tax increases to aid in the rebuilding of Government revenues. Other routes suggested by the IMF to increase fiscal health included an increase in the value-added tax rate, a reworking of the bureaucracy, reforms in procurement practices and addressing existing imbalances in pension funds run by the Government. The IMF's latest PPM review is ongoing. DEBT. The Republic borrowed a total of P150.7 billion during the period from January to May 2002, up 73.9% from the same period last year. The increase was due primarily to the frontloading of external commercial borrowings by the Government to take advantage of the favorable external market conditions, which significantly reduced spreads on the Republic's sovereign bonds. On the domestic front, the Government issued predominantly longer-term commercial paper. Its issuance of Treasury Bonds for the first five months of the year grew by 15.3% on a year-on-year basis to P89 billion, as compared with the 68.4% decline in the issuance of Treasury Bills to P6.6 billion during the same period. The policy to increase external funding brought the borrowing mix for the five-month period to a ratio of 59.4% in favor of external borrowings, compared to 100% domestic borrowings during the same period in 2001. In June 2002, the Republic received the proceeds of the $300 million 8.375% global bonds due 2009. CREDIT RATINGS. On April 4, 2002 Standard & Poor's revised its outlook on the Republic's long term foreign currency rating to stable from negative, crediting the Government's improved economic management under the Arroyo administration and the Republic's adequate external liquidity. This follows the upgrade by Moody's on February 4, 2002 when Moody's upgraded its outlook on the Republic's long term foreign currency rating to stable from negative, crediting the Republic's success in meeting its fiscal targets and a stronger economic outlook. Fitch Ratings affirmed its foreign and local currency ratings for the Republic in June 2002. CORE POLICIES OF THE ARROYO ADMINISTRATION. In addition to the items agreed upon in the National Socio-Economic Summit of 2001, the Arroyo Administration has set out several other broad policy objectives which are discussed below. MEDIUM-TERM PHILIPPINE DEVELOPMENT PLAN. In its Medium-Term Philippine Development Plan for 2001-2004, the Government has stated that its primary policy objectives are: - Comprehensive human development and protecting the vulnerable; - Good governance and rule of law; 16
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- Agricultural and fisheries modernization with sound equity; and - Macroeconomic stability and equitable growth based on free enterprise. COMPREHENSIVE HUMAN DEVELOPMENT AND PROTECTING THE VULNERABLE. The goal of the Arroyo administration is to eradicate poverty by the end of the decade. The Arroyo administration's five core strategies to fight poverty are: - Asset reform programs or the redistribution of physical and resource assets, particularly land and credit. - Human development services, particularly basic education, health, shelter, water and electricity. - Social protection of the poorest and most vulnerable sectors and communities through social welfare and assistance, local safety nets, social security and insurance. - Participation of the poor in governance. - Security and protection against violence, including in the home. The plan calls for expanding the access of low-income groups to health care, education, vocational and technical training, housing and shelter programs, and population management and reproductive health initiatives. The plan also calls for an alleviation of regional disparities by directing more resources to poorer parts of the country. Special attention will be given to Mindanao to promote peace and economic development in the region. GOOD GOVERNANCE AND RULE OF LAW. To ensure good and effective governance, the Government plans institutional reforms to heighten accountability, decrease graft and corruption in procurement, guarantee political stability through the electoral and judicial process, and promote peace and order through a modernization of the national police and armed forces. The plan also reaffirms the Government's intention to abide by international commitments, including those under the ASEAN Free Trade Area-Comprehensive Effective Preferential Tariff, the World Trade Organization, and the Asia-Pacific Economic Cooperation forum. These international commitments include: - removing quantitative restrictions (import quotas or prohibition on imports) and conversion of these restrictions into equivalent tariffs; - maintaining current regulations on market access with respect to the financial sector, telecommunications, transport and tourism; - strengthening financial market supervision through training of banking supervisors and securities regulators; - assessing the banking supervisory regimes; - reforming the pension systems; - improving credit rating agencies' ability to channel timely and accurate information to capital markets and strengthening financial disclosure standards; - developing domestic bond markets; - strengthening corporate governance; - designing a voluntary action plan for supporting freer and stable capital flows; and - supporting privatization efforts through institutional strengthening and investment programs. The Republic's compliance with its international commitments helps to strengthen the country's economic performance and support the economies of other Asian nations. For instance, in 1996, the Republic enacted Republic Act 8178 which authorized the replacement of all quantitative restrictions on agricultural 17
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imports (except rice) with tariffs. To promote more trade between the Philippines and other Asian countries, the tariffs will be reduced by 24% over a period of 10 years. AGRICULTURAL AND FISHERIES MODERNIZATION WITH SOUND EQUITY. To raise agricultural productivity and rural household incomes, the plan calls for the full implementation of the Agriculture and Fisheries Modernization Act of 1997 before the end of this decade. This Act includes increased research and development in the agriculture and fishing industries, rural industrialization, and the accelerated development of infrastructure facilities like irrigation and farm-to-market roads. As agriculture is modernized, safeguards will be put in place to ensure that intensified production activities do not undermine the integrity of the environment. MACROECONOMIC STABILITY AND EQUITABLE GROWTH BASED ON FREE ENTERPRISE. The plan calls for macroeconomic stability and sustained growth of income and employment across sectors and socio-economic groups. The plan aims to avoid unexpected surges in unemployment and declines in income through fiscal, monetary, financial, and exchange rate policies coordinated to achieve a low inflation rate and a sound balance of payments position. The plan includes an expansion of microfinance and small-to-medium enterprise credit, acceleration of improvement in information and communications technology, development of tourism infrastructure, and outreach and social safety net programs. The plan also aims to remove barriers to private investments, including power costs, through the recently enacted Electric Power Industry Reform Act, which became effective on June 26, 2001. See "-- Recent Economic Developments -- Electric Power Industry Reform Act". The following is a description of the principal elements of the plan relating to macroeconomic stability. Fiscal Policy: Sustainability and Discipline. The Government's immediate objective is to reduce its budget deficit. The Government believes that reducing the deficit will reduce interest rates, free resources for private sector investment and reduce the risk of insolvency and illiquidity. To support the Government's development objective, the Government's fiscal deficit reduction program will focus primarily on revenue generating measures, while maintaining prudent public spending. The deficit reduction program will be comprehensive and extend also to Government corporations and local government units. The components of the fiscal deficit reduction program are: - increasing revenue collection efficiency to finance the Government's development projects, especially those intended to benefit the poor; and - reducing Government expenditures without sacrificing anti-poverty programs and vital social services such as education and training, health care and agricultural modernization. Revenue generating measures will include improved tax administration and privatization of Government assets, including: - Restructuring the road users' tax, redefining automobile categories and increasing automobile fees and charges; - Installing electronic metering machines to collect the proper documentary stamp taxes; - Establishing large taxpayer's offices, initially in three major cities in the country; - Accelerating efforts to pursue settlements of Bureau of Internal Revenue receivables and conducting intensive audits of various taxpayers and industries; and - Disposing government assets, including shares in National Power Corporation, Philippine National Oil Company -- Energy Development Corporation and Philippines National Construction Corporation. Cost-cutting measures include: - Re-imposing a 25% mandatory reserve on all government agencies; - Re-enactment of the 2000 budget for calendar year 2001; 18
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- Austerity measures such as staff reduction through attrition and postponing construction of new buildings and the purchase of furniture and motor vehicles; and - Deferment of low priority projects and the scaling down of special purpose funds. These measures combined with expected increases in tax and privatization revenues beginning in 2001, are expected to offset any decline in Government revenues which may result from declines in the Republic's economic performance. Even as Government spending is reduced, poverty alleviation programs and other core programs will be protected. Increasingly, a larger proportion of the budget and more discretionary expenditures will be channeled to social services. To further its fiscal policy, the Arroyo administration will propose legislation which will: - Restructure the excise tax system on motor vehicles to remove the bias based on engine displacement of all types of vehicles, and modify the tax system to include new automotive technologies, such as electric cars and cars propelled by other types of fuel; - Rationalize grants of fiscal incentives; - Index excise tax rates to inflation; - Include reforms for effective governance, including the institutionalization of a professional and dynamic bureaucracy; - Grant the President authority to reorganize the executive branch; and - Rationalize the pay structure between the public and private sectors with mitigation measures to enable the smooth implementation of the reengineering of the organizations in such sectors. Monetary Policy: Price Stability. Monetary policy is geared to achieving price stability, which is expected to result in a low and stable inflation rate over the medium term and is expected to lead to a reduction in lending rates, which will encourage firms to invest and thus generate jobs. Low interest rates also benefit farmers and small enterprises that borrow to meet their working capital requirements. The Government's fiscal deficit reduction program is intended to ensure that the efforts of the monetary authorities to lower inflation and lending rates are not negated by a persistent budget deficit. The Government will seek to achieve greater coordination between its fiscal and monetary policies. On January 1, 2002, Bangko Sentral formally shifted from monetary targeting to inflation targeting as the framework for monetary policy. The policy shift is expected to strengthen Bangko Sentral's commitment to achieve its primary mandate of price stability and enhance the level of transparency and credibility in the conduct of monetary policy. As a strategy for conducting monetary policy, Bangko Sentral believes that inflation targeting offers the following advantages: - provides a clearer definition of the objective of monetary policy; - enhances transparency in the conduct of monetary policy; - provides simplicity and, therefore, is easier for the public to understand; - guides or anchors inflationary expectations; - improves the accountability and credibility of monetary authorities to the inflation objective; and - leads to greater probability of success in achieving the inflation objective. External Policy: Stable Foreign Exchange Rate. The Government's foreign exchange rate policy is to maintain a comfortable level of reserves, keep the capital markets open and maintain a market-determined exchange rate. These policies are intended to increase the economy's resilience against volatile capital flows and facilitate the Government's realization of its macroeconomic targets. 19
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Financial Sector Policy: Banking and Corporate Governance Reforms and Capital Market Development. The Government intends to pursue policies that strengthen the regulatory framework and minimize systemic risks. Because a sound banking system cannot exist when the corporate sector is weak, policies that will enhance corporate governance are needed to complement banking sector reforms. To prepare the financial system for the challenges posed by globalization, Bangko Sentral implemented major reforms in financial regulation and legislation geared toward improving the legislative and regulatory framework, using a risk-based approach to banking supervision and encouraging mergers and consolidations. Bangko Sentral has identified several areas in its regulatory and supervisory framework that need to be strengthened further to ensure the banking system's ability to absorb shocks. Aside from the ongoing efforts to amend the New Central Bank Act, as described below, Bangko Sentral proposes implementing the newly formulated rules and regulations of the General Banking Law. In the area of banking supervision, Bangko Sentral continues its effort to shift to consolidated bank supervision and risk-based examinations. Bangko Sentral has recognized the need to upgrade the banking system's settlements and payments system into real-time gross settlements. The envisaged system would cover equities, fixed income, money and foreign exchange markets, and effect final settlement on a real-time basis. The Asian financial crisis has also shown the importance of developing primary and secondary capital markets that can provide financial instruments other than bank credit to the corporate sector. The development of the capital markets is also necessary to raise domestic savings, especially long-term savings, to finance domestic investments. The poverty reduction agenda requires supporting the development of microfinance and agriculture related credit institutions that are in the best position to provide credit to small and agricultural enterprises. The Government is pursuing the enactment of the following legislation to further its policies, strengthen financial and corporate governance and develop the capital markets: AMENDMENTS TO THE NEW CENTRAL BANK ACT The key changes being sought in the New Central Bank Act of 1993 are aimed at three main objectives: - Promoting greater stability of the banking system: - Grants Bangko Sentral authority to provide loans in situations that, in the judgement of the Monetary Board, could lead to illiquidity of the banking system; - Treats an overdraft as an emergency loan; - Removes the five-day overdraft privilege granted to banks; and - Allows the placement of banks into receivership and liquidation: - Upon submission of a report by Bangko Sentral to the Monetary Board that the capital to risk asset ratio falls below 2% for 90 consecutive days; or - Upon a public announcement by banks of a bank holiday and suspension of payments of its deposit liabilities for more than 30 days. - Strengthening supervisory capability of Bangko Sentral: - Authorizes the Monetary Board to allow Bangko Sentral to conduct examinations or inquiries into all deposit accounts of more than P50 million or its foreign currency equivalent, if there are reasonable grounds to believe that there is irregular activity in the account; - Allows Bangko Sentral to conduct examinations of the books of banks at least once every calendar year and permits the governor or the supervisory department head or his deputy to authorize these examinations; - Imposes stiffer penalties for violations of banking laws; 20
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- Imposes stiffer sanctions on banks and expands the sanctions to their subsidiaries and affiliates; - Extends the requirements of a balanced currency position to banks' subsidiaries and affiliates; and - Authorizes Bangko Sentral to impose service fees on financial institutions. - Enhancing Bangko Sentral's effectiveness: - Removes the five-year time limit on Bangko Sentral's tax exemption as provided in Sections 125 and 126 of R.A. No. 7653; - Grants the Monetary Board the authority to provide a compensation structure based on job evaluation and wage surveys; and - Allows banks to engage in financial derivatives subject to regulations, as may be issued by the Monetary Board, to restrain banks from taking speculative positions with respect to future fluctuations in foreign exchange rates. The bill proposing the amendments to the New Central Bank Act is pending in Congress. AMENDMENTS TO THE PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT - Strengthens the supervisory authority of the Philippine Deposit Insurance Corporation over insolvent banks, provides assistance to facilitate the sale of assets and assumption of liabilities of banks under receivership and increases the amount of the permanent insurance fund. The Philippine Deposit Insurance Corporation is consulting with Bangko Sentral on the specific terms of the proposed amendments. CORPORATE RECOVERY ACT - Seeks a pre-negotiated, fast-tracked, and court-supervised rehabilitation plan and provides a procedure for the dissolution and liquidation of companies; - Repeals certain sections of the old insolvency law that pertain to corporate bankruptcies while retaining individual bankruptcy procedures; and - Includes some specific measures such as allowing either a debtor or a creditor to initiate formal insolvency proceedings. Two competing bills relating to the Corporate Recovery Act are being considered by Congress. One bill is being discussed in the House and the other bill is being discussed in the Senate. RATIONALIZATION OF TAXATION ON THE FINANCIAL SECTOR - Restructures gross receipts and documentary stamp taxes to minimize their cascading effect, particularly on frequently traded instruments and assets; - Eliminates distortions arising from the non-uniform tax treatment of financial institutions and assets; and - Rationalizes tax treatment of pension funds, insurance and investments houses to assist in the development of the capital market. The Department of Finance has drafted a proposed bill and is preparing to submit it to Congress. REVISED INVESTMENT COMPANY ACT - Establishes a comprehensive regulation scheme to permit investment companies to serve their role in the capital formation process, and at the same time to prevent abuses and protect investors in such companies; and 21
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- Provides a favorable framework where investment companies can operate to facilitate the flow of investments from sources within the country and abroad, and to broaden securities ownership by Filipinos. Four competing bills relating to the Investment Company Act have been submitted to Congress. PRE-NEED PLAN CODE - Provides the regulatory framework for the efficient regulation of the pre-need industry (investing today for things like education costs which will be needed in the future) including the method of determining and computing reserves and the annual valuation of pre-need products. Five competing bills relating to the Pre-need Plan Code have been submitted to Congress. Two bills are being considered in the House and three bills are being considered by the Senate. SECURITIZATION ACT - Offers investment participation in asset-backed securities products to a wider range of investors; and - Creates special purpose vehicles as the transferees of assets and the issuer of securities, removes gross receipts and documentary stamp taxes, creates a regulatory system, and removes the one-year right to redeem, although foreclosure will be considered a final settlement of an obligation. A draft bill relating to the Securitization Act is being reviewed by the Department of Finance and the SEC. ASSET MANAGEMENT COMPANY - Authorizes the creation of special purpose asset vehicles to acquire non-performing loans, real estate and other assets for the benefit of financial institutions. A bill relating to asset management companies has been approved by the Senate. SECURITIES REGULATION CODE - Amends the mandatory tender provision from 15% to 35%; - Amends the broker-director prohibition by allowing the broker-dealers' self-regulatory organization to issue rules; - Transfers the authority to impose net capital and other capital adequacy ratios on broker/dealers from the SEC to the self-regulatory organization; - Repeals the broker-dealer segregation; and - Repeals the rule which allows the automatic listing of securities in all exchanges. Three bills relating to the Securities Regulation Code have been submitted to Congress. Two bills are being considered by the Senate and one bill is being considered by the House. PERSONAL EQUITY AND RETIREMENT ACCOUNT BILLS - Provides for the taxability or non-taxability of an individual's personal equity and retirement account; and - Provides rules relating to contributions, earnings from investments and distribution of benefits upon retirement. Eight bills relating to personal equity and retirement accounts have been submitted to Congress. Four bills are being considered by the House and four bills are being considered by the Senate. 22
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INCOME TAX SYSTEM REFORM - Proposes uniform taxation on income of corporations, self-employed individuals and professionals by changing the tax base and lowering the income tax rate; and - Amends the tax on salaried individuals by increasing the amount of exempt income, lowering the marginal income tax rate and simplifying tax compliance and administration rules. Three bills relating to income tax reform have been submitted to Congress. Two bills are being considered by the House and one bill is being considered by the Senate. EXCISE TAX INDEXATION AND RECLASSIFICATION - Proposes to adjust the excise tax on cigarettes and alcohol products to more accurately reflect prevailing market values; and - Proposes to reclassify the excise tax based on net retail price and on a three-year interval. The Department of Finance has prepared a draft bill relating to excise tax indexation and reclassification, which is currently being reviewed. FISCAL INCENTIVE SYSTEM REFORM - Rationalizes fiscal incentives granted under all existing laws including those incentives granted under laws creating economic zones; and - Provides for an indicative tax expenditure budget. Five bills relating to fiscal incentive system reform have been submitted to Congress. Two bills are being considered by the House and three bills are being considered by the Senate. CUSTOMS MODERNIZATION BILL - Amends certain sections of the Tariff and Customs Code to enable the Bureau of Customs to accept documents and electronically transmit acknowledgement receipts, approvals and responses. A draft bill relating to customs modernization has been submitted to Congress. HISTORY, LAND AND PEOPLE HISTORY. Spain governed the Philippines as a colony from 1521 until 1898. On June 12, 1898, during the Spanish-American War, the Filipinos declared their independence. The United States claimed sovereignty over the Philippines under the 1898 Treaty of Paris, which ended the Spanish-American War, and governed the Philippines as a colony until 1935 when the Philippines became a self-governing commonwealth. On July 4, 1946, the Philippines became an independent republic. GEOGRAPHY AND GENERAL INFORMATION. The Philippine archipelago, located in Southeast Asia, comprises over 7,000 islands and a total land area of approximately 300,000 square kilometers. The Republic groups the islands into three geographic regions: Luzon in the north, covering an area of 141,395 square kilometers, Visayas in the center, covering an area of 55,606 square kilometers, and Mindanao in the south, covering an area of 101,999 square kilometers. The Republic is also divided into 15 administrative regions. Forests cover approximately 50% of the Philippines and 47% of the country is under agricultural cultivation. In 2000, agriculture, forestry and fishery employed 37.1% of the labor force and provided 4.4% of the Republic's export earnings (including exports of agriculture-based products). The Republic is generally self-sufficient in staple cereals and is a major exporter of certain agricultural products. Manufactured goods comprise the most important category of the Republic's exports, accounting for 89.2% of the Republic's exports in 2000. Electronics, machinery and transport equipment and garments have historically been the Republic's leading manufactured exports. 23
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As of May 1, 2000, the Republic's population was approximately 76.5 million. The Republic's population grew at an average annual rate of 2.4% from 1996 to 2000. The Republic's capital, Manila, located in Luzon, has an estimated population of approximately 1.7 million. The cities of Manila, Pasay, Kalookan, Quezon City, Mandaluyong, Las Pinas, Muntinlupa, Marikina, Pasig and Makati, together with seven surrounding municipalities, make up the National Capital Region or Metro Manila. Metro Manila, the most populous of the administrative regions, has an estimated population of approximately 9.9 million people. The majority of Filipinos have Malay ethnic origins. Filipino culture also includes strong Spanish, Chinese and American influences. Filipino is the national language, but English is the primary language used in business, government and education. The population speaks over 80 other dialects and languages, including Chinese and Spanish. Based on a 1999 survey, the Republic's literacy rate is 95.1%, ranking among the highest in Asia. Christianity, primarily Roman Catholicism, is the predominant religion in the Philippines. A significant Muslim minority lives in Mindanao. GOVERNMENT AND POLITICS GOVERNMENTAL STRUCTURE. Since 1935, the Republic has had three Constitutions. The country adopted the current Constitution by plebiscite in February 1987 after the ousting a year earlier of Ferdinand E. Marcos, who had ruled for 20 years, in favor of Corazon C. Aquino after a people's uprising. The new Constitution restored a presidential form of government comprised of three branches: executive, legislative and judicial. The principal features of each branch are as follows: - Executive -- A President, directly elected for a single, six-year term, exercises executive power. If the President dies, becomes permanently disabled or is removed from office or resigns, the Vice President acts as President for the remainder of the term. If the Vice President cannot serve, the President of the Senate or, if he cannot serve, the Speaker of the House of Representatives, acts as President until the election and qualification of a new President or Vice President. The person acting as President for any remaining term may, if elected, serve a six-year term as President. In May 1998, the country elected Joseph Estrada as President and Gloria Macapagal-Arroyo as Vice President. In January 2001, after a people's uprising, there was a transition of power to President Arroyo. See "-- Recent Political Developments". - Legislative -- The Congress, comprised of the Senate and the House of Representatives, exercises the country's legislative authority. The Constitution mandates a Senate of 24 members and a House of Representatives of not more than 250 members, all elected by popular vote. Senators serve for a term of six years and members of the House of Representatives for a term of three years. The country held elections for 13 Senators and all members of the House of Representatives in May 2001. The other 11 Senators were elected in May 1998. - Judicial -- The Supreme Court and any lower courts established by law exercise the country's judicial authority. The country's court system is a multi-tiered system of courts of general jurisdiction that includes the Supreme Court and the Court of Appeals. Below these, the Regional Trial Courts, Metropolitan Trial Courts, the Municipal Trial Courts and the Municipal Circuit Trial Courts constitute courts of original jurisdiction. Special or administrative tribunals and quasi-courts also exercise judicial functions. Included in this category are constitutional commissions, the Sandiganbayan, which handles Government graft and corruption cases, the Court of Tax Appeals, the Shari'ah courts, which handle matters governed by Islamic law, and administrative agencies that handle specialized areas such as labor relations and securities regulation. A Chief Justice and 14 Associate Justices constitute the Supreme Court, which supervises all lower courts and related personnel. The Supreme Court and the Court of Appeals may review decisions and 24
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rulings of lower courts and quasi-judicial tribunals. The President appoints each Supreme Court or Court of Appeals justice and lower court judge from at least three candidates nominated by the Judicial and Bar Council. POLITICAL PARTIES. The Republic's multi-party system currently has several registered political parties. For the May 2001 elections, President Arroyo was supported by the People Power Coalition which was comprised of the Lakas-NUCD-UMDP, the Liberal Party, Reporma, Promdi, Aksyon Demokratiko and other pro-Arroyo administration parties. In turn, parties identified with former President Estrada formed the Puwersa ng Masa ("Force of the Masses") coalition which was comprised of the Nationalist People's Coalition, the Laban ng Demokratikong Pilipino, Partido ng Masang Pilipino, the People's Reform Party and the Kilusang Bagong Lipunan (the party organized by the late President Ferdinard Marcos and his political allies). ADMINISTRATIVE ORGANIZATION. As of April 30, 2001, there were 1,626 local Government units, 16 regions, 79 provinces, 114 cities, 1,496 municipalities (subdivisions of provinces) and 41,943 barangays (villages, which are the basic units of the political system) -- comprising the country's basic political and administrative structures. Highly urbanized cities function independently of any province, while other cities are subject to the administrative supervision of their home provinces. The Government is mainly organized around the 20 departments and department-equivalent agencies of the executive branch, which implement the various programs and projects of the Government. The departments and department-equivalent agencies are in turn organized into sectors. [Enlarge/Download Table] SECTOR MAJOR DEPARTMENTS ------ ------------------------------------------------------------ Social services................... Health; Education, Culture and Sports; Labor and Employment; Social Welfare and Development Economic services................. Agriculture; Agrarian Reform; Energy; Environment and Natural Resources; Tourism, Trade and Industry; Public Works and Highways; Transportation and Communications; Science and Technology Defense........................... National Defense General public services........... Foreign Affairs; Finance; Budget and Management; Interior and Local Government; Justice; National Economic and Development Authority; Office of the Press Secretary Constitutional offices............ Elections; Audit; Civil Service; Office of the Ombudsman; Human Rights Autonomous Region of Muslim Mindanao................. Not applicable Cordillera Administrative Region.......................... Not applicable Agencies attached to the various departments perform regulatory, policy formulation and coordination functions. The projects and programs in the Autonomous Region of Muslim Mindanao and Cordillera Administrative Region are implemented by various departments from different sectors. The total budget allocated for projects in the Autonomous Region of Muslim Mindanao is P5.4 billion for 2002. For 2002, P50.0 million or 0.9% of the budget is allocated to infrastructure projects, with locally-funded road and flood control projects implemented by the Department of Public Works and Highways. The remainder of the budget is allocated for governance and institutions development projects. The total budget allocated for projects in the Cordillera Administrative Region is P4.0 billion for 2002. For 2002, P517.7 million or 12.9% of the budget is allocated to infrastructure projects, with locally-funded road and flood control projects implemented by the Department of Public Works and Highways. Approximately 20% of the budget is allocated for agriculture, natural resources and agrarian reform projects. The remainder of the budget will pay for social reform and development projects. 25
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The Government also owns or controls a number of corporations that provide essential goods and services and work with the private sector to encourage economic growth and development. Traditionally restricted to basic public services and national monopolies, the number of Government corporations grew from 13 in the 1930s to 301 by 1984. In 1988, the Government launched a reform program to reduce the number of Government corporations, establishing the legal and policy framework for the country's privatization program. See "-- Government and Politics -- Privatization". Currently, there are approximately 100 Government corporations, including subsidiaries. Each of these corporations is attached to a department for policy and program coordination. The Government closely monitors 14 major non-financial Government corporations engaged in various major business activities by recording their individual contribution to the public sector deficit or surplus position and other financial indicators. These 14 corporations and their areas of activity are as follows. [Download Table] GOVERNMENT CORPORATION BUSINESS ACTIVITY ---------------------- ---------------------- National Power Corporation.................................. power Philippine National Oil Company............................. holding company, power National Electrification Administration..................... electric utilities Metropolitan Waterworks and Sewerage System................. water utilities Local Water Utilities Administration........................ water utilities Philippine Export Zone Authority............................ area development National Food Authority..................................... agriculture National Irrigation Administration.......................... agriculture Philippine National Railways................................ transportation Light Rail Transit Authority................................ transportation Philippine Ports Authority.................................. transportation National Development Company................................ holding company National Housing Authority.................................. housing Home Insurance Guaranty Corporation......................... housing insurance As of March 30, 2001, these 14 corporations had aggregate domestic and external debt of approximately P1,097 billion, which comprised virtually all the debt incurred by Government corporations. To facilitate the implementation of better business practices, the Government intends to expand its monitoring of Government corporations, including to the National Home Financing Corporation, which provides mortgage financing for low-income housing. The Government currently records the contribution to the public sector deficit or surplus, and other financial indicators, of three Governmental financial institutions that provide credit to enterprises in support of public policies including two specialized Government banks -- the Development Bank of the Philippines and the Land Bank of the Philippines. For a description of the Development Bank and the Land Bank, see "-- The Philippine Financial System -- Structure of the Financial System". The third institution, the Trade and Investment Development Corporation of the Philippines (formerly Philippine Export and Foreign Loan Guarantee Corporation), guarantees foreign currency loans to exporters and contractors. As of March 30, 2001, the monitored Governmental financial institutions had aggregate domestic and external debt of approximately P353.4 billion. PRIVATIZATION. The Government has privatized a number of Government corporations. The country's privatization program has broadened the ownership base of Government assets and developed the domestic capital markets. Prior to 2001, the Committee on Privatization, an executive office under the office of the President chaired by the Secretary of Finance, oversaw the Government's privatization program. The Committee was responsible for formulating privatization policies and guidelines, identifying disposable assets, monitoring progress and approving the price for and the buyers of the assets. The marketing of assets was handled by 26
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disposition entities, including the Asset Privatization Trust, the Presidential Commission on Good Government and the National Development Company. The division of responsibilities between the Committee on Privatization and the disposition entities served as a check and balance mechanism and enhanced transparency. The terms of the Committee on Privatization and the Asset Privatization Trust expired on December 31, 2000. Since January 1, 2001, the Privatization Council has been responsible for the privatization of the remaining Government corporations scheduled to be privatized. The Privatization Council, a policy-making body, is chaired by the Secretary of Finance and includes representatives from the Department of Tourism, The Department of Trade and Industry, the Department of Budget and Management, the Department of Justice, the National Economic and Development Authority, the National Treasury and the Presidential Commission on Good Government. Along with the Privatization Council, there are two new disposition entities, the Land Bank of the Philippines, which is responsible for the disposition of the financial assets previously held by the Asset Privatization Trust, and the Privatization and Management Office, which is responsible for the disposition of physical assets. To maintain a check and balance system, all disposition entities must submit their privatization plans to the Privatization Council for its review and approval and file a report containing the results of each privatization transaction. 27
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The following table summarizes certain information regarding the Government's principal privatizations to date. [Enlarge/Download Table] GOVERNMENT OWNERSHIP AFTER GROSS PRIVATIZATION YEAR OF SALE SALE PROCEEDS(1) ---------------------------------- --------------- ------------------- (IN BILLIONS) International Corporate Bank...... 1987; 1993 0.0% P 2.2 Union Bank of the Philippines..... 1988; 1991; 1992 13.0 1.3 Philippine National Bank.......... 1989; 1992; 1995; 1996; 2000 16.0(2) 6.5 Philippine Plaza Holdings......... 1991 0.0 1.5 Manila Electric Company........... 1991; 1994; 1997 30.0(3) 16.3 Philippine Airlines............... 1992 0.97(2) 10.7 Petron Corporation................ 1993; 1994 40.0 25.0 National Steel Corporation........ 1994; 1997 12.5 17.1 Paper Industries Corporation of the Philippines................. 1994 8.0 2.4 Philippine Shipyard and Engineering Corporation..................... 1994 9.0 2.1 Fort Bonifacio Development Corporation..................... 1995 45.0 39.2 Metropolitan Waterworks and Sewerage System................. 1997 --(4) --(4) Philippine Associated Smelting and Refining Corp. ................. 1999 4.26 3.3 Philippine Phosphate Fertilizer Corporation..................... 2000 0.0 3.1 --------------- Source: Privatization Council. (1) Net remittances to the Government upon the privatization of its assets are, in certain circumstances, less than the gross proceeds from the sale of such assets, based on agreements between the Government and the privatized entities. (2) Government ownership was diluted in 2001 by a pre-emptive rights offering. (3) Government ownership includes ownership by agencies and Government financial institutions. (4) The privatization of Metropolitan Waterworks and Sewerage System involved awarding two 25-year concessions to rehabilitate, expand and operate the system. Over the term of the concessions, the concessionaires obligated themselves to make improvements by, among other things, providing for water services, sewerage services, and interconnection facilities between themselves and paying concession fees to the Metropolitan Waterworks and Sewerage System. The estimated cost of these improvements is $7.0 billion, which is expected to be incurred over the 25-year concession period. As of May 31, 2002, 26 Government corporations, 144 assets handled by the Privatization and Management Office and certain personal property assets held by the Presidential Commission on Good Government were scheduled for privatization. With the initial privatization phase approximately 80% complete, during the remainder of 2002 the Government plans to focus on selling its remaining shares in Manila Electric Company, privatizing the Philippine National Construction Corporation, disposing of certain assets held by the Presidential Commission on Good Government and selling the International School of Manila property. The current economic slowdown, however, may, in the near term, affect investors' propensity to invest, or the prices that they are willing to pay for the Government's assets, which would thereby reduce the proceeds received from any privatized assets. In the medium term, the Government plans to privatize the National Power Corporation, PNOC Energy Development Corporation, the International Broadcasting Corporation, Food Terminal Inc. and the Philippine Postal Corp. In the long term, the Government intends to concentrate on establishing public-private partnerships to provide social services, especially in the health, education and pension sectors and also on privatizing the operations and management functions of selected Government corporations. The Government has also encouraged "build-operate-transfer" arrangements and other initiatives to enable the private sector to meet more of the country's infrastructure needs, especially in the power, water, transportation and telecommunications sectors. By pursuing its privatization goals, the Government hopes the private sector will provide for infrastructure and social needs, simultaneously stimulating the economy and relaxing the demand on public resources. 28
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From January through May 2002, remittances to the National Treasury from privatizations amounted to P140 million, increasing total remittances to approximately P128 billion as of May 31, 2002. The Government's privatization proceeds target for 2002 is P5 billion. INTERNATIONAL RELATIONS. The Philippines places a high priority on expanding global trade through a multilateral framework of principles and rules that respect national policy objectives and the level of economic development of individual countries. The country's participation in various international organizations, like the World Trade Organization of the United Nations, the IMF, the International Bank for Reconstruction and Development, also known as the World Bank and the Asian Development Bank, allows it to encourage liberalized global trade and investment and to discuss financial and development issues that will affect the Republic's economic development. The following table shows the Republic's capital participation in, and loans obtained from, major international financial organizations. MEMBERSHIP IN INTERNATIONAL FINANCIAL ORGANIZATIONS [Enlarge/Download Table] AS OF DECEMBER 31, 2001 ------------------------------------------------- DATE OF CAPITAL CAPITAL PAID LOANS NAME OF ORGANIZATION ADMISSION SUBSCRIBED SHARE IN OUTSTANDING -------------------- ------------- ---------- ------- ------------ ----------- (IN MILLIONS, EXCEPT FOR PERCENTAGES) International Monetary Fund(1)...... November 1945 SDR 879.9 -- SDR 879.9 SDR 1,559.2 International Bank for Reconstruction and Development(2).................... December 1945 $6,844.0 0.4% $48.9 $3,802.1 Asian Development Bank(3)........... December 1966 $1,091.9 2.4% $78.0 $7,994.3 --------------- (1) Source: IMF. (2) Source: World Bank Annual Report. (3) Source: Asian Development Bank Annual Report. The Philippines also promotes its economic interests through close ties with neighboring countries and membership in the following regional organizations: - the Association of Southeast Asian Nations ("ASEAN"); - South East Asia, New Zealand and Australia Central Banks; - South East Asian Central Banks; - ASEAN Free Trade Area; - Asia-Pacific Economic Cooperation; and - Executives Meeting of East Asia and Pacific Central Banks. The Philippines seeks advances in bilateral relations and peaceful solutions to regional issues through frequent consultations, visits and cooperative activities. For example, in 1995, the country adopted a series of bilateral codes of conduct regarding the Spratly Islands, an archipelago in the South China Sea claimed by several Asian countries, to reduce the chances of accidental conflict and is working toward the adoption of a regional code of conduct with ASEAN and China. Nevertheless, several incidents related to the disputed islands have occurred since 1995. PHILIPPINE ECONOMY Overview Like many developing countries after World War II, the Philippines protected local industry from foreign competition through measures such as import tariffs and quotas, hoping to replace imported finished goods with domestically produced goods over time. Successive Governments also intervened in the country's economic affairs by imposing quantitative trade barriers, price controls and subsidies. Initially, the economy grew rapidly, with real GNP growing at an average rate of 5.8% per annum from 1970 to 1980 largely due to increased exports and Government investments. Infrastructure spending increased, and state ownership of 29
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commercial enterprises became prevalent. By the early 1980s, however, the country faced ballooning budget deficits, growing levels of foreign and domestic borrowing, rising inflation, climbing interest rates, a depreciating Peso, declining investment capital, and slowing economic growth or, at times, a contraction in GDP. The country's unstable political situation during that period, highlighted by the assassination of opposition leader Benigno Aquino in 1983, exacerbated its economic problems. The general optimism brought about by the peaceful removal of the unpopular Marcos administration in 1986 helped economic recovery. Real GNP grew by 3.6% in 1986, increasing to 7.2% in 1988 before decelerating to 0.5% in 1991. The deceleration was caused principally by underlying macroeconomic imbalances, compounded by supply bottlenecks, natural disasters, political instability, the global recession and the Persian Gulf crisis. The Government of President Corazon Aquino, who came to power in 1986, embarked on a stabilization program aimed at preventing an upsurge in inflation, controlling the fiscal deficit and improving the external current account position. The economy responded favorably to these measures, posting increases in real GNP, investments, private consumption and imports in 1992. The Aquino administration also recognized that the country's economic difficulties in large part resulted from its protectionist policies. The Aquino administration, therefore, initiated reforms to open the economy to market forces and reduce the size and role of the Government in the Philippine economy. The Government of President Fidel Ramos, who assumed office in 1992, accelerated the reform efforts initiated by the Aquino administration. Despite undertaking a review of a number of the policies and programs initiated by previous administrations, the Estrada administration continued many of the financial policies and market-oriented reforms of the Aquino and Ramos administrations. Prior to the onset of the Asian economic crisis in mid-1997, real GDP grew at an average annual rate of 5.0% from 1994 to 1996 while real GNP grew at an average annual rate of 5.8% during the same period. The exchange rate between the Peso and the US dollar was stable, ranging from P24 to P27 per US dollar from 1994 to 1996. The consolidated public sector financial position swung from a deficit of P8.4 billion in 1994 to a surplus of P7.3 billion in 1996. Total net foreign investments increased from $1.6 billion to $3.5 billion during the same period and the unemployment rate declined from 9.5% in 1994 to 8.6% in 1996. After the onset of the Asian economic crisis in mid-1997, the Philippines experienced economic turmoil characterized by currency depreciation, a decline in the performance of the banking sector, interest rate volatility, a significant decline in share prices on the local stock market and a reduction of foreign currency reserves. These factors led to a slowdown in the Philippine economy in 1997 and 1998 with real GDP contracting by 0.6% in 1998. The Philippines' economic performance in 1998 was also adversely affected by the decline in agricultural production caused mainly by the effects of the drought related to the El Nino phenomenon and later the typhoons related to the La Nina phenomenon. In response, the Government adopted a number of policies to address the effects of the Asian economic crisis by strengthening the country's economic fundamentals. In 1999 and 2000, a number of the Philippines' economic indicators showed more favorable results. In 1999, real GNP growth improved to 3.7% while real GDP expanded by 3.4%. The trend continued in 2000 with real GNP growing by 4.8% and GDP growing by 4.4%. In 2001, the real GNP grew by 3.4% and the real GDP grew by 3.2%. The GNP and GDP growth for 2001 remained strong, although growing at a slower pace than 2000, primarily due to strong agricultural output, a strong services sector and rapid growth in the telecommunications industry, which was able to offset a manufacturing sector suffering from weak global demand. The Arroyo administration has prepared a medium-term development plan for 2001 to 2004 to fight poverty and unemployment. Major features of the medium-term development plan are devoted to ensure good and effective governance and improve public finances to reduce the number of poor families and reduce unemployment. See "Core Policies of the Arroyo Administration." 30
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Relationship with the International Monetary Fund Multilateral organizations have generally supported the structural reforms undertaken by the Philippines. In February 1998, an IMF review mission cited the strong performance of the Philippine economy and the implementation of key structural reforms as evidence of the country's commitment to sustaining economic growth. Consequently, on March 28, 1998 the IMF allowed the Philippines to draw down the final $331 million available under the Philippines' last extended fund facility. The drawdown marked the end of more than three decades of conditional lending by the IMF to the Republic. All borrowings from the IMF have been carried out in the name of Bangko Sentral and all repayments under the facility with the IMF are made by Bangko Sentral. The Republic and the IMF entered into a two-year precautionary stand-by facility in March 1998 that made available $1.4 billion to support the country's economic program for 1998-1999. Because of the regional economic slowdown, in September 1998 the Government activated the stand-by facility. To draw funds, the Republic had to satisfy certain quantitative performance criteria with respect to base money, public sector borrowing, net international reserves, approvals of medium- and long-term external borrowings and short-term public sector debt. The criteria were based on assumptions regarding macroeconomic growth, inflation and the current account. As of December 31, 2000, a total of $1.1 billion had been disbursed under the stand-by facility. The stand-by facility expired in December 2000. The Philippines is currently engaged in a post-program monitoring arrangement with the IMF. See "Recent Economic Developments -- Relationship with the IMF". GDP AND MAJOR FINANCIAL INDICATORS Gross Domestic Product Gross domestic product, or GDP, measures the market value of all final goods and services produced within a country during a given period and is indicative of whether the country's productive output rises or falls over time. By comparison, gross national product, or GNP, measures the market value of all final goods and services produced by a country's citizens during a given period, whether or not the production occurred within the country. Economists show GDP in both current and constant market prices. GDP at current market prices values a country's output using the actual prices of each year, whereas GDP at constant market prices values output using the prices from a base year, thereby eliminating the distorting effects of inflation. 31
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The following tables present the GDP of the Philippines by major sector at both current and constant market prices. GROSS DOMESTIC PRODUCT BY MAJOR SECTORS (AT CURRENT MARKET PRICES) [Enlarge/Download Table] PERCENTAGE OF FIRST GDP QUARTER ------------- 1997 1998 1999 2000 2001 2002 1997 2001 -------- -------- -------- -------- -------- ------- ----- ----- (IN BILLIONS, EXCEPT AS INDICATED) Agriculture, fishery and forestry...................... P 458.0 P 451.6 P 510.5 P 525.9 P 549.4 P134.8 18.8% 15.1% -------- -------- -------- -------- -------- ------ ----- ----- Industry sector Mining and quarrying.......... 17.3 20.1 18.0 21.2 21.2 6.6 0.7 0.6 Manufacturing................. 540.3 582.9 644.0 745.9 831.6 199.1 22.3 22.8 Construction.................. 156.1 157.4 162.9 174.4 182.4 46.6 6.4 5.0 Electricity, gas and water.... 66.1 78.0 86.1 97.5 116.3 28.4 2.7 3.2 -------- -------- -------- -------- -------- ------ ----- ----- Total................. 779.8 838.4 911.1 1,039.0 1,151.5 280.7 32.1 31.6 Service sector Transportation, communications and storage................ 118.9 139.7 159.3 199.0 247.6 63.4 4.9 6.8 Trade......................... 317.2 361.2 419.3 473.0 517.5 118.5 13.1 14.2 Finance....................... 114.5 130.3 141.6 149.1 160.1 40.6 4.7 4.4 Ownership of dwellings and real estate................ 168.0 189.3 208.9 221.9 236.7 62.7 6.9 6.5 Private services.............. 233.7 280.6 335.4 381.6 433.7 112.6 9.6 11.9 Government services........... 236.7 274.1 290.8 319.8 343.6 85.3 9.7 9.4 -------- -------- -------- -------- -------- ------ ----- ----- Total................. 1,189.0 1,375.0 1,555.3 1,743.4 1,939.1 483.2 49.0 53.3 -------- -------- -------- -------- -------- ------ ----- ----- Total GDP....................... P2,426.7 P2,665.1 P2,976.9 P3,308.3 P3,640.0 P898.8 100.0% 100.0% ======== ======== ======== ======== ======== ====== ===== ===== Total GNP....................... P2,528.3 P2,802.1 P3,136.2 P3,496.9 P3,853.3 P966.1 Total GDP (in billions of US dollars)(1)................... $ 82.3 $ 65.2 $ 76.2 $ 74.9 $ 71.4 $ 17.5 GDP per capita (in US dollars)(1)................... $1,116.3 $ 864.5 $ 988.8 $ 951.7 $ 888.7 $215.5 --------------- Source: National Statistical Coordination Board. (1) Calculated using the average exchange rate for the period indicated. See "-- Monetary System -- Foreign Exchange System". 32
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GROSS DOMESTIC PRODUCT BY MAJOR SECTORS (AT CONSTANT MARKET PRICES(1)) [Enlarge/Download Table] PERCENTAGE OF FIRST GDP QUARTER ------------- 1997 1998 1999 2000 2001 2002 1997 2001 ------ ------ ------ -------- -------- ------- ----- ----- (IN BILLIONS, EXCEPT PERCENTAGES) Agriculture, fishery and forestry................ P 185.0 P 173.2 P184.5 P190.7 P197.7 P 51.4 20.7% 20.0% ------ ------ ------ -------- -------- ------ ----- ----- Industry sector Mining and quarrying.... 10.3 10.6 9.7 10.7 10.0 3.4 1.2 1.0 Manufacturing........... 223.7 221.2 224.7 237.3 244.1 56.9 25.0 24.7 Construction............ 57.3 51.8 51.0 51.7 49.8 12.1 6.4 5.0 Electricity, gas and water................ 29.4 30.3 31.3 32.6 32.8 7.1 3.3 3.3 ------ ------ ------ -------- -------- ------ ----- ----- Total................ 320.7 313.9 316.7 329.0 336.7 79.5 35.9 34.0 Service sector Transportation, communications and storage.............. 55.1 58.6 61.7 68.2 74.2 18.6 6.2 7.5 Trade................... 135.3 138.6 145.4 152.9 161.5 37.0 15.0 16.3 Finance................. 43.5 45.4 46.3 46.7 47.3 11.8 4.9 4.8 Ownership of dwellings and real estate...... 47.3 48.1 48.4 48.3 48.1 12.3 5.3 4.9 Private services........ 61.0 63.9 67.6 70.9 74.0 18.6 6.8 7.5 Government services..... 45.2 46.2 47.7 48.5 49.8 12.8 5.1 5.0 ------ ------ ------ -------- -------- ------ ----- ----- Total................ 387.5 400.9 417.0 435.5 454.8 111.1 43.4 46.0 ------ ------ ------ -------- -------- ------ ----- ----- Total GDP................. P 893.2 P 888.0 P918.2 P958.4 P989.3 P241.9 100.0% 100.0% ====== ====== ====== ======== ======== ====== ===== ===== Total GNP................. P 930.7 P934.5 P969.3 P1,012.6 P1,051.1 P261.1 Percentage change in GDP..................... 5.2% (0.6)% 3.4% 4.0% 3.2% 3.8%(2) Percentage change in GNP..................... 5.3% 0.4% 3.7% 4.5% 3.4% 4.9%(2) --------------- Source: Economic and Social Statistics Office; National Statistical Coordination Board. (1) Based on constant 1985 prices. (2) Changes as compared to the first quarter of 2001. The following table shows the percentage distribution of the country's GDP at constant 1985 prices. DISTRIBUTION OF GROSS DOMESTIC PRODUCT BY EXPENDITURE (AT CONSTANT MARKET PRICES(1)) [Enlarge/Download Table] FIRST QUARTER 1997 1998 1999 2000 2001 2002 ----- ----- ----- ----- ----- ------- Personal consumption................................ 76.6% 79.7% 79.1% 78.8% 78.6% 79.6% Government consumption.............................. 8.0 7.9 8.2 7.8 7.5 8.1 Capital formation Fixed capital..................................... 25.8 23.1 21.8 21.0 20.4 23.8 Changes in stocks................................. 0.5 (0.9) (0.8) (0.3) 0.5 0.5 ----- ----- ----- ----- ----- ----- Total capital formation........................ 26.3 22.2 21.0 20.7 20.9 24.3 Exports of goods and services....................... 52.1 41.4 41.5 46.9 43.0 44.1 Imports of goods and services....................... (63.6) (54.5) (51.3) (51.3) (49.1) (47.0) Statistical discrepancy............................. 0.6 3.4 1.5 (2.8) (1.3) (5.3) ----- ----- ----- ----- ----- ----- Total............................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== ===== --------------- Source: Economic and Social Statistics Office; National Statistical Coordination Board. (1) Based on constant 1985 prices. 33
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PRINCIPAL SECTORS OF THE ECONOMY Agriculture, Fishery and Forestry AGRICULTURE. The country's principal agricultural products include cereals, such as palay (rice) and corn, cultivated primarily for domestic use, and crops, such as coconuts, sugar cane and bananas, produced for both the domestic market and export. The Philippines' diverse agricultural system contains many coconut plantations farmed by agricultural tenants and workers, sugar haciendas farmed either under labor administration or by tenants, and large "agro-business" plantations devoted mainly to non-traditional export crops such as bananas and pineapples. Rice, corn and coconuts each account for approximately one-quarter of the country's cultivated area. The country occasionally needs to import rice and corn. Through its economic stimulus activities, the Government has begun to implement a number of programs to boost agricultural output. The principal programs are as follows: - The Agriculture and Fisheries Modernization Act of 1997, which is the Government's blueprint for the modernization of the agriculture and fisheries sectors. The Act provides for, among other things, the establishment of development zones for production, processing and marketing agencies responsible for the enforcement of quality standards, the simplification of access to credit, and the grant of tariff exemptions on the importation of certain equipment. - A national productivity program designed to increase the yield and competitiveness of the five major agriculture subsectors: rice, corn, high value crops, livestock and fisheries. - Improvement of support services to farmers, particularly irrigation, roads, post-harvest facilities, training, credit and marketing assistance. - Stabilization of prices and supply of agricultural commodities. FISHERY. The Philippines' fishing industry contributes significantly to the country's foreign exchange earnings. Pollution of coastal waters as a result of population growth, mining activities and wasteful fishing methods have damaged the marine and inland resources in some areas in recent years, leading to decreases in production. FORESTRY. The country's forests, one of the Philippines' main natural resources, contain a large quantity of hardwood trees. Over the years population growth, shifting cultivation, illegal logging and inadequate reforestation depleted the forests, leading to a Government-imposed total ban on logging activity and the subsequent continuing decline of the forestry subsector. RECENT RESULTS. The agriculture, fishery and forestry sector grew by 3.7% in 2001 compared to growth of 3.4% in 2000 at constant market prices, due to the positive performance of the agriculture and fishery subsectors, offsetting the decrease in the forestry subsector. The agriculture industry subsector grew by 4.0% in 2001 compared to growth of 3.6% in 2000. In addition to favorable weather conditions, the Government's revitalized support for agriculture through various means including the distribution of certified seeds, rehabilitation of irrigation facilities and the use of modern equipment, especially in the fishery subsector, contributed to the growth in the agriculture and fishery subsectors. The forestry subsector contracted by 33.5% in 2001 compared to a 19.5% contraction in 2000. For 2001, the agriculture, fishery and forestry sector contributed 0.7% to the total GDP growth rate of 3.2%. In the first quarter of 2002, the agriculture, fishery and forestry sector grew by 4.4% compared to 3.0% in the first quarter of 2001 at constant market prices. The increase was attributable primarily to the favorable weather experienced during the period, the Government's efforts to improve productivity (particularly for palay and corn) and the elimination of tariffs on fertilizer. Industry Sector The sector comprises, in order of importance, manufacturing, construction, electricity, gas and water and mining and quarrying. The sector contributed approximately 35.9% of GDP in 1997 and 34.0% in 2001, at constant market prices. The sector grew by 1.3% in 2001, compared to growth of 4.9% in 2000. This lower 34
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growth was mainly due to the global economic slowdown. In the first quarter of 2002, the industry sector grew by 1.9% compared to 0.6% in the first quarter of 2001. MINING AND QUARRYING. The mining and quarrying subsector contracted by 6.6% in 2001, compared to growth of 10.0% during 2000. This considerable decline was caused primarily by the decline in growth of gold production and contraction in the production of stone quarrying, clay and sandpits and other non-metallic mining. Increases in the growth of chromium and other metallic mining did not have a significant impact on the growth of the subsector as a whole. MANUFACTURING. The country's manufacturing subsector comprises three major industry groups: - consumer goods, including the food, footwear and garment industries; - intermediate goods, including the petroleum, chemical and chemical product industries; and - capital goods, including the electrical machinery and electronics industries. The following table presents, at constant market prices, the gross value added, which equals the value of sales minus the cost of raw material and service inputs, for the manufacturing sector by industry or industry group. GROSS VALUE ADDED IN MANUFACTURING BY INDUSTRY GROUP (AT CONSTANT MARKET PRICES(1)) [Enlarge/Download Table] FIRST QUARTER INDUSTRY/INDUSTRY GROUP 1997 1998 1999 2000 2001 2002 ----------------------- -------- -------- -------- -------- -------- ------- (IN MILLIONS) Food manufactures................. P 76,318 P 78,744 P 83,049 P 84,590 P 88,227 P 23,363 Beverage industries............... 8,961 9,003 8,896 9,175 8,820 1,367 Tobacco manufactures.............. 5,779 5,538 5,681 5,886 6,133 1,220 Textile manufactures.............. 5,320 5,085 4,660 4,128 3,778 832 Footwear/wearing apparel.......... 12,356 12,699 10,801 12,327 12,801 1,863 Wood and cork products............ 2,969 2,769 2,451 2,220 2,060 403 Furniture and fixtures............ 2,822 2,881 2,852 3,172 3,232 676 Paper and paper products.......... 2,038 2,132 2,033 2,627 2,258 491 Publishing and printing........... 3,233 3,093 3,055 2,964 2,967 1,060 Leather and leather products...... 215 224 222 229 254 61 Rubber products................... 2,088 1,849 2,065 2,115 1,743 484 Chemical and chemical products.... 14,276 14,169 13,868 13,523 14,648 3,099 Petroleum and coal products....... 39,753 37,472 37,137 39,896 38,929 7,268 Non-metallic mineral products..... 7,925 6,614 5,834 5,625 5,215 1,236 Basic metal industries............ 5,223 4,745 4,206 3,600 3,851 795 Metal industries.................. 4,841 4,231 4,272 4,645 5,257 961 Machinery (except electrical)..... 3,756 3,540 3,555 4,219 5,326 1,133 Electrical machinery.............. 18,179 19,284 22,277 27,678 29,009 8,281 Transport equipment............... 2,744 1,810 1,984 2,125 2,325 454 Miscellaneous manufactures........ 4,876 5,269 5,769 6,527 7,249 1,819 -------- -------- -------- -------- -------- ------- Gross value added in manufacturing................ P223,672 P221,151 P 224,667 P 237,271 P 244,082 P 56,866 ======== ======== ======== ======== ======== ======= --------------- Source: Economic and Social Statistics Office; National Statistical Coordination Board. (1) Based on constant 1985 prices. 35
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Higher interest rates in the wake of the currency crisis led to a 1.1% decline in the manufacturing subsector in 1998, compared to 4.2% growth in 1997. From 1998 through the first quarter of 1999, weak demand and high operating costs forced a number of businesses to close or cut back operations. Import-dependent industries, including transport equipment and rubber, chemical, petroleum and coal products, experienced declining output. Export-related industries, however, including furniture and fixtures, electrical machinery and leather products, grew, as did food manufactures. In 1999, the manufacturing subsector reversed its 1.1% contraction in 1998 to record a growth of 1.6%. The sector recorded positive growth for the last three quarters of 1999. The major gainers for the sector included electrical machinery, which registered a growth of 15.5% and transport equipment, which registered a growth of 9.6%. The decliners in the subsector were led by footwear/wearing apparel, which recorded a 14.9% contraction. Manufacturing accounted for, on average, approximately 24.8% of GDP at constant market prices from 1997 to 2001. The subsector grew by only 2.9% in 2001, compared to 5.6% growth in 2000. This reduction was caused primarily by lower growth in the manufacture of apparel, furniture and electrical machinery and by contraction in the manufacture of beverages, paper products, rubber products, petroleum and coal products, and non-metallic mineral products. Gains in growth in the manufacture of food, tobacco, leather products, non-electrical machinery, chemical products and basic metal products contributed positively to the manufacturing subsector, although they were unable to fully offset the declines in the subsector as a whole. In the first quarter of 2002, the growth rate in the manufacturing subsector decreased to 2.0%, compared to 3.4% in the first quarter of 2001, due to a slowdown in exports. Food processing, textiles, footwear and apparel, non-metallic mineral products and electrical machinery showed improved results while wood and cork products, beverages, paper and paper products, rubber products, leather products, petroleum and coal products and non-electrical machinery products were all negatively affected by the slowdown in exports. CONSTRUCTION. The construction subsector's contribution to GDP, at constant market prices, declined from 6.4% in 1997 to 5.0% in 2001. The construction subsector declined by 3.6% in 2001 compared to an increase of 1.4% in 2000. This reduction was primarily because public construction recorded a 6.1% decrease reversing a 6.6% increase in 2000. For 2001, the industry sector contributed 0.6% to the total GDP growth rate of 3.4%. Growth in the construction subsector increased to 1.5% in the first quarter of 2002 compared to a contraction of 9.7% in the first quarter of 2001. ELECTRICITY, GAS AND WATER. Electricity, gas and water accounted for 3.4% of GDP at constant market prices, on average, from 1997 to 2001. The subsector grew by 0.7% in 2001, compared to 4.2% in 2000. The slower growth was attributable primarily to reduced electricity demand and decreased water sales resulting from the rehabilitation of water mains and pipes. The electricity, gas and water subsector contracted by 8.8% in the first quarter of 2002 compared to growth of 4.0% in the first quarter of 2001. With limited natural resources available for energy development, the Philippines satisfies most of its energy needs with imports of coal and oil, which it then converts into electric power. In August 1996, the Government deregulated oil prices by introducing an automatic mechanism that adjusted petroleum product prices monthly in accordance with Singapore posted prices. In February 1997, the Downstream Oil Industry Deregulation Act of 1996 superseded the automatic-pricing mechanism and allowed domestic oil prices to fluctuate freely based on market conditions. On November 5, 1997, however, the Philippine Supreme Court declared the act unconstitutional on the basis that it inhibited fair competition, encouraged monopolies, interfered with free market forces and nullified the principle of deregulation. On February 10, 1998, the Government enacted a new oil industry deregulation act, which allowed oil prices to fluctuate and eased the entry of new players into the industry. The 1998 oil industry deregulation act has increased investment activity and attracted new players into the downstream oil industry, with approximately P4 billion of new investments in LPG refilling, bulk storage and retail outlets since deregulation of the industry. Prices of petroleum products have fluctuated in response to market prices and competition has increased. Retail petrol prices declined by a total of 50-65 centavos per 36
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litre between October 1998 and January 1999 in response to increased competition, however prices have since increased due to the increase in world crude oil prices. Increases in world crude oil prices led the country to increase coal imports and decrease oil imports. The following table sets out the country's energy consumption by source. ENERGY CONSUMPTION BY SOURCE [Enlarge/Download Table] ENERGY SOURCE 1997 1998 1999 2000 2001 ------------- ----- ----- ----- ----- ----- (% OF TOTAL CONSUMPTION) Domestic sources Oil................................................. 0.0% 0.1% 0.1% 0.0% 0.1% Coal................................................ 1.7 2.0 1.6 1.6 1.9 Hydro............................................... 4.5 3.6 5.5 5.0 5.1 Geothermal.......................................... 5.5 6.4 7.5 7.8 7.2 Other(1)............................................ 30.3 28.6 28.8 27.8 30.7 ----- ----- ----- ----- ----- Total domestic sources...................... 42.0 40.7 43.5 42.2 45.0 ----- ----- ----- ----- ----- Imported sources Oil................................................. 52.9 53.7 50.2 45.5 46.0 Coal................................................ 5.1 5.5 6.3 12.3 10.1 ----- ----- ----- ----- ----- Total imported sources...................... 58.0 59.2 56.5 57.8 56.1 ----- ----- ----- ----- ----- Total..................................... 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== --------------- Source:Department of Energy. (1) Other includes gas, fuelwood and biomass fuel. National Power Corporation is the principal entity engaged in the development, generation and transmission of electric power on a nationwide basis. It establishes and maintains transmission line grids, generating facilities and inter-island connections throughout the Republic. In August 1998, the Department of Energy proposed a number of measures to restructure the Republic's electric power industry, including: - eliminating subsidies for less populated service areas, which are currently generated by requiring all service areas to pay the same prices for electricity; - restructuring and privatizing the National Power Corporation; - creating competition in power generation; and - providing free access to the transmission and distribution system. The reforms, especially the restructuring and privatization of National Power Corporation, would allow distributors and large customers to choose their electricity supplier. Commercial, regulatory and tariff reforms will be put in place in response to the additional burdens on the regulatory agency, the distribution sector and the other industry players resulting from increased competition in the industry. The Electric Power Industry Reform Act, which provides a legal framework for the restructuring of the electric power industry and the privatization of the assets and liabilities of the National Power Corporation, was enacted on June 8, 2001. See "-- Recent Economic Developments -- Electric Power Industry Reform Act and -- Privatization of the National Power Corporation". Service Sector The sector comprises, in order of importance, trade, finance and housing, private services, transportation, communications and storage and Government services. The service sector remains the largest contributor to 37
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GDP, having contributed approximately 45.1% of GDP at constant market prices from 1997 to 2001. In the first quarter of 2002, the services sector grew by 4.8%, compared to growth of 4.6% in the first quarter of 2001. TRADE. The trade subsector, which consists of wholesale and retail activities, accounted for an average of 15.8% of GDP at constant market prices from 1997 to 2001. The trade subsector grew by 5.6% in 2001 at constant market prices, compared to 5.2% growth in 2000. This increase was caused by a notable growth in wholesale trade, which accounts for one-fourth of trade output. The trade subsector grew by 5.3% in the first quarter of 2002 compared to growth of 5.6% in the first quarter of 2001 at constant market prices. FINANCE AND HOUSING. The finance subsector's contribution to GDP at constant market prices decreased slightly from 4.9% in 1997 to 4.8% in 2001. The housing subsector's contribution to GDP at constant market prices, decreased from 5.3% in 1997 to 4.9% in 2001. The finance subsector grew by 1.2% in 2001, compared to a growth of 0.9% in 2000. The bank subsector grew by 0.8% in 2001 as it slightly recovered from its 0.4% contraction in 2000. For a discussion of the country's financial system, see "-- The Philippine Financial System". Insurance, the only subsector which had positive gains in each quarter of 2000, grew by 4.4% in 2000. With sustained positive gains from the second to the fourth quarter of 2000, non-banking activities were able to withstand the turbulence in financial services as that subsector posted growth of 3.1% in 2000 against 2.4% in 1999. The positive development in the non-banking activities resulted from the expansion in financing activities and the increasing use of credit cards. The finance subsector contracted by 0.7% in the first quarter of 2002 compared to growth of 3.3% in the first quarter of 2001, at constant market prices. The housing subsector contracted by 0.5% in 2001, compared to zero growth in 2000, at constant market prices. This was primarily caused by the 10.0% contraction of the real estate market, which was partially offset by the 2.0% growth in the ownership of dwellings. The ownership of dwellings and real estate subsector grew by 3.0% in the first quarter of 2002 at constant market prices compared to a contraction of 2.7% during the same period of last year. PRIVATE SERVICES. The private services subsector includes educational, medical and health, recreational and hotel and restaurant services. The subsector contributed an average of approximately 7.3% to GDP at constant market prices each year from 1997 to 2001. Except for business services and personal services, which experienced higher rates of growth, all private services experienced lower, although positive, growth. The private services subsector grew by 5.0% in the first quarter of 2002 compared to growth of 4.8% in the first quarter of 2001. TRANSPORTATION, COMMUNICATIONS AND STORAGE. The geographically diverse nature of the Philippines makes it important to have well developed road, air and sea transportation systems. The Government has encouraged, "build, operate and transfer", projects and other private sector initiatives to provide basic transportation services and strengthen inter-regional and urban links to ensure safe and efficient movement of people and goods. Important ongoing "build, operate and transfer" projects (or variants of such projects) and joint venture projects include the Metro Rail Transit Project, Metro Manila Skyway Project, the Manila-Cavite Expressway Project and the South Luzon Expressway Extension. The country's road network is the most important transportation system carrying about 65% of freight and 90% of passenger traffic. The road network covers more than 200,000 kilometers. About 1.8 million vehicles use the road network, including 236,000 vehicles for public use, principally in Metro Manila. Traffic remains congested in the capital region, despite traffic management and various engineering measures. The Government has built and continues to emphasize alternative road networks and mass rapid urban transit rail facilities to ease the problem. In 2000, approximately 1,194 miles of national roads were constructed or rehabilitated while 7,100 lineal meters of bridges along national roads were converted to permanent structures. This improved the percentage of paved national arterial roads to 77% and that of national secondary roads to 52% at the end of 2000. Usage of the country's rail facilities has declined largely because of the outdated facilities of the Philippine National Railways. The Government has constructed a two-line light-rail transit system in Metro 38
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Manila, financed by a build, lease and transfer arrangement, and has started work on a third line of the light-rail transit system, which is expected to be operational by year 2004 and will provide additional maximum capacity of 500,000 passengers per day for the Metro Manila commuters. In addition to a more conducive environment for private sector participation brought about by the amendment of the Build-Operate-Transfer Law, the light-rail transit system Line 1 South Extension Project is expected to be undertaken under a joint venture agreement. The 27-kilometer extension line will expand the existing light-rail system Line 1 service southward to the cities of Paranaque and Las Pinas and the adjoining municipality of Bacoor. The project will connect the north and south ends of the existing railway system. Four international airports, in Manila, Cebu, Clark and Subic, and 83 other facilities throughout the country help meet the country's air transport needs. The Government plans to upgrade several major airports to international standards and generally to modernize air navigation and communications operations in the country. The new Manila International Airport terminal's project will commence by the end of this year. The Government has formulated a plan for the transition from land-based to satellite-based technology in civil aviation. It approved the implementation of the new communications, navigation surveillance and air traffic management systems project, which will implement satellite-based technology designed to control and manage the air traffic within the respective flight information region. Once financing is obtained and implementation is completed, the system will increase air travel safety, shorten flight duration for air passengers and improve aircraft operating efficiency due to more flexible flight paths and increased airspace capacity. Philippine Airlines, Inc., the primary national air carrier, several smaller domestic airlines and airlines from various countries provide air service to, from and within the country. Philippine Airlines retains a leading position in domestic routes, but since the beginning of 1998, Philippine Airlines has had increasing financial difficulties and labor problems. After suspending operations in September 1998, Philippine Airlines resumed service in October 1998 after management and the unions agreed to, among other things, a 10-year suspension of the collective bargaining agreement, a grant of 20% of the airline's equity to its employees and a guarantee of no salary reductions. On December 7, 1998, the airline submitted a rehabilitation plan to the Philippine Securities and Exchange Commission which included proposals for debt restructuring and forgiveness, capital injection, fleet reduction, manpower adjustments and a spin-off of non-core businesses. In May 1999, the airline submitted a restated rehabilitation plan which was approved by the Philippine SEC. Certain creditors of the airline have objected to the rehabilitation plan and its approval by the Philippine SEC. In June 1999, Lucio Tan, a shareholder of the airline, provided $200 million of equity capital to Philippine Airlines and became its Chief Executive Officer. The airline's finances, however, began to improve in its fiscal year 1999 (ending on March 31, 2000). After registering six consecutive years of losses, Philippine Airlines reported a net profit of P45.8 million in fiscal year 1999. In the fiscal year 2000 (ending on March 31, 2001), the airline realized an 815% rise in profits, registering a net profit of P419 million. The country's geography also requires an effective water transport system to ferry cargo and passengers among islands. Currently, the water transport system handles about 40% of total freight traffic and 10% of total passenger traffic in the Philippines. The regulatory policy during the past decade has been to open the industry to competition, ensuring lower cargo passage rates and improving the quality of service. The Government plans to construct or improve 96 national ports, approximately 300 municipal, feeder and fishing ports and river landings and special handling facilities for grains and bulk cargo in other selected ports. Faced with historical shortages of telephone lines and long waits for basic telephone service, especially outside Metro Manila, the Government opened the telecommunications industry in 1993 to intensify competition and to increase substantially the number of telephone lines and interconnections. The Government has continued to implement programs designed to provide telephone lines, exchanges and transmission facilities to underserved regions of the country. As of December 31, 2001, a cumulative total of more than 6.9 million lines have been installed, which translates to a telephone density of 9.0 main telephone lines per 100 inhabitants. 39
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The country has 11 international long distance providers and five cellular mobile telephone operators, as well as a number of competitors in the local telephone market. The privately-owned Philippine Long Distance Telephone Company ("PLDT") continues to exert strong influence over the telecommunications market through its ownership and operation of the public switch telecommunications network, to which other companies are interconnected. On November 24, 1998, First Pacific Limited ("First Pacific") announced the acquisition of 17.2% of PLDT's issued common shares and an effective 27.4% voting interest. As the phone company's principal shareholder, First Pacific assumed management control. The acquisition was completed in the first half of 1999. First Pacific recently announced the signing of a memorandum of agreement with the group of companies controlled by industrialist John Gokongwei to create a joint venture entity that will own all of First Pacific's assets in the Philippines including the controlling interest in PLDT. The joint venture will be owned 66 2/3% by the Gokongwei group and 33 1/3% by First Pacific. For the year ended December 31, 2001, PLDT's revenues increased 17% to P73.6 billion, although the company reported a net loss due to increased selling and promotional expenses, as well as subsidiary losses. The company's revenues rose again in the first quarter of 2002 to P19.1 billion, representing an increase of 5.8% from revenues of P18.0 billion in the first quarter of 2000. The transport, communications and storage subsector's contribution to GDP, at constant market prices, grew from 6.2% in 1997 to 7.5% in 2001. The subsector grew by 8.8% in 2001, compared to growth of 10.4% in 2000. This reduced growth was caused primarily by decreases in the growth rate of most facets of transportation and storage, most notably a contraction in water transport and a significant decrease in growth of air transport. Growth in communications partially offset the slowdowns in transportation and storage, although the growth rate in communications has declined on a quarterly basis since the first three months of 2001. In the first quarter of 2002, the subsector grew by 9.7%, compared to 10.3% in the first quarter of 2001. Similarly, the combined transport and storage services subsector grew at 2.5% in the first quarter of 2002 due to increased volume of goods moved and passengers carried, compared to the 1.7% growth during the same period in 2001. Storage and services incidental to transport posted a 2.5% gain during the period. Air transport decreased to 5.4% in the first quarter of 2002, from the 14.9% growth registered in the first quarter of 2001. GOVERNMENT SERVICES. Government services was one of the three services subsectors that experienced increased growth in 2001 compared to 2000, increasing from 1.7% to 2.7%. This resulted from the hiring of additional teachers as well as additional compensation for teachers for their election-related duties. The Government services subsector grew by 3.4% in the first quarter of 2002 compared to growth of 3.3% in the first quarter of 2001. PRICES, EMPLOYMENT AND WAGES Inflation The Philippines reports inflation as the annual percentage change in the consumer price index, which measures the average price of a standard "basket" of goods and services used by a typical consumer. In June 1998, the Government began employing a 1994-based CPI basket of goods and services, which since 1999 has been the sole official measurement. For Metro Manila, the 1994 CPI basket consists of 705 commodities. In addition, the 1994 CPI basket for areas outside Metro Manila focuses on provinces or cities. 40
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The following table sets out the principal components of the 1994 CPI basket. PRINCIPAL COMPONENTS OF 1994 CPI BASKET [Download Table] CATEGORY BASKET -------- ------ Food items (including beverages and tobacco)................ 55.1% Rice...................................................... 11.8 Non-food items.............................................. 44.9 Housing and repairs....................................... 14.7 Services.................................................. 12.3 Fuel, light and water..................................... 5.7 Clothing.................................................. 3.7 Miscellaneous............................................. 8.5 The following table sets out the consumer price index and the manufacturing sector's equivalent, the producer price index, as well as the annual percentage changes in each index based on the 1994 CPI basket. CHANGES IN CONSUMER AND PRODUCER PRICE INDEX [Enlarge/Download Table] 1997 1998 1999 2000 2001 2002 ----- ----- ----- ----- ----- ----- Consumer Price Index........................... 124.7 136.8 145.9 152.3 161.6 165.4(1) Increase over Previous Year.................... 5.9% 9.7% 6.7% 4.4% 6.1% 3.5%(2) Producer Price Index for Manufacturing(3)...... 118.7 117.6 125.8 141.5 165.6 160.1(4) Increase/(Decrease) over Previous Year(3)...... 3.5% (0.9)% 7.0% 12.5% 17.0% (2.0)%(5) --------------- Source: National Statistics Office. (1) Preliminary. January through June 2002. (2) Represents the average year on year increase for the six months ended June 30, 2002. (3) Measured by the 1994 PPI benchmark except for 1997, which was measured by the 1992 PPI benchmark. (4) January through March 2002. (5) Represents the average year-on-year increase for the three months ended March 31, 2002. Inflation in 1998 increased because of Peso depreciation and lower agricultural output caused principally by the drought related to the El Nino phenomenon and a number of typhoons related to the La Nina phenomenon. The 1998 inflation rate was 9.7%. The Producer Price Index increased by 7.0% in 1999 from 1998. In December 1999, the monthly inflation rate was 4.3%, down from a high for the year of 11.5% in January 1999. The decline was due primarily to a sharp fall and subsequent stability in food prices resulting from strong performance in the agriculture sector leading to increased food supply, which partially offset the effects of increases in world crude oil prices. The easing of inflationary pressures in the second half of 1999 extended up to the second quarter of 2000. Inflation remained in single digits at 4.4% for 2000 compared with the 6.7% recorded in 1999. Moderate inflation was achieved notwithstanding an increase in economic activity, inflationary pressures arising from wage adjustments and increases in oil prices and transport fares. Inflation was kept low in 2001, at an average of 6.1%, which was below the Government's target of 6.7%. Favorable food and oil prices, stable exchange rates and moderate growth in demand all contributed to low inflation. Implementation of Bangko Sentral's inflation targeting framework for monetary policy formally began in January 2002. Among the changes in the institutional setting of monetary policy was the creation of the Bangko Sentral Advisory Committee, which is scheduled to meet regularly every four weeks to deliberate, discuss and make recommendations to the Monetary Board on the appropriate stance of monetary policy. The Committee may also meet between the regular meetings when necessary. Decisions of the Monetary Board are determined by a majority vote of its members. However, there is no attribution of votes to individual 41
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members in order to emphasize consensus and the collegial process in decision-making. Chaired by the Governor, with the Deputy Governors for banking services and supervision, and the heads of the Research and Treasury Departments as members, the Advisory Committee held its first regular monthly meeting on January 15, 2002. Employment and Wages The following table presents selected employment information for various sectors of the economy. SELECTED EMPLOYMENT INFORMATION(1) [Enlarge/Download Table] FIRST QUARTER 1997 1998 1999(2) 2000(2) 2001(2) 2002(2) ------ ------ ------- ------- ------- ------------- Labor force (in thousands)............ 30,355 31,056 30,759 30,911 32,808 34,075 Unemployment rate..................... 8.7% 10.1% 9.8% 11.2% 11.1% 12.1% Employment share by sector: Agriculture, fishery and forestry..... 40.8% 39.2% 40.1% 37.1% 37.2% 36.8% Industry sector Mining and quarrying................ 0.5 0.4 0.4 0.4 0.4 0.4 Manufacturing....................... 9.9 9.7 9.5 10.0 10.0 9.6 Construction........................ 5.9 5.8 5.4 5.4 5.4 5.3 Electricity, gas and water.......... 0.5 0.5 0.5 0.4 0.4 0.4 ------ ------ ------ ------ ------ ------ Total industry sector....... 16.7% 16.4% 15.8% 16.2% 16.2% 15.7% Service sector Transportation, communication and storage.......................... 6.3 6.6 6.7 7.2 7.3 7.1 Trade............................... 14.9 15.4 15.5 16.3 18.0 18.8 Finance and housing................. 2.5 2.4 2.5 2.6 2.8 2.8 Services............................ 18.7 19.9 19.5 20.5 18.6 18.7 ------ ------ ------ ------ ------ ------ Total services sector....... 42.5% 44.4% 44.2% 46.7% 46.6% 47.5% ------ ------ ------ ------ ------ ------ Total employed......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ====== ====== ====== ====== ====== ====== --------------- Source: Bureau of Labor and Employment Statistics -- Current Labor Statistics; National Statistics Office -- Labor Force Survey. (1) Figures are the average of the applicable statistic for each quarter in the relevant period. (2) Figures generated using 1995 census-based population projections. In 2001, the Filipino labor force totalled 32.8 million people. A total of 866,590 Filipino workers were deployed overseas during 2001, an increase of approximately 3.0% from 2000. The Filipino labor force is relatively young. They are employed primarily in service industries, such as nursing and education, and in manufacturing export industries, such as electronics and garments. Regional tripartite bodies consisting of representatives of Government, businesses and workers establish minimum wage requirements, which vary based on region and industry. Under the law, minimum wage requirements may only be increased once in any twelve month period. The minimum wages for workers in Metro Manila and the surrounding areas are the highest in the country. Across the regions, daily minimum wages range from a low of P114.0 to a high of P280.0. The economic difficulties that began in the second half of 1997, including the slower growth of the country's industrial production, drove the average unemployment rate to 8.7% in 1997 and 10.1% in 1998, before improving to 9.8% in 1999. The unemployment rate increased to 11.2% in 2000 amidst uncertainties over the allegations of corruption surrounding former President Estrada and fears of subsequent economic slowdown. In Metro Manila, where 13.8% of the country's labor force is located, unemployment ranged from 13.8% to 16.3% from 1997 to 1999 and from 16.4% to 18.4% in 2000. In response to the economic slowdown in 42
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2001, employers and workers agreed to the Social Accord for Industrial Harmony and Stability under which they confirmed the commitment to refrain from layoffs, closures, work stoppages or slowdowns except as a last resort. Labor and employment conditions improved in 2001 as the economy grew stronger than expected during the year. The substantially reduced number of strikes, increased rates of deployment of workers overseas and improved legislated wage indicators reflect broadly improved labor, employment and wage conditions during the year. The number of employed persons increased by 6.2% to 29.2 million in 2001 from 27.5 million in 2000, due largely to the strong performance of the services sector, particularly in the wholesale and retail trade sub-sector, as well as the agriculture, fishery and forestry sector. The employment rate, however, improved slightly by only 0.1% to 88.9% from 88.8% in 2000 as the 6.2% growth in the number of employed persons was accompanied by a 6.1% increase in the labor force. Meanwhile, the number of unemployed persons increased by 9.1% in 2002, to 4.9 million. The largest number of unemployed persons was located in Metro Manila which posted double-digit rates of unemployment. Social Security System and Government Service Insurance System The Philippines does not pay any unemployment compensation or make any general welfare payments other than through the Social Security System and the Government Service Insurance System. The Social Security System provides private sector employees, including self-employed persons and their families, with protection against disability, sickness, old age and death. Monthly contributions by covered employees and their employers, and investment income of the Social Security System fund the system. The Social Security System invests its funds in Government securities and in local equity securities. The Government Service Insurance System administers social security benefits for Government employees, including retirement benefits, life insurance, medical care and sickness and disability benefits. The system also administers the self-insurance program for Government properties, such as buildings and equipment. The Government Service Insurance System also oversees loan programs, including housing loans for Government employees. Monthly contributions by covered employees and their employers fund the system. Government agencies must include in their annual appropriations the amounts needed to cover their share of the contributions and any additional premium required based on the hazardous nature of the work. The Government Service Insurance System invests its funds in a manner similar to the Social Security System. Savings The following table sets out the ratio of gross national savings, total investment and the savings-investment gap as a percentage of GDP. [Enlarge/Download Table] 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (IN PERCENTAGES) Gross national savings..................................... 19.5 22.7 28.8 29.2 23.7 Gross investments.......................................... 24.8 20.3 18.8 17.8 17.4 Savings-investment gap..................................... (5.3) 2.4 10.0 11.3 6.3 --------------- Source: National Economic and Development Authority. Government steps to stimulate the savings rate in the Philippines include: - launching a nationwide savings consciousness campaign to inform savers about different types of financial assets; - shifting by the Philippine Stock Exchange from merit-based regulation to self-regulation; - tightening disclosure and insider trading rules; 43
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- removing double taxation of mutual funds; - allowing increased foreign equity participation in investment and financing companies; - rationalizing financial taxes (e.g., gross receipts tax, documentary stamp tax, initial public offerings tax); - broadening of the scope and coverage of small denominated Treasury-bills which were offered beginning in November 1998; - establishing a Small and Medium Enterprises Board at the Philippine Stock Exchange; and - lengthening of the yield curve of government securities. BALANCE OF PAYMENTS Balance of Payments Performance Balance of payments figures measure the relative flow of goods, services and capital into and out of the country as represented in the current account and the capital and financial accounts. The current account tracks a country's trade in goods, services, income and current transfer transactions. The capital and financial account includes the capital account, which covers all transactions involving capital transfers and acquisition or disposition of non-produced, non-financial assets, and the financial account, which covers all transactions associated with changes of ownership in the foreign financial assets and liabilities of an economy. A balance of payments surplus indicates a net inflow of foreign currencies, thereby increasing demand for and strengthening the local currency. A balance of payments deficit indicates a net outflow of foreign currencies, thereby decreasing demand for and weakening the local currency. 44
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The following table presents basic balance of payments information for 1996 through 1998 prior to the Bangko Sentral adopting the revised framework for compiling and reporting balance of payment information. BALANCE OF PAYMENTS(1) [Enlarge/Download Table] 1996 1997 1998 -------- -------- -------- (IN MILLIONS) Current account: Goods trade Exports................................................. $ 20,543 $ 25,228 $ 29,496 Imports................................................. (31,885)(2) (36,355)(2) (29,524)(2) Services trade Receipts................................................ 19,006 22,835 13,917 Payments................................................ (12,206) (17,139) (12,778) Transfers Inflow.................................................. 1,185 1,670 758 Outflow................................................. (596) (590) (323) -------- -------- -------- Total current account (deficit)....................... $ (3,953) $ (4,351) $ 1,546 Capital and financial account: Medium and long-term loans Availment............................................. $ 6,540 $ 7,724 $ 6,025 Repayment............................................. (3,699) (2,900) (3,285) Trading of bonds in the secondary market Resale of bonds....................................... 4,148 3,072 3,307 Purchase of bonds..................................... (4,185) (3,748) (4,390) Investments, net(3) Non-resident investments in the Philippines........... 3,621 843 2,016 Resident investments abroad........................... (104) (81) (344) Change in the net foreign assets of commercial banks.... 4,214 1,188 (4,347) Short-term capital, net................................. 540 495 (1,205) -------- -------- -------- Net capital and financial account........................... $ 11,075 $ 6,593 $ 187 Monetization of gold(4)..................................... 198 105 118 Revaluation adjustments(5).................................. (203) (465) (22) Net unclassified items...................................... (3,010) (5,245) (470) -------- -------- -------- Overall balance of payments position........................ $ 4,107 $ (3,363) $ 1,359 ======== ======== ======== --------------- Source:Bangko Sentral. (1) As described below, the framework for compiling and reporting the balance of payments has been revised based on the new concept under the IMF Balance of Payment Manual, 5th Edition. (2) National Statistics Office data was adjusted to exclude the value of aircraft amounting to $542 million in 1996, $45 million in 1997 and $136 million in 1998 procured under operating lease arrangements, and to include an additional $466 million worth of aircraft imported under capital lease arrangements in 1997. (3) Revised to reflect proper classification of balance of trade related transactions from non-resident to resident transactions. (4) Represents gold purchased by Bangko Sentral from domestic gold producers that becomes part of its official reserves, and profits from the sale of gold by Bangko Sentral. (5) Represents changes in valuation of monetary assets and liabilities as a result of changes in the exchange rate of the US dollar against the Special Drawing Rights and other foreign currencies that form part of the reserve assets and monetary liabilities of Bangko Sentral, as well as discounts accruing to Bangko Sentral in connection with debt-to-equity conversion programs and other debt reduction schemes. 45
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New Framework Beginning in January 2000, Bangko Sentral adopted a new framework for the balance of payments compilation and reporting based on the fifth edition of the Balance of Payments Manual, or BPM5, of the International Monetary Fund. The following table presents a comparative summary of major revisions in the format of balance of payments reports. COMPARATIVE SUMMARY OF MAJOR REVISIONS IN THE BALANCE OF PAYMENTS REPORT FORMAT [Enlarge/Download Table] BOP CATEGORIES OLD FORMAT NEW FORMAT -------------- ------------------------------------------ --------------------------------------- Current Account Consists of: Consists of: - Goods - Goods - Services - Services - Transfers - Income - Current transfers Goods Includes data on all goods leaving the Excludes shipments of goods that do not country and entering any of the seaports involve a change in ownership and airports of entry in the Philippines that are properly cleared through the Bureau of Customs Services Includes both factor services (services of Includes only non-factor services; labor and capital) and non-factor services factor services are lodged separately (transport services, travel, and other under "Income Account" services not reported separately) Income Included in the "Services Account" Includes income for factor services Transfers Includes both current and capital Includes only current transfers. transfers Capital transfers are lodged under the "Capital Account", a sub-account under the Capital and Financial Account Capital and Financial Consists of: Consists of: Account - Medium- and long-term loans Capital Account which includes: - Trading of bonds in the secondary market - Capital transfers - Investments - Acquisition or disposition of non- - Change in commercial banks' net foreign produced non-financial assets (e.g. assets goodwill, patent, copyrights) - Short-term capital Financial Account which is composed of: - Direct Investments - Portfolio Investments - Other Investments Medium- and Long-Term Consists of: Consists of: Loans - Non-bank loans including inter-company - Non-bank loans, excluding inter- loans company loans, are categorized as - Bonds issued and redeemed by the Other Investments. original issuer - Inter-company loans are treated as Direct Investments - Bonds are classified under Portfolio Investments 46
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[Enlarge/Download Table] BOP CATEGORIES OLD FORMAT NEW FORMAT -------------- ------------------------------------------ --------------------------------------- Trading of Bonds in the Refers to the purchase and sale abroad of Classified as Portfolio Investments Secondary Market resident-issued bonds in the secondary (together with bonds treated as medium- market by residents (other than the and long-term loans under the old original issuer) from non-residents framework) Investments Includes: Includes: - Direct Investments which covers: - Direct investments which cover: - Investments in equities - Investment in equities - Reinvested earnings - Portfolio Investments - Inter-company loans For non-residents, covers investments in: - Equities of resident firms acquired - Portfolio Investments through the stock exchange For Non-Residents, covers investments - Resident debt securities issued in the in: local market - Equities of resident firms acquired For residents, covers investments in: through the stock exchange - Equities listed in foreign stock - Debt securities (bills and bonds) exchanges issued by both the public and private sectors, banks and non-banks, in the local market and abroad. These include bonds which were treated as medium-and long-term loans under the old framework For Residents, covers investments in: - Equities listed in foreign stock exchanges - Foreign debt securities of bank and non-banks Change in Commercial Change in net foreign asset position of Distributed among direct, portfolio and Banks Net Foreign commercial banks other investments accounts Assets Short-Term Capital Consists of non-bank short-term loans and Included in other investments net trade credits Other Investments Includes: - Net trade credits - Loans of banks and non-banks - Currencies and deposits of resident banks abroad, and currencies and deposits non-residents with resident banks (net change) - Other assets and liabilities of banks (net change) Others Includes: No longer part of the computation of - Monetization of gold the balance of payments - Revaluation adjustments Net Unclassified Items Includes: Includes: - Errors and omissions - Errors and omissions - Floats - Floats Overall BOP Computed as the sum of the Current Account Computed as the sum of the Current and Capital and Financial Account plus Account and Capital and Financial Others and Net Unclassified Items Account plus Net Unclassified Items 47
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The following table sets out the consolidated financial position on a cash basis for the Republic for the periods indicated. BALANCE OF PAYMENTS(1) [Enlarge/Download Table] YEARS ENDED 31 DECEMBER FIRST ----------------------------- QUARTER 1999 2000 2001 2002 ------- ------- ------- -------- (IN MILLIONS) CURRENT ACCOUNT:................................... $ 7,363 $ 8,459 $ 4,603 $ 2,323 ------- ------- ------- ------- Goods and services:................................ 2,247 4,805 809 889 Exports.......................................... 39,014 41,267 34,391 8,681 Imports.......................................... 36,767 36,461 33,852 7,792 Goods............................................ 4,959 6,918 2,763 1,113 Credit: Exports(2)............................ 34,211 37,295 31,243 7,902 Debit: Imports(2)............................. 29,252 30,377 28,480 6,789 Services......................................... (2,712) (2,112) (1,954) (224) Credit: Exports............................... 4,803 3,972 3,148 779 Debit: Imports................................ 7,515 6,084 5,102 1,003 Income:............................................ 4,604 3,216 3,350 1,331 Credit: Receipts................................. 8,082 7,804 7,446 2,200 Debit: Disbursements............................. 3,478 4,588 4,096 869 Current transfers:................................. 512 437 444 103 Credit: Receipts................................. 607 552 515 140 Debit: Disbursements............................. 95 115 71 37 CAPITAL AND FINANCIAL ACCOUNT:..................... (1,803) (6,469) (3,839) 538 Capital account:................................... (8) 38 (12) (4) Credit: Receipts................................. 44 74 12 0 Debit: Disbursements............................. 52 36 24 4 Financial account:................................. (1,795) (6,507) (3,827) 542 Direct investment................................ 608 1,348 1,953 1,224 Debit: Assets, residents' investments abroad...................................... (30) (107) (161) 13 Credit: Liabilities, non-residents' investments in the Philippines.............. 578 1,241 1,792 1,237 Portfolio Investment:............................ 6,064 (113) 1,399 1,511 Debit: Assets, residents' investments abroad...................................... 586 806 (234) 271 Credit: Liabilities, non-residents' investments in the Philippines.............. 6,650 693 1,165 1,782 Other Investment:................................ (8,467) (7,742) (7,179) (2,374) Debit......................................... 18,647 15,311 13,893 3,579 Credit........................................ 10,180 7,569 6,714 1,205 NET UNCLASSIFIED ITEMS:............................ (1,974) (2,503) (956) (363) ------- ------- ------- ------- OVERALL BOP POSITION:(3)........................... $ 3,586 $ (513) $ (192) $ 2,157 ======= ======= ======= ======= --------------- Source: Bangko Sentral. (1) Beginning January 2000, the Republic adopted the fifth edition of the International Monetary Fund's Balance of Payments Manual ("BPM5"). For the purpose of assessing comparative performance, the 1999 balance of payments was reconstructed to conform with the conceptual coverage of the BPM5. (2) Data on exports and imports from the National Statistics Office were adjusted to exclude temporary exports and imports and returned goods. (3) The overall BOP position results from the change in net international reserves that is purely due to transactions excluding the effects of revaluation of reserve assets and selected reserve liabilities, gold monetization and Special Drawing Rights allocation. 48
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In 1997, the balance of payments registered an overall deficit of $3.4 billion. The current account deficit grew by 10.1% to $4.4 billion because of a fall in net receipts from services due to increased travel expenses for Filipinos and increased interest expenses. The capital and financial account also suffered in 1997, registering a surplus of only $6.6 billion after an $11.1 billion surplus in 1996. Lower net receipts of foreign investments and higher foreign exchange liability payments in the second half of 1997, both in response to the regional economic crisis, contributed to the lower net inflow to the capital and financial account. In 1998, the balance of payments registered an overall surplus of $1.4 billion, compared to a $3.4 billion deficit in 1997. The current account yielded a surplus of $1.5 billion compared to a deficit of $4.4 billion in 1997 primarily because of an increase in merchandise exports and a reduction of imports that led to a 99.7% improvement in the goods trade balance. The capital and financial account fell 97.2% from $6.6 billion in 1997 to $187 million in 1998, due mainly to a significant decline in net medium and long-term loans and a negative change in the net foreign asset position of commercial banks arising largely from the reduction in commercial banks' foreign liabilities. Net unclassified items fell to $470 million in 1998 versus $5.2 billion in 1997, due to more effective monitoring by the authorities, further contributing to the improved balance of payments position. In 1999, under the BPM5 framework, the balance of payments registered an overall surplus of $3.6 billion. This resulted from a surplus of $7.4 billion in the current account due to an improvement in the goods trade balance and net inflows from the income account. The capital and financial account recorded a deficit of $1.8 billion in 1999, although there were sustained inflows of direct investment and portfolio investment by nonresidents. In 2000, under the BPM5 framework, the balance of payments position showed a deficit of $513 million following the weaker capital and financial account even as the current account continued to perform favorably. The current account posted a surplus of $8.5 billion for 2000, or 14.9% higher than the level registered in 1999. The trade-in-goods surplus was driven by the robust growth of export earnings. The net outflow in the capital and financial account totalled $6.5 billion following the weakening in the financial account. Inflows of both direct and portfolio investments offset some of the outflows in the other investments account. However, portfolio investments were down considerably in 2000 to a net outflow of $113 million from a net inflow of $6.1 billion in 1999 due to fewer issuances of public debt. Overall, the underperformance in the capital and financial account in 2000 compared to 1999 resulted mainly from weak portfolio investments by non-residents, purchases by residents of foreign currency-denominated Philippine debt papers, lower medium- and long-term loan availments, and higher residents' short-term trade receivables. The overall balance of payments showed a deficit of $192 million in 2001, compared to a deficit of $513 million in 2000. This positive development was caused by lower net outflows of $3.8 billion in the capital and financial account in 2001, as compared to $6.5 billion in 2000, which overshadowed a substantial decline in the current account surplus of $4.6 billion in 2001, as compared to $8.5 billion in 2000. The current account surplus declined due mainly to lower receipts from trade-in-goods even as the services trade account yielded lower net outflows and as the surplus in the income account rose slightly. Exports of goods contracted by 16.2% and inflows in the services trade account decreased by 20.7% due to lower travel receipts arising from perceived security concerns and the travel scare that followed the terrorist attacks in the United States. Imports of goods declined by 6.2%, and outflows in the services trade account declined by 16.1% due mainly to lower payments for freight (following the decline in merchandise imports). Foreign direct investments posted a sustained net inflow of $2.0 billion, compared to a $1.3 billion net inflow in 2000. From a net outflow of $113 million in 2000, portfolio investments increased, posting a net inflow of $1.4 billion in 2001. The Republic's balance of payments for the first quarter of 2002 yielded a surplus of $2.2 billion. This was a reversal of the $512 million deficit recorded for the first quarter of 2001, which resulted due to turnaround in the capital and financial account from a net outflow to a net inflow and the substantial increase in the current account surplus. The current account surplus of $2.3 billion for the first three months 2002 resulted from higher net inflows in the income and goods accounts which more than offset the deficit in the services account. The net inflow in the income account of $1.3 billion during the period was nearly twice the amount of net inflow during 49
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the same period in 2001, while the trade-in-goods account continued to be in surplus at $1.1 billion. Together with the reduced net outflow in the services account, these developments caused the current account surplus to increase by 38.7% from the level realized in the same period in 2001. With the adoption of the BPM5 framework, the change in net international reserves is not exactly equal to the balance of payments position. Under the new format, the balance of payments position results from the change in net international reserves that is due solely to economic transactions, excluding the effects of revaluation of reserve assets and reserve-related liabilities, gold monetization and Special Drawing Rights allocation. Current Account Goods Trade Trading in goods significantly affects the Philippine economy. From 1997 to 2001, exports accounted for an average of approximately 41.4% of the country's GNP and imports accounted for an average of approximately 40.5% of GNP. The country's trade strategy emphasizes export promotion. The rapid expansion of export-oriented, labor-intensive manufacturing operations, such as electronics and textiles, drove total exports to $32.1 billion in 2001 and produced an average annual export growth rate of 16.8% from 1997 to 2001. A significant proportion of exports, estimated at 40% to 50% in 2000, depends on imported raw materials or other inputs, rendering the country's exports vulnerable to any import decline resulting from a Peso depreciation. The Government aims to reduce the importance of imports for producing the country's exports by implementing a number of different policies, including infrastructure development and tariff reform. 50
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EXPORTS. The following table sets out the country's exports by major commodity group. MERCHANDISE EXPORTS BY SECTOR [Enlarge/Download Table] PERCENTAGE OF TOTAL EXPORTS FIRST QUARTER ------------- 1997 1998 1999 2000 2001 2002 1997 2001 ------- ------- ------- ------- ------- ------------- ----- ----- (IN MILLIONS) Manufactures Electronics and electrical equipment/parts and telecommunications........... $13,028 $17,137 $21,166 $22,179 $16,699 $4,323 51.6% 52.0% Garments....................... 2,349 2,356 2,267 2,563 2,403 483 9.3 7.5 Textile yarns/fabrics.......... 299 242 219 249 226 56 1.2 0.7 Footwear....................... 194 147 86 76 73 11 0.8 0.2 Travel goods and handbags...... 174 183 154 177 174 20 0.7 0.5 Wood manufactures.............. 134 118 129 212 119 22 0.5 0.4 Furniture & fixtures........... 322 323 354 381 298 71 1.3 0.9 Chemicals...................... 383 340 294 328 318 85 1.5 1.0 Non-metallic mineral manufactures................. 105 106 111 133 123 28 0.4 0.4 Machinery and transport equipment.................... 2,685 3,316 4,950 5,909 6,136 1,654 10.6 19.1 Processed food and beverages... 346 306 256 267 337 79 1.4 1.0 Iron and steel................. 46 28 18 25 14 2 0.2 0.1 Baby carriages, toys, games and sporting goods............... 203 169 158 165 145 26 0.8 0.5 Basketwork, wickerwork and other articles of plaiting materials.................... 93 85 85 95 83 22 0.4 0.3 Miscellaneous manufactured articles, not elsewhere specified.................... 209 202 212 229 220 50 0.8 0.7 Others......................... 892 785 850 997 974 239 3.5 3.0 ------- ------- ------- ------- ------- ------ ----- ----- Total manufactures........... 21,462 25,843 31,309 33,985 28,342 7,171 85.1 88.2 Agro-based products Coconut products............... 835 831 466 577 532 103 3.3 1.7 Sugar and sugar products....... 99 100 71 57 32 30 0.4 0.1 Fruits and vegetables.......... 458 446 455 528 552 127 1.8 1.7 Others......................... 508 466 476 486 427 94 2.0 1.3 ------- ------- ------- ------- ------- ------ ----- ----- Total agro-based products................ 1,900 1,843 1,468 1,648 1,543 354 7.5 4.8 Mineral products................. 762 592 646 650 537 115 3.0 1.7 Petroleum products............... 258 129 216 436 242 64 1.0 0.8 Forest products.................. 45 24 20 44 23 4 0.2 0.1 Others........................... 801 1,065 1,379 1,315 1,464 400 3.2 4.5 ------- ------- ------- ------- ------- ------ ----- ----- Total...................... $25,228 $29,496 $35,038 $38,078 $32,150 $8,108 100.0% 100.0% ======= ======= ======= ======= ======= ====== ===== ===== --------------- Source: National Statistics Office. Exports of manufactured goods grew at an average rate of 18.9% per year from 1997 to 2000. However in 2001 a decline of 16.6% was recorded. As a percentage of total exports, manufactured goods increased from 85.1% in 1997 to 89.4% in 1999 before declining slightly to 89.3% in 2000 and declining further to 88.2% in 2001. Exports of electronics, electrical equipment and parts, and telecommunications equipment grew as a proportion of total exports at an average rate of 56.1% from 1997 to 2001, reflecting increasing global demand for electronics products. During the same period, exports of garments as a proportion of total exports decreased from 9.3% in 1997 to 7.5% in 2001 because of increased international competition and a general decline in world-wide demand. Exports of agro-based products, including coconut products, sugar products, fruits and vegetables also declined considerably as a proportion of total exports from 7.5% in 1997 to 4.4% in 2000, and increased slightly to 4.8% in 2001. On the other hand, increased production helped exports of machinery and transport equipment grow at an average annual rate of 30.7% from 1997 to 2000, but slowed to 51
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3.8% in 2001. As a percentage of total exports machinery and transport grew from 10.6% in 1997 to 19.1% in 2001. In 1997, total exports reached $25.2 billion, growing 22.8% from 1996. Growth in exports of electronics, which constituted more than 50% of the total exports of goods, spurred the increased export activity in 1997. Exports increased despite a decline in shipments of garments, shrimp and prawns and copper. The rise in exports of light industry products in 1997 indicated the success of Government efforts to diversify the country's exports. In 1998, total exports increased by 16.9% to $29.5 billion compared with 1997, less than the 24.6% increase in 1997 over 1996. The start-up of a number of new semiconductor and microprocessor factories boosted exports of semiconductors, the top export earner. The depreciation of the Peso helped exports and offset the adverse effects of the Asian financial crisis on a number of the Republic's trading partners. In 1999, total exports grew by 18.8% to $35.0 billion, an increase of 18.8% over 1998. Electronics, machinery and transport equipment and garments were the leading export earners. Higher shipments of mineral products, fruits and vegetables and furniture and fixtures also contributed to the expansion of exports in 1999. In 2000, exports totalled $38.1 billion and accounted for 43.9% of the GNP. Merchandise exports in 2000 grew by 8.7%. Among the merchandise exports, electronics maintained its position as the top earner and continued growing, but at a decelerated rate of 4.8% in 2000 compared to 23.5% in 1999. Garments, the third top earner, had a 13.1% increase in 2000 after a 3.9% contraction in 1999. Machinery and transport, the second top earner in 2000, experienced decelerated growth, from 49.3% in 1999 to only 19.8% in 2000. Merchandise exports during 2000 amounted to $38 billion translating to an 8.7% growth, a deceleration from the 18.8% growth registered in 1999. In 2001, exports declined by 15.6% to $32.1 billion. The decline reflected the slump in demand by the country's leading trading partners, namely the US and Japan, as well as the downtrend in demand in the information technology sector. Exports of semiconductor components experienced declines in both volume and price. All major commodity groups posted declines except fruits and vegetables, which registered a 4.7% modest growth. Electronics, machinery and transport equipment and garments remained the top three export commodities. Exports for the first quarter of 2002 declined to $7.9 billion, or by 5.3%, as compared to the same period in 2001, largely due to decreased shipments of manufactured goods, particularly electronics and garments. On the other hand, exports of machinery and transport equipment, processed food and beverages and sugar products increased relative to the same period in 2001. The year-on-year rate of contraction of exports has slowed considerably from the double-digit declines in 2001 to less than 1% in March 2002, mainly due to the marked deceleration in the rate of decline of electronics exports, the monthly year-on-year contraction for which was only 3.9% in March 2002 from a high of almost 39% in May 2001. The continued expansion in exports of machinery and transport also contributed to the relatively improved export performance. The leading export commodities during the first quarter of 2002 continued to be electronics, machinery and transport equipment and garments. 52
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The following table sets out the destinations of the country's exports. EXPORTS BY DESTINATION [Enlarge/Download Table] PERCENTAGE OF TOTAL EXPORTS ------------- FIRST QUARTER 1997 1998 1999 2000 2001 1997 2001 2002 ------- ------- ------- -------- ------- ----- ----- ------------- (IN MILLIONS) United States.......... $ 8,815 $10,098 $10,446 $ 11,381 $ 8,979 34.9% 27.9% $2,002 Japan.................. 4,192 4,232 4,660 5,606 5,054 16.6 15.7 1,259 ASEAN countries(1)..... 3,335 3,723 4,916 5,894 4,915 13.2 15.3 1,228 United Kingdom......... 1,086 1,757 1,766 1,506 997 4.3 3.1 243 Hong Kong SAR.......... 1,171 1,326 1,947 1,907 1,580 4.7 4.9 468 The Netherlands........ 1,663 2,319 2,865 2,982 2,976 6.6 9.3 710 Germany................ 1,060 1,035 1,229 1,329 1,323 4.2 4.1 294 Taiwan................. 1,169 1,757 2,993 2,845 2,127 4.6 6.6 616 South Korea............ 474 509 1,032 1,173 1,044 1.9 3.2 349 People's Republic of China(2)............. 244 344 575 663 793 1.0 2.5 269 Others................. 2,018 2,396 2,609 2,792 2,362 8.0 7.4 670 ------- ------- ------- -------- ------- ----- ----- ------ Total........ $25,228 $29,496 $35,038 $ 38,078 $32,150 100.0% 100.0% $8,108 ======= ======= ======= ======== ======= ===== ===== ====== --------------- Source: Foreign Trade Statistics, National Statistics Office. (1) Includes only Brunei, Indonesia, Malaysia, Singapore and Thailand. (2) Excludes Hong Kong SAR. The United States, Japan and ASEAN countries are currently the Philippines' largest export markets. In 2001, the United States accounted for 27.9% and the ASEAN countries accounted for 15.3% of total exports. Japan, historically the second largest market for Philippines exports, accounted for 15.7% of total exports in 2001. The United States absorbed, on average, 32.2% of total exports from 1997 to 2000 and 27.9% in 2001. Japan accounted for, on average, 14.9% of Philippine exports from 1997 to 2001. Recognizing the danger of over-reliance on so few export markets, the country has attempted to increase its exports to other countries, particularly ASEAN countries. The Republic is a party to the ASEAN Free Trade Agreement that provides for the implementation of the common effective preferential tariff that will reduce tariffs among ASEAN nations by 2008 to between 0% and 5% for all manufactured goods and non-sensitive agricultural and processed agricultural products. Additional activities to support the free trade area include plans for intra-regional investments, industrial linkages and banking and financial integration. 53
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IMPORTS. The following table sets out the country's imports by major commodity group. IMPORTS BY COMMODITY GROUP [Enlarge/Download Table] PERCENTAGE OF TOTAL IMPORTS FIRST QUARTER -------------- 1997 1998 1999 2000 2001 2002 1997 2001 ------- ------- ------- ------- ------- ------------- ----- ----- (IN MILLIONS) Raw materials and intermediate goods Unprocessed raw materials(1).............. $ 1,645 $ 1,168 $ 1,518 $ 1,337 $ 1,368 $ 335 4.5% 4.6% Semi-processed raw materials(2).............. 12,989 10,416 11,083 10,724 10,068 2,507 35.7 34.1 ------- ------- ------- ------- ------- ------ ----- ----- Total raw materials and intermediate goods...... $14,634 $11,584 12,601 12,061 11,436 2,842 40.2 38.7 Capital goods............... 14,369 12,051 11,827 12,162 11,463 2,857 39.5 38.8 Consumer goods Durable................... 1,516 901 1,093 1,070 947 207 4.2 3.2 Non-durable............... 1,575 1,722 1,549 1,452 1,536 325 4.3 5.2 ------- ------- ------- ------- ------- ------ ----- ----- Total consumer goods.... $ 3,091 $ 2,623 2,642 2,523 2,483 532 8.5 8.4 Mineral fuels and lubricants................ 3,074 2,020 2,433 3,877 3,373 619 8.5 11.4 Others...................... 1,187 1,246 1,239 765 796 234 3.3 2.7 ------- ------- ------- ------- ------- ------ ----- ----- Total..................... $36,355(3) $29,524(4) $30,742 $31,388 $29,551 $7,084 100.0% 100.0% ======= ======= ======= ======= ======= ====== ===== ===== --------------- Source: National Statistics Office. (1) Includes wheat, corn, unmilled cereals excluding rice and corn, inedible crude materials and unmanufactured tobacco. (2) Includes chemicals and chemical compounds, manufactured goods that are not capital or consumer goods, materials for the manufacture of electrical and electronic equipment and parts and embroideries. (3) Excludes the value of aircraft amounting to $45 million procured under operating lease arrangements and includes the value of aircraft amounting to $466 million procured under capital lease arrangements. (4) Excludes the value of aircraft amounting to $136 million procured under operating lease arrangements. Imports declined by 18.8% from 1997 to 1998 before increasing by 4.1% in 1999 and 2.0% in 2000. In 2001, imports declined by 5.8%, reflecting weak domestic demand. Raw materials and intermediate goods needed to manufacture electrical and electronic equipment and parts accounted for, on average, approximately 39.5% of total imports from 1997 to 2001. Imports of mineral fuels and lubricants, which accounted for 8.5% of total imports in 1997, constituted 11.4% of imports in 2001. In 1997, imports grew to $36.4 billion spurred on by the continued strength of the Philippine economy. Imports of capital goods, particularly telecommunications equipment and electrical machinery, aircraft, office and electric data machines, as well as raw materials and intermediate goods, supported investment growth in the economy. In 1998, weakening demand because of the economic slowdown and the depreciation of the Peso forced imports down 18.8% to $29.5 billion, compared with $36.4 billion for 1997. Lower imports of machinery transport equipment, partly due to Philippine Airlines' financial difficulties and temporary closure, fertilizers and artificial resins led the decline. A number of exporters decreased their imports and elected instead to draw down their inventories to alleviate the impact of the weak Peso, also hurting overall imports. In 1999, imports totalled $30.7 billion. This represented an increase of 4.1% from imports for 1998. The increase was due mainly to an increase in imports of electronics and components, minerals, fuel and lubricants. Imports in December 1999 increased by 28.7% compared to December 1998, the highest monthly growth in imports in three and a half years. In 2000, imports increased by 2.1% to $31.4 billion compared to a 4.1% increase in 1999. The growth was due to higher imports of capital goods which rose by 2.8%, as well as the increase in imports of mineral fuel 54
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and lubricants which grew by 59.3% following the hike in the average price of petroleum crude to $27.89 per barrel, compared to $16.31 per barrel in 1999. In 2001, imports fell by 5.9% to $28.5 billion, a reversal of the 3.8% increase registered in 2000. This decline resulted primarily from the reduction in imports of raw materials and intermediate goods and capital goods used for exports and domestic production as well as the reduced appetite for foreign-made goods as a result of the weak Peso. Except for the months of April to June, imports were down, with November posting the largest year-on-year contraction at 23.6%. However, the decline in imports appeared to be bottoming out as December imports fell by only 4.2%. All major commodity groups except for special transactions posted downtrends, with imports of mineral fuels and lubricants registering the highest drop at 13.0%. Imports continued to show signs of recovery during the first quarter of 2002, expanding by 10% in March, after exhibiting consecutive declines since July 2001. This tempered the first quarter import contraction to 2.6%. Total imports amounted to $7.1 billion during the first quarter of 2002. Increases in imports were noted in capital goods and raw materials and intermediate goods, particularly materials and accessories for the manufacture of electrical equipment. 55
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The following table sets out the sources of the Philippines' imports by country. IMPORTS BY SOURCE [Enlarge/Download Table] PERCENTAGE OF TOTAL IMPORTS FIRST QUARTER ------------- 1997(1) 1998(1) 1999 2000 2001 2002 1997 2001 ------- ------- ------- ------- ------- ------------- ----- ----- (IN MILLIONS) Japan............................ $ 7,414 $ 6,029 $ 6,138 $ 6,027 $ 6,098 $1,462 20.4% 20.6% United States.................... 7,154 6,562 6,365 5,323 4,991 1,441 19.7 16.9 ASEAN countries(2)............... 4,605 4,050 4,242 4,746 4,658 1,117 12.7 14.8 Hong Kong SAR.................... 1,549 1,300 1,225 1,217 1,259 326 4.3 4.3 Saudi Arabia..................... 1,058 606 810 1,048 887 102 2.9 3.0 Taiwan........................... 1,808 1,415 1,614 1,948 1,607 345 5.0 5.4 South Korea...................... 2,182 2,190 2,721 2,350 1,950 597 6.0 6.6 Australia........................ 955 683 747 816 645 118 2.6 2.2 Germany.......................... 1,180 812 800 734 734 156 3.2 2.5 People's Republic of China(3).... 872 1,198 1,039 768 953 233 2.4 3.2 Others........................... 7,578 4,679 5,025 6,411 5,769 1,187 20.8 20.5 ------- ------- ------- ------- ------- ------ ----- ----- Total.......................... $36,355 $29,524 $30,724 $31,388 $29,551 $7,084 100.0% 100.0% ======= ======= ======= ======= ======= ====== ===== ===== --------------- Source: Foreign Trade Statistics, National Statistics Office. (1) Foreign trade statistics were adjusted to exclude aircraft procured under operational lease arrangements to conform with the new balance of payments framework. (2) Includes only Brunei, Indonesia, Malaysia, Singapore and Thailand. (3) Excludes Hong Kong SAR. From 1997 to 2001, an average of 39.4% of the country's imports came from Japan (20.1%) and the United States (19.3%). In 2001, Japan accounted for 20.6% and the United States 16.9% of total imports. The Philippines increased its imports from the ASEAN countries from 12.7% of total imports in 1997 to 14.8% in 2001. The country also imported from South Korea, Taiwan, Hong Kong and Saudi Arabia. For the first two months of 2002, imports from Japan decreased by 0.9% to 17.7% compared to the first two months of 2001, while those from the United States increased by 2.4% to 20.6% of total imports. The Republic's imports from the ASEAN countries increased at 16% from 14.4% of the same period last year while those from other countries remained relatively unchanged. 56
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The following table sets out the country's services trade by sector compiled in accordance with the BPM5 framework for the periods indicated. SERVICES TRADE [Enlarge/Download Table] FIRST QUARTER 1999 2000 2001 2002 ------- ------- ------- ------------- (IN MILLIONS) Total services trade.................................. $(2,712) $(2,112) $(1,939) $ (224) Exports............................................. 4,803 3,972 3,151 779 Imports............................................. 7,515 6,084 5,090 1,003 Transportation........................................ (1,369) (1,785) (1,666) (291) Exports............................................. 575 891 659 161 Imports............................................. 1,944 2,676 2,325 452 of which: Passenger................................. (117) (73) (236) (57) Exports.......................................... 15 243 99 19 Imports.......................................... 132 316 335 76 of which: Freight................................... (1,167) (1,638) (1,361) (214) Exports.......................................... 428 481 380 120 Imports.......................................... 1,595 2,119 1,741 334 of which: Other..................................... (85) (74) (69) (20) Exports.......................................... 132 167 180 22 Imports.......................................... 217 241 249 42 Travel................................................ 1,246 1,129 499 257 Exports............................................. 2,554 2,134 1,723 479 Imports............................................. 1,308 1,005 1,224 222 Communication services................................ (307) (79) 115 27 Exports............................................. 424 182 330 54 Imports............................................. 731 261 215 27 Construction services................................. (108) (27) (234) (69) Exports............................................. 58 97 64 5 Imports............................................. 166 124 298 74 Insurance services.................................... (30) (90) (68) (55) Exports............................................. 51 66 48 6 Imports............................................. 81 156 116 61 Financial services.................................... (250) (389) (41) (6) Exports............................................. 67 80 34 8 Imports............................................. 317 469 75 14 Computer and information services..................... (38) (18) (61) (11) Exports............................................. 57 76 22 4 Imports............................................. 95 94 83 15 Royalties and license fees............................ (104) (190) (157) (39) Exports............................................. 6 7 1 0 Imports............................................. 110 197 158 39 Other business services............................... (1,672) (595) (318) (40) Exports............................................. 929 359 219 54 Imports............................................. 2,601 954 537 94 Merchanting and other trade-related services........ (230) (200) 16 10 Exports.......................................... 186 59 24 11 Imports.......................................... 416 259 8 1 57
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[Enlarge/Download Table] FIRST QUARTER 1999 2000 2001 2002 ------- ------- ------- ------------- (IN MILLIONS) Operational leasing services........................ (47) (58) (61) (7) Exports.......................................... 15 23 10 0 Imports.......................................... 62 81 71 7 Misc. business, professional and technical services......................................... (1,395) (337) (123) (43) Exports.......................................... 728 277 185 43 Imports.......................................... 2,123 614 458 86 Personal, cultural and recreational services.......... (81) (87) (42) (3) Exports............................................. 58 43 15 1 Imports............................................. 139 130 57 4 Audio-visual and related services................... (3) (9) (10) (3) Exports.......................................... 14 15 6 1 Imports.......................................... 17 24 16 4 Other personal, cultural and recreational services......................................... (78) (78) (32) 0 Exports.......................................... 44 28 9 0 Imports.......................................... 122 106 41 0 Government services, n.i.e. .......................... 1 19 34 6 Exports............................................. 24 37 36 7 Imports............................................. 23 18 2 1 --------------- Source: Bangko Sentral. In 1997, receipts from the services trade totalled $22.8 billion, growing from 13.5% of GNP in 1993 to 26.6%. Increasing receipts from overseas Filipino workers and Peso conversions of foreign currency deposits contributed to the growth in the service receipts. Payments for services grew from approximately 9.0% of GNP in 1993 to 20% in 1997, when payments totalled $17.1 billion. Greater trade and travel-related outflows spurred the increase in service payments. Freight and merchandise insurance payments and investment expenses also increased significantly. In 1998, service receipts declined by 39.1% from their 1997 levels, and service payments fell 25.4% compared with the 1997 levels, principally as a result of the regional economic decline. Total services receipts declined in 1998 principally because of declining receipts from Peso conversion of foreign currency deposits and lower investment income during the year. Services payments also declined because of the significant decline in other services disbursements reported by commercial banks. In 1999, under the BPM5 framework, the services account recorded a net outflow of $2.7 billion following higher service payments. Net outflows were noted in transportation, communication, construction, insurance, financial, computer and information, royalties and license fees, and other personal, cultural and recreational services with the exception of travel services which recorded a net inflow of $1.2 billion. For 2000, the services account, under the BPM5 framework, recorded a net outflow of $2.11 billion, 22.0% lower than the net outflow of $2.7 billion in 1999. This development was due to lower net outflows in communication, construction, miscellaneous business, professional and technical services, computer and information and other trade-related services. For 2001, under the BPM5 framework, the services trade account posted a deficit of $1.94 billion, 8% lower than the $2.11 billion deficit recorded last year. This year's deficit was brought about by decreased inflows from passenger and travel services. However, the reduction in the deficit from last year was due mainly to the lower net outflows in freight following the decline in good imports, royalties and fees, financial services and other business services. The reversal in communication services account to a net inflow from a net outflow also contributed to the narrower deficit. 58
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During the first quarter of 2002, the services trade account under the BPM5 framework posted a deficit of $224 million, comparing favorably with the $494 million deficit recorded in the same period in 2001. The 54.7% reduction of the deficit was brought about largely by lower net outflows for transportation services and the higher net inflow from travel. The lower net outflow for transportation services was a result of the reduced payment for freight following the contraction in merchandise imports. However, the net inflow from travel services accelerated by 26.0% to $257 million from the previous year's period due to a higher rate of decline in travel payments relative to that of travel receipts. The following table sets out the Republic's income compiled in accordance with the BPM5 framework for the periods indicated. Prior to the adoption of the BPM5 framework, income was included in services trade. Entries with "zero" balances indicate either that there are no relevant transactions during the period or that the Republic has not yet begun to track and record the relevant entry. INCOME [Enlarge/Download Table] FIRST QUARTER 1999 2000 2001 2002 ------- ------- ------- ------------- (IN MILLIONS) Total income........................................ $ 4,604 $ 3,216 $ 3,350 $ 1,331 Receipts.......................................... 8,082 7,804 7,446 2,200 Disbursements..................................... 3,478 4,588 4,096 869 Compensation of employees, incl. border, seasonal and other workers................................. 6,794 6,050 6,325 1,964 Receipts.......................................... 6,794 6,050 6,325 1,964 Disbursements..................................... 0 0 0 0 Investment income................................... (2,190) (2,834) (2,975) (633) Receipts.......................................... 1,288 1,754 1,121 236 Disbursements..................................... 3,478 4,588 4,096 869 Direct investment income.......................... (772) (802) (1,150) (183) Receipts....................................... 63 163 10 11 Disbursements.................................. 835 965 1,160 194 Income on equity............................... (718) (819) (1,143) (182) Receipts..................................... 35 57 10 11 Disbursements................................ 753 876 1,153 193 Dividends and distributed branch profits..... (184) (240) (654) (62) Receipts.................................. 35 57 10 11 Disbursements............................. 219 297 664 73 Reinvested earnings and undistributed branch profits................................... (534) (579) (489) (120) Receipts.................................. 0 0 0 0 Disbursements............................. 534 579 489 120 Income on debt (interest)...................... (54) 17 (7) (1) Receipts..................................... 28 106 0 0 Disbursements................................ 82 89 7 1 Portfolio investment income....................... (607) (445) (545) (72) Receipts....................................... 451 645 634 165 Disbursements.................................. 1,058 1,090 1,179 237 Income on equity (dividends)................... (22) (8) (23) (2) Receipts..................................... 16 8 6 0 Disbursements................................ 38 16 29 2 59
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[Enlarge/Download Table] FIRST QUARTER 1999 2000 2001 2002 ------- ------- ------- ------------- (IN MILLIONS) Monetary authorities......................... 0 0 0 0 Receipts.................................. 0 0 0 0 Disbursements............................. 0 0 0 0 General government........................... 0 0 0 0 Receipts.................................. 0 0 0 0 Disbursements............................. 0 0 0 0 Banks........................................ 0 0 0 0 Receipts.................................. 0 0 0 0 Disbursements............................. 0 0 0 0 Other sectors................................ (22) (8) (23) (2) Receipts.................................. 16 8 6 0 Disbursements............................. 38 16 29 2 Income on debt (interest)...................... (585) (437) (522) (70) Receipts..................................... 435 637 628 165 Disbursements................................ 1,020 1,074 1,150 235 Bonds and notes.............................. (525) (429) (554) (76) Receipts.................................. 430 621 584 159 Disbursements............................. 955 1,050 1,138 235 Monetary authorities...................... 180 305 303 (110) Receipts................................ 266 443 417 123 Disbursements........................... 86 138 114 13 General government........................ (501) (469) (516) (127) Receipts................................ 0 0 126 26 Disbursements........................... 501 469 642 153 Banks..................................... 35 0 0 0 Receipts................................ 35 0 0 0 Disbursements........................... 0 0 0 0 Other sectors............................. (239) (265) (341) (59) Receipts................................ 129 178 41 10 Disbursements........................... 368 443 382 69 Money market instruments..................... (60) (8) 32 6 Receipts.................................. 5 16 44 6 Disbursements............................. 65 24 12 0 Monetary authorities...................... (6) (5) 0 0 Receipts................................ 0 0 0 0 Disbursements........................... 6 5 0 0 General government........................ 0 0 0 0 Receipts................................ 0 0 0 0 Disbursements........................... 0 0 0 0 Banks..................................... 0 0 0 0 Receipts................................ 0 0 0 0 Disbursements........................... 0 0 0 0 Other sectors............................. (54) (3) 32 6 Receipts................................ 5 16 44 6 Disbursements........................... 59 19 12 0 60
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[Enlarge/Download Table] FIRST QUARTER 1999 2000 2001 2002 ------- ------- ------- ------------- (IN MILLIONS) Other investment income...................... (811) (1,587) (1,280) (378) Receipts.................................. 774 946 477 60 Disbursements............................. 1,585 2,533 1,757 438 Monetary authorities...................... 135 184 (91) 40 Receipts................................ 313 472 232 34 Disbursements........................... 178 288 323 74 General government........................ (795) (1,462) (659) (208) Receipts................................ 0 0 0 0 Disbursements........................... 795 1,462 659 208 Banks..................................... 187 161 (102) (38) Receipts................................ 382 397 206 25 Disbursements........................... 195 236 308 63 Other sectors............................. (338) (470) (428) (92) Receipts................................ 79 77 39 1 Disbursements........................... 417 547 467 93 The income account posted a surplus of $3.2 billion in 2000, down by 30.2% from $4.6 billion in 1999. Negating the impact of increasing interest payments were income from investments abroad and continuing inflows of remittances from overseas Filipino workers. In 2001, the income account continued to be in surplus totaling $3,350 million, which was 4.2% higher than the 2001 surplus of $3,216 million. This increase was due mainly to the increase in remittances from overseas Filipino workers ("OFW"). The 4.5% increase in OFW remittances was attributed mainly to the expanded coverage of the OFW monitoring system, which, now includes foreign exchange corporations and thrift banks. The net outflow in the investment income account rose by 5.0% to $2,975 million as falling global interest rates had a greater impact on investment income (particularly interest income on placements in portfolio and other investments) than on interest repayments. Disbursements mainly consisted of divided repatriation and interest payments on loans. During the first quarter of 2002, the income account yielded a surplus of $1.3 billion, 91.2% higher than the surplus of $696 million during the same period in 2001. The increase was due to higher remittances from OFWs of $2.0 billion from $1.4 billion in the same period or an annual increase of 38.0%. Remittances from OFWs comprised about 89% of gross income receipts. The bulk of OFW remittances came from the U.S., Saudi Arabia, Japan, Hong Kong and Singapore. The Government expects that OFW remittances will continue to be a major source of foreign exchange as it continues to promote Filipino skills in new markets as well as in other professional fields. Capital and Financial Account Foreign Investments The Philippines monitors investment flows into and out of the country, keeping track of direct and portfolio investments by non-residents in the Philippines and by Filipino residents abroad. Direct investments are the category of international investment in which a resident entity in one economy obtains a lasting interest in an enterprise resident in another economy. A direct investment is established when a resident in one economy owns 10% or more of the ordinary shares or voting power of an incorporated enterprise or the equivalent of an unincorporated enterprise in another economy. Portfolio investments include investments in equity and debt securities, that is, bonds, notes and money market instruments, and financial derivatives. The essential characteristic of instruments classified as portfolio investments is that they are traded or tradable. 61
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The following table sets out the foreign investment flows into and out of the Philippines by type for the periods indicated. Entries with "zero" balances indicate either that there are no relevant transactions during the period or that the Republic has not yet begun to track and record the relevant entry. FOREIGN INVESTMENTS [Enlarge/Download Table] 1996 1997 1998 1999 2000 2001 ------- ------- ------- -------- ------- ------- (IN MILLIONS) Non-resident investments in the Philippines Direct investments Placements New foreign investments in the Philippines................... $ 1,074 $ 1,073 $ 1,631 $ 1,241 $ 1,207 $ 697 Reinvested earnings.............. 44 56 85 534 579 488 Technical fees and others converted to equity........... 0 0 0 26 2 0 Bond conversions................. 277 114 36 0 0 0 Imports converted into investments................... 0 6 0 0 0 0 Others........................... 125 0 0 0 0 0 Withdrawals(1)..................... 0 0 0 (122) (185) (69) ------- ------- ------- -------- ------- ------- Total direct investments.............. 1,520 1,249 1,752 1,679 1,603 1,116 ======= ======= ======= ======== ======= ======= Portfolio investments Placements......................... 6,687 6,947 4,297 15,490 3,704 1,486 Withdrawals........................ (4,586) (7,353) (4,033) (14,080) 3,887 1,103 ------- ------- ------- -------- ------- ------- Total portfolio investments........... 2,101 (406) 264 1,410 (183) 383 ======= ======= ======= ======== ======= ======= Total non-resident investments in the Philippines(2)..................... 3,621 843 2,016 3,089 1,420 1,499 ======= ======= ======= ======== ======= ======= Less Resident Investments Abroad Direct investments Placements Residents' investments abroad...... 182 136 160 63 46 33 Withdrawals........................ 0 0 0 (108) (141) (195) ------- ------- ------- -------- ------- ------- Total direct investments.............. 182 136 160 (45) (95) (162) ======= ======= ======= ======== ======= ======= Portfolio investments Placements......................... 119 184 184 788 1,866 4,080 Withdrawals........................ (197) (239) 0 (300) (1,417) (4,022) ------- ------- ------- -------- ------- ------- Total portfolio investments........... (78) (55) 184 488 449 58 ======= ======= ======= ======== ======= ======= Other investments(3).................. -- -- -- 1,317 177 589 ======= ======= ======= ======== ======= ======= Total resident investments abroad....... 104 81 344 1,760 531 485 ======= ======= ======= ======== ======= ======= Total foreign investments, net.......... $ 3,517 $ 762 $ 1,672 $ 1,329 $ 889 $ 771 ======= ======= ======= ======== ======= ======= --------------- Source: Bangko Sentral. (1) Non-resident withdrawals of direct investments include capital recovery under the build-operate-transfer scheme. (2) Excludes net flows arising from the trading of Philippine debt papers in the secondary market abroad. (3) Includes residents' deposits in banks abroad. For the 1996 to 1998 period, other investments were not separately tracked. 62
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After the implementation of the BPM5 framework, the Financial Account is now divided into three categories: direct investments, portfolio investments and other investments. The following table sets out the Republic's direct investments compiled in accordance with the BPM5 framework for the periods indicated. Entries with "zero" balances indicate either that there are no relevant transactions during the period or that the Republic has not yet begun to track and record the relevant entry. DIRECT INVESTMENTS [Enlarge/Download Table] FIRST QUARTER 1999 2000 2001 2002 ------- ------- ------ ------------- (IN MILLIONS) Total direct investments................................ $ 608 $ 1,348 $1,953 $ 1,224 ======= ======= ====== ========== Assets: Residents' investments abroad................... (30) (107) (161) 13 Equity capital........................................ (45) (95) (162) 12 Claims on affiliated enterprises................... (45) (95) (162) 12 Placements....................................... 63 46 33 12 Withdrawals...................................... 108 141 195 0 Liabilities to affiliated enterprises.............. 0 0 0 0 Reinvested earnings................................... 0 0 0 0 Other capital......................................... 15 (12) 1 1 Liabilities: Non-residents' investments in the Philippines........................................... 578 1,241 1,792 1,237 Equity capital........................................ 1,145 1,024 628 662 Liabilities to direct investors.................... 1,145 1,024 628 662 Placements....................................... 1,267 1,209 697 666 Withdrawals...................................... 122 185 69 4 Reinvested earnings................................... 534 579 488 120 Other capital......................................... (1,101) (362) 676 455 Claims on direct investors......................... 0 0 0 0 Liabilities to direct investors.................... (1,101) (362) 676 455 --------------- Source: Bangko Sentral. (1) Preliminary. 63
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The following table sets out the Republic's portfolio investments compiled in accordance with the BPM5 framework for the periods indicated. Entries with "zero" balances indicate either that there are no relevant transactions during the period or that the Republic has not yet begun to track and record the relevant entry. PORTFOLIO INVESTMENTS [Enlarge/Download Table] FIRST QUARTER 1999 2000 2001 2002 ------- ------- ------ ------------- (IN MILLIONS) Total portfolio investments............................. $ 6,064 $ (113) $1,399 $ 1,511 ======= ======= ====== ========= Assets: Residents' investments abroad................... 586 806 (234) 271 Equity securities..................................... 55 42 4 0 Placements......................................... 75 219 4 0 Withdrawals........................................ 20 177 0 0 Debt securities....................................... 531 764 (238) 271 Banks.............................................. 98 357 (292) 270 Other sectors...................................... 433 407 54 1 Placements....................................... 713 1,647 4,076 505 Withdrawals...................................... 280 1,240 4,022 504 Money-market instruments.............................. 0 0 0 0 Financial derivatives................................. 0 0 0 0 Liabilities: Non-residents' investments in the Philippines........................................... 6,650 693 1,165 1,782 Equity securities..................................... 1,410 (183) 383 122 Placements......................................... 15,490 3,704 1,486 396 Withdrawals........................................ 14,080 3,887 1,103 274 Debt securities....................................... 5,240 876 782 1,660 Monetary authorities............................... 1,158 88 (47) 227 General Government................................. 2,912 2,223 944 1,675 Banks.............................................. 0 0 0 0 Other sectors...................................... 1,170 (1,435) (115) (242) Money-market instruments.............................. 0 0 0 0 Financial derivatives................................. 0 0 0 0 --------------- Source: Bangko Sentral. 64
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The following table sets out the country's other investments compiled in accordance with the BPM5 framework for the periods indicated. Entries with "zero" balances indicate either that there are no relevant transactions during the period or that the Republic has not yet begun to track and record the relevant entry. OTHER INVESTMENTS [Enlarge/Download Table] FIRST QUARTER 1999 2000 2001 2002 ------- ------- ------- ------- (IN MILLIONS) Total other investments................................... $(8,467) $(7,742) $(7,179) $(2,374) ======= ======= ======= ======= Assets: Residents' investments abroad..................... 18,647 15,311 13,893 3,579 Trade credits(1)........................................ 16,381 17,401 13,770 3,185 Loans(2)................................................ 262 (1,309) 830 (297) Currency and deposits................................... 2,278 (757) (508) 841 Banks................................................ 961 (934) (1,097) 530 Other sectors........................................ 1,317 177 589 311 Other assets(3)......................................... (274) (24) (199) (150) Liabilities: Non-residents' investments in the Philippines............................................. 10,180 7,569 6,714 1,205 Trade credits(1)........................................ 9,958 7,157 7,499 1,325 Loans................................................... 575 354 (225) 102 Monetary authorities................................. 0 51 171 (2) Drawings(4)........................................ 0 105 177 0 Repayments(4)...................................... 0 54 6 2 General Government................................... 340 (125) (78) 6 Drawings(4)........................................ 1,465 933 826 243 Repayments(4)...................................... 1,125 1,058 904 237 Banks(6)............................................. 626 (250) (647) 143 Other sectors........................................ (391) 678 329 (45) Long-term.......................................... (494) 952 686 (119) Drawings........................................ 2,610 2,428 2,848 311 Repayments...................................... 3,104 1,476 2,162 430 Short-term......................................... 103 (274) (357) 74 Currency and deposits(6)................................ (466) (120) (340) (195) Other Liabilities(7).................................... 113 178 (220) (27) --------------- Source: Bangko Sentral. (1) All trade credits are short-term credits in non-governmental sectors. (2) All loans are short-term bank loans. (3) All other assets are short-term bank assets. (4) Long-term loans. (5) Short-term loans. (6) All bank currency and deposits. (7) All short-term bank liabilities. Domestic macroeconomic policies and structural reforms have significantly affected the flow of foreign investment into the Philippines. The Foreign Investment Act of 1991, as amended, introduced a more favorable investment environment to the Philippines. The act permits foreigners to own 100% of Philippine enterprises, except in certain specified areas included in a "negative list" with respect to which the 65
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Constitution or applicable statute limits foreign ownership, generally to a maximum of 40% of the enterprise's equity capital. The Constitution also prohibits foreign ownership in certain sectors, such as the media. From 1994 to 1996, improvements in macroeconomic conditions resulted in growth in production, declining inflation rates, lower interest rates, a stable exchange rate and an improved external payments position, including a rising level of international reserves, all of which encouraged foreign investment. In 1996, the country's net foreign investment surplus grew 118.6% to $3.5 billion as residents' investments abroad declined 92.2% to $104 million and non-residents' investments in the country rose 23%. New foreign investments in the country fell 17.4% to $1.1 billion. In January 1997, Bangko Sentral attempted to enhance the investment climate by lifting the limits on domestic borrowing by foreign firms. Beginning in mid-1997, however, due to the regional economic crisis, production dropped, interest rates climbed, the Peso depreciated, the balance of payments position deteriorated and international reserves fell, leading to a flight of capital from the country. In 1997, the country's net foreign investment surplus fell 78.3% to $762 million. Non-residents investments in the Philippines dropped 76.7% as portfolio investment withdrawals climbed 60.3%, creating a portfolio investments deficit of $406 million. Total resident investments abroad fell 22.1% from 1996. New foreign investments in the Philippines remained virtually unchanged from 1996. In 1998, net investment inflows increased significantly to $1.7 billion compared with $762 million recorded in 1997. New foreign direct investments in the Philippines grew 52% to $1.6 billion, compared with $1.1 billion in 1997. In 1999, net investment inflows declined by 20.5% to $1,329 million compared to 1998. New foreign direct investments declined by 23.9% to $1.2 billion, compared with $1.6 billion for 1998. In 1999, under the BPM5 framework, a net outflow of $1.8 billion was registered in the capital and financial account due to the net outflow of $9.5 billion in the other investment accounts. The continued inflows of direct and portfolio investments, on the other hand, cushioned the impact of these outflows. In 2000, under the BPM5 framework the net outflow in the financial account reached $6.5 billion, an increase of 262.5% from the net outflow of $1.8 billion recorded in 1999. However, sustained net inflows of both direct and portfolio investments mitigated the contraction in the financial account. This developed due to the net outflows posted in the portfolio and other investment accounts. In 2001, the financial account registered a net outflow of $3.8 billion, a 41.2% decline from the net outflow of $6.5 million recorded in 2000. The direct investment account posted a sustained net inflow while the portfolio investment account gained strength as it made a dramatic turnaround to a net inflow of $1.4 billion in 2001. Meanwhile, the cumulative net outflow in the other investment account of $7.2 billion was lower by 7.3% than last year's level of $7.7 billion. For the first quarter of 2002, the financial account posted a net inflow of $361 million, a reversal of the net outflow of $1.7 billion for the same period in 2001. This occurred because of higher net portfolio and direct investment inflows, which more than offset the increase in the net outflow of other investments. Total direct investments for the period from January-March 2002 more than doubled to $1.2 billion compared to $608 million for the same period in 2001. The significant expansion in direct investments was traced to non- residents' investments in equity capital which rose by almost seven times to $662 million in the first three months of 2002. The bulk of this equity investment was represented by a $557 million investment in a local brewery company by a Japanese firm, with the remainder directed at other manufacturing companies, financial institutions, and services industries. Higher intercompany loans extended by parent companies to their local subsidiaries, which rose by 15.8% to $455 million, also contributed to the favorable performance of the direct investment account during the quarter. Meanwhile, portfolio investment recorded a net inflow of $1.5 billion compared to a net outflow of $554 million during the same period in 2001. This positive development resulted because of a $2.0 billion increase in non-residents' investments in foreign-denominated debt securities, particularly Government-issued bonds. Similarly, non-residents' investments in equity securities rose by 22% to $122 million from the level posted last year, reflecting increased confidence in the local equities market. On the other hand, the net outflow in the other investments account increased by 37.5% to 66
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$2.4 billion from $1.7 billion in the same period in 2001 due to higher net deposits abroad of resident banks to cover their clients' import payments and to diversify their portfolios. Payments arising from maturing non-residents' placements to local banks also contributed to the net outflow in the other investments account. Over the past few years, the Government has undertaken a number of programs to encourage capital investment, including introducing build, operate and transfer programs, reforming the legal regimes governing foreign investment and the foreign exchange payment system and restructuring the tariff regime. In August 1995, the Government implemented a schedule of tariff reductions to correct distortions caused by past policies. Rates will be reduced to 3% for raw materials and to 10% for finished goods by 2003 and tariffs will be further adjusted to a range from 0% to 5% by 2004. The Philippines also lifted quantitative restrictions on all regulated agricultural products, except rice, and replaced them with tariffs permitted under the Uruguay Round agreements. In early 1996, the authorities further reduced import costs by changing the system of import duty valuation from "home consumption value" to actual transaction value. The Philippines is also a member of the ASEAN Free Trade Area, which provides for the gradual reduction to 5% or less or elimination of tariffs in 2003 on the trade of goods among ASEAN countries pursuant to a Common Effective Preferential Tariff scheme. Currently, the Philippines restricts imports of certain products only for reasons of health, security, safety and environmental protection. The Republic's Board of Investments coordinates with national agencies and local Governments on investment policies and procedures and establishes and administers annual investment priority plans to promote certain sectors of the economy by providing special investment incentives to specific industries. The Government's 2001 Investments Priorities Plan is working to promote the following areas: - poverty alleviation and eradication for all filipinos; - a business and policy environment to promote economic health; and - a business community that is prepared to compete in the global e-commerce business community. Businesses that promote the Republic's investment priorities are eligible for a package of incentives which can last for up to 10 years, including: - income tax holidays; - exemption from wharfage fees; - unlimited use of consigned equipment; - additional tax deductions for labor expenses; and - fewer restrictions on the employment of foreign nationals. The Government grants additional incentives to industries located in less-developed areas or administered by the Philippine Export Zone Authority and the Subic and Clark special economic zones. In March 2000, the Retail Trade Liberalization Act was enacted. The law aims to promote efficiency and competition among domestic industries and foreign competitors which will result in better service and lower prices for the consumers. Prior to its enactment, only citizens of the Philippines and corporations wholly-owned by Filipino citizens could engage in the retail business in the Philippines. Under the law, a foreigner is allowed to own 100% of a retail business in the Philippines provided it makes an investment of at least $7.5 million in the Philippines. If a foreigner makes an investment of between $2.5 million to $7.5 million, the foreigner is allowed to own up to 60% of the retail business in the Philippines for the first two years. 67
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The following table sets out foreign investment in the Philippines registered with Bangko Sentral by sector. FOREIGN EQUITY INVESTMENTS REGISTERED WITH BANGKO SENTRAL BY SECTOR [Enlarge/Download Table] JAN-MAR 1997 1998 1999 2000 2001 2002 -------- ------ -------- -------- ------ ------- (IN MILLIONS) Banks and other financial institutions.... $ 226.4 $193.1 $ 258.3 $ 483.9 $476.4 $ 44.4 Manufacturing............................. 172.2 245.5 1,049.1 171.7 262.9 58.7 Mining.................................... 2.8 161.2 27.3 239.5 66.2 0 Commerce and real estate.................. 78.0 161.9 166.3 62.3 23.2 0.2 Services.................................. 33.3 12.1 16.7 5.2 8.4 17.9 Public utilities.......................... 297.8 67.9 552.5 423.5 20.6 59.1 Others(1)................................. 242.9 43.0 36.5 12.2 0.2 0 -------- ------ -------- -------- ------ ------ Total investments......................... $1,053.4 $884.7 $2,106.7 $1,398.2 $857.8 $180.3 ======== ====== ======== ======== ====== ====== --------------- Source: International Operations Department, Bangko Sentral. (1) Includes construction and agriculture, fishery and forestry. 68
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International Reserves The following table sets out the gross international reserves of Bangko Sentral, compiled in a manner consistent with the revised balance of payments framework and the treatment of IMF accounts in the monetary survey published in the IMF's International Financial Statistics. GROSS INTERNATIONAL RESERVES OF BANGKO SENTRAL [Enlarge/Download Table] AS OF DECEMBER 31, AS OF ---------------------------------------------- MAY 31, 1997 1998 1999(4) 2000(5) 2001 2002 ------ ------- ------- ------- ------- ------- (IN MILLIONS, EXCEPT MONTHS AND PERCENTAGES) Gold(1).................................... $1,472 $ 1,569 $ 1,782 $ 1,973 $ 2,216 $ 2,644 SDRs....................................... 31 1 19 2 14 3 Foreign Investments(2)..................... 6,968 8,738 12,881 12,371 12,786 13,858 Foreign Exchange........................... 179 376 222 565 533 472 Reserve Position in the IMF(3)............. 118 122 120 113 109 112 ------ ------- ------- ------- ------- ------- Total...................................... $8,768 $10,806 $15,024 $15,024 $15,658 $17,089 ====== ======= ======= ======= ======= ======= Total as number of months of imports of goods and services....................... 2.0 3.1 4.4 4.4 5.0 5.6 As a % of short-term debt Original maturity........................ 103.9% 150.4% 261.5% 252.6% 258.9% 324.0% Residual maturity........................ 77.8% 98.2% 168.4% 141.8% 130.7% 149.7% --------------- Notes: (1) Of these amounts 82.3% in 1997, 75.3% in 1998, and 83.3% in 1999 served as collateral for gold-backed loans. Under the new accounting system adopted in 2000, 82.6% of the amount as of December 31, 2000, 85.7% as of December 31, 2001, and 65.9% as of May 31, 2002 served as collateral for gold-backed loans and gold swap arrangements. (2) Consists of time deposits, investments in securities issued or guaranteed by government or supranational organizations and repurchase agreements. (3) The reserve position in the IMF is an off-balance sheet item and is recorded by Bangko Sentral's Treasury Department as a contingent asset with a matching contingent liability. (4) Represents official figures from Bangko Sentral's Treasury Department under the old system where monetary gold under the swap arrangement was not part of gross international reserves. (5) Beginning January 2000, a new system was adopted revising the treatment of monetary gold under the swap arrangement, including it as part of gross international reserves. To allow comparability with 2000 data, the revised treatment of monetary gold under the swap arrangement would have resulted in an upward adjustment of the gross international reserves level as of December 31, 1999 to $15,107 million. The gross international reserves controlled by Bangko Sentral constitute substantially all of the Philippines' official international reserves. By the end of March 1997, gross international reserves rose to approximately $12 billion. After the onset of the Asian economic currency crisis, however, gross international reserves declined to $8.8 billion as of December 31, 1997, primarily because of $2.8 billion of net foreign exchange sales by Bangko Sentral in 1997. In addition, in 1997 the Government spent $1.9 billion and Bangko Sentral spent $555 million on debt service payments. These expenditures effectively consumed $500 million from Bangko Sentral's June 1997 bond flotation, $700 million and $331 million from two drawings under the Republic's extended fund facility with the IMF and $324 million borrowed in parallel loan financing from the Export-Import Bank of Japan. In 1998, the Government took a number of steps to boost reserves, including obtaining a $610 million one-year loan from a syndicate of mainly domestic banks in September 1998 and drawing upon the $1.4 billion stand-by facility provided by the IMF. The IMF disbursed $278 million under the stand-by facility in November 1998 and $133 million in December 1998. In 1998, the reserve level was also increased by $500 million of foreign currency deposits with Bangko Sentral from foreign banks, $492 million in net proceeds from the Republic's global bond offering in 69
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April 1998, a $750 million club loan from a consortium of foreign banks, $210 million in net foreign exchange purchases by Bangko Sentral and increased investment inflows resulting from improvements in the currency markets. Foreign exchange outlays of $1.9 billion by the Government and $532 million by Bangko Sentral were used to service maturing foreign obligations, however, reduced reserve levels. In 1999, gross international reserves increased significantly to reach $15.0 billion as of the end of 1999, equivalent to 4.4 months of imports of goods and payment of services and income. The increase in reserve level was due to higher public sector borrowing, renewed private capital flows and stronger external trade performance. Among other reasons, the reserve level was increased by the Republic's $1.2 billion global bond offerings in January and February 1999, E350 million eurobond offering in March 1999, $292 million global bond offering in October 1999 and $400 million re-opening of its 2019 bonds in December 1999. Further, the IMF disbursed $130 million under the stand-by facility in March 1999 and $214 million in July 1999. In June 1999, the Republic refinanced the $610 million syndicated loan facility it obtained in 1998 with three-year fixed and floating rate notes and, in December 1999, the Republic completed a $260 million eurobond offering to partially refinance the $610 million one-year loan. In January 2000, Bangko Sentral revised its method of accounting for international reserves at the recommendation of the IMF. Under the previous accounting system, a gold swap transaction was treated as a sale of gold which reduced the amount of gold holdings. Under the revised system, a gold swap transaction is treated as a loan transaction collateralized by gold that remains a part of the international reserves. In addition, under the revised system, the accrued interest payable on Bangko Sentral's short-term liabilities is netted out of gross international reserves when calculating net international reserves, reducing the level of net international reserves. As of December 31, 2000, gross international reserves stood at $15.0 billion, equivalent to 4.4 months of imports of goods and payment of services and income. Major sources of foreign exchange inflows in 2000 were the Republic's $1.6 billion Yankee bond offering in March, a $500 million Bangko Sentral syndicated loan in April, Y35 billion Samurai bond offering and $400 million syndicated loan in October, $200 million private placement of Yen-denominated eurobonds in November and $200 million private placement of eurobonds in December. These inflows were partially offset by a decline in portfolio investments by non-residents from their 1999 levels. As of December 31, 2000, net international reserves totalled $11.3 billion, compared to $11.8 billion as of December 31, 1999 (after adjustment for the BPM5 framework). As of December 31, 2001, gross international reserves rose to $15.7 billion compared to $15.0 billion as of December 31, 2000. The increase in gross international reserves during the year 2001 was attributed mainly to foreign exchange inflows arising from various foreign loans and bond flotations. The various loans and bond flotations include, among others, the Republic's $199 million Floating Rate Notes due 2004; the Republic's $100 million Facility Loan Agreement; the Republic's $220 million Cross Currency Swap; the Republic's $119 million Treasury Bills to pre-fund the Government's 2002 requirements; the Asian Development Bank ("ADB") Non-Bank Financial Program Loan of $75 million; the ADB Power Sector Loan of $100 million; the Republic's $444 million Fixed Rate Bonds due 2006; the Republic's Shibosai $365 million Fixed Rate Guaranteed Bonds due 2011; Bangko Sentral's $740 million 3-year Term Loan Facility; Bangko Sentral's $200 million Floating Rate Notes due 2003; Bangko Sentral's $550 million 9% Notes due 2005 and Bangko Sentral's $700 million loan from other foreign financial institutions. The impact of these inflows was partly mitigated by the servicing of foreign exchange requirements of the Government and Bangko Sentral. Net international reserves totaled $11.4 billion as of December 31, 2001. Bangko Sentral's gross international reserves, including the reserve position in the IMF, rose to $17.1 billion as of May 31, 2002 from $15.7 billion as of December 31, 2001. The rise in reserves in May 2002 was due mainly to the deposit by the Republic of the proceeds from Global Bonds issued in January and March 2002 totaling $1.73 billion, a loan drawdown from the Japan Bank for International Cooperation Co-Financing Power Sector Reform Loan of $100 million in January, as well as Bangko Sentral's reopening of four-year fixed rate notes totaling $250 million in January. The increase in reserves was partly offset, however, by the servicing of foreign exchange requirements of the Republic and Bangko Sentral. The gross reserves were equivalent to 5.6 months of imports of goods and payments of services and income, 1.5 times the amount 70
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of short-term external obligations of the Republic based on residual maturity and 3.2 times the amount of short-term external debt of the Republic based on original maturity. Bangko Sentral occasionally enters into options with respect to gold, foreign exchange and foreign securities for purposes of managing yield or market risk. It also enters into financial swap contracts to optimize yield on its gold reserves. MONETARY SYSTEM Monetary Policy In 1993, the Government established Bangko Sentral, the Republic's central bank, pursuant to the New Central Bank Act. Bangko Sentral replaced the old Central Bank of the Philippines, which had incurred substantial deficits in connection with: - quasi-fiscal activities, including entering into foreign exchange forward cover contracts and swaps with certain banks and Government corporations and assuming the foreign exchange liabilities of certain Government and private corporations during the Philippines' foreign exchange crisis in the early 1980s; - development banking and financing; and - open market operations financed by the issuance of domestic securities at high interest rates. Bangko Sentral functions as an independent central monetary authority responsible for policies in the areas of money, banking and credit as authorized under Section 3 of Republic Act No. 7653, otherwise known as the New Central Bank Act. As such, it does not engage in the quasi-fiscal activities that caused the old Central Bank to fail. The New Central Bank Act also prohibits Bangko Sentral from engaging in development banking or financing. Additionally, Bangko Sentral does not engage in any commercial banking activities. Bangko Sentral's primary objective is to maintain price stability conducive to a balanced and sustainable growth of the economy, as well as to promote and maintain monetary stability and the convertibility of the Peso. To achieve the price stability objective, Bangko Sentral undertakes monetary management mainly through adjustments to policy rates and the conduct of open market operations, including the purchase and sale of Government securities, rediscounting transactions and adjustments in reserve requirements. Bangko Sentral's functions include: - conducting monetary policy; - issuing the national currency; - managing foreign currency reserves; - acting as depository for the Government, its political subdivisions and instrumentalities and for Government owned corporations; and - supervising and regulating banks and quasi-banks in the Philippines. The Government owns all of the capital stock of Bangko Sentral. A seven member Monetary Board, comprised of Bangko Sentral's Governor, a member of the Cabinet designated by the President and five full-time private sector representatives, governs Bangko Sentral. The President appoints each of the seven Monetary Board members to six-year terms except the Cabinet representative. Philippine law requires Bangko Sentral to maintain a net positive foreign asset position. As of June 2001, Bangko Sentral had total assets of P1.13 trillion, of which net international reserves accounted for P756.5 billion ($14.4 billion). Bangko Sentral's remaining assets consist mainly of foreign exchange receivables, loans and advances and Government securities, and its liabilities consist mainly of deposits of financial institutions and, the Government and Government-owned corporations and foreign liabilities in the form of loans and bonds payable. 71
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Money Supply The following tables presents certain information regarding the Philippines' money supply: MONEY SUPPLY [Enlarge/Download Table] AS OF DECEMBER 31 AS OF ----------------------------------------------------- APRIL 30, 1997 1998 1999 2000 2001 2002(1) -------- -------- -------- -------- -------- --------- (IN BILLIONS, EXCEPT FOR PERCENTAGES) M1(2) Currency in circulation................... P 143.6 P 146.1 P 218.5 P 192.3 P 194.7 P 176.2 Current account deposits.................. 114.7 135.4 175.6 194.7 193.3 227.4 -------- -------- -------- -------- -------- -------- Total..................................... 258.3 281.5 394.1 387.0 388.1 403.6 % increase.............................. 16.4% 9.0% 40% (1.8%) 0.3% 3.7%(5) M2(3)..................................... P1,053.9 P1,138.4 P1,357.9 P1,423.2 P1,521.1 P1,564.9 % increase.............................. 20.5% 8.0% 19.3% 4.8% 6.9% 6.7%(5) M3(4)..................................... P1,066.0 P1,144.6 P1,365.1 P1,427.0 P1,525.0 P1,563.2 % increase.............................. 20.9% 7.4% 19.3% 4.6% 6.8% 6.6%(5) --------------- Source: Bangko Sentral, Department of Economic Research. (1) Preliminary. (2) Consists of currency in circulation and demand deposits. (3) Consists of M1, savings deposits and time deposits. (4) Consists of M2 and deposit substitutes. (5) Percentage growth over April 2001 level. The following table presents information regarding domestic interest and deposit rates. DOMESTIC INTEREST AND DEPOSIT RATES [Enlarge/Download Table] 1997 1998 1999 2000 2001 2002 ----- ----- ----- ----- ----- ----- (WEIGHTED AVERAGES IN PERCENTAGES PER PERIOD) 91-day Treasury bill rates.................................. 13.1% 15.3% 10.2% 9.9% 9.9% 5.7%(3) 90-day Manila Reference rate(1)............................. 11.1 13.8 10.1 8.8 10.1 8.9(4) Bank average lending rates(2)............................... 16.2 18.4 11.8 10.9 12.4 10.6(5) --------------- Source: Bangko Sentral, Department of Economic Research. (1) Based on promissory notes and time deposit transactions of sample commercial banks. (2) Starting January 2002, monthly rates reflect the annual percentage equivalent of all commercial banks' actual monthly interest income on Peso-denominated loans to the total outstanding levels of their Peso-denominated demand/time loans, bills discounted, mortgage contract receivables and restructured loans. (3) January to June 2002. (4) January to May 2002. (5) January to April 2002. The Asian economic crisis complicated Bangko Sentral's task of balancing the need for readily available credit against the fear of rising inflation. To control the inflationary effect of the Peso's depreciation, Bangko Sentral initially reduced the supply of Pesos by raising interest rates and reserve requirements. Bangko Sentral raised its overnight borrowing rate to 32% in July 1997 from 15% at the end of June 1997 and its overnight lending rate to 34% in July 1997 from 17% at the end of June 1997. On August 20, 1997, Bangko Sentral temporarily suspended its overnight lending facility. Bangko Sentral also increased liquidity reserve requirements on Peso deposit liabilities from 2% in July 1997 to 8% in August 1997 in addition to the bank's 13% statutory reserve requirement. In November 1997, as signs of improvement appeared, Bangko Sentral lowered liquidity reserve requirements to 4% of Peso deposit liabilities. 72
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Bangko Sentral and the Bankers' Association of the Philippines also took measures to encourage reductions in bank lending rates to avoid potential corporate bankruptcies. Bangko Sentral approved certain liquidity easing measures in January 1998, including the opening of a 30-day lending window, the opening of a swap window for banks without Government securities holdings and the purchase of Government securities at market prices. In April 1999, Bangko Sentral decreased the liquidity reserve requirement from 5% to 4% and lowered the statutory reserve requirement from 13% to 10% on March 1998. These measures were intended to lower bank intermediation costs and thereby reduce the banks' domestic lending rates. Bangko Sentral further reduced the statutory reserve requirement to 9% in July 1999 to help reduce the cost of money and increase funds available for lending. At the same time, Bangko Sentral maintained liquidity by raising the proportion of reserves which earns interest to 40% from 25%. In July 2001, Bangko Sentral raised banks' liquidity reserve requirement from 7.0% to 9.0%. The statutory reserve requirement remained unchanged at 9.0%. Bangko Sentral also reduced, from $10,000 to $5,000, the amount of US currency an individual could buy over-the-counter from banks without documentation. The measures were intended to siphon excess liquidity in the economy that could lead to higher inflation or be used to speculate on the Peso. On August 10, 2001, Bangko Sentral raised required liquidity reserves by another 2% points to 11%. As the inflation rate eased from 11.5% in January 1999 to 6.7% for the full-year 1999, Bangko Sentral implemented 21 rate cuts in its overnight borrowing rate (for a cumulative reduction of 462.5 basis points) and 20 rate cuts in its overnight lending rate (for a cumulative reduction of 377.5 basis points). The inflation rate in 2000 averaged 4.4%, which is well below the 6.7% recorded in 1999. Emerging inflationary pressures and volatility in the foreign exchange market due to narrowing interest rate differentials prompted monetary tightening actions in 2000. In May 2000, Bangko Sentral increased its overnight borrowing and lending rates by a total of 125 basis points to 10.0% and 12.3%, respectively. Policy rates were raised in September 2000 by 100 basis points and by an additional 400 basis points in October 2000 to address the upside risks of inflation due to the sharp depreciation of the Peso and the narrowing interest rate differential. The October 2000 rate increase was accompanied by a 4-percentage point increase in banks' liquidity reserve requirements intended to siphon off excess liquidity, which was feeding speculative activity in the foreign exchange market. As a result of these tightening moves, the average 91-day Treasury bill rate rose from 8.9% in January to 15.8% in November. The temporary tightening measures helped keep inflationary pressures in check, restored general stability in the foreign exchange market and provided room for the gradual easing of the monetary policy stance. In December 2000, Bangko Sentral began the process of restoring policy rates to pre-crisis levels by reducing the overnight rates by a cumulative 150 basis points. This induced a gradual downtrend in interest rates, with the 91-day Treasury bill rate falling to 13.6% in December. In early 2001, Bangko Sentral successively reduced interest rates to encourage economic activity. From January to May 2001, sustained monetary easing reduced Bangko Sentral policy rates by a total of 450 basis points to 9.0% and 11.25% for the overnight borrowing rates and lending rates, respectively. These rates remained unchanged from May 18 to October 4, 2001. Subsequently, relative stability in the financial markets and the containment of inflation allowed Bangko Sentral to further ease monetary policy. Moreover, the worldwide reduction in interest rates by many central banks, following significant monetary policy easing by the US Federal Reserve, made possible a comfortable interest rate differential and mitigated the risk of abrupt shifts in short-term investment funds toward foreign-currency denominated assets. Thus, Bangko Sentral's policy rates were reduced successively in the fourth quarter of 2001, resulting in a cumulative reduction of 575 basis points from December 2000. At the end of December 2001, the overnight borrowing rates and lending rates stood at 7.75% and 10.0%, respectively. The reduction in policy rates in December was accompanied by a two percentage point reduction in banks' liquidity reserve requirements intended to encourage a further downtrend in market interest rates. The tiering system on banks' overnight placements with Bangko Sentral (initially adopted in June 2000) was temporarily removed on August 3, 2001 to help ease pressure on the Peso. In November 2001, the tiering scheme was subsequently restored to induce banks to lend their funds to the various productive sectors of the economy. In December 2001, a change in the structure of the tiering scheme of Bangko Sentral's overnight 73
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rates window was effected as follows: 7.75% for placements of up to P5 billion, 5.75% for the next P5 billion, and 3.75% for placements in excess of P10 billion. During the first three months of 2002, Bangko Sentral eased policy rates three times for a cumulative reduction of 75 basis points to reach 7.0% and 9.25% for the overnight borrowing and lending rates, respectively. These are the lowest levels in Bangko Sentral's policy rates in 10 years. The rate reductions were accompanied by corresponding changes in the structure of the tiering scheme for interest rates on banks' overnight placements with Bangko Sentral. As of March 15, 2002, the rates under the tiering structure for banks' placements in the overnight rates placements with Bangko Sentral were as follows: 7.0% for placements of up to P5 billion, 4.0% for the next P5 billion, and 1.0% for placements in excess of P10 billion. The tiering scheme was also modified to cover placements in special deposit accounts ("SDAs") and was required to be applied on a consolidated basis. These changes were aimed at inducing banks to channel the additional liquidity into lending for productive activities. Bangko Sentral also reduced the liquidity reserve requirement on deposits by two percentage points to 7.0% effective January 18, 2002, a move which restored the liquidity reserves to their pre-July 2001 level. The benchmark 91-day Treasury bill rate declined from an average of 12.2% in January 2001 to 9.9% in December 2001. Bank lending rates have also begun to ease, from a range of 17.1%-19.0% in January 2001 to a range of 14.2%-12.7% in December 2001 and further to 7.9%-9.6% in June 2002. Foreign Exchange System The Republic maintains a floating exchange rate system under which market forces determine the exchange rate for the Philippine Peso. Bangko Sentral may, however, intervene in the market to maintain orderly market conditions and limit sharp fluctuations in the exchange rate. The following table sets out exchange rate information between the Peso and the US dollar. EXCHANGE RATES OF PESO PER US DOLLAR [Enlarge/Download Table] YEAR PERIOD END PERIOD AVERAGE(1) ---- ---------- ----------------- 1997..................................................... 39.975 29.471 1998..................................................... 39.059 40.893 1999..................................................... 40.313 39.089 2000..................................................... 49.998 44.194 2001..................................................... 51.789 50.993 2002(2).................................................. 50.418 50.832 --------------- Source: Reference Exchange Rate Bulletin, Treasury Department, Bangko Sentral. (1) The average of the monthly average exchange rates for each month of the applicable period. (2) First six months of 2002. In 1993, the Government significantly reformed the Republic's foreign exchange payment system by, among other things: - eliminating the requirement to surrender export proceeds; - removing restrictions on current account transactions; - easing access to foreign currency loans for exporters and producers; and - relaxing the regulations governing investments outside the Philippines. Foreign exchange may be freely sold and purchased outside the banking system and deposited in foreign currency accounts. Both residents and non-residents may maintain foreign currency deposit accounts with authorized banks in the Philippines, and residents may maintain deposits abroad without restriction. 74
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Payments related to foreign loans registered with Bangko Sentral and foreign investments approved by or registered with Bangko Sentral may be serviced with foreign exchange purchased from authorized agent banks. Bangko Sentral must approve and register all outgoing investments by residents exceeding $6 million per investor per year if the funds will be sourced from the banking system. For a discussion of Bangko Sentral's loan approval regime, see "-- The Philippine Financial System -- Foreign Currency Loans". While the Government imposes no currency requirements for outgoing payments, all exchange proceeds from exports, services and investments must be obtained in any of 22 prescribed currencies. Authorized agent banks may convert the acceptable currencies to Pesos. Bangko Sentral maintains an Exporters' Dollar Facility to facilitate the conversion of export proceeds in US dollars into Pesos. In 1999, Bangko Sentral expanded the facility to include a Japanese yen rediscounting facility and renamed it the Exporters' Dollar and Yen Rediscount Facility. Individual or corporate non-residents may open Peso bank accounts without Bangko Sentral's approval. The export or electronic transfer out of the Philippines of Peso amounts exceeding P10,000 requires prior authorization from Bangko Sentral. The value of the Peso relative to the US dollar and other foreign currencies declined substantially in 1997 and early 1998. Bangko Sentral initially responded to the Peso depreciation in July 1997 by increasing its sales of US dollars and raising interest rates. In 1997, total net sales of US dollars by Bangko Sentral amounted to over $2.6 billion, including $2.1 billion in June and July 1997. Despite Bangko Sentral's intervention, sales of Pesos proved stronger than expected and as a result, Bangko Sentral allowed the Peso to float on July 11, 1997. The value of the Peso then declined over time, reaching a low of P45.42 per US dollar on January 8, 1998. As the Government implemented various monetary, foreign exchange and fiscal policies to curb speculation and restore confidence in the economy, the Peso began to strengthen. On December 31, 1998, Bangko Sentral's reference exchange rate was P39.06 per US dollar and on December 31, 1999, the exchange rate was P40.31 per US dollar. For the first four months of 2000, the Peso-dollar rate was relatively stable, averaging P40.78 per US dollar. However, the exchange rate began to exhibit volatility starting in mid-May and exceeded P45.00 per US dollar on July 27, 2000. It exceeded P50.00 per US dollar on October 27, 2000, and reached a record average low of P51.68 per US dollar in November 2000. The Peso recovered briefly in November, bringing the rate up to P49.39 per US dollar on November 29, 2000. This trend, however, was not sustained as the Peso depreciated to an average of P49.99 per US dollar by the end of 2000. The weakness of the Peso in 2000 may be attributed to a number of factors, including the rise in US interest rates, which reduced the interest rate differential between domestic and international interest rates, concerns over the rising fiscal deficit, and some domestic, non-economic factors, which included the tension in Mindanao, some issues pertaining to public governance, and the ensuing political uncertainties surrounding the impeachment trial of former President Estrada. The Peso depreciated further in 2001. From P49.998/US$1 at end-2000, transitory shocks caused the Peso to reach a low of P55.013/US$1 on January 19, 2001. The Peso strengthened thereafter and was relatively stable for most of February and March. From early April, however, the Peso traded in the P50-P51/US$1 range. The pressure on the Peso again intensified starting late June until the first week of August but the Peso subsequently appreciated to an average of P51.250/US$1 in September, from an average of P53.224/US$1 in July. The Peso weakened again starting the second week of October before appreciating towards the latter part of December as market conditions stabilized. Overall, during 2001 the Peso depreciated by 13.8% compared to the average peso-dollar exchange rate for 2000. The fluctuations in the peso-dollar rate during 2001 were caused by a confluence of domestic and external factors. In early January, the political crisis involving the impeachment proceedings of the former President negatively affected the Peso. However, the speedy and peaceful resolution of the political crisis enabled the Peso to recover and gain some stability beginning in the third week of January. Starting April until the first week of August, the Peso, along with other regional currencies, was again weakened against the dollar due primarily to bearish market sentiment brought about by concerns over the economic slowdown in the US and 75
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in Japan. The weakness of the Peso was also attributed to: (1) the continued tension resulting from the Abu Sayyaf hostage crisis and the spate of kidnappings in Metro Manila; (2) the downgrading of growth projections by the government due to the contraction in exports and the slowdown in industrial output; (3) worries over the budget deficit; (4) rising corporate dollar demand for mid-year import requirements and dividend repatriation; and (5) renewed weakening of investor sentiment on emerging market currencies due to the debt crisis in Argentina. Heightened uncertainty after the 11 September terrorist attacks in the United States was mainly behind the depreciation pressure on the Peso in the last quarter of the year. STABILIZATION OF THE PESO. Since it allowed the Peso to move within a wider range on July 11, 1997, Bangko Sentral has intervened minimally in the foreign exchange market. It has, however, adopted certain measures related to foreign exchange trading including: - requiring prior approval of Bangko Sentral to sell non-deliverable forward contracts to non-residents to decrease the demand for foreign currency (Bangko Sentral believes that speculators used non-deliverable forward contracts to increase artificially the demand for foreign currency); - reducing banks' permitted long or overbought foreign exchange position to the lower of $10 million or 5% of unimpaired capital, to limit a bank's ability to speculate in foreign exchange; - lifting temporarily, subject to periodic review by Bangko Sentral, the 20% limit on banks' short or oversold foreign exchange position, to increase the foreign exchange available in the market; - limiting the types of forward contracts that can be used as deductions when valuing a bank's overbought foreign exchange position; - requiring banks to consolidate their foreign exchange accounts with those of their subsidiaries when calculating net open foreign exchange positions so that a bank cannot circumvent the rules by engaging in foreign exchange transactions through a subsidiary or affiliate; - decreasing the maximum amount of foreign exchange that banks can sell over-the-counter on an undocumented basis to $5,000 from $100,000, thus moderating demand for foreign exchange; - prohibiting banks from extending Peso loans to non-residents to curb undue speculation in the foreign exchange market and to further reinforce the regulation that Peso deposits should be funded from inward foreign exchange remittance; - requiring banks with foreign exchange corporations to submit a report containing details of foreign exchange purchases and sales; - issuing rules and regulations to combat money laundering. See "-- The Philippine Financial System -- Structure of the Financial System". In addition, in December 1997, Bangko Sentral introduced the currency risk protection program, which is a hedging facility provided by Bangko Sentral through commercial banks under which, on the maturity of a forward contract, the difference between the contract rate and the market rate is settled and paid in Pesos. The program allows eligible borrowers with unhedged foreign exchange liabilities to borrow from the program to hedge their unmatured liabilities with reference to foreign currency deposit units of banks. This reduces their foreign exchange exposure and generally reduces demand for foreign currency in the spot market. In early 1998, as a part of the program, Bangko Sentral expanded oil companies' access to commercial bank funds by permitting them to borrow foreign currencies, in addition to obtaining loans and advances, to pay for their non- crude and non-refined imports and to meet their short-term working capital requirements. In January 2000, Bangko Sentral imposed a 90-day minimum holding period for foreign investments placed in Peso time deposits with Philippine banks to tighten its monitoring of the foreign exchange market and discourage the inflow of short-term speculative funds. The holding period applies only to Peso time deposits and not to other investments such as equities, government securities or commercial paper. Peso time deposits that are terminated within the 90-day period will not be converted by Philippine banks to foreign currency, but may be transferred to other Peso-denominated investments. 76
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In June 2000, Bangko Sentral began to require banks and their subsidiaries with foreign exchange operations to submit detailed reports of foreign exchange purchases and sales transactions involving more than $250,000 with the objective of closely monitoring and supervising the foreign exchange operations of those banks and subsidiaries. In October 2000, Bangko Sentral introduced guidelines on the foreign exchange trading activities for foreign exchange corporations or corporations that are subsidiaries or affiliates of banks, quasi-banks or non-bank intermediaries. Under the guidelines, foreign exchange corporations must require a written, notarized application and supporting documentation for sales of foreign exchange in excess of $10,000 to Philippine residents for trade and non-trade purposes. Additionally, foreign exchange corporations are required to confirm that the $10,000 limit is not breached by splitting the foreign exchange purchases into smaller amounts to make it appear that the purchase does not violate the prescribed limit. Bangko Sentral also increased the minimum paid-in capital for foreign exchange corporations to P50 million. In October 2000, Bangko Sentral also expressly prohibited banks from engaging in engineered swap transactions because Bangko Sentral believes these transactions contributed to the volatility of the Peso-US dollar exchange rate during 2000. In 2001 and 2002, Bangko Sentral implemented the following measures to address dollar speculation and exchange rate volatility: - in July 2001, expanded the eligibility rules of the currency risk protection program, a hedging facility established in 1997, to include US dollar trust receipts; net importers; registered foreign currency- denominated bonds and foreign currency deposit loans with the original maturities longer than one year and up to five years; and trade transactions of clients other than oil companies. The coverage of the currency risk protection program was further expanded in September 2001 to include Bangko Sentral-registered short-term trade-related borrowings of oil companies from offshore banking units and offshore banks. The measures are expected to further relieve the pressure on the spot market created by investors who seek to front-load their future foreign currency requirements and by borrowers who seek to cover unmatured foreign currency obligations; - reduced the ceiling on undocumented over-the-counter sales of foreign exchange to $5,000 to prevent abuse through the splitting of foreign exchange sales; - kept policy rates unchanged since May 18, 2001 to preserve an appropriate interest rate differential to encourage investors to maintain their Peso-denominated assets, while concurrently addressing the risk of inflation arising from the pass-through effects of the Peso depreciation. Bangko Sentral's overnight borrowing and lending rates were subsequently reduced after the third quarter of 2001 to their current levels of 7.0% and 9.25%, respectively; - increased the monetary penalty and introduced non-monetary sanctions for those violating foreign exchange rules and regulations; and - required effective from January 1, 2002, any person who brings into or out of the Philippines foreign currency in excess of $10,000 or its equivalent to declare the same in writing and to furnish information on the source and purpose of the transport of such currency. 77
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THE PHILIPPINE FINANCIAL SYSTEM Composition The following table sets out the total assets of the Philippine financial system by category of financial institution. TOTAL ASSETS OF THE FINANCIAL SYSTEM(1) [Enlarge/Download Table] AS OF DECEMBER 31, AS OF ---------------------------------------------------- MARCH 31, 1997 1998 1999 2000 2001(2) 2002 -------- -------- -------- -------- -------- --------- (IN BILLIONS) Banks Commercial banks................... P2,513.0 P2,512.2 P2,722.3 P3,013.6 P3,070.5 P3,108.3 Thrift banks....................... 208.4 216.4 223.5 245.8 259.0 256.9(2) Rural banks........................ 57.6 60.0 61.9 67.4 73.8 73.8(3) -------- -------- -------- -------- -------- -------- Total banks...................... 2,779.0 2,788.6 3,007.7 3,326.8 3,403.3 3,439.0 ======== ======== ======== ======== ======== ======== Non-bank financial institutions.... 610.3 656.2 733.6 773.8 691.3 690.5 -------- -------- -------- -------- -------- -------- Total assets..................... P3,389.3 P3,444.8 P3,741.3 P4,100.6 P4,094.6 P4,129.5 ======== ======== ======== ======== ======== ======== --------------- Source: Bangko Sentral. (1) Excludes assets of Bangko Sentral. (2) As of February 28, 2002. (3) As of December 31, 2001. The Philippine financial system consists of banks and non-bank financial institutions. Banks include all financial institutions that lend funds obtained from the public primarily through the receipt of deposits. Non-banks include financial institutions other than banks which lend, invest or place funds, or at which evidences of indebtedness or equity are deposited with or acquired by them, either for their own account or for the account of others. Non-bank financial institutions may have quasi-banking functions. Quasi-banking functions include borrowing money to relend or purchase receivables and other obligations by issuing, endorsing or accepting debt or other instruments or by entering into repurchase agreements with 20 or more lenders at any one time. The Supervision and Examination Sector of Bangko Sentral supervises all banks and non-banks with quasi-banking functions, including their subsidiaries and affiliates engaged in related activities, with Bangko Sentral's Monetary Board having ultimate supervisory authority. Structure of the Financial System The Philippine financial system is comprised of commercial banks, thrift banks, rural banks, specialized Government banks and non-bank financial institutions. Each type of bank participates in distinct business activities and geographic markets. Commercial banks perform the following activities: - accept drafts; - issue letters of credit, discount and negotiate promissory notes, drafts, bills of exchange and other evidences of indebtedness; - receive deposits; - buy and sell foreign exchange and gold and silver bullion; and - lend money on a secured or unsecured basis. 78
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Expanded commercial banks, otherwise known as universal banks, in addition to regular commercial banking activities may also engage in investment banking activities, invest in non-bank businesses and own allied financial undertakings other than commercial banks. As of March 31, 2002, the country had 44 commercial banks, with 4,282 branch offices. Of such commercial banks, 41 were privately owned, including 13 foreign-controlled banks and six subsidiaries of foreign banks. The following table sets out the outstanding loans of commercial banks classified by sector. COMMERCIAL BANKS' OUTSTANDING LOANS BY SECTOR [Enlarge/Download Table] AS OF DECEMBER 31, --------------------------------------------------------------------------------- AS OF APRIL 30, 1998 1999 2000 2001 2002(1) ------------------ ------------------ ------------------ ------------------ ------------------ (IN MILLIONS, EXCEPT PERCENTAGES) Agriculture, fishery and forestry........ P 62,930 4.7% P 58,859 4.3% P 62,101 4.3% P 56,823 4.1% P 48,962 3.5% Mining and quarrying........... 20,048 1.5 16,466 1.2 21,166 1.5 19,890 1.4 16,114 1.1 Manufacturing......... 357,455 26.5 382,267 28.2 404,224 27.8 372,906 26.7 372,261 26.3 Electricity, gas and water............... 47,284 3.5 53,274 3.9 75,398 5.2 70,359 5.0 68,524 4.8 Construction.......... 54,972 4.1 53,384 4.0 46,949 3.2 42,151 3.0 42,278 3.0 Wholesale and retail.............. 210,191 15.6 203,177 15.0 201,233 13.9 210,306 15.0 194,765 13.7 Transportation, storage and communication....... 98,636 7.3 91,024 6.7 99,653 6.9 83,068 5.9 81,110 5.7 Financial institutions, real estate and business services............ 347,339 25.7 342,673 25.3 386,797 26.6 359,199 25.7 409,004 28.8 Community, social and personal services... 149,336 11.1 153,104 11.3 153,983 10.6 184,534 13.2 185,008 13.1 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total............. P1,348,191 100.0% P1,354,228 100.0% P1,451,504 100.0% P1,399,236 100.0% P1,418,026 100.0% ========== ===== ========== ===== ========== ===== ========== ===== ========== ===== --------------- Source: Bangko Sentral. (1) Preliminary. Thrift banks invest their capital and the savings of depositors in: - financings for homebuilding and home development; - marketable debt securities; - commercial paper and accounts receivable, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; or - short-term working capital and medium and long-term loans to small and medium-sized businesses and individuals engaged in agriculture, services, industry, housing and other financial and allied services in its market. As of March 31, 2002, the country had 100 thrift banks, with 1,242 branch offices. Rural banks extend credit in the rural areas on reasonable terms to meet the normal credit needs of farmers, fishermen, cooperatives and merchants and in general, the people in the rural communities. As of March 31, 2002, the country had 782 rural banks, with 1,137 branch offices. The specialized Government banks are the Development Bank of the Philippines, the Land Bank of the Philippines and the Al-Amanah Islamic Investment Bank of the Philippines. The Development Bank generally provides banking services to meet the medium and long-term needs of small and medium-sized agricultural and industrial enterprises, particularly in rural areas. The Land Bank primarily provides financial support for agriculture and all phases of the Republic's agrarian reform program. In addition to their special 79
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functions, the Development Bank and the Land Bank may operate as universal banks. The Al-Amanah Islamic Investment Bank promotes and accelerates the socio-economic development of the Autonomous Region of Muslim Mindanao by offering banking, financing and investment services based on Islamic banking principles and rulings. Non-bank financial institutions are primarily long-term financing institutions that engage in productive ventures and, to a minor extent, facilitate short-term placements in other financial institutions. As of December 31, 2001, Bangko Sentral regulated or supervised 36 investment houses, 48 finance companies, 26 security dealers/brokers, 5,018 pawnshops, 11 investment companies, nine lending investors, 86 non-stock savings and loan associations, four venture capital corporations, six mutual building and loan associations, four Government non-bank financial institutions and seven credit companies. Over the past several years, the Government has reformed the financial sector to eliminate controls, enhance competition and promote stronger and more efficient financial institutions. The reforms include: - unifying and gradually reducing reserve requirements to reduce intermediation costs of banks and improve their efficiency; - using the extension of credit by Bangko Sentral to banks against promissory notes and other collateral or rediscounting as a mechanism for liquidity control rather than pure credit allocation; - broadening securities dealing in Philippine Treasury bills to allow the market to determine interest rates; - prescribing more stringent standards for the establishment of new banks; - easing the entry and operation of foreign banks to attract foreign investments, promote competition and reduce intermediation costs; - simplifying the entry rules for rural banks to improve competition and promote efficiency; and - increasing minimum capital requirements to promote stronger financial institutions. The minimum bank capitalization requirements as of December 2000 is P4.95 billion for universal banks, P2.4 billion for commercial banks and P325 million for thrift banks based in Metro Manila. The economic downturn affected banks in the Philippines primarily in two ways. First, due to the economic troubles, bank deposits increased only minimally which in turn limited the ability of banks to extend new loans. Aggregate assets of the banking system increased by 21.8% from year-end 1997 to February, 2002. Second, the depreciation of the Peso, declining equity prices and higher domestic interest rates weakened the quality of the assets of Philippine banks. This caused a number of relatively small financial institutions to fail and created concerns about the stability of the Philippine financial system. 80
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The following table provides information regarding non-performing loans for the banking system for the periods indicated. TOTAL LOANS (GROSS) AND NON-PERFORMING LOANS BY TYPE OF COMMERCIAL BANKS [Enlarge/Download Table] AS OF DECEMBER 31, AS OF ---------------------------------------------------- APRIL 30, 1997 1998 1999 2000 2001 2002 -------- -------- -------- -------- -------- --------- (IN BILLIONS EXCEPT PERCENTAGES) Expanded commercial banks(1) Total loans.................... P1,112.0 P1,080.1 P1,086.1 P1,025.0 P 992.2 P 988.6 Total non-performing loans..... 46.6 112.4 141.6 172.4 192.6 211.3 Ratio of non-performing loans to total loans.............. 4.2% 10.4% 13.0% 16.8% 19.4% 21.4% Non-expanded commercial banks(2) Total loans.................... 137.6 120.8 139.7 184.3 182.7 190.0 Total non-performing loans..... 9.8 16.5 23.0 32.4 41.7 40.7 Ratio of non-performing loans to total loans.............. 7.2% 13.6% 16.4% 17.6% 22.8% 21.4% Government banks(3) Total loans.................... 166.4 185.9 201.0 222.4 200.3 206.9 Total non-performing loans..... 10.2 18.8 25.4 33.5 35.7 38.6 Ratio of non-performing loans to total loans.............. 6.1% 10.1% 12.6% 15.1% 17.8% 18.7% Foreign banks(4) Total loans.................... 157.1 155.7 156.2 196.5 249.9 267.0 Total non-performing loans..... 6.9 12.2 5.4 7.5 11.9 10.7 Ratio of non-performing loans to total loans.............. 4.4% 7.9% 3.5% 3.8% 4.8% 4.0% Total loans...................... P1,573.1 P1,542.5 P1,582.9 P1,628.2 P1,625.1 P1,652.6 Total non-performing loans....... 73.6 160.0 195.4 245.8 281.9 301.3 Ratio of non-performing loans to total loans.......................... 4.7% 10.4% 12.3% 15.1% 17.4% 18.2% --------------- Source: Bangko Sentral, Department of Economic Research/Supervisory Reports and Studies Office. (1) Includes ING Bank (foreign bank) and excludes Land Bank of the Philippines and Development Bank of the Philippines. Starting May 2001, three expanded commercial banks (Standard Chartered Bank, HSBC and ING Bank) were reclassified as foreign banks. (2) Excludes Orient Bank. (3) Consists of Land Bank, Development Bank and Al-Amanah Islamic Bank. (4) Consists of 13 foreign banks, excludes three foreign banks' subsidiaries. The commercial banking system's NPLs, as a percentage of total loans climbed from 4.7% in 1997 to 17.4% in 2001. In 1998, Bangko Sentral shortened the period after which overdue loans must be classified as NPLs from six months to three months. High interest rates and the depreciation in the Peso have contributed to the increase in NPLs. Bangko Sentral's policy to address the increase in NPLs has been to lower domestic interest rates, promote corporate restructuring and encourage the swift disposal of real and other properties owned or acquired through private-sector led initiatives. These actions enable banks to concentrate on new loans and focus on areas within their core competence. The rise in NPLs weighed down on the asset quality of banks in 2001. The commercial banking system's NPLs as a percent of total loans rose from 15.1% in December 2000 to 17.4% in December 2001. This weakening resulted from the depreciation of the Peso, which contributed to a rise in loan defaults, and the slowdown in business activity that saw a drop in credit demand. 81
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In late 2000 and early 2001, Bangko Sentral extended P30 billion in emergency loans to Equitable PCI and P25 billion in emergency loans to Philippine National Bank ("PNB") to help the banks alleviate short-term liquidity problems attributed to heavy withdrawals during the Estrada impeachment trial. The average capital adequacy ratio of the banking system based on the old concept was 16.6% as of February 28, 2002, above the statutory floor of 10%. After the onset of the Asian economic crisis, Bangko Sentral adopted a number of measures to protect the financial position and soundness of the country's banks, including measures relating to: - Limits on a bank's transactional capacity by: - reducing the maximum loan value for real estate loans from 70% to 60% of the appraised value of the real estate collateral; - limiting bank's real estate loans to no more than 20% of a bank's loan portfolio, subject to certain exceptions that could increase the percentage to 30% overall; - requiring that 30% of the 100% cover of a bank's foreign currency deposit units' foreign exchange liabilities be kept in liquid assets; and - requiring banks to mark-to-market their trading portfolios in line with existing market conditions at the execution of every transaction at the end of each month. - Measures relating to delinquent and restructured loans: - in cases of loans payable in monthly or quarterly installments, reducing the number of missed monthly payments from six to three and quarterly payments from two to one before a loan must be classified as non-performing. To align domestic regulations with international standards, in May 1999 Bangko Sentral extended the date to classify a loan as non-performing for loans payable on a lump sum basis and loans payable in quarterly, semi-annual or annual installments to 30 days after their past-due date; - revising the treatment of restructured loans to provide that they should be treated as performing loans or interest income related to them should accrue if they are current and fully secured by real estate with loan value up to 60% of the appraised value of the real estate security plus ensured improvements. In May 1999, Bangko Sentral further tightened regulations regarding the appraisal of collateral for restructured loans and stipulated additional criteria for reclassifying restructured loans as performing; - mandating general loan loss provisions over and above the provision for probable losses linked to individually identified bad accounts. Incremental loans granted over and above the loan portfolio level of banks, net of allowable exclusions, as of March 31, 1999 are no longer subject to the provisioning requirements requiring banks to reserve an amount equal to 2% of their gross loan portfolio (less certain accounts) as an allowance for probable losses. In December 2001, Bangko Sentral lowered the provisioning ratio from 2% to 1% of the latest outstanding balance of unclassified loans other than restructured loans (less loans which are considered non-risk under existing laws and regulations) to increase new lending, and imposed a 5% reserve on the outstanding balance of unclassified restructured loans (less the outstanding balance of restructured loans which are considered non-risk under existing regulations), to reflect the higher risks attached to such loans even if they are presently performing. These adjustments were implemented to reduce disincentives to lending activities of banks with otherwise sound loan portfolios; and - tightening provisioning requirements to include new categories of loans especially mentioned, regardless of whether such loans are secured by collateral (loan loss provisions of 5% of outstanding loan amount), and secured loans classified as substandard (loan loss provisions of 25% of outstanding loan amount). Guidelines on the allowance required on loan accounts classified as substandard-secured were subsequently issued. 82
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- Measures relating to capitalization: - increasing minimum capital requirements for universal banks to P4.95 billion by December 31, 2000 and for commercial banks to P2.4 billion by December 31, 2000; - implementing additional penalties for a bank's failure to comply with minimum capital requirements; and - categorizing banks by the degree of undercapitalization and adopting prompt corrective measures as appropriate. - Measures relating to disclosure and management: - improving bank disclosures regarding interest rates, non-performing loans, classified loans, loan loss reserves, allowances for probable losses and loss provisions; - improving bank management by outlining and expanding the duties of boards of directors; - requiring banks to appoint compliance officers to ensure the bank's compliance with banking rules and regulations; and - requiring external auditors to provide more information to Bangko Sentral. - Measures relating to regulatory control and bankruptcy: - shifting the regulatory approach to a risk-based approach of examination and consolidated supervision as opposed to one focused exclusively on transaction testing and verifying the existence and value of assets; - issuing stricter guidelines to establish and operate new banks so that new banks will have suitable stockholders, adequate financial strength, an appropriate legal structure in line with its operational structure and appropriate management with sufficient expertise and integrity to operate the bank in a sound and prudent manner. In 1999, Bangko Sentral put in place an indefinite moratorium on the establishment of new banks with certain exceptions such as new banks resulting from mergers and consolidations. In March 2001, Bangko Sentral issued implementing guidelines to enforce section 8 of the General Banking Law of 2000. These guidelines provided for a moratorium on the establishment of commercial banks, with certain exceptions such as new banks arising from the acquisition by a foreign bank of 100% of the voting stock of an existing domestic commercial bank; and - adopting strategies for restructuring a failed bank before closing it, including rehabilitating the troubled bank, buying-in another bank or financial institution or merging the troubled bank with another financial institution. Bangko Sentral worked to amend the banking laws to: - allow Bangko Sentral to adopt internationally accepted risk-based capital requirements, - define unsound banking practices and increase the frequency of bank examinations, - impose sanctions on banks and related persons for violations of banking regulations, - issue regulations requiring banks and affiliates to maintain balanced positions in their foreign currency transactions, and - grant loans to banks for liquidity purposes. To stimulate economic recovery and encourage greater bank lending, Bangko Sentral relaxed the general loan loss provisioning requirement in April 1999 so that banks would not have to make general loan loss provisions for loans granted after March 31, 1999 (the general loan loss provision prior to March 31, 1999 was 1.5% of the total amount of outstanding loan). The requirements for specific loan loss provisions still apply. 83
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The General Banking Law of 2000, signed in May 2000, amended the General Banking Act and enhanced Bangko Sentral's supervisory powers, tightened prudential norms and liberalized foreign ownership of banks. Bangko Sentral now has the power to conduct more in-depth examinations of banks and undertake more effective prompt corrective action. The General Banking Law, however, repealed the Philippine Deposit Insurance Corporation's independent right to conduct on-site supervision and require information from banks. Since August 2000, Bangko Sentral has been issuing the implementing guidelines for the General Banking Law. The General Banking Law reforms introduced include: - a strong legal basis for consolidated supervision; - formal adoption of Basel risk-based capital requirements effective beginning July 1, 2001; - fit-and-proper criteria for directors and officers; - stronger safeguards against connected lending and more comprehensive coverage of single borrower's limit; - inclusion of the declaration of a bank holiday as a ground for placing a bank under receivership; - the legal basis for formulating standards determining unsafe and unsound bank practices; - ownership ceilings by foreign and domestic banks; - increases in monetary penalties; and - improved transparency and disclosure standards. As part of the global fight against money laundering, since July 2000, Bangko Sentral has required banks to report on unusually large transactions and all unusual patterns of transactions which have no apparent or visible lawful purpose. On July 26, 2001, Bangko Sentral also reduced the ceiling on undocumented over-the-counter sales of foreign exchange from $10,000 to $5,000. Additionally, Bangko Sentral has issued a number of administrative measures that bring the country's regulatory regime relating to money laundering closer to international standards. See "Recent Economic Developments -- Anti-Money Laundering Act of 2001". These measures include: - requiring banks and non-bank financial institutions to take reasonable measures to establish and record the true identity of their clients and to update their records at least every other year; - requiring banks and non-bank financial intermediaries to submit their respective plans of action to comply with the above requirements; - requiring banks to take necessary measures to establish and record the true identity of their clients in cases of numbered foreign currency accounts authorized under existing law; - precluding banks from issuing cashier's, manager's checks, certified checks or other instruments payable, to cash, bearer or numbered accounts in amounts exceeding $10,000; - requiring banks with foreign exchange subsidiaries or affiliates to report, on a daily basis, the counterparties and other details of all foreign exchange sales and purchases. For transactions of $250,000 and above, banks are required to specify the identities and addresses of the parties as well as the purpose of the transaction; - instructing foreign exchange corporations, for sales of foreign exchange exceeding $5,000 or more to residents for trade and non-trade purposes, to require foreign exchange purchasers to submit a notarized application and supporting documents; and - requiring any person to declare in writing the amount, source and purpose of the transfer of foreign currency into and out of the country for amounts equivalent to or exceeding $10,000. 84
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Foreign Currency Loans Bangko Sentral imposes a combination of prior approval, registration and reporting requirements on all non-Peso denominated loans. The regime is as follows: [Enlarge/Download Table] TYPE OF LOAN REGULATORY REQUIREMENT --------------------------------------------- --------------------------------------------- Private sector loans: Prior approval, subsequent registration and - guaranteed by a public sector entity or a reporting requirements. local commercial bank; - granted by foreign currency deposit units that are specifically or directly funded from, or collateralized by, offshore loans or deposits; - obtained by banks and financial institutions with a term exceeding one year which will be relent to public and private enterprises; or - serviced using foreign exchange purchased from the banking system, unless specifically exempted from the approval requirement. Private sector loans which are specifically Subsequent registration and reporting exempted and which will be serviced with requirements. foreign exchange purchased in the banking system. All private sector loans to be serviced with Reporting requirements. foreign exchange not purchased from the banking system. Public sector offshore loans except: Prior approval and reporting requirements. - short-term foreign currency deposit loans for trade financing; and - short-term interbank borrowings. THE PHILIPPINE SECURITIES MARKETS History and Development The securities industry in the Philippines began with the opening of the Manila Stock Exchange in 1927. In 1936, the Government established the Securities and Exchange Commission (the "SEC") to oversee the industry and protect investors. Subsequently, the Makati Stock Exchange opened in 1963 and merged with the Manila Stock Exchange to form the Philippine Stock Exchange in 1994. Until economic and political difficulties in the 1970s caused its decline, the Philippine securities market was the most active in Asia. Since 1992, the Government has attempted to improve the capital market, attract more companies to list on the Philippine Stock Exchange and allow more investors to participate in the market by emphasizing market deregulation and self-regulation. On December 6, 1996, the SEC granted the Philippine Central Depository, Inc. a temporary operating license. The central depository, a private institution, implemented a book-entry system to simplify the mechanism for issuing and transferring securities. By December 1997, the central depository had enrolled all active listed issues in the book entry system. On June 29, 1998, the SEC granted the Philippine Stock Exchange self-regulatory organization status, empowering it to supervise and discipline its members, including by examining a member's books of account and conducting audits. To broaden the range of securities eligible for listing, the Philippine Stock Exchange established a board for small-and medium-sized enterprises with an authorized capital of P20 million to P99.9 million of which at 85
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least 85% must be subscribed and fully paid. The Philippine Stock Exchange intends to eventually list debt securities and equity derivatives as well. On July 19, 2000, the Securities Act of 1999 was signed into law. The new Act: - shifts the focus of securities regulation from a merit-based system to a disclosure-based system; - strengthens the anti-fraud provisions of the securities laws; - utilizes self-regulatory organizations to enforce greater investor protection; - updates the regulations governing the securities industry consistent with international practices; and - strengthens the rule-making and corporate reorganization powers of the SEC. As of June 10, 2002, the Philippine Stock Exchange had 151 local and 33 foreign members and 236 listed companies. Share prices of companies listed on the Philippine Stock Exchange fell significantly in 1997. The falling stock market and resultant heavy selling of Philippine equity securities by foreign investors hurt the value of the Peso and the foreign currency positions of financial institutions in the Philippines. The Philippine Stock Exchange Composite Index declined by 45.8% in Peso terms from 3,447.6 on February 3, 1997 to 1,869.2 on December 29, 1997. The Philippine Stock Exchange Composite Index was quite volatile and continued to fall during most of 1998, reaching an historic low of 1,082.2 on September 11, 1998. The stock market rebounded in late 1999, as the Philippine Stock Exchange Composite Index reached 2,143.0 at the end of December 1999, a 8.9% increase from its level at the end of December 1998. The recovery, however, was short-lived as the Philippine Stock Exchange Composite Index contracted for three consecutive quarters in 2000, declining 31.1% for the first nine months due to political turmoil, weakening economic fundamentals and a stock market manipulation scandal involving BW Resources Corporation ("BW"), a publicly traded company, and Mr. Dante Tan, its largest shareholder. During 1999, Mr. Tan, in his own name, under alias names and through associates, bought and sold large quantities of BW shares in an attempt to control the price of the shares. Mr. Tan was charged with, among other things, price manipulation and insider trading. Mr. Tan's case is currently pending with the Department of Justice. The stock market's overall capitalization grew 33% in 2000. As of December 31, 2000, overall capitalization was approximately P2.5 trillion, compared to P1.9 trillion as of December 31, 1999 and P1.4 trillion as of December 31, 1998. As a percentage of GNP, market capitalization declined from 86.4% in 1999 to 77.6% by the end of 2000. The Philippine Stock Exchange Composite Index closed at 1,494.5 on December 31, 2000. On June 20, 2001, the Philippine Stock Exchange announced that the SEC had approved its proposal for its demutualization, or conversion from a mutual or membership organization into a publicly-held stock corporation. Under the demutualization, the Exchange created a new corporation which assumed approximately 80% of the Exchange's total assets. Exchange member broker-dealers surrendered membership rights to the Exchange and, in return, received shares of the new corporation, shares of the Exchange and trading rights. On July 20, 2001, the Philippine Stock Exchange approved the plan to demutualize the stock exchange. On August 8, 2001, the Philippine Stock Exchange completed its conversion to a stock corporation that is publicly held. As its first shareholders, each of the 184 member-brokers subscribed and fully paid for 50,000 shares. The second part of the demutualization which is the public offering and listing of its shares on the Exchange is still under planning. The Philippine Stock Exchange Composite Index reached 1,168.08 at the end of December 2001, a 21.8% decrease from its level at the end of December 2000. At the end of September 2001, the composite index closed the month at 1,126.63, a decrease of 21.5% from end of September 2000. In October 2001, amid the onset of the US-led attacks against the Taliban government in Afghanistan, fears and uncertainties about the prospects of the global economy due to the subsequent threat of war and recession and apprehensions over the Philippine economic and political environment, the composite index continued its decline, finishing the month at 993.35, or 11.8% lower than September 2001. In November 2001, the composite index rose to finish the month at 1,128.47, or 13.6% higher than the prior month, due to the release of better-than-expected domestic economic data, a lower budget deficit for October 2001 than was targeted and favorable news on the 86
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US-led attacks against the Taliban in Afghanistan. In December 2001, the composite index increased to 1,168.08 at month-end, or 3.5% higher than at the end of November 2001. Government Securities Market The Government securities market is dominated by short-term Treasury bills with maturities not exceeding one year. Responding to investor preferences and to create a yield curve for long-term domestic securities, the Government issued securities with longer maturities, including five-year fixed rate treasury bonds in June 1995 and seven and ten-year fixed rate treasury bonds in 1996. The restructuring of the Republic's domestic debt in favor of longer-term securities kept the issuance of Treasury bills of P17.9 billion below budget in 1996, while the issuance of fixed rate Treasury bonds exceeded expectations by P13.5 billion. In 1997, the Government sold, for the first time, 20-year Treasury bonds in the amount of P2 billion. The Government's outstanding direct domestic debt totalled P1,247.7 billion as of December 31, 2001, an increase of 46.6% from P850.9 billion as of December 31, 1998. In June 1999, the Government issued P11.6 billion small-denominated Treasury bonds. These bonds, which have a maturity of five years and are available in blocks of as low as P5,000, are aimed at Philippine retail investors. The bonds are intended to reduce the Government's dependence on weekly auctions and to provide the Government with another source of long-term funding. The Government intends to continue to issue small-denominated Treasury bonds and expects the program to reduce demand for short-term funding and contribute to reduced pressure on interest rates. The Government has taken steps to further the development of the secondary market in Treasury securities, including establishing of the Registry of Scripless Securities which computerizes the sales and purchases of Treasury securities in the secondary market. International Bond Market In February 1997, Bangko Sentral approved guidelines governing the issuance of Peso-denominated instruments in the international capital markets. Bangko Sentral will require the receipt of foreign currency by the Philippines and its exchange into Pesos in the local banking system. PUBLIC FINANCE The Consolidated Financial Position The consolidated public sector financial position measures the overall financial standing of the Republic's public sector. It is comprised of the public sector borrowing requirement and the aggregate deficit or surplus of the Social Security System and the Government Service Insurance System, Bangko Sentral, the Government financial institutions and the local Government units. The public sector borrowing requirement reflects the aggregate deficit or surplus of the Government, the Central Bank-Board of Liquidator's accounts, the Oil Price Stabilization Fund and the 14 monitored Government owned corporations. 87
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The following table sets out the consolidated financial position on a cash basis for the periods indicated. CONSOLIDATED PUBLIC SECTOR FINANCIAL POSITION OF THE REPUBLIC [Enlarge/Download Table] 1997 1998 1999 2000 2001(1) ------ ------- ------- ------- ------- (IN BILLIONS, EXCEPT PERCENTAGES) Public sector borrowing requirement: National Government................................. P 1.6 P (50.0) P(111.7) P(134.2) P(147.0) Central Bank-Board of Liquidation................... (25.7) (26.4) (20.5) (19.2) (23.5) Oil Price Stabilization Fund(2)..................... (0.8) 0.7 1.9 0.1 0.0 Monitored Government owned corporations............. (17.2) (38.0) (4.6) (19.2) (20.9) Government transfers to Government owned corporations...................................... 2.5 0.9 3.0 4.2 4.4 Other adjustments................................... 0.0 1.5 (6.1) (6.6) 0.0 ------ ------- ------- ------- ------- Total public sector borrowing requirement......... P(39.5) P(111.3) P(138.0) P(174.8) P(187.0) ====== ======= ======= ======= ======= As a percentage of GNP................................ (1.6)% (4.0)% (4.4)% (5.0)% (5.1)% Other public sector: Social Security System and Government Service Insurance System.................................. P 3.9 P 17.8 P 36.4 P 15.5 P 15.6 Bangko Sentral(3)................................... 2.2 3.2 (4.0) 0.2 15.0 Government financial institutions................... 4.4 5.4 3.3 2.8 4.8 Local Government units.............................. 4.0 2.0 3.2 3.8 4.2 Timing adjustment of interest payments to Bangko Sentral........................................... 2.3 (0.3) (2.3) 0.5 (0.2) Other adjustments................................... 0.0 0.0 0.8 0.1 0.1 ------ ------- ------- ------- ------- Total other public sector....................... 16.6 28.1 37.5 22.9 39.4 ------ ------- ------- ------- ------- Consolidated public sector financial position... P(22.9) P (83.2) P(100.5) P(151.9) P(147.6) ====== ======= ======= ======= ======= As a percentage of GNP................................ (1.0)% (3.0)% (3.2)% (4.3)% (4.1)% --------------- Source: Fiscal Policy and Planning Office, Department of Finance. (1) Preliminary. (2) The Oil Price Stabilization Fund was created by the Government to stabilize the domestic price of oil products. Prior to deregulation in 1997, if exchange rates and international crude oil prices exceeded certain levels, oil companies received money from the fund, but if exchange rates and crude oil prices fell below those levels, oil companies contributed to the fund. The fund was technically abolished with the full deregulation of the oil industry in February 1998. The Government will settle claims against the fund, amounting to P2.6 billion in 1997, by granting the claimants tax credits over a 15-month period. (3) Amounts are net of interest rebates, dividends and other amounts remitted to the Government and the Central Bank-Board of Liquidation. In 1997, the consolidated financial position recorded a deficit of P22.9 billion, or 1.0% of GNP at current prices. The significantly higher deficit resulted from increased interest rates and, accordingly, interest costs, coupled with lower than projected GNP, which resulted in lower revenues in 1997. In addition, costs relating to the restructuring of the old Central Bank of the Philippines contributed P25.7 billion to the deficit. For 1998, the consolidated financial position recorded a deficit of P83.2 billion, or 3.0% of GNP at current prices, because of increased public sector borrowing requirement to finance higher deficits incurred by the Government and the Government owned corporations. Costs relating to the restructuring of the old Central Bank contributed P26.4 billion to the deficit. For 1999, the consolidated financial position recorded a deficit of P100.5 billion, or 3.2% of GNP at current market prices, compared to a deficit of P83.2 billion in 1998. The Government's position was P15.2 billion off its target of P85.3 billion for the year. The Government accounted for P111.7 billion of the total deficit for the period, in line with its objective of stimulating the economy. Restructuring costs for the old Central Bank also contributed P20.5 billion to the total public sector borrowing requirement. Led by the Government deficit, the consolidated financial position deficit increased to P151.9 billion in 2000 or 4.3% of GNP at current market prices, compared with the previous year's deficit of P100.5 billion. The consolidated public sector deficit was largely due to a public sector borrowing requirement of P174.8 billion, 88
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which included P19.2 billion for costs relating to the restructuring of the old Central Bank and the P19.2 billion deficit of the 14 monitored non-financial Government corporations. The Government owned corporations' budget gap deteriorated from the single-digit deficit posted in 1999 as both current and capital expenditures increased. The greatest contributors to the deficit were the Philippine National Oil Company, the National Power Corporation, the Light Rail Transit Authority, the National Development Corporation and the National Food Authority. The other public sector entities had a combined surplus of P22.9 billion in 2000, largely due to the substantial surpluses of the local government units and the social security institutions such as the Government Services and Insurance System and Social Security System. For 2001, the consolidated financial position recorded a deficit of P147.6 billion or 4.1% of GDP at current market prices. The Government accounted for P147.0 billion of the deficit, the Central Bank restructuring accounted for P23.5 billion and the monitored Government-owned corporations accounted for P21.7 billion. The other public sector entities had a combined surplus of P39.4 billion during 2001, of which P15.5 billion was attributable to the social security institutions. 89
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Government Revenues and Expenditures The following table sets out Government revenues and expenditures for the periods indicated. GOVERNMENT REVENUES AND EXPENDITURES [Enlarge/Download Table] ACTUAL BUDGET --------------------------------------------------------- ------------------- JAN-MAY 1997 1998 1999 2000 2001(1) 2002 2001(2) 2002 ------ ------ ------- ------- ------- ------- ------- ------- (IN BILLIONS, EXCEPT PERCENTAGES) REVENUES Tax revenues Bureau of Internal Revenue....... P314.7 P337.2 P 341.3 P 360.8 P 388.7 P160.0 P 388.1 P447.6 Bureau of Customs................ 94.8 76.0 86.5 95.0 96.2 36.8 105.1 115.1 Others(3)........................ 2.7 3.4 3.8 4.2 4.9 2.3 5.7 8.6 ------ ------ ------- ------- ------- ------- ------- ------ Total tax revenues............. 412.2 416.6 431.7 460.0 489.8 199.1 498.9 571.3 As a percentage of GNP....... 16.1% 14.9% 13.9% 13.2% 12.8% N/A 13.0% 13.7% Non-tax revenues Bureau of the Treasury income(4)...................... P 35.4 P 22.5 P 26.3 P 30.8 P 46.4 P 12.7 P 24.9 P 22.2 Fees and other charges(5)........ 13.2 21.0 16.0 17.9 24.3 11.9 23.2 25.6 Privatizations(6)................ 9.4 1.7 4.2 4.6 1.2 0.1 10.0 5.0 Comprehensive Agrarian Reform Program (land acquisition and credit)........................ 0.0 0.0 0.1 0.0 0.0 -- 0.0 0.0 Foreign grants................... 1.7 0.4 0.3 1.4 2.0 0.1 1.2 0.3 ------ ------ ------- ------- ------- ------- ------- ------ Total non-tax revenues......... 59.7 45.6 46.8 54.7 73.9 24.8 59.3 53.0 ------ ------ ------- ------- ------- ------- ------- ------ Total revenues............... 471.8 462.5 478.5 514.8 563.7 223.9 558.2 624.3 ------ ------ ------- ------- ------- ------- ------- ------ As a percentage of GNP..... 18.4% 16.6% 15.2% 14.7% 14.7% N/A 14.5% 15.0% EXPENDITURES Personnel services............... P150.4 P198.5 P 202.7 P 225.2 P 195.3 N/A N/A(7) P251.3 Maintenance and operating expense........................ 108.1 64.4 70.8 79.8 150.8 N/A N/A(7) 80.8 Other current operating expense........................ 6.1 0.2 5.5 3.6 0 N/A N/A(7) N/A(7) Interest payments Foreign........................ 19.6 26.3 31.3 47.3 62.2 24.9 63.2 64.0 Domestic....................... 58.4 73.5 75.0 93.6 112.6 47.4 116.2 140.3 ------ ------ ------- ------- ------- ------- ------- ------ Total interest payments...... 78.0 99.8 106.3 140.9 174.8 72.3 179.4 204.3 Subsidies to Government corporation.................... 5.9 4.7 6.8 6.7 9.4 N/A N/A(7) 5.0 Allotment to local government units.......................... 71.0 72.0 78.7 100.0 118.2 N/A N/A(7) 103.9 Transfers to the Oil Price Stabilization Fund............. 0.0 0.0 0.7 0.0 0.0 N/A N/A(7) 28.6 Comprehensive Agrarian Reform Program (land acquisition and credit)........................ 0.0 0.5 0.0 2.3 0.0 N/A N/A(7) 5.6 Infrastructure and other capital outlays........................ 47.9 71.3 115.7 87.2 57.9 N/A 101.0 67.8 Equity and net lending........... 3.0 1.1 3.2 3.2 4.4 N/A N/A(7) 7.1 ------ ------ ------- ------- ------- ------- ------- ------ Total expenditures............. 470.3 512.5 590.4 649.0 710.8 331.3 703.2 754.3 ------ ------ ------- ------- ------- ------- ------- ------ As a percentage of GNP....... 18.6% 18.4% 18.8% 18.5% 18.6% N/A 18.3% 18.0% Surplus/(Deficit).................. P 1.6 P(50.0) P(111.7) P(134.2) P(147.0) P(107.5) P(145.0) (130.0) ====== ====== ======= ======= ======= ======= ======= ====== FINANCING Domestic financing............... P 5.3 P 37.6 P 28.9 P 55.5 P 124.1 P 18.4 P 118.7 P 79.0 Net domestic borrowings........ (20.3) 76.5 98.8 119.5 152.3 61.6 165.2 63.3 Non-budgetary accounts......... (7.0) (56.0) 32.6 (57.6) (50.4) (15.2) (24.3) 15.1 Use of cash balances............. 32.6 17.1 37.4 (6.5) 22.2 (28) 22.2 Foreign financing................ (6.8) 12.3 82.8 78.8 22.9 89.1 26.3 .7 ------ ------ ------- ------- ------- ------- ------- ------ Total financing.............. P (1.6) P 50.0 P 111.7 P 134.2 P 147.0 P107.5 P 145.0 P130.0 ====== ====== ======= ======= ======= ======= ======= ====== --------------- Source: Department of Finance; Department of Budget and Management. (1) Preliminary. (2) Revised as of July 17, 2001. (3) Represents tax revenues of the Department of Environment and Natural Resources, Bureau of Immigration and Deportation, Land Transportation Office and other Government entities. (4) Represents interest on deposits, interest on advances to Government owned corporations, interest on securities, dividends from Government owned corporations, earnings received from the Philippine Amusement and Gaming Corporation, earnings and terminal fees received from Ninoy Aquino International Airport, guarantee fees and others. 90
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(5) Represents receipts from the Land Transportation Office, Department of Foreign Affairs and other Government agencies. (6) Represents remittances to the National Government from the sale of interests in Government owned corporations, Government financial institutions and other Government-owned assets and from the sale of assets by the Presidential Commission on Good Government and the Asset Privatization Trust. (7) N/A means "not available". Revenues SOURCES. The Government derives its revenues from both tax and non-tax sources. The main sources of revenue include income tax, value added tax and customs duties. The main sources of non-tax revenue consist of interest on deposits, amounts earned from Government owned corporations and privatization receipts. In 1995 the Ramos Government submitted the Comprehensive Tax Reform Package for Congressional action. The objective of the proposal was to establish a simple, broad-based and efficient tax system, with minimal scope for discretion on the part of Government officials, that would provide a self-sustaining revenue base that would keep pace with the budgetary needs of a growing economy. The comprehensive tax reform package was enacted in 1997 and provides a three-tiered excise tax on cigarettes and converts beer taxation from ad valorem to specific excise taxes. The comprehensive tax reform package also restructured and simplified the tax rates for business and professional income, reduced the corporate income tax rate, and reformed certain elements of tax administration. The Government expanded the coverage of the value-added tax system in 1996 and 1997 to include Government contracts and suppliers, telecommunication services, road freight and other transportation, real property, restaurants and caterers, hotels and motels, and broadcasting. The new regime raised P6.7 billion out of total value-added tax revenues of P40.9 billion in 1996, P6.4 billion out of total value-added tax revenues of P47.3 billion in 1997 and P0.2 billion out of total value-added tax revenues of P47.5 billion in 1998. Total value-added tax revenues amounted to P55.2 billion for 1999 and P55.3 billion for 2000. The tax effort in 2001 will be increased through policies designed to result in the collection of additional tax revenues and non-tax revenues such as fees and charges. Increased tax revenue is expected to come from a program of intensified collection through enforcement of tax laws, improvement of corporate governance and plugging of leakages in the tax system. The Bureau of Internal Revenue is currently implementing tax administration improvements which include the following: - resolution of delinquent accounts or disputed assessments which are either being litigated in the courts or being challenged by taxpayers; - use of electronic documentary stamp metering machines to accurately assess and monitor documentary stamp taxes; - broadening the tax base to increase the number of registered taxpayers; - issuance of revenue regulations regarding automobiles which are subject to excise tax; and - implementing a ceiling on deductible representation expenses as mandated by the Tax Code of 1997. Moreover, the Department of Finance is in the process of identifying measures to address the areas in which tax collection is deficient in an effort to increase revenues in 2001. Likewise, necessary controls need to be instituted to ensure the correct declaration of revenues and deductions, and controls need to be established on the claims of input taxes. RESULTS. In 1997, Government revenues rose to P471.8 billion, an increase of 15% from 1996, due to higher tax revenues resulting from excise tax reforms, computerization of the tax authorities' offices and an increased number of tax audits, tied in part to the Government's Tax Reform Package. Non-tax revenue also rose as privatization receipts and dividends and other receipts from Government owned corporations climbed. These increases more than offset the loss of revenues from the tariff reductions that took effect in 1997. Nevertheless, revenues came in below projections because of lower than expected GNP growth. In 1997, the Government recorded a surplus of P1.6 billion. 91
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In 1998, Government revenues decreased to P462.5 billion compared with P471.8 billion for 1997 due, in part, to the general contraction of the economy and lower imports. Revenues collected by the Bureau of Internal Revenue increased to P337.2 billion from P314.7 billion, but were P17.9 billion short of target estimates. Revenues from customs duties fell to P76 billion from P94.8 billion, just below the target for the year. In 1999, Government revenues amounted to P478.5 billion, a 3.5% increase compared with 1998. The 1999 figure was, however, P12.2 billion less than the revised target. Non-tax revenues reflected a P5.6 billion dividend payment from Bangko Sentral and P3.3 billion in proceeds from the sale of Philippine Associated Smelting and Refining Corp. Revenues collected by the Bureau of Internal Revenue were P12.2 billion less than the revised target. The shortfall was primarily attributable to the slow recovery of the industry sector. Revenues collected by the Bureau of Customs were P2.9 billion more than the revised target. In 2000, Government revenues amounted to P514.8 billion, a 7.6% increase over 1999 revenues. The 2000 amount was P47.6 billion short of the April 2000 IMF revenue target. Revenues collected by the Bureau of Internal Revenue increased to P360.8 billion but were P37.0 billion short of target estimates. The shortfall was attributable primarily to lower Bureau of Internal Revenue collections of items such as documentary stamp tax and capital gains tax. The slowdown in the financial and real estate sectors also adversely affected collections in 2000. Bureau of Customs revenue increased to P95.0 billion, P3.1 billion more than targeted. Intensified customs collection and anti-smuggling operations accounted for the Bureau of Custom's overperformance. Even with the marked slowdown in its collections from 1999 levels, the Bureau of the Treasury continued to surpass its target. The Treasury collected P30.8 billion in non-tax revenue from dividends on its shares of stocks and income from investments. Privatization efforts generated only P4.6 billion in remittances, compared to a target of P22.9 billion, as unfavorable market prices prevented the government from disposing of its assets. Privatization remittances consisted of proceeds from the sale of the Philippine National Bank, Philippine Phosphate Fertilizer Corporation, and a package of International Broadcasting Corporation's radio stations. Government revenues for 2001 were P563.7 billion, of which P489.8 billion were tax revenues and P73.9 billion were non-tax revenues. Revenue collections for 2001 were P5.5 billion higher than the budgeted amount of P558.2 billion and 9.5% higher than revenue collections for 2000. The increase was mainly attributable to the Bureau of the Treasury which collected P21.5 billion more than its target of P24.9 billion, offsetting a P8.9 billion shortfall from the targeted amount of cash collections by the Bureau of Customs. The Bureau of Internal Revenue surpassed its target by P621 million for the period, collecting P388.7 billion. Privatization revenues for 2001 were P1.2 billion, compared to the budgeted amount of P10 billion, as unfavorable market conditions prevented the disposition of Government assets targeted for privatization. Government expenditures for 2001 were P710.8 billion, P7.5 billion more than the budgeted amount of P703.2 billion and 9.5% higher than expenditures for 2000. The actual Government deficit for 2001 was P147.0 billion compared to the budgeted deficit of P145.0 billion. Expenditures Expenditures for 1997 amounted to P470.3 billion, an increase of 16.4% from 1996. Personnel expenses accounted for the largest increase, an increase of 27.6%, due to the implementation of the last phase of the Salary Standardization Law, which reduced the gap between public- and private-sector salaries. Capital outlays also climbed because of irrigation projects constructed to offset the effects of the El Nino phenomenon on agricultural production levels. Allotments to local Government, especially for infrastructure projects, rose significantly. Interest expenses also rose as a result of the depreciation in the value of the Peso due to the regional economic turmoil. Expenditures in 1998 increased to P512.5 billion compared to P470.3 billion in 1997. These expenditures compared together with revenues of P462.5 billion resulted in a deficit of P50.0 billion in the Government's fiscal position for 1998, compared to a fiscal surplus of P1.6 billion in 1997. Expenditures in 1999 increased to P590.2 billion compared to P512.5 billion in 1998. The total expenditures were P14.1 billion more than the revised target. The increase in expenditures in 1999 was due in large part to economic stimulus efforts by the Government and in part to the repayment of certain accounts 92
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payable that were outstanding from previous Government administrations. Revenues of P478.5 billion resulted in an overall deficit of P111.7 billion in 1999. Expenditures in 2000 increased to P649.0 billion compared to P590.2 billion in 1999. The total expenditures were P19.5 billion more than the Government's target. The increase in expenditures was due primarily to higher interest payments which increased by P16 billion as a result of high interest rates for Treasury bills and fixed rate Treasury bonds. Other contributing factors included the depreciation of the Peso, compared to the US dollar, an increase in LIBOR and the unprogrammed interest payment for the Metro Rail Transit obligation. Revenues of P514.8 resulted in an actual Government deficit of P134.2 in 2000. THE GOVERNMENT BUDGET The Budget Process The Administrative Code of 1987 requires the Government to formulate and implement a national budget. Various planning and fiscal agencies coordinate to determine expected revenue, expenditure and debt based on growth, employment and inflation targets. The budget also reflects national objectives regarding domestic and foreign debt, domestic credit and balance of payments. The President submits the budget to Congress within 30 days of the opening of each regular session of Congress, which occurs on the fourth Monday of each July. The House of Representatives reviews the budget and transforms it into a general appropriations bill. The Senate then reviews the budget. A conference committee composed of members of both houses of Congress then formulates a common version of the bill. Once both houses approve the budget, the bill goes to the President for signing as a general appropriations act. Government Budget for 2002 On August 8, 2001, the Arroyo administration submitted to Congress its proposed 2002 budget. The 2002 budget is seeking an 11.6% increase in general appropriations to P780.8 billion from P699.9 billion in 2001. The proposed 2002 budget contemplates revenue collections of P624.3 billion and expenditures of P754.3 billion, resulting in a P130 billion deficit. The 2002 budget proposal is based on assumptions of real GDP growth of 4.0% to 4.8%, no export growth, inflation of 5% to 6% and interest rates for 91-day Treasury bills between 10% and 11%. The Republic expects to fund 52% of the 2002 budget deficit with foreign sourced financing and 48% with domestic sourced financing, compared to 18.1% and 81.9%, respectively, in 2000. The Government plans to increase the proportion of its foreign borrowings in 2002 because of its desire not to reduce the amount of funds available for borrowers in the domestic market. 93
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DEBT External Debt The following table sets out the total outstanding Bangko Sentral-approved and registered external debt. BANGKO SENTRAL APPROVED EXTERNAL DEBT [Enlarge/Download Table] AS OF DECEMBER 31 AS OF ----------------------------------------------- MARCH 31, 1997 1998 1999 2000 2001 2002 ------- ------- ------- ------- ------- --------- (IN MILLIONS, EXCEPT PERCENTAGES) By Maturity: Short-term(1)......................... $ 8,439 $ 7,185 $ 5,745 $ 5,948 $ 6,049 $ 5,565 Medium and long-term.................. 36,994 40,632 46,465 46,112 46,306 47,874 ------- ------- ------- ------- ------- ------- Total.............................. $45,433 $47,817 $52,210 $52,060 $52,355 $53,439 ======= ======= ======= ======= ======= ======= By Debtor:(2) Bangko Sentral........................ $ 2,499 $ 3,437 $ 3,005 $ 2,914 $11,537 $11,089 Public sector(3)...................... 24,459 26,873 31,795 31,498 25,149 26,707 Private sector........................ 18,475 17,507 17,410 17,648 15,669 15,644 ------- ------- ------- ------- ------- ------- Total.............................. $45,433 $47,817 $52,210 $52,060 $52,355 $53,439 ======= ======= ======= ======= ======= ======= By Creditor Type: Multilateral.......................... $ 8,638 $10,058 $10,245 $ 9,665 $ 9,553 $ 8,884 Bilateral............................. 13,307 14,926 16,429 15,336 14,531 14,767 Banks and financial institutions...... 10,176 9,672 10,340 11,176 12,003 12,172 Bondholders/noteholders............... 10,633 11,209 12,951 13,447 13,678 15,061 Others................................ 2,679 1,952 2,245 2,436 2,590 2,555 ------- ------- ------- ------- ------- ------- Total.............................. $45,433 $47,817 $52,210 $52,060 $52,355 $53,439 ======= ======= ======= ======= ======= ======= Ratios: Debt service burden to exports of goods and services(4).............. 11.6% 11.7% 14.2% 12.3% 15.7% 15.4% Debt service burden to GNP............ 6.5% 7.4% 8.4% 7.7% 8.7% 8.9% Foreign exchange liabilities to GNP... 53.0% 69.8% 65.1% 65.9% 70.1% 70.0% --------------- Source: Bangko Sentral. (1) Debt with original maturity of one year or less. (2) Classification by debtor is based on the primary obligor under the relevant loan or rescheduling documentation. (3) Includes public sector debt whether or not guaranteed by the Government. (4) This ratio is based on the debt service burden for the relevant period relative to the total exports of goods and receipts from services and income during such period based on the BPM5 framework. The Republic's external debt amounted to $53.4 billion as of March 31, 2002, a 2.1% increase over the $52.4 billion recorded as of December 31, 2001. The increase in debt was due primarily to net loan availments, upward adjustments to reflect audited results and late reporting of transactions occurring in prior periods. During the first quarter of 2002, new loans and bond issuances were higher than repayments made, contributing $1.1 billion to the increase in the debt stock. In January 2002, the Republic received the proceeds of the $750 million 9.375% global bonds due 2017, and in March 2002 the Republic received the proceeds of the $1 billion 8.375% global bonds due 2009. The Republic intends to on-lend an aggregate of a maximum of $750 million of the proceeds of these two offerings to NPC. In addition, Bangko Sentral received the proceeds of the $250 million Fixed Rate Notes due 2005, the Land Bank of the Philippines received $96 million in proceeds (net of funds provided by resident Foreign Currency Deposit Units) of a $100 million syndicated bank loan and the Development Bank of the Philippines received proceeds from a $94 million partial 94
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drawdown from its Y32.5 billion ($250 million) 10-year Information Technology and Industry Support Loan from the Japan Bank for International Cooperation. These borrowings were primarily used to finance projects involving power and energy development, communication, transportation and other infrastructure projects as well as to provide budgetary support. Upward adjustments amounting to $234 million were also made to reflect audited results and late reporting of transactions from prior periods. These upward adjustments in the debt stock were more than offset by foreign exchange revaluation gains, resulting in a $175 million reduction of total debt. Almost three-fourths of the revaluation gains resulted from the weakening of the Japanese yen against the US dollar during the first quarter of 2002. Liabilities of commercial banks also decreased the total debt by $103 million. In addition, the increase in residents' holdings of foreign currency-denominated Philippine debt that was originally issued offshore led to a further increase of the debt stock by $5 million. Medium- and long-term liabilities, 84.3% of which have a maturity of more than five years, totaled $47.9 billion and accounted for 89.6% of total external debt as of March 31, 2002, slightly higher than the 88.4% share of total external debt in the previous quarter. Public sector medium- and long-term debt had a longer average maturity of 18.6 years as compared to the average maturity of 10.3 years for similar private sector debt. Fifty-four percent of medium- and long-term debt carried fixed rates while 45% had variable rates. The remaining 3% were non-interest bearing. The average cost of fixed rate credits was about 6.2%. For liabilities with floating interest rates, the average margin over base rate was 1.6%. The average interest rates for short-term debt decreased from 2.7% as of December 31, 2001 to 2.4% as of March 31, 2002, following the decline in global interest rates. As of March 31, 2002, more than half (58.5%) of the country's external obligations were denominated in US dollars while 23.9% were in Japanese yen. Multi-currency loans from the World Bank and the Asian Development Bank comprised 8.7% of total liabilities. Based on preliminary estimates, the ratio of debt service to exports of goods and receipts from services and income declined to 15.4% in the first quarter of 2002, compared to 16.3% in the fourth quarter of 2001 and 15.8% in the first quarter of 2001. The quarter-on-quarter improvement in the ratio was the combined result of lower principal and interest payments as well as higher receipts from exports of goods during the first quarter of 2002. Similarly, the year-on-year decline in the ratio was due largely to reduced interest payments in the first quarter of the year in view of the continued decline in global interest rates. The public sector remained the biggest borrower, accounting for $26.7 billion of foreign financing as of March 31, 2002, compared to $25.1 billion as of December 31, 2001. The increase was due primarily to net loan availments by the Government and adjustments made on prior periods' transactions. Meanwhile, private sector debt remained unchanged at 15.6 billion. Some private companies have taken steps to manage the effects of the currency depreciation on their ability to repay their external debt. These steps include netting foreign currency obligations and entering into forward contracts to hedge their currency risks. Certain companies also benefit from natural hedges intrinsic to their businesses. These companies either generate foreign exchange revenues or are allowed by law to pass on to clients the impact of exchange rate adjustments. Bangko Sentral also introduced the currency risk protection facility, or the non-deliverable forward facility, to allow eligible borrowers to limit their foreign exchange risk on unhedged outstanding foreign exchange obligations to foreign currency deposit units of banks. The Government has obtained funds under the so-called "Miyazawa initiative" to help finance projects contemplated by the country's spending program. The Miyazawa initiative was launched by the Japanese government in October 1998 with an assistance package totalling the equivalent of $30 billion. The package consists of support measures to assist five Asian countries, including the Philippines, overcome their economic difficulties. Under the Miyazawa initiative, the Government requested co-financing from Japan of approximately $900 million of program loans from the Asian Development Bank and the World Bank, $300 million each for the banking sector reform program with the World Bank, the power sector restructuring program with the Asian Development Bank and the Metro Manila air quality enhancement program with the Asian 95
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Development Bank. As of the end of March 2002, the Government had received total disbursements of $800 million for these three programs from the Asian Development Bank, the World Bank and the Japan Bank for International Cooperation. The World Bank disbursed $100 million for a banking sector reform program loan while the Asian Development Bank disbursed $100 million under an air quality improvement program loan and $200 million under the power sector program loans. The Japan Bank for International Cooperation disbursed $200 million as co-financing to each of the foregoing Asian development Bank program loans and $100 million as co-financing for the banking sector reform program loan. While the Government remains committed to the policies of the banking sector reform program, in early 2001 the Government canceled the balance of the Japan Bank for International Cooperation parallel financing of the banking sector reform program loan following the cancellation by the World Bank of its participation. Thus, a total of $400 million in loan program financing for banking sector reform was cancelled by the Government by June 2001. The Government is also negotiating with the World Bank for a loan of up to $365 million to finance various development projects, including public finance restructuring, investments in water supply, environment, public services and judicial reforms, for the fiscal year 2002. This amount exceeds the approximately $200 million that the World Bank allotted to lend the Government for 2001. In September 2001, the Government commenced discussions with the World Bank for a $200 million loan program to finance reforms in the country's expenditure management and revenue enhancement systems and possibly co-financing an additional $200 million loan program. For its 2002 budgetary requirements, the Government plans to raise approximately $1.5 billion from commercial sources and about $1.2 billion from official development assistance sources. As of June 2002, the Government had raised a total of approximately $1.7 billion from commercial sources for its 2002 budgetary requirements. These include the JPY 50 Billion Shibosai Bonds issued in December 2001, the $500 million 9.375% Global Bonds issued on January 18, 2002, the $500 million 8.375% Global Bonds issued on March 12, 2002 and the $300 million 8.375% Global Bonds issued on June 14, 2002. The Government intends to on-lend a total of $750 million to the National Power Corporation from the remaining proceeds of the January 18, 2002 and March 12, 2002 bond issuances. The Government is also seeking financing under the Special Yen Loan Package, or "Obuchi Fund", which is a $5 billion loan facility offered to all countries and concentrating primarily on project type activities. Under this program, since January 2002, the Government has secured financing for ten projects in the amount of approximately $1.2 billion. The Government hopes to finance the restructuring of small and medium-sized enterprises with a portion of the $10 billion expected to be available under the Asian Growth and Recovery Initiative. The United States, Japan, the Asian Development Bank and the World Bank established the Asian Growth and Recovery Initiative in 1998 to accelerate the pace of bank and corporate restructuring, increase trade finance, mobilize new private sector capital financing by multilateral agencies and enhance technical assistance to corporations undergoing restructuring. With the passage of the Electric Power Industry Sector Reform Act on June 8, 2001, certain multilateral agencies are expected to release up to $950 million in loans for additional infrastructure projects and government budgetary needs. New ODA-assisted projects in the agricultural-industrial area include Credit Lines for Small and Medium Enterprises, Grains Sector Development Program and the Pasig River Environmental Management and Rehabilitation. The social development area received 9% ($117.3 million) of the total commitments. Other ODA-assisted projects in the social development area include the Technical Education and Skills Development Project and the Expansion of the Contraceptive Social Marketing Project. Credit Ratings Standard and Poor's has assigned the Republic a long-term foreign currency rating of BB+, a short-term foreign currency rating of B, a long-term local currency rating of BBB+ and a short-term local currency rating 96
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of A2, with a stable outlook on the Republic's long-term foreign currency rating. On February 2, 2002, Moody's confirmed the Republic's long-term foreign currency rating of Ba1 and upgraded its outlook on the Republic's long term foreign currency rating to stable from negative. See "Recent Economic Developments -- Review of Financial Contingency Plan". The following table sets out the changes in credit ratings or rating outlooks for the Republic from February 1998 to the date of this Prospectus. [Enlarge/Download Table] CREDIT RATING OR RATING DATE RATING AGENCY INSTRUMENT OUTLOOK ---- ---------------------- ------------------------- ------------------------- February 23, 1998....... Standard & Poor's Republic's long-term Lowered to BBB+ Rating local currency rating outlook changed to "negative" from "stable"(1) Republic's short-term Lowered to A2(1) local currency rating Bangko Sentral's Lowered to BBB+ long-term local currency rating Bangko Sentral's Lowered to A2 short-term local currency rating April 7, 1998........... Moody's Republic's bonds and Lowered to Ba1/NP(2) notes Rating outlook changed to "cloudy"(2) from "stable" January 6, 1999......... Standard & Poor's Republic's long-term Rating outlook changed to foreign currency rating stable from negative(3) March 30, 2000(4)....... Moody's Republic's bonds and Rating outlook changed to notes "stable" from "cloudy"(2)(4) October 19, 2000........ Standard & Poor's Republic's long-term Rating outlook changed local and foreign from "stable" to currency rating "negative"(5) October 27, 2000........ Moody's Republic's bonds and Raised to Ba1 Rating notes outlook changed to "negative" from "stable"(6) March 15, 2001.......... Fitch-IBCA Long-term local currency Rating outlook changed to obligations "stable" from "positive"(7) May 3, 2001............. Moody's Republic's bonds and Affirmed Ba1 Rating notes outlook remains "negative"(8) June 19, 2001........... Standard & Poor's Republic's long-term Affirmed BB+ foreign currency rating Rating outlook remains "negative"(9) Republic's short-term Affirmed B foreign currency rating Republic's long-term Affirmed BBB+ local currency rating Rating outlook remains "negative"(9) Republic's short-term Affirmed A-2 local currency rating July 30, 2001........... Fitch-IBCA Republic's foreign Affirmed BB+ currency rating Republic's local currency Affirmed BBB- rating 97
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[Enlarge/Download Table] CREDIT RATING OR RATING DATE RATING AGENCY INSTRUMENT OUTLOOK ---- ---------------------- ------------------------- ------------------------- February 4, 2002........ Moody's Republic's long-term Upgraded outlook from foreign currency rating "negative" to "positive"(10) April 4, 2002........... Standard & Poor's Republic's long-term Upgraded outlook from foreign currency rating "negative" to "positive"(11) June 27, 2002........... Fitch-IBCA Republic's long-term Affirmed BB+(12) foreign currency rating --------------- (1) Standard & Poor's noted the deterioration in the bank asset quality and the expected 1998 budget deficit, as well as the depreciation of the Peso and the risk of increased spending around the time of the presidential elections in May 1998. Also, on February 23, 1998, Standard & Poor's affirmed the country's long-term and short-term foreign currency ratings. (2) NP (Moody's): Not prime. Cloudy: With speculative elements/uncertainty of position. (3) Standard & Poor's noted the diminished likelihood of a deterioration in external liquidity and financial flexibility and the improved prospects for policy continuity from the Ramos administration to the Estrada administration. (4) Moody's noted that the changes in the Philippines' credit rating in 2000 reflected changes in the domestic climate and continued momentum from the previous government's success in reform. (5) Standard & Poor's noted the political uncertainty relating to former President Joseph Estrada's alleged corrupt practices, the rising budget deficit and growing concerns about the Government's ability to undertake effective economic management during a period of political uncertainty. (6) Moody's noted that unfolding political developments associated with then-president Estrada could impair policy-making and hamper the Government's ability to defend its external payments position. (7) Fitch-IBCA noted the continuing deterioration of public finances and its impact on public indebtedness. (8) Moody's noted that the negative outlook reflected the challenges from structural economic and political problems in the country, deterioration in the budget and in the external conditions particular to the country and increases in Government debt. (9) Standard & Poor's noted that the negative outlook on the Republic reflected its high Government debt, rising fiscal inflexibility, narrow tax base and weak banking sector. (10) Moody's noted that the upgrade reflected the Republic's success in meeting its fiscal targets and a stronger economic outlook. (11) Standard & Poor's noted that the upgrade reflected the Government's improved economic management under the Arroyo administration and the Republic's adequate external liquidity. (12) Fitch-IBCA noted that the change in the Republic's political leadership has restored investor and business confidence and curbed capital flight but stated concern over the country's fiscal situation. 98
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Public Sector Debt The following table describes the country's outstanding public sector debt. OUTSTANDING PUBLIC SECTOR DEBT(1) [Enlarge/Download Table] AS OF DECEMBER 31, ----------------------------------------- 1997 1998 1999 2000(2) -------- -------- -------- -------- (IN BILLIONS, EXCEPT PERCENTAGES) Government(3) Domestic............................................. P 749.7 P 850.9 P 986.7 P1,058.6 External............................................. 602.1 570.2 1,155.5 1,310.1 -------- -------- -------- -------- Total............................................. 1,351.8 1,421.1 2,142.2 2,368.7 Monitored GOCCs(4) Domestic............................................. 203.6 143.5 644.8 578.9 External............................................. 198.6 548.0 286.1 365.6 -------- -------- -------- -------- Total............................................. 402.4 691.5 930.9 944.5 CB-BOL(5) Domestic............................................. 51.4 0.0 0.0 0.0 External............................................. 60.6 102.2 74.9 75.3 -------- -------- -------- -------- Total............................................. 112.0 102.2 74.9 75.3 Bangko Sentral(5) Domestic............................................. 199.5 197.3 193.5 278.7 External............................................. 139.0 190.3 299.3 345.1 -------- -------- -------- -------- Total............................................. 338.6 387.6 492.8 623.8 GFIs(4) Domestic............................................. 58.0 204.5 379.9 280.3 External............................................. 52.0 68.9 95.3 67.4 -------- -------- -------- -------- Total............................................. 110.0 273.4 475.2 347.8 Less loans on-lent or guaranteed by the Government Domestic............................................. 7.6 8.7 8.3 12.3 External............................................. 265.8 370.6 441.4 487.4 -------- -------- -------- -------- Total............................................. 273.4 379.3 449.7 499.6 Total public sector(6) Domestic............................................. 1,262.3 1,396.2 2,196.6 2,184.2 External............................................. 1,052.3 1,479.6 1,469.7 1,676.1 -------- -------- -------- -------- Total............................................. P2,314.6 P2,875.8 P3,666.3 P3,860.4 ======== ======== ======== ======== As a percentage of GNP (at current prices) Public sector debt(6).................................. 91.7% 102.9% 116.9% 110.6% Public sector domestic debt(6)....................... 48.9% 50.0% 70.0% 62.6% Public sector external debt(6)....................... 30.7% 53.0% 46.9% 48.0% National Government debt(3).......................... 42.0% 37.3% 54.0% 53.5% National Government domestic debt(3)................. 29.2% 30.5% 31.5% 30.3% National Government external debt(3)................. 23.5% 20.4% 36.8% 37.5% --------------- Source: Fiscal Policy and Planning Office, Department of Finance. (1) Amounts in original currencies were converted to Pesos using the applicable Bangko Sentral reference exchange rates at the end of each period. (2) Preliminary. (3) Includes debt that is on-lent to Government owned corporations and other public sector entities and debt that has been assumed by the Government and contingent liabilities. (4) Includes net lending from the Government, and borrowings on-lent or guaranteed by the Government. (5) Liabilities, including deposits, less currency issue and inter-government accounts. 99
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(6) Includes the Government, the monitored Government owned corporations, the Central Bank -- Board of Liquidation, Bangko Sentral and Government financial institutions. Does not include other public sector debt that is not guaranteed by the Government. The outstanding public sector debt, comprised of the debt of the Government, the monitored Government corporations, the Central Bank-Board of Liquidation, Bangko Sentral and the Government financial institutions amounted to P3,860.4 billion as of June 30, 2000 and P2,854.1 billion as of June 30, 1999. As of June 30, 2000, the Government incurred P2,368 billion, or 61.4% of outstanding public sector debt. Public sector debt as a proportion of GNP decreased from 116.9% as of December 31, 1999 to 110.6% as of June 30, 2000. 100
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Government Debt The following table summarizes the outstanding direct debt of the Republic as of the dates indicated. SUMMARY OF OUTSTANDING DIRECT DEBT OF THE REPUBLIC(1)(2) [Enlarge/Download Table] AS OF DECEMBER 31, ---------------------------------------------------------------- 1997 1998 1999 2000 2001 -------- -------- -------- -------- -------------------- (IN MILLIONS) Funded debt(3) Domestic....................... P357,446 P408,809 P513,667 P600,925 P822,269 $15,966 External....................... $ 15,034 $ 16,525 $ 19,800 $ 21,992 $ 22,082 $22,082(5) Floating debt(4) Domestic....................... P392,162 P442,121 P464,737 P467,275 P425,414 $ 8,260 ------- Total debt.................. $46,309 ======= --------------- Source: Bureau of the Treasury, Department of Finance. (1) Includes Government debt that is on-lent to Government owned corporations and other public sector entities. Excludes debt guaranteed by the Government and debt originally guaranteed by other public sector entities for which the guarantee has been assumed by the Government. The table reflects debt of the Government only and does not include any other public sector debt. (2) Amounts in original currencies were converted to US dollars or Pesos, as applicable, using Bangko Sentral's reference exchange rates at the end of each period. (3) Debt with original maturities of one year or longer. (4) Debt with original maturities of less than one year. (5) The Government has incurred an aggregate of $1.3 billion of external debt since December 31, 2001. Domestic Debt of the Republic The following table summarizes the outstanding direct domestic debt of the Republic as of the dates indicated. SUMMARY OF OUTSTANDING DIRECT DOMESTIC DEBT OF THE REPUBLIC(1)(2) [Enlarge/Download Table] AS OF DECEMBER 31, -------------------------------------------------------------------- 1997 1998 1999 2000 2001 -------- -------- -------- ---------- ---------------------- (IN MILLIONS) Loans Direct..................... P 14,980 P 38,789 P 39,743 P 15,541 P 15,317 $ 297 Assumed.................... 29,520 24,355 20,369 19,117 13,858 269 -------- -------- -------- ---------- ---------- ------- Total loans............. 44,500 63,144 60,112 34,658 29,175 567 Securities Treasury bills............. 392,162 442,121 464,737 467,275 425,414 8,260 Treasury notes/bonds....... 312,946 345,665 453,555 566,267 793,094 15,400 -------- -------- -------- ---------- ---------- ------- Total securities........ 705,108 787,786 918,292 1,033,542 1,218,508 23,660 -------- -------- -------- ---------- ---------- ------- Total debt.............. P749,608 P850,930 P978,404 P1,068,200 P1,247,683 $24,227 ======== ======== ======== ========== ========== ======= --------------- Source: Bureau of the Treasury, Department of Finance. (1) Includes Government debt that is on-lent to Government owned corporations and other public sector entities. Excludes debt guaranteed by the Government and debt originally guaranteed by other public sector entities for which the guarantee has been assumed by the Government. The table reflects debt of the Government only, and does not include any other public sector debt. (2) Amounts in original currencies were converted to US dollars or Pesos, as applicable, using Bangko Sentral's reference exchange rates at the end of each period. 101
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The following table sets forth the direct domestic debt service requirements of the Republic for the years indicated. DIRECT DOMESTIC DEBT SERVICE REQUIREMENT OF THE REPUBLIC(1) [Enlarge/Download Table] YEAR PRINCIPAL REPAYMENTS INTEREST PAYMENTS TOTAL TOTAL(2) ---- -------------------- ----------------- -------- -------- (IN MILLIONS) 1997.................................... P 17,865 P 58,350 P 76,215 $1,907 1998.................................... 28,761 73,525 102,286 2,619 1999.................................... 61,552 74,980 136,532 3,392 2000.................................... 45,429 93,575 139,004 2,783 2001.................................... 54,039 112,592 166,631 3,236 2002(3)................................. 72,697 136,935 209,632 4,071 2003(3)................................. 86,204 151,825 238,029 4,622 2004(3)................................. 99,002 164,952 263,954 5,125 2005(3)................................. 105,719 174,051 279,770 5,432 2006(3)................................. 110,316 179,658 289,974 5,631 --------------- Source: Bureau of the Treasury, Department of Finance. (1) Excludes debt service in respect of Government debt that is on-lent to Government owned corporations and other public sector entities guaranteed by the Government and debt originally guaranteed by other public sector entities for which the guarantee has been assumed by the Government. The table reflects debt of the Government only, and does not include any other public sector debt. (2) Amounts in Pesos were converted to US dollars using the applicable Bangko Sentral reference exchange rates at the end of each period. For 2002 through 2006, amounts in Pesos were converted to US dollars using the applicable Bangko Sentral reference exchange rates as of December 29, 2001. (3) Projected, based on debt outstanding as of December 31, 2001. The Government's outstanding direct domestic debt increased 16.8% to P1,247.7 billion as of December 31, 2001, from P1,068.2 billion as of December 31, 2000. External Debt of the Republic The following table summarizes the outstanding external direct debt of the Republic as of the dates indicated. SUMMARY OF OUTSTANDING DIRECT EXTERNAL DEBT OF THE REPUBLIC(1)(2) [Enlarge/Download Table] AS OF DECEMBER 31, ----------------------------------------------- 1997 1998 1999 2000 2001 ------- ------- ------- ------- ------- (IN MILLIONS) Loans Multilateral................................... $ 4,546 $ 4,665 $ 4,468 $ 4,388 $ 4,323 Bilateral...................................... 7,082 7,944 9,055 8,193 7,236 Commercial..................................... 180 208 256 651 841 ------- ------- ------- ------- ------- Total loans................................. 11,808 12,817 13,779 13,232 12,400 Securities Eurobonds...................................... -- -- 352 514 915 Brady Bonds.................................... 2,229 2,173 1,482 1,385 1,287 Yen Bonds...................................... 307 345 391 655 949 Notes.......................................... -- -- -- 810 1,010 Global Bonds................................... 690 1,190 3,796 5,396 5,396 ------- ------- ------- ------- ------- T-Bills........................................ -- -- -- -- 125 Total securities............................ 3,226 3,708 6,021 8,760 9,682 ------- ------- ------- ------- ------- Total..................................... $15,034 $16,525 $19,800 $21,992 $22,082(3) ======= ======= ======= ======= ======= 102
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--------------- Source:Bureau of the Treasury, Department of Finance. (1) Includes Government debt that is on-lent to Government owned corporations and other public sector entities. Excludes debt guaranteed by the Government and debt originally guaranteed by other public sector entities for which the guarantee has been assumed by the Government. The table reflects debt of the Government only, and does not include any other public sector debt. (2) Amounts in original currencies were converted to US dollars using the applicable Bangko Sentral reference exchange rates at the end of each period. (3) Additional external debt of $1.3 billion has been incurred since December 31, 2001. Outstanding direct external debt increased 0.4% to $22.1 billion as of December 31, 2001, from $22.0 billion as of December 31, 2000. The Government borrowed to finance power and energy development projects, financial and economic reforms and manufacturing, transportation and communication and other infrastructure undertakings. The currency depreciation during 1997 significantly increased the amount of external debt in Peso terms. As of December 31, 2001, the Government owed 32.8% of outstanding direct external debt to bilateral creditors, mainly the United States and Japan, 47.6% to banks and other commercial creditors and 19.6% to multilateral creditors. In June 2001, the Government issued $200 million of floating rate notes. In July 2001, the Government borrowed $100 million under a loan facility. The following table sets forth, by designated currency and the equivalent amount in US dollars, the outstanding direct external debt of the Republic as of December 31, 2001. SUMMARY OF OUTSTANDING DIRECT EXTERNAL DEBT BY THE REPUBLIC BY CURRENCY(1) (AS OF DECEMBER 31, 2001) [Enlarge/Download Table] AMOUNT IN EQUIVALENT AMOUNT ORIGINAL CURRENCY IN US DOLLARS(2) % OF TOTAL ----------------- ----------------- ---------- (IN MILLIONS) US Dollar.......................................... 12,710 $12,710 57.56% Japanese Yen....................................... 974,263 7,400 33.51 Special Drawing Rights............................. 697 874 3.96 European Currency Unit............................. 866 765 3.46 French Franc....................................... 908 122 0.55 Deutsche Mark...................................... 130 59 0.27 Austrian Schilling................................. 1,115 72 0.32 Pound Sterling..................................... 15 21 0.10 Belgian Franc...................................... 776 17 0.08 Swiss Franc........................................ 28 17 0.08 Danish Kroner...................................... 70 8 0.04 Kuwait Dinar....................................... 2 7 0.03 Italian Lire....................................... 9,686 4 0.02 Korean Won......................................... 4,359 3 0.01 Canadian Dollar.................................... 2 1 0.01 Sweden Kroner...................................... 14 1 0.01 ------- ------ Total............................................ $22,082(3) 100.00% ======= ====== --------------- Source: Bureau of the Treasury, Department of Finance. (1) Includes Government debt that is on-lent to Government owned corporations and other public sector entities. Excludes debt guaranteed by the Government and debt originally guaranteed by other public sector entities for which the guarantee has been assumed by the Government. The table reflects debt of the Government only, and does not include any other public sector debt. (2) Amounts in original currencies were converted to US dollars using the applicable Bangko Sentral reference exchange rates as of December 28, 2001. (3) Additional external debt of $1.3 billion has been incurred since December 31, 2001. 103
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The following table sets forth the direct external debt service requirements of the Republic for the years indicated. DIRECT EXTERNAL DEBT SERVICE REQUIREMENTS OF THE REPUBLIC(1)(2) [Enlarge/Download Table] PRINCIPAL INTEREST YEAR REPAYMENTS PAYMENTS TOTAL ---- ---------- -------- ------ (IN MILLIONS) 1997........................................................ $ 741 $ 458 $1,199 1998........................................................ 907 584 1,491 1999........................................................ 933 776 1,711 2000........................................................ 831 947 1,778 2001........................................................ 887 1,209 2,095 2002(3)..................................................... 1,805 1,229 3,034 2003(3)..................................................... 1,551 1,402 2,954 2004(3)..................................................... 1,482 1,452 2,934 2005(3)..................................................... 2,021 1,439 3,459 2006(3)..................................................... 1,526 1,436 2,962 --------------- Source: Bureau of the Treasury, Department of Finance. (1) Excludes debt service in respect of Government debt that is on-lent to Government owned corporations and other public sector entities or guaranteed by the Government, other than debt originally guaranteed by other public sector entities for which the guarantee has been assumed by the Government. The table reflects debt of the Government only, and does not include any other public sector debt. (2) For 1997 through 2001, amounts in original currencies were converted to US dollars using the applicable Bangko Sentral reference exchange rates prevailing on the date of payment. For 2002 through 2006, amounts in original currencies were converted to US dollars using the applicable Bangko Sentral reference exchange rates as of December 28, 2001. (3) Projected, based on debt outstanding as of December 31, 2001. Government Guaranteed Debt The following table sets forth all Republic guarantees of indebtedness, including guarantees assumed by the Government, as of the dates indicated. SUMMARY OF OUTSTANDING GUARANTEES OF THE REPUBLIC(1)(2) [Enlarge/Download Table] AS OF DECEMBER 31, ----------------------------------------------------- 1997 1998 1999 2000 2001 ------ ------ ------ ------- ---------------- (IN MILLIONS) Domestic..................................... P7,645 P8,677 P8,320 P12,451 P23,167 $ 450 External..................................... $6,649 $7,568 $8,908 $ 9,402 $ 9,177 $9,177 ------ ------ ------ ------- ------- ------ Total $9,627 ====== --------------- Source: Bureau of the Treasury, Department of Finance. (1) Includes debt originally guaranteed by the Government and debt guaranteed by other public sector entities for which the guarantee has been assumed by the Government. (2) Amounts in original currencies were converted to US dollars or Pesos, as applicable, using Bangko Sentral's reference exchange rates at the end of each period. Payment History of Foreign Debt In early 1985 and in 1987, the Government rescheduled principal maturities of most medium- and long-term liabilities owed to commercial bank creditors falling due between October 1983 and December 1992. The Philippines normalized its relationship with foreign bank creditors in 1992 after issuing Brady Bonds in exchange for its commercial bank debt. 104
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The Philippines rescheduled portions of its obligations to official creditors, such as foreign Governments and their export credit agencies, five times between 1984 and 1994 as follows. [Enlarge/Download Table] DATE OF RESCHEDULING NEW MATURITY (FROM DATE OF AGREEMENT AMOUNT RESCHEDULED RESCHEDULING AGREEMENT) GRACE PERIOD -------------------- ------------------ -------------------------- ------------ December 1984............................ $896 million 10 years 5 years January 1987............................. $1.1 billion 10 years 5.5 years May 1989................................. $1.8 billion 8.5 years 5 years June 1991................................ $1.5 billion 15-20 years 6.5 years July 1994*............................... $498 million 15-20 years 8-10 years --------------- * Not implemented. See discussion in following paragraph. In December 1994, the Government decided not to avail itself of the July 1994 rescheduling agreement to accelerate the country's graduation from rescheduling country status. As of June 30, 1999, the Republic's rescheduled obligations with its bilateral creditors amounted to $2.2 billion, with Japan at $1.2 billion and the United States at $506 million having the largest exposures. In addition to debt restructuring, the Republic has engaged in debt buyback, debt-to-equity, debt-for-debt, debt-for-nature and other debt reduction arrangements to reduce its debt by at least $6 billion. The Republic intends to maintain various efforts to manage its debt portfolio to improve yield and maturity profiles. The Republic may utilize proceeds from debt issues for the purpose of repurchasing outstanding debt through a variety of methods, including public auctions and repurchases of debt securities in the open markets. While there have been a number of reschedulings of the Republic's debt to its bilateral creditors in the past few years, the Republic has not defaulted on, and has not attempted to restructure, the payment of principal or interest on any of its external securities in the last 20 years. BRADY BONDS. In 1992, the Philippines issued approximately $3.3 billion of Brady Bonds, maturing between 2007 and 2018, in exchange for commercial bank debt, and secured, as to repayment of principal at stated maturity, $1.9 billion of the bonds with zero-coupon bonds purchased by the Republic in the open market. As of year-end 1997, cash and short-term investment grade securities deposited with the Federal Reserve Bank of New York, as collateral agent, secured the payment of approximately 12 to 14 months of interest on $1.6 billion of the Brady Bonds. In October 1996, the Government exchanged $6.5 million of Series A Principal Collateralized Interest Reduction Bonds due 2018 and approximately $628 million of Series B Principal Collateralized Interest Reduction Bonds due 2017 for $551 million of its $690 million 8.75% Bonds due 2016. After the exchange, approximately $2.3 billion of the Brady Bonds remained outstanding. The exchange generated significant savings in debt service and the release of the US Treasury securities held as collateral and established a liquid and long-term sovereign benchmark extending the maturity of the Philippine debt profile. The exchange resulted in the redemption, at a discount, of approximately $635 million of Brady Bonds. In addition, the Brady Bond exchange freed more than $124 million in cash from the collateral released in the retirement of the Brady Bonds. In October 1999, the Government exchanged approximately $401 million of its Principal Collateralized Interest Reduction Bonds, $165 million of its Interest Reduction Bonds and $54 million of its Floating Rate Debt Conversion Bonds for approximately $544 million of 9.50% Global Bonds due 2024. After the exchange, approximately $1.5 billion of the Brady Bonds remained outstanding. Similar to the October 1996 exchange, this exchange generated significant savings in debt service and the release of the US Treasury securities held as collateral and established a sovereign benchmark extending the maturity of the Philippine debt profile. The exchange freed approximately $149 million in cash from the collateral released in the retirement of the Brady Bonds. 105
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The following table sets out the foreign currency bonds issued by the Republic. FOREIGN BONDS ISSUED BY THE REPUBLIC [Enlarge/Download Table] OUTSTANDING BALANCE OUTSTANDING BALANCE AS OF DECEMBER 31, AS OF ISSUE DATE 2001 ------------------- ------------------- (IN MILLIONS) Brady Bonds(1) Interest Reduction Bonds................................. $ 757 $ 296 Principal Collateralized Interest Reduction Bonds........ 1,894 583 Debt Conversion Bonds.................................... 697 408 ------- ------ Total................................................. $ 3,348 $1,287 Japanese Yen Bonds(2) Fifth Series............................................. $ 76 $ 76 Sixth Series............................................. 228 228 Seventh Series........................................... 266 266 ------- ------ Shibosai Series A.......................................... 380 380 ------- ------ Total................................................. $ 950 $ 950 Notes...................................................... 1,010 1,010 Global bonds............................................... 5,396 5,396 Eurobonds(2)............................................... 915 915 T-Bills.................................................... 125 125 ------- ------ Total foreign bonds................................... $11,743 $9,682(3) ======= ====== --------------- Source: Bureau of the Treasury, Department of Finance. (1) The difference between the amount of the Brady Bonds originally issued and the amount currently outstanding represents repurchases of such Bonds by the Republic in the secondary market (or their acquisition in connection with debt for equity and similar transactions), the 1996 and 1999 Brady Bond exchanges, the cancellation of such acquired Bonds and principal repayments. (2) Yen and Euro denominated bonds were converted to US dollars using Bangko Sentral's reference exchange rate as of December 28, 2001. (3) Additional external debt of $1.3 billion has been incurred since December 31, 2001. 106
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DESCRIPTION OF THE SECURITIES DESCRIPTION OF THE DEBT SECURITIES The Philippines may issue debt securities in separate series at various times. The description below summarizes the material provisions of the debt securities that are common to all series and the Fiscal Agency Agreement. Each series of the debt securities will be issued pursuant to a fiscal agency agreement (each, as applicable to a series of debt securities, the "Fiscal Agency Agreement"). Since it is only a summary, the description may not contain all of the information that is important to you as a potential investor in the debt securities. Therefore, the Philippines urges you to read the form of the Fiscal Agency Agreement and the form of global bond before deciding whether to invest in the debt securities. The Philippines has filed a copy of these documents with the Securities and Exchange Commission as exhibits to the registration statement of which this prospectus is a part. You should refer to such exhibits for more complete information. The financial terms and other specific terms of your debt securities are described in the prospectus supplement relating to your debt securities. The description in the prospectus supplement will supplement this description or, to the extent inconsistent with this description, replace it. You can find the definitions of certain capitalized terms in the subsection titled "Glossary of Certain Defined Terms" located at the end of this section. General Terms of the Bonds The prospectus supplement that relates to your debt securities will specify the following terms: - The aggregate principal amount and the designation; - The currency or currencies or composite currencies of denomination and payment; - Any limitation on principal amount and authorized denominations; - The percentage of their principal amount at which the debt securities will be issued; - The maturity date or dates; - The interest rate or rates, if any, for the debt securities and, if variable, the method by which the interest rate or rates will be calculated; - Whether any amount payable in respect of the debt securities will be determined based on an index or formula, and how any such amount will be determined; - The dates from which interest, if any, will accrue for payment of interest and the record dates for any such interest payments; - Where and how the Philippines will pay principal and interest; - Whether and in what circumstances the debt securities may be redeemed before maturity; - Any sinking fund or similar provision; - Whether any part or all of the debt securities will be in the form of a global security and the circumstances in which a global security is exchangeable for certificated securities; - If issued in certificated form, whether the debt securities will be in bearer form with interest coupons, if any, or in registered form without interest coupons, or both forms, and any restrictions on exchanges from one form to the other; and If the Philippines issues debt securities at an original issue discount, in bearer form or payable in a currency other than the US dollar, the prospectus supplement relating to the debt securities will also describe applicable US federal income tax and other considerations additional to the disclosure in this prospectus. 107
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Payments of Principal, Premium and Interest On every payment date specified in the relevant prospectus supplement, the Philippines will pay the principal, premium and/or interest due on that date to the registered holder of the relevant debt security at the close of business on the related record date. The record date will be specified in the applicable prospectus supplement. The Philippines will make all payments at the place and in the currency set out in the prospectus supplement. Unless otherwise specified in the relevant prospectus supplement or the debt securities, the Philippines will make payments in US dollars at the New York office of the fiscal agent or, outside the United States, at the office of any paying agent. Unless otherwise specified in the applicable prospectus supplement, the Philippines will pay interest by check, payable to the registered holder. If the relevant debt security has joint holders, the check will be payable to all of them or to the person designated by the joint holders at least three business days before payment. The Philippines will mail the check to the address of the registered holder in the bond register and, in the case of joint holders, to the address of the joint holder named first in the bond register. The Philippines will make any payment on debt securities in bearer form at the designated offices or agencies of the fiscal agent, or any other paying agent, outside of the United States. At the option of the holder of debt securities, the Philippines will pay by check or by transfer to an account maintained by the payee with a bank located outside of the United States. The Philippines will not make payments on bearer securities at the corporate trust office of the fiscal agent in the United States or at any other paying agency in the United States. In addition, the Philippines will not make any payment by mail to an address in the United States or by transfer to an account with a bank in the United States, Nevertheless, the Philippines will make payments on a bearer security denominated and payable in US dollars at an office or agency in the United States if: - payment outside the United States is illegal or effectively precluded by exchange controls or other similar restrictions; and - the payment is then permitted under United States law, without material adverse consequences to the Philippines. If the Philippines issues bearer securities, it will designate the offices of at least one paying agent outside the United States as the location for payment. Repayment of Funds; Prescription If no one claims money paid by the Philippines to the fiscal agent for the payment of principal or interest for two years after the payment was due and payable, the fiscal agent or paying agent will repay the money to the Philippines. After such repayment, the fiscal agent or paying agent will not be liable with respect to the amounts so repaid. However, the Philippines' obligations to pay the principal of, and interest on, the debt securities as they become due will not be affected by such repayment. You will not be permitted to submit a claim to the Philippines for payment of principal or interest on any series of debt securities unless made within ten years, in the case of principal, and five years, in the case of interest, from the date on which payment was due. Global Securities The prospectus supplement relating to a series of debt securities will indicate whether any of that series of debt securities will be represented by a global security. The prospectus supplement will also describe any unique specific terms of the depositary arrangement with respect to that series. Unless otherwise specified in the prospectus supplement, the Philippines anticipates that the following provisions will apply to depositary arrangements. REGISTERED OWNERSHIP OF THE GLOBAL SECURITY. The global security will be registered in the name of a depositary identified in the prospectus supplement, or its nominee, and will be deposited with the depositary, its nominee or a custodian. The depositary, or its nominee, will therefore be considered the sole owner or 108
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holder of debt securities represented by the global security for all purposes under the Fiscal Agency Agreement. Except as specified below or in the applicable prospectus supplement, beneficial owners: - will not be entitled to have any of the debt securities represented by the global security registered in their names; - will not receive physical delivery of any debt securities in definitive form; - will not be considered the owners or holders of the debt securities; - must rely on the procedures of the depositary and, if applicable, any participants (institutions that have accounts with the depositary or a nominee of the depositary, such as securities brokers and dealers) to exercise any rights of a holder of the debt securities; and - will receive payments of principal and interest from the depositary or its participants rather than directly from the Philippines. The Philippines understands that, under existing industry practice, the depositary and participants will allow beneficial owners to take all actions required of, and exercise all rights granted to, the registered holders of the debt securities. The Philippines will issue certificated securities and register debt securities in the name of a person other than the depositary or its nominee only if: - the depositary for a series of debt securities is unwilling or unable to continue as depositary or ceases to be a clearing agency registered under the Securities Exchange Act of 1934 and the Philippines does not appoint a successor depositary within 90 days; - the Philippines determines, in its sole discretion, not to have a series of debt securities represented by a global security; or - a default occurs that entitles the holders of the debt securities to accelerate the maturity date and such default has not been cured. In these circumstances, an owner of a beneficial interest in a global security will be entitled to registration of a principal amount of debt securities equal to its beneficial interest in its name and to physical delivery of the debt securities in definitive form. Definitive debt securities in bearer form will not be issued in respect of a global security in registered form. BENEFICIAL INTERESTS IN AND PAYMENTS ON A GLOBAL SECURITY. Only participants, and persons that may hold beneficial interests through participants, can own a beneficial interest in the global security. The depositary keeps records of the ownership and transfer of beneficial interests in the global security by its participants. In turn, participants keep records of the ownership and transfer of beneficial interests in the global security by other persons (such as their customers). No other records of the ownership and transfer of beneficial interests in the global security will be kept. All payments on a global security will be made to the depositary or its nominee. When the depositary receives payment of principal or interest on the global security, the Philippines expects the depositary to credit its participants' accounts with amounts that correspond to their respective beneficial interests in the global security. The Philippines also expects that, after the participants' accounts are credited, the participants will credit the accounts of the owners of beneficial interests in the global security with amounts that correspond to the owners' respective beneficial interests in the global security. The depositary and its participants establish policies and procedures governing payments, transfers, exchanges and other important matters that affect owners of beneficial interests in a global security. The depositary and its participants may change these policies and procedures from time to time. The Philippines has no responsibility or liability for the records of ownership of beneficial interests in the global security, or for payments made or not made to owners of such beneficial interests. The Philippines also has no responsibility or liability for any aspect of the relationship between the depositary and its participants or for any aspect of the relationship between participants and owners of beneficial interests in the global security. 109
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BEARER SECURITIES. The Philippines may issue debt securities of a series in the form of one or more bearer global debt securities deposited with a common depositary for the Euroclear System and Clearstream Banking, societe anonyme, or with a nominee identified in the applicable Prospectus Supplement. The specific terms and procedures, including the specific terms of the depositary arrangement, with respect to any portion of a series of debt securities to be represented by a bearer global security will be described in the applicable Prospectus Supplement. Additional Amounts The Philippines will make all payments on the debt securities without withholding or deducting any present or future taxes imposed by the Philippines or any of its political subdivisions, unless required by law. If Philippine law requires the Philippines to deduct or withhold taxes, it will pay the holders of the debt securities such additional amounts as are necessary to ensure that they receive the same amount as they would have received without such withholding or deduction. The Philippines will not pay, however, any additional amounts if the holder of the debt securities is liable for Philippine tax because: - the holder of the debt securities is connected with the Philippines other than by merely owning the debt security or receiving income or payments on the bond; or - the holder of the debt securities failed to comply with any reasonable certification, identification or other reporting requirement concerning the holder's nationality, residence, identity or connection with the Philippines, if compliance with such requirement is required by any statute or regulation of the Philippines as a precondition to exemption from withholding or deduction of taxes; or - the holder of the debt securities failed to present its debt security for payment within 30 days of when the payment is due or when the Philippines makes available to the holder of the debt securities or the relevant fiscal or paying agent a payment of principal or interest, whichever is later. Nevertheless, the Philippines will pay additional amounts to the extent the holder would have been entitled to such amounts had it presented its debt security for payment on the last day of the 30 day period. Status of Bonds While outstanding, the debt securities will: - constitute direct, unconditional and unsecured obligations of the Philippines; - rank at least equally in right of payment with all of the Philippines' other unsecured and unsubordinated External Indebtedness, except as described below; and - continue to be backed by the full faith and credit of the Philippines. Under Philippine law, unsecured debt (including guarantees of debt) of a borrower in insolvency or liquidation that is documented by a public instrument, as provided in Article 2244(14) of the Civil Code of the Philippines, ranks ahead of unsecured debt that is not so documented. Debt is treated as documented by a public instrument if it is acknowledged before a notary or any person authorized to administer oaths in the Philippines. The Government maintains that debt of the Philippines is not subject to the preferences granted under Article 2244(14) or cannot be documented by a public instrument without acknowledgment of the Philippines as debtor. The Philippine courts have never addressed this matter, however, and it is uncertain whether a document evidencing the Philippines' Peso or non-Peso denominated debt (including External Indebtedness), notarized without the Philippines' participation, would be considered documented by a public instrument. If such debt were considered documented by a public instrument, it would rank ahead of the debt securities if the Philippines could not meet its debt obligations. The Philippines has represented that it has not prepared, executed or filed any public instrument, as provided in Article 2244(14) of the Civil Code of the Philippines, relating to any External Indebtedness. It also has not consented or assisted in the preparation or filing of any such public instrument. The Philippines 110
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also agreed that it will not create any preference or priority in respect of any External Public Indebtedness pursuant to Article 2244(14) of the Civil Code of the Philippines unless its grants equal and ratable preference or priority to amounts payable under the debt securities. Negative Pledge Covenant If any debt securities are outstanding, the Philippines will not create or permit any Liens on its assets or revenues as security for any of its External Public Indebtedness, unless the Lien also secures the Philippines' obligations under the debt securities. In addition, the Philippines will not create any preference or priority for any of its External Public Indebtedness pursuant to Article 2244(14) of the Civil Code of the Philippines, or any successor law, unless it grants equal and ratable preference or priority to amounts due under the debt securities. The Philippines may create or permit a Lien: - on any property or asset (or any interest in such property or asset) incurred when the property or asset was purchased, improved, constructed, developed or redeveloped to secure payment of the cost of the activity; - securing Refinanced External Public Indebtedness; - arising out of the extension, renewal or replacement of any External Public Indebtedness that is permitted to be subject to a lien pursuant to either of the previous two bullet points, as long as the principal amount of the External Public Indebtedness so secured is not increased; - arising in the ordinary course of banking transactions to secure External Public Indebtedness with a maturity not exceeding one year; - existing on any property or asset at the time it was purchased, or arising after the acquisition under a contract entered into before and not in contemplation of the acquisition, and any extension and renewal of that Lien which is limited to the original property or asset and secures any extension or renewal of the original secured financing; - that: (A) arises pursuant to any legal process in connection with court proceedings so long as the enforcement of the lien is stayed and the Philippines is contesting the claims secured in good faith; or (B) secures the reimbursement obligation under any surety given in connection with the release of any lien referred to in (A) above; if it is released or discharged within one year of imposition; or - arising by operation of law, provided that any such Lien is not created or permitted to be created by the Philippines for the purpose of securing any External Public Indebtedness The international reserves of Bangko Sentral represent substantially all of the official gross international reserves of the Philippines. Because Bangko Sentral is an independent entity, the Philippines and Bangko Sentral believe that the debt securities' negative pledge covenant does not apply to Bangko Sentral's international reserves. Bangko Sentral could therefore incur External Indebtedness secured by international reserves without securing amounts payable under the debt securities. Events of Default Each of the following constitutes an event of default with respect to any series of debt securities: 1. NON-PAYMENT: the Philippines does not pay principal or interest on any debt securities of such series when due and such failure continues for 30 days; 2. BREACH OF OTHER OBLIGATIONS: the Philippines fails to observe or perform any of the covenants in the series of debt securities (other than non-payment) for 60 days after written notice of the default is 111
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delivered by any holder of debt securities to the Philippines at the corporate trust office of the fiscal agent in New York City; 3. CROSS DEFAULT AND CROSS ACCELERATION: (a) the Philippines fails to make a payment of principal, premium, prepayment charge or interest when due on any External Public Indebtedness with a principal amount equal to or greater than $25,000,000 or its equivalent, and this failure continues beyond the applicable grace period; or (b) any External Public Indebtedness of the Philippines or the central monetary authority in principal amount equal to or greater than $25,000,000 is accelerated, other than by optional or mandatory prepayment or redemption; For purposes of this event of default, the US dollar equivalent for non-US dollar debt will be computed using the middle spot rate for the relevant currency against the US dollar as quoted by The Chase Manhattan Bank on the date of determination. 4. MORATORIUM: the Philippines declares a general moratorium on the payment of its or the central monetary authority's External Indebtedness; 5. VALIDITY: (a) the Philippines, or any governmental body with the legal power and authority to declare such series of debt securities and the related Fiscal Agency Agreement invalid or unenforceable, challenges the validity of such series of debt securities or the related Fiscal Agency Agreement; (b) the Philippines denies any of its obligations under such series of debt securities or the related Fiscal Agency Agreement; or (c) any legislative executive, or constitutional measure or final judicial decision renders any material provision of such series of debt securities or the related Fiscal Agency Agreement invalid or unenforceable or prevents or delays the performance of the Philippines' obligations under such series of debt securities or the related Fiscal Agency Agreement; 6. FAILURE OF AUTHORIZATIONS: any legislative, executive or constitutional authorization necessary for the Philippines to perform its material obligations under the series of debt securities or the related Fiscal Agency Agreement ceases to be in full force and effect or is modified in a manner materially prejudicial to the holders of the debt securities; 7. CONTROL OF ASSETS: The Philippines or the central monetary authority does not at all times exercise full control over the Philippines' International Monetary Assets; or 8. IMF MEMBERSHIP: The Philippines ceases to be a member of the IMF or losses its eligibility to use the general resources of the IMF. The events described in paragraphs 2, 4, 5 and 6 will be events of default only if they materially prejudice the interests of holders of the debt securities. If any of the above events of default occurs and is continuing, holders of the debt securities representing at least 25% in principal amount of the debt securities of that series then outstanding may declare all of the debt securities of the series to be due and payable immediately by written notice to the Philippines and the fiscal agent. In the case of an event of default described in paragraphs 1 or 4 above, any holder of the debt securities may declare the principal amount of debt securities that it holds to be immediately due and payable by written notice to the Philippines and the fiscal agent. Investors should note that: - despite the procedure described above, no debt securities may be declared due and payable if the Philippines cures the applicable event of default before it receives the written notice from the holder of the debt securities; 112
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- the Philippines is not required to provide periodic evidence of the absence of defaults; and - the Fiscal Agency Agreement does not require the Philippines to notify holders of the debt securities of an event of default or grant any holder of the debt securities a right to examine the bond register. Modifications and Amendments; Bondholders' Meetings Each holder of a series of debt securities must consent to any amendment or modification of the terms of that series of debt securities or the Fiscal Agency Agreement that would: - change the stated maturity of the principal of the debt securities or any installment of interest; - reduce the principal amount of such series of debt securities or the portion of the principal amount payable upon acceleration of such debt securities; - change the debt securities' interest rate; - change the currency of payment of principal or interest; - change the obligation of the Philippines to pay additional amounts on account of withholding taxes or deductions; or - reduce the percentage of the outstanding principal amount needed to modify or amend the related Fiscal Agency Agreement or the terms of such series of debt securities. With respect to other types of amendment or modification, the Philippines may, with the consent of the holders of at least a majority in principal amount of the debt securities of a series that are outstanding, modify and amend that series of debt securities or, to the extent the modification or amendment affects that series of debt securities, the Fiscal Agency Agreement. The Philippines may at any time call a meeting of the holders of a series of debt securities to seek the holders' approval of the modification, or amendment, or obtain a waiver, of any provision of that series of debt securities. The meeting will be held at the time and place in the Borough of Manhattan in New York City as determined by the Philippines. The notice calling the meeting must be given at least 30 days and not more than 60 days prior to the meeting. While an event of default with respect to a series of debt securities is continuing, holders of at least 10% of the aggregate principal amount of that series of debt securities may compel the fiscal agent to call a meeting of all holders of debt securities of that series. The Persons entitled to vote a majority in principal amount of the debt securities of the series that are outstanding at the time will constitute a quorum at a meeting of the holders of the debt securities. To vote at a meeting, a person must either hold outstanding debt securities of the relevant series or be duly appointed as a proxy for a holder of the debt securities. The fiscal agent will make all rules governing the conduct of any meeting. The Fiscal Agency Agreement and a series of debt securities may be modified or amended, without the consent of the holders of the debt securities, to: - add covenants of the Philippines that benefit holders of the debt securities; - surrender any right or power given to the Philippines; - secure the debt securities; - cure any ambiguity or correct or supplement any defective provision in the Fiscal Agency Agreement or the debt securities, without materially and adversely affecting the interests of the holders of the debt securities. 113
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Replacement of Debt Securities If a debt security becomes mutilated, defaced, destroyed, lost or stolen, the Philippines may issue, and the fiscal agent will authenticate and deliver, a substitute debt security. The Philippines and the fiscal agent will require proof of any claim that a debt security was destroyed, lost or stolen. The applicant for a substitute debt security must indemnify the Philippines, the fiscal agent and any other agent for any losses they may suffer relating to the debt security that was destroyed, lost or stolen. The applicant will be required to pay all expenses and reasonable charges associated with the replacement of the mutilated, defaced, destroyed, lost or stolen debt security. Fiscal Agent The Philippines will appoint a fiscal agent or agents in connection each series of the debt securities whose duties would be governed by the related Fiscal Agency Agreement. Different fiscal agents may be appointed for different series of debt securities. The Philippines may maintain bank accounts and a banking relationship with each fiscal agent. Each fiscal agent is the agent of the Philippines and does not act as a trustee for the holders of the debt securities. Notices All notices will be mailed to the registered holders of a series of debt securities. If a depositary is the registered holder of global securities, each beneficial holder must rely on the procedures of the depositary and its participants to receive notices, subject to any statutory or regulatory requirements. If the Philippines lists a series of debt securities on the Luxembourg Stock Exchange, and the rules of that exchange so require, all notices to holders of that series of debt securities will be published in a daily newspaper of general circulation in Luxembourg. The Philippines expects that the Luxemburger Wort will be the newspaper. If notice cannot be published in an appropriate newspaper, notice will be considered validly given if made pursuant to the rules of the Luxembourg Stock Exchange. Governing Law The Fiscal Agency Agreement and the debt securities will be governed by the laws of the State of New York without regard to any principles of New York law requiring the application of the laws of another jurisdiction. Nevertheless, all matters governing the authorization, execution and delivery of the debt securities and the Fiscal Agency Agreement by the Philippines will be governed by the laws of the Philippines. Further Issues of Debt Securities The Philippines may, without the consent of the holders of the debt securities, create and issue additional debt securities with the same terms and conditions as any series of bonds (or that are the same in all respects except for the amount of the first interest payment and for the interest paid on the series of debt securities prior to the issuance of the additional debt securities). The Philippines may consolidate such additional debt securities with the outstanding debt securities to form a single series. Any further Debt Securities forming a single series with the outstanding Debt Securities of any series constituted by a Fiscal Agency Agreement shall be constituted by an agreement supplemental to such relevant Fiscal Agency Agreement. Jurisdiction and Enforceability The Philippines is a foreign sovereign government and your ability to collect on judgments of US courts against the Philippines may be limited. The Philippines will irrevocably appoint the Philippine Counsel General in New York, New York as its authorized agent to receive service of process in any suit based on any series of debt securities which any holder of the debt securities may bring in any state or federal court in New York City. The Philippines submits to the jurisdiction of any state or federal court in New York City or any competent court in the Philippines in 114
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such action. The Philippines waives, to the extent permitted by law, any objection to proceedings in such courts. The Philippines also waives irrevocably any immunity from jurisdiction to which it might otherwise be entitled in any suit based on any series of debt securities. Because of its waiver of immunity, the Philippines would be subject to suit in competent courts in the Philippines. Judgments against the Philippines in state or federal court in New York City would be recognized and enforced by the courts of the Philippines in any enforcement action without re-examining the issues if: - such judgment were not obtained by collusion or fraud; - the foreign court rendering such judgment had jurisdiction over the case; - the Philippines had proper notice of the proceedings before the foreign court; and - such judgment were not based upon a clear mistake of law or fact. Notwithstanding any of the above, the Philippine Counsel General is not the agent for receipt of service for suits under the US federal or state securities laws, and the Philippines' waiver of immunity does not extend to those actions. In addition, the Philippines does not waive immunity relating to its: - properties and assets used by a diplomatic or consular mission; - properties and assets under the control of its military authority or defense agency; and - properties and assets located in the Philippines and dedicated to a public or governmental use. If you bring a suit against the Philippines under federal or state securities laws, unless the Philippines waives immunity, you would be able to obtain a United States judgment against the Philippines only if a court determined that the Philippines is not entitled to sovereign immunity under the United States Foreign Sovereign Immunities Act. Even if you obtained a United States judgment in any such suit, you may not be able to enforce the judgment in the Philippines. Moreover, you may not be able to enforce a judgment obtained under the Foreign Sovereign Immunities Act against the Philippines' property located in the United States except under the limited circumstances specified in the act. Glossary of Certain Defined Terms Certain definitions used in the Fiscal Agency Agreement are set forth below. For a full explanation of all of these terms or any capitalized terms used in this section you should refer to the Fiscal Agency Agreement. "External Indebtedness" means Indebtedness denominated or payable by its terms, or at the option of the holder, in a currency or currencies other than that of the Philippines. "External Public Indebtedness" means any External Indebtedness in the form of bonds, debentures, notes or other similar instruments or other securities which is, or is eligible to be, quoted, listed or ordinarily purchased and sold on any stock exchange, automated trading system or over-the-counter or other securities market. "Indebtedness" means any indebtedness for money borrowed or any guarantee of indebtedness for money borrowed. "International Monetary Assets" means all (i) gold, (ii) Special Drawing Rights, (iii) Reserve Positions in the Fund and (iv) Foreign Exchange. "Lien" means any mortgage, deed of trust, charge, pledge, lien or other encumbrance or preferential arrangement which has the practical effect of constituting a security interest. "Refinanced External Public Indebtedness" means the US$130,760,000 Series A Interest Reduction Bonds due 2007 issued by the Republic on December 1, 1992, the US$626,616,000 Series B Interest Reduction Bonds due 2008 issued by the Republic on December 1, 1992, the US$153,490,000 Series A Principal Collateralized Interest Reduction Bonds due 2018 issued by the Republic on December 1, 1992 and 115
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the US$1,740,600,000 Series B Collateralized Interest Reduction Bonds due 2017 issued by the Republic on December 1, 1992. "Special Drawing Rights," "Reserve Positions in the Fund" and "Foreign Exchange", have, as to the type of assets included, the meanings given to them in the IMF's publication entitled "International Financial Statistics" or any other meaning formally adopted by the IMF from time to time. DESCRIPTION OF THE WARRANTS The description below summarizes some of the provisions of warrants for the purchase of bonds that the Republic may issue from time to time and of the Warrant Agreement. Copies of the forms of warrants and the Warrant Agreement are or will be filed as exhibits to the registration statement of which this prospectus is a part. Since it is only a summary, the description may not contain all of the information that is important to you as a potential investor in the warrants. The description of the warrants that will be contained in the prospectus supplement will supplement this description and, to the extent inconsistent with this description, replace it. General Terms of the Warrants Each series of warrants will be issued under a warrant agreement to be entered into between the Republic and a bank or trust company, as warrant agent. The prospectus supplement relating to the series of warrants will set forth: - The terms of the bonds purchasable upon exercise of the warrants, as described above under "Description of the Debt Securities -- General Terms of the Bonds"; - The principal amount of bonds purchasable upon exercise of one warrant and the exercise price; - The procedures and conditions for the exercise of the warrants; - The dates on which the right to exercise the warrants begins and expires; - Whether and under what conditions the warrants and any bonds issued with the warrants will be separately transferable; - Whether the warrants will be issued in certificated or global form and, if in global form, information with respect to applicable depositary arrangements; - If issued in certificated form, whether the warrants will be issued in registered or bearer form, whether they will be exchangeable between such forms, and, if issued in registered form, where they may be transferred and registered; and - Other specific provisions. The warrants will be subject to the provisions set forth under "Description of the Securities -- Description of the Debt Securities," "-- Governing Law" and "-- Jurisdiction and Enforceability". LIMITATIONS ON ISSUANCE OF BEARER DEBT SECURITIES Bearer securities will not be offered, sold or delivered in the United States or its possessions or to a United States person, except in certain circumstances permitted by United States tax regulations. Bearer securities will initially be represented by temporary global securities (without interest coupons) deposited with a common depositary in London for the Euroclear System and Cedel for credit to designated accounts. Unless otherwise indicated in the applicable Prospectus Supplement: - each temporary global security will be exchangeable for definitive bearer securities on or after the date that is 40 days after issuance only upon receipt of certification of non-United States beneficial ownership of the temporary global security as provided in United States tax regulations, provided that 116
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no bearer security will be mailed or otherwise delivered to any location in the United States in connection with the exchange; and - any interest payable on any portion of a temporary global security with respect to any interest payment date occurring prior to the issuance of definitive bearer securities will be paid only upon receipt of certification of non-United States beneficial ownership of the temporary global security as provided in United States tax regulations. Bearer securities (other than temporary global debt securities) and any related coupons will bear the following legend: "Any United States person who holds this obligation will be subject to limitations under the United States federal income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the Internal Revenue Code." The sections referred to in the legend provide that, with certain exceptions, a United States person who holds a bearer security, or coupon will not be allowed to deduct any loss realized on the disposition of the bearer security, and any gain (which might otherwise be characterized as capital gain) recognized on the disposition will be treated as ordinary income. For purposes of this section, "United States person" means: - a citizen or resident of the United States; - a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof; - an estate the income of which is subject to United States federal income taxation regardless of its source; or - a trust if a United States court is able to exercise primary supervision over the trust's administration and one or more United States persons have the authority to control all of the trust's substantial decisions. For purposes of this section, "United States" means United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction. 117
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TAXATION The following discussion summarizes certain US federal income and Philippine tax considerations that may be relevant to you if you invest in debt securities. This summary is based on laws, regulations, rulings and decisions now in effect, all of which may change. Any change could apply retroactively and could affect the continued validity of this summary. This summary does not describe all of the tax considerations that may be relevant to you or your situation, particularly if you are subject to special tax rules. You should consult your tax advisor about the tax consequences of holding debt securities, including the relevance to your particular situation of the considerations discussed below, as well as of state, local or other tax laws. PHILIPPINE TAXATION The following is a summary of certain Philippine tax consequences that may be relevant to non-Philippine holders of the global bonds in connection with the holding and disposition of the global bonds. The Republic uses the term "non-Philippine holders" to refer to (i) non-residents of the Philippines who are neither citizens of the Philippines nor are engaged in trade or business within the Philippines or (ii) non-Philippine corporations not engaged in trade or business in the Philippines. This summary is based on Philippine laws, rules, and regulations now in effect, all of which are subject to change. It is not intended to constitute a complete analysis of the tax consequences under Philippine law of the receipt, ownership, or disposition of the global bonds, in each case by non-Philippine holders, nor to describe any of the tax consequences that may be applicable to residents of the Republic. Effect of Holding Global Bonds. Payments by the Republic of principal of and interest on the global bonds to a non-Philippine holder will not subject such non-Philippine holder to taxation in the Philippines by reason solely of the holding of the global bonds or the receipt of principal or interest in respect thereof. Taxation of Interest on the Global Bonds. When the Republic makes payments of principal and interest to you on the global bonds, no amount will be withheld from such payments for, or on account of, any taxes of any kind imposed, levied, withheld or assessed by the Philippines or any political subdivision or taxing authority thereof or therein. Taxation of Capital Gains. Non-Philippine holders of the global bonds will not be subject to Philippine income or withholding tax in connection with the sale, exchange, or retirement of a global bond if such sale, exchange or retirement is made outside the Philippines or an exemption is available under an applicable tax treaty in force between the Philippines and the country of domicile of the non-Philippine holder. Documentary Stamp Taxes. No documentary stamp tax is imposed upon the transfer of the global bonds. A documentary stamp tax is payable upon the issuance of the global bonds and will be for the account of the Republic. Estate and Donor's Taxes. The transfer of a global bond by way of succession upon the death of a non-Philippine holder will be subject to Philippine estate tax at progressive rates ranging from 5% to 20% if the value of the net estate of properties located in the Philippines is over P200,000. The transfer of a global bond by gift to an individual who is related to the non-resident holder will generally be subject to a Philippine donor's tax at progressive rates ranging from 2% to 15% if the value of the net gifts of properties located in the Philippines exceed P100,000 during the relevant calendar year. Gifts to unrelated donees are generally subject to tax at a flat rate of 30%. An unrelated donee is a person who is not a (i) brother, sister (whether by whole or half blood), spouse, ancestor, or lineal descendant or (ii) relative by consanguinity in the collateral line within the fourth degree of relationship. The foregoing apply even if the holder is a nonresident holder. However, the Republic will not collect estate and donor's taxes on the transfer of the global bonds by gift or succession if the deceased at the time of death, or the donor at the time of donation, was a citizen and resident of a foreign country that provides certain reciprocal rights to citizens of the Philippines (a "Reciprocating Jurisdiction"). For these purposes, a 118
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Reciprocating Jurisdiction is a foreign country which at the time of death or donation (i) did not impose a transfer tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country or (ii) allowed a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. UNITED STATES TAX CONSIDERATIONS The following discussion summarizes certain US federal income tax considerations that may be relevant to you if you invest in debt securities. This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), applicable income tax regulations ("Treasury regulations"), published rulings, administrative pronouncements, and court decisions in effect on the date of this prospectus, all of which are subject to change, possibly with retroactive effect. Any such change could affect the tax consequences described below. This summary deals only with US holders that hold debt securities as capital assets. It does not address considerations that may be relevant to you if you are an investor that is subject to special tax rules, such as a bank, thrift, real estate investment trust, regulated investment company, insurance company, dealer in securities or currencies, trader in securities or commodities that elects mark to market treatment, a person that will hold debt securities as a hedge against currency risk or as a position in a "straddle" or conversion transaction, tax exempt organization or a person whose "functional currency" is not the US dollar. You will be a US holder if you are (i) an individual who is a citizen or resident of the United States, (ii) a corporation or other entity treated as a corporation for US federal income tax purposes created or organized in or under the laws of the United States or any state thereof (including the District of Columbia), (iii) an estate the income of which is subject to US federal income taxation regardless of its source or (iv) a trust if a court within the United States is able to execute primary supervision over its administration and one or more US persons have authority to control the substantial decisions of such trust. If you are a partner in a partnership that holds debt securities, the tax consequences of an investment in debt securities will generally depend on the status of the partners and the activities of the partnership. If you are not a US holder, consult the discussions below under the captions "Non-US Holders" and "Information Reporting and Backup Withholding". You should consult your own tax advisor concerning the particular US federal income tax consequences to you of ownership and disposition of debt securities, as well as the consequences to you arising under the laws of any other taxing jurisdiction. United States Holders PAYMENTS OR ACCRUALS OF INTEREST Payments or accruals of "qualified stated interest" (as defined below) on a debt security will be taxable to you as ordinary interest income at the time that you receive or accrue such amounts (in accordance with your regular method of tax accounting). If you use the cash method of tax accounting and you receive payments of interest pursuant to the terms of a debt security in a currency other than US dollars (a "foreign currency"), the amount of interest income you will realize will be the US dollar value of the foreign currency payment based on the exchange rate in effect on the date you receive the payment regardless of whether you convert the payment into US dollars. If you are an accrual basis US holder, the amount of interest income you will realize will be based on the average exchange rate in effect during the interest accrual period (or with respect to an interest accrual period that spans two taxable years, at the average exchange rate for the partial period within the taxable year). Alternatively, as an accrual basis US holder you may elect to translate all interest income on foreign currency denominated debt securities at the spot rate of exchange on the last day of the accrual period (or the last day of the taxable year, in the case of an accrual period that spans more than one taxable year) or on the date that you receive the interest payment if that date is within five business days of the end of the accrual period. If you make this election you must apply it consistently to all debt instruments from year to year and you cannot change the election without the consent of the Internal Revenue Service. If you use the accrual method of accounting for tax purposes you will recognize foreign currency gain or loss on the receipt of 119
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a foreign currency interest payment if the exchange rate in effect on the date the payment is received differs from the rate applicable to a previous accrual of that interest income. This foreign currency gain or loss will be treated as ordinary income or loss, but generally will not be treated as an adjustment to interest income received on the debt security. Payments of interest on the debt securities will be treated as foreign source income for US federal income tax purposes. For US foreign tax credit limitation purposes, interest on the debt securities will generally constitute "passive income", or in the case of certain US holders, "financial services income". THE PURCHASE, SALE AND RETIREMENT OF DEBT SECURITIES Initially, your tax basis in a debt security generally will equal the cost of the debt security to you. Your basis will increase by any amounts that you are required to include in income under the rules governing original issue discount and market discount, and will decrease by the amount of any amortized premium and any payments other than qualified stated interest made on the debt security. The rules for determining these amounts are discussed below. If you purchase a debt security that is denominated in a foreign currency, the cost to you (and therefore generally your initial tax basis) will be the US dollar value of the foreign currency purchase price on the date of purchase calculated at (i) the exchange rate in effect on that date or (ii) if the foreign currency debt security is traded on an established securities market and you are a cash basis taxpayer, or if you are an accrual basis taxpayer that makes a special election, the spot rate of exchange on the settlement date of your purchase. The amount of any subsequent adjustments to your tax basis in a debt security in respect of foreign currency denominated original issue discount, market discount and premium will be determined in the manner described below. If you convert US dollars into a foreign currency and then immediately use that foreign currency to purchase a debt security, you generally will not have any taxable gain or loss as a result of the conversion or purchase. When you sell or exchange a debt security, or if a debt security is retired, you generally will recognize gain or loss equal to the difference between the amount you realize on the transaction (less any accrued but unpaid interest not previously included in income, which will be subject to tax in the manner described above under "Payments or Accruals of Interest") and your tax basis in the debt security. If you sell or exchange a debt security for a foreign currency, or receive foreign currency on the retirement of a debt security, the amount you will realize for US tax purposes generally will be the US dollar value of the foreign currency that you receive calculated at (i) the exchange rate in effect on the date the foreign currency debt security is disposed of or retired or (ii) if you dispose of a foreign currency debt security that is traded on an established securities market and you are a cash basis US holder, or if you are an accrual basis holder that makes a special election, the spot rate of exchange on the settlement date of the sale, exchange or retirement. The special election available to you if you are an accrual basis taxpayer in respect of the purchase and sale of foreign currency debt securities traded on an established securities market, which is discussed in the two preceding paragraphs, must be applied consistently to all debt instruments from year to year and cannot be changed without the consent of the Internal Revenue Service. Except as discussed below with respect to market discount and foreign currency gain or loss, the gain or loss that you recognize on the sale, exchange or retirement of a debt security generally will be long-term capital gain or loss if you have held the debt security for more than one year. The Code provides preferential treatment under certain circumstances for net long-term capital gains recognized by individual non-corporate investors. Net long-term capital gain recognized by an individual US holder generally will be subject to a maximum tax rate of 20%. A further reduced tax rate may apply to any such capital gain if you have held the debt security for more than five years. Capital gain or loss, if any, recognized by a US holder generally will be treated as US source income or loss for US foreign tax credit purposes. The ability of US holders to offset capital losses against income is limited. Despite the foregoing, the gain or loss that you recognize on the sale, exchange or retirement of a foreign currency debt security generally will be treated as ordinary income or loss to the extent that the gain or loss is attributable to changes in exchange rates during the period in which you held the debt security. This foreign 120
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currency gain or loss will not be treated as an adjustment to interest income that you receive on the debt security. ORIGINAL ISSUE DISCOUNT If the Republic issues debt securities at a discount from their stated redemption price at maturity, and the discount is equal to or more than the product of one-fourth of one percent (0.25%) of the stated redemption price at maturity of the debt securities multiplied by the number of full years to their maturity, the debt securities will be "OID debt securities". The difference between the issue price and the stated redemption price at maturity of the debt securities will be the "original issue discount" or "OID". The "issue price" of the debt securities will be the first price at which a substantial amount of the debt securities are sold to the public (i.e. excluding sales of debt securities to underwriters, placement agents, wholesalers, or similar persons). The "stated redemption price at maturity" will include all payments under the debt securities other than payments of qualified stated interest. The term "qualified stated interest" generally means stated interest that is unconditionally payable in cash or property (other than debt instruments issued by the Republic) at least annually during the entire term of a debt security at a single fixed interest rate or, subject to certain conditions, based on one or more interest indices. If you invest in OID debt securities you generally will be subject to the special tax accounting rules for OID obligations provided by the Code and certain Treasury regulations. You should be aware that, as described in greater detail below, if you invest in an OID debt security you generally will be required to include OID in ordinary gross income for US federal income tax purposes as it accrues, although you may not yet have received the cash attributable to that income. In general, and regardless of whether you use the cash or the accrual method of tax accounting, if you are the holder of an OID debt security with a maturity greater than one year, you will be required to include in ordinary gross income the sum of the "daily portions" of OID on that debt security for all days during the taxable year that you own the debt security. The daily portions of OID on an OID debt security are determined by allocating to each day in any accrual period a ratable portion of the OID allocable to that period. Accrual periods may be any length and may vary in length over the term of an OID debt security, so long as no accrual period is longer than one year and each scheduled payment of principal or interest occurs on the first or last day of an accrual period. If you are the initial holder of the debt security, the amount of OID on an OID debt security allocable to each accrual period is determined by: (i) multiplying the "adjusted issue price" (as defined below) of the debt security at the beginning of the accrual period by a fraction, the numerator of which is the annual yield to maturity of the debt security and the denominator of which is the number of accrual periods in a year; and (ii) subtracting from that product the amount (if any) of qualified stated interest payments allocable to that accrual period. An OID debt security that is a floating rate debt security will be subject to special rules. Generally, if a floating rate debt security qualifies as a "variable rate debt instrument" (as defined in applicable Treasury regulations) then (i) all stated interest with respect to such floating rate debt security will be qualified stated interest and hence included in a US holder's income in accordance with such US holder's normal method of accounting for US federal income tax purposes, and (ii) the amount of OID, if any, will be determined under the general OID rules (as described above) by assuming that the variable rate is a fixed rate equal, in general, to the value, as of the issue date, of the floating rate. If a floating rate debt security does not qualify as "variable rate debt instruments", such floating rate debt security will be classified as contingent payment debt instruments and will be subject to special rules for calculating the accrual of stated interest and original issue document. Any special considerations with respect to the tax consequences of holding a floating rate debt security will be provided in the applicable prospectus supplement. 121
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The "adjusted issue price" of an OID debt security at the beginning of any accrual period will generally be the sum of its issue price (including any accrued interest) and the amount of OID previously includable in the gross income of the holder, reduced by the amount of all payments other than any qualified stated interest payments on the debt security in all prior accrual periods. All payments on an OID debt security, other than qualified stated interest, generally will be viewed first as payments of previously accrued OID (to the extent of the previously accrued discount), with payments considered made from the earliest accrual periods first, and then as a payment of principal. The "annual yield to maturity" of a debt security is the discount rate (appropriately adjusted to reflect the length of accrual periods) that causes the present value on the issue date of all payments on the debt security to equal the issue price. As a result of this "constant yield" method of including OID income, you will generally be required to include in your gross income increasingly greater amounts of OID over the life of OID debt security. You generally may make an irrevocable election to include in income your entire return on a debt security (i.e., the excess of all remaining payments to be received on the debt security, including payments of qualified stated interest, over the amount you paid for the debt security) under the constant yield method described above. For debt securities purchased at a premium or bearing market discount in your hands, if you make this election you will also be deemed to have made the election (discussed below under the caption "Premium and Market Discount") to amortize premium or to accrue market discount in income currently on a constant yield basis. In the case of an OID debt security that is also a foreign currency debt security, you should determine the US dollar amount includible as OID for each accrual period by (i) calculating the amount of OID allocable to each accrual period in the foreign currency using the constant yield method, and (ii) translating the foreign currency amount so determined at the average exchange rate in effect during that accrual period (or, with respect to an interest accrual period that spans two taxable years, at the average exchange rate for the partial period within the taxable year). Alternatively, you may translate the foreign currency amount so determined at the spot rate of exchange on the last day of the accrual period (or the last day of the taxable year, for an accrual period that spans two taxable years) or at the spot rate of exchange on the date of receipt, if that date is within five business days of the last day of the accrual period, provided that you have made the election described under the caption "Payment or Accruals of Interest" above. Because exchange rates may fluctuate, if you are the holder of an OID debt security that is also a foreign currency debt security you may recognize a different amount of OID income in each accrual period than would be the case if you were the holder of an otherwise similar OID debt security denominated in US dollars. Upon the receipt of an amount attributable to OID (whether in connection with a payment of an amount that is not qualified stated interest or the sale or retirement of the OID debt security), you will recognize ordinary income or loss measured by the difference between the amount received, translated into US dollars at the exchange rate in effect on the date of receipt or on the date of disposition of the OID debt security, as the case may be, and the amount accrued, using the exchange rate applicable to such previous accrual. If you purchase an OID debt security outside of the initial offering at a cost less than its "remaining redemption amount", or if you purchase an OID debt security in the initial offering at a price other than the debt security's issue price, you will also generally be required to include in gross income the daily portions of OID, calculated as described above. However, if you acquire an OID debt security at a price (i) less than or equal to the remaining redemption amount but (ii) greater than its adjusted issue price, you will be entitled to reduce your periodic inclusions to reflect the premium paid over the adjusted issue price. (As discussed under "Premium and Market Discount" below, if you purchase an OID debt security at a price greater than its remaining redemption amount, the OID rules described in this section will not apply.) The "remaining redemption amount" for an OID debt security is the total of all future payments to be made on the debt security other than qualified stated interest. Certain of the OID debt securities may be redeemed prior to maturity, either at the option of the Republic or at the option of the holder, or may have special repayment or interest rate reset features as indicated in the pricing supplement. OID debt securities containing these features may be subject to rules that differ from the general rules discussed above. If you purchase OID debt securities with these features, you 122
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should carefully examine the pricing supplement and consult your tax advisor about their treatment since the tax consequences of OID will depend, in part, on the particular terms and features of the debt securities. OID accrued with respect to an OID debt security will be treated as foreign source income for US US federal income tax purposes. For US foreign tax credit purposes, OID accrued with respect to an OID debt security will generally constitute "passive income", or in the case of certain US holders, "financial services income". SHORT-TERM DEBT SECURITIES Special rules may apply to a debt security with a maturity of one year or less ("short-term debt securities"). If you are an accrual basis holder, you will be required to accrue OID on the short-term debt security on either a straight line basis or, at the election of the holder, under a constant yield method (based on daily compounding). No interest payments on a short-term debt security will be qualified stated interest. Consequently, such interest payments are included in the short-term debt security's stated redemption price at maturity. Since the amount of OID is calculated in the same manner as described above under "Original Issue Discount," such interest payments may give rise to OID (or acquisition discount, as defined below) even if the short-term debt securities are not actually issued at a discount. If you are a cash basis holder and do not elect to include OID in income as it accrues, you will not be required to include OID in income until you actually receive payments on the debt security. However, you will be required to treat any gain upon the sale, exchange or retirement of the debt security as ordinary income to the extent of the accrued OID on the debt security that you have not yet taken into income at the time of the sale. Also, if you borrow money (or do not repay outstanding debt) to acquire or hold the debt security, you may not be allowed to deduct interest on the borrowing that corresponds to accrued OID on the debt security until you include the OID in your income. Alternatively, regardless of whether you are a cash basis or accrual basis holder, you can elect to accrue any "acquisition discount" with respect to the short-term debt security on a current basis. Acquisition discount is the excess of the stated redemption price at maturity of the debt security over the purchase price. Acquisition discount will be treated as accruing rateably or, at the election of the holder, under a constant yield method (based on daily compounding). If you elect to accrue acquisition discount, the OID rules will not apply. US holders should consult their own tax advisors as to the application of these rules. As described above, certain of the debt securities may be subject to special redemption features. These features may affect the determination of whether a debt security has a maturity of one year or less and thus is a short-term debt security. If you purchase a short-term debt security, you should carefully examine the pricing supplement and consult your tax advisor about these features. PREMIUM AND MARKET DISCOUNT If you purchase a debt security at a cost greater than the debt security's remaining redemption amount, you will be considered to have purchased the debt security at a premium, and you may elect to amortize the premium as an offset to interest income, using a constant yield method, over the remaining term of the debt security. If you make this election, it generally will apply to all debt instruments that you hold at the time of the election, as well as any debt instruments that you subsequently acquire. In addition, you may not revoke the election without the consent of the Internal Revenue Service. If you elect to amortize the premium you will be required to reduce your tax basis in the debt security by the amount of the premium amortized during your holding period. In the case of premium on a foreign currency debt security, you should calculate the amortization of the premium in the foreign currency. Amortization deductions attributable to a period reduce interest payments in respect of that period, and therefore are translated into US dollars at the rate that you use for those interest payments. Exchange gain or loss will be realized with respect to amortized premium on a foreign currency debt security based on the difference between the exchange rate computed on the date or dates the premium is amortized against interest payments on the debt security and the exchange rate on the date when the holder acquired the debt security. For a US holder that does not elect to amortize premium, the amount of premium will be included in your tax basis when the debt security matures or is disposed of. 123
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Therefore, if you do not elect to amortize premium and you hold the debt security to maturity, you generally will be required to treat the premium as capital loss when the debt security matures. A debt security, other than a short-term debt security, will be treated as purchased at a market discount (a "market discount debt security") if the debt security's stated redemption price at maturity or, in the case of OID debt security, the debt security's "revised issue price", exceeds the amount for which the US Holder purchased the debt security by at least one-fourth of one per cent (0.25%) of such debt security's stated redemption price at maturity or revised issue price, respectively, multiplied by the number of complete years to the debt security's maturity. If such excess is not sufficient to cause the debt security to be a market discount debt security, then such excess constitutes "de minimis market discount" and such debt security is not subject to the rules discussed in the following paragraphs. For these purposes, the "revised issue price" of a debt security generally equals its issue price, increased by the amount of any OID that has accrued on the debt security. Any gain recognized on the maturity or disposition of a market discount debt security will be treated as ordinary income to the extent that such gain does not exceed the accrued market discount on such debt security. Alternatively, a US holder of a market discount debt security may elect to include market discount in income currently over the life of the debt security. Such an election shall apply to all debt instruments with market discount acquired by the electing US holder on or after the first day of the first taxable year to which the election applies. This election may not be revoked without the consent of the Internal Revenue Service. Market discount on a market discount debt security will accrue on a straight line basis unless the US holder elects to accrue such market discount on a constant yield method. Such an election shall apply only to the debt security with respect to which it is made and may not be revoked. A US holder of a market discount debt security that does not elect to include market discount in income currently generally will be required to defer deductions for interest on borrowings allocable to such debt security in an amount not exceeding the accrued market discount on such debt security until the maturity or disposition of such debt security. Any accrued market discount on a foreign currency debt security that is currently includable in income will generally be translated into US dollars at the average rate for the accrual periods (or portion thereof within the holder's taxable year). WARRANTS A description of the tax consequences of an investment in warrants will be provided in the applicable prospectus supplement. INDEXED DEBT SECURITIES AND OTHER DEBT SECURITIES PROVIDING FOR CONTINGENT PAYMENT Special rules govern the tax treatment of debt obligations that provide for contingent payments ("contingent debt obligations"). These rules generally require accrual of interest income on a constant yield basis in respect of contingent debt obligations at a yield determined at the time of issuance of the obligation, and may require adjustments to these accruals when any contingent payments are made. In addition, special rules may apply to floating rate debt securities if the interest payable on the debt securities is based on more than one interest index. We will provide a detailed description of the tax considerations relevant to US holders of any debt securities that are subject to the special rules discussed in this paragraph in the relevant prospectus supplement. Non-US Holders The following summary applies to you if you are not a US holder, as defined above. Subject to the discussion below under the caption "Information Reporting and Backup Withholding", the interest income and gains that you derive in respect of the debt securities generally will be exempt from US federal income taxes, including US withholding tax on payments of interest (including OID) unless such income is effectively connected with the conduct of a trade or business in the United States. 124
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If you are not a US holder, subject to the discussion below under the caption "Information Reporting and Backup Withholding", any gain you realize on a sale or exchange of debt securities generally will be exempt from US federal income tax, including US withholding tax, unless: - your gain is effectively connected with your conduct of a trade or business in the United States; or - you are an individual holder and are present in the United States for 183 days or more in the taxable year of the sale, and either (i) your gain is attributable to an office or other fixed place of business that you maintain in the United States or (ii) you have a tax home in the United States. A debt security held by an individual holder who at the time of death is a non-resident alien will not be subject to US federal estate tax. However, this rule only applies if, at the death of the individual, payments on the global bonds were not effectively connected with the conduct of a trade or business in the United States. Information Reporting and Backup Withholding In general, information reporting requirements may apply to certain payments made within the United States of interest on a debt security, including payments made by the US office of a paying agent, broker or other intermediary, and to proceeds of a sale, exchange, or retirement of debt security effected at the US office of a US or foreign broker. A "backup withholding" tax at a maximum rate of 30% may apply to such payments or proceeds if the beneficial owner fails to provide a correct taxpayer identification number or to otherwise comply with the applicable backup withholding rules. Certain persons (including, among others, corporations) and non-US holders which provide an appropriate certification or otherwise qualify for exemption are not subject to the backup withholding and information reporting requirements. The proceeds of the sale, exchange, retirement or other disposition of debt securities effected through a foreign office of a broker that is a US controlled person will be subject to information reporting, but are not generally subject to backup withholding. A "US controlled person" is (i) a United States person, (ii) a controlled foreign corporation for United States federal income tax purposes, (iii) a foreign person for which 50% or more of its gross income from all sources, over as specified three year period, is effectively connected with a United States trade or business or (iv) a foreign partnership that, at any time in its taxable year, is 50% or more (by income or capital interest) owned by a United States person or is engaged in the conduct of a United States trade or business. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment made to a US holder generally may be claimed as a credit against such holder's US federal income tax liability provided the appropriate information is furnished to the United States Internal Revenue Service. 125
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PLAN OF DISTRIBUTION The Republic may sell the debt securities or warrants in any of three ways: - through underwriters or dealers; - directly to one or more purchasers; or - through agents. The prospectus supplement relating to a particular series of debt securities or warrants will set out: - the names of any underwriters or agents; - the purchase price of the securities; - the proceeds to the Republic from the sale; - any underwriting discounts and other compensation; - the initial public offering price; - any discounts or concessions allowed, reallowed or paid to dealers; and - any securities exchanges on which the securities will be listed. Any underwriter involved in the sale of securities will acquire the securities for its own account. The underwriters may resell the securities from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices to be determined at the time of sale. The securities may be offered to the public either by underwriting syndicates represented by managing underwriters or by underwriters without a syndicate. Unless the prospectus supplement states otherwise, the underwriters will benefit from certain conditions that must be satisfied before they are obligated to purchase such securities and they will be obligated to purchase all of the securities if any are purchased. The underwriters may change any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers. If the Republic sells debt securities or warrants through agents, the prospectus supplement will identify the agent and indicate any commissions payable by the Republic. Unless the prospectus supplement states otherwise, all agents will act on a best efforts basis. The Republic may authorize agents, underwriters or dealers to solicit offers by certain specified entities to purchase the securities from the Republic at the public offering price set forth in a prospectus supplement pursuant to delayed delivery contracts. The prospectus supplement will set out the conditions of the delayed delivery contracts and the commission receivable by the agents, underwriters or dealers for soliciting the contracts. The Republic may offer securities as full, partial or alternative consideration for the purchase of other securities of the Republic, either in connection with a publicly announced tender, exchange or other offer for such securities or in privately negotiated transactions. The offer may be in addition to or in lieu of sales of securities directly or through underwriters or agents. Agents and underwriters may be entitled to indemnification by the Republic against certain liabilities, including liabilities under the United States Securities Act of 1933, or to contribution from the Republic with respect to certain payments which the agents or underwriters may be required to make. Agents and underwriters may be customers of, engage in transactions with, or perform services (including commercial and investment banking services) for, the Republic in the ordinary course of business. 126
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Unless otherwise specified in the applicable prospectus supplement, if the Republic offers and sells securities outside the United States, each underwriter or dealer will acknowledge that: - the securities offered have not been and will not be registered under the US Securities Act of 1933; and - may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the US Securities Act of 1933. Each participating underwriter or dealer will agree that it has not offered or sold, and will not offer or sell, any debt securities constituting part of its allotment in the United States except in accordance with Rule 903 of Regulation S under the US Securities Act of 1933. Accordingly, each underwriter or dealer will agree that neither the underwriter nor dealer nor its affiliates nor any persons acting on its or their behalf have engaged or will engage in any directed selling efforts with respect to the securities. VALIDITY OF THE SECURITIES The Secretary of the Department of Justice of the Republic will provide an opinion on behalf of the Republic as to the validity of the securities under Philippine law. Allen & Overy, United States counsel for the Republic, will provide an opinion on behalf of the Republic as to the validity of the securities under US and New York State law. US and Philippine counsel named in the applicable prospectus supplement will provide an opinion as to certain legal matters on behalf of the underwriters named in the applicable prospectus supplement. AUTHORIZED REPRESENTATIVE IN THE UNITED STATES The authorized agent of the Republic in the United States is Hon. Linglingay Lacanlale, Consul General, the Philippine Consulate General, 556 Fifth Avenue, New York, New York 10036-5095. EXPERTS; OFFICIAL STATEMENTS AND DOCUMENTS Hon. Jose Isidro N. Camacho, in his official capacity as Secretary of the Department of Finance of the Republic, reviewed the information set forth in the prospectus relating to the Republic, which information is included in the prospectus on his authority. FURTHER INFORMATION The Republic filed a registration statement with respect to the securities with the Securities and Exchange Commission under the US Securities Act of 1933, as amended, and its related rules and regulations. You can find additional information concerning the Republic and the securities in the registration statement and any pre- or post-effective amendment, including its various exhibits, which may be inspected at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549. 127
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INDEX TO TABLES [Download Table] PAGE ---- Guaranteed External Debts of the Republic of the Philippines............................................... T-2 External Debt of the Republic of the Philippines............ T-9 Domestic Government Securities.............................. T-20 Government Guaranteed Corporate Bonds....................... T-31 Domestic Debt of the Republic (Other Than Securities)....... T-32 Guaranteed Domestic Debt of the Republic (Other Than Securities)............................................... T-34 T-1
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GUARANTEED EXTERNAL DEBTS OF THE REPUBLIC OF THE PHILIPPINES AS OF DECEMBER 31, 2001 (IN MILLIONS) [Enlarge/Download Table] INTEREST RATE/ SPREAD/ SERVICE CHARGE YEAR YEAR OF CURRENCY INTEREST RATE BASIS (PER ANNUM) CONTRACTED MATURITY -------- ------------------- -------------- ---------- -------- GRAND TOTAL I. NATIONAL GOVERNMENT DIRECT GUARANTEE ON GOCC LOANS A. LOANS CANADIAN DOLLARS Fixed Rate 9.2000% 1991 2003 SWISS FRANCS Fixed Rate 8.8750% 1992 2004 Swiss Export Base Rate 1.3750% 1993 2004 Swiss Export Base Rate 1.3750% 1993 2004 DEUTSCHE MARKS Fixed Rate 7.0000% 1995 2035 Fixed Rate 2.0000% 1990 2020 Fixed Rate 2.0000% 1988 2018 Fixed Rate 9.0000% 1992 2032 Fixed Rate 9.0000% 1993 2033 Fixed Rate 9.0000% 1993 2023 Fixed Rate 2.0000% 1981 2016 Fixed Rate 2.0000% 1981 2011 Fixed Rate 7.5000% 1995 2035 Fixed Rate 2.0000% 1981 2011 Fixed Rate 2.0000% 1979 2009 Fixed Rate 2.0000% 1979 2015 Fixed Rate 7.5000% 1995 2035 Fixed Rate 2.0000% 1979 2009 Fixed Rate 9.0000% 1993 2033 Fixed Rate 6.5000% 1996 2008 Fixed Rate 9.0000% 1995 2036 Fixed Rate 6.5000% 1996 2036 German Capital Market Rate 0.0000% 1991 2031 German Capital Market Rate 0.0000% 1992 2005 German Capital Market Rate 0.0000% 1993 2005 German Capital Market Rate 0.0000% 1993 2005 LIBOR-6 Mos. Deposit 1.0000% 1992 2004 LIBOR-6 Mos. Deposit 0.0000% 1994 2004 EURO Interest Free 0.0000% 2000 2013 SPANISH PESETAS Fixed Rate 2.5000% 1993 2013 Organization for Economic Cooperation Development 0.0000% 1993 2004 Rate FRENCH FRANCS Fixed Rate 6.8500% 1994 2006 Fixed Rate 6.8500% 1994 2002 Fixed Rate 3.0000% 1990 2021 Fixed Rate 3.0000% 1990 2021 Fixed Rate 8.3000% 1991 2002 Fixed Rate 3.5000% 1979 2005 Fixed Rate 8.3000% 1990 2002 Fixed Rate 3.0000% 1990 2021 Fixed Rate 3.1000% 1994 2014 Fixed Rate 8.3000% 1990 2002 Fixed Rate 3.3000% 1994 2014 Fixed Rate 3.0000% 1990 2021 Fixed Rate 2.5000% 1991 2022 Fixed Rate 3.1000% 1994 2014 Fixed Rate 3.0000% 1990 2022 Fixed Rate 8.3000% 1990 2001 Fixed Rate 8.1000% 1994 2005 Fixed Rate 3.0000% 1988 2021 Fixed Rate 3.0000% 1990 2021 Fixed Rate 8.3000% 1990 2002 Fixed Rate 8.3000% 1990 2001 Fixed Rate 3.0000% 1990 2021 ORIGINAL AMOUNT CONTRACTED -------------------------- (IN ORIGINAL (IN US CURRENCY INTEREST RATE BASIS CURRENCY) DOLLARS)(2) -------- ------------------- ------------ ----------- GRAND TOTAL 15,088.04 --------- I. NATIONAL GOVERNMENT DIRECT GUARANTEE ON GOCC LOANS 14,695.99 --------- A. LOANS 12,875.86 --------- CANADIAN DOLLARS Fixed Rate 23.54 14.74 ---------- --------- SWISS FRANCS 81.46 48.52 ---------- --------- Fixed Rate 34.31 20.44 Swiss Export Base Rate 6.50 3.87 Swiss Export Base Rate 40.65 24.21 DEUTSCHE MARKS 850.93 384.22 ---------- --------- Fixed Rate 30.70 13.86 Fixed Rate 150.00 67.73 Fixed Rate 46.00 20.77 Fixed Rate 60.00 27.09 Fixed Rate 60.00 27.09 Fixed Rate 30.40 13.73 Fixed Rate 15.50 7.00 Fixed Rate 0.60 0.27 Fixed Rate 14.75 6.66 Fixed Rate 4.70 2.12 Fixed Rate 7.00 3.16 Fixed Rate 35.80 16.16 Fixed Rate 50.10 22.62 Fixed Rate 2.80 1.26 Fixed Rate 145.00 65.47 Fixed Rate 15.00 6.77 Fixed Rate 12.80 5.78 Fixed Rate 9.30 4.20 German Capital Market Rate 17.25 7.79 German Capital Market Rate 26.00 11.74 German Capital Market Rate 39.60 17.88 German Capital Market Rate 15.00 6.77 LIBOR-6 Mos. Deposit 18.70 8.44 LIBOR-6 Mos. Deposit 43.93 19.84 EURO Interest Free 7.81 6.90 ---------- --------- SPANISH PESETAS 1,262.24 6.70 ---------- --------- Fixed Rate 631.12 3.35 Organization for Economic Cooperation Development 631.12 3.35 Rate FRENCH FRANCS 554.46 74.64 ---------- --------- Fixed Rate 9.42 1.27 Fixed Rate 54.75 7.37 Fixed Rate 4.86 0.65 Fixed Rate 0.38 0.05 Fixed Rate 4.78 0.64 Fixed Rate 80.00 10.77 Fixed Rate 0.29 0.04 Fixed Rate 1.68 0.23 Fixed Rate 10.09 1.36 Fixed Rate 0.47 0.06 Fixed Rate 4.94 0.67 Fixed Rate 1.45 0.20 Fixed Rate 6.44 0.87 Fixed Rate 9.90 1.33 Fixed Rate 0.76 0.10 Fixed Rate 1.97 0.27 Fixed Rate 1.69 0.23 Fixed Rate 45.88 6.18 Fixed Rate 6.26 0.84 Fixed Rate 0.53 0.07 Fixed Rate 1.57 0.21 Fixed Rate 1.41 0.19 OUTSTANDING BALANCE AS OF DECEMBER 31, 2001 -------------------------------- (IN ORIGINAL (IN US CURRENCY INTEREST RATE BASIS CURRENCY) DOLLARS)(2) -------- ------------------- ------------------ ----------- GRAND TOTAL 9,176.89 --------- I. NATIONAL GOVERNMENT DIRECT GUARANTEE ON GOCC LOANS 8,856.17 --------- A. LOANS 6,594.49 --------- CANADIAN DOLLARS Fixed Rate 3.53 2.21 ---------- --------- SWISS FRANCS 27.20 16.20 ---------- --------- Fixed Rate 8.58 5.11 Swiss Export Base Rate 2.18 1.30 Swiss Export Base Rate 16.44 9.79 DEUTSCHE MARKS 427.74 193.13 ---------- --------- Fixed Rate 29.48 13.31 Fixed Rate 28.19 12.73 Fixed Rate 37.95 17.14 Fixed Rate 72.80 32.87 Fixed Rate 59.95 27.07 Fixed Rate 30.40 13.73 Fixed Rate 7.35 3.32 Fixed Rate 0.30 0.14 Fixed Rate 14.75 6.66 Fixed Rate 2.33 1.05 Fixed Rate 2.63 1.19 Fixed Rate 17.64 7.97 Fixed Rate 44.70 20.18 Fixed Rate 1.05 0.47 Fixed Rate 9.20 4.15 Fixed Rate 0.00 0.00 Fixed Rate 6.86 3.10 Fixed Rate 6.76 3.05 German Capital Market Rate 2.70 1.22 German Capital Market Rate 7.01 3.16 German Capital Market Rate 20.32 9.18 German Capital Market Rate 9.71 4.38 LIBOR-6 Mos. Deposit 4.68 2.11 LIBOR-6 Mos. Deposit 10.98 4.96 EURO Interest Free 3.06 2.70 ---------- --------- SPANISH PESETAS 772.75 4.10 ---------- --------- Fixed Rate 549.63 2.92 Organization for Economic Cooperation Development 223.12 1.18 Rate FRENCH FRANCS 344.20 46.34 ---------- --------- Fixed Rate 5.58 0.75 Fixed Rate 0.40 0.05 Fixed Rate 4.86 0.65 Fixed Rate 0.38 0.05 Fixed Rate 0.24 0.03 Fixed Rate 13.99 1.88 Fixed Rate 0.03 0.00 Fixed Rate 1.68 0.23 Fixed Rate 9.86 1.33 Fixed Rate 0.05 0.01 Fixed Rate 4.76 0.64 Fixed Rate 1.41 0.19 Fixed Rate 6.44 0.87 Fixed Rate 9.67 1.30 Fixed Rate 0.76 0.10 Fixed Rate 0.00 0.00 Fixed Rate 0.59 0.08 Fixed Rate 40.15 5.40 Fixed Rate 6.11 0.82 Fixed Rate 0.05 0.01 Fixed Rate 0.00 0.00 Fixed Rate 1.34 0.18 T-2
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GUARANTEED EXTERNAL DEBTS OF THE REPUBLIC OF THE PHILIPPINES -- (CONTINUED) (IN MILLIONS) [Enlarge/Download Table] INTEREST RATE/ SPREAD/ SERVICE CHARGE YEAR YEAR OF CURRENCY INTEREST RATE BASIS (PER ANNUM) CONTRACTED MATURITY -------- ------------------- -------------- ---------- -------- Fixed Rate 8.3000% 1990 2001 Fixed Rate 3.0000% 1990 2021 Fixed Rate 8.3000% 1990 2001 Fixed Rate 5.4500% 1990 2016 Fixed Rate 2.5000% 1991 2022 Fixed Rate 3.0000% 1990 2022 Fixed Rate 8.3000% 1990 2002 Fixed Rate 3.0000% 1990 2022 Fixed Rate 3.0000% 1990 2021 Fixed Rate 3.0000% 1990 2022 Fixed Rate 3.0000% 1990 2022 Fixed Rate 3.0000% 1988 2021 Fixed Rate 8.1000% 1994 2006 Fixed Rate 8.3000% 1990 2002 Fixed Rate 3.1000% 1994 2014 Fixed Rate 8.3000% 1990 2002 Fixed Rate 6.8700% 1996 2017 Fixed Rate 1.5000% 1996 2022 Fixed Rate 1.5000% 1996 2002 Fixed Rate 1.5000% 1996 2002 Fixed Rate 1.5000% 1996 2002 Fixed Rate 1.5000% 1996 2002 Fixed Rate 5.4500% 1991 2018 Fixed Rate 8.3000% 1990 2002 Fixed Rate 8.3000% 1991 2002 Fixed Rate 3.3000% 1994 2014 Fixed Rate 8.3000% 1990 2002 Fixed Rate 3.0000% 1990 2022 Fixed Rate 8.3000% 1990 2002 Fixed Rate 8.3000% 1990 2002 Fixed Rate 8.3000% 1990 2002 Fixed Rate 3.0000% 1990 2022 Fixed Rate 8.3000% 1990 2002 Fixed Rate 8.3000% 1990 2002 Fixed Rate 8.3000% 1990 2002 KOREAN WON Fixed Rate 3.5000% 1995 2015 Fixed Rate 3.5000% 1995 2015 POUNDS STERLING Fixed Rate 8.3000% 1990 2002 Fixed Rate 5.9500% 1995 2007 JAPANESE YEN Fixed Rate 6.5000% 1991 2002 Fixed Rate 2.5000% 1992 2022 Fixed Rate 6.5000% 1991 2003 Fixed Rate 3.0000% 1994 2024 Fixed Rate 2.5000% 1989 2006 Fixed Rate 6.5000% 1991 1999 Fixed Rate 2.5000% 1991 2021 Fixed Rate 6.0000% 1992 2004 Fixed Rate 2.7000% 1988 2002 Fixed Rate 6.5000% 1991 2011 Fixed Rate 3.0000% 1994 2024 Fixed Rate 5.5000% 1992 2010 Fixed Rate 4.7000% 1993 2009 Fixed Rate 2.5000% 1991 2007 Fixed Rate 2.0000% 1992 2006 Fixed Rate 2.5000% 1989 2002 Fixed Rate 5.8000% 1992 2004 Fixed Rate 7.5000% 1992 2003 Fixed Rate 2.5000% 1995 2025 Fixed Rate 2.1000% 1995 2025 Fixed Rate 2.5000% 1995 2025 Fixed Rate 2.1000% 1995 2025 Fixed Rate 2.7000% 1995 2025 Fixed Rate 2.3000% 1995 2025 Fixed Rate 2.7000% 1995 2025 ORIGINAL AMOUNT CONTRACTED -------------------------- (IN ORIGINAL (IN US CURRENCY INTEREST RATE BASIS CURRENCY) DOLLARS)(2) -------- ------------------- ------------ ----------- Fixed Rate 1.68 0.23 Fixed Rate 1.69 0.23 Fixed Rate 0.13 0.02 Fixed Rate 120.00 16.16 Fixed Rate 8.06 1.09 Fixed Rate 1.22 0.16 Fixed Rate 0.29 0.04 Fixed Rate 6.12 0.82 Fixed Rate 4.73 0.64 Fixed Rate 0.36 0.05 Fixed Rate 2.25 0.30 Fixed Rate 4.12 0.55 Fixed Rate 5.00 0.67 Fixed Rate 0.44 0.06 Fixed Rate 42.62 5.74 Fixed Rate 0.22 0.03 Fixed Rate 24.65 3.32 Fixed Rate 8.42 1.13 Fixed Rate 4.46 0.60 Fixed Rate 7.49 1.01 Fixed Rate 10.46 1.41 Fixed Rate 0.45 0.06 Fixed Rate 30.00 4.04 Fixed Rate 0.22 0.03 Fixed Rate 6.83 0.92 Fixed Rate 1.14 0.15 Fixed Rate 0.57 0.08 Fixed Rate 0.48 0.07 Fixed Rate 0.47 0.06 Fixed Rate 3.50 0.47 Fixed Rate 4.79 0.64 Fixed Rate 0.70 0.09 Fixed Rate 0.29 0.04 Fixed Rate 0.69 0.09 Fixed Rate 0.38 0.05 KOREAN WON 8,249.00 6.25 ---------- --------- Fixed Rate 8,249.00 6.25 Fixed Rate 8,645.00 6.55 POUNDS STERLING 20.77 30.18 ---------- --------- Fixed Rate 13.03 18.94 Fixed Rate 7.74 11.25 JAPANESE YEN 728,681.73 5,534.34 ---------- --------- Fixed Rate 2,250.58 17.09 Fixed Rate 6,686.00 50.78 Fixed Rate 13,214.97 100.37 Fixed Rate 15,000.00 113.93 Fixed Rate 5,003.68 38.00 Fixed Rate 2,201.88 16.72 Fixed Rate 30,084.00 228.49 Fixed Rate 27,073.09 205.62 Fixed Rate 1,936.96 14.71 Fixed Rate 12,215.94 92.78 Fixed Rate 22,500.00 170.89 Fixed Rate 20,550.00 156.08 Fixed Rate 17,812.50 135.29 Fixed Rate 6,705.49 50.93 Fixed Rate 891.52 6.77 Fixed Rate 987.56 7.50 Fixed Rate 27,885.85 211.79 Fixed Rate 18,820.15 142.94 Fixed Rate 5,283.00 40.12 Fixed Rate 848.00 6.44 Fixed Rate 1,104.00 8.38 Fixed Rate 248.00 1.88 Fixed Rate 11,394.00 86.54 Fixed Rate 921.00 6.99 Fixed Rate 2,224.00 16.89 OUTSTANDING BALANCE AS OF DECEMBER 31, 2001 -------------------------------- (IN ORIGINAL (IN US CURRENCY INTEREST RATE BASIS CURRENCY) DOLLARS)(2) -------- ------------------- ------------------ ----------- Fixed Rate 0.00 0.00 Fixed Rate 1.61 0.22 Fixed Rate 0.00 0.00 Fixed Rate 90.00 12.12 Fixed Rate 8.06 1.09 Fixed Rate 1.22 0.16 Fixed Rate 0.03 0.00 Fixed Rate 6.12 0.82 Fixed Rate 4.38 0.59 Fixed Rate 0.36 0.05 Fixed Rate 2.13 0.29 Fixed Rate 3.81 0.51 Fixed Rate 2.23 0.30 Fixed Rate 0.04 0.01 Fixed Rate 36.68 4.94 Fixed Rate 0.02 0.00 Fixed Rate 16.02 2.16 Fixed Rate 8.42 1.13 Fixed Rate 4.46 0.60 Fixed Rate 7.49 1.01 Fixed Rate 10.46 1.41 Fixed Rate 2.99 0.40 Fixed Rate 25.65 3.45 Fixed Rate 0.02 0.00 Fixed Rate 0.34 0.05 Fixed Rate 1.06 0.14 Fixed Rate 0.06 0.01 Fixed Rate 0.47 0.06 Fixed Rate 0.05 0.01 Fixed Rate 0.35 0.05 Fixed Rate 0.48 0.06 Fixed Rate 0.70 0.09 Fixed Rate 0.03 0.00 Fixed Rate 0.07 0.01 Fixed Rate 0.04 0.01 KOREAN WON 7,655.98 5.80 ---------- --------- Fixed Rate 7,655.98 5.80 Fixed Rate 7.85 0.01 POUNDS STERLING 4.94 7.18 ---------- --------- Fixed Rate 0.30 0.43 Fixed Rate 4.64 6.75 JAPANESE YEN 394,526.36 2,996.43 ---------- --------- Fixed Rate 225.06 1.71 Fixed Rate 6,686.00 50.78 Fixed Rate 2,640.80 20.06 Fixed Rate 12,699.81 96.46 Fixed Rate 4,943.68 37.55 Fixed Rate 0.00 0.00 Fixed Rate 28,616.48 217.34 Fixed Rate 0.00 0.00 Fixed Rate 1,936.95 14.71 Fixed Rate 7,985.70 60.65 Fixed Rate 22,500.00 170.89 Fixed Rate 4,586.55 34.83 Fixed Rate 7,325.25 55.64 Fixed Rate 0.00 0.00 Fixed Rate 0.00 0.00 Fixed Rate 0.00 0.00 Fixed Rate 7,154.39 54.34 Fixed Rate 0.00 0.00 Fixed Rate 172.17 1.31 Fixed Rate 359.86 2.73 Fixed Rate 836.48 6.35 Fixed Rate 285.79 2.17 Fixed Rate 9,624.38 73.10 Fixed Rate 1,048.22 7.96 Fixed Rate 1,366.30 10.38 T-3
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GUARANTEED EXTERNAL DEBTS OF THE REPUBLIC OF THE PHILIPPINES -- (CONTINUED) (IN MILLIONS) [Enlarge/Download Table] INTEREST RATE/ SPREAD/ SERVICE CHARGE YEAR YEAR OF CURRENCY INTEREST RATE BASIS (PER ANNUM) CONTRACTED MATURITY -------- ------------------- -------------- ---------- -------- Fixed Rate 2.7000% 1996 2026 Fixed Rate 2.3000% 1996 2026 Fixed Rate 2.7000% 1996 2026 Fixed Rate 2.3000% 1996 2026 Fixed Rate 2.5000% 1996 2026 Fixed Rate 2.1000% 1996 2026 Fixed Rate 2.3000% 1997 2027 Fixed Rate 2.7000% 1997 2027 Fixed Rate 2.3000% 1997 2027 Fixed Rate 2.7000% 1997 2027 Fixed Rate 2.3000% 1997 2027 Fixed Rate 2.7000% 1997 2027 Fixed Rate 2.3000% 1997 2027 Fixed Rate 2.5000% 1997 2027 Fixed Rate 2.1000% 1997 2027 Fixed Rate 2.5000% 1997 2027 Fixed Rate 2.1000% 1997 2027 Fixed Rate 2.5000% 1997 2027 Fixed Rate 2.1000% 1997 2027 Fixed Rate 2.2000% 1998 2028 Fixed Rate 0.7500% 1998 2038 Fixed Rate 2.2000% 1998 2028 Fixed Rate 0.7500% 1998 2038 Fixed Rate 2.2000% 1998 2028 Fixed Rate 1.7000% 1998 2028 Fixed Rate 0.7500% 1998 2038 Fixed Rate 2.2000% 1999 2028 Fixed Rate 1.7000% 1999 2028 Fixed Rate 2.2000% 1999 2040 Fixed Rate 0.9500% 2001 2041 Fixed Rate 0.7500% 2001 2041 Japan Long Term Prime 1.2500% 1994 2003 Japan Long Term Prime 1.2500% 1994 2003 Japan Long Term Prime Lending Rate 1.2500% 1994 2005 Japan Long Term Prime Lending Rate 0.0000% 1994 2014 Japan Long Term Prime Lending Rate 1.2500% 1994 2005 Japan Long Term Prime Lending Rate 0.0000% 1992 2014 Japan Long Term Prime Lending Rate 0.0000% 1992 2015 Japan Long Term Prime Lending Rate 0.0000% 1999 2019 Japan Long Term Prime Lending Rate 0.0000% 2000 2007 Japan Long Term Prime Lending Rate -0.2000% 1999 2014 Japan Swap Rate 1.6000% 1999 2009 LIBOR 6 Mos. Deposit 1.6000% 1999 2009 LIBOR 6 Mos. Deposit 0.0000% 1999 2003 LIBOR 6 Mos. Deposit 0.0000% 1999 2004 ADB Floating Rate 0.5000% 1996 2016 LIBOR Base Rate 0.5000% 1996 2016 US LIBOR 0.0000% 2001 2020 SPECIAL DRAWING RIGHTS Interest Free 0.7500% 1992 2032 LIBOR 6 Mos. Deposit 0.8000% 1995 2034 LIBOR 6 Mos. Deposit 0.8000% 1995 2014 UNITED STATES DOLLARS ADB Floating Rate 0.0000% 1993 2018 ADB Floating Rate 0.0000% 1989 2004 ADB Floating Rate 0.0000% 1991 2009 ADB Floating Rate 0.0000% 1992 2007 ADB Floating Rate 0.0000% 1989 2012 ADB Floating Rate 0.0000% 1988 2012 ADB Floating Rate 0.0000% 1991 2006 ADB Floating Rate 0.0000% 1986 2006 ADB Floating Rate 0.0000% 1995 2020 ADB Floating Rate 0.0000% 1993 2012 ADB Floating Rate 0.0000% 1991 2015 ADB Floating Rate 0.0000% 1988 2008 ADB Floating Rate 0.0000% 1989 2009 ADB Floating Rate 0.0000% 1995 2019 ORIGINAL AMOUNT CONTRACTED -------------------------- (IN ORIGINAL (IN US CURRENCY INTEREST RATE BASIS CURRENCY) DOLLARS)(2) -------- ------------------- ------------ ----------- Fixed Rate 22,837.00 173.45 Fixed Rate 1,875.00 14.24 Fixed Rate 10,184.00 77.35 Fixed Rate 310.00 2.35 Fixed Rate 5,000.00 37.98 Fixed Rate 158.00 1.20 Fixed Rate 8,760.00 66.53 Fixed Rate 14,011.00 106.41 Fixed Rate 449.00 3.41 Fixed Rate 7,747.00 58.84 Fixed Rate 339.00 2.57 Fixed Rate 14,638.00 111.18 Fixed Rate 334.00 2.54 Fixed Rate 5,903.00 44.83 Fixed Rate 1,325.00 10.06 Fixed Rate 386.00 2.93 Fixed Rate 648.00 4.92 Fixed Rate 1,927.00 14.64 Fixed Rate 819.00 6.22 Fixed Rate 13,788.00 104.72 Fixed Rate 767.00 5.83 Fixed Rate 19,532.00 148.35 Fixed Rate 458.00 3.48 Fixed Rate 3,064.00 23.27 Fixed Rate 2,193.00 16.66 Fixed Rate 815.00 6.19 Fixed Rate 3,064.00 23.27 Fixed Rate 2,193.00 16.66 Fixed Rate 16,450.00 124.94 Fixed Rate 39,455.00 299.66 Fixed Rate 2,476.00 18.81 Japan Long Term Prime 26,840.00 203.85 Japan Long Term Prime 31,500.00 239.24 Japan Long Term Prime Lending Rate 2,163.65 16.43 Japan Long Term Prime Lending Rate 12,400.00 94.18 Japan Long Term Prime Lending Rate 297.84 2.26 Japan Long Term Prime Lending Rate 6,100.00 46.33 Japan Long Term Prime Lending Rate 18,600.00 141.27 Japan Long Term Prime Lending Rate 60,000.00 455.70 Japan Long Term Prime Lending Rate 5,370.68 40.79 Japan Long Term Prime Lending Rate 26,000.00 197.47 Japan Swap Rate 20,800.00 157.98 LIBOR 6 Mos. Deposit 27,200.00 206.58 LIBOR 6 Mos. Deposit 8,469.00 64.32 LIBOR 6 Mos. Deposit 13,537.00 102.81 ADB Floating Rate 2,166.00 16.45 LIBOR Base Rate 9,090.39 69.04 US LIBOR 2,400.00 18.23 SPECIAL DRAWING RIGHTS 13.50 16.94 ---------- --------- Interest Free 3.00 3.76 LIBOR 6 Mos. Deposit 3.50 4.39 LIBOR 6 Mos. Deposit 7.00 8.78 UNITED STATES DOLLARS 6,534.34 6,734.34 ---------- --------- ADB Floating Rate 43.20 43.20 ADB Floating Rate 130.00 130.00 ADB Floating Rate 25.00 25.00 ADB Floating Rate 2.60 2.60 ADB Floating Rate 26.40 26.40 ADB Floating Rate 43.50 43.50 ADB Floating Rate 100.00 100.00 ADB Floating Rate 92.00 92.00 ADB Floating Rate 92.00 92.00 ADB Floating Rate 138.00 138.00 ADB Floating Rate 200.00 200.00 ADB Floating Rate 120.00 120.00 ADB Floating Rate 160.00 160.00 ADB Floating Rate 244.00 244.00 OUTSTANDING BALANCE AS OF DECEMBER 31, 2001 -------------------------------- (IN ORIGINAL (IN US CURRENCY INTEREST RATE BASIS CURRENCY) DOLLARS)(2) -------- ------------------- ------------------ ----------- Fixed Rate 8,092.68 61.46 Fixed Rate 3,257.67 24.74 Fixed Rate 9,458.12 71.83 Fixed Rate 219.34 1.67 Fixed Rate 4,652.67 35.34 Fixed Rate 157.99 1.20 Fixed Rate 502.89 3.82 Fixed Rate 411.92 3.13 Fixed Rate 15.76 0.12 Fixed Rate 5,479.35 41.62 Fixed Rate 282.30 2.14 Fixed Rate 5,379.17 40.85 Fixed Rate 206.08 1.57 Fixed Rate 0.00 0.00 Fixed Rate 760.27 5.77 Fixed Rate 248.88 1.89 Fixed Rate 434.86 3.30 Fixed Rate 0.00 0.00 Fixed Rate 143.51 1.09 Fixed Rate 310.92 2.36 Fixed Rate 136.51 1.04 Fixed Rate 2,648.90 20.12 Fixed Rate 248.32 1.89 Fixed Rate 298.70 2.27 Fixed Rate 227.53 1.73 Fixed Rate 134.72 1.02 Fixed Rate 10,158.42 77.15 Fixed Rate 1,638.70 12.45 Fixed Rate 303.40 2.30 Fixed Rate 0.00 0.00 Fixed Rate 0.00 0.00 Japan Long Term Prime 16,622.68 126.25 Japan Long Term Prime 28,909.69 219.57 Japan Long Term Prime Lending Rate 713.71 5.42 Japan Long Term Prime Lending Rate 5,147.26 39.09 Japan Long Term Prime Lending Rate 89.35 0.68 Japan Long Term Prime Lending Rate 4,771.15 36.24 Japan Long Term Prime Lending Rate 14,136.44 107.37 Japan Long Term Prime Lending Rate 60,000.00 455.70 Japan Long Term Prime Lending Rate 4,603.44 34.96 Japan Long Term Prime Lending Rate 19,050.50 144.69 Japan Swap Rate 20,800.00 157.98 LIBOR 6 Mos. Deposit 27,200.00 206.58 LIBOR 6 Mos. Deposit 4,234.53 32.16 LIBOR 6 Mos. Deposit 7,520.30 57.12 ADB Floating Rate 143.48 1.09 LIBOR Base Rate 1,380.39 10.48 US LIBOR 2,400.00 18.23 SPECIAL DRAWING RIGHTS 11.86 14.87 ---------- --------- Interest Free 2.35 2.95 LIBOR 6 Mos. Deposit 3.48 4.36 LIBOR 6 Mos. Deposit 6.03 7.56 UNITED STATES DOLLARS 3,305.28 3,305.28 ---------- --------- ADB Floating Rate 19.17 19.17 ADB Floating Rate 88.69 88.69 ADB Floating Rate 11.50 11.50 ADB Floating Rate 1.10 1.10 ADB Floating Rate 20.25 20.25 ADB Floating Rate 33.03 33.03 ADB Floating Rate 18.69 18.69 ADB Floating Rate 44.95 44.95 ADB Floating Rate 72.60 72.60 ADB Floating Rate 103.67 103.67 ADB Floating Rate 170.65 170.65 ADB Floating Rate 68.41 68.41 ADB Floating Rate 109.52 109.52 ADB Floating Rate 155.24 155.24 T-4
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GUARANTEED EXTERNAL DEBTS OF THE REPUBLIC OF THE PHILIPPINES -- (CONTINUED) (IN MILLIONS) [Download Table] INTEREST RATE/ SPREAD/ SERVICE CHARGE YEAR YEAR OF CURRENCY INTEREST RATE BASIS (PER ANNUM) CONTRACTED MATURITY -------- ------------------- -------------- ---------- -------- ADB Floating Rate 0.0000% 1992 2012 ADB Floating Rate 0.0000% 1992 2016 ADB Floating Rate 0.0000% 1993 2013 ADB Floating Rate 0.0000% 1998 2021 ADB Floating Rate 0.0000% 1996 2011 ADB Floating Rate 0.0000% 1998 2017 ADB Floating Rate 0.0000% 1998 2013 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 10.5000% 1984 1999 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 3.0000% 1995 2006 Fixed Rate 8.1000% 1980 2005 Fixed Rate 7.6000% 1979 2004 Fixed Rate 1.5000% 1990 2010 Fixed Rate 7.7000% 1978 2003 Fixed Rate 1.5000% 1990 2010 Fixed Rate 8.9000% 1977 2002 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 2.0000% 1993 2013 Fixed Rate 3.5750% 1995 2012 Fixed Rate 1.5000% 1990 2010 Fixed Rate 8.3000% 1989 2003 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 10.1000% 1981 2006 Fixed Rate 11.6000% 1982 2002 Fixed Rate 1.5000% 1990 2010 Fixed Rate 11.6000% 1982 2006 Fixed Rate 8.3000% 1977 2003 Fixed Rate 9.6000% 1981 2001 Fixed Rate 1.5000% 1990 2010 Fixed Rate 11.0000% 1983 2002 Fixed Rate 10.2500% 1984 2004 Fixed Rate 1.5000% 1990 2010 Fixed Rate 3.0000% 1995 2006 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.2500% 1993 2025 Fixed Rate 1.5000% 1990 2010 Fixed Rate 10.5000% 1984 2007 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 9.0000% 1980 2001 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 1.5000% 1990 2010 Fixed Rate 6.6000% 1995 2008 Fixed Rate 7.6500% 1996 2009 Fixed Rate 3.0000% 1994 2007 Fixed Rate 4.0000% 1995 2018 Fixed Rate 6.5000% 1997 2010 IBRD Cost of Qualified Borrowings 0.5000% 1989 2009 IBRD Cost of Qualified Borrowings 0.5000% 1994 2014 IBRD Cost of Qualified Borrowings 0.5000% 1982 2002 IBRD Cost of Qualified Borrowings 0.5000% 1993 2012 IBRD Cost of Qualified Borrowings 0.5000% 1994 2014 IBRD Cost of Qualified Borrowings 0.5000% 1993 2013 IBRD Cost of Qualified Borrowings 0.5000% 1989 2009 IBRD Cost of Qualified Borrowings 0.5000% 1994 2014 IBRD Cost of Qualified Borrowings 0.5000% 1994 2014 ORIGINAL AMOUNT CONTRACTED -------------------------- (IN ORIGINAL (IN US CURRENCY INTEREST RATE BASIS CURRENCY) DOLLARS)(2) -------- ------------------- ------------ ----------- ADB Floating Rate 75.00 75.00 ADB Floating Rate 31.40 31.40 ADB Floating Rate 164.00 164.00 ADB Floating Rate 50.00 50.00 ADB Floating Rate 5.35 5.35 ADB Floating Rate 20.22 20.22 ADB Floating Rate 300.00 300.00 Fixed Rate 0.17 0.17 Fixed Rate 0.03 0.03 Fixed Rate 39.30 39.30 Fixed Rate 0.08 0.08 Fixed Rate 0.05 0.05 Fixed Rate 0.50 0.50 Fixed Rate 42.80 42.80 Fixed Rate 60.70 60.70 Fixed Rate 0.41 0.41 Fixed Rate 49.00 49.00 Fixed Rate 0.04 0.04 Fixed Rate 52.00 52.00 Fixed Rate 15.67 15.67 Fixed Rate 9.34 9.34 Fixed Rate 11.56 11.56 Fixed Rate 0.09 0.09 Fixed Rate 19.30 19.30 Fixed Rate 37.90 37.90 Fixed Rate 0.03 0.03 Fixed Rate 2.24 2.24 Fixed Rate 0.10 0.10 Fixed Rate 0.20 0.20 Fixed Rate 3.38 3.38 Fixed Rate 0.17 0.17 Fixed Rate 87.50 87.50 Fixed Rate 24.00 24.00 Fixed Rate 11.21 11.21 Fixed Rate 17.00 17.00 Fixed Rate 29.00 29.00 Fixed Rate 150.00 150.00 Fixed Rate 0.15 0.15 Fixed Rate 32.75 32.75 Fixed Rate 33.00 33.00 Fixed Rate 0.04 0.04 Fixed Rate 9.50 9.50 Fixed Rate 0.18 0.18 Fixed Rate 0.91 0.91 Fixed Rate 0.12 0.12 Fixed Rate 0.63 0.63 Fixed Rate 24.50 24.50 Fixed Rate 0.51 0.51 Fixed Rate 43.80 43.80 Fixed Rate 0.99 0.99 Fixed Rate 0.38 0.38 Fixed Rate 60.50 60.50 Fixed Rate 4.99 4.99 Fixed Rate 0.23 0.23 Fixed Rate 1.35 1.35 Fixed Rate 11.70 11.70 Fixed Rate 25.00 25.00 Fixed Rate 25.00 25.00 Fixed Rate 5.00 5.00 Fixed Rate 15.00 15.00 Fixed Rate 11.10 11.10 IBRD Cost of Qualified Borrowings 65.50 65.50 IBRD Cost of Qualified Borrowings 113.00 113.00 IBRD Cost of Qualified Borrowings 36.00 36.00 IBRD Cost of Qualified Borrowings 134.00 134.00 IBRD Cost of Qualified Borrowings 114.00 114.00 IBRD Cost of Qualified Borrowings 110.00 110.00 IBRD Cost of Qualified Borrowings 65.00 65.00 IBRD Cost of Qualified Borrowings 127.35 127.35 IBRD Cost of Qualified Borrowings 19.65 19.65 OUTSTANDING BALANCE AS OF DECEMBER 31, 2001 -------------------------------- (IN ORIGINAL (IN US CURRENCY INTEREST RATE BASIS CURRENCY) DOLLARS)(2) -------- ------------------- ------------------ ----------- ADB Floating Rate 64.22 64.22 ADB Floating Rate 8.04 8.04 ADB Floating Rate 101.32 101.32 ADB Floating Rate 4.48 4.48 ADB Floating Rate 4.39 4.39 ADB Floating Rate 9.32 9.32 ADB Floating Rate 1.01 1.01 Fixed Rate 0.15 0.15 Fixed Rate 0.03 0.03 Fixed Rate 14.08 14.08 Fixed Rate 0.07 0.07 Fixed Rate 0.04 0.04 Fixed Rate 0.37 0.37 Fixed Rate 8.49 8.49 Fixed Rate 14.06 14.06 Fixed Rate 0.37 0.37 Fixed Rate 8.50 8.50 Fixed Rate 0.04 0.04 Fixed Rate 2.69 2.69 Fixed Rate 14.10 14.10 Fixed Rate 8.40 8.40 Fixed Rate 10.40 10.40 Fixed Rate 0.08 0.08 Fixed Rate 19.30 19.30 Fixed Rate 37.90 37.90 Fixed Rate 0.02 0.02 Fixed Rate 0.45 0.45 Fixed Rate 0.09 0.09 Fixed Rate 0.18 0.18 Fixed Rate 3.04 3.04 Fixed Rate 0.15 0.15 Fixed Rate 23.17 23.17 Fixed Rate 0.00 0.00 Fixed Rate 10.09 10.09 Fixed Rate 0.00 0.00 Fixed Rate 2.13 2.13 Fixed Rate 0.00 0.00 Fixed Rate 0.14 0.14 Fixed Rate 1.03 1.03 Fixed Rate 7.74 7.74 Fixed Rate 0.04 0.04 Fixed Rate 3.75 3.75 Fixed Rate 0.16 0.16 Fixed Rate 0.82 0.82 Fixed Rate 0.11 0.11 Fixed Rate 0.57 0.57 Fixed Rate 24.50 24.50 Fixed Rate 0.46 0.46 Fixed Rate 5.23 5.23 Fixed Rate 0.89 0.89 Fixed Rate 0.34 0.34 Fixed Rate 0.00 0.00 Fixed Rate 4.49 4.49 Fixed Rate 0.21 0.21 Fixed Rate 1.00 1.00 Fixed Rate 10.53 10.53 Fixed Rate 0.72 0.72 Fixed Rate 1.88 1.88 Fixed Rate 0.64 0.64 Fixed Rate 14.37 14.37 Fixed Rate 3.50 3.50 IBRD Cost of Qualified Borrowings 39.57 39.57 IBRD Cost of Qualified Borrowings 88.89 88.89 IBRD Cost of Qualified Borrowings 0.55 0.55 IBRD Cost of Qualified Borrowings 30.78 30.78 IBRD Cost of Qualified Borrowings 49.18 49.18 IBRD Cost of Qualified Borrowings 44.28 44.28 IBRD Cost of Qualified Borrowings 43.53 43.53 IBRD Cost of Qualified Borrowings 113.89 113.89 IBRD Cost of Qualified Borrowings 11.20 11.20 T-5
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GUARANTEED EXTERNAL DEBTS OF THE REPUBLIC OF THE PHILIPPINES -- (CONTINUED) (IN MILLIONS) [Enlarge/Download Table] INTEREST RATE/ SPREAD/ SERVICE CHARGE YEAR YEAR OF CURRENCY INTEREST RATE BASIS (PER ANNUM) CONTRACTED MATURITY -------- ------------------- -------------- ---------- -------- IBRD Cost of Qualified Borrowings 0.5000% 1995 2002 IBRD Cost of Qualified Borrowings 0.5000% 1994 2013 IBRD Cost of Qualified Borrowings 0.5000% 1991 2011 IBRD Cost of Qualified Borrowings 0.5000% 1994 2014 IBRD Cost of Qualified Borrowings 0.5000% 1995 2011 IBRD Cost of Qualified Borrowings 0.5000% 1992 2012 IBRD Cost of Qualified Borrowings 0.5000% 1988 2008 IBRD Cost of Qualified Borrowings 0.5000% 1988 2008 IBRD Cost of Qualified Borrowings 0.5000% 1991 2011 IBRD Cost of Qualified Borrowings 0.5000% 1990 2010 IBRD Cost of Qualified Borrowings 0.5000% 1990 2010 IBRD Cost of Qualified Borrowings 0.5000% 1985 2005 IBRD Cost of Qualified Borrowings 0.5000% 1991 2011 IBRD Cost of Qualified Borrowings 0.5000% 1989 2009 Interest Free 0.0000% 2000 2013 LIBOR 6 Mos. Deposits 0.6250% 1992 2003 LIBOR 6 Mos. Deposits 0.6250% 1992 2003 LIBOR 6 Mos. Deposits 0.6250% 1991 2003 LIBOR 6 Mos. Deposits 0.6250% 1992 2003 LIBOR 6 Mos. Deposits 0.6250% 1992 2003 LIBOR 6 Mos. Deposit 0.0000% 1992 2004 LIBOR 6 Mos. Deposit 0.0000% 1992 2004 LIBOR 6 Mos. Deposit 0.0000% 1992 2004 LIBOR Base Rate 0.5000% 1996 2016 LIBOR Base Rate 0.5000% 1996 2016 LIBOR Base Rate 0.5000% 1996 2016 LIBOR Base Rate 0.5000% 1995 2015 US Concessionary Interest Relending Rate 0.0000% 1993 2004 LIBOR Base Rate 0.5000% 1996 2017 LIBOR Base Rate 0.5000% 1997 2017 LIBOR Base Rate 0.5000% 1998 2018 LIBOR Base Rate 0.5000% 1998 2019 LIBOR Base Rate 0.5000% 1998 2019 LIBOR 6 Mos. Deposit 0.0000% 1998 2014 LIBOR 6 Mos. Deposit 0.0000% 1997 2008 LIBOR 6 Mos. Deposit 0.0000% 1998 2014 LIBOR 6 Mos. Deposit 0.0000% 1998 2008 US Floating Rate 0.9000% 1999 2014 US Floating Rate 0.3000% 2000 2003 B. BONDS UNITED STATES DOLLARS Fixed Rate 9.0000% 1995 2002 Fixed Rate 9.7500% 1994 2009 Fixed Rate 7.8750% 1996 2006 Fixed Rate 8.4000% 1996 2016 Fixed Rate 9.6250% 1998 2028 Fixed Rate 9.8750% 2000 2010 JAPANESE YEN Fixed Rate 4.6500% 1995 2015 Fixed Rate 3.1500% 1997 2003 Fixed Rate 2.3500% 2000 2010 EURO Fixed Rate 9.5750% 2001 2006 II. GFI GUARANTEE ASSUMED BY NATIONAL GOVERNMENT BELGIAN FRANCS BIBOR 6 Mos. 0.6000% 1992 2007 BIBOR 6 Mos. 0.6000% 1992 2007 BIBOR 6 Mos. 0.6000% 1992 2007 CANADIAN DOLLARS 0.0000% 1986 Upon Interest Free Demand DEUTSCHE MARKS DM LIBOR 0.8125% 1986 2003 ORIGINAL AMOUNT CONTRACTED -------------------------- (IN ORIGINAL (IN US CURRENCY INTEREST RATE BASIS CURRENCY) DOLLARS)(2) -------- ------------------- ------------ ----------- IBRD Cost of Qualified Borrowings 50.00 50.00 IBRD Cost of Qualified Borrowings 64.00 64.00 IBRD Cost of Qualified Borrowings 175.00 175.00 IBRD Cost of Qualified Borrowings 40.00 40.00 IBRD Cost of Qualified Borrowings 50.00 50.00 IBRD Cost of Qualified Borrowings 91.30 91.30 IBRD Cost of Qualified Borrowings 41.00 41.00 IBRD Cost of Qualified Borrowings 59.00 59.00 IBRD Cost of Qualified Borrowings 150.00 150.00 IBRD Cost of Qualified Borrowings 150.00 150.00 IBRD Cost of Qualified Borrowings 200.00 200.00 IBRD Cost of Qualified Borrowings 100.00 100.00 IBRD Cost of Qualified Borrowings 15.00 15.00 IBRD Cost of Qualified Borrowings 40.00 40.00 Interest Free 7.50 7.50 LIBOR 6 Mos. Deposits 19.52 19.52 LIBOR 6 Mos. Deposits 4.87 4.87 LIBOR 6 Mos. Deposits 19.52 19.52 LIBOR 6 Mos. Deposits 6.21 6.21 LIBOR 6 Mos. Deposits 4.52 4.52 LIBOR 6 Mos. Deposit 25.50 25.50 LIBOR 6 Mos. Deposit 17.44 17.44 LIBOR 6 Mos. Deposit 18.77 18.77 LIBOR Base Rate 100.00 100.00 LIBOR Base Rate 57.00 57.00 LIBOR Base Rate 150.00 150.00 LIBOR Base Rate 50.00 50.00 US Concessionary Interest Relending Rate 2.13 2.13 LIBOR Base Rate 60.00 60.00 LIBOR Base Rate 54.50 54.50 LIBOR Base Rate 150.00 150.00 LIBOR Base Rate 150.00 150.00 LIBOR Base Rate 23.30 23.30 LIBOR 6 Mos. Deposit 160.00 160.00 LIBOR 6 Mos. Deposit 25.00 25.00 LIBOR 6 Mos. Deposit 160.00 160.00 LIBOR 6 Mos. Deposit 25.00 25.00 US Floating Rate 200.00 200.00 US Floating Rate 200.00 200.00 B. BONDS 1,820.13 --------- UNITED STATES DOLLARS 1,410.00 1,410.00 ---------- --------- Fixed Rate 150.00 150.00 Fixed Rate 100.00 100.00 Fixed Rate 200.00 200.00 Fixed Rate 160.00 160.00 Fixed Rate 300.00 300.00 Fixed Rate 500.00 500.00 JAPANESE YEN 54,000.00 410.13 ---------- --------- Fixed Rate 12,000.00 91.14 Fixed Rate 20,000.00 151.90 Fixed Rate 22,000.00 167.09 EURO 500.00 441.55 ---------- --------- Fixed Rate 500.00 441.55 II. GFI GUARANTEE ASSUMED BY NATIONAL GOVERNMENT 392.05 --------- BELGIAN FRANCS 1,005.34 22.01 ---------- --------- BIBOR 6 Mos. 158.97 3.48 BIBOR 6 Mos. 722.14 15.81 BIBOR 6 Mos. 124.23 2.72 CANADIAN DOLLARS 0.27 0.17 ---------- --------- Interest Free DEUTSCHE MARKS 3.84 1.73 ---------- --------- DM LIBOR 0.33 0.15 OUTSTANDING BALANCE AS OF DECEMBER 31, 2001 -------------------------------- (IN ORIGINAL (IN US CURRENCY INTEREST RATE BASIS CURRENCY) DOLLARS)(2) -------- ------------------- ------------------ ----------- IBRD Cost of Qualified Borrowings 48.05 48.05 IBRD Cost of Qualified Borrowings 46.51 46.51 IBRD Cost of Qualified Borrowings 132.24 132.24 IBRD Cost of Qualified Borrowings 34.73 34.73 IBRD Cost of Qualified Borrowings 45.15 45.15 IBRD Cost of Qualified Borrowings 44.15 44.15 IBRD Cost of Qualified Borrowings 24.85 24.85 IBRD Cost of Qualified Borrowings 31.35 31.35 IBRD Cost of Qualified Borrowings 117.37 117.37 IBRD Cost of Qualified Borrowings 97.31 97.31 IBRD Cost of Qualified Borrowings 139.91 139.91 IBRD Cost of Qualified Borrowings 26.63 26.63 IBRD Cost of Qualified Borrowings 1.13 1.13 IBRD Cost of Qualified Borrowings 25.07 25.07 Interest Free 2.74 2.74 LIBOR 6 Mos. Deposits 3.90 3.90 LIBOR 6 Mos. Deposits 0.65 0.65 LIBOR 6 Mos. Deposits 2.93 2.93 LIBOR 6 Mos. Deposits 1.24 1.24 LIBOR 6 Mos. Deposits 0.70 0.70 LIBOR 6 Mos. Deposit 7.65 7.65 LIBOR 6 Mos. Deposit 4.11 4.11 LIBOR 6 Mos. Deposit 4.14 4.14 LIBOR Base Rate 33.24 33.24 LIBOR Base Rate 5.56 5.56 LIBOR Base Rate 84.07 84.07 LIBOR Base Rate 43.37 43.37 US Concessionary Interest Relending Rate 0.04 0.04 LIBOR Base Rate 13.31 13.31 LIBOR Base Rate 3.18 3.18 LIBOR Base Rate 38.52 38.52 LIBOR Base Rate 0.00 0.00 LIBOR Base Rate 5.03 5.03 LIBOR 6 Mos. Deposit 66.56 66.56 LIBOR 6 Mos. Deposit 0.00 0.00 LIBOR 6 Mos. Deposit 0.00 0.00 LIBOR 6 Mos. Deposit 21.25 21.25 US Floating Rate 180.00 180.00 US Floating Rate 175.00 175.00 B. BONDS 2,261.68 --------- UNITED STATES DOLLARS 1,410.00 1,410.00 ---------- --------- Fixed Rate 150.00 150.00 Fixed Rate 100.00 100.00 Fixed Rate 200.00 200.00 Fixed Rate 160.00 160.00 Fixed Rate 300.00 300.00 Fixed Rate 500.00 500.00 JAPANESE YEN 54,000.00 410.13 ---------- --------- Fixed Rate 12,000.00 91.14 Fixed Rate 20,000.00 151.90 Fixed Rate 22,000.00 167.09 EURO 500.00 441.55 ---------- --------- Fixed Rate 500.00 441.55 II. GFI GUARANTEE ASSUMED BY NATIONAL GOVERNMENT 320.72 --------- BELGIAN FRANCS 789.91 17.29 ---------- --------- BIBOR 6 Mos. 124.90 2.73 BIBOR 6 Mos. 567.40 12.42 BIBOR 6 Mos. 97.61 2.14 CANADIAN DOLLARS 0.27 0.17 ---------- --------- Interest Free DEUTSCHE MARKS 2.43 1.10 ---------- --------- DM LIBOR 0.07 0.03 T-6
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GUARANTEED EXTERNAL DEBTS OF THE REPUBLIC OF THE PHILIPPINES -- (CONTINUED) (IN MILLIONS) [Enlarge/Download Table] INTEREST RATE/ SPREAD/ SERVICE CHARGE YEAR YEAR OF CURRENCY INTEREST RATE BASIS (PER ANNUM) CONTRACTED MATURITY -------- ------------------- -------------- ---------- -------- DM LIBOR 0.8125% 1986 2003 DM LIBOR 0.8125% 1986 2003 Fixed Rate 8.6000% 1992 2007 SPANISH PESETAS Fixed Rate 11.0000% 1991 2007 FRENCH FRANCS Interest Free 0.0000% 1986 Upon Demand Taux Du Marche Obligataire 0.4000% 1991 2007 Taux Du Marche Obligataire 0.4000% 1991 2007 Taux Du Marche Obligataire 0.4000% 1989 2007 Taux Du Marche Obligataire 0.4000% 1989 2007 POUNDS STERLING 0.0000% 1986 Upon Demand GBP LIBOR 0.5000% 1991 2007 JAPANESE YEN Long Term Prime Rate 0.1000% 1992 2007 Long Term Prime Rate 0.1000% 1992 2007 Long Term Prime Rate 0.1000% 1992 2007 Interest Free 0.0000% 1986 Upon Demand Long Term Prime Rate 0.1000% 1992 2007 Long Term Prime Rate 0.1000% 1992 2007 Long Term Prime Rate 0.1000% 1992 2007 Long Term Prime Rate 0.1000% 1992 2007 Long Term Prime Rate 0.1000% 1992 2007 Long Term Prime Rate 0.1000% 1992 2007 Long Term Prime Rate 0.1000% 1992 2000 SAUDI RIAL Interest Free 0.0000% 1986 Upon Demand Interest Free 0.0000% 1986 Upon Demand Interest Free 0.0000% 1986 Upon Demand UNITED STATES DOLLARS Interest Free 0.0000% 1986 Upon Demand Interest Free 0.0000% 1986 Upon Demand Interest Free 0.0000% 1986 Upon Demand Interest Free 0.0000% 1986 Upon Demand Interest Free 0.0000% 1986 Upon Demand Interest Free 0.0000% 1986 Upon Demand Interest Free 0.0000% 1986 Upon Demand Interest Free 0.0000% 1986 Upon Demand Interest Free 0.0000% 1986 Upon Demand Interest Free 0.0000% 1986 Upon Demand Interest Free 0.0000% 1988 Upon Demand Fixed Rate 3.4750% 1992 2007 Fixed Rate 3.4750% 1992 2007 Fixed Rate 3.4750% 1992 2007 LIBOR 6 Mos. 0.8125% 1986 2003 LIBOR 6 Mos. 0.8125% 1986 2003 LIBOR 6 Mos. 0.8125% 1991 2007 ORIGINAL AMOUNT CONTRACTED -------------------------- (IN ORIGINAL (IN US CURRENCY INTEREST RATE BASIS CURRENCY) DOLLARS)(2) -------- ------------------- ------------ ----------- DM LIBOR 0.33 0.15 DM LIBOR 0.33 0.15 Fixed Rate 2.84 1.28 SPANISH PESETAS 6,989.98 37.10