Report on Economic and Financial Developments

Second Quarter 2008

200 8 Second Quarter

Report on Economic and Financial Developments

A. EXECUTIVE SUMMARY 1 B. REAL SECTOR AGGREGATE SUPPLY AND DEMAND 5 LABOR AND EMPLOYMENT 8

C. FISCAL SECTOR NATIONAL GOVERNMENT CASH OPERATIONS 9 D. MONETARY SECTOR PRICES 10 DOMESTIC LIQUIDITY 12 DOMESTIC INTEREST RATES 13 E. FINANCIAL SECTOR BANKING SYSTEM 15 BANKING POLICIES 20 CAPITAL MARKET 20 STOCK MARKET 23 BOND MARKET 25 CREDIT RISK ASSESSMENT 27 PAYMENTS AND SETTLEMENTS SYSTEM 28 F. EXTERNAL SECTOR BALANCE OF PAYMENTS 29 INTERNATIONAL RESERVES 34 EXCHANGE RATE 36 EXTERNAL DEBT 37 FOREIGN INTEREST RATES 39 GLOBAL ECONOMY 41 G. FINANCIAL CONDITION OF THE BSP BALANCE SHEET 44 INCOME STATEMENT 45 H. CHALLENGES AND FUTURE POLICY DIRECTIONS 46

ANNEX A 49

STATISTICAL TABLES

i 2008 Second Quarter

EXECUTIVE SUMMARY

A. Key Economic Developments factor income remained strong, growing at a double digit rate of 14.1 percent during the quarter. Rising inflation and slower growth marked the economic landscape in the second quarter of Labor market conditions soften. Labor market 2008. To a large extent, this reflected rising global conditions softened in the second quarter of 2008. oil and commodity prices and the slowdown in the Based on the results of the April 2008 Labor Force world economy. The economy also experienced Survey (LFS) of the National Statistics Office softer labor market conditions, bearish stock (NSO), the unemployment rate rose to 8.0 percent market activity, higher domestic interest rates and in the second quarter of 2008, from 7.4 percent in a weakening peso during the period. the same period last year. This was due mainly to the drop in employment in industry, with the Economic growth moderates. Economic growth manufacturing sub-sector posting the largest fall. moderated in the second quarter of 2008. Real Meanwhile, the total number of deployed overseas Gross Domestic Product (GDP) rose by 4.6 Filipino (OF) workers increased by 33.9 percent percent compared to the 8.3 percent growth in the during the review period. The underemployment same period last year. On the production side, rate likewise rose to 19.8 percent in April 2008 services and industry slowed down due to rising from 18.9 percent in April 2007. production costs while agriculture, fishery, and forestry (AFF) continued to expand. The NG cash operations post a surplus. The cash performance of AFF registered an improvement, operations of the NG yielded a surplus of P33.6 relative to the comparable quarter of 2007, due to billion in the second quarter of 2008, higher than sufficient water supply from rainfall, rehabilitated the P11.0 billion surplus incurred in the same irrigation facilities and the ongoing support period in 2007. This also reflected an measures of the government to improve crop overperformance relative to the programmed yields. On the expenditure side, growth surplus of P19.2 billion for the review period. performance was mixed. Personal consumption expenditure slowed down while public Prices rise nationwide. Average headline consumption contracted. Exports rose and inflation rose to 9.7 percent in the second quarter, investments continued to post double-digit growth from 5.6 percent in the previous quarter and 2.4 as private construction surged due to the strong percent in the same quarter a year ago. This demand for mid-income housing. Real GNP stemmed mainly from the higher international growth also moderated to 5.5 percent from 9.8 prices of food and energy products. The strong percent in the second quarter of last year, as the price dynamics of food and oil have also started to continued inflow of remittances from overseas feed into prices, as evident in the uptrend in core workers was offset by a decline in property income inflation. The official NSO core measure rose to (specifically interest income from investment in 6.2 percent in Q2 2008 from 4.1 percent in the bonds and deposits abroad). Nonetheless, net previous quarter and 2.6 percent a year ago.

1 2008 Second Quarter

Domestic liquidity expands. Domestic liquidity or The banking system’s asset quality continued to M3 grew by 5.1 percent year-on-year as of end- improve, with the non-performing loan (NPL) ratio June 2008, from 2.1 percent (revised) as of end- easing further to 4.7 percent as of end-May 2008, March 2008, driven mostly by the increase in net compared to 5.8 percent a year ago. The foreign assets of depository corporations. improvement in the NPL ratio was due to the combination of lower NPL and higher total loan Domestic interest rates rise. The primary market portfolio (TLP) levels. 364-day Treasury bill rate rose in the second quarter of 2008 compared to the previous quarter. The banking system remained adequately There were no primary market transactions for the capitalized as of end-December 2007 with the 91-day and 182-day T-bills as the Bureau of average capital adequacy ratios (CAR) at 14.7 Treasury (BTr) suspended the auction for the said percent on a solo basis and 15.7 percent on a tenors during the quarter. In the secondary consolidated basis, which are both higher than the market, the yield for government securities (GS) BSP’s 10.0 percent required minimum ratio. rose across all tenors . Domestic interest rates increased amid persistent concerns over domestic Stock trading affected by global and domestic inflation resulting from higher global commodity concerns. The Philippine stock market retreated prices and market expectations on the likely in the second quarter of 2008 due to concerns impact of higher inflation on the policy stance of over rising inflation, lower earnings of listed local the central bank. companies, slower domestic economic growth in the first quarter, and weaker demand in the US. Given the early evidence of second-round effects, the Monetary Board recognized the need to act The PSEi fell to 2,460.0 index points at end-June promptly to rein in inflation expectations. In June, 2008, 32.8 percent lower than the index posted at the BSP raised its policy rates by 25 basis points end-June last year and 32.1 percent lower than its to 5.25 percent for the overnight borrowing or close in December 2007. reverse repurchase (RRP) rate and to 7.25 percent for the overnight lending or repurchase (RP) rate. BOP remains in surplus. The country’s overall The interest rates on term RRPs, RPs, and SDAs BOP position continued to be in surplus in the were also raised accordingly. second quarter of 2008, although lower by 87.3 percent to reach US$221 million compared to its Banking system remains stable. The year-ago level of US$1,734 million. The current performance of the Philippine banking system account surplus amounted to US$823 million remained favorable during the second quarter of during the quarter as the capital and financial the year, despite concerns of a potential fallout accounts reversed to a net inflow. from the ongoing US subprime mortgage crisis and the shocks brought about by the sharp spikes in GIR level continues to increase. As of end-June world oil and food prices. 2008, the gross international reserves (GIR) amounted to US$36.7 billion, up by 39.2 percent

2 2008 Second Quarter from the end-June 2007 level of US$26.4 billion as overseas deployment also increased. and US$88.0 million higher than the March 2008 Consumption spending growth, however, has level of US$36.6 billion. weakened due to the higher cost of oil and food. On the upside, consumption could potentially pick The GIR level as of end-June 2008 was adequate up on the back of continued remittance inflows as to cover 6.0 months’ worth of imports of goods and well as the expected easing of commodity prices. payment of services and income. In terms of These developments could temper the negative reserve adequacy, the level of reserves is impact of a slowdown in exports due to the cooling equivalent to 5.1 times the country’s short-term off of the US economy and the expected downturn external liabilities based on original maturity and in other advanced economies. Higher overseas 2.9 times based on residual maturity. deployment and the diversification in OF deployment destination and level of skills could The peso weakens. On a year-to-date basis, the also mitigate a slowdown in OF remittances from peso depreciated by 8.1 percent relative to the the weakening of the US and other advanced end-2007 level to close at P44.9/US$1 on 30 June economies. 2008. The peso’s weakness was due to rising global risk aversion brought about by worries over Inflation continues to pose a risk to future the sustained increase in oil and food prices. economic performance given indications that Global financial market strains and cooling supply-driven pressures are beginning to feed into domestic and global growth prospects also demand. Although increases in food and fuel influenced the downtrend of the peso. prices may subside in the coming months, it may take some time before the downward impact on B. Challenges and Future Policy Directions inflation could alleviate price pressures.

During the second quarter, the Philippines, like Policy directions most emerging and developing economies, faced the dilemma of a slowing economy and rising Policymakers around the world face the daunting inflationary pressures in the context of sharp challenge of combating the recent rise in increases in commodity prices. Slowing growth in inflationary pressures while navigating through a the US and other advanced economies also period of slower growth. Given the prospects of a adversely affected economic performance. Going sustained uptrend in food and oil prices due to forward, growth prospects are on the downside. global structural changes, inflation expectations For the Philippines, real GDP growth for the review need to be anchored firmly. Macroeconomic period was weaker than the same period last year, policies need to ensure that the sustained shift in while headline inflation surged in June. The relative prices brought about by the surge in domestic economy was supported by the growth of commodity prices does not drive up inflation and exports and private construction investments inflation expectations further. Monetary policy during the quarter. Meanwhile, remittances should continue to play the lead role, as it is the continued to accelerate during the review quarter first line of defense against rising inflation, but in

3 2008 Second Quarter this task, it needs to be complemented by appropriate non-monetary interventions to be able to address the more structural sources of the recent supply-side-driven price pressures.

Monetary authorities decided to raise the BSP’s policy rates starting in June to address inflation risks for 2008 and 2009, based on forecasts indicating that inflation targets may be breached. The BSP actions recognized the need for timely and decisive responses in inflation management, which should also reduce the output costs to the economy. With price stability as the main priority, the BSP stands ready to take further action to keep inflation expectations well-anchored.

The BSP will continue to monitor the financial sector as the spillover effects from the global economic slowdown and higher risk aversion could adversely affect output growth and the stability of the financial system. Key financial reforms aimed at improving the BSP’s supervision technology and capacity; aligning prudential regulation of the banking system with international standards and best practices, strengthening corporate governance standards and market discipline mechanisms, enhancing the payments system, developing further the domestic capital market, and promoting broad-based financial literacy, will continue to be pursued.

4 2008 Second Quarter

B. Real Sector

Aggregate Supply and Demand

Economic growth moderates. Economic growth moderated in the second quarter of 2008. Real Gross Domestic Product (GDP) rose by 4.6 percent from 8.3 percent in the same period last Real Gross Domestic Product and Real Gross National Product year. On the production side, services and industry Annual growth rates in percent slowed down due to rising production costs while 11.0 10.0 Real GDP Real GNP agriculture, fishery, and forestry (AFF) continued to 9.0

8.0 expand. The performance of AFF registered an 7.0 improvement, relative to the comparable quarter of 2007, 6.0

5.0 due to the expansion of area harvested following the 4.0 provision of sufficient water supply from rainfall, 3.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 rehabilitated irrigation facilities and the ongoing support 2006 2007 2008 measures of the government to improve crop yields. On the expenditure side, growth was supported by exports and investments as private consumption growth slowed down while public consumption declined.

During the review period, real GNP growth also moderated to 5.5 percent from 9.8 percent in the second quarter of last year as the continued inflow of remittances from overseas workers was offset by a decline in property income (specifically interest income from investment in bonds and deposits abroad). Nonetheless, net factor income from abroad (NFIA) remained strong, growing at a double-digit rate of 14.1 percent during the quarter (Table 1). Real GDP, By Industry Annual growth rates in percent 12.0 Agriculture, Fishery and Forestry The services sector slowed down, registering a 10.0 Industry Services 4.3 percent growth, from 8.4 percent in Q2 2007. This 8.0 sector, which represented about half of total GDP, 6.0 contributed 2.3 percentage points to the 4.6 percent 4.0 GDP growth for the review period, significantly lower 2.0 than its contribution to the quarter- and year- ago GDP 0.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 growth rates. The slowdown may be attributed to the 2006 2007 2008 adverse impact of the rising cost of fuel and other basic

5 2008 Second Quarter commodities, and was particularly evident in trade, communications, and storage (TCS), trade, finance, and private services. Meanwhile, demand for residential space from OFs and for commercial space from the Business Process Outsourcing (BPO) industry fueled the growth in the real estate sector. Other dwellings and real estates (ODRE) was the only sector among the services sub-group which accelerated in the second quarter.

The industry sector likewise expanded but at a decelerated rate of 4.8 percent for the second quarter of this year from 10.3 percent during the same period last year. The industry sector accounted for about a third of total GDP and contributed 1.6 percentage points to the 4.6 percent GDP growth for the review period. The slowdown in the industry sector was due to the contraction in mining and quarrying and the sharp deceleration in the construction sub-sector. From a high of 38.9 percent growth in the second quarter of 2007, mining and quarrying contracted by 18.5 percent during the review period as a result of the weak performances of other non-metallic minerals, nickel, other metallic minerals, and crude oil, natural gas and condensate. Meanwhile, the manufacturing industry posted a hefty gain, growing by 6.1 percent in Q2 2008 from 3.4 percent in the previous year, with food manufacturing leading the expansion.

Growth in the agriculture, fishery and forestry (AFF) sector accelerated to 4.9 percent during the second quarter of 2008, compared to 4.2 percent in the comparable quarter of 2007. The AFF sector accounted for 16.6 percent of total GDP and contributed 0.8 percentage point to the 4.6 percent GDP growth during the review period. Growth in the AFF sector was propelled by palay, corn, banana and sugarcane. Palay output grew as the harvested area effectively increased due to adequate rainfall and the rehabilitation of irrigation facilities. The major gainers in agriculture

6 2008 Second Quarter

also included corn, coconut, and banana. Corn continued to experience double-digit growth as the intensive use of hybrid and open-pollinated variety seed, coupled with the higher prices of yellow corn, encouraged more farmers to shift to corn farming. Coconut likewise continued to benefit from the higher price of copra since 2007.

On the expenditure side, growth performance was Real GDP, By Expenditure Annual growth rates in percent mixed. The growth of personal consumption expenditure 20.0 Personal Consumption Expenditure (PCE) slowed down to 3.4 percent in the second quarter Government Consumption 15.0 Investments of 2008 from 5.6 percent a year ago as high commodity 10.0

5.0 prices constrained spending. Government consumption 0.0 expenditure (GCE) contracted by 5.1 percent in the -5.0 second quarter of 2008 after expanding by 11.9 percent -10.0

-15.0 in the same quarter in the previous year. The decline Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 can be attributed to a high base following last year’s 2006 2007 2008 spending on pump-priming activities.

Meanwhile, exports accelerated by 7.7 percent during the second quarter of 2008 from 4.9 percent last year, led by non-merchandise exports, reflecting the upsurge in the IT-enabled services/BPOs in the country. The growth of gross capital formation remained in double-digit at 14.7 percent, although lower than the 17.6 percent growth registered in the comparable period in the previous year due to the slowdown in public construction. Private construction, however, surged by 25.0 percent from the previous year due to the strong demand for mid-income housing supported by better financing schemes and the low interest rate environment (Table 1a).

7 2008 Second Quarter

Labor and Employment

Labor market conditions weaken. Labor market conditions weakened in the second quarter Unemployment Rate* In percent of 2008. Based on the results of the April 2008 Labor 8.5 Force Survey (LFS) of the National Statistics Office 8.0 (NSO), the unemployment rate rose to 8.0 percent in the 7.5 second quarter of 2008, from 7.4 percent in the previous 7.0 quarter and in the same period last year (Table 2).1

6.5 Conversely, the employment rate declined slightly to

6.0 92.0 percent during the quarter in review, from Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2006 2007 2008 92.6 percent in Q2 2007 and Q1 2008. The number of *Based on the new LFS definition employed persons fell slightly by 0.5 percent year-on-year to 33.5 million. The decline in employment reflected the slowdown in demand for certain products and lower profit margins that resulted from soaring fuel and food prices and the downturn in the global economy. These, in turn reduced investment and production and lowered the demand for labor.

Employment in the agriculture and services sectors increased by 0.4 percent and 0.2 percent, respectively, in the second quarter of 2008 from the same period last year. However, employment in the industry sector fell by 4.6 percent with the manufacturing sub-sector posting the largest decline (183,000 workers). The services Underemployment Rate* In percent sector continued to employ about half of the total 26.0 employed population, while the agriculture and industry 25.0 24.0 sectors accounted for 35.5 percent and 14.9 percent, 23.0 22.0 respectively. 21.0 20.0 19.0 The underemployment rate also rose to 19.8 percent 18.0 during the quarter in review from 18.9 percent a year 17.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ago. 2 Underemployed persons in agriculture accounted 2006 2007 2008 *Based on the new LFS definition for 46 percent of the total underemployed, while services

1 Starting April 2005, the new LFS questionnaire was adopted to reflect the change in definition of unemployment, pursuant to NSCB Resolution No. 15 dated 20 October 2004. As indicated in the said Resolution, the unemployed included all persons who were 15 years old and over as of their last birthday and were reported as without work, currently available for work, and seeking work or not seeking work due to valid reasons. The old unemployment definition did not consider the criterion on availability for work. 2 Underemployed persons include all employed persons who express the desire to have additional hours of work in their present job or an additional job, or to have a new job with longer working hours.

8 2008 Second Quarter

and industry accounted for 38.5 percent and Deployed Overseas Workers In thousands 15.5 percent, respectively. 400.0 Land-based Sea-based 350.0 300.0 The total number of deployed overseas Filipino (OF) 250.0

200.0 workers increased by 33.9 percent to 354,735 during the 150.0 review period, from 264,942 in the same period last year. 100.0

50.0 Filipino workers continue to be in strong demand due to 0.0 the diversity and the quality of skills they offer. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2006 2007 2008 * Q1 and Q2 2008 breakdown as to land-based and sea-based not available

C. Fiscal Sector

National Government Cash Operations

NG cash operations yield a surplus. The cash operations of the NG yielded a surplus of P33.6 billion in the second quarter of 2008, higher than the P11.0 billion surplus incurred in the same period in Cash Operations of the National Government In Billion Pesos 2007. This also reflected an overperformance relative to 350 Revenues Expenditures Surplus/(Deficit) 300 the programmed surplus of P19.2 billion for the review 250 period (Table 3). 200

150 100 Total revenues in the second quarter of 2008 reached 50

0 P316.5 billion, 15.9 percent higher than the P273.0

-50 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 billion posted during the same period a year ago and -100 2006 2007 2008 1.4 percent higher than the programmed level of P312.1 billion. The bulk of the revenues came from tax collections, which constituted around 93.0 percent of the total revenues generated during the review period.

Actual vs. Program Non-tax revenues and grants at P22.0 billion accounted Surplus/Deficit ( -) In billion pesos for 7.0 percent of total revenues, and consisted primarily 45.0 30.0 of the collections by the Bureau of the Treasury. 15.0

0.0 -15.0 To increase revenues and attain collection efficiency, -30.0

-45.0 fiscal authorities have been monitoring closely the -60.0 implementation of ongoing programs and action plans of -75.0 Actual Program

-90.0 revenue-generating agencies. The Government is also Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2006 2007 2008 considering establishing a joint government-civil society body to monitor tax collections, gather information on

9 2008 Second Quarter

lifestyle and corrupt practices, and follow up major tax evasion and smuggling cases.

Total expenditures amounted to P282.9 billion in the second quarter of 2008, slightly lower than the P292.9 billion programmed expenditure for the quarter but 8.0 percent higher than the level in the second quarter of 2007. Increases in spending went largely to infrastructure developments and other capital outlays.

The NG was a net borrower for the review period, with net borrowings amounting to P18.7 billion, funded mainly by domestic borrowings as the NG repaid its external borrowings. This is in contrast to the program which indicated net repayments totaling P22.6 billion for both domestic and external borrowings.

D. Monetary Sector

Prices

Inflation continues to accelerate in Q2 2008. Against the background of a continuous surge in energy and food prices, average headline inflation rose further to 9.7 percent from 5.6 percent in the previous quarter and

Inflation Rate 2.4 percent in the same quarter a year ago (Table 4). In Percent (2000=100) Of the 9.7 percent average headline inflation rate for the 11.0 10.0 Philippines NCR Areas Outside the NCR second quarter of 2008, 6.8 percentage points were 9.0

8.0 attributed to food alone. Services contributed

7.0

6.0 1.3 percentage points while housing and repairs

5.0

4.0 contributed 0.7 percentage point. 3.0 2.0

1.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Both food and non-food inflation rates were higher 2006 2007 2008 compared to the levels posted in the previous quarter and the same quarter a year ago. Inflation for food, beverages and tobacco (FBT) reached double-digit levels at 13.8 percent in the second quarter of 2008 from 7.0 percent in the previous quarter and 2.7 percent in the same quarter a year ago. Similarly, non-food inflation

10 2008 Second Quarter

was higher at 6.1 percent relative to 4.2 percent in the last quarter and 2.0 percent in Q2 2007.

Quarter-on-quarter headline inflation accelerated in the second quarter of 2008 to 4.5 percent, higher than the previous quarter’s 2.4 percent with FBT inflation reaching 6.8 percent, more than double the 3.1 percent recorded in the previous quarter. Meanwhile, non-food inflation also rose to 2.5 percent from 1.7 percent in the previous quarter.

Price pressures from food and oil have also started to feed into other prices, as evident in the uptrend in core

Core Inflation Measures inflation. Core inflation, an indicator of the long-term Quarterly averages of year-on-year change trend of inflation, continued to rise during the review

Official Definition Alternative BSP Estimates quarter. The official NSO core inflation measure rose to Net of Headline Core Trimmed Weighted 6.2 percent in the second quarter of 2008 from Volatile Inflation Inflation Mean 2 Mean 3 Items 4 4.1 percent in the previous quarter and 2.6 percent in the 2006 6.2 5.5 5.4 5.0 6.9 same quarter a year ago. Q1 7.3 6.2 5.9 5.4 8.1 Q2 6.9 6.1 5.8 5.0 7.6 Q3 6.1 5.2 5.2 5.2 6.7 Q4 4.8 4.8 4.5 4.2 5.0 The alternative measures of core inflation estimated by 2007 2.8 2.8 2.6 2.3 2.7 Q1 2.9 3.2 2.9 2.5 3.0 the BSP all increased markedly in the second quarter of Q2 2.4 2.6 2.2 2.2 2.5 Q3 2.5 2.9 2.3 2.1 2.5 2008. The trimmed mean measure of core inflation went Q4 3.3 2.4 2.9 2.5 3.0 2008 up to 7.7 percent from 5.1 percent in Q1 2008 and Q1 5.6 4.1 5.1 4.5 5.2 Q2 9.7 6.2 7.7 7.4 8.0 2.2 percent in the comparable quarter of 2007; the

1 The official definition excludes 18.4 percent of the CPI basket as follows: rice, corn, fruits and weighted median rose to 7.4 percent from 4.5 percent in vegetables, fuel items (gas, LPG, kerosene, gasoline and diesel). 2 The trimmed mean represents the average inflation rate of the (weighted) middle 70 percent in a lowest-to-highest ranking of year-on-year inflation rates for all CPI components. the previous quarter and 2.2 percent in the same quarter 3 The weighted median represents the middle inflation rate (corresponding to a cumulative CPI weight of 50 percent) in a lowest-to-highest ranking of year-on-year inflation rates. 4 a year ago. Core inflation measure of net of volatile The net of volatile items method excludes the following items: educational services, fruits and vegetables, personal services, rentals, recreational services, rice and corn, which represent 37.59 percent of all items. This series has been recomputed using a new methodology that is items, went up to 8.0 percent from 5.2 percent in the aligned with NSO's method of computing the official core inflation, which re-weights remaining items to comprise 100 percent of the core basket after excluding non-core items. The previous methodology retained the weights of volatile items in the CPI basket while keeping their indices previous quarter and 2.5 percent in the comparable constant at 100.0 from month-to-month. quarter in 2007.

Inflation increases in both Metro Manila By geographical location, headline inflation accelerated and in areas outside Metro Manila. both within Metro Manila and in the rest of the country with the higher distribution costs associated with the increase in fuel prices. In Metro Manila, year-on-year headline inflation went up to 8.3 percent in the second quarter of 2008 from 4.5 percent in the previous quarter and 2.0 percent in the same quarter a year ago

11 2008 Second Quarter

(Table 4a). Headline inflation in areas outside Metro Manila also went up to 10.4 percent from 6.0 percent in the first quarter of 2008 and 2.5 percent in the same quarter of 2007 (Table 4b).

On a quarter-on-quarter basis, headline inflation within Metro Manila rose to 4.1 percent, more than twice the 1.6 percent posted in the previous quarter, while headline inflation in areas outside Metro Manila increased by 1.9 percentage points to reach 4.7 percent in the second quarter of 2008 from the previous quarter’s 2.8 percent.

Domestic Liquidity 3

Domestic liquidity expands further in Based on data generated from the new system of bank end-June. reports,4 domestic liquidity or M3 grew by 5.1 percent year-on-year as of end-June 2008, from 2.1 percent Domestic Liquidity (revised) as of end-March 2008 (Table 5). On a quarter-on-quarter basis, domestic liquidity growth was Growth Rates Levels (in billion pesos) (in %) Particulars higher at 4.6 percent as of end-June 2008 from a decline Jun 2008 Mar 2008 Jun 2007 Q-o-Q Y-o-Y of 3.7 percent registered in the quarter ending March

Domestic Liquidity (M3) 3,197.5 3,055.6 3,041.8 4.6 5.1 2008. of which: Net Foreign Assets 1,862.5 1,735.9 1,582.8 7.3 17.7 Net Domestic Assets 2,399.1 2,251.5 2,364.5 6.6 1.5 The expansion in M3 as of end-June can be traced to the of which: sustained rise in net foreign assets (NFA) coupled with a Credits to the Public Sector 1,097.3 1,108.7 1,075.9 -1.0 2.0 Credits to the Private Sector 2,199.5 2,067.4 1,968.2 6.4 11.8 moderate increase in net domestic assets (NDA). NFA posted double-digit growth by end-June 2008 at 17.7 percent from 13.4 percent by end-March 2008, while NDA grew by 1.5 percent in end-June from negative 6.6 percent in end-March 2008. The Net Other Items account (which includes SDAs and RRPs) remained in negative balance.

Growth in money demand was also supported by the acceleration in private sector credits, which grew by

3 The indicators used for money supply are: M1 (or narrow money) consisting of currency in circulation and demand deposits; M2 composed of M1 plus savings and time deposits (quasi-money); and M3 consisting of M2 plus deposit substitutes. 4 The Financial Reporting Package (FRP), which replaces the Consolidated Statement of Condition (CSOC) reports, is compliant with the International Accounting Standards (IAS) and International Financial Reporting System (IFRS). All the numbers were worked back to show a consistent series.

12 2008 Second Quarter

11.8 percent as of end-June from the 7.4 percent M4: Domestic Liquidity and FCDs Value in P billion; share in percent increase recorded as of end-March 2008. Credit extended to the public sector continued to grow FCDs FCDs 21.8% 21.3% ₧892.9 B but at a slower pace of 2.0 percent as of end-June 2008 ₧822.4 B from 9.7 percent as of end-March 2008 due to the relatively slower growth of credit extended to the NG and

M3 M3 78.7% 78.2% the decline in loans to local governments and other ₧3,041.8 B ₧3,197.5 B public entities. End-June 2007 End-June 2008 M4—a broader concept of domestic liquidity which includes FCDU deposits of residents—grew by 5.9 percent year-on-year as of end-June 2008. The expansion in M4 was driven mainly by the growth in M3 which contributed 4.0 percentage points.

Domestic Interest Rates

Domestic interest rates rise in the second Domestic interest rate for the 364-day Treasury bills quarter of 2008. in the primary market for government securities (GS) rose in the second quarter of 2008. However, both

Selected Domestic Nominal Interest Rates the 91-day and 182-day Treasury bill rates remained in percent at their Q1 levels as there were no offers for the said Difference 2008 2007 (basis points) tenors during the quarter (Table 6). Q2 Q1 Q2 Q-o-Q Y-o-Y Treasury Bills All Maturities 6.60 5.07 3.81 152.80 279.40 Mirroring the rise in interest rate in the primary market 91 days N.I. 3.67 2.97 182 days N.I. 4.67 3.71 for the 364-day Treasury bills, bank lending rates 364 days 6.60 5.38 5.17 121.60 142.60 Lending Rates increased along with time deposit rates. However, the High 8.94 8.80 8.29 14.45 65.50 Low 7.14 6.95 6.62 18.57 51.59 interbank call loans and savings rates decreased, All Maturities 1 8.26 8.43 8.29 (17.00) (3.20) Interbank Call Loans 5.16 5.48 7.38 (31.99) (222.05) while the Manila reference rates were unchanged. Savings Deposits 2.14 2.23 2.03 (8.97) 11.60 Time Deposits (all maturities) 3.57 3.48 3.03 9.20 54.10 Manila Reference Rates 5.63 5.63 6.56 - (93.75)

1 Refers to the weighted average interest rate of reporting commecial banks' interest incomes The yields for GS in the primary and secondary on their outstanding peso-denominated loans. markets rose across all tenors (except for the 91-day and 182-day Treasury bill rates) compared with the previous quarter. The yield curve shifted upward amid persistent concerns over domestic inflation following higher global commodity prices and market expectations on the likely impact of higher inflation on the policy stance of the central bank.

13 2008 Second Quarter

The Monetary Board increased the BSP’s policy rates in June by 25 basis points to 5.25 percent for the overnight borrowing or reverse repurchase (RRP) rate and to 7.25 percent for the overnight lending or repurchase (RP) rate. The interest rates on term RRPs, RPs, and SDAs were also raised accordingly. The Monetary Board noted that the baseline forecasts indicated a likely breach of the inflation targets for 2008 and 2009 and that there were indications that supply-driven pressures were beginning to feed into demand.

The Monetary Board recognized that second-round effects were evident in the uptrend of core inflation, higher prices of services, and the earlier-than-expected wage adjustments. In addition, business and consumer confidence surveys also indicated the upward shift in inflation expectations, coinciding with increased term spreads on government securities and higher secondary Interest Rate Differential In basis points market yields. Authorities believed that the policy 150.00 100.00 RP 91-DAY T-bill vs US 90-day LIBOR adjustment will help steer inflation towards its desired 50.00 RP 91-DAY T-bill vs US 90-day T-bill 0.00 path for the medium term.

-50.00

-100.00 -150.00 The before-tax differentials between the domestic 91-day -200.00

-250.00 T-bill rate and comparable foreign rates (90-day US -300.00 LIBOR and 90-day US T-bill rate) rose while the after-tax -350.00 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2006 2007 2008 differentials turned positive due to the decline in the foreign rates as the US Fed eased policy rates amidst indications of an imminent slowdown in real activity in Risk Premium 2008.

US 10-year 10-year Risk BSP Rate Risk- Fed ROP Note US Note Premium RRP Differential Adjusted Funds (%) (%) (basis points) (%) (basis points) Differential (%) (1) (2) (3)=(1)-(2) (4) (5) (6)=(4)-(5) (7)=(6)-(3) Adjusted for the risk premium, as measured by the

2006 Mar 5.91 4.78 112 7.50 4.75 275 163 differential between the 10-year Republic of the Jun 7.28 5.23 206 7.50 5.00 250 44 Sep 6.04 4.53 151 7.50 5.25 225 74 Dec 6.01 4.63 139 7.50 5.25 225 86 Philippines (ROP) note and the 10-year US Treasury 2007 Mar 6.14 4.64 149 7.50 5.25 225 76 note, the differential between the BSP’s policy rate and Jun 6.45 5.02 143 7.50 5.25 225 82 Sep 6.18 4.55 163 6.00 4.75 125 -38 Dec 5.91 3.98 194 5.25 4.25 100 -94 the US federal funds rate widened and turned positive 2008 Mar 5.67 3.20 248 5.00 2.25 275 27 for the first time after three consecutive quarters. Jun 6.77 3.80 297 5.25 2.00 325 28

14 2008 Second Quarter

E. Financial Sector

Banking system remains stable . The Philippine banking industry exhibited generally favorable performance and sound favorable condition during the quarter. Key performance indicators demonstrated the banking system’s resilience, in spite of persistent concerns over the fallout from the US subprime mortgage crisis. Bank lending expanded strongly, bank asset quality further improved, and banks remained adequately capitalized. Overall, the system’s performance benefited from earlier reforms, particularly in the area of enhancing capital adequacy and better risk management.

Ongoing consolidation contributes to Performance of the Banking System improved operational efficiency.

Market Size Number of Banking Institutions end-of-period The number of banking institutions (head offices) fell 2008 2007 further to 841 as of end-June 2008 from the year-ago Jun Mar Jun

Total 7,769 7,743 7,738 level of 858, reflecting the continued consolidation of Head Offices 841 845 858 banks as well as the exit of weaker players in the Commercial Banks 38 38 38 Thrift Banks 80 80 83 banking system. By banking classification, banks (head SMBs 33 33 33 PDBs 19 19 20 offices) consisted of 38 universal/commercial banks SSLAs 24 24 26 MFIN 4 4 4 (U/KBs), 80 thrift banks (TBs), and 723 rural banks Rural Banks 723 727 737 Branches 6,928 6,898 6,880 (RBs). Meanwhile, the operating network (including Commercial Banks 4,271 4,246 4,259 Thrift Banks 1,234 1,238 1,250 branches) of the banking system increased to 7,769 from SMBs 811 817 817 PDBs 276 275 282 7,738 during the same period last year, reflecting mainly SSLAs 137 136 141 MFIN 10 10 10 the increase in commercial and rural banks’ Rural Banks 1,423 1,414 1,371 branches/agencies.

Resources of the Banking System Total resources of the banking system rose by In billion pesos

5,500 7.2 percent to P5.4 trillion as of end-May 2008, from its 5,300 year-ago level of P5.0 trillion. The increase was due 5,100

4,900 mainly to the rise in cash and loan accounts. U/KBs 4,700 continued to account for almost 90 percent of the total 4,500

4,300 resources of the banking system. 4,100 3,900

3,700 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2006 2007 2008

15 2008 Second Quarter

Savings Mobilization

Deposit Liabilities of Banks The banking system’s total deposit liabilities as of In billion pesos end-February 2008 was broadly unchanged at P3.5 4,000 Demand Savings Time trillion compared to its level a year ago. Demand 3,500

3,000 deposits grew by 7.7 percent year-on-year, while savings 2,500 deposits, which continued to account for half of the 2,000 banks’ funding base, registered a modest 0.8 percent 1,500

1,000 growth. However, time deposits declined by 3.5 percent 500 from a year ago. Compared to the previous quarter, the 0 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Feb banking system’s deposit liabilities declined by 2005 2006 2007 2008 1.8 percent.

Bank Lending Operations

Bank lending accelerates. Based on preliminary data obtained from the new system

of bank reporting, outstanding loans of commercial

Loans Outstanding of Other Depository Corporations banks (including reverse repurchase agreements or and Universal Banks/Commercial Banks In trillion pesos RRPs) grew at a faster pace as of end-June, at

2.05 Other Depository Corporations (Feb 08) ₧1.904 22.4 percent year-on-year, compared to the 2.4 percent 1.95 5 1.85 expansion posted in June last year.

1.75 Universal Banks/Commercial Banks (Jun 08) ₧1.741 1.65 Loans for production activities accounted for the bulk of 1.55

1.45 total outstanding loans and grew by 15.7 percent,

1.35 recovering from 0.7 percent contraction in June last year. Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun 2006 2007 2008 Production loans were driven largely by credit extended to transportation, storage and communication (57.0 percent); public administration and defense (44.3 percent); electricity, gas and water (43.8 percent); other community, social and personal services (39.5 percent); and wholesale and retail trade (38.5 percent).

Consumption loans, which accounted for 7.4 percent of total loans, rose by 22.0 percent in June, lower than the growth of 56.2 percent registered during the same period

5 The Financial Reporting Package (FRP), which replaced the Consolidated Statement of Condition (CSOC) reports, adopted the detailed classification of the amended 1994 Philippine Standard Industrial Classification (PSIC) for international comparability. The new system classified lending by production purposes (which covers 16 economic activities) and by household consumption purposes (with three economic categories). Previously, bank reports classified loans into 17 economic sectors.

16 2008 Second Quarter

in 2007. The growth in consumption loans was reflected mainly by the expansion in credit card receivables.

Credit Card Receivables

Credit card receivables rise. The combined credit card receivables (CCRs) of U/KBs

and TBs, inclusive of credit card subsidiaries, as of end- March 2008 increased by 19.7 percent year-on-year to Total Credit Card Receivables and Auto Loans In billion pesos reach P115.4 billion, but minimally declined by 0.6 percent compared to the P116.1 billion level at 120 Credit Card Receivables Auto Loans 105 end- December 2007. The ratio of CCRs to the total loan 90

75 portfolio (TLP) at 5.4 percent was higher than last year’s 60 5.0 percent, but slightly lower than the 5.5 percent 45

30 recorded during the previous quarter. Of the total CCRs, 15 10.2 percent was past due, an improvement from the 0 Mar Jun Sep Dec Mar Jun Sep Dec Mar 2006 2007 2008 14.2 percent recorded at end-December 2007.

Auto Loans

Auto loans also increase. The combined auto loans (ALs) of U/KBs and TBs inclusive of non-bank subsidiaries, as of end-March 2008 declined by 1.0 percent to P73.9 billion from P74.7 billion during the same period last year, and by 14.2 percent from the end-December 2007 level of P86.2 billion. The decline in ALs stemmed from the change in financial reporting under the new system of bank reporting.6 ALs accounted for 3.5 percent of TLP, lower than the same period last year at 3.9 percent and 4.0 percent posted at end-December 2007. The non-performing ALs to total ALs ratio rose to 5.7 percent from 5.1 percent both registered during the same period last year and at end-December 2007.

6 The financial reporting of auto loans was changed from auto loans granted to individuals and corporate accounts to auto loans granted only to individuals for consumption purposes under the new Financial Reporting Package (FRP) as of end-March 2008.

17 2008 Second Quarter

Real Estate Loans

Real estate loans decline. U/KBs' real estate loans (RELs) as of end-December 2007 declined slightly by 0.6 percent to P197.7 billion from its year-ago level of P198.9 billion, but increased modestly by 2.7 percent compared to the previous quarter’s level of P192.6 billion. This resulted in a lower ratio of RELs to TLP at 10.4 percent from the previous year’s 11.5 percent ratio and previous quarter’s 11.2 percent. The majority or 97.2 percent of total RELs was held by U/KBs’ bank proper, while the remaining 2.8 percent was for the account of U/KBs’ trust departments. RELs extended for the construction and development of real estate properties for commercial purposes, including infrastructure projects, comprised the bulk of property loans at 79.9 percent (or P158.0 billion) while the balance of 20.1 percent (or P39.7 billion) was granted for the acquisition of residential units by individual homeowners/borrowers.

Asset Quality and Capital Adequacy

Asset quality continues to improve. The banking system’s asset quality continued to

improve, with the non-performing loan (NPL) ratio easing

Ratio of Non -Performing Loans to Total Loans of the further to 4.7 percent as of end-May 2008 compared to Banking System In percent 5.8 percent a year ago. The improvement in the NPL 14.0 ratio during the period was due to the 7.8 percent drop in 12.0

10.0 the level of NPLs, complemented by the 14.5 percent

8.0 expansion in the industry’s TLP. NPLs declined to 6.0 P127.0 billion during the period under review from the 4.0 previous year’s level of P137.8 billion, while TLP 2.0

0.0 expanded to P2,715.7 billion from P2,371.9 billion during Mar Jun Sep Dec Mar Jun Sep Dec Mar May 2006 2007 2008 the same period in 2007.

Meanwhile, the NPL ratio of U/KBs fell further to 4.2 percent as of end-May 2008, an improvement from the 5.3 percent ratio registered a year ago.

18 2008 Second Quarter

Compared with other countries in the region, the Philippine banking system’s NPL ratio of 4.7 percent was higher than Indonesia’s 4.3 percent, Malaysia’s 2.7 percent, Thailand’s 3.4 percent, and Korea’s 0.7 percent. 7 The lower NPL ratios in Malaysia, Thailand, and South Korea may be traced to the creation of publicly-owned asset management companies (AMCs), which purchased the bulk of their NPLs, a practice which was not resorted to in the Philippines.

The loan exposure of banks remained adequately covered as the banking system’s NPL coverage ratio was steady at 82.1 percent as of end-May 2008, reflecting banks’ diligent compliance with the loan-loss provisioning requirements of the BSP.

Banks remain adequately capitalized. The banking system remained adequately capitalized as of end-December 2007 with the average capital adequacy ratios (CAR) remaining strong at 14.7 percent Capital Adequacy Ratio of the Banking System In percent on a solo basis and 15.7 percent on a consolidated 20.0 19.5 basis. Both were higher than the BSP’s 10.0 percent 19.0

18.5 required minimum ratio. The stricter requirements of 18.0 Basel 2 caused the decline in the CARs of the banking 17.5 17.0 system as compared with last year’s CARs of 16.5

16.0 16.8 percent and 18.1 percent on solo and consolidated 15.5 bases, respectively. 15.0 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec 2005 2006 2007 The Philippine banking system registered a higher CAR compared to Thailand (14.5 percent), Malaysia (12.4 percent), and Korea (12.0 percent). Meanwhile, Indonesia posted the highest CAR in the region at 18.3 percent. 8

7 Sources: Various central bank websites, Indonesia (Banking system, May 2008); Malaysia (Banking system, June 2008); Thailand (Financial institutions, June 2008); and Korea (KBs, December 2007). 8 Sources: Various central bank websites, Thailand (KBs, March 2008); Malaysia (KBs, June 2008); Korea (KBs, December 2007); and Indonesia (KBs, May 2008).

19 2008 Second Quarter

Banking Policies

The BSP continues to implement prudent The BSP continued to implement prudent banking banking policies for a resilient Philippine policies to ensure that the Philippine banking system will banking system. remain resilient amidst the challenges of a global financial meltdown triggered by the collapse of the US subprime market. During the period, policy issuances focused on further upgrading prudential measures, promoting the development of the domestic capital market, strengthening efforts to address money laundering, and improving banking services (Annex A).

Capital Market

Capital market development initiatives Capital market initiatives continued to make headway continue to gain headway. during the second quarter of the year, capped by policy measures to promote investor confidence, transparency and corporate governance, trading practices and infrastructure.

Bangko Sentral ng Pilipinas

The Monetary Board approved the guidelines on Securities Borrowing and Lending (SBL) transactions in the PSE involving borrowings of foreign entities of PSE-listed shares from local investors/lenders under Circular No. 611 dated 15 May 2008. The circular authorized custodian banks to issue special Bangko Sentral Registration Documents (BSRD) to cover the PSE-listed shares of stock borrowed by foreign entities from local investors/lenders. This then allowed foreign borrowers to purchase foreign exchange from the banking system for remittance abroad using the peso sales proceeds of the borrowed shares, including related income from SBL transactions.

20 2008 Second Quarter

Securities and Exchange Commission

SEC granted Credit Rating and Investors Services Philippines, Inc (CRISP) accreditation as a rating agency authorized to issue ratings on debt securities sold to the public and asset-backed securities. 9 The accreditation created an alternative source of unbiased evaluation of investment risks that could attract more investors in local debt instruments.

Philippine Stock Exchange

After another review of its 2007 trading activity, the PSE updated the composition of the PSE benchmark and the six sector indices, effective 26 May 2008. Four large-cap stocks were removed (ABS-CBN Broadcasting Corp., DMCI Holdings, Inc., Belle Corp., and Petron Corp) from the 30-stock index, to be replaced by PNB, RCBC, Union Bank of the Philippines, and Vista Land and Lifescapes. Changes will also be made in the composition of the sector indices.

The PSE and the New York Stock Exchange (NYSE) Euronext signed a memorandum of understanding (MOU) that establishes areas of possible cooperation between the two exchange companies, including trading system architecture and technology, exchange traded products, market participant connectivity and market data management. The MOU, signed on 26 June at the NYSE, also covers the PSE’s intention to purchase new trading system technology from NYSE Euronext and its affiliates.

9 Early this year, CRISP was formed by senior faculty from the Asian Institute of Management who combined their industry experience and risk management background to provide an alternative source of credit evaluation for investors. In March 2008, they were registered as a stock corporation with the SEC.

21 2008 Second Quarter

Philippine Dealing and Exchange Corporation (PDEx)

The PDS had allowed the participation of Trust entities in its Inter-Profession Repurchase Agreement (Repo) Program as repo buyers/cash lenders following the set-up of the systems necessary to transact repurchase agreements.10 By participating as a repo buyer, a trust entity can invest its excess cash holding and earn standard amount of return based on the repo rate.

Department of Finance (DoF)

The BIR consolidated into a single revenue regulation all of its decades-old tax rules governing the sale of stocks and securities (Revenue Regulation 6-2008), which were last consolidated in 1982. This includes tax rules on the sale of shares of stocks traded at the PSE, including: a tax rate of one-half of one percent on stock transactions made in the local bourse; tax rates for IPOs, ranging from one percent to four percent depending on the proportion of disposed shares to outstanding shares; and, for shares of stocks not listed at the PSE, a tax rate of five percent for capital gains below P100,000 and 10 percent for earnings in excess of P100,000. The BIR gave the assurance that no new taxes are imposed under the new directive.

10 A Repo agreement is a contract wherein one party (repo seller/cash borrower) sells a security to another party (repo buyer/cash lender) on a given date for cash proceeds with a commitment to repurchase the same or equivalent security at a pre-agreed future date. The collateralized nature of a repo sets it apart from othe r investment instruments as it requires less amount of capital to be allocated for the risk assumed by investing in this type of asset.

22 2008 Second Quarter

Stock Market

PSEi continues to fall. The Philippine stock market retreated in the second quarter of 2008 due to concerns over rising inflation,

PSE Composite Index lower earnings of listed local companies, slower In average index points domestic economic growth in the first quarter, and 3,500

3,000 weaker demand in the US (Table 10). 2,500 2,000 The PSEi ended the quarter at 2,460.0 index points, 1,500

1,000 32.8 percent lower than the index of 3,660.9 points 500 posted in June last year and 32.1 percent lower than its 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2006 2007 2008 close in December 2007 of 3,621.6 index points. The mining and oil sector was the best performer among the six sector indices as it gained by 6.3 percent year-on-year. All other sector indices contracted, with the property sector posting the biggest year-on-year drop of 51.8 percent, followed by the industrial sector with 42.0 percent, the holding firms sector with 40.9 percent, the financial sector with 36.3 percent and the services PSEi vs Other Selected Stock Indices End-of-month sector with 11.7 percent.

1 2 Stock Index Traded Location Jun 2008 Mar 2008 Dec 2007 QTD YTD (in %) (in %)

Shanghai SE Composite People's Republic of China 2,736.1 3,472.7 5,761.6 -21.2 -52.5 Similarly, other stock markets posted declines, both SENSEX India 13,461.6 15,644.4 20,268.0 -14.0 -33.6 PSEi Philippines 2,460.0 2,984.7 3,621.6 -17.6 -32.1 Hang Seng Hong Kong, China 22,102.0 22,849.2 27,812.7 -3.3 -20.5 compared to end-2007 as well as to the preceding KLSE Composite Malaysia 1,186.6 1,247.5 1,445.0 -4.9 -17.9 Strait Times Singapore 2,947.5 3,007.4 3,482.3 -2.0 -15.4 quarter, reflecting weak global investor sentiment. Dow Jones Industrial United States of America 11,350.0 12,216.4 13,264.8 -7.1 -14.4 Jakarta Composite Indonesia 2,349.1 2,447.3 2,745.8 -4.0 -14.4 NASDAQ United States of America 2,293.0 2,279.1 1,652.3 0.6 38.8 The Shanghai composite (China) posted the biggest FTSE 100 United Kingdom 5,625.9 5,702.1 6,456.9 -1.3 -12.9 S&P 500 United States of America 1,280.0 1,322.7 1,468.4 -3.2 -12.8 Nikkei 225 Japan 13,481.4 12,525.5 15,307.8 7.6 -11.9 decline in share prices, by 52.5 percent year-to-date, KOSPI Republic of Korea 1,674.9 1,704.0 1,897.1 -1.7 -11.7 SET Thailand 768.6 817.0 858.1 -5.9 -10.4 followed by SENSEX (India) with 33.6 percent, the PSEi 1 QTD (in percent) is the change in percent from the previous quarters' last trading data 2 YTD (in percent) is the change in percent from end-December 2007 Source: Bloomberg, Stock Exchange of Thailand and Philippine Stock Exchange (Philippines) with 32.1 percent and Hang Seng (Hong Kong) with 20.5 percent.

Investors were similarly risk averse Reflecting investors’ generally cautious stance, trading elsewhere. activity in the local bourse was sluggish during the quarter, with the average daily turnover falling to P2.8 billion, 19.9 percent less than the previous quarter’s level and 54.4 percent lower than the year-ago level. Market volatility similarly fell during the period, with the average standard deviation dipping by 23.3 percent to 83.4 index points compared to the first three months of

23 2008 Second Quarter

2008. 11 Relative to year-ago levels, however, market volatility for the period in review was higher by

MarketPSEi Capitalizationvs Other Selected by Sector Stock Indices 46.9 percent. June 2008 End-of-month

Property 6% Mining and Oil 2% Services 14% Market capitalization stood at P6.4 trillion in June 2008. This represents a fall of 22.9 percent year-on-year and 4.8 percent quarter-on-quarter. Total capital raised as of June 2008 reached P15.8 billion, 65.2 percent lower than

Holding Firms 8% Financials 58% the P45.4 billion posted last year. There was only one Industrial 12% IPO during the quarter compared to two IPOs issued in the same period a year ago.

Foreign investors may have gradually Notwithstanding investors’ continued cautiousness, resumed net buying activity. second quarter data showed that foreign investors may be gradually returning to the local bourse. Data from the PSE revealed that foreign investors became net buyers

Net Foreign Transactions and Stock Market Capitalization in billion pesos in the stock market from the period April to June with a

20.0 9,000 modest net purchase of P1.5 billion. This figure was a 15.0 8,500 reversal of the substantial P16.7 billion net selling posted 10.0 8,000 5.0 in the previous quarter, but remained way below the 7,500 0.0 7,000 P37.1 billion net buying posted a year ago. As a ratio of -5.0

Net Foreign Transactions -10.0 6,500 total transactions, foreign investors accounted for Stock Market Capitalization -15.0 6,000 53.0 percent. Jul-07 Apr-08 Apr-07 Oct-07 Jun-08 Jun-07 Jan-08 Jan-07 Aug-07 Feb-08 Mar-08 Feb-07 Mar-07 Sep-07 Nov-07 Dec-07 May-08 May-07 Meanwhile, amidst lingering uncertainties, the average price-earnings (P/E) ratio dipped to 11.9 during the second quarter of 2008, from 13.6 in the previous quarter and 16.8 a year ago. The decline indicated that investors are expecting lower earnings growth in the future.

11 Market volatility is measured as the standard deviation of daily stock indices.

24 2008 Second Quarter

Bond Market

Domestic bond market rises marginally. Outstanding domestic bond market transactions stood at

P2.5 trillion in the second quarter of 2008, 8.4 percent Results of GS Auctions and 1.0 percent higher than the year-ago and the in billion pesos previous quarter levels, respectively. Government bonds continued to dominate the Philippine bond market, Accepted Rejected Offering Tenders Bids Bids accounting for 95.2 percent of total outstanding bonds as

Treasury Bills of end-June 2007. Outstanding government securities 2008 81.0 96.9 31.3 65.5 (GS) amounted to P2.4 trillion, 61.6 percent of which Q1 45.0 46.7 13.9 32.7 Q2 36.0 50.2 17.4 32.8 were regular issuances such as Treasury bills (T-bills) Treasury Bonds and Fixed-Rate Treasury bonds (T-bonds). The 2008 87.0 132.0 40.2 91.7 remaining 38.4 percent of government-issued debt Q1 45.0 74.3 21.7 52.5 Q2 42.0 57.7 18.5 39.2 papers were benchmark bonds, special bond issues,

Source: Bureau of the Treasury other notes and bonds and government guaranteed corporate debt papers. Meanwhile, private issuances which amounted to P119.8 billion, comprised 4.8 percent of the domestic debt securities market. Asset-backed securities (ABS) comprised the bulk of private issuances at P77.6 billion and the balance were in the form of bonds, corporate notes, and commercial papers.12

Government rejects bids in the primary In the primary market, the National Government (NG) market due to high premiums demanded. decreased its offerings of T-bills and T-bonds during the

second quarter due to the higher premiums demanded by the market. T-bill offerings were reduced to P36.0 billion from P45.0 billion during the previous quarter while T-bond offerings likewise declined to P42.0 billion from P45.0 billion posted in the first quarter. Total tenders for T-bills reached P50.2 billion, while tenders for T-bonds amounted to P57.7 billion, both indicating oversubscriptions of P14.2 billion and P15.7 billion, respectively. 13

12 Data were sourced from PhilRatings. Due to data lack, the issued amount was used instead of the outstanding amount for private debt issuances, which were in the form of asset-backed securities (ABS), bonds, corporate notes, as well as short- and long-term commercial paper lines. The data also excluded unsecured subordinated notes (Tier 2) which have some characteristics of both debt and equity. Tier 2 capital are long-term notes or debt obligations, with tenors usually 10 years and up, but are allowed to form part or be counted as capital of the issuer. 13 Oversubscription is the gap between the amount tendered and the amount offered for a given instrument.

25 2008 Second Quarter

During the quarter, dealers quoted higher rates for government debt papers, prompting the NG to make partial awards of the 364-day T-bill offering and to reject some of the bids for T-bond sales. The government also cancelled the sale of the 91-day and 182-day T-bills for the entire second quarter because of the perceived lack of market interest in short-term-dated debt papers. Of the total tenders of P50.2 billion for T-bills and P57.7 billion for T-bonds, the NG only accepted P17.4 billion and P18.5 billion worth of T-bills and T-bonds, respectively.

The higher premium demanded by the market reflected the cautious stance among investors due to the escalating inflationary pressures. Rising inflation expectations was addressed by the 25-basis-point hike in the BSP’s policy rates in June this year. This, in turn, translated to an increase in benchmark rates in the fixed income market. Moreover, rising risk aversion towards the local debt securities market, as the global financial turmoil remained unabated, likewise contributed to the market’s softening demand for GS papers.

Trading also slows in the secondary The trend of trading in the secondary market mirrored market. that in the primary market. Total transactions at the

Fixed Income Exchange (FIE) dropped significantly to P294.9 billion during the review period, 55.7 percent lower than the P665.9 billion posted in the previous quarter, although still slightly higher than the P249.3 billion recorded in the same period a year ago. Fixed Rate Treasury Notes (FXTNs) were the most traded instruments, accounting for 90.2 percent of all transactions during the quarter. The decline in trading transactions at the FIE reflected investors’ softening appetite for government bonds due to a confluence of factors which include rising inflationary pressure, slowing GDP growth, and widening fiscal deficit.

26 2008 Second Quarter

Two rating agencies affirm their ratings and Credit Risk Assessment outlook on the country. During the quarter, two international credit rating Latest Philippine Sovereign Credit Ratings as of June 2008 agencies maintained their ratings for the Philippines

Date of the Date of the (Table 11). In April, Standard & Poor’s Rating Services Rating Local Foreign Latest Rating Latest Rating Currency Currency Outlook Agency (S&P) reaffirmed its “BB-“ long-term foreign currency Action Assessment (LT/ST) (LT/ST) rating, its “BB+” long-term local currency rating and its S&P 9 Feb 2006 14 Apr 2008 BB+/B BB-/B Stable “B” short-term foreign and local currency rating, while Moody's 25 Jan 2008 25 Jan 2008 B1/- B1/- Positive maintaining its “stable” outlook. In June, Fitch Ratings Fitch 13 Feb 2006 27 Jun 2008 BB+/- BB/B Stable kept its Issuer Default Ratings for the country’s long-term foreign currency sovereign debt at “BB”, long-term local currency debt at “BB+”, and short-term foreign currency

Long-Term Foreign Currency Ratings debt at “B”, while the outlook was maintained at “stable”. as of June 2008

S&P Moody's Fitch Ratings Country Date Date Date Rating Outlook Rating Outlook Rating Outlook The country’s relatively strong external financial position Revised Revised Revised

Singapore AAA Stable Nov 05 Aaa Stable Nov 06 AAA Stable Jun 06 combined with efforts at fiscal consolidation supported Japan AA Stable Apr 07 Aaa Stable Nov 06 AA Stable Jul 06 Hong Kong AA Positive Jul 07 Aa2 Stable Jul 07 AA Stable Jul 07 these stable ratings. However, rating agencies believed China A Positive Jul 07 A1 Stable Jul 07 A+ Stable Nov 07 Korea A Stable Jul 07 A2 Stable Jul 07 A+ Stable May 07 that the country remains vulnerable to shocks on account Malaysia A- Stable Aug 07 A3 Stable Dec 04 A- Positive Jan 08 Thailand BBB+ Stable Oct 06 Baa1 Stable Nov 03 BBB+ Stable Oct 06 of its high public leverage and inadequate infrastructure. Vietnam BB Negative May 08 Ba3 Negative Jun 08 BB- Negative May 08 Philippines BB- Stable Nov 06 Ba3 Stable Oct 07 BB Stable Feb 08 These fiscal and infrastructure constraints also lowered Indonesia BB- Stable Feb 06 B1 Positive Jan 08 BB Stable Feb 06

Source: S&P, Moody's and Fitch's websites the country’s growth potential relative to its Asian neighbors. Compared with the long-term foreign currency sovereign ratings of its neighboring countries in Asia, the Philippines ranks closely with Vietnam and Indonesia. Emerging Markets Bond Index Spread January 2007 – June 2008 350 325 Meanwhile, amidst deepening concerns that increases in EMBI+ Philippines EMBI+Global 300 275 food and oil prices are raising the pressure for monetary

250

225 authorities to tighten monetary policy at a time of likely 200 economic slowdown, Philippine debt spreads widened in 175 150 the second quarter of 2008. The EMBI+ (Emerging 125 100 Market Bond Index+) Philippine spreads widened to Jul-07 Jan-07 Oct-07 Jan-08 Jun-07 Jun-08 Feb-07 Mar-07 Apr-07 Feb-08 Mar-08 Apr-08 Sep-07 Nov-07 Dec-07 May-07 Aug-07 May-08 302 basis points in end-June from 272 basis points in end-March and from 154 basis points in end-June 2007.

27 2008 Second Quarter

The Philippine credit default swap (CDS) spreads Philippine 5 -Year Credit Default Swap Spread January 2007 – June 2008 likewise expanded to 262 basis points from 240 basis 275 points in end-March and 111 basis points in end-June 250 225 2007.14 In contrast, emerging debt spreads over US 200 175 Treasury notes (EMBI+global) narrowed to 295 basis 150 125 points during the quarter in review from 308 basis points 100 75 in the previous quarter but widened relative to 175 basis Jul-07 Jan-07 Oct-07 Jan-08 Jun-07 Jun-08 Feb-07 Mar-07 Apr-07 Feb-08 Apr-08 Sep-07 Nov-07 Dec-07 May-07 May-08 points a year ago.

Payments and Settlements System

Financial transactions via PhilPass During the second quarter 2008, the Philippine increase. Payments and Settlements System (PhilPaSS) PhilPass Transactions continued to deliver large-value payments for transactions between financial institutions in real time. 20082007 Growth Rates (%)

Q2 Q1 Q2 Q-o-Q Y-o-Y The volume of transactions that passed through the Volume 134,624 138,097 120,232 -2.5 12.0 Value (in trillion pesos) 57.70 54.62 44.15 5.6 30.7 PhilPaSS totaled 134,624 valued at P57.7 trillion during Transaction Fees (in million pesos) 26.59 23.32 12.00 14.0 121.6 the quarter. The volume and value of PhilPaSS Source: Payments and Settlements Office, Bangko Sentral ng Pilipinas transactions this quarter were higher by 12.0 percent and 30.7 percent, respectively than the levels posted in the previous year. The growth in the volume of transactions was accounted for by the following arrangements: treasury, interbank and Electronic Cash Withdrawal System (ECWS). 15 In terms of value, interbank, Electronic Fund Transfer Instruction System (EFTIS) and treasury transactions accounted for the biggest increases.

On a quarter-on-quarter comparison, the volume of financial transactions declined by 2.5 percent as the supervisory fees and delivery-versus-payments (DvP) transactions declined. Meanwhile, the increase in the

14 A credit default swap (CDS) is a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity. Under a credit default swap agreement, a protection buyer pays a periodic fee to a protection seller in exchange for a contingent payment by the seller upon a credit event (such as a default or failure to pay) happening in the reference entity. When a credit event is triggered, the protection seller either takes delivery of the defaulted bond for the par value (physical settlement) or pays the protection buyer the difference between the par value and recovery value of the bond (cash settlement). Credit default swaps are the most widely traded credit derivative product. The typical term of a credit default swap contract is five years, although being an over-the-counter derivative, credit default swaps of almost any maturity can be traded. 15 Payment versus Payment (PvP) transactions consists of interbank sale and purchase of foreign currency (US$) where the settlement of the peso is done through the PhilPaSS. EFTIS refers to banks’ remittances of revenue collections for the account of the Bureau of the Treasury as well as intra-account transfers for reserve compliance purposes.

28 2008 Second Quarter

value of transactions was largely due to the growth in enhanced delivery-versus-payments (eDvP) transactions.

The total revenue generated by the BSP from its operation of the payments and settlements system rose by 14.0 percent from the previous quarter, to total P26.6 million. 16

F. External Sector

BOP posts a surplus. Balance of Payments. The country’s balance of payments (BOP) posted a surplus of US$221 million in the second quarter of 2008. This was 87.3 percent lower Balance of Payments than the US$1,734 million surplus recorded in the same In million US dollars

3800 quarter in 2007. The current account surplus was halved 3400 BOP 3000 Current Account during the review quarter but its impact on the overall Capital Account 2600 BOP position was mitigated by the reversal of the capital 2200 1800 and financial account balance, from a deficit a year ago 1400 1000 to a surplus during the quarter in review (Table 12). 600 200 -200 -600 Current Account. The current account surplus Q1 Q2 Q3 Q4 Q1 Q2 2007 2008 amounted to US$823 million (equivalent to 1.9 percent of GDP) during the quarter in review buoyed by the increase in net receipts from current transfers, income and services. However, the surplus achieved during the period was 50.7 percent lower than its previous level of US$1,671 million. The widening deficit in merchandise trade accounted for the decline in the current account surplus.

16 The revenue was derived from transaction fees, connectivity fees from third party providers and software installation fee.

29 2008 Second Quarter

Balance of trade yields a deficit. Trade-in-Goods . The trade-in-goods deficit reached US$3,660 million in the second quarter of 2008, up by 76.1 percent from its year-ago level. Exports rose by 5.2 Exports by Major Commodity Group percent during the quarter in review while imports

Levels (in million US$) Growth accelerated by 15.5 percent (Tables 12a and 12b). The Items Rates Q2 2008 Q2 2007 (in %) major commodities which contributed to the growth in the Total exports 12,855 12,221 5.2 of which: country’s exports included manufactures, agricultural Agriculture and Forest Products 805 611 31.8 Mineral Products 726 732 -0.8 products and petroleum products. Export of Petroleum Products 320 316 1.3 Manufactures 10,823 10,435 3.7 manufactures rose by 3.7 percent, reaching US$10,823 of which: Electronics 7,974 7,846 1.6 million, due to higher exports of electronics and other Machinery and Transport Equipment 523 457 14.4 Garments 475 533 -10.9 electronic products and other manufactures. Electronics, which constituted two-thirds (61.0 percent) of total exports increased to US$7,974 million in the second quarter of 2008, compared to US$7,846 million a year ago. The 1.6 percent expansion was due to higher exports of electronics products such as electronic data processing (EDP) machines, automotive electronics, consumer electronics and other electronics. Other manufactures which posted gains over their year-ago levels included machinery and transport equipment (14.4 percent), processed food and beverages (45.6 percent) and wood manufactures (16.3 percent). Meanwhile, export receipts from garments slipped by 10.9 percent to reach US$475 million compared to US$533 million in the same period a year ago. The weak performance of the garments industry was attributed largely to the termination of the quota regime in the US resulting in stiffer competition from low-cost suppliers, such as China and Bangladesh. Agricultural products, mainly coconut and other agro-based goods, performed favorably during the review quarter. In particular, shipments of coconut products expanded by 68.9 percent, significantly better than the 10.5 percent growth posted in the same quarter in 2007. Exports of petroleum products rose by 1.3 percent to reach US$320 million from US$316 million in the same quarter a year ago. By contrast, exports of mineral products declined by 0.8 percent due to lower exports of iron ore

30 2008 Second Quarter

agglomerates, copper concentrates, gold, chromium ore and other mineral products.

Total merchandise imports grew at a relatively rapid rate Imports by Major Commodity Group of 15.5 percent during the second quarter of 2008,

Levels (in million US$) Growth to reach US$16,515 million from the year-ago level of Items Rates Q2 2008 Q2 2007 (in %) US$14,299 million. Imports of consumer goods Total imports 16,515 14,299 15.5 registered the highest expansion rate of 62.5 percent to of which: Capital Goods 2,392 2,251 6.3 reach US$1,903 million. The 85.5 percent expansion in Raw Materials and Intermediate Goods 8,439 8,231 2.5 Mineral Fuels and Lubricants 3,432 2,390 43.6 the imports of non-durable goods was attributable mainly Consumer Goods 1,903 1,171 62.5 to the surge in imports of rice. Rice imports rose to US$693 million from only US$194 million in the comparable quarter last year due to increases in both the import volume and price of this item of imports. The volume of rice imports accelerated by 73.3 percent following efforts of the government and the private sector to increase the country’s rice buffer stock.

Imports of durable goods increased by 29.8 percent with higher procurement of passenger cars and motorized cycles (36.8 percent), home appliances (22.2 percent) and miscellaneous manufactures (21.9 percent). Likewise, mineral fuels and lubricants rose by 43.6 percent to US$3,432 million due to higher imports of petroleum crude and other mineral fuels and lubricants. Capital goods grew by 6.3 percent to US$2,392 million, due largely to increased purchases of power generating and specialized machines (17.6 percent), office and EDP machines (6.6 percent) and land transport equipment excluding passengers cars and motorized cycle (18.2 percent). Imports of raw materials and intermediate goods, inched up by 2.5 percent to US$8,439 million. Higher purchases of chemicals (40.7 percent), manufactured goods (8.2 percent) notably iron and steel, paper and paper products and feeding stuff for animals (75.6) contributed to the observed increase in imports of raw materials and goods.

31 2008 Second Quarter

The United States, Japan and China were the main destinations for Philippines exports during the second quarter of 2008. The United States and Japan likewise were the main sources of imports of the country, along with Singapore.

Net receipts i n trade -in -services account Trade-in-Services . The trade-in-services account rise almost threefold. recorded a surplus of US$183 million in the second quarter of 2008. The almost threefold rise from the year-ago surplus of US$62 million was a result mainly of the combined impact of higher net receipts from computer and information and other business services, particularly, business, professional, technical and miscellaneous services and lower net outflow in financial and personal, cultural and recreational services. These positive developments offset the decline in net inflows from travel, communication and construction services as well as the increase in net outflows for transportation, royalties and fees, insurance and government services.

The income account surplus grows. Income. The income account surplus grew by 61.7 percent to US$414 million. This was achieved through: 1) higher gross earnings of resident overseas Filipinos (OFs) which reached at US$1,107 million during the review quarter, or a year-on-year expansion of 46.8 percent; and 2) higher net income receipts from holdings of foreign debt securities, particularly by the BSP.

17 The current transfers account surplus rises. Current Transfers . Net receipts from current transfers amounted to US$3,886 million, higher by 13.3 percent from its year-ago level. The expansion of current transfers was boosted largely by the 16.2 percent increase in remittances from non-resident OFs to US$3,767 million. The robust remittance flows were

17 Under the BPM5, the residency of seasonal workers such as OFWs is classified according to the length of their stay in the host economy. OFWs who are working for less than one year are classified as Philippine residents and their gross earnings are reflected under the Income Account. Meanwhile, OFWs who are working for one year or more are classified as non-residents (or migrants) and their remittances are reflected under the Current Transfers Account.

32 2008 Second Quarter

shored up by strong overseas demand for Filipino workers due to the diversity and quality of skills they offer. Moreover, the level of remittances also drew strong support from the expanded presence of local banks and non-bank remittance agents in countries with large concentration of OFs.

Capital and Financial Account

Capital and financial account reverses to a The capital and financial account reversed to a net inflow net inflow. in the second quarter of 2008 amounting to US$442 million from a net outflow of US$395 million a year ago. This positive turnaround was owed to the reversal of the direct investment account to a net inflow and gains recorded in financial derivatives transactions which offset the net outflow in the portfolio investment account.

Capital account. The capital account netted an inflow of US$9 million in the second quarter of the year as against a net outflow of US$21 million a year ago which resulted from a one-time payment made for the acquisition of non-financial assets, in particular, a trademark of a private manufacturing company.

Direct investment. Net direct investment reversed to an inflow of US$216 million during the review quarter, from a net outflow amounting to US$2,731 million a year ago. This developed on account of the decline in equity capital placements abroad by residents to US$77 million, from US$3,276 million in the comparable quarter last year. Meanwhile, inflow of non-residents’ investments during the review quarter was weaker at US$293 million from US$545 million a year ago, reflecting cautiousness among foreign investors.

Portfolio investment. A weaker portfolio investment account was observed during the review period as global financial strains raised uncertainties among investors. Portfolio investments yielded a net outflow amounting to

33 2008 Second Quarter

US$636 million during the review quarter, a turnaround from the net inflow of US$1,719 million a year ago. The contributing factors behind this development included the net withdrawal by non-residents of their investments in equity securities issued by private corporations and redemption of bonds issued by the NG and private corporations. These outflows were mitigated partially by inflows from maturing debt securities placements abroad by local banks.

Financial derivatives. Banks’ trading in financial derivatives resulted in a net gain of US$61 million, compared to a loss of US$90 million in the comparable quarter a year ago.

Other investments. Net inflows in the other investment account increased marginally by 8.8 percent year-on- year to US$792 million. Growth of this account resulted mainly from trade credits extended by non-residents to private corporations amounting to US$1,135 million. Offsetting these inflows were the loan repayments made by the NG (US$242 million), banks (US$808 million) and the private sector (US$703 million).

International Reserves

Gross international reserves expands… The country’s gross international reserves (GIR) Gross International Reserves In million US dollars continued to increase as of end-June 2008 at US$36.7 40,000 billion (Table 13). This is 39.2 percent higher than the 35,000

30,000 year-ago level of US$26.4 billion and an US$88.0 million 25,000 increase from the quarter-ago level of US$36.6 billion. 20,000

15,000 The end-June GIR level was adequate to cover

10,000 6.0 months of imports of goods and payments of

5,000 services and income. In terms of reserve adequacy, the 0 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun 2006 2007 2008 level of reserves is equivalent to 5.1 times the country’s short-term external debt based on original maturity and 2.9 times based on residual maturity. 18

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

34 2008 Second Quarter

The continued accumulation of reserves was attributed mainly to the deposit by the Power Sector Assets and Liabilities Management Corporation (PSALM) of proceeds from the privatization program of the National Power Corporation (NPC), as well as income from investments abroad, credits from foreign financial counterparties, and revaluation gains. These receipts were partly offset, however, by outflows arising mainly from payments of maturing foreign currency- denominated obligations of the NG and the BSP, and prepayments of NPC’s various foreign loans.

Majority of the reserves was in the form of foreign investments (88.0 percent), with the balance in gold Composition of Reserves by Currency (10.7 percent), foreign exchange (1.0 percent), and Percent share; end-June 2008

Others combined Special Drawing Rights and reserve position Euro 0.9% 7.2% Yen in the IMF (0.3 percent). 14.9%

US Dollar By currency composition, reserves (excluding gold) were 76.9% denominated in US dollars (76.9 percent), Pounds 0.1% euro (7.2 percent), yen (14.9 percent), pounds sterling (0.1 percent), and the balance in other currencies (0.9 percent).

Net international reserves (NIR) level, including revaluation of reserve assets and reserve-related liabilities, likewise rose to US$36.2 billion from the year-ago level of US$26.4 billion but was lower than the quarter-ago level of US$36.6 billion. The NIR refers to the difference between the BSP’s GIR and total short-term liabilities.

35 2008 Second Quarter

Exchange Rate

Trends in the Peso-Dollar Rate

The peso weakens. The peso depreciated by 4.7 percent quarter-on-quarter to average P43.00/US$1 in the second quarter of 2008 (Table 14).19 By contrast, on a year-on-year basis, the peso appreciated by 9.2 percent.

The weakening of the peso during the review quarter reflected market concerns over rising inflation resulting from sustained increases in oil and food prices as well as over slowing global growth. The peso weakened as elevated prices of imported oil and food commodities fuelled increased demand for dollars. Moreover, the peso was weighed down by expectations of a less favorable balance of payments due to weaker external demand for Philippine exports. This was further Year-to-Date Changes in Selected Asian Currencies exacerbated by the rise in the country’s unemployment level, indicating signs of slowing economic activity. Appreciation/Depreciation ( - ) Currencies 30 Jun 2008 vs. 28 Dec 2007 Year-to-date, the peso depreciated by 8.1 percent to New Taiwan Dollar 7.1 close at P 44.9/US$1 on 30 June 2008 relative to the Japanese Yen 6.6 end-2007 level.20 The depreciation of the peso was in Chinese Yuan 6.5 Singaporean Dollar 6.4 line with the movements of the Korean won, Thailand Indonesian Rupiah 2.0 baht, and Indian rupee which depreciated by Malaysian Ringgit 1.6 10.5 percent, 10.4 percent, and 8.2 percent, respectively, Philippine Peso -8.1 vis-à-vis the US dollar relative to their end-2007 closing Indian Rupee -8.2 levels. Meanwhile, other selected Asian currencies Thai Baht (Offshore) -10.4 maintained their strength against the US dollar, led by Korean Won -10.5 the New Taiwan dollar’s 7.1 percent appreciation.

19 Dollar rates or the reciprocal of the peso-dollar rates were used to compute for the percentage change. 20 Based on the last done deal in the afternoon.

36 2008 Second Quarter

On a quarter-on-quarter basis, the peso gained external Real Effective Exchange Rate Indices of the Peso Average, December 1980 =100 price competitiveness in the second quarter against the 200 Broad Narrow MTPs baskets of currencies of major trading partners (MTPs) 180 21 160 and competitor countries. The real effective exchange 140 22 120 rate (REER) index of the peso, which measures the 100 external price competitiveness of the peso, decreased by 80 60 3.1 percent, 1.8 percent and 2.5 percent against the 40 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 baskets of currencies of MTPs and competitor countries 2006 2007 2008

* MTP basket includes currencies of US, Japan, the Euro area, and UK. Broad basket includes currencies of Singapore, South in the broad and narrow series, respectively Korea, Taiwan, Malaysia, Thailand, Indonesia and Hong Kong while Narrow basket includes currencies of Malaysia, Thailand, and Indonesia. (Table 14b).23 This developed as the nominal depreciation of the peso offset the negative impact of the widening inflation differential against the MTPs and competitor countries in the broad and narrow series.

Meanwhile, on a year-on-year basis, the peso lost some external price competitiveness in the second quarter as the REER index of the peso increased by 7.2 percent, 12.2 percent and 11.5 percent against the baskets of currencies of MTPs and competitor countries in the broad and narrow series, respectively.

External Debt

External debt remains manageable. The country’s outstanding external debt stood at US$54.6 billion as of end-March 2008, higher by US$565 Philippine External Debt As of end-March 2008 million or 1.0 percent from its year-ago level of US$54.0 billion (Table 15). Short-term US$6.7B 12.2% Year-on-year, foreign exchange revaluation adjustments

Medium- and reached US$3.4 billion, surpassing net principal Long-term US$48.0B 87.8% payments of US$2.8 billion and causing the debt stock to

TOTAL: US$54.6 billion rise by US$565 million. Prepayments during the 12-month period ending March 2008 totaled US$1.2 billion.

21 The basket of the major trading partners is composed of the currencies of US, Japan, the Euro area and the United Kingdom. The broad basket of competitor countries comprises the currencies of Singapore, South Korea, Taiwan, Malaysia, Thailand, Indonesia and Hong Kong while the narrow basket is composed of the currencies of Indonesia, Malaysia and Thailand only. 22 The REER index represents the Nominal Effective Exchange Rate (NEER) index of the peso, adjusted for inflation rate differentials with the countries whose currencies comprise the NEER index basket. The NEER index, meanwhile, represents the weighted average exchange rate of the peso vis-à-vis a basket of foreign currencies. 23 Revised figures from the 2 nd Quarter Inflation Report.

37 2008 Second Quarter

Medium and long-term (MLT) foreign loans decreased by Medium- and Long-Term External Debt * US$968 million to US$48.0 billion during the period By Maturity Profile as of end-March 2008 under review from the previous year’s US$48.9 billion. These loans had a weighted average maturity of No. of Years 19.7 years, based on original maturity, longer than the Total MLT Debt 19.7 year ago average maturity of 18.1 years. Meanwhile, the Public Sector 21.4 share to total external debt of MLT loans reached Private Sector 11.3 87.8 percent as against the end-March 2007 ratio of * based on original maturity 90.5 percent. By contrast, short-term (ST) obligations rose significantly by US$1.5 billion to US$6.7 billion at end-March 2008 from US$5.1 billion in the previous year. Public sector debt reached US$40.1 billion during the first quarter of 2008 from US$38.3 billion as of end-March 2007. The share to total borrowings by the public sector rose to 73.5 percent as of end-March 2008 from 70.9 percent as of end-March 2007. By contrast, private sector debt declined slightly to US$14.5 billion during the first quarter of 2008 from US$15.7 billion in 2007. The share to total borrowings of debt owed by the private sector fell to 26.5 percent from 29.1 percent in March 2007.

By creditor profile, debts owed to official lenders (multilateral institutions and bilateral creditors) reached US$22.9 billion as of end-March 2008 as against the previous year’s US$21.1 billion. This accounted for 42.0 percent of the total debt, followed by foreign holders of bonds and notes (35.1 percent) and banks as well as other financial institutions (15.5 percent). The rest of the country’s debts (7.4 percent) were owed to suppliers/exporters and other creditors.

The country’s debt stock consisted mainly of two major currencies, namely: (1) US dollar, whose share to total went down by 50.65 percent (US$27.7 billion) from 53.4 percent (US$28.9 billion); and (2) Japanese yen, whose share to total rose by 28.5 percent (US$15.6 billion) from 25.0 percent (US$28.9 billion). US dollar-denominated multi-currency loans from the

38 2008 Second Quarter

World Bank and Asian Development Bank comprised 9.6 percent of the total external debt, with the remaining 11.2 percent pertaining to 16 other currencies, mainly the euro, Special Drawing Rights and the Philippine peso.

The country’s major external debt indicators continued to improve due to increased levels of aggregate output, gross international reserves and foreign exchange receipts. The ratio of external debt to GNP slid to 32.5 percent as of end-March 2008 from 40.8 percent as of end-March 2007. Similarly, the ratio of external debt to GDP declined to 35.6 percent as of end-March 2008 vis-à-vis 44.2 percent in 2007.

As of end-March 2008, the country’s debt service burden Selected External Debt Indicators (DSB) declined to US$2.19 billion (i.e., principal in percent amortizations and interest payments) as against 2008 2007 US$2.22 billion as of end-March 2007 (Table 16). The Q1 Q4 Q1 debt service ratio (DSR), computed as the percentage of

External Debt to GNP 32.5 35.0 40.8 the DSB to the country’s total exports of goods and External Debt to GDP 35.6 38.1 44.2 receipts from services and income (XGSI) reached DSB to XGSI 11.3 7.6 12.5 DSB to CAR 10.9 7.3 12.0 11.3 percent vis-à-vis 12.5 percent as of end-March DSB to GNP 4.9 3.2 6.5 2007.

Foreign Interest Rates

Major central banks remain cautious. The monetary policy stance of major central banks generally remained cautious, with some central banks raising their policy rates during the second quarter of the year while others maintaining policy settings steady. Concerns over slowing economic activity and increasing upside risks to inflation influenced the policy stance of central banks.

The US Federal Open Market Committee (FOMC) decided to further lower its target for the federal funds rate by 25 basis points to 2.0 percent during its 29-30 April 2008 meeting as recent information indicated

39 2008 Second Quarter

that economic activity remained weak. 24 The decision to ease monetary policy was aimed at promoting moderate growth over time and mitigating risks to economic activity. In its subsequent meeting on 24-25 June 2008, the US FOMC decided to maintain its target at 2.0 percent as upside risks to inflation and inflation expectations have increased while downside risks to growth have diminished. Following the easing thrust of monetary policy, the average US prime and discount rates dropped by 110 basis points and 136 basis points to 5.0947 percent and 2.3371 percent, respectively (Table 17). 25

The Monetary Policy Committee (MPC) of the Bank of England (BOE) likewise reduced the official bank rate paid on commercial bank reserves by 25 basis points to average 5.0 percent during its meeting on 9-10 April 2008. In the Committee’s judgment, the disruption in financial markets could lead to a slowdown in the economy that was sufficiently sharp to pull inflation below the target of 2.0 percent in the medium term. Thus, a cut in the bank rate was justified. The BOE maintained the official bank rate at 5.0 percent for the rest of the quarter as the MPDC judged that the risks to inflation in the medium term have moved further to the upside.

Meanwhile, the Governing Council of the European Central Bank (ECB) and the Bank of Japan (BOJ) kept monetary policy settings unchanged during the second quarter. The Governing Council of the ECB decided to maintain the minimum bid rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility at 4 percent, 5 percent and 3 percent, respectively, on its three meetings during the quarter. The Council noted that while upside risks to

24 Federal Reserve, FOMC Statement available online at http://www.federalreserve.gov/ boarddocs/ press/ monetary/2008 25 The prime rate refers to the interest rate banks charge their most creditworthy customers. The discount rate refers to the rate charged by the Federal Reserve banks when they extend credit to depository institutions.

40 2008 Second Quarter

price stability over the medium term have increased as confirmed by vigorous money and credit growth, the current monetary policy stance remained consistent with its inflation objective. However, the Council stressed that it continues to be in a state of heightened alertness and is ready to act in a firm and timely manner to prevent second-round effects and ensure that risks to price stability over the medium term do not materialize.

Similarly, the Bank of Japan (BOJ) maintained its current guideline for money market operations, by keeping the uncollateralized overnight call rate at around 0.5 percent. 26 The BOJ believed that the current policy stance remained appropriate while recognizing the increasing risks both domestically and globally due to uncertainty in global financial markets and high energy, food and materials prices. The BOJ judged that it was appropriate to carefully examine economic and financial developments at home and abroad to grasp the situation Foreign Interest Rates more accurately before undertaking any policy action. In percent

Difference 2008 2007 (basis points) Meanwhile, the 90-day London Interbank Offered Rate Q2 Q1 Q2 Q-o-Q Y-o-Y (LIBOR) and the 90-day Singapore Interbank Offered US Prime Rate 5.0947 6.1962 8.2500 (110.15) (315.53) US Discount Rate 2.3371 3.6989 6.2500 (136.18) (391.29) Rate (SIBOR) decreased by 51 basis points to average US Federal Funds Rate 1.9385 3.0942 5.2468 (115.57) (330.83) 2.75 percent and 2.77 percent, respectively, during the LIBOR (90 days) 2.7508 3.2626 5.3579 (51.17) (260.71) SIBOR (90 days) 2.7695 3.2735 5.3617 (50.40) (259.21) quarter.

Global Economy

Overall global economic activity remained Global economic activity slowed down in the second resilient in the first quarter of 2008. quarter as it continued to be affected by fragile

conditions in the international financial market and rising inflation. Even as economic growth moderated, headline inflation rose with broader increases felt in emerging and developing countries as the prices of energy and food commodities hit record highs during the quarter in review.

26 BOJ, Announcement of the Monetary Policy Meeting Decisions, available online at http://www.boj.or.jp

41 2008 Second Quarter

The US economy grew by 2.2 percent from 2.5 percent and 1.9 percent in the previous quarter and same quarter Macroeconomic Indicators in Selected Economies a year ago, respectively. On a quarterly annualized Year-on-year growth rates; in percent basis, GDP expanded by 3.3 percent compared with Real GDP Inflation Unemployment 1 Country 20072008 2007 2008 2007 2008 0.9 percent in the first quarter. This growth primarily Q2 Q1 Q2 Q2 Q1 Q2 Q2 Q1 Q2

G3 reflected strong positive contributions from exports, US 1.9 2.5 2.2 2.7 4.1 4.4 4.5 4.9 5.3 Japan 1.7 1.2 1.0 -0.1 1.0 1.4 3.8 3.8 4.0 personal consumption expenditures, and federal Eurozone 2.6 2.1 1.4 1.9 3.4 3.7 7.5 7.2 7.3 Asian NIEs government spending. In the euro area, real GDP Hong Kong 6.4 7.1 4.2 1.3 4.6 5.7 4.3 3.4 3.3 South Korea 4.9 5.8 4.8 2.4 3.8 4.8 3.2 3.4 3.1 growth weakened to 1.4 percent from 2.1 percent in the Singapore 9.1 6.9 2.1 1.0 6.6 7.5 2.9 1.8 2.9 China 11.9 10.6 10.1 3.6 8.0 7.8 4.1 4.0 n.a. India 9.2 8.8 7.9 5.4 5.8 9.5 n.a. n.a. n.a. first quarter, dragged down by falling output in two of its ASEAN 27 Indonesia 6.3 6.3 6.4 6.0 7.6 10.1 n.a. n.a. n.a. largest economies, Germany and France. Other Malaysia 5.8 7.1 6.3 1.4 2.6 4.8 3.4 3.6 n.a. Thailand 4.3 6.1 5.3 1.9 5.0 7.6 1.6 1.4 1.5 factors included weakened domestic demand, a decline Vietnam 7.8 7.4 6.5 7.4 16.4 24.5 n.a. n.a. n.a. n.a. - not available in exports, higher borrowing costs and dampening 1 Unemployment Rate is the proportion (in percent) of the total number of unemployed to the total number of persons in the labor force. Sources: Bloomberg; The Institute of International Finance, Inc.; Bureau of Economic Analysis; Bureau of Labor Statistics; Cabinet Office; European Central Bank; Hong Kong Administrative Region Government Portal; Korea National Statistics; Singapore Department of Statistics National Bureau of Statistics; Department of Statistics, Malaysia; National Economic and Social Development Board, Thailand; effects on output posed by volatile food and oil prices. Bank of Indonesia; BPS, Statistics Indonesia Similarly, Japan’s economic growth slowed down to 1.0 percent from 1.2 percent in the previous quarter, as exports and consumption fell during the quarter.

In Emerging Asia, economic growth likewise tracked a moderating trend except for Indonesia where it rose by 6.4 percent on the back of strong domestic demand.

China’s real GDP eased to 10.1 percent from 10.6 percent in the first quarter and 11.9 percent a year earlier. Weak external demand slowed industrial production and fixed investment which decreased to 15.9 percent (from 18.3 percent) and 15.2 percent (from 22.3 percent), respectively.

Growth deceleration was also seen in other newly-industrialized Asian economies such as Hong Kong, South Korea and Singapore as they posted growth of 4.2 percent, 4.8 percent and 2.1 percent in the second quarter from 7.1 percent, 5.8 percent and 6.9 percent, respectively, in the previous quarter. Economic

27 The euro area (EA13) consisted of 13 Member States up to 31 December 2007: Belgium, Germany, Ireland, Greece, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal, Slovenia and Finland. From 1 January 2008, the euro area (EA15) also includes Cyprus and Malta. The EU27 includes Belgium, Bulgaria, the Czech Republic, Denmark, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Latvia, Lithuania, Luxembourg, Hungary, Malta, the Netherlands, Austria, Poland, Portugal, Romania, Slovenia, Slovakia, Finland, Sweden and the United Kingdom.

42 2008 Second Quarter activity in South Korea was weighed down by weak domestic demand while Singapore’s growth was pulled down by the steep decline in the manufacturing sector, particularly in biomedical production as well as sluggish growth in the electronics industry. Malaysia and Thailand reported real GDP growth of 6.3 percent and 5.3 percent from 7.1 percent and 6.1 percent, respectively, in the first quarter.

The elevated levels in the prices in oil and non-energy commodities led to a continued increase in inflation in the second quarter of 2008. Inflation in the Euro area rose to 3.7 percent in the second quarter after registering 3.7 percent and 4.0 percent inflation in May and June, respectively. The double-digit annual increase in energy prices accounted for most of the increase in the overall inflation during the period. In Japan, the decade-high 2.0 percent inflation registered in June as a result of surging food and energy prices brought the average inflation for the second quarter of 2008 to 1.4 percent compared to the 1.0 percent increase in the first quarter. The United States likewise posted higher inflation of 4.4 percent in the second quarter of 2008 against the previous quarter’s 4.1 percent.

In Asia’s NIEs, China’s inflation registered an average of 7.8 percent in the second quarter of 2008 compared to 8.0 percent in the first quarter. The implementation of price controls on food, fuel, and other basic goods together with the payment of subsidies to increase food supplies by the Chinese government led to a slight slowdown in inflation to 7.7 percent in May and 7.1 percent in June. Meanwhile, other NIEs in Asia continued to experience an increasing trend in inflation. For the second quarter of the year, South Korea’s inflation increased by 4.8 percent (from 3.8 percent), Singapore by 7.5 percent (from 6.6 percent) and India by 9.5 percent (from 5.8 percent). Among ASEAN countries, inflation in the second quarter of 2008 picked

43 2008 Second Quarter

up in Indonesia at 10.1 percent (from 7.6 percent), Malaysia at 4.8 percent (from 2.6 percent), Thailand at 7.6 percent (from 5.0 percent), and Vietnam at 24.5 percent (from 16.4 percent).

G. Financial Condition of the BSP

Balance Sheet

BSP’s assets increase. Based on preliminary and unaudited financial statements, the BSP’s assets as of end-June 2008 reached P2.2 trillion, 28.2 percent or P488.1 billion Balance Sheet of the BSP in billion pesos higher than the year-ago level. The amount was also higher by 5.3 percent or P111.5 billion compared to the 2008 * 2007 end of the previous quarter’s level. The BSP’s liabilities June March June grew by P556.3 billion or 37.0 percent year-on-year to Assets 2,219.1 2,107.6 1,731.0 P2.1 trillion and by P102.4 billion or 5.2 percent as Liabilities 2,061.3 1,959.0 1,505.1 compared to the previous quarter’s level (Table 18). As a Networth 157.7 148.6 225.9 result, the BSP’s net worth declined to P157.7 billion or * unaudited 30.2 percent lower compared to the year-ago level of P225.9 billion.

The year-on-year growth in BSP assets was mainly due to the continued expansion in international reserves, which grew by P427.8 billion, following the gains coming from the BSP’s foreign exchange operations and receipts from investment income abroad. The higher asset balance was also complemented by the P65.7 billion rise in the BSP’s holdings of domestic securities as it purchased Treasury bills from banks in the course of its liquidity management operations. Meanwhile, loans and advances declined by P4.3 billion, offsetting partially the overall expansion in the BSP’s assets during the quarter.

During the same period, the BSP’s liabilities likewise went up owing largely to higher balances in its deposit facilities as part of its liquidity management measures. The growth in liabilities could be traced to the increases

44 2008 Second Quarter

posted in almost all accounts in the balance sheet, notably the P112.9 billion expansion in the BSP debt instruments and the P36.0 billion rise in currency issued during the period under review.

Income Statement

The BSP posts an income. Based on preliminary and unaudited data, the BSP yielded a net income of P17.2 billion during the second Income Statement of the BSP quarter of the year, from the P27.6 billion and P24.8 in billion pesos billion losses during the same period in the previous year 2008 * 2007 and in the previous quarter, respectively (Table 19). The Q2 Q1 Q2 net income during the period was realized mainly Revenue 19.632 22.809 24.304 Less: Expenses 20.465 19.133 15.268 through gains on foreign exchange fluctiuations Equals: Net Income Before Gain/Loss (-) -0.833 3.676 9.036 amounting to P18.0 billion. Add/Less: Gain/Loss (-) on FX Rate and Price Fluctuations 18.048 -28.479 -36.669 Less: Provision for Income Tax 0.000 0.000 0.000 Equals: Net Income Available Total revenues during the review period contracted by for Distribution 17.215 -24.803 -27.633

* unaudited P4.7 billion to P19.6 billion, lower than the P24.3 billion posted during the same period last year. Interest income continued to be the major source of revenue, coming mainly from higher interest earnings from international reserves and domestic securities. The fall in in revenue was due to the decline registered in miscellaneous income as trading losses amounted to P7.9 billion during the period.

During the same period, total expenditures amounted to P20.5 billion, which was P5.2 billion higher compared to the level posted in the same quarter in the previous year. The year-on-year expansion was due mainly to higher interest expenses, which rose by 45.6 percent, owing to increased interest payments on deposit liabilities. Meanwhile, total taxes and licenses remitted to the NG during the period amounted to P160.8 million.

45 2008 Second Quarter

H. Challenges and Future Policy Directions

During the second quarter, the Philippines, like most emerging and developing economies, faced the dilemma of a slowing economy and rising inflationary pressures in the context of sharp increases in commodity prices. Slowing growth in the US and other advanced economies could also adversely affect economic performance. A more pressing concern for emerging economies in Asia is the output effects of a sharper as well as a more broad-based-than-anticipated global slowdown. For the Philippines, real GDP growth for the review period was weaker than the same period last year, while headline inflation surged in June. The domestic economy was supported by the growth of exports and private construction investments during the quarter. Meanwhile, remittances continued to accelerate during the review quarter as overseas deployment also increased. Consumption spending growth, however, has weakened due to the higher cost of oil and food. On the upside, consumption could potentially pick up on the back of continued remittance inflows as well as the expected easing of commodity prices. These developments could temper the negative impact of a slowdown in exports due to the cooling off of the US economy and the expected downturn in other advanced economies. Higher overseas deployment and the diversification in OF deployment destination and level of skills could also mitigate a slowdown in OF remittances from a weakening US and other advanced economies.

Inflation continues to pose a risk to future economic performance given indications that supply-driven pressures are beginning to feed into demand. Although increases in food and fuel prices may subside in the coming months, it may take some time before the downward impact on inflation could alleviate price pressures.

46 2008 Second Quarter

Policy directions

Policymakers around the world face the daunting challenge of combating the recent rise in inflationary pressures while navigating through a period of slower growth. Given the prospects of a sustained uptrend in food and oil prices due to global structural changes, inflation expectations need to be anchored firmly. Macroeconomic policies need to ensure that the sustained shift in relative prices brought about by the surge in commodity prices does not further drive up inflation and inflation expectations. Monetary policy should continue to play the lead role, as it is the first line of defense against rising inflation, but in this task, it needs to be complemented by appropriate non-monetary interventions to be able to address the more structural sources of the recent supply-side-driven price pressures.

The recent policy decisions of monetary authorities to raise the BSP’s policy rates starting in June were aimed at addressing inflation risks for 2008 and 2009, based on forecasts indicating that inflation targets may be breached. The BSP actions recognized the need for timely and decisive responses in inflation management, which should also reduce the output costs to the economy. With price stability as the main priority, the BSP stands ready to take further action to keep inflation expectations well-anchored.

The BSP will continue to monitor the financial sector as the spillover effects from the global economic slowdown and higher risk aversion could adversely affect output growth and the stability of the financial system. Key financial reforms aimed at improving the BSP’s supervision technology and capacity; aligning prudential regulation of the banking system with international standards and best practices, strengthening corporate governance standards and market discipline mechanisms, enhancing the payments system,

47 2008 Second Quarter developing further the domestic capital market, and promoting broad-based financial literacy, will continue to be pursued. Microfinance will remain the BSP’s flagship program for poverty alleviation with a view to providing the entrepreneurial poor with the much needed capital to start a business.

48 2008 Second Quarter

Annex A

Banking Policies

The BSP policy issuances during the second quarter essentially focused on four areas as follows: 1) regulatory and prudential standards; 2) capital market development; 3) anti-money laundering efforts; and 4) banking services.

Strengthening prudential standards

• The BSP relaxed the regulations governing the loans-to-deposits ratio (LDR) of banks and streamlined the bank branch reportorial requirements in order to provide banks more flexibility in their regional lending and deposit operations as well as reduce the burden in complying with reportorial requirements. (Circular No. 613 dated 18 June 2008)

Promoting the development of the domestic capital market

• The BSP authorized custodian banks to issue special Bangko Sentral Registration Documents (BSRDs) to cover the PSE-listed shares of stock borrowed by foreign entities from local investors/lenders. Moreover, said foreign borrowers are allowed to purchase foreign exchange from the banking system for remittance abroad using the peso sales proceeds of the borrowed shares, including the related income from Securities Borrowing and Lending (SBL) transactions, i.e., rebates or share in the income earned on the reinvestment of the cash collateral, interest and dividends earned on the peso-denominated government securities and PSE-listed shares used a collaterals but subject to certain conditions. (Circular No. 611 dated 30 May 2008)

Strengthening efforts to address money laundering

• The BSP issued an amendment to the rules governing the acceptance of valid identification cards for all types of financial transactions by banks and non-bank financial institutions under BSP supervision, including financial transactions involving overseas Filipino workers. The amendment expanded the type of valid identification cards used in any financial transactions to include: Integrated Bar of the Philippines ID and company IDs issued by private entities and institutions registered with or supervised or regulated by the BSP, Securities and Exchange Commission or Insurance Commission. (Circular No. 608 dated 20 May 2008)

• The BSP extended the deadline for the submission of covered transaction reports (CTRs) and suspicious transaction reports (STRs) by all banks and non-bank financial institutions under the supervision and regulation of the BSP to the Anti-Money Laundering Council (AMLAC) from five (5) to ten (10) working days from the day of occurrence. (Circular No. 612 dated 13 June 2008)

49 2008 Second Quarter

Improving Bank Services

• The outsourcing of other banking functions of banks and non-bank financial institutions was amended to include mortgage registration and other activities as may be determined by the BSP. (Circular No. 610 dated 26 May 2008)

50 1 GROSS NATIONAL PRODUCT BY INDUSTRIAL ORIGIN in million pesos; at constant 1985 prices

Annual Percent Change (in %) 2006 2007 2008 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2

Agriculture, Fishery and Forestry 60,247 53,935 53,580 71,737 62,664 56,194 56,611 75,802 64,351 58,929 4.0 4.2 5.7 5.7 2.7 4.9

Industry 95,677 105,085 102,990 112,234 102,035 115,907 109,793 117,752 105,059 121,487 6.6 10.3 6.6 4.9 3.0 4.8 Mining and Quarrying 5,068 6,170 3,655 3,919 5,813 8,571 4,533 4,761 6,635 6,989 14.7 38.9 24.0 21.5 14.1 -18.5 Manufacturing 70,755 73,643 76,000 86,439 73,630 76,116 78,793 88,658 75,379 80,733 4.1 3.4 3.7 2.6 2.4 6.1 Construction 10,801 14,517 12,379 12,570 13,140 19,882 14,588 14,256 12,693 21,537 21.7 37.0 17.8 13.4 -3.4 8.3 Electricity, Gas and Water 9,053 10,754 10,956 9,306 9,452 11,338 11,879 10,077 10,352 12,228 4.4 5.4 8.4 8.3 9.5 7.8

Services 143,995 154,627 151,040 171,727 156,118 167,550 163,139 185,077 166,342 174,788 8.4 8.4 8.0 7.8 6.5 4.3 Transportation, Communication and Storage 26,219 28,630 25,509 31,054 28,970 31,370 26,991 33,366 30,601 32,409 10.5 9.6 5.8 7.4 5.6 3.3 Trade 46,562 51,805 53,287 64,305 49,931 55,741 58,144 69,958 52,803 58,135 7.2 7.6 9.1 8.8 5.8 4.3 Finance 17,266 18,341 17,280 19,004 20,079 20,937 19,251 21,044 22,536 21,448 16.3 14.2 11.4 10.7 12.2 2.4 Ownership of Dwellings and Real Esatate 14,435 14,823 15,294 15,183 15,235 15,718 16,335 15,947 16,342 16,866 5.5 6.0 6.8 5.0 7.3 7.3 Private Services 25,501 26,462 26,498 28,855 27,655 28,875 28,797 31,046 29,241 30,665 8.4 9.1 8.7 7.6 5.7 6.2 Government Services 14,013 14,565 13,172 13,327 14,248 14,908 13,621 13,716 14,818 15,265 1.7 2.4 3.4 2.9 4.0 2.4

Gross Domestic Product 299,918 313,646 307,610 355,699 320,816 339,651 329,543 378,630 335,752 355,204 7.0 8.3 7.1 6.4 4.7 4.6

Net Factor Income from the Rest of the World 26,490 29,825 26,008 32,809 29,495 37,366 34,311 32,999 34,890 42,624 11.3 25.3 31.9 0.6 18.3 14.1

Gross National Product 326,408 343,471 333,618 388,507 350,312 377,017 363,855 411,630 370,642 397,828 7.3 9.8 9.1 6.0 5.8 5.5

Note: Totals may not add up due to rounding; revised 2006 data Source of data: National Statistical Coordination Board (NSCB) 1a GROSS NATIONAL PRODUCT BY EXPENDITURE SHARES in million pesos; at constant 1985 prices

Annual Percent Change (in %) 2006 2007 2008 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2

Personal Consumption Expenditures 227,928 247,502 244,561 279,737 241,363 261,402 258,446 296,966 253,855 270,361 5.9 5.6 5.7 6.2 5.2 3.4

Government Consumption Expenditures 20,591 24,293 21,551 18,773 22,539 27,183 22,941 19,630 22,967 25,795 9.5 11.9 6.4 4.6 1.9 -5.1

Capital Formation 56,885 53,482 53,955 59,783 61,815 62,890 58,072 66,345 64,299 72,145 8.7 17.6 7.6 11.0 4.0 14.7 Fixed Capital 54,669 55,733 52,602 54,301 60,308 67,373 57,249 57,960 62,054 71,169 10.3 20.9 8.8 6.7 2.9 5.6 Construction 21,055 26,608 23,329 23,196 25,348 35,754 27,255 25,909 24,559 38,667 20.4 34.4 16.8 11.7 -3.1 8.1 Durable Equipment 29,184 25,253 26,211 25,994 30,439 27,473 26,821 26,679 33,065 28,564 4.3 8.8 2.3 2.6 8.6 4.0 Breeding Stock & Orchard Dev't. 4,430 3,873 3,062 5,111 4,520 4,146 3,174 5,372 4,430 3,937 2.0 7.0 3.7 5.1 -2.0 -5.0 Changes in Stocks 2,216 -2,251 1,353 5,481 1,507 -4,484 822 8,385 2,245 976 -32.0 99.2 -39.2 53.0 49.0 -121.8

Exports 142,387 167,620 184,645 146,918 157,709 175,836 191,487 152,665 148,040 189,444 10.8 4.9 3.7 3.9 -6.1 7.7

Less: Imports 151,835 174,033 169,561 160,592 149,052 155,765 161,010 160,917 140,423 154,154 -1.8 -10.5 -5.0 0.2 -5.8 -1.0

Statistical Discrepancy 3,962 -5,218 -27,541 11,079 -13,558 -31,894 -40,391 3,942 -12,986 -48,387 -442.2 511.2 46.7 -64.4 -4.2 51.7

Gross Domestic Product 299,918 313,646 307,610 355,699 320,816 339,651 329,543 378,630 335,752 355,204 7.0 8.3 7.1 6.4 4.7 4.6

Net Factor Income from the Rest of the World 26,490 29,825 26,008 32,809 29,495 37,366 34,311 32,999 34,890 42,624 11.3 25.3 31.9 0.6 18.3 14.1

Gross National Product 326,408 343,471 333,618 388,507 350,312 377,017 363,855 411,630 370,642 397,828 7.3 9.8 9.1 6.0 5.8 5.5

Note: Totals may not add up due to rounding. Source of data: National Statistical Coordination Board (NSCB) 2 SELECTED LABOR, EMPLOYMENT AND WAGE INDICATORS

2006 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 p Q2 p

Employment Status 1 Labor Force (in thousands) 34,868 35,633 35,844 35,511 36,395 36,396 36,142 35,919 36,370 36,450 Employed 32,031 32,699 32,926 32,886 33,545 33,704 33,318 33,671 33,695 33,536 Unemployed 2,837 2,935 2,918 2,625 2,850 2,692 2,824 2,248 2,675 2,914 Underemployed 6,774 8,309 7,718 6,681 7,214 6,378 7,327 6,104 6,370 6,626 Labor Force Participation Rate (%) 63.6 64.8 64.6 63.8 64.8 64.5 63.6 63.2 63.4 63.2 Employment Rate (%) 91.9 91.8 91.9 92.6 92.2 92.6 92.2 93.7 92.6 92.0 Unemployment Rate (%) 8.1 8.2 8.1 7.4 7.8 7.4 7.8 6.3 7.4 8.0 Underemployment Rate (%) 21.1 25.4 23.4 20.3 21.5 18.9 22.0 18.1 18.9 19.8

Overseas Employment (Deployed) 280,605 294,783 265,788 221,391 214,783 264,942 319,006 278,892 285,666 354,735 Land-based 211,279 224,683 201,998 150,110 156,272 201,406 246,153 207,239 .. .. Sea-based 69,326 70,100 63,790 71,281 58,511 63,536 72,853 71,653 .. ..

Strikes Number of New Strikes 5 4 2 1 1 0 3 2 3 0 Number of Workers Involved (thousands) 568 381 380 86 54 0 418 443 810 0

3 Nominal Daily Wage Rates (in pesos) National Capital Region Agricultural Plantation 288.00 288.00 313.00 313.00 313.00 313.00 325.00 325.00 325.00 345.00 Non-Plantation 288.00 288.00 313.00 313.00 313.00 313.00 325.00 325.00 325.00 345.00 Non-Agricultural 325.00 325.00 350.00 350.00 350.00 350.00 362.00 362.00 362.00 382.00

4 Real Daily Wage Rates (in pesos) , 2000=100 National Capital Region Agricultural Plantation 206.90 204.11 220.90 219.65 220.27 217.66 223.06 220.34 216.96 219.75 Non-Plantation 206.90 204.11 220.90 219.65 220.27 217.66 223.06 220.34 216.96 219.75 Non-Agricultural 233.48 230.33 247.10 245.61 246.31 243.39 248.46 245.42 241.66 243.31

Notes: 1 Starting with January 2007 LFS round, the population projections based on the 2000 Census of Population was adopted to generate the labor force statistics per NSCB Resolution No. 1 Series of 2005. For 2006 data, recalculation of employment indicators were done using the population projection based on the 2000 Census of Population. p Preliminary No breakdown available ֵ Sources of data: Bureau of Labor and Employment Statistics (BLES), Philippine Overseas Employment Administration (POEA), National Statistics Office (NSO), National Wages and Productivity Commission (NWPC), and National Conciliation and Mediation Board (NCMB) 3 CASH OPERATIONS OF THE NATIONAL GOVERNMENT for periods indicated; in billion pesos

PROGRAM 2006 2007 2008 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2

Revenues 205.0 266.1 244.8 263.7 237.3 273.0 302.0 324.3 253.5 316.5 255.8 302.2 279.0 281.8 249.6 312.1 Tax 179.4 238.2 216.2 226.0 186.1 246.4 250.5 250.0 217.9 294.5 204.2 278.9 255.9 264.1 214.0 286.2 Non-tax 25.5 27.8 28.6 37.7 51.2 26.6 51.4 74.3 35.5 22.0 51.6 23.3 23.1 17.6 35.6 25.9

Expenditures 272.6 230.0 263.7 278.1 289.3 262.0 301.0 296.7 305.1 282.9 301.6 287.6 301.7 290.8 309.8 292.9 Interest Payments 103.8 52.7 97.9 55.7 89.1 40.5 93.1 45.1 100.2 40.7 94.3 55.6 96.7 56.7 102.3 43.6 Equity 0.1 0.9 0.1 2.5 0.1 0.1 0.1 3.4 0.1 0.3 0.0 0.5 0.1 1.4 0.2 0.5 Net Lending 2.8 4.7 6.2 -13.6 1.8 0.7 1.9 5.3 2.2 1.9 2.8 2.4 2.5 2.8 3.1 2.7 Subsidy 3.6 3.2 2.4 4.6 6.0 4.5 4.9 11.8 2.1 1.6 1.9 1.3 1.0 0.7 1.6 2.8 Allotment to LGUs 39.9 38.8 37.9 58.1 51.6 48.2 46.4 47.5 54.0 57.3 36.8 39.7 36.8 36.8 42.1 44.1 Tax Expenditures 1.2 5.8 1.2 7.3 0.4 5.4 13.8 5.4 3.9 20.5 2.1 2.0 1.5 6.1 2.4 3.6 Others 121.2 123.8 117.9 163.6 140.2 162.5 140.7 178.3 142.6 160.5 163.9 186.2 163.1 186.2 158.0 195.5

Surplus/Deficit (-) -67.6 36.1 -18.9 -14.4 -52.0 11.0 1.0 27.6 -51.6 33.6 -45.8 14.6 -22.7 -9.0 -60.2 19.2

Financing 1 109.7 -42.3 35.4 7.3 54.8 -22.7 55.8 11.3 13.3 18.7 52.8 32.8 -33.5 30.3 17.6 -22.6 External Borrowings (Net) 96.9 -2.9 30.8 -4.0 75.4 -1.9 -17.6 0.2 9.4 -18.0 64.9 -3.4 -21.1 14.3 11.4 -2.8 Domestic Borrowings (Net) 12.8 -39.5 4.6 11.4 -20.6 -20.8 73.3 11.1 3.9 36.7 -12.0 36.3 -12.3 16.0 6.2 -19.8

Total Change in Cash: Deposit/Withdrawal (-) 52.8 -12.8 -8.8 -25.1 16.5 -27.8 10.6 107.6 -7.1 52.9 3.6 43.4 -59.4 17.4 -28.7 -13.5 Budgetary 42.1 -6.2 16.5 -7.1 2.8 -11.7 56.7 38.9 -38.2 52.2 7.0 47.4 -56.1 21.3 -42.6 -3.4 Non-Budgetary Accounts 1 10.7 -6.6 -25.3 -18.0 13.7 -16.1 -46.1 68.8 31.2 0.6 -3.4 -4.0 -3.3 -3.9 13.9 -10.1

1 Refers to accounts not included in the NG budget, e.g., sale, purchase or redemption of government securities, but included in the cash operations report to show the complete relations in the movements of the cash accounts. Note: Details may not add up due to rounding off. Source of Data: Bureau of the Treasury (BTr) 4 CONSUMER PRICE INDEX IN THE PHILIPPINES (2000=100)

2006 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

All Items 135.9 137.3 139.1 139.5 139.8 140.6 142.6 144.1 147.6 154.3 Food, Beverages and Tobacco 128.6 129.9 131.4 132.5 132.9 133.4 135.2 137.9 142.2 151.8 Non-Food 143.1 144.8 146.7 146.5 146.7 147.7 150.0 150.3 152.9 156.7 Clothing 120.7 121.7 122.5 123.3 124.1 124.7 125.1 125.5 128.0 129.7 Housing and Repairs 130.5 131.7 132.5 132.9 133.3 133.7 134.2 134.4 137.0 139.1 Fuel, Light and Water 175.0 174.8 178.0 177.9 179.2 180.6 185.5 183.0 188.9 194.9 Services 157.9 161.1 164.8 163.0 162.3 164.5 168.3 169.9 171.8 178.0 Miscellaneous 119.5 120.4 121.0 121.4 121.9 122.3 122.7 123.0 124.4 125.7

Annual Change (in percent) 2006 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

All Items 7.3 6.9 6.1 4.8 2.9 2.4 2.5 3.3 5.6 9.7 Food, Beverages and Tobacco 6.2 5.8 5.2 4.9 3.3 2.7 2.9 4.1 7.0 13.8 Non-Food 8.4 7.9 6.9 4.7 2.5 2.0 2.2 2.6 4.2 6.1 Clothing 3.1 3.1 3.1 3.0 2.8 2.5 2.1 1.8 3.1 4.1 Housing and Repairs 4.3 4.1 3.8 3.7 2.2 1.5 1.3 1.2 2.7 4.1 Fuel, Light and Water 16.4 14.2 13.7 8.0 2.4 3.3 4.2 2.8 5.4 8.0 Services 11.3 10.9 8.7 5.0 2.8 2.1 2.1 4.3 5.9 8.2 Miscellaneous 3.2 3.1 3.0 2.6 2.1 1.6 1.4 1.3 2.0 2.8

Source of basic data: National Statistics Office (NSO) 4a CONSUMER PRICE INDEX IN METRO MANILA (2000=100)

2006 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

All Items 138.5 140.1 142.1 142.3 142.4 142.9 145.9 146.4 148.7 154.8 Food, Beverages and Tobacco 125.4 126.2 128.5 130.4 129.9 129.6 132.4 135.3 138.4 145.9 Non-Food 147.1 149.4 151.2 150.4 150.8 151.9 155.0 153.8 155.7 160.8 Clothing 125.1 126.4 127.1 128.4 129.7 130.0 130.2 130.3 135.0 136.8 Housing and Repairs 130.7 131.8 131.9 132.4 133.0 133.3 133.5 133.6 134.2 136.6 Fuel, Light and Water 204.4 205.9 207.1 206.4 210.2 210.7 222.0 205.8 211.4 222.4 Services 159.7 163.9 168.7 165.4 164.3 167.0 172.0 174.2 176.3 184.4 Miscellaneous 119.2 120.0 120.3 120.7 121.4 121.6 121.7 121.8 122.5 123.7

Annual Change (in percent) 2006 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

All Items 8.2 7.7 6.7 5.4 2.8 2.0 2.7 2.8 4.5 8.3 Food, Beverages and Tobacco 5.6 5.5 5.7 5.6 3.6 2.7 3.0 3.7 6.5 12.6 Non-Food 9.6 9.1 7.4 5.3 2.5 1.7 2.5 2.3 3.2 5.8 Clothing 2.0 2.6 2.8 3.5 3.7 2.9 2.4 1.5 4.1 5.2 Housing and Repairs 6.2 5.2 4.1 4.3 1.8 1.1 1.2 0.9 0.9 2.5 Fuel, Light and Water 15.6 14.6 13.6 8.0 2.8 2.4 7.2 -0.3 0.6 5.5 Services 13.8 13.1 9.8 5.8 2.9 1.9 2.0 5.3 7.3 10.4 Miscellaneous 3.0 2.9 2.7 2.5 1.8 1.3 1.2 0.9 0.9 1.8

Source of basic data: National Statistics Office (NSO) 4b CONSUMER PRICE INDEX IN AREAS OUTSIDE METRO MANILA (2000=100)

2006 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

All Items 134.8 136.2 137.8 138.2 138.7 139.6 141.1 143.1 147.1 154.0 Food, Beverages and Tobacco 129.7 131.1 132.3 133.2 133.9 134.6 136.1 138.7 143.4 153.7 Non-Food 140.9 142.2 144.2 144.2 144.4 145.5 147.2 148.2 151.4 154.4 Clothing 119.2 120.0 120.8 121.5 122.2 122.8 123.3 123.7 125.5 127.2 Housing and Repairs 130.3 131.7 132.8 133.2 133.6 134.0 134.8 135.1 139.3 141.1 Fuel, Light and Water 162.2 161.2 165.3 165.4 165.7 167.4 169.7 173.0 179.1 182.9 Services 156.9 159.6 162.6 161.6 161.2 163.0 166.1 167.5 169.3 174.3 Miscellaneous 119.6 120.5 121.2 121.7 122.1 122.6 123.0 123.5 125.0 126.3

Annual Change (in percent) 2006 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

All Items 6.9 6.5 5.9 4.5 2.9 2.5 2.4 3.5 6.0 10.4 Food, Beverages and Tobacco 6.4 5.9 5.1 4.6 3.2 2.6 2.9 4.2 7.1 14.2 Non-Food 7.6 7.2 6.6 4.4 2.5 2.3 2.0 2.8 4.8 6.1 Clothing 3.6 3.4 3.2 2.8 2.5 2.3 2.0 1.8 2.7 3.6 Housing and Repairs 2.8 3.2 3.5 3.2 2.6 1.7 1.5 1.4 4.2 5.3 Fuel, Light and Water 16.9 13.9 13.7 8.1 2.2 3.9 2.6 4.6 8.1 9.3 Services 9.8 9.7 8.1 4.4 2.7 2.2 2.2 3.7 5.0 6.9 Miscellaneous 3.3 3.2 3.1 2.6 2.1 1.7 1.5 1.5 2.4 3.1

Source of basic data: National Statistics Office (NSO) 5 MONETARY INDICATORS (DCS CONCEPT) as of periods indicated; in billion pesos

2006 2007 2008 Item Q1 Q2 Q3 Q4 Q1 r Q2 r Q3 p Q4 r Q1 r Q2 p

A. Liquidity

1. M4 (2 + 7) 3,119.7 3,384.8 3,432.7 3,722.1 3,841.9 3,864.2 3,700.5 3,925.4 3,829.8 4,090.4

2. Broad Money Liabilities or M3 (5 + 6) 2,348.3 2,531.9 2,590.4 2,869.6 2,994.2 3,041.8 2,886.0 3,174.4 3,055.6 3,197.5

3. Currency Outside Depository Corporations and Transferable Deposits (Narrow Money or M1) 613.3 640.4 648.9 768.9 812.0 834.5 784.0 886.0 874.3 901.5 a. Currency Outside Depository Corporations (Currency in Circulation) 244.4 244.0 238.0 305.3 291.6 288.6 283.7 347.7 310.9 316.4 b. Transferable Deposits (Demand Deposits) 369.0 396.4 410.9 463.6 520.4 546.0 500.3 538.4 563.4 585.1

4. Other Deposits (Quasi-Money) 1,710.5 1,860.2 1,901.5 2,057.8 2,141.7 2,176.6 2,055.3 2,243.0 2,134.7 2,247.0 a. Savings Deposits 1,290.3 1,400.2 1,451.1 1,500.3 1,471.7 1,483.0 1,408.2 1,505.6 1,359.8 1,317.1 b. Time Deposits 420.2 460.0 450.5 557.5 670.0 693.5 647.1 737.4 774.9 930.0

5. M2 (C+D) 2,323.8 2,500.6 2,550.4 2,826.7 2,953.7 3,011.1 2,839.4 3,129.0 3,009.0 3,148.5

6. Securities Other Than Shares Included in Broad Money (Deposit Substitutes) 24.4 31.3 40.0 42.8 40.6 30.7 46.6 45.3 46.6 48.9

7. Transferable and Other Deposits in Foreign Currency (FCDU Deposits - Residents) 771.4 852.9 842.3 852.5 847.7 822.4 814.5 751.0 774.2 892.9

8. Liabilities Excluded from Broad Money (Other Liabilities) 94.5 87.3 105.1 89.0 100.7 83.1 126.0 155.4 157.5 171.2 a. Bills Payable 89.4 81.9 99.7 83.6 98.8 81.2 119.7 153.5 155.7 169.3 b. Marginal Deposits 1.7 1.9 1.9 2.2 3.0 c. Restricted Deposits 3.4 3.5 3.5 3.2 1.9 1.9 3.3 1.9 1.9 1.9

B. Credits

1. Net Domestic Assets 2,152.9 2,272.2 2,280.1 2,444.8 2,411.8 2,364.5 2,163.1 2,440.5 2,251.5 2,399.1 a. Bangko Sentral ng Pilipinas -644.3 -725.3 -711.8 -692.2 -801.9 -837.9 -1,012.3 -930.7 -1,109.5 -1,208.3 b. Other Depository Corporations 2,797.2 2,997.5 2,991.9 3,137.0 3,213.7 3,202.4 3,175.4 3,371.2 3,361.0 3,607.5

2. Net Claims on Residents (Net Domestic Credits) 2,664.1 2,816.5 2,781.9 3,006.6 2,935.0 3,044.1 3,047.9 3,161.6 3,178.6 3,296.8 By End-User Net Claims on the Public Sector (Public Sector) 844.4 971.4 962.0 1,039.7 1,010.6 1,075.9 1,073.8 1,027.4 1,108.7 1,097.3 Claims on Other Sectors (Private Sector) 1,819.7 1,845.1 1,819.9 1,966.9 1,924.4 1,968.2 1,974.1 2,134.2 2,067.4 2,199.5

By Institution Bangko Sentral ng Pilipinas -23.9 -46.5 20.0 156.7 181.6 181.4 192.5 195.9 217.4 189.4 Other Depository Corporations 2,688.0 2,863.0 2,761.9 2,849.9 2,753.5 2,862.7 2,855.3 2,965.8 2,961.3 3,107.5

3. Net Other Items -511.2 -544.3 -501.8 -561.8 -523.2 -679.6 -884.8 -721.1 -924.6 -897.7

C. Net Foreign Assets 1,061.3 1,199.9 1,257.8 1,366.3 1,530.8 1,582.8 1,663.4 1,640.3 1,735.9 1,862.5

1. Bangko Sentral ng Pilipinas 940.5 1,020.0 1,003.0 1,077.0 1,149.4 1,186.5 1,355.8 1,364.9 1,495.5 1,592.9 a. Net International Reserves 1,026.4 1,098.6 1,075.4 1,127.7 1,190.1 1,222.0 1,391.5 1,397.4 1,528.4 1,625.5 Foreign Assets 1,058.8 1,131.9 1,088.0 1,128.4 1,191.3 1,222.3 1,392.5 1,397.7 1,529.3 1,648.2 Foreign Liabilities 32.4 33.3 12.6 0.7 1.2 0.3 1.0 0.3 0.9 22.7 b. Medium- and Long-Term Foreign Liabilities 85.8 78.6 72.4 50.7 40.7 35.5 35.7 32.4 32.9 32.6

2. Other Depository Corporations 120.7 179.8 254.8 289.2 381.3 396.4 307.6 275.4 240.4 269.6 a. Foreign Assets 672.0 723.6 743.0 792.2 866.6 896.9 812.4 746.5 702.2 750.1 b. Foreign Liabilities 551.2 543.8 488.3 503.0 485.2 500.5 504.8 471.1 461.7 480.6

Note: Details may not add up to totals due to rounding. Source: Bangko Sentral ng Pilipinas (BSP) 6 SELECTED DOMESTIC INTEREST RATES quarterly average; in percent per annum

NOMINAL INTEREST RATES REAL INTEREST RATES 4 2006 2007 2008 2006 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Interbank Call Loans 7.8819 7.9103 8.0579 7.4600 7.4918 7.3774 6.7115 6.3199 5.4768 5.1569 0.5359 1.0621 1.9557 2.6516 4.6220 4.9739 4.1953 3.0224 -0.1026 -4.5871 Savings Deposits 3.6540 3.7020 3.4430 3.4090 2.4550 2.0260 2.0390 2.2540 2.2310 2.1420 -3.6920 -3.1462 -2.6592 -1.3994 -0.4148 -0.3775 -0.4772 -1.0435 -3.3484 -7.6020 Time Deposits (All Maturities) 5.2790 5.1200 4.9970 4.5690 3.2100 3.0330 3.4250 4.0160 3.4820 3.5740 -2.0670 -1.7282 -1.1052 -0.2394 0.3402 0.6295 0.9088 0.7185 -2.0974 -6.1700 Manila Reference Rates (All Maturities) 1 6.8125 7.1250 6.6250 6.0625 6.3125 6.5625 5.7500 6.0625 5.6250 5.6250 -0.5335 0.2768 0.5228 1.2541 3.4427 4.1590 3.2338 2.7650 0.0456 -4.1190

Lending Rates

High 10.0623 10.0348 10.5046 10.0152 8.5582 8.2882 8.7129 8.8019 8.7987 8.9432 2.7164 3.1866 4.4024 5.2068 5.6885 5.8847 6.1967 5.5044 3.2193 -0.8007 Low 8.2028 8.2965 8.6186 8.0676 6.8400 6.6229 6.9567 6.9704 6.9531 7.1388 0.8568 1.4482 2.5164 3.2592 3.9702 4.2194 4.4406 3.6729 1.3737 -2.6052 All Maturities 2 9.8430 9.9070 10.0720 9.1710 8.8970 8.2920 9.0370 8.5910 8.4300 8.2600 2.4970 3.0588 3.9698 4.3626 6.0272 5.8885 6.5208 5.2935 2.8506 -1.4840

Bangko Sentral Rates

3 R/P (Overnight) 9.7500 9.7500 9.7500 N.T. N.T. 9.7500 8.0000 7.7232 7.0000 N.T. 2.4040 2.9018 3.6478 N.T. N.T. 7.3465 5.4838 4.4257 1.4206 N.T. 3 R/P (Term) 9.8125 9.8125 N.T. N.T. N.T. 9.8125 8.0731 N.T. N.T. N.T. 2.4665 2.9643 N.T. N.T. N.T. 7.4090 5.5569 N.T. N.T. N.T. 3 RR/P (Overnight) 7.5000 7.5000 7.5000 7.5000 7.5000 7.5000 6.1932 5.6107 5.0928 5.0747 0.1540 0.6518 1.3978 2.6916 4.6302 5.0965 3.6770 2.3132 -0.4866 -4.6693 3 RR/P (Term) 7.5863 7.5848 7.5905 7.5979 7.6055 7.6015 6.2998 5.7613 5.2199 5.1867 0.2403 0.7366 1.4883 2.7895 4.7357 5.1980 3.7836 2.4638 -0.3595 -4.5573 Rediscounting 5.2987 5.1110 6.0717 5.1147 3.4467 3.3637 3.9357 4.1803 3.8267 3.9657 -2.0473 -1.7372 -0.0305 0.3063 0.5769 0.9602 1.4195 0.8828 -1.7527 -5.7783

Rate on Government Securities

Treasury Bills, All Maturities 6.4290 5.8370 6.4250 5.6820 3.7860 3.8060 4.6110 4.7390 5.0720 6.6000 -0.9170 -1.0112 0.3228 0.8736 0.9162 1.4025 2.0948 1.4415 -0.5074 -3.1440 91-Days 5.0310 5.1850 5.6070 5.2580 3.1490 2.9730 3.6800 3.7060 3.6730 N.I. -2.3150 -1.6632 -0.4952 0.4496 0.2792 0.5695 1.1638 0.4085 -1.9064 N.I. 182-Days 6.2650 5.9720 6.4240 5.5580 3.6880 3.7130 4.7760 4.7150 4.6700 N.I. -1.0810 -0.8762 0.3218 0.7496 0.8182 1.3095 2.2598 1.4175 -0.9094 N.I. 364-Days 7.2720 6.4100 7.3090 6.1530 4.1650 5.1740 5.5300 5.5890 5.3840 6.6000 -0.0740 -0.4382 1.2068 1.3446 1.2952 2.7705 3.0138 2.2915 -0.1954 -3.1440

1 Refers to the New MRR based on combined transactions on time deposits and promissory notes of reporting commercial banks. 2 Refers to the weighted average interest rate of reporting commercial banks' interest incomes on their outstanding peso-denominated loans 3 Weighted average of transacted rates 4 Nominal interest rate less inflation rate p Preliminary N.T. - No Transactions N.I. - No Issue Source: Bangko Sentral ng Pilipinas 7 NUMBER OF FINANCIAL INSTITUTIONS 1 as of periods indicated

2006 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

TOTAL 20,152 20,396 20,686 20,953 21,030 21,149 21,259 21,536 21,636 21,772 Head Offices 7,102 7,181 7,230 7,264 7,274 7,307 7,342 7,367 7,390 7,382 Branches/Agencies 13,050 13,215 13,456 13,689 13,756 13,842 13,917 14,169 14,246 14,390

A. BANKS 7,672 7,693 7,679 7,710 7,704 7,738 7,736 7,744 7,743 7,769 Head Offices 872 871 865 862 861 858 852 847 845 841 Branches/Agencies 6,800 6,822 6,814 6,848 6,843 6,880 6,884 6,897 6,898 6,928

1. Commercial Banks 4,318 4,324 4,295 4,313 4,278 4,297 4,284 4,275 4,284 4,309 Head Offices 41 41 39 39 39 38 38 38 38 38 Branches/Agencies 4,277 4,283 4,256 4,274 4,239 4,259 4,246 4,237 4,246 4,271

2. Thrift Banks 1,312 1,316 1,318 1,322 1,338 1,333 1,337 1,336 1,318 1,314 Head Offices 85 85 84 84 84 83 82 82 80 80 Branches/Agencies 1,227 1,231 1,234 1,238 1,254 1,250 1,255 1,254 1,238 1,234

a. Savings and Mortgage Banks 833 837 843 844 852 850 860 861 850 844 Head Offices 32 32 33 33 33 33 33 33 33 33 Branches/Agencies 801 805 810 811 819 817 827 828 817 811

b. Private Development Banks 300 300 300 300 305 302 303 300 294 295 Head Offices 22 22 21 21 21 20 20 20 19 19 Branches/Agencies 278 278 279 279 284 282 283 280 275 276

c. Stock Savings and Loan Associations 162 162 162 165 167 167 160 161 160 161 Head Offices 26 26 26 26 26 26 25 25 24 24 Branches/Agencies 136 136 136 139 141 141 135 136 136 137

d. Micro Finance Banks 17 17 13 13 14 14 14 14 14 14 Head Offices 5 5 4 4 4 4 4 4 4 4 Branches/Agencies 12 12 9 9 10 10 10 10 10 10

3. Rural Banks 2,042 2,053 2,066 2,075 2,088 2,108 2,115 2,133 2,141 2,146 Head Offices 746 745 742 739 738 737 732 727 727 723 Branches/Agencies 1,296 1,308 1,324 1,336 1,350 1,371 1,383 1,406 1,414 1,423

B. NON -BANKING FINANCIAL INSTITUTIONS 12,480 12,703 13,007 13,243 13,326 13,411 13,523 13,792 13,893 14,003 Head Offices 6,230 6,310 6,365 6,402 6,413 6,449 6,490 6,520 6,545 6,541 Branches/Agencies 6,250 6,393 6,642 6,841 6,913 6,962 7,033 7,272 7,348 7,462

1. Investment Houses 39 39 39 39 39 39 39 39 39 39 Head Offices 26 26 26 26 26 26 26 26 26 26 Branches/Agencies 13 13 13 13 13 13 13 13 13 13

2. Finance Companies 55 55 55 55 55 55 56 56 55 53 Head Offices 28 28 28 28 28 28 29 29 28 26 Branches/Agencies 27 27 27 27 27 27 27 27 27 27

3. Investment Companies 10 10 10 10 10 10 10 10 10 6 Head Offices 10 10 10 10 10 10 10 10 10 6 Branches/Agencies 0 0 0 0 0 0 0 0 0 0

4. Securities Dealers/Brokers 18 18 18 18 18 18 18 18 18 17 Head Offices 18 18 18 18 18 18 18 18 18 17 Branches/Agencies 0 0 0 0 0 0 0 0 0 0

5. Pawnshops 12,075 12,298 12,602 12,839 12,926 13,011 13,122 13,391 13,493 13,612 Head Offices 5,911 5,991 6,046 6,084 6,099 6,135 6,177 6,207 6,233 6,238 Branches/Agencies 6,164 6,307 6,556 6,755 6,827 6,876 6,945 7,184 7,260 7,374

6. Lending Investors 2 2 2 2 2 2 2 2 2 2 Head Offices 2 2 2 2 2 2 2 2 2 2 Branches/Agencies 0 0 0 0 0 0 0 0 0 0

7. Non-Stock Savings and Loan Associations 119 119 119 119 116 116 116 116 116 116 Head Offices 82 82 82 82 79 79 77 77 77 77 Branches/Agencies 37 37 37 37 37 37 39 39 39 39

8. Private Insurance Companies 2 148 p 148 p 148 p 148 p 148 p 148 p 148 p 148 p 148 p 148 p Head Offices 139 139 139 139 139 139 139 139 139 139 Branches/Agencies 9 9 9 9 9 9 9 9 9 9

9. Government Non-Banks 4 4 4 4 4 4 4 4 4 4 Head Offices 4 4 4 4 4 4 4 4 4 4 Branches/Agencies 0 0 0 0 0 0 0 0 0 0

10. Venture Capital Coporations 4 4 4 4 3 3 3 3 3 1 Head Offices 4 4 4 4 3 3 3 3 3 1 Branches/Agencies 0 0 0 0 0 0 0 0 0 0

11. Credit Card Companies 6 6 6 5 5 5 5 5 5 5 Head Offices 6 6 6 5 5 5 5 5 5 5 Branches/Agencies 0 0 0 0 0 0 0 0 0 0

1 Refers to the number of financial establishments which includes the head offices and branches; excludes the Bangko Sentral ng Pilipinas. 2 Covers only the head offices and foreign branches. p Preliminary 8 TOTAL RESOURCES OF THE FINANCIAL SYSTEM 1 as of period indicated; in billion pesos

2006 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

TOTAL 5,606.4 p 5,840.1 p 5,862.3 p 6,257.1 p 6,385.7 p 6,402.6 p 6,359.6 p 6,562.5 p 6,602.0 p 6,723.8 p

Banks 4,438.7 4,664.0 4,667.5 4,985.6 5,091.7 5,091.3 5,051.2 5,244.7 5,284.2 p 5,406.0 p

Commercial Banks 3,953.8 4,148.2 4,118.1 4,392.6 4,460.9 4,456.4 4,399.4 4,578.3 4,602.4 p 4,724.2 c

Thrift Banks 364.8 390.0 419.0 453.8 484.9 482.2 495.1 501.8 510.4 a 510.4 a Savings and Mortgage Banks 274.9 292.9 315.8 346.8 373.6 368.8 360.9 373.1 366.9 a 366.9 a Private Development Banks 70.0 74.7 74.2 77.7 81.0 81.5 80.2 81.6 77.4 a 77.4 a Stock Savings and Loan Associations 19.3 21.7 28.4 28.7 29.7 31.4 53.4 46.4 65.4 a 65.4 a Micro Finance Banks 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.7 0.7 a 0.7 a

Rural Banks 120.2 125.8 130.4 139.3 145.9 152.7 156.7 164.6 171.4 171.4 d

Non-Banks 2 1,167.7 p 1,176.1 p 1,194.8 p 1,271.5 p 1,293.9 p 1,311.3 p 1,308.4 p 1,317.8 p 1,317.8 b 1,317.8 b

1 Excluding the Bangko Sentral ng Pilipinas 2 Includes investment houses; finance companies;;investment companies; securities dealers/brokers; pawnshops; lending investors; non-stock savings and loan associations; mutual building and loan associations; venture capital corporations; credit card companies; and private and government insurance companies (SSS and GSIS). p preliminary a As of end-Feb 2008 b As of end-Dec 2007 c As of end-May 2008 d As of end-Mar 2008 Source: Bangko Sentral ng Pilipinas 9 RATIOS OF NON-PERFORMING LOANS (NPL) AND LOAN LOSS PROVISIONS (LLP) TO TOTAL LOANS OF THE BANKING SYSTEM as of periods indicated

TOTAL NPL/TOTAL LOANS TOTAL LLP/TOTAL LOANS Commercial Thrift Rural Commercial Thrift Rural Total Total Banks Banks Banks Banks Banks Banks

2006 Mar 8.290 8.007 9.596 12.026 6.063 6.294 4.601 4.134 Jun 7.733 7.391 9.205 12.075 5.756 5.919 4.930 4.071 Sep 7.722 7.431 8.771 11.626 5.905 6.120 4.811 3.991 Dec 6.108 5.662 8.220 10.867 4.611 4.679 4.055 4.589

2007 Mar 5.704 5.275 7.267 10.924 4.199 4.285 3.667 3.879 Jun 5.720 5.208 7.864 10.568 4.297 4.370 3.969 3.679 Sep 5.660 5.191 7.482 10.097 4.453 4.604 3.723 3.475 Dec 4.932 4.448 6.846 9.952 4.027 4.151 3.235 3.627

2008 Mar 5.024 p 4.544 6.692 a 9.819 4.068 p 4.233 3.100 a 3.568 May 4.678 p 4.173 6.692 a 9.819 b 3.843 p 3.955 3.100 a 3.568 b

1 Data include banks under liquidation, foreign office transactions and interbank loans. p preliminary a As of February 2008 b As of March 2008 10 STOCK MARKET TRANSACTIONS 1 volume in million shares; value in million pesos

2006 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

VOLUME 88,752 174,494 171,065 166,779 373,908 308,551 250,668 224,703 98,844 82,978 Financials 886 1,544 823 1,708 1,593 2,435 1,996 1,461 2,196 630 Industrial 3,481 2,570 8,524 14,710 10,193 6,075 14,889 11,546 5,476 4,644 Holding Firms 11,466 12,389 13,311 24,057 54,576 75,249 64,434 63,813 10,915 6,581 Property 6,808 12,094 12,013 19,211 36,270 32,503 20,206 12,622 10,385 15,894 Services 33,637 24,069 11,081 23,780 31,408 29,544 27,472 16,295 11,988 6,870 Mining and Oil 32,473 121,829 125,314 83,307 239,869 162,742 121,627 118,839 57,880 48,358 SME 2 0 0 7 0 144127 4 0

VALUE 122,715 134,504 106,477 208,714 295,805 359,665 351,785 330,998 211,646 172,582 Financials 16,978 32,701 14,307 44,591 38,289 52,748 52,703 38,688 40,322 19,763 Industrial 31,208 14,568 16,129 51,234 55,676 85,265 83,081 110,877 51,787 41,734 Holding Firms 11,436 13,132 23,989 22,456 48,421 66,151 46,500 43,098 23,742 25,518 Property 11,210 23,069 16,598 39,552 67,950 74,754 76,387 51,489 34,253 25,811 Services 47,462 35,807 27,826 43,554 65,343 56,817 69,407 53,182 48,022 49,068 Mining and Oil 4,413 15,226 7,629 7,507 20,124 23,928 23,562 33,434 13,513 10,686 SME 7 0 0 43 1 2 145 231 9 1

Composite Index (Average) 2,155 2,248 2,420 2,827 3,170 3,469 3,480 3,653 3,127 2,679

1 Starting January 2006, new sector classification was implemented. Source: Philippine Stock Exchange 11 HISTORY OF PHILIPPINE SOVEREIGN CREDIT RATINGS

Foreign Currency Rating Local Currency Rating Date Long-term Short-term Outlook Long-term Short-term Outlook

STANDARD AND POORS' 2 Jul 1993 BB- - Stable - - - 2 Nov 1994 BB- - Positive BBB - Positive 23 Mar 1995 BB- - Positive BBB A-2 Positive 30 May 1995 BB- - Positive BBB+ A-2 Positive 21 Feb 1997 BB+ - Positive A- A-1 Positive 25 Sep 1997 BB+ B Stable A- A-1 Stable 23 Feb 1998 BB+ B Negative BBB+ A-2 Negative 6 Jan 1999 BB+ B Stable BBB+ A-2 Stable 19 Oct 2000 BB+ B Negative BBB+ A-2 Negative 4 Apr 2002 BB+ B Stable BBB+ A-2 Stable 28 Oct 2002 BB+ B Negative BBB+ A-2 Negative 24 Apr 2003 BB B Stable BBB A-3 Stable 29 Jul 2004 BB B Stable BBB- A-3 Stable 17 Jan 2005 BB- B Stable BB+ B Stable 11 Jul 2005 BB- B Negative BB+ B Negative 3 Nov 2005 BB- B Negative BB+ B Negative 9 Feb 2006 BB- B Stable BB+ B Stable 12 Jun 2007 BB- B Stable BB+ B Stable 18 Apr 2008 BB- B Stable BB+ B Stable

MOODY'S INVESTORS SERVICE 11 May 1995 Ba2 - - - - - 22 Jan 1997 Ba2 - RUR 1 --- 7 Mar 1997 Ba2 - Positive - - - 18 May 1997 Ba1 - Stable - - - 4 Sep 1998 Ba1 - Stable Baa3 - - 27 Oct 2000 Ba1 - Negative Baa3 - - 3 Feb 2002 Ba1 - Stable Baa3 - Stable 8 Jan 2003 Ba1 - Stable Baa3 - Negative 29 Sep 2003 Ba1 - Negative Baa3 - Negative 26 Nov 2003 Ba1 - RUR 1 Baa3 - RUR 1 27 Jan 2004 Ba2 - Negative Ba2 - Negative 9 Nov 2004 Ba2 - RUR 1 Ba2 - RUR 1 16 Feb 2005 B1 - Stable B1 - Stable 13 Jul 2005 B1 - Negative B1 - Negative 2 Nov 2006 B1 - Stable B1 - Stable 25 Jan 2008 B1 - Positive B1 - Positive

FITCH RATINGS 2 8 Jul 1999 BB+ B - BBB - - 21 Sep 2000 BB+ B Stable BBB - - 17 Jan 2001 BB+ B RUR 1 BBB - - 15 Mar 2001 BB+ B Stable BBB- - - 25 Nov 2002 BB+ B Negative BBB- - - 12 Jun 2003 BB B Stable BBB- - - 7 Dec 2004 BB B Negative BB+ - Negative 26 May 2005 BB B Stable BB+ - Stable 11 Jul 2005 BB B Negative BB+ - Negative 13 Feb 2006 BB B Stable BB+ - Stable 17 Aug 2006 BB B Stable BB+ - Stable 5 Mar 2007 BB B Stable BB+ - Stable 27 Jun 2008 BB B Stable BB+ - Stable

1 RUR - Rating under Review 2 Fitch IBCA merged with Duff and Phelps in 2000. Since 2005, Fitch Ratings has assigned Issuer Default Ratings (IDR) to all the sovereigns it currently rates. The sovereign foreign and local currency IDRs that have been assigned are the same as the previous long- and short-term credit ratings assigned to senior unsecured debt. Note: Non-investment grade: Ba1 (Moody's), BB+ (S&P) and BB+ (Fitch). Modifiers, numerical or otherwise, ranks instruments in the same rating category. For S&P and Fitch, the plus "+" mofifier indicates higher standing within the group. For Moody's, the number 1 numerical modifier indicates the instrument ranks in the higher end of the rating category. 12 PHILIPPINES: BALANCE OF PAYMENTS for periods indicated

Growth Levels (in million US dollars) Rates ITEM (in percent) 2007 r 2008 p 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q2

Current Account 1,909 1,671 1,006 1,715 884 823 -50.7

Goods and Services -843 -2,016 -2,170 -2,105 -2,274 -3,477 -72.5 Export 13,893 14,150 14,758 15,159 14,758 15,402 8.8 Import 14,736 16,166 16,928 17,264 17,032 18,879 16.8

Goods 1 -1,089 -2,078 -2,492 -2,552 -2,744 -3,660 -76.1 Credit: Exports 11,948 12,221 12,555 12,788 12,301 12,855 5.2 Debit: Imports 13,037 14,299 15,047 15,340 15,045 16,515 15.5

Services 246 62 322 447 470 183 195.2 Credit: Exports 1,945 1,929 2,203 2,371 2,457 2,547 32.0 Debit: Imports 1,699 1,867 1,881 1,924 1,987 2,364 26.6

Income -663 256 -77 -58 -482 414 61.7 Credit: Receipts 1,154 1,314 1,520 1,500 1,683 1,573 19.7 Debit: Disbursements 1,817 1,058 1,597 1,558 2,165 1,159 9.5

Current Transfers 3,415 3,431 3,253 3,878 3,640 3,886 13.3 Credit: Receipts 3,493 3,541 3,354 4,009 3,731 3,996 12.8 Debit: Disbursements 78 110 101 131 91 110 0.0

Capital and Financial Account 539 -395 3,254 -509 755 442 211.9

Capital Account 15 -21 18 12 21 9 142.9 Credit: Receipts 28 29 30 21 33 24 -17.2 Debit: Disbursements 13 50 12 9 12 15 -70.0

Financial Account 524 -374 3,236 -521 734 433 215.8 Direct Investment 1,316 -2,731 530 371 526 216 107.9 Debit: Assets, Residents' Investments Abroad 72 3,276 61 33 -6 77 -97.6 Credit: Liabilities, Non-Residents' Investments in the Phil. 1,388 545 591 404 520 293 -46.2

Portfolio Investment 628 1,719 1,696 339 445 -636 -137.0 Debit: Assets, Residents' Investments Abroad 1,123 -607 -673 -656 -1,067 -1,034 -70.3 Credit: Liabilities, Non-Residents' Investments in the Phil. 1,751 1,112 1,023 -317 -622 -1,670 -250.2

Financial Derivatives -60 -90 -18 -120 -88 61 167.8 Debit: Assets, Residents' Investments Abroad -30 -11 -56 -73 -92 -99 -800.0 Credit: Liabilities, Non-Residents' Investments in the Phil. -90 -101 -74 -193 -180 -38 62.4

Other Investment -1,360 728 1,028 -1,111 -149 792 8.8 Debit: Assets, Residents' Investments Abroad 964 2,368 -22 1,542 -2,065 402 -83.0 Credit: Liabilities, Non-Residents' Investments in the Phil. -396 3,096 1,006 431 -2,214 1,194 -61.4

Net Unclassified Items -995 458 -756 660 74 -1,044 -327.9

Overall BOP Position 1,453 1,734 3,504 1,866 1,713 221 -87.3 Debit: Change in Reserve Assets 1,465 1,716 3,519 1,850 1,727 705 -58.9

Credit: Change in Reserve Liabilities 12 -18 15 -16 14 484 2,788.9 Use of Fund Credits 0 0 0 0 0 0 0 Short-term 12 -18 15 -16 14 484 2,788.9 p preliminary r Revised to reflect: a) late reports; b) post-audit adjustments; and c) final data from companies. 1 Data on goods import for 2007 were adjusted to reflect preliminary adjustments on the valuation of raw materials for electronics and garments exports. Technical Notes: 1. Net balances in the current and capital and financial accounts are derived by deducting debit entries from credit entries. 2. Overall BOP position is determined by deducting change in reserve liabilities from change in reserve assets. 3. Net unclassifed items is an offsetting account to the overstatement or understatement in either receipts or payments of the recorded BOP components vis-à-vis the overall BOP position. 4. Change in KBs NFA as a BOP entry is derived by deducting foreign assets from foreign liabilities, consistent with the principle described in technical note No. 1. 5. Basic balance represents a BOP position that excludes transactions that are volatile and are in the short run susceptible to being reversed. It is derived using the following formula: Overall BOP position less (Net portfolio investments + net short-term liabilities) less errors and omissions. In the old BOP series, all transactions in assets and liabilities of commercial banks were deemed to be long-term. With the refinements in the new series on the maturity structure of KBs' transactions, short-term financial transactions of KBs are now excluded from the basic balance. Source: Bangko Sentral ng Pilipinas 12a EXPORTS BY MAJOR COMMODITY GROUPS for periods indicated volume in 000 metric tons; unit price in U.S.$/m.t.; fob value in million U.S. dollars

2007 r 2008 p C o m m o d i t i e s Q1 Q2 Q3 Q4 Q1 Q2 Volume Price Value Volume Price Value Volume Price Value Volume Price Value Volume Price Value Volume Price Value

Coconut Products 117 244 247 337 330 412 Copra 000000000000000000 Coconut Oil 111 663 74 248 755 187 222 861 191 308 916 282 248 1,123 278 253 1,348 341 Desiccated Coconut 31 1,115 35 34 1,271 43 35 1,246 44 30 1,237 38 25 1,318 33 35 1,542 54 Copra Meal/Cake 122 54 7 125 94 12 84 112 9 151 101 15 151 116 18 119 134 16 Others 2 2 3 2 2 2 Sugar and Products 20 28 38 2 15 26 Centrifugal & Refined 50 332 17 75 342 26 108 321 35 2 380 1 45 297 13 75 298 22 Molasses 30 92 3 21 85 2 6 101 1 6 55 -- 8 87 1 22 108 2 Others 1 1 2 1 1 1 Fruits and Vegetables 169 205 183 193 171 197 Canned Pineapple 35 627 22 45 626 28 56 623 35 61 619 38 44 703 31 38 694 26 Pineapple Juice 15 437 7 18 430 8 21 408 8 19 420 8 21 432 9 18 430 8 Pineapple Concentrates 11 853 9 13 851 11 8 802 7 10 845 8 9 890 8 6 836 5 Bananas 504 182 92 591 185 110 526 186 98 579 175 101 479 184 88 626 188 118 Mangoes 7 745 5 10 917 9 5 992 5 5 895 4 5 895 4 8 988 8 Others 34 39 30 33 30 32 Other Agro-Based Products 114 126 132 149 126 159 Fish, Fresh or Preserved 25 2,395 59 23 3,063 70 23 3,251 76 28 2,984 83 23 2,619 60 28 2,919 83 of which: Shrimps & Prawns 1 6,133 4 1 6,624 4 .. 5,926 3 1 6,342 3 .. 5,729 1 .. 5,489 1 Coffee, Raw, not Roasted 000000000000000000 Abaca Fibers 14 356 5 4 1,011 4 3 1,067 3 7 393 3 3 1,482 4 3 1,653 5 Tobacco,Unmanufactured 4 1,776 7 3 2,204 8 5 2,631 13 6 2,344 15 4 2,560 11 7 2,150 15 Natural Rubber 13 749 10 5 1,760 9 9 1,219 11 8 1,381 11 10 1,308 13 8 1,546 13 Ramie Fibers, Raw or Processed 000000000000000000 Seaweeds, Dried 3 1,533 5 3 2,118 6 3 1,696 5 3 1,877 6 5 2,002 9 5 1,890 9 Rice 000000000000000000 Others 28 29 23 32 29 35 Forest Products 1 10 8 12 5 8 11 Logs 000000000000000000 Lumber 43 99 4 58 60 3 60 77 5 47 58 3 50 68 3 64 55 3 Plywood 11 459 5 9 316 3 14 422 6 3 392 1 10 377 4 12 614 7 Veneer Sheets/Corestocks 1 611 1 3 511 1 1 585 1 1 626 1 1 640 1 1 715 1 Others ------Mineral Products 525 732 573 774 563 726 Copper Concentrates 18 1,426 26 19 1,680 32 19 1,938 37 25 1,723 43 18 1,358 25 20 1,805 36 Copper Metal 48 6,221 300 43 6,927 297 28 9,382 264 56 7,721 432 39 6,982 270 45 8,304 377 Gold 2 29 619 18 30 652 19 37 631 23 44 733 32 25 811 21 35 888 31 Iron Ore Agglomerates 1,537 28 42 1,459 29 42 1,184 44 52 1,226 29 36 1,097 29 32 1,424 24 34 Chromium Ore 27 82 2 47 66 3 33 33 1 40 35 1 91 29 3 50 65 3 Nickel 0 0 0 0 0 0 Others 137 339 196 229 213 244 Petroleum Products 153 316 276 364 320 320 Manufactures 10,726 10,435 10,974 10,821 10,587 10,823 Electronic Products 7,872 7,598 7,760 7,854 7,514 7,624 Other electronics 279 248 310 320 351 350 Garments 594 533 653 528 516 475 Textile Yarns/Fabrics 51 49 55 53 49 55 Footwear 9 7 8 7 9 8 Travel Goods and Handbags 4 28 34 38 22 21 Wood Manufactures 180 203 193 193 210 236 Furnitures & Fixtures 58 61 63 60 62 61 Chemicals 244 276 251 262 294 271 Non-Metallic Mineral Manufactures 55 47 52 69 51 56 Machinery & Transport Equipment 427 457 488 485 491 523 Processed Food and Beverages 153 169 199 207 183 246 Iron & Steel 66 60 68 71 56 95 Baby Carr., Toys, Games & Sporting Goods 30 36 47 38 29 38 Basketwork, Wickerwork, & Other Articles of Plaiting Materials 15 14 14 14 13 10 Misc. Manufactured Articles, n.e.s. 79 77 95 91 83 92 Others 608 571 684 530 654 661 Special Transactions 366 305 324 463 417 388 TOTAL EXPORTS, as per NSO Foreign Trade Statistics 12,200 12,399 12,759 13,107 12,536 13,062 Coverage Adjustments -252 -178 -204 -319 -235 -207 TOTAL EXPORTS, BPM5 11,948 12,221 12,555 12,788 12,301 12,855

.. Less than one thousand metric tons -- Less than one million US$ p Preliminary r Revised based on NSO press released on 14 May 2008. Note: Components may not add up to total due to rounding 12b IMPORTS BY MAJOR COMMODITY GROUP for periods indicated volume in 000 metric tons; unit price in U.S.$/mt; f.o.b. value in million U.S. dollars

2007 r 2008 Commodities Q1 Q2 Q3 Q4 Q1 Q2 p Volume Price Value Volume Price Value Volume Price Value Volume Price Value Volume Price Value Volume Price Value

Capital Goods 2,208 2,251 2,516 2,736 2,309 2,392 Power Generating & Specialized Machines 556 568 638 705 587 6 68 Office & EDP Machines 788 693 913 915 760 739 Telecommunication Eqpt. & Elect. Mach. 465 490 519 567 505 489 Land Transport Eqpt. excl. Passenger Cars & Motorized Cycle 157 147 180 183 158 175 Aircraft, Ships & Boats 119 214 143 223 180 196 Prof. Sci. & Cont. Inst.; Photo- 123 139 123 143 119 125 graphic Eqpt. & Optical Goods Raw Materials & Intermediate Goods 8,135 8,231 8,372 8,192 8,087 8,439 Unprocessed Raw Materials 428 386 417 420 430 492 Wheat 466 193 90 543 190 103 410 213 87 377 288 109 549 349 192 361 453 164 Corn 3 747 2 5 1,333 7 140 226 32 4 955 4 4 842 3 7 1,009 8 Unmilled cereals excl. rice & corn 1 2 1 3 3 3 Crude materials, inedible 288 231 261 257 196 265 Pulp & waste paper 18 15 15 14 16 16 Cotton 4 1,222 4 5 1,247 7 5 1,192 6 3 1,312 4 4 1,479 4 3 1,500 5 Syn. fibers 11 1,502 17 12 1,681 20 12 1,816 21 10 2,256 23 9 2,003 18 7 2,268 17 Metalliferous ores 134 51 115 108 63 104 Others 115 138 104 108 94 123 Tobacco, unmanufactured 47 43 36 47 36 52 Semi-Processed Raw Materials 7,707 7,845 7,955 7,772 7,657 7,947 Feeding stuffs for animals 542 245 133 322 278 90 365 296 108 489 305 149 450 384 173 426 370 158 Animal & vegetable oils & fats 53 38 35 41 46 63 Chemical 942 945 1,081 1,013 1,183 1,330 Chemical compounds 258 247 321 286 320 314 Medicinal & pharmaceutical chemicals 146 151 151 137 167 171 Urea 113 171 19 160 235 38 134 216 29 98 268 26 136 312 42 195 372 72 Fertilizer excl. urea 212 150 32 201 144 29 186 214 40 197 228 45 249 301 75 325 530 172 Artificial resins 238 222 269 253 295 292 Others 249 258 271 266 284 309 Manufactured goods 947 1,136 1,022 1,038 958 1,229 Paper & paper products 168 688 116 169 676 114 181 667 121 160 708 113 173 709 122 192 733 141 Textile yarn, fabrics & made-up articles 199 246 206 202 166 182 Non-metallic mineral mftures. 45 56 63 68 60 66 Iron & steel 430 599 258 560 645 361 367 727 267 505 664 335 542 620 336 670 812 545 Non-ferrous metals 141 171 190 150 125 136 Metal products 124 118 110 111 87 98 Others 64 70 65 59 62 61 Embroideries 266 267 270 236 207 203 Mat/Acc for the mftr. of elect. eqpt. 5,340 5,325 5,397 5,272 5,064 4,950 Iron ore, not agglomerated 713 36 26 1,218 37 44 1,185 35 42 622 36 23 689 38 26 313 45 14 Mineral Fuels & Lubricant 1,641 2,390 2,626 2,936 3,044 3,432 Coal, Coke 1,323 42 56 1,741 46 79 979 44 43 1,483 39 58 1,093 46 50 1,095 43 47 Petroleum Crude 1 13.15 59.06 777 21.08 68.96 1,454 21.66 77.24 1,673 20.51 89.20 1,829 17.85 94.78 1,692 18.91 114.85 2,172 Others 1 11.31 71.51 808 10.20 83.99 857 10.11 89.93 909 10.80 97.05 1,049 11.71 111.17 1,302 14.78 82.05 1,213 Consumer Goods 865 1,171 1,289 1,343 1,318 1,903 Durable 424 483 553 571 554 627 Passenger cars & motorized cycle 212 247 309 299 296 338 Home appliances 51 54 55 78 72 66 Misc. manufactures 162 183 189 193 186 223 Non-Durable 441 688 735 772 764 1,276 Food & live animals chiefly for food 409 654 692 726 726 1,237 Dairy products 73 1,700 125 81 2,061 167 66 2,460 163 68 2,699 183 69 3,302 229 61 2,536 154 Fish & fish preparation 36 581 21 22 569 13 31 539 17 67 603 40 46 605 28 34 636 22 Rice 79 318 25 602 321 194 635 324 206 490 346 170 396 417 165 1,043 664 693 Fruits & vegetables 39 37 37 62 52 51 Others 199 243 269 271 253 318 Beverages & tobacco mfture. 9 13 17 22 15 15 Articles of apparel, access. 22 21 26 24 24 24 Special Transactions 183 160 184 211 190 199 Articles temporarily imported & exported 75 58 60 69 58 65 Others 108 102 124 142 132 134

TOTAL IMPORTS 2 13,032 14,203 14,987 15,418 14,948 16,365 Conceptual and Coverage Adjustments 5 96 60 -78 97 150 TOTAL IMPORTS, BPM5 13,037 14,299 15,047 15,340 15,045 16,515

1 Volume in million barrels; unit price in U.S.$/barrel 2 Include valuation adjustments to NSO data. r Revised based on the adjustments made by NSO that was released on 14 May 2008. p Preliminary Note: Note: Valuation Valuation adjustments adjustments include: include: a) Adjustments a.) Adjustments to NSO's raw to NSO's material raw imports material for imports electronics for electronics exports' for exports' 2007 and for 2008.the 1999 - 2001 series. b) Adjustments b.) Adjustments to NSO's raw to NSO's material raw imports material for imports garments for forgarments 2007 and fo the2008. 1999 - 2005 series. Source: National Statistics Office 13 INTERNATIONAL RESERVES OF THE BANGKO SENTRAL NG PILIPINAS as of periods indicated; in million US dollars

2006 2007 2008 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun

Gross International Reserves 20,645 21,123 21,593 22,967 24,684 26,383 30,902 33,751 36,624 36,712

Gold 2,797 2,904 2,746 2,941 3,008 2,928 3,034 3,541 3,834 3,963 SDRs 0 1 1 2 2 1 ... 1 ... 13 Foreign Investments 17,209 17,648 18,266 19,612 20,804 23,023 27,500 29,715 32,275 32,223 Foreign Exchange 513 442 452 280 738 298 232 356 371 370 Reserve Position in the Fund 126 129 129 132 132 133 136 138 144 143

Net International Reserves 20,013 20,502 21,343 22,953 24,659 26,376 30,880 33,744 36,603 36,206

Source: Bangko Sentral ng Pilipinas 14 EXCHANGE RATES OF THE PESO period averages; pesos per unit of foreign currency

New South US Japanese EMU Pound Singapore Hongkong Malaysian Thailand Indonesian Period Taiwan Korean Dollar Yen Euro Sterling Dollar Dollar Ringgit Baht Rupiah Dollar Won

2006 Ave 51.3143 0.4414 64.4473 94.5112 32.3020 6.6060 13.9972 1.3542 0.0056 1.5793 0.0538 Q1 51.8843 0.4439 62.4140 90.9607 31.8697 6.6884 13.9168 1.3196 0.0056 1.6081 0.0531 Q2 52.2146 0.4565 65.6478 95.4016 32.8576 6.7306 14.3285 1.3701 0.0057 1.6238 0.0550 Q3 51.3869 0.4423 65.5118 96.3133 32.5442 6.6079 14.0057 1.3639 0.0056 1.5694 0.0538 Q4 49.7714 0.4229 64.2156 95.3693 31.9364 6.3971 13.7376 1.3631 0.0055 1.5161 0.0531

2007 Ave 46.1484 0.3919 63.1489 92.3479 30.6124 5.9149 13.4272 1.4331 0.0051 1.4047 0.0497 Q1 48.6043 0.4072 63.7030 95.0271 31.7330 6.2254 13.8966 1.4346 0.0053 1.4773 0.0518 Q2 46.9322 0.3888 63.2916 93.2331 30.7872 6.0048 13.7009 1.4437 0.0052 1.4165 0.0505 Q3 45.9434 0.3898 63.1350 92.8769 30.2877 5.8852 13.2648 1.4684 0.0050 1.3954 0.0496 Q4 43.1136 0.3818 62.4659 88.2544 29.6415 5.5442 12.8466 1.3857 0.0047 1.3296 0.0468

2008 Ave 41.9773 0.4000 64.2803 82.8949 30.2809 5.3838 13.0458 1.3136 0.0045 1.3560 0.0426 Q1 40.9539 0.3889 61.3700 81.0404 29.0692 5.2541 12.6957 1.2939 0.0044 1.2991 0.0429 Q2 43.0007 0.4112 67.1906 84.7493 31.4927 5.5136 13.3959 1.3332 0.0047 1.4129 0.0423

Source: Bangko Sentral ng Pilipinas 14a EXCHANGE RATES OF THE PESO period averages; units of foreign currency per peso

New South US Japanese EMU Pound Singapore Hongkong Malaysian Thailand Indonesian Period Taiwan Korean Dollar Yen Euro Sterling Dollar Dollar Ringgit Baht Rupiah Dollar Won

2006 Ave 0.0195 2.2681 0.0155 0.0106 0.0310 0.1515 0.0715 0.7387 178.4957 0.6338 18.6093 Q1 0.0193 2.2534 0.0160 0.0110 0.0314 0.1495 0.0719 0.7578 179.1089 0.6220 18.8175 Q2 0.0192 2.1922 0.0152 0.0105 0.0304 0.1486 0.0698 0.7300 174.0687 0.6160 18.1908 Q3 0.0195 2.2618 0.0153 0.0104 0.0307 0.1514 0.0714 0.7332 177.4946 0.6374 18.5907 Q4 0.0201 2.3649 0.0156 0.0105 0.0313 0.1563 0.0728 0.7338 183.3106 0.6596 18.8382

2007 Ave 0.0212 2.5325 0.0158 0.0107 0.0323 0.1657 0.0735 0.6906 193.1554 0.6999 19.7606 Q1 0.0206 2.4562 0.0157 0.0105 0.0315 0.1606 0.0720 0.6976 186.9915 0.6769 19.3086 Q2 0.0213 2.5740 0.0158 0.0107 0.0325 0.1666 0.0730 0.6929 191.2427 0.7061 19.7919 Q3 0.0218 2.5674 0.0158 0.0108 0.0330 0.1699 0.0754 0.6812 201.2321 0.7167 20.1814 Q4 0.0232 2.6204 0.0160 0.0113 0.0338 0.1805 0.0779 0.7217 214.5354 0.7525 21.3721

2008 Ave 0.0238 2.5032 0.0156 0.0121 0.0331 0.1859 0.0767 0.7617 220.4099 0.7392 23.4801 Q1 0.0244 2.5744 0.0163 0.0123 0.0344 0.1903 0.0788 0.7734 225.6993 0.7703 23.2925 Q2 0.0233 2.4320 0.0149 0.0118 0.0318 0.1815 0.0747 0.7501 215.1204 0.7082 23.6676

Source: Bangko Sentral ng Pilipinas 14b EFFECTIVE EXCHANGE RATE INDICES OF THE PESO period averages; December 1980=100

N O M I N A L R E A L Major Trading Competing Countries Major Trading Competing Countries Partners 1 Broad 2 Narrow 3 Partners 1 Broad 2 Narrow 3

2006 12.91 28.17 55.52 69.99 109.01 153.85 Q1 12.98 28.27 55.96 69.58 108.00 153.58 Q2 12.64 27.55 54.30 67.95 105.94 149.77 Q3 12.81 28.08 55.25 70.07 110.25 155.76 Q4 13.20 28.76 56.58 72.34 111.86 156.28

2007 14.01 31.78 66.09 76.21 119.69 166.27 Q1 13.53 30.34 63.15 73.03 113.54 157.20 Q2 13.91 31.05 64.10 74.82 116.55 160.49 Q3 14.04 31.97 66.60 77.13 122.20 170.41 Q4 14.58 33.74 70.53 79.85 126.49 176.99

2008 14.52 34.66 72.24 81.45 131.98 181.21 Q1 14.98 35.42 73.92 82.72 133.14 183.49 Q2 14.06 33.89 70.56 80.19 130.81 178.94

1 U.S., Japan, European Monetary Union, United Kingdom 2 Singapore, South Korea, Taiwan, Malaysia, Thailand, Indonesia, Hongkong 3 Indonesia, Malaysia, Thailand Source: Bangko Sentral ng Pilipinas 15 TOTAL EXTERNAL DEBT 1 as of periods indicated; in million US dollars

31 March 2007 31 December 2007 31 March 2008 Short-term Medium & Short-term Medium & Short-term Medium & Total 2 Total 2 Total 2 Trade Non-Trade Long-Term 2 Trade Non-Trade Long-Term 2 Trade Non-Trade Long-Term 2

Grand Total 2,073 3,045 48,928 54,046 2,469 4,614 47,854 54,938 2,411 4,240 47,960 54,611

Public Sector 177 102 38,044 a 38,323 43 69 37,562 a 37,674 90 143 39,907 a 40,140

Banks 177 102 2,880 3,159 43 69 2,880 2,992 90 143 3,223 3,456 Bangko Sentral ng Pilipinas - - 287 287 - - 337 337 - - 333 333 Others 177 102 2,593 2,872 43 69 2,542 2,654 90 143 2,890 3,123

Non-Banks - - 35,164 35,164 - - 34,683 34,683 - - 36,684 36,684 CB-BOL - - 43 43 - - 40 40 - - 40 40 NG and Others - - 35,122 35,122 - - 34,643 34,643 - - 36,644 36,644

Private Sector 1,895 2,944 10,885 15,723 2,426 4,545 10,292 17,264 2,321 4,097 8,053 14,471

Banks 193 2,799 3,288 b 6,280 173 4,342 2,837 b 7,352 180 3,714 736 b 4,631 Foreign Bank Branches 28 1,458 2,538 4,023 d 17 2,643 2,205 4,866 d 18 1,800 65 1,883 d Domestic Banks 165 1,342 750 2,257 c 156 1,699 631 2,486 162 1,914 672 2,748 c

Non-Banks 1,703 144 7,597 e 9,444 2,253 203 7,455 c 9,911 2,141 383 7,316 c 9,840

1 External debt data were revised from 1990 onwards to reflect the reclassification of offshore banking units (OBUs) from non-resident to resident entities for statistical purposes. Starting March 2004, debt stock is adjusted to exclude holdings of residents of Philippine debt papers booked under the Trust Department of commercial banks. Total external debt covers BSP-approved/registered debt owed to non-residents, with classification by borrower based on primary obligor per covering loan/rescheduling debt covers agreement/document. 2 Inclusions: 31-Mar-07 31-Dec-07 31-Mar-08 a Cumulative foreign exchange revaluation on US dollar-denominated multi-currency loans from Asian Development Bank and World Bank amounting 37 106 264 b Accounts restructured under CB Circular No.1179 amounting to US$43 million. 43 43 63 c Liabilities of private development bank and rural banks 10 10 10 Exclusions: d Due to Head Office/Branches Abroad accounts of branches and offshore banking units of foreign banks operating in the Philippines 2,554 2,812 3,014 e Obligations under various capital lease agreements; 758 754 705 Loans without BSP approval/registration 4,476 7,357 7,411 Source: Bangko Sentral ng Pilipinas 16 SELECTED FOREIGN DEBT SERVICE INDICATORS for periods indicated; in million US dollars

2007 p 2008 p Q1 Q2 Q3 Q4 Total Q1

Debt Service Burden (DSB) 1 2,221 1,690 1,887 1,511 7,309 2,192 Principal 1,108 1,127 946 834 4,015 1,075 Interest 1,113 563 941 677 3,294 1,117

Export Shipments (XS) 11,948 12,221 12,555 12,788 49,512 12,301

Exports of Goods and Receipts from Services and Income (XGSI) 2 17,817 18,254 18,950 19,869 74,890 19,369

Current Account Receipts (CAR) 3 18,540 19,005 19,632 20,668 77,845 20,172

Gross National Product (GNP) 34,021 38,034 38,483 47,379 157,087 44,641

RATIOS (in %):

DSB to XS 18.59 13.83 15.03 11.82 14.76 17.82

DSB to XGSI 12.47 9.26 9.96 7.60 9.76 11.32

DSB to CAR 11.98 8.89 9.61 7.31 9.39 10.87

DSB to GNP 6.53 4.44 4.90 3.19 4.65 4.91

1 Debt service burden represents principal and interest payments after rescheduling. In accordance with the internationally- accepted concept, debt service burden consists of (a) principal and interest payments on fixed MLT credits including IMF credits, loans covered by the Paris Club and Commercial Banks rescheduling, and New Money Facilities; and (b) interest payments on fixed and revolving short-term liabilities of banks and non-banks but excludes (i) prepayments of future years' maturities of foreign loans and (ii) principal payments on fixed and revolving short-term liabilities of banks and non-banks. 2 Includes cash remittances of overseas Filipino workers that were coursed through and reported by commercial banks which are reflected under Compensation of Employees in the income account and workers' remittances in the Current Transfers account. 3 Based on the accounting principle under the Balance of Payments Manual, Fifth Edition which excludes (1) temporary exports and returned goods for exports of goods and (2) capital transfers in the computation of current account receipts. p preliminary Source: Bangko Sentral ng Pilipinas 17 SELECTED FOREIGN INTEREST RATES period averages; in percent

2006 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

US Prime Rate 7.4312 7.8989 8.2500 8.2500 8.2500 8.2500 8.1750 7.5203 6.1962 5.0947

US Discount Rate 5.4153 5.8841 6.2460 6.2500 6.2500 6.2500 5.9598 5.0392 3.6989 2.3371

US Federal Funds Rate 4.4649 4.8881 5.2570 5.2448 5.2627 5.2468 5.0345 4.4119 3.0942 1.9385

LIBOR (90 days) 4.7604 5.2140 5.4332 5.3686 5.3555 5.3579 5.4454 5.0293 3.2626 2.7508

SIBOR (90 days) 4.7664 5.2205 5.4378 5.3728 5.3604 5.3617 5.4544 5.0436 3.2735 2.7695

Source: Bloomberg, Asian Wall Street Journal, Reuters 18 BALANCE SHEET OF THE BANGKO SENTRAL NG PILIPINAS as of periods indicated; in billion pesos

2006 2007 2008 Mar Jun Sep Dec Mar Jun Sep Dec u Mar u Jun u

Assets 1,378.7 1,406.5 1,417.8 1,571.4 1,677.5 1,731.0 1,915.6 2,035.1 2,107.6 2,219.1

International Reserves 1,049.7 1,117.3 1,078.6 1,119.9 1,183.8 1,214.0 1,383.7 1,391.9 1,523.3 1,641.8 Foreign Exchange Receivable 17.2 4.1 4.1 4.1 4.1 0.0 0.0 0.0 0.0 0.0 Domestic Securities 87.6 67.3 120.6 222.5 258.7 258.1 270.0 329.3 340.5 323.8 Loans and Advances 111.4 111.3 111.0 118.1 118.8 112.0 105.9 103.8 107.5 107.7 Revaluation of International Reserves 41.7 49.8 102.9 15.1 0.0 Bank Premises and Other Fixed Assets 11.9 12.1 12.1 12.1 12.1 12.2 12.2 12.3 12.3 12.0 Derivative Instruments 11.7 Other Assets 100.9 94.4 91.3 94.7 100.0 93.2 94.1 94.8 108.9 122.1

Liabilities 1,125.4 1,137.8 1,161.0 1,304.6 1,417.2 1,505.1 1,684.5 1,860.7 1,959.0 2,061.3

Currency Issue 296.1 294.5 290.7 384.5 347.2 348.2 343.3 433.9 385.6 384.2 Deposits 415.2 433.9 469.8 571.2 686.9 901.2 1,070.9 1,060.0 1,270.8 1,228.6 Reserve Deposits of Banks & Other FIs 145.0 168.0 192.3 331.9 426.8 419.6 418.6 412.4 423.5 473.2 of which: DMBs 133.0 155.0 179.9 309.6 401.4 395.5 396.0 391.5 400.7 447.5 Special Deposit Accounts 9.6 25.5 50.2 51.8 53.9 282.0 468.0 385.5 596.5 451.0 Other Deposits of Banks & Other FIs 8.5 6.3 5.0 2.6 2.7 2.6 2.5 2.6 2.4 2.4 Treasurer of the Philippines 157.8 141.4 134.0 108.5 119.6 111.3 106.9 167.4 160.9 181.8 Other Foreign Currency Deposits 15.5 17.1 14.5 13.6 17.2 18.1 10.2 28.1 23.5 22.7 Foreign Financial Institutions 77.3 71.1 66.3 55.1 55.0 52.1 52.0 52.0 51.9 48.4 Other Deposits 1.5 4.4 7.5 7.7 11.7 15.4 12.7 12.1 12.1 49.0 Foreign Loans Payable 134.1 108.9 87.2 51.7 15.9 6.7 6.2 5.9 5.7 28.4 Foreign Bonds Payable 45.5 46.1 44.5 39.6 39.7 36.4 36.1 32.6 33.5 35.3 Derivative Instruments 0.1 -0.1 0.1 3.9 0.1 2.1 4.9 18.3 0.2 0.1 Allocation of SDRs 8.6 9.2 8.7 8.7 8.5 8.2 8.2 7.7 8.0 8.6 Revaluation of International Reserves 1 39.7 62.0 29.5 9.1 3.2 0.0 0.0 0.0 0.0 60.5 BSP Debt Instruments 177.3 170.9 222.7 228.7 307.8 194.4 206.1 295.2 247.9 307.3 Other Liabilities 8.7 12.4 7.8 7.3 7.8 7.9 8.7 7.2 7.1 8.4

Net Worth 253.4 268.7 256.8 266.8 260.3 225.9 231.1 174.4 148.6 157.7

Capital 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 Surplus/Reserves 243.4 258.7 246.8 256.8 250.3 215.9 221.1 164.4 138.6 147.7

Note: Details may not add up to totals due to rounding u Unaudited; starting with December 2005, BSP financial statements have been prepared in compliance with some of the requirements of the Philippine Financial Reporting Standards (PFRS) and Philippine Accounting Standards (PAS), both of which have been aligned with the International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS). Thus, December 2005 to September 2007 figures are not comparable with those in prior periods. 1 Starting January 2004, all revaluation accounts, namely, FX differential account, revaluation of international reserves, revaluation of gold holdings-price fluctuation were consolidated in the account "net revaluation of international reserves". Source: Bangko Sentral ng Pilipinas 19 INCOME POSITION OF THE BANGKO SENTRAL NG PILIPINAS for periods indicated; in billion pesos

2006 2007 2008 Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 u FY u Q1 u Q2 u

Revenues 12.558 13.366 13.071 35.733 74.728 14.248 24.304 28.372 26.888 93.812 22.809 19.632

Interest Income 11.879 12.455 12.330 14.037 50.701 14.057 15.105 17.011 17.414 63.587 17.518 18.107 International Reserves 8.982 10.032 10.035 10.578 39.627 10.348 11.770 13.690 13.383 49.191 13.288 13.616 Domestic Securities 1.531 1.543 1.432 2.389 6.895 2.703 2.557 2.474 2.771 10.505 3.421 3.514 Loans and Advances 0.981 0.932 0.757 1.002 3.672 0.915 0.803 0.755 1.218 3.691 0.773 0.660 Others 0.385 -0.052 0.106 0.068 0.507 0.091 -0.025 0.092 0.042 0.200 0.036 0.317 Miscellaneous Income 0.618 0.846 0.712 21.656 a 23.832 a 0.100 9.028 11.325 9.424 29.877 5.245 1.411 Net Income from Branches 0.061 0.065 0.029 0.040 0.195 0.091 0.171 0.036 0.050 0.348 0.046 0.114

Expenses 12.249 12.697 13.323 13.726 51.995 13.181 15.268 19.109 19.487 67.045 19.133 20.465

Interest Expenses 9.160 10.192 10.430 11.072 40.854 10.825 11.742 15.349 15.099 53.015 16.613 17.096 Legal Reserve Deposits of Banks 0.812 0.840 0.978 2.149 4.779 2.738 2.504 2.549 2.705 10.496 2.951 3.026 National Government Deposits 1.943 1.951 2.069 1.596 7.559 1.343 1.671 1.473 0.474 4.961 1.878 1.971 BSP Debt Instruments 3.241 3.844 4.111 3.818 15.014 4.144 3.914 3.305 3.437 14.800 3.063 3.685 Special Deposit Accounts 0.055 0.360 0.615 1.182 2.212 0.957 2.656 7.125 7.547 18.285 7.788 7.409 Loans Payable and OtherForeign Currency Deposits 3.109 3.197 2.657 2.327 11.290 1.643 0.984 0.881 0.933 4.441 0.933 0.918 Other Liabilities 0.000 0.000 0.000 0.000 0.000 0.000 0.013 0.016 0.003 0.032 0.000 0.087 Cost of Minting/Printing of Currency 1.181 -0.231 0.547 -0.109 1.388 0.432 0.768 0.718 1.213 3.131 0.462 0.805 Taxes and Licenses 0.308 0.286 0.265 0.317 1.176 0.301 0.272 0.180 0.161 0.914 0.239 0.161 Others 1.600 2.450 2.081 2.446 8.577 1.623 2.486 2.862 3.014 9.985 1.819 2.403

Net Income Before Gain/Loss(-) on FXR and Price Fluctuations, Provision for Income Tax and Capital Reserves 0.309 0.669 -0.252 22.007 22.733 1.067 9.036 9.263 7.401 26.767 3.676 -0.833

Gain/Loss(-) on Foreign Exchange Rate and Price Fluctuations -2.409 16.767 -17.580 -15.714 a -18.936 a -5.161 -36.669 -6.463 -65.417 -113.710 -28.479 18.048

Provision for Income Tax 0.000 4.298 -0.260 -4.026 0.012 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Capital Reserves

Net Income Available for Distribution -2.100 13.138 -17.572 10.319 3.785 -4.094 -27.633 2.800 -58.016 -86.943 -24.803 17.215 u Unaudited; starting with December 2005, BSP financial statements have been prepared in compliance with some of the requirements of the Philippine Financial Reporting Standards (PFRS) and Philippine Accounting Standards (PAS), both of which have been aligned with the International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS). Thus, starting December 2005 to November 2006, figures are not comparable with those in prior periods. a Trading gains in foreign and local currency financial assets were reclassified under miscellaneous income for comparability with the 2007 classification. Source: Bangko Sentral ng Pilipinas