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Foreign funds getting out of Philippines stock market

MANILA: Asian stock markets are generally thought to be recovering steadily from the 1997 economic crisis but the Philippines appeared to stumble backward last week with an insider trading scandal which hit crisis proportions.

In the Philippines now, as they did elsewhere in Asia about three years ago, foreign funds are getting out of the stock market, citing unacceptable levels of cronyism and nudge, nudge-wink, wink relationships between authorities and markets.

The main stock market index closed at a 16-month low of 1,621.62 points on Friday, down 4.4 percent on the week after the scandal almost forced the suspension of the stock exchange.

It is Asia's worst-performing index this year with losses of 24.33 percent.

And although the fall may not yet be as alarming as the precipitous declines at the height of the crisis, there is no evidence that foreign funds will return in the near future.

"The downside we are looking at for the market is at the 1,440 point level," said Michelle Bumanlag, an analyst at OCBC Securities Philippines. "We don't really see the situation now as much better than at the height of the Asian crisis."

The index, at a high of about 3,447 points in early 1997, crashed to about 1,082 points by September 1998 at the worst of the crisis.

"Corruption or crony capitalism or whatever you want to call it has been a problem there for some time," said Murdoch Murchison, fund manager at Templeton Asset Management Ltd in Singapore.

"We want to see a level playing field and there's no evidence of that existing in the Philippines at all.

"For foreign investors to be interested you have to provide an adequate return and for an adequate return you need some sort of transparency. And we look further away from that than we were a couple of years ago."

BW SCANDAL BRINGS IT OUT IN THE OPEN

There have long been worries about cronyism and the slow pace of reform in the Philippines. But it all came to a head last week when the compliance group at the exchange resigned en masse in protest against what they said was a whitewash of their investigations into price fixing at gaming firm BW Resource Corp.

The firm is majority owned by Dante Tan, a man President Joseph Estrada has said is a close friend. Tan has rejected the investigators' report, which said there was prima facie evidence against him and several brokers of price manipulation.

The scandal sharpened when the chief securities regulator, with whom Estrada has publicly clashed in the past, said trading on the exchange had to be suspended until the issue was resolved.

He was eventually over-ruled by other commissioners at the Securities and Exchange Commission, but opposition senators have questioned what they said seemed to be government pressure on the independent body to ensure the market remained open.

"Why would you invest or put money into the country if you are worried that the structure or the institution itself is a bit dubious," said Robert Penaloza, investment manager at Aberdeen Asset Management Asia, in Singapore.

"In the near-term it (the Philippine market) looks like it may get worse before it gets better."

GOOD VALUES BEING IGNORED

Analysts have said that at current levels several stocks in the Philippines provide extremely good value, especially when seen in a regional context. But the overhang of political risk means there will be few pickers.

Ayala group companies including holding firm Ayala Corp, property arm Ayala Land Inc and banking unit Bank of the Philippine Islands are all trading at 25-30 percent below fair value, they said.

Other reasonable picks include La Tondena Distilleries, media firm ABS-CBN and utility Manila Electric Co.

"You do have names that are of good quality in the Philippines," said Penaloza. "If they were in other countries like Singapore or Hong Kong, they would be a buy. But people are looking top-down and it seems to be politically driven at the moment."

And to a foreign investor, value can be found elsewhere, said Templeton's Murchison.

"There are some good long-term prospects," he said. "But to put that in context, as you look around the world, value opportunities are not difficult to find.

"If values were scarce you might be prepared to take on the additional risk. But if I look around the world today, it's not difficult to find value in other stock markets which have lower risk profiles."

On Friday, a Philippine sovereign bond issue targeted initially at $1.0 billion raked in $1.6 billion, but was priced about 20-25 basis points higher than the market was expecting a week or so ago.-Reuters