This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 MANILA 000064 
 
SIPDIS 
 
Sensitive 
 
STATE FOR EAP/EP, EB/IFD, E 
STATE ALSO PASS FED RESERVE SAN FRANCISCO 
STATE ALSO PASS USAID FOR AA/ANE and AA/G 
TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: EFIN PGOV EINV RP
SUBJECT:  Stock Exchange Growing But Reforms Needed to 
Boost Credibility 
 
Sensitive but Unclassified - Not for Internet - Protect 
Accordingly. 
 
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Summary 
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¶1.  (SBU)  The Philippine Stock Exchange is implementing 
reforms to restore investor confidence shattered from a 
market manipulation scandal in 2001-02.  The composite 
index extended its three-year bull run with 15 percent 
growth in 2005 and a significant rise in daily turnover. 
PSE President Lim is working to increase small investor 
participation in the market and tap the vast amount of 
remittances by Overseas Filipino Workers.  More 
fundamental reforms are needed, however, to overcome 
continued investor wariness.  End Summary. 
 
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Stock Exchange Continues Bull Run 
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¶2.  (U)  The Philippine Stock Exchange composite index 
(Phisix) continued its strong growth, ending 2005 
substantially higher than it began in spite of political 
turbulence the second half of the year.  The Phisix, 
which consists of 30 local blue chip companies, gained 15 
percent, with an average daily turnover often double and 
triple the 2004 level for much of the year.  (Note: Even 
at its peak of $34 million per day in early 2005, 
however, the PSE's turnover was just 15% that of the 
Indonesian stock market and 5% that of Thailand's.  End 
Note.)  Analysts polled by a local business newspaper 
predicted the Phisix would hit 2600 this year, reflecting 
its three-year average growth rate of 28 percent. 
 
¶3.  (SBU)  The renewed vigor of the Philippine Stock 
Exchange (PSE) is reflected in the demand for shares of 
newly-listed companies.  The overwhelming success of the 
initial public offering (IPO) by Manila Water in March 
2005, the first in the Philippines since 1997, was 
surprising.  More than 120 international investors 
demanded 15 times the offer size of $88 million.  SM 
Investment also drew keen interest for its $500 million 
offering later in the year.  (Note: Six other IPOs in the 
pipeline for 2005, however, were postponed or canceled 
unexpectedly, an issue Lim did not address.  End Note.) 
IPOs expected to attract significant investor interest 
this year include the Lopez-owned power producer First 
Generation, which will test the market for $200 million 
in February, followed by Shell Philippines, National Book 
Store, and United Laboratories.  UBS Bank commented at a 
recent investment conference in the Philippines that 
equities listed on the PSE are undervalued and primed for 
continued growth compared to other Southeast Asian 
bourses. 
 
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Restoring Investor Confidence 
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¶4.  (SBU)  In a meeting January 4, PSE President and CEO 
Francis Lim told Econoff that the PSE was still suffering 
a lack of credibility following market manipulation by 
the company BWU, in 2001-02.  BWU stock grew from 22 
centavos to 107 pesos, nearly a 50-fold increase, in just 
four months.  Investor interest soared based in part of 
false rumors that the Hong Kong shipping and gambling 
magnate Stanley Ho was tipping BWU for a multi-million 
dollar project.  The investigation later uncovered links 
to former President Joseph Estrada.  Even today, the 
Phisix and average daily turnover are still not even half 
of their peak levels of the late 1990s.  Lim said 
investors are still concerned about insider trading and 
market manipulation, especially since no one from BWU was 
ever arrested and charged in this clear-cut case of 
defrauding the public. 
 
¶5.  (U)  Lim said the PSE has worked hard to restore 
investor confidence by working with the Securities and 
Exchange Commission (SEC) to revise Disclosure Rules. 
Under the new rules, approved by the SEC in 2004, company 
compliance officers must meet the "10 minute rule" in 
informing the PSE about new information that could affect 
share prices so it can be posted on the web 
(www.pse.com).  In addition, the PSE prohibited 
"selective disclosure" of material information to members 
of a group without informing others.  The PSE also 
instituted a "blackout" provision on directors or 
principal officers not to conduct security trading until 
at least two full trading days after information becomes 
public. 
 
¶6.  (U)  Lim noted that the PSE is still 52% owned by 
brokers.  Although down from 100% broker-ownership at its 
founding in 1992, an executive order limits individual 
company and single industry ownership of the PSE to no 
more than 20%.  As a result, the broker percentage of 
ownership must be reduced much further in the coming 
year. 
 
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Reaching out to Small Investors 
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¶7.  (U)  Lim said another of his initiatives is to 
increase the percentage of shares owned by small and 
local investors.  Foreigners make up 50-70% of the daily 
turnover at the PSE.  Although this indicates strong 
interest from international portfolio managers of new and 
emerging markets, the PSE would gain stability and 
strength from greater domestic investment.  To that end, 
Lim has promoted programs for investor education and 
investor protection, and marketed the efforts of the PSE 
to safeguard rights.  Through the Small Investor Program, 
10% of the shares in a newly listed company must go to 
small investors - those with share values less than 
25,000 pesos ($500).  The PSE also requires a minimum of 
1000 shareholders for large company listings. 
 
¶8.  (SBU)  Lim said he expanded the Marketing Department 
and tasked it to find ways to attract investment from 
Overseas Filipino Workers who are remitting over $10 
billion annually to the Philippines but putting little of 
it in the stock market.  He also bemoaned the practice of 
asset management firms of limiting investments in 
equities to 10% or less of their account portfolios. 
(For example, the Asset Management and Trust Group that 
handles the investments for the U.S. Embassy's FSN 
Retirement Fund only added stocks to its investment 
portfolio mix in August 2005 but kept the equities at 5% 
of the total investment.) 
 
¶9.  (SBU)  Another measure Lim encouraged during his 
tenure at PSE is the emergence of a Market Integrity 
Board to oversee broker compliance with stock exchange 
rules.  Lim said brokers are notorious worldwide for 
cutting corners on certain regulations.  The MIB 
(jokingly referred to as Men in Black) has worked to 
improve compliance by rewarding proper behavior and 
meting out infractions.  The MIB is composed of 12 
individuals, including a former Supreme Court Justice and 
a former chairman of the Securities and Exchange 
Commission.  Through the efforts of MIB, broker 
compliance has increased by 60% since the program began 
based on annual audits, Lim said. 
 
¶10.  (U)  The Philippines used to have two separate stock 
exchanges - one for Manila and one for Makati housed in 
different locations.  Lim said former President Fidel 
Ramos forced their merger about ten years ago.  The PSE 
now consists of two trading floors with identical company 
listings.  Lim said he is trying to consolidate the two 
trading venues into one to save over 13 million pesos a 
month in overhead expenses.  Eventually, he hopes to have 
floorless stock exchange, but admitted it may be 
difficult to convince brokers to go virtual. 
 
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Investment Board Requires Listing 
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¶11.  (U)  While the PSE is encouraging investment in the 
exchange, the GRP, particularly the Philippines Board of 
Investment (BOI), is trying to expand the number of 
listings.  According to BOI Attorney Marjorie Ramos, 
under the Omnibus Investment Code (Executive Order 226) 
the Board of Investment can require firms, "when 
considered desirable and feasible," to list their shares 
on the PSE or offer them directly to the public or its 
employees.  There may be deferments, the requirement can 
be suspended under certain conditions, and there may be 
circumstances in which the firm has "substantially 
complied" with the requirement.  But in most cases the 
firms must offer for sale or distribution a minimum of 
10% of its shares within ten years after receiving 
investment incentives. 
 
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Comment 
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¶12.  (SBU)  Despite the rising index and higher daily 
turnover, the PSE is still on the periphery of investor 
interest , dwarfed by investor interest in the government 
bond market.  While the PSE has made limited progress on 
issues such as divestiture, it must undertake and 
implement more fundamental reforms, such as implementing 
a market surveillance program and requiring risk-based 
capital management.  The PSE must also strive to enhance 
its role as an independent regulator with increased 
autonomy of the Board of Directors.  Although Lim should 
be commended for the reforms instituted during his 
tenure, PSE recalcitrance to push ahead with basic 
reforms of how the stock exchange operates will cause 
continued investor wariness and PSE domination by 
institutional and large investors. 
Jones