BAIPHIL Market Watch – 26 February 2018 Page 1 of 23

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BAIPHIL MARKET WATCH

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26 Feb 2018

Legend Improvement / Up Deterioration / Down No Movement

FINANCIAL MARKETS AT A GLANCE

PHILIPPINES

Financial Rates Current Previous

USD/PHP 51.8900 52.1000

30-D PDST-R1 3.4179% 3.4179%

91-D PDST-R1 3.4383% 3.4268%

180-D PDST-R1 3.6750% 3.0831%

1-Y PDST-R1 3.0226% 3.9161%

10-Y PDST-R1 6.8554% 6.8036%

30-D PDST-R2 3.4179% 3.4179%

91-D PDST-R2 2.9012% 3.0109%

180-D PDST-R2 3.0529% 3.0447%

1-Y PDST-R2 3.0280% 3.9196%

10-Y PDST-R2 6.8554% 6.8036%

Stock Index Current Previous

PSEi 8,467.56 8,515.57

Total Market Cap (Php Tr) 14.535 14.603

Trade Value (Php B) 9.236 10.456

PSEi Performers Last Price % Change

Top Gainers

MRC Allied Inc 0.58 + 48.72

Crown Equities Inc 0.29 + 13.73

LMG Chemicals Corporation 4.45 + 10.42

Top Losers

Roxas & Co Inc 3.30 - 14.29

National Reinsurance Corp 1.59 - 14.05

Easycall Communications 40.00 - 11.11

ASIA-PACIFIC

Stock Index Current Previous

NIKKEI 21,892.78 21,736.44

HANG SENG 31,267.17 30,965.68

SHANGHAI 3,289.24 3,268.73

STRAITS 3,533.22 3,488.46

SET 1,808.06 1,788.63

JAKARTA 6,619.80 6,593.06

Currency Exchange Current Previous

USD/JPY 106.8500 106.7300

USD/HKD 7.8235 7.8241

USD/CNY 6.3329 6.3471

USD/SGD 1.3195 1.3185

USD/THB 31.3900 31.4800

USD/IDR 13,660.00 13,680.00

REST OF THE WORLD

Stock Index Current Previous

FTSEuro First 300 1,492.78 1,489.37

FTSE 100 7,244.41 7,252.39

DAX 12,483.79 12,461.91

CAC 40 5,317.37 5,309.23

DOW JONES 25,309.99 24,962.48

S&P 500 2,747.30 2,703.96

NASDAQ 7,337.39 7,210.09 ,

Various Current Previous

EUR/USD 1.2294 1.2334

GBP/USD 1.3965 1.3955

Gold Spot (USD/oz) 1,329.80 1,331.81

Brent Crude (USD/bbl) 67.31 66.39

3-M US Treasury Yield 1.60% 1.60%

10-Y US Treasury Yield 2.87% 2.92%

30-Y US Treasury Yield 3.16% 3.21%

PHILIPPINES

✓ The local stock barometer ended the week on a sluggish mood ahead of the Edsa Revolution anniversary, slipping below the 8,500

mark on Friday despite the upswing seen across regional markets. The Philippine Stock Exchange index (PSEi) fell by 48.01 points or 0.56 percent to close at 8,467.56, weighed down by heavy selling by foreign investors. Investors are pricing in risks that “something may happen on Feb. 25,” the 32nd anniversary of the Edsa Revolution that toppled the Marcos dictatorship, a senior stock dealer said. For the week, the first week under the new Lunar Year of the Dog, the PSEi lost a total of 144.88 points or 1.68 percent. Except for the mining/oil counter, which gained 1.15 percent, all other counters tumbled. The most battered was the financial counter, which slipped by 1.11 percent. Total value turnover for the day amounted to P9.24 billion. Net foreign selling amounted to P1.04 billion. In the past few days, investors have been pricing into the market an uptick in local inflation and interest rates alongside the stream of fourth quarter 2017 corporate earnings reports. There were 122 decliners that edged out 91 advancers while 39 stocks were unchanged. The PSE was dragged down by BDO, URC and JG Summit, which all fell by more than 2 percent. SM Prime declined by 1.53 percent while Ayala Land and AGI also slipped. On the other hand, Metro Pacific gained 2.13 percent and SM Investments added 1.05 percent. Ayala Corp., GT Capital, ICTSI and BPI also slightly gained. Investors also accumulated stocks outside the PSEi. MRC Allied, for instance, surged by 48.72 percent and was the day’s second

BAIPHIL Market Watch – 26 February 2018 Page 2 of 23

most actively traded company. Now Corp., the day’s most actively traded company, gained 4.39 percent. Its affiliate, Now Telecom, bagged a 25-year franchise renewal from Congress, seen as a boost to its aspiration to be the third telecom player in the country. PXP Energy, a beneficiary of warmer Philippine-China diplomatic relations amid long-stalled oil exploration discussions, rallied by 6.87 percent.

✓ The peso strengthened against the dollar on Friday to return to the P51 level as it continued to correct following its plunge on

Monday. The local currency ended the week at P51.89 against the greenback, 21 centavos stronger than its P52.10 close on Thursday. The peso traded stronger the whole day, opening the session at P52 versus the dollar. Its best showing yesterday was at P51.82. Its intraday low, meanwhile, was seen at P52.05 to the greenback. Dollars traded slightly declined to $656.3 million on Friday from the $668.4 million that changed hands in the previous session. Traders interviewed over the phone said the peso extended its strength in what is seen as a correction after its plunge to the P52 level on Monday. “The magnitude of the move is too big, and given the fact that there was a support in the past four trading days. There was a support for the peso,” a trader said. “Probably, the BSP (Bangko Sentral ng Pilipinas) is providing liquidity lately. That prompted most of the players to try to square out the long-dollar-peso positions for now. Thus we saw a good correction,” the trader noted. Meanwhile, another trader said domestic trading tracked the stronger local currency in the offshore exchange market. “The offshore dollar-peso trading went [higher], that’s why we saw the peso strengthening,” the trader said, adding that the pair continued to trade within the range.

✓ Approved foreign investment commitments fell to their worst level in 12 years, according to data the Philippine Statistics Authority

(PSA) released on Thursday. The PSA said approved foreign investment pledges for the entire 2017 totaled P105.6 billion, down by an annual 51.8%. This was the lowest amount since 2005’s P95.8 billion. The tally for the fourth quarter was likewise lackluster, plunging 82.8% to P21.6 billion from P125.7 billion in 2016’s comparable three months. “The drop in foreign investment pledges in 2017 may be attributed to the high base/denominator effects in previous years,” said Michael L. Ricafort, economist at Rizal Commercial Banking Corp. He likewise cited “tentativeness on investment” in the face of the five-month siege of Marawi City up to October last year and US President Donald Trump’s “America First” policy that encouraged US businesses to invest more at home than abroad in order to create jobs. The United States’ approved investment pledges of P8.7 billion in 2017 was merely 8.3% of the total for the year and was 72.2% less than the P31.4 billion in 2016. For Ruben Carlo O. Asuncion, chief economist at the Union Bank of the Philippines, “the way the government was dealing with different countries may have an impact on foreign investments.” Approved commitments from the Netherlands and Australia, which were the top two sources of foreign investment pledges in 2016, showed the biggest drops last year. Investment pledges from the Netherlands dropped 80.5% to P9.6 billion last year from P49.4 billion in 2016. Australia, meanwhile, saw pledges drop 87.9% to P3.9 billion in 2017 from P32.4 billion a year prior. The country’s largest foreign investor in 2017 was Japan, whose approved FIs registered P32 billion, an 18.2% increase from 2016. Japanese investments accounted for 30.3% of total pledges, followed by Taiwan (10.3%) and Singapore (9.6%). Pledges from China and Hong Kong increased by 53.6% (P2.3 billion) and 16.4% (P1.6 billion), respectively. The report counted investment pledges from the government’s seven premier investment promotion agencies (IPAs), namely: the free port authorities of Bataan, Clark, Cagayan, Subic and the Autonomous Region of Muslim Mindanao, as well as the Board of Investments and the Philippine Economic Zone Authority (PEZA). PEZA, which contributed 74% of the total last year, reported a 35.4% drop in approved foreign investment pledges at P78.3 billion versus the year-ago P121.2 billion. Foreign investment commitments are different from actual capital inflows tracked by the Bangko Sentral ng Pilipinas (BSP) for balance of payments purposes. Latest available BSP data showed net foreign direct investments rising by 20% annually to $8.725 billion in the 11 months to November, surpassing the BSP’s $8-billion full-year forecast. In the fourth quarter alone, manufacturing continued to receive the biggest portion of approved foreign investment pledges with P8.3 billion, accounting for 38.4%. This was followed by real estate with investment commitments worth P5.1 billion or 23.5%, as well administrative and support service activities at P3.5 billion or 16%. The bulk of the approved commitments in the fourth quarter — 29.5% at P6.4 billion — will go to projects in the Cavite-Laguna-Batangas-Rizal-Quezon (Calabarzon) region immediately south of Metro Manila, or the National Capital Region (NCR), that hosts major industrial parks. Calabarzon was followed by NCR’s P5.5 billion or 25.4% and Central Luzon with 22.6% or P4.9 billion. According to PSA, around 29,813 jobs will be generated from the total projects approved by the seven IPAs for the fourth quarter of 2017.

✓ After turning positive in January, foreign investors resumed the repatriation of their so-called “hot money” in the first two weeks of

this month and bringing the six-week year-to-date level of net portfolio investments back in the red. Documents from the Bangko Sentral ng Pilipinas showed that $59.95 million in cash were withdrawn by overseas fund managers from the local equity, bond and money markets in the first week of February 2018. This was followed by a much faster pace of “hot money” repatriations in the second week of the same month with a net amount of $159.21 million leaving the Philippine financial system—for a total of $219.1 million in outflows. These withdrawals reversed the portfolio investment level of $162 million in net inflows at the end of January to total net outflows of $57 million for the current year. In contrast, the first six weeks of 2017 yielded net portfolio inflows of $164.2 million, according to BSP data. For the entire 2017, BSP said that $16.06 billion in “hot money” entered the local investment scene, offset by $16.27 billion in repatriations by fund managers, resulting in a net outflow of $205.03 million for last year, which, in turn, helped push the country’s overall balance of payments further into the red. Just before the latest reversal in portfolio investment flows, BSP Governor Nestor Espenilla Jr. said the inward movement of hot money in January was “attributable to investor optimism over the passage of the first phase of the government’s tax reform program, positive news on corporate earnings and expected higher government spending for infrastructure projects.” About 69.2 percent of investments registered in January were in Philippine Stock Exchange-listed securities pertaining mainly to holding firms, banks, property companies, food, beverage and tobacco firms, and utilities companies, while the remaining 30.8 percent went to peso-denominated government securities. Transactions in PSE-listed securities and government securities yielded net inflows of $80 million and $82 million, respectively. The United Kingdom, the US, Malaysia, Singapore and Hong Kong were the top five investor countries for the month, with a combined share to the total at 80.2 percent. The US continued to be the main destination of outflows, receiving 79.9 percent of the total.

✓ The Philippine Statistics Authority (PSA) said the base year for the consumer price index (CPI) will change to 2012 beginning in

March. The PSA said the change will take place in the next release of CPI for All Income Households on March 6. “[T]his will include monthly CPI from January 2012 to February 2018. Data users will expect two sets of the CPI as the new series shall be issued simultaneous with the 2006-based series until June 2018. CPI series for July 2018 onwards shall be 2012-based,” the PSA said. The PSA said that rebasing is “necessary,” as the current reference “no longer represents” household behavior and “would tend to give wrong market signals.” “Economic, social and technological changes may have influenced Filipinos’ tastes and preferences and these, in effect may have resulted in changes in the consumption patterns,” it said. Ruben Carlo O. Asuncion, chief economist at the Union Bank of the Philippines said that the rebasing would “naturally make a difference, but not big.” “Nominal prices usually do not capture the real information about the level of prices. A base year is needed to compare ‘apples to apples,’” he said. However, he added that CPI must also reflect the times. “There should be an alternative to PSA’s measure of inflation. There are a lot of commodities bought outside the supermarket, such as online. How do we measure that?” He cited Japanese publication Nikkei’s CPINow as an example of a “detailed” measurement. The Nikkei CPINow index is a daily price gauge based on point-of-sale data in supermarkets nationwide. For the 2012-based CPI, the PSA will adopt the chain method for the first time. “This activity involves assigning weights to the commodity groups/sub-groups. This reflects the consumption priorities of households and the way

BAIPHIL Market Watch – 26 February 2018 Page 3 of 23

they allocate resources to meet their needs,” it said. The weights will be derived from expenditure data of the 2012 Family Income and Expenditure Survey (FIES) — which monitors the expenditure of around 50,000 sample households nationwide. “This is a good move. The FIES is a disaggregated data of household consumption. It is very accurate in terms of buying behavior,” Mr. Asuncion commented. Nomura, a Japanese financial services group, said inflation is “tricky to calculate” in its report “First Insights — Philippines: CPI rebasing from 2006 to 2012 finally announced” released yesterday. “[W]hether this rebasing will bias the inflation readings up or down… we do not know the exact weighting changes of all the items in the basket. However, we believe it is likely to introduce a small upside bias, largely because of the impact of recent tax reforms. We believe the more discretionary, big-ticket items tend to have their weightings increased in these exercises. These are the same items (e.g., utilities, beverages and tobacco, transport and telecommunication services) that have arguably experienced significant price rises due to the tax reforms at the beginning of the year, in addition to higher oil prices,” it said. “In our view, BSP will unlikely judge a shift in its inflation outlook in either direction just because of the rebasing,” Nomura said. “We reiterate our forecast for BSP to hike its policy rate by 25 basis points at its 22 March meeting, driven by rising inflation expectations and risks of its 2-4% inflation target being breached,” it added.

✓ Soured debts held by thrift lenders grew by a tenth in 2017 to match the increase in total loans granted from a year ago, latest central

bank data showed, as these banks enjoyed a surge in profits. Non-performing loans (NPLs) held by thrift lenders reached P40.448 billion at end-December, up by 10.4% from the P36.654 billion tallied in 2016, according to the Bangko Sentral ng Pilipinas (BSP). The figure, however, declined from the P41.715 billion in bad loans incurred as of November. NPLs refer to debts left unpaid for at least 30 days past due date. These are considered as risky assets due to a high risk of default that would spell losses for the bank. The growth in NPLs matched a 10.6% increase in the banks’ total loan portfolio, which expanded to P860.304 billion from P778.133 billion the previous year. NPLs accounted for 4.7% of total credit lines extended by the banks, barely changed from the 4.71% ratio posted in December 2016. Despite the increase in problem loans, the thrift lenders kept their reserves for potential defaults steady at P26.929 billion, which can only cover 66.58% of the NPL stash. This declined from the 73.05% coverage ratio recorded in 2016. Thrift banks are focused on lending to consumers and small-scale firms, which is are deemed riskier segments. On the other hand, the bigger universal and commercial banks cater mostly to corporate clients. Meanwhile, bank deposits likewise reached P945.431 billion, growing by 8.3% from the P872.869 billion tallied in 2016. Thrift banks enjoyed a 29.2% improvement in bottom lines, according to BSP data. The lenders reported a cumulative net income of P17.939 billion in 2017, surging from the P13.889 billion booked in 2016. Cost-to-income ratio also improved to 62.71% from 63.58% the prior year, as a cumulative P45.65 billion non-interest expenses generated a P72.798-billion operating income for thrift players. There are 54 thrift banks operating in the Philippines as of end-September. The central bank monitors the loan and asset quality of banks and other financial firms as they seek to maintain a stable financial system.

✓ A rural bank in Batangas has been ordered shut by the Bangko Sentral ng Pilipinas (BSP), becoming the second lender to be closed

down by regulators this month. The BSP’s Monetary Board on Thursday shut down the operations of the Empire Rural Bank, Inc., a lender based in Lipa City. The Philippine Deposit Insurance Corp. (PDIC) took over the bank the following day as receiver. Empire Rural Bank runs one branch along C.M. Recto Avenue in Lipa, and is led by its president Benjamin B. Abendan, according to the BSP’s database. The bank holds P36.4 million in total deposits spread across 564 accounts as of December 2017, the PDIC said. Of the amount, P31.6 million is covered by deposit insurance. PDIC’s takeover allows the state-run deposit insurer to acquire the lender’s assets in order to pay outstanding liabilities to depositors. Bank deposits are insured up to P500,000 per depositor, according to the law. Funds used to settle valid deposit insurance claims are drawn from the Deposit Insurance Fund managed by the PDIC. Any remaining amount which cannot be supported by the insurance fund will be sourced from the sale of the closed bank’s properties. Depositors with balances of P100,000 or lower can avail of early payment, provided that they have no outstanding obligations with the bank, the PDIC said. The Empire Rural Bank follows the fate of the Rural Bank of Loreto, Inc. in Dinagat Islands, which was also closed down by the BSP on Feb. 9. The central bank ordered the closure of six rural banks and one thrift bank last year. In 2016, the regulator closed 22 lenders.

✓ The government will start handing out cash transfers to some 7.4 million households by March, with the P200 monthly subsidy

expected to help poor families cope with rising prices of basic goods. In a statement, the Department of Finance (DoF) said 4.4 million existing beneficiaries of the Pantawid Pamilyang Pilipino Program as well as 3 million senior citizens receiving social pensions will start receiving additional doleouts this February, representing the unconditional cash transfers provided under the tax reform law. Signed into law as Republic Act 10963, the Tax Reform for Acceleration and Inclusion (TRAIN) law introduced additional taxes on fuel, cars, coal, sugar-sweetened drinks and a host of other items, which took effect Jan. 1. Majority of Filipinos will also enjoy bigger disposable incomes under TRAIN, as it reduced the income tax rates for those earning below P2 million yearly. However, this does not include minimum wage workers as they are already exempted from paying duties under the old tax regime. Some P25.67 billion or 30% of the additional revenues generated by the new tax law will be spent on “social protection” programs, largely for the cash transfers to the 10 million poorest families in the country. Under the program, these households will receive P2,400 this year to help them keep up with higher daily expenses as a result of the TRAIN law. The subsidies will increase to P300 a month or P3,600 annually for 2019 and 2020. Finance Undersecretary Karl Kendrick T. Chua said the 7.4 million families will be receiving a top-up in their existing conditional cash transfers as early as this month if they are getting their benefits via automated teller machine cards. Those withdrawing over the counter through rural banks, cooperatives and non-government organizations will receive additional money by March. Meanwhile, senior citizens will get the additional benefits by next month as well. Mr. Chua said that the remaining 2.6 million families will receive P2,400 worth of cash transfers by August, citing a report from the Department of Social Welfare and Development. For 2018, the government has allocated P25.67 billion for unconditional cash transfers under the General Appropriations Act to help low-income households cope with the inflationary impact of the Tax Reform for Acceleration and Inclusion Act (TRAIN), according to the DOF. Out of the P25.67 billion, P24.49 billion is under the Land Bank of the Philippines, which will distributed nationwide via ATM transfers, over the counter or through conduit systems such as rural banks, non-government organizations and cooperatives. The remaining P1.18 billion has been allocated to cover the administrative costs of implementing the social protection program. Starting next year, the government expects to distribute 100 percent of the unconditional cash transfers through ATM cards of the beneficiaries. Under the TRAIN, up to 30 percent of additional revenues will go to social mitigation measures and 70 percent to help support the government’s “Build, Build, Build” infrastructure program.

✓ Construction of the Philippines’ first subway line is expected to start later this year, with authorities hoping to alleviate Manila’s

road congestion, which is estimated by Japan’s aid agency to cost the economy P3.5 billion daily. Susumu Ito, chief representative of the Japan International Cooperation Agency (JICA) in the Philippines, made the estimate, which is substantially higher than the P2.4 billion daily given by a 2014 study. Metro Manila’s population is about 13 million. “As you can see, the traffic cost is P3.5 billion a day in Metro Manila. If we do nothing, it will become P5.4 billion a day in 2035, but with Build, Build, Build, it can be reduced to P3 billion a day,” Mr. Ito said during the 36th Annual Joint Meeting of the Philippines-Japan Economic Coordinating Committee held yesterday at the New World Hotel in Makati City. “JICA is supporting the Build, Build, Build program fully. It is a must.” Based on JICA estimates, road usage in Metro Manila was 13.4 million trips per day in 2017. Without any infrastructure interventions, this will rise to 16.1 million daily trips by 2035, which will come with

BAIPHIL Market Watch – 26 February 2018 Page 4 of 23

a cost to the economy of P5.4 billion. Mr. Ito also pointed out road congestion issues in the nearby provinces of Bulacan, Rizal, Laguna and Cavite, and a Mega Manila population estimate of which over 38 million people by 2035. Socioeconomic Planning Secretary Ernesto M. Pernia said the government wants to fast-track the rollout of the Metro Manila Subway Project, which will be funded through official development assistance from Japan. Mr. Pernia said the government wants to break ground for the 25-kilometer railway by the third quarter with partial operations up by late 2021 or 2022, following the Japan-Philippines meeting held Feb. 12 in Cebu. However, JICA’s Mr. Ito said authorities are “still discussing” project timelines, with the two nations hoping to sign the first tranche of the loan deal next month. The subway line runs from Mindanao Avenue in Quezon City to the site of the former Food Terminal, Inc. in Taguig City. Mr. Ito said completion is targeted by 2025. Mr. Pernia said the government will be staging a job fair in the Middle East within the quarter to attract Filipino technical workers home to boost the labor pool for infrastructure projects. “What we’re planning — in fact it is already scheduled — is we will hold a job fair in the Middle East so that we can attract back our skilled technical workers to come back and work here,” Mr. Pernia said during his keynote speech. “We’ll make sure that the salary differential between what they are getting in overseas workplaces and here is minimal or maybe even much (more than) whatever they’re getting.” Pressed further, Mr. Pernia said the job fair will likely be held by “late March.” Mr. Pernia said the government will be spending P8.13 trillion for 75 big-ticket infrastructure projects until 2022, which are expected to improve mass transport and inter-island connectivity. Separately, President Rodrigo R. Duterte promised that Japan’s projects in the Philippines will be free from red tape, Presidential Spokesperson Herminio L. Roque, Jr. said. “[The President] pledged his commitment to ensure that Japan projects will receive attention and will be free from bureaucratic delays whether the projects are government-to-government or business-to-business,” Mr. Roque said in a televised press briefing at Sara Municipal Hall in Iloilo on Thursday, Feb. 22. Mr. Duterte met with Philippine and Japanese conglomerates at Malacañan Palace on Wednesday. At the meeting, according to Mr. Roque, “the President thanked Japan for its wholehearted support for his government programs, and for the humanitarian assistance it has extended to the Filipino people.” In a statement from the Presidential Communications Office sent late Wednesday, the Palace said Mr. Duterte likewise met with the “representatives of the Philippine-Japan Economic Cooperation (PHILJEC) to tackle infrastructure programs.” According to the Palace, “PHILJEC aims to promote, strengthen and expand trade, economic, scientific technological advancements, exchange assistance to business endeavors in both the Philippines and Japan.” “It was designed to be a forum for private sector dialogue and the exchange of ideas geared towards the enhancement of Philippines-Japan relations.” Moreover, in their meeting with the President, the Philippine conglomerates “discussed competitiveness and macroeconomic fundamentals, infrastructure and innovation matters,” the Palace said. Present during the meeting were Japanese Ambassador to the Philippines Koji Haneda, Marubeni Corp. Chairman Teruo Asada, Mitsubishi Corp. Chairman Ken Kobayashi, Japan Chamber of Commerce and Industry (JCCI) International Division Manager Masazumi Nishizawa, and Japan Airlines Chairman Masaru Onishi. Also present were JCCI Secretary General Hidekazu Oshita, PHILJEC outgoing Chairman Aniceto Saludo, PHILJEC incoming Chairman Gerard Sanvictores, ANA Holdings Senior Vice-President Koji Shibata, and Japanese Chamber of Commerce and Industry of the Philippines (JCCIPI) President Hiroshi Shiraishi. Executive Secretary Salvador C. Medialdea joined Mr. Duterte during the meeting.

✓ Singapore’s Changi Airport Group is keen on taking up a 30-percent stake in the venture among seven local conglomerates to

expand and operate the crown jewel of Philippine air gateways—Manila’s Ninoy Aquino International Airport (Naia). This was revealed by businessman Manuel V. Pangilinan, who was a guest speaker at the Joint Meeting of the Economic Cooperation Committees of the Philippines and Japan. Pangilinan is chair of infrastructure giant Metro Pacific Investments Corp., one of the consortium members. The other participants are Ayala Corp., Aboitiz Equity Ventures, Andrew Tan’s Alliance Global Group Inc., Lucio Tan’s Asia Emerging Dragon, Gotianun-led Filinvest Development Corp., and Gokongwei-led JG Summit Holdings Inc. Pangilinan said Changi Airport had “signified its intention” to take up to 30 percent equity in the project, estimated to cost P350 billion over two major phases. Changi Airports International Pte. Ltd. was earlier tapped as technical partner. Pangilinan said the remaining 70 percent would be evenly split among the consortium members. “I think this is a good sign of the business groups getting together to address very serious issues,” Pangilinan said. Since it is an unsolicited offer, the project is expected to undergo a Swiss challenge should it be accepted by the government. The Naia offer, which requires a 35-year concession period, is divided into two phases. The first would improve and expand existing facilities while the next stage was more complex given the addition of taxiways, passenger terminals and a third runway, which would help support an annual capacity of 100 million passengers. Naia handles over 40 million passengers per year, well above its design capacity of about 30 million passengers. Congestion on its two intersecting runways also curtails further growth and causes delays. Singapore’s Changi Airport Group is keen on tak ing up a 30-percent stake in the venture among seven local conglomerates to expand and operate the crown jewel of Philippine air gateways—Manila’s Ninoy Aquino International Airport (Naia). This was revealed by businessman Manuel V. Pangilinan, who was a guest speaker at the Joint Meeting of the Economic Cooperation Committees of the Philippines and Japan. Pangilinan is chair of infrastructure giant Metro Pacific Investments Corp., one of the consortium members. The other participants are Ayala Corp., Aboitiz Equity Ventures, Andrew Tan’s Alliance Global Group Inc., Lucio Tan’s Asia Emerging Dragon, Gotianun-led Filinvest Development Corp., and Gokongwei-led JG Summit Holdings Inc. Pangilinan said Changi Airport had “signified its intention” to take up to 30 percent equity in the project, estimated to cost P350 billion over two major phases. Changi Airports International Pte. Ltd. was earlier tapped as technical partner. Pangilinan said the remaining 70 percent would be evenly split among the consortium members. “I think this is a good sign of the business groups getting together to address very serious issues,” Pangilinan said. Since it is an unsolicited offer, the project is expected to undergo a Swiss challenge should it be accepted by the government. The Naia offer, which requires a 35-year concession period, is divided into two phases. The first would improve and expand existing facilities while the next stage was more complex given the addition of taxiways, passenger terminals and a third runway, which would help support an annual capacity of 100 million passengers. Naia handles over 40 million passengers per year, well above its design capacity of about 30 million passengers. Congestion on its two intersecting runways also curtails further growth and causes delays. In 2014, an official of the Civil Aviation Authority of the Philippines estimated economic losses of airlines operating in Naia at around P7 billion per year.

✓ The Philippine Competition Commission (PCC) has cleared two joint-venture projects related to real estate development and

hydropower, with one of the parties being the Ayala group. In a statement, the PCC said its mergers and acquisitions office found that the two partnerships—that of Ayala Land Inc. and Royal Asia Land Inc. as well as that of Markham Resources Corp. and Alternergy Mini Hydro Holdings Corp.—would not result in the substantial lessening of competition in their respective markets. The Philippine Competition Commission (PCC) has cleared two joint-venture projects related to real estate development and hydropower, with one of the parties being the Ayala group. In a statement, the PCC said its mergers and acquisitions office found that the two partnerships—that of Ayala Land Inc. and Royal Asia Land Inc. as well as that of Markham Resources Corp. and Alternergy Mini Hydro Holdings Corp.—would not result in the substantial lessening of competition in their respective markets. “The transaction [between Ayala and Royal Asia] does not result in the substantial lessening of competition because it will not have a structural effect on the market,” the PCC said in a decision dated Feb. 20. Ayala Land and Royal Asia are setting up a joint venture to acquire, own and develop a 936-hectare property in Silang and Carmona, Cavite, into a mixed-use project with commercial and residential components. The PCC said Royal Asia Land—a unit of PCO South Frontier Holdings Inc.—was incorporated to purchase, acquire, own, lease, sell and convey real properties. Also, the PCC found that there were enough competitive constraints by other players in the hydropower market, even with a partnership between local firms Markham and Alternergy. The two firms had proposed a joint-venture investment in Kiangan Mini Hydro Corp., Ibulao Mini Hydro Corp. and Lamut-Asipulo Mini Hydro Corp. Dubbed as the Markham-Alterenergy JV companies, these are Philippine special purpose companies that will be formed to operate, develop and

BAIPHIL Market Watch – 26 February 2018 Page 5 of 23

maintain run-of-river mini hydro projects along the stretch of Asin, Ibulao, Hungduan, Lamut and Panubtuban Rivers in the Ifugao province. The PCC said its review found no increased ability or incentive for the new joint venture to engage in foreclosure in the relevant market after the transaction. “The transaction also does not appear to create or strengthen the ability or incentive of the merged firm to engage in withholding capacity,” the antitrust body said.

✓ Despite the National Food Authority’s (NFA) failure to fulfill its mandate to stabilize the supply and prices of rice in the market, a

coalition of industry groups are opposing the proposal of some lawmakers to dismantle the agency. In a joint statement released to the media, the National Farmer Federation, Pambansang Kaisahan ng Magbubukid sa Pilipinas, Pambansang Katipunan ng Makabayang Magbubukid, Katipunan ng Bagong Pilipina, Pambansang Katipunan ng mga Samahan sa Kanayunan, Pangisda, Amma-K, Makabayan, Aktib and Integrated Rural Development Foundation called on the government to rethink the agency’s functions instead of dissolving it. “Policymakers who see the increases in rice prices as an opportunity to dismantle the NFA is barking at the wrong tree and maybe penalizing the farmers and poor consumers in the end,” the statement read. “Those who demand for its dismantling under a post-QR regime will only help the private sector take over the country’s rice importation,” it added. The coalition is asking relevant government agencies to conduct an investigation of rice traders who are allegedly involved in the hoarding and overpricing of commercial rice. During a House hearing on Tuesday, Rep. Benhur Lopez named 13 rice traders who allegedly controlled the prices of rice in Metro Manila. The committee has ordered the attendance of these rice traders in the next hearing to explain their alleged involvement in the manipulation of rice prices. Based on data from the Philippine Statistics Authority, prices of rice continued to shoot up due to the absence of NFA rice in the market. The average retail prices of regular milled and well-milled rice have now gone up to P39.01 per kilo and P42.83 per kilo from P38.77 and P42.59 a week ago, respectively. Moreover, the coalition joins the call of other lawmakers to increase NFA’s buying price for palay to at least P20 a kilo from the current price of P17 per kilo. The NFA must procure at least 10 percent of the country’s total palay harvest to reinforce its buffer stock—a mandate that it has not been able to fulfill for the past years. The agency has yet to make a plan on how it would be able to replenish the supply of subsidized rice in the market.

✓ With the country’s record harvest last year, an economist from the Philippine Rice Research Institute (PhilRice) said there would be

no rice shortage in the country, at least for the first quarter of 2018. According to Flordeliza Bordey, deputy executive director for research of PhilRice, the Philippines was able to produce a total of 19.3 million metric tons (MT) of palay last year, which was equivalent to 12.5 million MT of rice—the country’s highest production in history. “If we examine our rice consumption, we only need 13.1 million tons, including our food, rice seeds, raw materials for processing of value-added products, animal food and even wastage. This is based on the assumption that about 105 million Filipino individually consume approximately 110 kilograms of rice every year,” Bordey explained. For the start of the year, PhilRice estimated roughly 3 million MT of carryover rice stocks, which was sufficient to feed the country for 87 days. Moreover, local farmers traditionally harvest 23 percent of the total production of the year during the first quarter. Nonetheless, the economist said there was still a need to import rice given the country’s “seasonal” production along with the government’s policy shift to a “tariff regime” wherein imported rice could freely enter the country provided that the required tariff was paid. “Our stocks dwindle as we enter the lean months from July to September. Without comfortable level of stocks, there is a tendency for the price of rice to spike. This is where importation can help. It can help us manage the supply and demand for rice, and avoid sudden increase in its rice. Even with a 35-percent tariff rate on our [rice imports from] Asean neighbors such as Thailand and Vietnam, Philippine rice is still more expensive,” said Bordey. “The only way our local rice can compete is to lower its cost. We can only do that if we enhance the competitiveness of our farmers,” she added.

✓ As harvest season begins, the National Food Authority (NFA) is appealing to local farmers to sell their palay to the agency to help

replenish its rice stock. In a forecast made by the Philippine Statistics Authority (PSA), this year’s summer crop is expected to yield around 4.67 million metric tons (MT) of palay, 5.65-percent higher than the production in the same period last year at 4.43 million MT. “If we can get at least 10 percent of this harvest, the NFA can continue to fulfill its commitment to relief agencies, local governments and may even bring back the P27- and P32-per-kilogram rice in the market,” NFA Administrator Jason Aquino said in a statement. “We are hopeful that we can still buy enough from local farmers to augment our dwindling stocks for food security. This is very important since the arrival of the 250,000 MT of imported rice, which we have requested, has been set for June or about four months from now,” he added. According to the NFA, the country’s daily rice consumption requirement was now at 640,250 bags of rice a day. With its mandate to have at least a 15-day buffer stock, the agency should have 9.6 million bags at any given time. However, it has only 1.12 million bags of rice in its warehouses that could last for just 1.7 days. While procurement is an all-year round activity for the agency, Aquino said the NFA was able to buy only 7,469 bags of palay from local farmers so far this year, mostly from the provinces of Antique, Nueva Vizcaya, Bukidnon and Catanduanes. Reports from Samahang Industriya ng Agrikultura showed palay in Masbate, Isabela and parts of Visayas were being sold at P15 to P19 a kilo. “Our low procurement price hinders us from buying more. It is not only the task of NFA to ensure food security of the nation, it is the task of everybody, and surely, we cannot do this without the help of our local farmers,” Aquino said. “Our food security mandate can only be fulfilled if we have sufficient buffer stock stored in our government warehouses to ensure that we have enough for our rice distribution to poor consumers and relief operations,” he added. NFA is buying palay from farmers at a support price of P17 a kilo so long as these are clean and dry, with additional incentives of up to P1 a kilo for drying, delivery and cooperative development. Meanwhile, rice traders had been buying palay at a higher price of P18 to P22 a kilo.

✓ The National Telecommunications Commission (NTC) issued the implementing rules and regulations for freeing up frequencies to

support the country’s shift to digital television. The rules, which take effect 15 days after publication, involve the reallocation of the 470 to 512 Megahertz band, or channels 14 to 20. It follows the 2013 decision by the Philippines to choose the Japanese digital TV standard over its European counterpart. Japan edged out its rival in terms of cost and a built-in warning system to inform people about natural calamities. The NTC announced last year that the “switch off” of analog TV was targeted for 2023, after which about 95 percent of all households should have access to digital television. The shift to digital would also benefit consumers since it would provide sharper video and audio quality. The NTC noted that existing analog TV stations were using low VHF band channels, which were susceptible to “local electrical interference, particularly in highly urbanized cities.” According to the rules, all authorized and operating Mega Manila VHF TV networks are entitled to a channel assignment from channels 14 to 20 so long as they file their intention to convert their analog TV service to digital terrestrial television broadcasting. Those who would fail to submit their notice of intent would waive the opportunity to operate within the 470-512 MHz “without prejudice to the assignment of a channel in the 512-698 MHz band.” The NTC said a channel that would be the first choice of one network would be automatically assigned to that network. If two or more networks are interested, the winner will be selected via drawing of lots. In case there were available channels after this process, the NTC will then invite operating and authorized Mega Manila UHF TV networks to submit their intent to be assigned channels in the 470-512 MHz band. The NTC also noted that the cost of transfer of affected authorized users within the band “shall be equally shared” among TV networks assigned channels in the band. Each assignee of a channel from channels 14 to 20 should thus issue a check amounting to P9.52 million to be submitted in the name of the Kapisanan ng mga Brodkaster ng Pilipinas, which will act as custodian of the deposits.

BAIPHIL Market Watch – 26 February 2018 Page 6 of 23

✓ Online news site Rappler.com may reorganize and file new incorporation papers with the Securities and Exchange Commission (SEC) anytime, as long as the company would no longer have foreign ownership. SEC Chairperson Teresita J. Herbosa said the companies controlling Rappler.com, namely Rappler Inc. and its parent Rappler Holdings, Inc., could withdraw the petition they filed with the Court of Appeals (CA) questioning the commission’s decision, thus allowing them to organize as a mass media firm anew. “There are many ways of coming up, dissolving Rappler and reorganizing another corporation to engage and offer the same business but make sure it’s 100% Filipino….They can do that anytime. In fact they can withdraw the case at anytime. The courts would allow you to do that,” Ms. Herbosa told reporters after a forum held in Quezon City on Friday. To recall, the SEC had revoked Rappler’s incorporation papers last January for failing to meet the constitutional limits on foreign ownership, focusing on its sale of Philippine Depository Receipts (PDR) to foreign entities Omidyar Network Fund LLC and NBN Rappler LP. The SEC also voided the PDRs issued to Omidyar Network, as per Section 71.2.of the Securities Regulation Code for being a fraudulent transaction. Rappler then filed a petition before the CA last Jan. 29 questioning the decision, saying that the PDRs sold to Omidyar Network did not constitute control. Once the CA decides on the petition, the losing party will then have the option to elevate the case to the Supreme Court, which will have the final say on the matter. Should the courts uphold the SEC’s decision, Rappler would have to be dissolved. Ms. Herbosa however clarified that Rappler may still reorganize and “get in the same business of mass media.” Asked if the company can keep its name, Ms. Herbosa said this would be no problem. “When it comes to names, the SEC recognizes if you own the name and you want to reorganize or reincorporate the same name, as long as you own the name, then there is no problem,” Ms. Herbosa said. Ms. Herbosa also noted that it is “unfair and unkind” to say that the decision to revoke Rappler’s incorporation papers was politically motivated. “When I decided to become SEC chair, I knew there will be instances when hard decisions will not be accepted by everyone. That to me was really unfair and unkind to say that the decision is politically motivated,” Ms. Herbosa said. The SEC decision against Rappler highlighted the tension between the press and the administration of President Rodrigo R. Duterte, who has slammed media for their critical coverage of his bloody war on the narcotics trade. Earlier this week, Mr. Duterte banned Rappler.com’s senior reporter Pia I. Ranada from covering Malacañang due to “loss of trust,” according to Presidential Spokesperson Herminio Harry L. Roque, Jr.

✓ The commissioner of the Bureau of Internal Revenue can have access to confidential information shared between taxpayers and

their accountants or lawyers during the course of an investigation, empowering the chief of the country’s biggest revenue agency to run after more tax cheats. Revenue Memorandum Circular No. 12-2018 issued by Internal Revenue Commissioner Caesar R. Dulay on Feb. 22 clarified the nature and extent of the power of his office to obtain information vis-à-vis the existing attorney- and accountant-client privileges under the law. “Under Section 5 of the National lnternal Revenue Code (NIRC), as amended—in ascertaining the correctness of any return, or in making a return when none has been made, or in determining the liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance—the Commissioner of lnternal Revenue is empowered, inter-alio, to obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation any information, such as, but not limited to, receipts or sales and gross income of taxpayers, and the names, addresses, and financial statements of corporations, registered partnerships, and their members,” Dulay said. Dulay noted that noncompliance to this section of the Tax Code would slap fines ranging from P1,000 to P10,000 as well as imprisonment of between one and 10 years. However, Dulay conceded that there were certain information shared by taxpayers only to their accountants and lawyers. “There is attorney-client privilege under the Code of Professional Responsibility and the Revised Rules on Evidence, wherein an attorney cannot, without the consent of his client, be examined as to any communication made by the client to him, or his advice given thereon in the course of, or with a view to, professional employment,” Dulay noted. Also, “there is accountant-client privilege under Republic Act (RA) 9298, or the Philippine Accountancy Act of 2004, and the Code of Ethics for Professional Accountants stating that all working papers, schedules and memoranda de by a certified public accountant in the course of an examination, including those prepared and submitted by the client, incident to or in the course of an examination, by such certified public accountant shall be treated confidential and privileged, and that professional accountants shall refrain from disclosing outside the firm or employing organization confidential information acquired as a result of professional and business relationships,” the BIR chief added.

✓ The Bureau of Internal Revenue (BIR) filed on Friday a P1-billion tax evasion complaint against Prieto-owned Golden Donuts, Inc.

(GDI), which holds the local franchise for Dunkin’ Donuts chain. In a statement, the BIR said the criminal complaint was filed with the Department of Justice against Golden Donuts and four of its officials for willful attempt to evade tax, and failure to supply correct and accurate information on the company’s income tax return (ITR) and quarterly value added tax (VAT) return in 2007. Named in the complaint were Golden Donuts President Walter C. Spakowski, Treasurer Miguel H. Prieto, Chief Financial Officer Pedro E. Paraiso and Vice-President for Finance and Administration Jocelyn V. Santos. The BIR said GDI and its corporate executives are also being held civilly liable for income tax, VAT and expanded withholding tax (EWT) deficiencies for taxable year 2007, reaching P1.12 billion, including surcharge and interest. Broken down, GDI’s income tax deficiency stood at P840.82 million; VAT — P270.42 million; and EWT — P7 million. Golden Donuts is the exclusive franchisor of Dunkin’ Donuts of America, Inc. (DDAI), which gave it the license to develop and operate doughnut shops in the Philippines. “The case arose when a confidential information was received by the BIR that GDI made substantial under-declaration on its sales. To check the veracity of said information, a Letter of Authority was issued by the Commissioner of Internal Revenue for the examination of its books of accounts and other accounting records pursuant to the Run After Tax Evaders (RATE) Program of the BIR,” the tax agency said. In its investigation, the BIR said sales invoices issued by some suppliers were “intentionally altered” and did not include GDI’s taxpayer identification number. “Through this scheme, GDI was able to claim the altered invoices as deductions from its income and as input VAT credits in the amount of PhP99,297,036.47 and PhP11,915,644.38, respectively. Consequently, no deduction or input tax credits shall be allowed if supported by non-compliant receipts/invoices as they are not valid proof of substantiation,” the BIR said. The tax authority also noted Golden Donuts was found to have “substantially” under-declared its sales by 39%, and its royalty income by P38.96 million. “The under-declaration of sales was noted by comparing the donut sales declared by GDI vis-à-vis sales derived from the grossed-up value of franchise fee paid to Dunkin Donuts of America, Inc. (US),” the BIR said. In response, Golden Donuts said it “categorically denies” the BIR’s accusations. “As a matter of fact, the tax liabilities of GDI for the said year had been settled with the BIR as of 2012. Further, it has always been compliant with all tax laws and regulations, as evidenced by tax clearances issued by the BIR over the years,” the company said in a statement. “It appears from the news reports that the complaint was filed based on an alleged 39% underdeclaration of sales which arose from the attribution of sales of franchises to GDI. All GDI franchisees are business entities separate from GDI that are responsible for paying their own taxes… GDI is prepared to answer the tax evasion case in the proper forum,” it added. In April 2017, President Rodrigo R. Duterte accused the Prieto family, which then owned The Philippine Daily Inquirer, of not paying correct taxes on its Dunkin’ Donuts business. “Inquirer ang may-ari ng Dunkin’ Donuts. Alam mo ba ‘yan? At may utang ‘yan sila na taxes. Inayos ni Kim Henares. Walang ibinayad o nabayad nang kaunti lang (Inquirer is the owner of Dunkin’ Donuts. Did you know that? And they owe us taxes. It was fixed by Kim Henares. They did not pay or just paid a little amount),” Mr. Duterte said then, referring to the former BIR commissioner. Last year, the Prietos sold its 85% stake in the Inquirer Group of Companies to business tycoon Ramon S. Ang, calling the move “a strategic business decision.” Mr. Duterte also criticized the Prieto and Rufino families, owners of the Mile Long property in Makati City, for evading taxes and rentals. The Mile Long property located along Amorsolo Street in Makati has been the subject of a legal dispute between the government and Sunvar Realty Development Corp. In August 2017, the

BAIPHIL Market Watch – 26 February 2018 Page 7 of 23

property firm owned by the Rufino and Prieto families agreed to vacate Mile Long following an order issued by the Makati Regional Trial Court’s branch 141.

✓ The Philippines is unlikely to see a “significant widening” of its current account deficit, even as a bigger gap exposes the country

more to “sudden capital outflows,” S&P Global Ratings said in a regional note on Thursday. The global debt watcher expects Philippine gross domestic product (GDP) to expand by 6.5% this year, slower than the 6.7% clocked in 2017 and below the government’s 7-8% growth goal for 2018. “We expect a return of traditional GDP growth drivers — consumption and investment — as the leaders of a decent 6.5% growth,” S&P said in the Asia-Pacific Economic Snapshots report it released yesterday. “As the Q4 figures show, the resurgence of private household spending came just in time, as electronics exports were no longer able to prevent the usual negative contribution of net exports to growth.” ANZ Research has warned that private spending could ease as a result of higher prices of goods and services, largely due to the implementation of Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion Act (TRAIN). TRAIN, which took effect Jan. 1, introduced higher or additional taxes on fuel, cars, coal, sugar-sweetened drinks and a host of other items. These are expected to shore up an additional P82.3 billion revenues this year, despite a reduction in personal income taxes. ANZ analysts said that historical data showed that every one percent increase in headline prices caused a corresponding 0.3% decline in private consumption. BMI Research, however, said rising incomes and sustained remittance inflows should keep consumer activity upbeat. At the same time, however, S&P said it will “continue to watch the current account, given slower remittance inflows, higher energy prices, and rising imports.” “Although we do not expect a significant widening of the deficit under our baseline, such a scenario would increase the Philippines’ exposure to potential sudden capital outflows in times of market panic,” the credit rater said. The current account measures fund flows from goods and services trading, which determines the country’s external payments position. As of December, the Bangko Sentral ng Pilipinas (BSP) expected the current account to settle at a $100-million deficit in 2017, a retreat from the $28-million surplus logged as of end-September. For this year, the central bank sees the current account at a $700-million deficit, equivalent to 0.2% of gross domestic product (GDP). BSP Managing Director Francisco G. Dakila, Jr. last week said a current account gap driven by an increase in investments and imports of capital goods is to be expected in order to prevent the economy from overheating, as such expenditures will help accelerate overall economic growth. The country’s external trade deficit logged a new all-time-high $4.017 billion in December, taking the full-year gap to $29.786 billion, also the highest on record. Last year saw merchandise imports surging by 10.2% and exports growing 9.5%, beating the government forecasts of nine percent and eight percent respectively, according to the National Economic and Development Authority. Increased imports of raw materials like artificial resin, iron and steel are expected to support the “Build, Build, Build” agenda of the current administration, which plans to spend over P8 trillion for big-ticket infrastructure projects until 2022, when President Rodrigo R. Duterte ends his six-year term. The increased infrastructure spending is expected to boost annual GDP growth to as fast as 7-8% up to 2022 from last year’s 6.7%, 2016’s 6.9% and a 6.2% average in 2010-2015.

✓ The Philippines dropped 10 spots globally and languished in the lower third of the Asia-Pacific list in an annual report of

businessmen’s corruption perception that tagged the country “among the worst” in terms of dealing with those who “dare to challenge the status quo.” The Corruption Perceptions Index 2017, which Transparency International released on Thursday, showed the Philippines dropping in rank to 111th out of 180 countries and territories from 101st out of 176 on the 2016 list. In Asia and the Pacific, the Philippines placed 21st among 31 countries and territories. After keeping a score of 35 from 2015 to 2016, on a 0-100 scale in which zero denotes a country is “highly corrupt” and 100 means it is “very clean,” the Philippines slipped to 34 in 2017. It was the country’s lowest score in five years, matching its grade in 2012. The Philippines’ score was also below the 44.39 and 43.07 regional and global averages, respectively. Within Southeast Asia, the Philippines was outdone by Singapore (which ranked sixth globally with a score of 84) Brunei Darussalam (which placed 32nd globally with a score of 62), Malaysia (62nd, 47), Timor-Leste (91st, 38), Indonesia (96th, 37), Thailand (also placing 96th with a score of 37) and Vietnam (107th, 35). Faring worse in Southeast Asia were Myanmar (which ranked 130th with a score of 30), Laos (135th, 29) and Cambodia (which placed 161st with a score of 21). Among others also in Asia and the Pacific, Japan placed 20th globally with a score of 73; South Korea ranked 51st with a score of 54; China, 77th with 41 and India, 81st with 40. In brief comments on select economies covered by the latest survey, Transparency International noted that “the results from the 2017 index also show that corruption in many countries is still strong.” “Often, when individuals dare to challenge the status quo, they suffer the consequences. In some countries across the region, journalists, activists, opposition leaders and even staff of law enforcement or watchdog agencies are threatened, and in the worst cases, even murdered,” the report read. “Philippines, India and the Maldives are among the worst regional offenders in this respect. These countries score high for corruption and have fewer press freedoms and higher numbers of journalist deaths.” Sought for comment, Chief Presidential Legal Counsel Salvador S. Panelo dismissed Transparency International’s (TI) findings, telling reporters in Malacañan Palace: “Fake news ‘yan,” while Dante L. Jimenez, Volunteer Against Crime and Corruption chairman who takes his post on March 6 as head of the newly formed Presidential Anti-Corruption Commission, said in a telephone interview: “I think that may be true, because there are still many agencies that have been tolerating corruption.” “That’s why the president would always emphasize to these agencies to stop corruption. So we have to do something about this,” Mr. Jimenez said, adding that the commission that he is about to head “will craft strategies because the Duterte administration has only more than four years until he ends his term.” “But of course, personally, what is important there is to strengthen the judicial system. We have to bring back the death penalty for plunderers. Unless we bring back these heavier penalties for plunderers, nothing will happen.” The head of the European Chamber of Commerce of the Philippines (ECCP) expressed concern with this development when asked for his reaction. “As a chamber that continues to promote the Philippines as an attractive foreign investment destination to potential investors in Europe and around the region, this new report is certainly worrying and also makes our job more challenging,” ECCP President Guenter Taus said in an e-mail. “What we suggest is to create an effective enforcement mechanism for the Anti-Graft and Corrupt Practices Act and this should certainly serve as a good starting to point in beginning to address these issues. We have long been supportive of legislative and administrative measures that will address corruption in the private sector. Besides the Integrity Initiative, we are willing to assist the government in establishing an effective enforcement mechanism that will ensure that the Anti-Graft and Corrupt Practices Act is not selective of the person involved.” John D. Forbes, senior adviser of the American Chamber of Commerce of the Philippines, said in a mobile phone message that while he had yet to read the latest report, “when developed country investors look at ASEAN they compare the ASEAN-6 and see Singapore and Malaysia as less corrupt and the Philippines trending upward into a cluster with Indonesia, Thailand, and V ietnam.” “In another major index of the WEF in 2010, corruption was the number one-concern of business; by 2017 it was the number-three concern after red tape and poor infrastructure,” Mr. Forbes said, referring to the World Economic Forum. “Philippine investors have been choosing to locate in PEZA zones because they have a great reputation for being corruption-free,” he added in reference to the Philippine Economic Zone Authority. For Makati Business Club Executive Director Peter Angelo V. Perfecto, “[t]he latest TI rankings should help government recalibrate its anti-corruption efforts and programs.” “One possible way forward is to partner with the private sector-led Integrity Initiative and, as a first step, issue an executive order that will provide all government agencies a framework for them to partner with private sector in jointly organizing projects and programs for integrity,” Mr. Perfecto said in a separate text message. “A public-private partnership for integrity and anti-corruption could look deeper into the latest TI rankings to better analyze the index and jointly pursue a program that will help lift the country back up in the rankings.” In order to improve scores across Asia and the Pacific, Transparency International prescribed: putting in place laws and institutions that will prevent corruption from happening in the first place, reducing impunity for the corrupt, improving space for civil society to speak out as well as improving integrity and values. Noting that the latest survey “shows high corruption burden in more than two-thirds of

BAIPHIL Market Watch – 26 February 2018 Page 8 of 23

countries”, Transparency International said “[t]his year’s Corruption Perceptions Index highlights that the majority of countries are making little or no progress in ending corruption, while further analysis shows journalists and activists in corrupt countries risking their lives every day in an effort to speak out.” “Further analysis of the results indicates that countries with the least protection for press and nongovernment organizations also tend to have the worst rates of corruption,” it said. “Every week at least one journalist is killed in a country that is highly corrupt.”

✓ The Philippine Stock Exchange, Inc. (PSE) has priced its stock rights offer (SRO) at a premium, the underwriter of the deal said on

Friday. BDO Capital and Investments Corp. President Eduardo V. Francisco said PSE’s SRO will be sold at P252 per share, above its closing price of P236.20 at the stock exchange on Friday. “It was priced at a premium over today’s P236.2 close showing belief of investors in our capital markets,” Mr. Francisco said in a text message to reporters. With the sale of 11.5 million shares, the SRO will allow the PSE to raise P2.898 billion. Proceeds of the offer will be used to partially finance its acquisition of the Philippine Dealing System Holdings Corp. Remaining funds will be used for general corporate purposes and for the introduction of new products until 2020. Due to unfavorable conditions in the global market, the SRO’s timeline was adjusted — it will now run from March 12 to 16, having previously been set from Feb. 26 to March 2. The fund-raising activity will likewise help the company bring down broker ownership to less than 20%, which is needed to secure the Securities and Exchange Commission’s approval to merge the PSE with the fixed-income bourse. The PSE posted an 18% net income increase in 2017 to P825 million, boosted by higher trading activity and one-time gains from the sale of its Tektite office in Ortigas.

✓ As it prepares to launch a rival bid to take over Philippine Dealing Systems Holdings Corp. (PDS Group), the state-owned Land Bank

of the Philippines has notified the Securities and Exchange Commission (SEC) that it would seek exemptive relief from regulatory limits on exchange ownership. The SEC, for its part, welcomes a “healthy” competition between Landbank and the Philippine Stock Exchange (PSE), a long-time suitor of PDS Group that wants to unify the country’s capital market infrastructure to be more competitive in the global financial market landscape. “I was also surprised by the move of Landbank but in the capital markets, especially when it comes to the functions like providing a platform for the exchange of stocks and fixed income securities, there are really a lot of public interest involved and the more parties there are interested to go into this business, the better for us. It’s always better for the competitive environment,” SEC Chair Teresita Herbosa said during a forum on Friday. As it prepares to launch a rival bid to take over Philippine Dealing Systems Holdings Corp. (PDS Group), the state-owned Land Bank of the Philippines has notified the Securities and Exchange Commission (SEC) that it would seek exemptive relief from regulatory limits on exchange ownership. The SEC, for its part, welcomes a “healthy” competition between Landbank and the Philippine Stock Exchange (PSE), a long-time suitor of PDS Group that wants to unify the country’s capital market infrastructure to be more competitive in the global financial market landscape. “I was also surprised by the move of Landbank but in the capital markets, especially when it comes to the functions like providing a platform for the exchange of stocks and fixed income securities, there are really a lot of public interest involved and the more parties there are interested to go into this business, the better for us. It’s always better for the competitive environment,” SEC Chair Teresita Herbosa said during a forum on Friday. “So when the Landbank posed a challenge to the PSE regarding the sale of PDS or exchange for fixed income, it will signify, I think, healthy competition among our businesses in the Philippines,” she added. PDS is the holding firm for fixed-income trading platform Philippine Dealing and Exchange Corp., Philippine Depositary and Trust Corp. and Philippine Securities Settlement Corp. “At this point, for me it’s more business issue, who can bid higher,” she said. The SEC noted that the PSE has had a lot of hurdles to overcome in its plan to acquire PDS as the securities law states that no single industry can exceed 20-percent ownership in an operating exchange.

✓ Land Bank of the Philippines (Landbank) saw its net income grow in 2017 on the back of its robust core revenues. In a statement

sent to reporters on Thursday, state-owned Landbank said it posted a net income of P14.05 billion, climbing 4% from the P13.58 billion recorded in 2016. Landbank’s net income growth was mainly supported by the double-digit growth of its core revenues. The bank’s income from loans expanded 12% to P26.8 billion last year from P23.9 billion in 2016. This, as the lender’s loan portfolio expanded by 30% to P674.3 billion last year, the bank said in the statement. Landbank’s deposit base likewise rose 15% to P1.42 trillion from the P1.23 billion recorded in 2016 as it added new branches and automated teller machines and expanded the enrollment of its Internet and mobile banking subscribers. Meanwhile, the bank’s income from investments also expanded 28% to P21.17 billion in 2017 from the P16.49 billion booked in the comparable year-ago period. Landbank’s investment portfolio rose 25% to P580.65 billion. Return on equity was at 14.8% in 2017, while the lender’s total capital expanded to P104.59 billion by 23%. “With our solid performance in 2017 further reinforcing the [b]ank’s foundation, we are confident with sustaining growth in 2018,” Landbank President and Chief Executive Officer Alex V. Buenaventura was quoted as saying in the statement. “Our core objective is to continuously grow the net income in order to expand support to our priority sectors, especially the farmers and fishers, cooperatives, [and micro-, small and medium enterprises].” Earlier, Landbank said it is eyeing to acquire the 66.67% stake of Philippine Dealing System Holdings Corp. (PDS) after its board approved the move last Jan. 23. Mr. Buenaventura said the lender’s acquisition of PDS will “increase Landbank[‘s] profits and accelerate development of capital markets in the country.” Finance Secretary Carlos G. Dominguez III backed Landbank’s planned acquisition of the country’s fixed-income exchange, saying that the Philippine Stock Exchange has taken too long to carry out its acquisition of PDS. Mr. Dominguez said recently that Landbank needs profits to subsidize farmer loans. Landbank is the largest provider of loans to small farmers and fishers, cooperatives and local government units. As of September last year, it was the country’s fourth largest bank in asset terms with P1.48 trillion.

✓ The Securities and Exchange Commission (SEC) said on Friday it will only grant exemptive relief once it is clear if the Philippine

Stock Exchange, Inc. (PSE) or Land Bank of the Philippines (Landbank) will acquire the Philippine Dealing Holding Systems Corp. (PDSHC). “We will issue exemptive relief once everything is already clear on who will win the price war,” SEC Chairperson Teresita J. Herbosa told reporters at the sidelines of a forum on Friday. Any entity looking to acquire PDSHC would have to secure exemptive relief from the SEC, as per the Securities Regulation Code that says no single group can own up to 20% of an exchange. Ms. Herbosa said the competition between PSE and Landbank for PDSHC is more of a business issue at this point, given that it would depend on which party can bid higher. “Acquisition should be for reasons to benefit the investing public… If it comes to that point where both PSE and Landbank will be applying to us, assuming also that they have the same go-signal from the owners of (PDSHC), we’ll have to probably consider these factors,” Ms. Herbosa said. The PSE has been negotiating to acquire the fixed-income exchange for about four years now, since it proposed to merge the two capital markets back in 2013 to promote synergies in operations. So far, the PSE has been able to hike its stake in the PDSHC to 69.03%. The bourse operator will also be conducting a P3.16-billion stock rights offer to eligible stockholders by March to bring down ownership of trading participants to less than 20% in the PSE. The funds raised will also be used for its acquisition of PDSHC, which is valued at P2.2 billion. In January, Landbank bared its plan to acquire a majority stake in PDSHC, in a challenge to PSE’s bid. Finance Secretary Carlo G. Dominguez III earlier said the PSE’s inability to merge with PDS has hampered the growth of the country’s capital markets. He has also expressed support for Landbank’s acquisition, saying it will be a profitable business for the government-owned bank. While the PSE has a pending petition, Ms. Herbosa said Landbank has yet to file a petition for exemptive relief at the commission.

✓ BDO Leasing and Finance, Inc. (BDO Leasing) booked a steady net income in 2017 as higher gross revenues were tempered by

higher funding and operating costs. In a disclosure to the local bourse on Thursday, the leasing and financing arm of Sy-led BDO Unibank,

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Inc. said it posted a net income of P570 million last year, steady from the bottom line it booked in 2016. BDO Leasing recorded gross revenues of P3.2 billion in 2017, up 11% from the previous year. Its net lease and loan portfolio, meanwhile, booked a 9% increase to total P34.3 billion. However, the listed firm saw higher funding and operating costs, which caused its net income to end flat, it said yesterday. BDO Leasing recorded an asset base of P42.8 billion, a 10% increase from the same period in 2016. “The company will continue to leverage on its parent company’s extensive market reach and intensify its provincial thrust to tap fast-growing and rapidly urbanizing areas outside Metro Manila,” BDO Leasing said in the statement. According to latest central bank data, BDO Leasing’s parent BDO Unibank is the country’s biggest bank in terms of assets, capital, deposits and loans. Shares in BDO Leasing closed at P3.74 apiece on Thursday, up by four centavos or 1.08% from Wednesday’s finish of P3.70 each.

✓ NOW Telecom Company, Inc.’s legislative franchise has been extended for another 25 years. The NOW Corporation affiliate said in a

disclosure to the stock exchange that on Feb. 22, President Rodrigo R. Duterte signed into law Republic Act No. 10972 which extends NOW Telecom’s franchise until 2043. “With the said law, NOW Telecom, as a telecommunications company, now has the privileges similar to those granted to existing dominant players in the industry,” the disclosure read. Republic Act (RA) No. 10972, which was first drafted in July last year, renews the old RA No. 7940 to allow the franchise to build, operate, and maintain mobile radio systems within and without the Philippines for 25 years. The act will take effect 15 days after it is published either in the Official Gazette or any general circulation newspaper. NOW Telecom Mel V. Velarde said in a Facebook post that this would mean that they have secured a “tri-mega franchise.” Formerly known as Infocom Communications Network, Inc., NOW Telecom is one of the three telecommunication companies vying take the third slot as one of the major players in the industry. The Department of Information and Communications Technology had announced some of the requirements needed to qualify for the slot, such as having a net worth of at least P10 billion, no liabilities, and that the company should be 60% Filipino-owned. Now Corp.’s shares on Friday closed P.66 or 4.39% higher at P15.70 from Thursday’s P15.04.

✓ SM Investments Corp.’s integrated transport solutions provider 2GO Group, Inc. (2GO) is investing in the online delivery service

Mober Technology PTE. In a statement issued Friday, Mober said it has received a capital infusion from 2GO, effectively linking it to SM Investments Corp. (SMIC). The holding firm of the country’s richest man Henry Sy, Sr. has an interest in 2GO after acquiring a 34.5% interest in its parent, Negros Navigation Company (Nenaco), last year. With this partnership, Mober said it will be able to service SM’s various businesses, such as SM Appliance, Our Home, SM Department Stores, and other SM affiliates, by providing them with same-day delivery capabilities. “From individual to businesses, Mober helps you move forward in just a few taps using our Mober app. It’s a click, load, deliver scheme. We offer pick-up and delivery services that’s tailored to your specific needs,” Mober founder and Chief Executive Officer Dennis Ng said in a statement. Founded in 2015, Mober has been described as the “Uber for logistics.” Using a mobile application, Mober allows users to book vans that can transport big items around Metro Manila, Laguna, and Bulacan. It has scaled up its operations to around 140 van partners as of May 2017. The company also provides home and store deliveries on the same day or in advance, and pet shuttles. Meanwhile, 2GO operates through three core business units: 2GO Freight for commercial and personal shipping needs, 2GO Travel for the integration of passenger ships and fast ferries, and 2GO Supply Chain for logistics, distribution, warehousing, and inventory management. For his part, 2GO President and Chief Executive Officer Frederic C. DyBuncio said the online platform will help fill a gap in the company’s services. “Mober fills in the gap for 2GO being a technology platform that allows on-demand delivery service for big items,” said Mr. DyBuncio, who also sits as the president and CEO of SMIC. 2GO Chief Operating Officer Ricardo B. Aguas, Jr. meanwhile said the partnership will merge technology and business innovations in the logistics space. “This is also a strategic partnership for 2GO as we are also embracing the multiple opportunities the digital world brings,” Mr. Aguas said. With the capital infusion from 2GO, Mr. Ng said he plans to expand Mober to other key cities in the Philippines, enhance the Mober app for better scalability, and add more van partners to its network. Mober did not disclose how much it had received from SMIC.

✓ Revolution Precrafted has struck a deal with Central Country Estate, Inc. (CCEI) for the construction of prefabricated homes in a 70-

hectare development in Pampanga. In a statement issued late Thursday, the local startup that develops prefabricated designer homes said it will be investing $115.4 million to build over 7,100 prefabricated homes in The Lakeshore in Mexico, Pampanga. Revolution Precrafted expects more than $345 million in revenues from the project, including the sale of prefabricated homes and pop-up retail stores. The company describes the project, dubbed Revolution Flavorscapes at Lakeshore, as the “first livable food park” as it would house pop-up stores featuring cuisines from 200 countries. “We all love food and we believe that there should be a community meant for all our foodies. The world’s first livable food park concept is another fresh concept which continues our tradition of bringing industry-first and world-first projects,” Revolution Precrafted founder and Chief Executive Officer Jose Roberto Antonio said in a statement. CCEI will be building what it calls a FamiLeisure hub which will include a community swimming pool, a “drive-by” cinema, museums, spas, and a sports center. “We will develop the property to ensure that there will be ample open spaces, where the residents can run, hike, and engage leisure activities. We are very excited about the project and we will reveal the new amenities in the coming months,” CCEI Managing Director Brian John Mangio said in the statement. Once CCEI completes its development, Revolution Precrafted will bring in the prefabricated homes which will be installed in the community. There will be three types of units in the community, the smallest of which is Revolution Alcove, 48-square meter townhouses, priced at P1.8 million. The 60-sq.m. single attached units called Revolution Cocoon will be priced at P2.16 million, while the 72-sq.m. Revolution Next units will be sold at P2.52 million. The retail pop stores will cost P6.2 million each. Other highlights in the masterplanned community include a Museum of Ice Cream, Museum of Candy, a Chocolate Gallery, and microbrewery surrounded by a beer garden. The company noted that the development is located near the Clark International Airport, which is expected to increase economic activity in the area. Revolution Precrafted said it will take it three years to develop the masterplanned community after starting this year. Revolution Precrafted is a local startup that has garnered so-called “unicorn” status, meaning that it has managed to quickly increase its market value to over $1 billion. It pools together architects, artists, and designers for the creation of prefabricated livable spaces.

✓ Philippine H2O Ventures Corp. (H2O) is spinning off its water assets as it prepares for a takeover by Davao-based businessman

Dennis A. Uy’s property company. In a disclosure to the stock exchange on Thursday, H2O said its board of directors approved the sale of its water business to sister firm Tabuk Water Corp. (Tabuk) for P442 million. Both parties have also signed a share purchase agreement for the transaction. H2O’s water business is solely under Calapan Waterworks Corp. (CWWC), where it holds a total of 137.05 million common shares, or 99.75% of the issued and outstanding shares. CWWC owns and operates the local waterworks system of Calapan City, Oriental Mindoro. The company serves 22 urban barangays and 13 adjoining rural barangays, connecting a total of 13,384 households as of 2016. The spin-off of the water business is in line Memorandum of Agreement between H2O’s parent, Jolliville Holdings Corp. (JOH) and other related parties and Mr. Uy’s Udenna Development Corp. (UDEVCO) last December 2017. Here, JOH agreed to sell all its shareholdings, or 62.006%, in H2O to UDEVCO. At least two-thirds of the shareholders of H2O would have to approve the transaction before it can be completed, as well as the confirmation by UDEVCO and JOH. UDEVCO will also be launching a mandatory tender offer for the H2O shares, as per the Securities Regulation Code. Shares in H2O jumped 13.03% or 77 centavos to P6.68 apiece at the stock market’s close on Thursday, while parent JOH enjoyed a 7.54% increase or 37 centavos to P5.28 each. The two firms were among the top gainers for the day, defying the Philippine Stock Exchange index’s 1.14% drop to 8,515.57 as rising bond yields continued to put a pressure on global markets.

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Mr. Uy’s property arm had earlier expressed interest taking its business public, saying it is considering an initial public offering or backdoor listing. UDEVCO currently operates Lapu-Lapu Land Corp., a Cebu-based firm undertaking the development of a $341-million Lapu-Lapu Leisure Mactan project. Spanning 12.5 hectares, the project will house a casino, retail complex, and hotels. The company looks to start the casino’s operations as early as 2019, ahead of the development’s target completion in 2022. Mr. Uy has been steadily expanding his business since the start of President Rodrigo R. Duterte’s administration. His logistics arm, Chelsea Logistics Holdings Corp., has been snapping up logistics firms to grow its reach after conducting a P5.84-billion IPO last June 2017.

✓ Local banks continue to extend loans to new coal-fired power plant projects despite the Philippines being directly hit by climate

change, the chairman of Lopez-led First Philippine Holdings Corp. (FPH) said. Federico R. Lopez, who is also FPH chief executive officer, said banks are “tripping over each other” in extending loans to coal power plants even if they recognize that burning the fossil fuel means emitting greenhouse gases. “Coal-fired power plants, being the easiest to develop and its fuel supply the simplest to procure, every competitor and new entrant is seeking to build more coal-fired power plants in a vicious race to the bottom,” he told participants of the second Philippine Environment Summit in Lahug, Cebu City on Thursday. “Adding to these pressures is the fact that majority of banks continue to finance coal production and coal-fired power generation,” he said. “In fact, major banks financed the top 120 coal plant developers by more than $600 billion over the last four years. They’ve been slow to embrace COP (Conference of Parties) 21 despite verbal pronouncements and still have quite a way to go,” he said, referring to the conference in Paris in 2015 that agreed to limit greenhouse gas emissions and slow down the rise in the earth’s temperature. He said if banks transitioned away from coal there would be a shift toward lower carbon alternatives, renewable energy (RE) sources and even the adoption of energy efficiency measures. Mr. Lopez also called out the government for its short-term perspective and ambivalence about climate change issues. “Despite our countrymen’s vulnerability to the effects of global warming, only token importance is given to such concerns in national public policy. Priority is power adequacy and cheap electricity prices,” he said. Mr. Lopez said the recent initiative to impose a coal tax is a step in the right direction but would only amount to as little as P0.01 to P0.03 per kilowatt-hour (kWh) tariffs to coal-fired power plants. He said in other countries such as India, the coal tax is equivalent to P0.06 per kWh. South Korea’s tax on the fuel even reached P0.25 per kWh. Mr. Lopez, who also chairs FPH units First Gen Corp. and Energy Development Corp. (EDC), said his group faces “quite a number of challenges” in the Philippines. First Gen produces power using natural gas while EDC’s output comes from geothermal plants. He noted price competition is intense, and retail competition and open access is underway. Low price is still the main driver of electricity for consumers, he added. “This has driven down profit margins of all power producers. But we’re driving down costs in our geothermal business, both the old fashioned way and through the use of new technology,” he said. Despite the obstacles, Mr. Lopez said the companies he chairs are committed to a “green road.” “There are more and more companies that are conscious about greening their footprints and supply chains. This has a lot to do with the millennial consumer coming of age. In the Philippines we’ve been seeing some electricity customers specifically coming to us because they want to green their supply chains with renewable power,” he said. He said another reason why the Lopez group is committed to its green energy platform is the country’s competitive market. “The Philippines is primarily a services-driven economy. Retail competition and open access that’s underway and progressing will disaggregate that demand. Our portfolio that blends flexible natural gas-fired plants and geothermal, which is the only competitive 24/7 RE technology today, is a better combination for serving this type of demand called mid-merit,” he said. He said natural gas and geothermal, which respectively have only a third or a tenth of the carbon emissions of even the most advanced coal plants, are capable of beating the latter’s prices. “Another reason for optimism about clean energy is that the forces of technology moving very fast. Solar, wind, and battery storage have experienced exponential cost reductions over the last few years. Never in my 20 years in the power industry have I seen anything move so fast,” he said. Given the rapid pace of renewable energy development, Mr. Lopez said coal-fired power plants “can’t keep up with that kind of variability and may likely end up as underutilized or stranded assets in 10 years or less.” “In countries like Australia, Germany, and some US states like California with even modest renewable energy penetration they are already experiencing coal and even gas plants being utilized less or being idled,” he said.

✓ Former 8990 Holdings, Inc. President and Chief Executive Officer Januario Jesus Gregorio B. Atencio III has been appointed to lead

Acudeen Technologies, Inc., a financial technology firm that helps out micro, small, and medium enterprises (MSMEs) with their funding needs. Mr. Atencio, who left the mass housing developer in January, will now sit as the chairman of Acudeen, replacing its founding chair Mario Jordan Fetalino III. “We have big plans for Acudeen. Our vision to support MSMEs does not end in the country, it is only the beginning. We have activated our market expansion initiatives in Southeast Asia early this year. Having Atencio as our chairman gives us a massive boost in terms of business experience, expertise, and resources,” Mr. Fetalino was quoted as saying in a statement. Established in 2016, Acudeen links MSMEs with 30- to 120-day receivables to buyers who would like to invest in them. With this, Acudeen has invoiced more than $3 million across over 400 MSMEs, providing liquidity to these businesses. In turn, individuals and corporates who purchase invoices get attractive returns for short-term cash. The name of the company is derived from the Filipino words “Ako Din” (Me Too), in line with its vision to help unbanked and underbanked MSMEs in emerging markets. “We want every entrepreneur to have the capability to say ‘Ako din,’ I have the capability to grow, too,” Mr. Fetalino said. For his part, Mr. Atencio said he would like to take an active part in the business aside from being an investor in the company. “I am supporting Acudeen because it is in the forefront of this new whole world; this Wild, Wild West if you will, that continuously benefits a wide range of underserved people in the current financial system. Financial inclusion is right around the corner with the emergence of this initiative,” Mr. Atencio said in a statement. Prior to being the chair of Acudeen, Mr. Atencio already had experience in helping finance MSMEs through Original Pitch Venture Capital Team, which he founded along with partners in 2016. The venture capital firm aims to “push start-ups with original ideas to their full growth potential,” according to its Web site. Acudeen is included in the company’s portfolio, alongside online job board for the hospitality sector ServeHappy, Wi-Fi advertising and monetization platform Social Light, Inc., food spoilage detecting strip StillFresh, and fashion and sports wear brand Stoked, Inc. Mr. Atencio resigned from his positions in 8990 last January after sitting as president and CEO for 13 years. He remains on the company’s board of directors.

✓ Light Rail Manila Corp. (LRMC) has signed a P450-million agreement with Voith Digital Solutions Austria GmBH and Co KG for the

rehabilitation and upgrade of Light Rail Transit-1 (LRT-1) generation-2 trains. In a statement, the operator and maintenance provider of the LRT-1 system said the Austrian company will re-engineer the 24 light rail vehicles (LRVs) of six train sets in the next two years. “The rehabilitation of the 24 LRVs will expand capacity which should result in faster travel time because of reduced train headway and queueing time,” LRMC President Juan F. Alfonso said in a statement. The project will be the first overhaul of the Generation 2 fleet’s propulsion system since the government bought the generation-2 trains from Hyundai and Adtranz Sweden in 1999, said LRMC. The current fleet of LRT-1 includes 51 generation-1 LRVs bought in 1984, eight generation-2 LRVs bought in 1999, and 44 generation-3 LRVs bought in 2007. The Department of Transportation (DoTr) last month signed the procurement of 120 new LRVs for delivery in 2020. LRMC has already completed the P1-billion rehabilitation of Generation 1 LRVs, which expanded the fleet, from 77 to 109 LRVs, and the number of daily trips from 498 to 554. LRMC is the consortium of Ayala Corp., Metro Pacific Light Rail Corp., of Metro Pacific Investments Corp. and Macquarie Infrastructure Holdings (Philippines) Pte. Ltd.

✓ Uber Systems Inc (Uber Philippines) has paid P41.15 million to the Bureau of Internal Revenue (BIR), settling its value added tax

(VAT) deficiency for the second half of 2017 and avoiding possible suspension or closure of its operations. “The payment, and the

BAIPHIL Market Watch – 26 February 2018 Page 11 of 23

imminent closure under the Oplan Kandado Program of the BIR that was avoided, was the culmination of the audit of Uber’s VAT compliance for the period July 1 to Dec. 31, 2016,” the tax collection agency said in a statement. The audit was conducted by Revenue District Office (RDO) No. 47 of Makati City. Based on the records of the investigation, the BIR said Uber is registered as a transportation network company with the Land Transportation Franchising & Regulatory Board (LTFRB) with a pool of Transportation Network Vehicle Service (TNVS) operators and drivers. “As such TNC, all of Uber’s earnings are derived from the transportation services made by its TNVS operators and drivers within the Philippines. Hence, its gross receipts from such sale of services is subject to the 12% VAT and not to the 3% common carrier’s tax,” the BIR said. While Uber filed VAT returns, the BIR said the company declared sale of services in the Philippines, which stood at P413.85 million, as “zero-rated sales.” The agency noted that Uber’s decision to declare sale of services as zero-rated and its failure to pay VAT on this “is a clear violation of the Tax Code which is one of the grounds for its suspension or temporary closure.” Under Section 115 of the Tax Code, the BIR can suspend or close the business operations of a taxpayer for a period of not less than five days for failure to: (1) register; (2) issue VAT official receipts or sales invoices; (3) file correct VAT returns; or (4) pay the correct VAT. In August 2017, the LTFRB slapped Uber with a one-month suspension for disregarding an order to stop accepting new driver applications. Uber later paid a P190-million fine to be have its suspension lifted.

✓ Uber Philippines is starting its ridesharing service in Pampanga province within the first semester of 2018 as the transport regulator

is set to lift a moratorium on the processing of new drivers. The announcement was made by Cat Avelino, Uber Philippines head of communications, on Friday as the company celebrated its fourth year of operations in the country. The company, the local unit of San Francisco, United States-based Uber Technologies, currently operates in Metro Manila and Cebu, where it competes with main rival Grab. Yves Gonzalez, Uber Philippines head of government relations and public policy, said there was growing demand in Pampanga, especially around the Clark Freeport Zone. The Duterte administration has emphasized the development of Clark, which it sees as a solution to Metro Manila’s congestion woes. The Department of Transportation is currently expanding the Clark International Airport. It is also targeting to build a railway line linking Clark to Manila by 2022. The Land Transportation Franchising and Regulatory Board (LTFRB) earlier announced that the processing of driver applications would start on March 5. The moratorium was ordered since the LTFRB wanted a closer look at the ridesharing industry. It had been in place since July 2016. Under LTFRB Memorandum Circular No. 2018-005, the supply of transport network vehicle services (TNVS) was capped at 65,000 for Metro Manila. Metro Cebu would get 1,500 cars while Pampanga was allowed 250 cars. LTFRB board member Aileen Lizada, who was present during the anniversary celebration, said the 65,000 cap in Metro Manila was enough to serve about 75 percent of the demand. She said there were currently around 59,000 ridesharing vehicles in the capital district serving around 52 percent of available demand. The cap would be reviewed every three months, Lizada noted. “We want to see the churn rate, we want to see the blacklisting of drivers,” Lizada said when asked about factors the LTFRB would review. For riders booking either Grab or Uber, the optimal waiting time should be two to three minutes instead of the current 10 to 15 minutes, she said. This will also be considered in the LTFRB’s regular review, she said. Uber Philippines said it serves around 1.6 million active riders and 32,000 drivers.

✓ Rejection, disbelief and lack of awareness. These were the issues that local solar energy company Equator Energy Corp. (EEC) had

to deal with when it was just starting out—issues which, says EEC founder, president and CEO Bernardo Fabula, became the company’s greatest source of inspiration to continue growing the business. “It was never easy for [EEC] to catapult its business to success. What makes it survive is a committed and motivated workforce, [coupled with] purpose-driven leadership,” says Fabula, a mechanical engineer, and former member of the Army Corps of Engineers and Society of American Military Engineers. “Another secret is our continuing research and development, [especially with] the advent of new technology in solar resources from various parts of the world. We never stop learning.” As early as 1996, Fabula says he had already thought of putting up EEC, after learning about the numerous benefits of renewable energy. His first ventured into the energy sector, however, by putting up in 2001 Equator Energy Oil Station—a business which finally allowed him to pursue his bigger dream of putting up his own renewable energy company to provide Filipinos with a cheaper alternative energy source. Fabula officially established EEC in 2011, along with his brothers who continue to work with him as members of the company’s board of directors. Equator Energy Oil became EEC’s “laboratory,” after the company installed on it a grid-tied solar power plant. Situated on Bayani Road in Taguig City, Equator Energy Oil is the country’s first and only solar-powered oil station. Since then, EEC has been involved in the design, supply, installation and maintenance of a variety of alternative energy systems, whether for industrial, commercial or residential use. Aside from solar power systems, EEC also builds wind farms for utilities in rural areas. “[We do] not only sell or import solar items from abroad, but also design, supply and integrate solar components for the smallest solar kits, solar street lights, solar water and irrigation pumps, [and even for] the biggest hybrid solar systems and industrial-size solar farms,” says Fabula. He considers one of their creations a major development for the country’s renewable energy sector: The Freenoy Solar Power Machine. Easy to install and use, the Freenoy is ideal for the country’s remotest areas, says Fabula. “The development of Freenoy, which the company considers the perfect machine, is a milestone in the field of renewable energy. This machine can provide continuous supply of energy using the free fuel from the sun,” he explains. “[It has] no need for fuel and maintenance; can be controlled and monitored remotely without bulky and expensive transmission line from the source; is easy to install and disassemble; can be transported anywhere; can be customized for commercial or residential purposes.” Freenoy was developed, adds Fabula, specifically to serve Filipinos in remote areas and those affected by natural calamities. In 2016, EEC deployed one five-kilowatt (kW) Freenoy to Brgy. Marayos, Pinamalayan in Oriental Mindoro, to provide power for those affected by Typhoon “Nina.” Around 35 families had access to basic power needs—for their lights, electric fans, TVs and cellphone charging—for around three months, says Fabula, until electricity was fully restored. Also in Oriental Mindoro is a 5-kw Freenoy on the John Paul College and Montessori School, which is designed to energize the school’s computers, fans, and lights during blackouts that occur twice a day. The municipality of Silvino Lubos in Northern Samar has also been using a 20-kW version of Freenoy since 2015. It is the main power source of the town’s municipal building. “The town has no power lines. People take three rides to reach the place—motorcycle, boat, and a four-wheel vehicle,” says Fabula of the remote town. “Freenoy (7 kW) was also installed in Mindanao State University last June 2016, our first solar installation in a government state university in Mindanao. We haven’t received reports, however, if it was damaged during the Marawi battle.” Aside from the Freenoy, Fabula says solar street lights are another EEC product which they aggressively setting up in the country’s rural areas. Existing projects include those in Isabel, Leyte; Semirara, Caluya, Antique; Brgy. Das, Toledo City, Cebu; and Lal-lo, Cagayan. Valenzuela City also uses EEC’s 78-kW hybrid solar power system, which Fabula says helps reduce electricity costs in the city and serves as a backup power source during calamities. He says that unlike the skepticism EEC received when it was still in its birthing stage, more people have now become receptive of solar power systems, especially because of increasing electricity costs. “A decade ago, people were naive and ignorant about solar [power]. It really took [a huge] effort to convince customers both in government and private sector to adopt solar power as one of their alternative sources of energy. Most of them [had] the wrong notion that solar components are expensive and unreliable. People even refused to accept free demos and solar kits, [believing] it was a waste of time and energy, and very complicated,” says Fabula. “[Now], the company is receiving contracts with government [for] building rooftop hybrid and grid-tied type [solar power systems].” The company’s gross sales numbers say enough about the quality not just of EEC’s solar products, but of its after-sales service as well: P8 million in 2015, P63 million in 2016, and P200 million last year. The company’s continued success, plus Filipinos’ wider acceptance of solar power, is enough inspiration for Fabula and his company to expand and continue developing its renewable energy technology. For him, solar power is the key to increasing the country’s energy supply.

BAIPHIL Market Watch – 26 February 2018 Page 12 of 23

✓ Semirara Mining and Power Corp. (SMPC) on Friday said its consolidated net income had jumped 18 percent to P14.14 billion in 2017 from P12.04 billion in 2016, thanks to higher prices and bigger volumes of coal sold last year. SMPC said in a regulatory filing that last year’s performance helped push up consolidated earnings per share by 17 percent to P3.32 from P2.83 previously. “Better coal profitability in 2017 is driven by increased average selling price (ASP) and slight increase in volume sold,” the company said. “Production and coal sales set new record highs at 13.2 million tons and 13.1 million tons, respectively,” it added. “Coal ASP rose by 20 percent [to] P2,268 per ton from P1,886 per ton in 2016.” In terms of business units, coal production contributed a net of P6.08 billion, or 43 percent of net income after tax. Sem-Calaca Power Corp. chipped in 32 percent, or P4.55 billion, and Southwest Luzon Power Generation Corp. had 26 percent, or P3.74 billion. “There were two significant nonrecurring transactions in 2017 that had impact on profitability,” the parent firm said. SMPC was referring to the partial recognition of income worth P330 million from disputed receivables from Power Sector Assets and Liabilities Management Corp. The other was the P840 million in accelerated depreciation relative to the life extension project of SMPC’s Unit 1 and Unit 2, which will start in the later part of this year. Also, SMPC saw the improved capacity of its power plants drive a 21-percent surge in generation, which reached 3,515 gigawatt-hours this year from 2,905 gwh last year. In 2017, the Semirara group’s energy sales totaled 3,560 gwh, or 7 percent higher than the 3,322 gwh in 2016. “With higher Newcastle price benchmark, ASP improved by 14 percent to P3.75 kilowatt-hour from P3.31 per kwh last year,” SMPC said. “Meanwhile, cost of energy sold slightly increased by 2 percent to P2.27 per kwh from P2.24 per kwh in 2016,” it added.

✓ The country’s leading fast-food chain continues its expansion in Hong Kong with the opening of its seventh and eighth stores in

December 2017, barely a month since it opened two stores in October and November the same year. Jollibee opened its first branch in Hong Kong in 1996. But it wasn’t until 2016 that the second store was opened. In a span of 18 months, Jollibee has launched seven more stores in Asia’s leading finance hub. Jollibee’s seventh and eighth stores opened in the exclusive enclave of Tsuen Wan and the shopping district of Tsim Sha Tsui, respectively. “This marks another important milestone in Jollibee’s exciting journey in Hong Kong,” said Dennis Flores, Jollibee Foods Corporation President for International Markets. “We’ve brought our well-loved Chickenjoy to more of Hong Kong’s residents and visitors to help them come together to bond over delicious food.” Jollibee favorites, particularly the Chickenjoy, have been making waves in Hong Kong as food critics and food editors from local newspapers have praised it for being the best version – in crunch and flavor – of fried chicken in the area. The warm reception that every Jollibee store opening receives from Hong Kong locals shows the growing non-Filipino market of Jollibee. Jollibee has been aggressively expanding its network overseas, focused on areas with strong concentrations of overseas Filipino workers (OFWs) and immigrants. While the food giant continues to establish itself with its fleet of stores, it also eyes new territories such as Italy, United Kingdom, and Japan. Today, Jollibee is operating an extensive 1100 stores around the world, with strong presence in Singapore, Vietnam, United Arab Emirates, United States of America, and Canada, among others.

✓ Hyundai Asia Resources Inc. (Hari) started the year with a “modest” 3-percent growth in sales volume in January 2018 after surging

at two digits in the same month last year. In a statement, Hari said it had sold 2,903 units of vehicles in January compared to 2,817 units previously as the take up of passenger cars dropped while sales of commercial vehicles grew by almost half year-on-year. “January’s performance provides a jump-start to 2018,” Hari president and CEO Ma. Fe Perez-Agudo said. The Korean brand considers its January performance as “quite a feat” considering that it was the first month that taxes on vehicles were raised through the Tax Reform for Acceleration and Inclusion (Train) Law. “Though faced with a tougher business landscape, we expect this year to bring us on higher grounds as we continue to level up our commitment in providing the best products and services to our customers,” Agudo said. Sales of passenger cars—representing 70 percent of total sales for the month—dipped by 8 percent to 2,036 units from 2,223 units in January 2017. Turnover of the Elantra compact car more than doubled in January to reach 219 units from 103 units. On the other hand, sales of Hari’s light commercial vehicles (LCV) surged by 46 percent to 867 units from 594 units previously.

✓ The feared demise of traditional retailing, which seems to be starting in the United States, Europe and China as a result of booming

online shopping, may not happen in the Philippines in the next five to 10 years, but it is a future possibility that SM Investments Corp. (SMIC) is preparing for, the chair of the country’s largest conglomerate said. Jose Sio—chair of SMIC which is the dominant player in retailing, property development and banking in the Philippines—said the group’s investment in the logistics business was a way of future-proofing the conglomerate. “This is the future business that we see. This is happening in the US now and it is happening in China, in Europe. Retailing will be gone,” Sio said in a forum with the Federation of Filipino Chinese Chambers of Commerce & Industry on Wednesday night. Last year, SMIC paid $124.5 million to acquire a 30.47-percent stake in leading logistics provider 2GO Group Inc. through its privately held parent firm Negros Navigation Co. Inc. 2GO is the country’s largest integrated supply chain operator whose businesses include shipping, freight forwarding, warehousing, and express delivery services. This is seen giving the SM group a logistics backbone if and when online shopping, which still accounts for a small share of consumer spending now, picks up pace in this market. The group entered this business as a partner of Davao-based tycoon Dennis Uy. During the open forum after his presentation, Sio was asked about the possibility of traditional retail trade dying in the future. In the US, a number of once-venerable fashion houses and big shopping malls closed shop amid the rise of online shopping. “In the Philippine environment, we don’t see this happening in five or even 10 years, because our market is not yet in that environment,” Sio said. “There is now a concern. Should we continue to encourage it? Don’t we see the social problem that it’s creating? What will happen to millions of people that will be out of work? What will happen to the small businessman that will be out?” Sio said it was beyond SM to stop new technology. However, he said it was better to accept it and “do something about it,” adding that SM group was ready to face such possibility. In his presentation, Sio said even the banking landscape would change in the next five years. “Branches will be out. Will it happen in the Philippines? We don’t know, but it will will come,” Sio said.

✓ A solution to the P3.5-billion gridlock plaguing Metro Manila exists but not overnight, according to the Metropolitan Manila

Development Authority (MMDA). In an interview on Dobol B sa News TV on Friday, MMDA Assistant General Manager Jojo Garcia said it will take time to make the traffic woes in the region go, noting that it was caused by poor urban planning 30 years ago. “Wala din pong overnight solution dito sa ating mga traffic. Talagang ang mga solution po, long-term, is ‘yung pong infrastructure, additional na kalye, ‘yung atin pong mass transportation,” Garcia said. “And then i-decongest po talaga ang Metro Manila katulad ng mga ginagawa nila ngayon,” he said. “Talagang kailangan po nating i-expand ang Metro Manila.” MMDA’s 2,000 traffic constables will continue to enforce traffic rules despite their diminished number and incomplete gear. “May mga nakalinya po kaming procurement ngayon, mga private companies po, may mga nagdo-donate sa amin. Within the next few months, may magdo-donate ng 1,000 plus body cameras,” Garcia said. Susumu Ito, Japan International Cooperation Agency’s (JICA) chief representative, noted in a presentation during the 36th Joint Meeting of the Japan-Philippines Economic Cooperation Committees that the country is losing P3.5 billion each day due to extreme traffic in Metro Manila. The recent estimate is nearly 50 percent higher than the estimate of P2.4 billion in 2012 and is on track to meet JICA’s projection that traffic jams in key cities around the country will cost P6 billion a day by 2030. The loss estimates were calculated based on the potential work wasted from the hours spent on the road by workers and delays in the delivery of goods, Garcia said. A lack of infrastructure and the constant increase in the number of private vehicles on the road, poor road planning, and a lack of discipline on part of motorists further compounded the problem. Build, Build, Build, the government’s infrastructure spending program, aims to address issues of public works in Metro Manila and ease the traffic problem.

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The government intends to spend more than P8.2 trillion on infrastructure projects during the six-year term of the Duterte administration. The infrastructure development program extends to areas outside of Metro Manila to address growing traffic problems in other various cities and provinces. “Highly-urbanized na ‘yung mga lugar, so hindi na naka-spread, pero at least po sa ibang bansa, bawat county—lalo na sa America—bawat city, nakakalat po ang mga malls, opisina, nakakalat ang trabaho,” Garcia said.

ASIA-PACIFIC

✓ Tokyo stocks rose on Friday in light trade as receding fears of more aggressive U.S. interest rate hikes boosted sentiment, with

defensive shares such as construction and utilities outperforming. The benchmark Nikkei ended 0.7 percent higher at 21,892.78. For the week, it was up 0.8 percent, rising for two straight weeks. The broader Topix gained 0.8 percent to 1,760.53, but trading was thin, with only 1.19 billion shares changing hands, the lowest since late December. Construction companies Kajima Corp and Taisei Corp climbed 3.4 percent and 2.9 percent, respectively, and Tokyo Electric Power Co rose 1.8 percent and Kansai Electric Power jumping 5.0 percent. Mining stocks also gained, with Inpex and Japan Petroleum Exploration rising 2.1 percent and 1.1 percent, respectively, after oil prices rose to two-week highs on Thursday before dipping on Friday.

✓ China shares extended their rebound on Friday, shtrugging off Beijing’s seizure of high-flying conglomerate Anbang Insurance

Group amid signs the government is once again supporting the country’s stock markets after their recent rout. The unprecedented takeover of a major non-state company underscores how far the communist Party will go in its growing campaign to reduce dangers to the financial system after years of break-neck growth. Anbang had violated laws and regulations which “may seriously endanger the solvency of the company”, the China Insurance Regulatory Commission (CIRC) said in a statement, without giving details. Anbang is one of China’s biggest insurance conglomerates. It claims 1.97 trillion yuan ($311 billion) in assets and ranks 139 on the Global Fortune 500 list. But Sun Lijin, an analyst with Pacific Securities, said the government’s takeover “could have rather limited impact on the stock market.” While dramatic, investors believe the move could prevent excessive shocks to the market by giving authorities more room to resolve financial risks related to Anbang and overhaul the firm, Sun added. Insurance industry insiders also said they believed the move had more to do with Anbang’s behaviour than broader systemic risks. The blue-chip CSI300 index ended up 0.5 percent to 4,071.09 points, while the Shanghai Composite Index gained 0.6 percent to 3,289.02 in a holiday shortened week. Both indexes have rebounded over 7 percent from a low hit on Feb. 9, the depth of a rout triggered by global market turmoil. Investors focused instead on signs that the government has once again stepped in to stabilise markets following the heavy selling early this month and ahead of key political gatherings in coming weeks. China’s five state-backed mutual funds boosted their equity holdings during the recent market slump, the official Shanghai Securities News reported on Friday. Meanwhile, China has suspended publishing its volatility index as regulators step up efforts to curb speculative trading. In light of government support, analysts said the Anbang incident has long been priced in. “The event had been fermenting for quite some time since 2017,” said Chen Xiaopeng, analyst at Sealand Securities. Chairman Wu Xiaohui, who had been prosecuted for economic crimes, was arrested in June. Chen added that the fundamentals of most listed firms in which Anbang holds stakes - mostly banking and property stocks - are relatively solid. Most of the Anbang-invested shares, including Vanke , Financial Street, Gemdale, China Minsheng Banking and China Merchants Bank gained on Friday, with few signs of panic-selling.

✓ Hong Kong stocks rose on Friday, capping a holiday-shortened trading week, as main indexes managed to recover much of the

damage done during the recent rout. The Hang Seng index rose 1.0 percent, to 31,267.17, while the China Enterprises Index gained 1.7 percent, to 12,735.06. The sub-index of the Hang Seng tracking energy shares rose 2.2 percent, while the IT sector rose 1.32 percent, the financial sector was 0.91 percent higher and the property sector rose 1.47 percent. The top gainer on Hang Seng was Country Garden Holdings Co Ltd, up 6.21 percent, while the biggest loser was Sunny Optical Technology Group Co Ltd, which was down 1.71 percent. Around the region, MSCI’s Asia ex-Japan stock index was firmer by 1.06 percent, while Japan’s Nikkei index closed up 0.72 percent. The yuan was quoted at 6.339 per U.S. dollar at 08:13 GMT, 0.3 percent firmer than the previous close of 6.3565. The top gainers among H-shares were China Merchants Bank Co Ltd up 3.86 percent, followed by China Minsheng Banking Corp Ltd gaining 3.62 percent and China Communications Construction Co Ltd up by 3.41 percent. The three biggest H-shares percentage decliners were Byd Co Ltd, which was down 0.48 percent, China Telecom Corp Ltd, which fell 0.6 percent, and China Construction Bank Corp down by 0.8 percent. About 1.72 billion Hang Seng index shares were traded, roughly 55.4 percent of the market’s 30-day moving average of 3.10 billion shares a day. The volume traded in the previous trading session was 2.47 billion. At close, China’s A-shares were trading at a premium of 27.36 percent over the Hong Kong-listed H-shares. The price-to-earnings ratio of the Hang Seng index was 13.64 as of the last full trading day, while the dividend yield was 2.8 percent.

✓ Bank of Japan Governor Haruhiko Kuroda may have little to cheer about despite landing another five-year term for one of the most

influential jobs in the country, if not the world. For one thing, the 73-year-old Kuroda faces a grueling job: frequent overseas trips and grillings in parliament some 50 times a year by lawmakers who summon him usually on short notice. The number of appearances - 10 times that of the Federal Reserve chair and seven times that of the Bank of England governor - could drain even a workaholic like Kuroda, who is in good health. He will turn 78 if he serves until the end of his second term through April 2023, making him the longest serving governor in the BOJ’s 135-year history. Age, however, could be the least of many challenges the bookish Kuroda faces in his second term, as his quantitative easing (QE) experiment becomes prolonged. His biggest task ahead will be to engineer a smooth exit from crisis-mode stimulus, now that the economy is stabilizing - and to signal how that will be done without throwing markets into turmoil. On the other hand, if the economy slips back into the doldrums, Kuroda has a diminished capacity to relaunch a stimulus program after the massive asset purchases of the past five years. “Kuroda’s bazooka stimulus was intended to be a quick-fix solution to deflation,” said Izuru Kato, chief economist at Totan Research. “But it’s still around and causing problems that have become hard to dismiss, mostly in the banking sector.” Years of near-zero rates are straining the banking sector, with more than half of Japan’s regional banks having lost money on their core business in the year ended March 2017. Five years ago, Kuroda’s job was to shock the public out of a deflationary mindset with a blast of QE and revive a

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stagnant economy hurt by a strong yen. He used skills, honed when he was Japan’s top currency diplomat overseeing exchange-rate intervention, to stun markets by scale and timing to maximize the policy effect. Now, the problem has become more complex. Inflation remains distant from his 2 percent target even as the economy enjoys its longest streak of expansion in four decades, forcing the BOJ to keep expanding its balance sheet at a pace deemed unsustainable. Kuroda’s unprecedented QE experiment has scooped up 40 percent of Japanese government bonds and bloated the BOJ’s balance sheet with risky assets like exchange-traded stock funds. The rising cost of that has become a matter of intensifying debate among BOJ policymakers. Winding down the stimulus program requires deft communications to avoid surprising markets. Telegraphing an exit is never easy, as illustrated when U.S. yields spiked in 2013 after former Fed chairman Ben Bernanke signaled a slowdown in asset purchases. The BOJ itself was caught off guard when a cut to its regular bond purchases in January spooked investors who pushed up yields and the yen. “It’s very hard for any central bank to fully convey its intentions to markets,” said Kazuo Momma, a former BOJ executive who oversaw its international and monetary policy affairs. “The risk of miscommunication is always there, especially when central banks are shifting policy. It’s a risk inherent to central bank communication.” Signaling an exit could also create rifts in Kuroda’s cozy relations with Prime Minister Shinzo Abe, who has won elections and enjoyed solid ratings for keeping the economy afloat. Abe instructed his ministers on Tuesday to come up with spending measures to ease an expected hit to private consumption from a scheduled sales tax hike next year. Pressure from Abe’s administration to keep borrowing costs low could discourage the BOJ from signaling an exit. The recent stock market rout could also prevent policymakers from debating an exit, if a rising yen begins to hurt corporate profits and exports. “The BOJ should be dialing back stimulus to prepare tools to deal with the next recession, which could come around 2019,” said former BOJ board member Sayuri Shirai. “The best chance to do this was last year. With that opportunity missed, the BOJ won’t be able to move for quite a long time,” she told Reuters. In the worst case scenario, Kuroda may be forced to expand, not dial back, stimulus to fend off external shocks like a strong yen - with little means to do so. After five years of buying, the BOJ’s government bond holdings rose by three-fold to 445 trillion yen ($4.2 trillion) - roughly 80 percent the size of Japan’s economy - leaving little room to ramp up buying. Lowering interest rates could also prove counter-productive as it would narrow margins at financial institutions and risks destabilizing the banking system, analysts say. “The BOJ is already doing the maximum in terms of easing,” said Momma, the former BOJ executive. “That means there’s no additional means left that are feasible and effective.”

✓ Japan’s key inflation rate remained at 0.9 percent in January on higher energy costs, almost matching market forecasts and still

below the Bank of Japan’s 2 percent target, government data showed Friday. The year-on-year change in the core consumer price index, which excludes volatile fresh food prices, remained positive for the 13th consecutive month, according to the Ministry of Internal Affairs and Communications. The rate had also stood at 0.9 percent in each of the previous two months. As energy costs have peaked with crude oil prices slowing the pace of increase, the inflation rate is “expected to be flat in the coming months, although the Japanese economy is recovering moderately,” a ministry official said. Electricity fees and gasoline prices were the main driver behind the increase in the core CPI, rising 6.4 percent and 8.8 percent, respectively. Among nonfresh foods and beverages, prices for beer increased following tighter regulations on discount beer while those for rice and beef also rose, the ministry said. Lower costs for mobile phone contracts weighed on the index, in a sign that carriers are wary of charging more for products and services in fear of losing customers. Yoshimasa Maruyama, chief economist at SMBC Nikko Securities Inc., said the BOJ’s 2 percent goal is “nowhere in sight,” underscoring that “the effect of oil pr ices in raising the core CPI will likely gradually dissipate in 2018.” Excluding both fresh food and energy prices, so-called “core-core” consumer prices rose 0.4 percent last month from a year before.

✓ Japanese electronics maker Sharp Corp (6753.T) has dropped legal action to block China’s Hisense Group Co Ltd from selling TV

sets in North America under Sharp’s brand, which Hisense had licensed, the Nikkei business daily reported on Friday. Sharp had filed a Federal lawsuit and an action with a U.S. trade body objecting to the use of its brand on what it called low-quality television sets. Both filings had been withdrawn as of Thursday, the Nikkei said, without citing sources. A Sharp spokesman declined to comment when contacted by Reuters. A Hisense spokesman in Tokyo said he could not comment on the matter. Sharp cut back its overseas TV business and licensed Hisense to use its brand in the United States in 2015. It later sued the Chinese state-owned firm for putting the Sharp name on what it said were low-quality TVs. In September, Sharp asked the U.S. International Trade Commission to probe certain Wi-Fi enabled devices and their parts after Sharp accused Hisense of infringing its patents. Sharp was taken over by Taiwan’s Hon Hai Precision Industry Co Ltd (Foxconn) (2317.TW), the world’s largest contract electronics maker, having struggled in the face of low-cost Asian competition. Recent financial results have shown Sharp is recovering from massive losses, and the company has said it plans to re-enter the U.S. market with a high-end TV brand.

✓ Liu He, a Harvard-trained economist who is a trusted confidant of Chinese President Xi Jinping, has emerged as the front runner to

be the next governor of the People’s Bank of China (PBOC), according to three sources with knowledge of the situation. Liu may be in a position to become one of China’s most powerful economic and financial officials ever, as he is already top adviser to Xi on economic policy and is also expected to become vice premier overseeing the economy. Liu would replace current PBOC chief, 70-year-old Zhou Xiaochuan, who is China’s longest-running head of the central bank, having taken the job in 2002. Zhou is expected to retire around the time of the annual session of parliament in March, sources previously told Reuters. The change would be part of a wider government reshuffle following the 19th Communist Party Congress in October last year, during which Xi laid out his vision for China’s long-term development, and elevated his key allies. Speculation has been rife for months over the choice of the next central bank governor. Xi will have the final say, and the sources noted that while Liu is clearly the frontrunner he is not yet certain to get the job. The PBOC and the State Council Information Office (SCIO), the government’s public relations arm, did not immediately respond to faxed requests for comment. Just before last October’s Congress, sources told Reuters that China’s banking regulator head Guo Shuqing and veteran banker Jiang Chaoliang were leading contenders for the PBOC job. But at the congress, the influence of the 66-year-old Liu continued to grow. He was elected into the 25-member Politburo, the second-highest tier in Beijing’s political power structure after the seven-member Politburo Standing Committee. Sources previously told Reuters that Liu, a fluent English speaker, is set to become one of China’s four vice premiers and would oversee the economy and financial sector. Two of the sources said that Liu could serve concurrently as vice premier and head of the central bank. Only Zhu Rongji in the early-1990s had held both the posts of vice premier and central bank governor simultaneously. Zhu later went on to become China’s premier from 1998-2003. The leadership reshuffle at the PBOC is closely watched in global financial markets as monetary policy changes and any moves to further liberalize the financial system of the world’s second-largest economy would have repercussions well beyond China’s shores. Liu’s appointment would mean the central bank would continue to be led by a “national leader”, which could reinforce its policy influence, stability and financial oversight powers. Zhou has spearheaded financial reforms and boosted the yuan currency’s global clout, as well as the central bank’s policy influence. But unlike western central banks, the PBOC does not have the final word on adjusting interest rates and the value of the yuan. Liu said last month at the World Economic Forum in Davos that China will roll out fresh market-opening measures this year that could exceed “international expectations”. But the next leader of the central bank will face tough challenges as he will have to walk a tightrope between ensuring economic stability and pushing reforms to rein in debt risks. Sources said Liu is well qualified for the PBOC job given his deep understanding of China’s economic issues, and his role in communications between China and U.S. leaders. Liu, who gained a master’s degree in public administration at Harvard’s Kennedy School of Government in 1995, won a top Chinese economics study award in 2015 for

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his research on the global financial crisis. He was also widely seen by political analysts as being behind the voice of an unnamed “authoritative person” who wrote in the People’s Daily, the party’s mouthpiece, in May 2016 warning about risks from the country’s debt-driven growth model. Liu, like Zhou, stands out among Chinese bureaucrats because of his grey hair. Many top officials dye their hair jet-black. Liu, who currently heads the General Office of the ruling Communist Party’s Central Leading Group for Financial and Economic Affairs, is also set to become the head of the cabinet-level Financial Stability and Development Committee (FSDC), sources previously told Reuters. He has been closely following Xi on regional tours and meetings with foreign leaders. When then-U.S. National Security Adviser Tom Donilon visited Beijing in 2013, Xi introduced Liu as “very important to me”, according to the Wall Street Journal. Liu and Xi have similar backgrounds - both their families were purged during the 1966-76 Cultural Revolution, and both their fathers were senior officials. “Without the reflection on the catastrophe of the Cultural Revolution, it is impossible for China to have today’s economic growth,” Liu said in an article published in 2017. A source with ties to the leadership previously told Reuters that Xi and Liu knew each other during their teens, and have kept in touch over the years.

✓ The Chinese government on Friday seized control of Anbang Insurance Group Co Ltd and said its chairman had been prosecuted,

dramatically illustrating Beijing’s willingness to curtail big-spending conglomerates as it cracks down on financial risk. Anbang [ANBANG.UL] had violated laws and regulations which “may seriously endanger the solvency of the company”, the China Insurance Regulatory Commission (CIRC) said in a statement announcing the seizure, without giving details. The CIRC also said Anbang’s chairman and key shareholder, Wu Xiaohui, had been prosecuted for economic crimes. Wu was arrested in June as troubles mounted for one of China’s most aggressive buyers of overseas assets. The Shanghai prosecutors office said in a statement Friday that Wu had recently been charged with fundraising fraud and abuse of his position, and that his case had been forwarded to the city’s intermediate court for prosecution. During the government takeover of Anbang Group, which will last for one year starting from Friday, the company will be managed by a group of officials from the CIRC, the central bank and other key financial regulators and government bodies. The group will seek to undertake an equity restructuring of the insurance giant, even as it keeps Anbang operating as usual, protecting the rights and interests of its consumers and stakeholders, the CIRC said. The takeover of Anbang, which claims 1.97 trillion yuan ($310.85 billion) in assets and ranks 139 on the Global Fortune 500 list, is a defining blow to a conglomerate best known for acquiring New York’s landmark Waldorf Astoria hotel. The unprecedented seizure of a major non-state company also underscores how far the ruling Communist Party will go in its growing campaign to lower financial risks, sending a signal to risk-taking private enterprises. Anbang Insurance has significant stakes in a slew of major Chinese companies, such as banks and property developers. Late on Friday, China Minsheng Banking Corp Ltd, China Merchants Bank Co Ltd, developers China Vanke Co Ltd and Gemdale Corp said they received similar notices from Anbang assuring them that there would not be immediate stake sales. “Currently, operations at Anbang Insurance Group and its units are operating normally with abundant cash reserves. There are no plans to sell shares in your company,” the companies quoted Anbang as saying in similar filings to the Shanghai and Shenzhen stock exchanges. It was not immediately clear what triggered the move. Three insurance industry insiders said they were not surprised by the move since Anbang had been in the crosshairs of the government. But they said they believed it had more to do with Anbang’s behavior than systemic financial risks. A regulatory source with knowledge of the matter said the government had been effectively running the company since Wu was detained and the timing of the official takeover was linked to the investigation into Wu, which was nearly complete. But a Beijing-based lawyer who works with the CIRC and other regulators said senior officials at the insurance regulator had been watching Anbang closely since last year as its liabilities from the sale of shadow banking products grew, raising questions about the company’s solvency. “The group has become too big to fail in some sense,” said the lawyer, who declined to be identified by name. The CIRC said on Friday that it had sent a working group to Anbang in June 2017 and that at present the company’s operations are “generally stable”. “This appears to be an unprecedented takeover - a Chinese-style hostile takeover,” said Scott Kennedy, director of the Project on Chinese Business & Political Economy at the Center for Strategic and International Studies in Washington. “The Chinese government doesn’t want to have a company default on foreign debt and it also wants to teach a lesson to other Chinese business people that the Party is in charge.” After a spate of high-profile deals worth over $30 billion, Anbang began to run into roadblocks even before Wu’s detention, failing to close on a handful of investments and facing criticism over its opaque shareholding structure. A spokesman for Anbang Insurance Group declined to comment and referred to the CIRC announcement. Calls to Wu Xiaohui’s personal phone numbers were either disconnected or unanswered. “Clearly a message is being fed back into the market and to private companies that being very innovative may not be looked on favorably in the long run,” said Keith Pogson, senior partner for Asia-Pacific financial services at EY. “This says to the market ‘tread carefully’ - if they hadn’t already got that message.” In a separate statement Friday, CIRC said insurers must take steps to handle fraud risks and that it had issued new guidelines for the industry. The regulator said it would seek to improve coordination among relevant authorities to prevent and mitigate fraud risks. The CIRC said that Anbang’s debts and obligations will not be impacted by the takeover. The takeover was implemented under a broad provision in the country’s insurance law allowing it to rectify violations of the law by insurance companies, it said. “Clearly a message is being fed back into the market and to private companies that being very innovative may not be looked on favorably in the long run,” said Keith Pogson, senior partner for Asia-Pacific financial services at EY. “This says to the market ‘tread carefully’ - if they hadn’t already got that message.” In a separate statement Friday, CIRC said insurers must take steps to handle fraud risks and that it had issued new guidelines for the industry. The regulator said it would seek to improve coordination among relevant authorities to prevent and mitigate fraud risks.

✓ China’s insurance regulator on Friday said insurers must take steps to handle fraud risks and that it has issued new guidelines for

the industry. The regulator said in a statement it would take charge of anti-fraud measures for the insurance sector and seek to improve coordination among relevant authorities to prevent and mitigate fraud risks. The news comes after the Chinese government on Friday seized control of Anbang Insurance Group Co Ltd and said its chairman had been prosecuted, a dramatic move that highlighted Beijing’s willingness to curtail big-spending conglomerates as it cracks down on financial risk.

✓ The Punjab National Bank branch in south Mumbai sits just down the road from both the Bombay Stock Exchange and the Reserve

Bank of India, at a physical center of one of the world’s fastest-growing major economies. The branch, clad in a stately colonial edifice, is now also at the heart of a fraud case linked to billionaire jeweler Nirav Modi that has shaken confidence in a state banking sector that accounts for some 70 percent of India’s banking assets. It was here, according to accounts from Punjab National Bank executives and government investigators, that a lone middle-aged manager, later aided by his young subordinate, engineered fraudulent transactions totaling about $1.8 billion from 2011 to 2017. The bank is investigating how they were able to do so and go undetected for so long. The accounts given by current and former executives suggest an answer as simple as it is alarming: No one was paying attention. The bank has since stepped up its controls on the use of SWIFT according to memos issued this month. The measures mean only PNB officers will be able to initiate messages on SWIFT, and limits have been placed on the amount that officers can generate. The still-unraveling story of how the fraud happened — which includes the alleged misuse of the SWIFT interbank messaging system and incomplete ledger entries — points to a breakdown in checks and balances, and standard banking practices. The apparent failure of anyone to notice the largest fraud in Indian banking history until this January reveals a “rot” in the state financial sector that goes beyond one lender, said Santosh Trivedi, who spent nearly four decades at Punjab National Bank before retiring in 2016 as a senior manager of audit and inspection in the New Delhi head office. Last month, Punjab National Bank filed an initial criminal complaint with the country’s Central Bureau

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of Investigation accusing Modi and others of defrauding the bank and causing it a loss of 2.8 billion Indian rupees (more than $43 million). The allegations against a man whose diamond creations have draped Hollywood stars such as Kate Winslet and Dakota Johnson generated a flurry of coverage across India’s TV screens and newspapers. Modi and his family left the country in early January. As more details surfaced about what is alleged to have happened at the state-run bank, which was founded in 1894, the stakes have gotten higher. A review of bank and government documents related to the case — and interviews with current and former PNB executives, bank auditors and experts — points to a lack of accountability and standards in the country’s public banking system. As of last September, those banks held about 87 percent of the Indian banking system’s 9.46 trillion rupees (about $147 billion) of soured loans that are nonperforming, restructured or rolled over. A preliminary investigation by the tax authority said “the hit Indian banks would take in the end may well exceed” $3 billion, according to an internal note. But despite a promise of action, one current senior executive at the bank’s headquarters in New Delhi said further problems could not be ruled out. “In Indian banks, we don’t work under ideal situation,” the executive said. “We are in the business of risk — you can’t say there won’t be road accidents.” According to court documents filed by the CBI, a deputy manager at the branch, Gokulnath Shetty, issued a series of fraudulent letters of undertaking — essentially guarantees sent to other banks so that they would provide loans to a customer, in this case a group of Indian jewelry companies. These letters were sent to overseas branches of banks, thought to be almost all Indian, that would then lend money to the jewelry firms. Shetty did so using the bank’s SWIFT system to log in with passwords that allowed him, and in at least some instances a more junior official, to serve as both the person who sent messages and as the person who reviewed them for approval, according to court documents and interviews. Shetty is now in custody and he has not publicly responded to the allegations. Asked about the password sharing, the senior Punjab National Bank executive said it was not best practice, but in the everyday bustle of Indian banks it happens. “When you are flooded with customers in the morning, with 101 demands, you look for shortcuts,” he said. “You do somebody else’s work, somebody else does your work. You are not working in an ideal situation.” After entering the transactions on SWIFT, the CBI documents said, Shetty — who worked at the same branch from 2010 to 2017 despite the normal bank practice of initiating regular rotations — did not record them on the bank’s internal system. Because PNB’s internal software system was not linked with SWIFT, employees were expected to manually log SWIFT activity. If that was not done, the transactions did not show up on the bank’s books. All together, there were at least 150 such fraudulent letters of undertaking during a seven-year period, according to a CBI official. In addition to detaining Shetty and the junior employee, the CBI has arrested a man who it described in court documents as both being “aware about the modus operandi of the entire scams” and serving as a director in “15 to 16 companies of Nirav Modi Group.” An older brother of the man, Hemant Bhatt, said outside a courtroom last Saturday that he was innocent and the allegations were the result of a “media trial.” An uncle of the junior bank employee, Manoj Kharat, told a reporter outside the court that his nephew was “just following orders of superiors” and added “he wasn’t aware of what he is doing.” All three are to be held in custody until March 3. No charges have so far been laid against them. Police have searched the bank’s south Mumbai branch and questioned five more Punjab National officials, taking the total number of staffers questioned to 11. A Feb. 12 note seen by Reuters, sent from PNB to other banks and marked “confidential,” said: “None of the transactions were routed through the CBS system” — the bank’s internal network — “thus avoiding early detection of fraudulent activity.” The Reserve Bank of India called the fraud at PNB “a case of operational risk arising on account of delinquent behavior by one or more employees of the bank and failure of internal controls.” The CBI paperwork says the fraudulent letters of undertaking are likely to add up to “the vicinity of” 60 billion rupees (more than $930 million). Bank executives say the amount tallied by working back through internal records is $1.77 billion. With assets of about $120 billion as of December, according to bank filings, PNB will be able to cover any associated losses, though it is still a huge hit for a bank whose stock market value was only $6.1 billion before it revealed details of the alleged fraud. It has since seen $1.4 billion wiped off that market capitalization. The mechanics of how the fraud happened, and what it says about the underlying industry culture, are worrying, said Abizer Diwanji, national leader for financial services in India at accounting firm Ernst & Young. “Checks and balances are there in public banks as well, but they are not followed earnestly,” said Diwanji. “This is where the discipline, the culture is not there. I always believe that we don’t have the culture to manage risks, even operational risks. PNB is not an outlier in this.” To control such risks, most private-sector banks require branches to route SWIFT messages through their central offices, Diwanji said. They also usually integrate their own software systems and SWIFT, meaning that activity such as a letter of undertaking being sent would get automatically recorded. Neither is the case at PNB or most state-run banks in India, Diwanji said. Representatives of two of the external audit firms listed on PNB’s annual report for the 2016-2017 fiscal year said they could not have known what happened. “It was off-books, so auditors will not be in a position to detect it,” said Sudesh Punhani, a partner at Chhajed & Doshi. Asked whether the bank’s failure to integrate its software system and SWIFT was a cause of concern, Neeraj Golas, a partner at R. Devendra Kumar & Associates, also an external auditor of the bank, said: “True, true — we have to really get into it and understand what all these things are.”

REST OF THE WORLD

✓ European stocks ended a bouncy session slightly higher on Friday, tracking gains for U.S. stocks as traders waded through a stream

of corporate updates. After shifting between small gains and losses through the day, the Stoxx Europe 600 index SXXP, +0.22% ended 0.2% higher at 381.16. That helped swing the pan-European benchmark into positive territory for the week, ending with a 0.1% weekly gain. France’s CAC 40 PX1, +0.15% closed up 0.2% at 5,317.37, while Germany’s DAX 30 index DAX, +0.18% rose 0.2% to 12,483.79. Underperforming the major European indexes, the U.K.’s FTSE 100 UKX, -0.11% dropped 0.1% to 7,244.41. The euro EURUSD, -0.2757% bought $1.2296, down from $1.2332 late Thursday in New York. The yield on the 10-year German bond TMBMKDE-10Y, +0.00% fell 5 basis points to 0.650%, according to Tradeweb. Yields fall when prices rise. European equities this week have largely followed moves on Wall Street. Analysts have said the recent global rout in stocks stemmed largely from concerns that a quickening pace of U.S. inflation could prompt the Fed to raise interest rates more than anticipated this year. In its latest report to Congress, the Federal Reserve gave no signs it was planning to hike rates faster than currently expected, reflecting uncertainty among senior officials about how fast inflation will rise this year. U.S. stock moved firmly higher on Friday, after the S&P 500 SPX, +1.60% and the Dow Jones Industrial Average DJIA, +1.39% finished Thursday with gains. “Fears revolving around rising inflationary pressures and rate hike jitters have certainly left investors skittish this trading week. Investors seem to be on edge about higher interest rates and as such, this continues to encourage global equity bulls and bears to engage in a tough tug of war,” said Lukman Otunuga, research analyst at FXTM. “With investors on guard as global stock markets become

BAIPHIL Market Watch – 26 February 2018 Page 17 of 23

increasingly sensitive to the prospect of rising inflation and interest rates, equity bears could steal the show,” he said in a note. Royal Bank of Scotland Group PLC RBS, -4.82% RBS, -3.78% shares dropped 4.8% as the majority state-owned lender posted its first full-year profit in 10 years. However, RBS said it has yet to agree a settlement with the U.S. Department of Justice over alleged mis-selling of mortgage-backed securities. Phoenix Group Holdings shares PHNX, +7.31% jumped 7.3% after the insurer said it bought Standard Life Assurance Ltd. from Standard Life Aberdeen PLC in a reverse takeover for £2.93 billion ($4.09 billion). Shares of Standard Life Aberdeen SLA, -2.49% ended down 2.5%. Deutsche Telekom AG DTE, +3.19% shares rose 3.3%. The German telecommunications company said late Thursday it had returned to profit in the fourth quarter of 2017, largely boosted by the effects of U.S. tax reform. Swiss Re SREN, +2.46% rose 2.5% after the reinsurance heavyweight said it’s not considering issuing new capital. The company did say it’s “carefully assessing” the implications of a deal with SoftBank Group Corp. 9984, +1.38% , and it reported a fall in net profit in 2017. Valeo SA FR, -11.09% tumbled 11%. The French automotive supplier said late Thursday its 2017 net profit fell year-on-year, despite both sales and order intake increasing. International Consolidated Airlines Group SA shares IAG, -5.69% ICAGY, -4.62% fell 5.7%. The British Airways parent said it was engaging a €500 million share-buyback program, and that pretax profit rose in 2017. The results were “mixed,” said Accendo Markets, with revenues in line. while adjusted per-share earnings of €1.02 fell short of a €1.06 consensus estimate. Economic activity in Germany slowed toward the end of 2017, but a booming export sector kept Europe’s largest economy on a solid growth path, according to new data. Germany’s Federal Statistical Office said gross domestic product grew 0.6%, or an annualized rate of 2.5%, in the fourth quarter, easing somewhat toward the end of 2017. The report confirmed preliminary figures. Eurostat confirmed that eurozone inflation was at 1.3% in January, down from 1.4% in December.

✓ U.S. stocks rallied on Friday, lifted by gains in technology stocks and a retreat in Treasury yields as the Federal Reserve eased

concerns about the path of interest rate hikes this year. The U.S. central bank, looking past the recent stock market sell-off and inflation concerns, said it expected economic growth to remain steady and saw no serious risks on the horizon that might pause its planned pace of rate hikes. Investors largely expect the Fed to raise rates three times this year, beginning with its next meeting in March, the first under new Chair Jerome Powell. Traders currently see a 95.5 percent chance of a quarter-percentage-point hike next month, according to Thomson Reuters data. “Certainly bond yields pulling back today is helpful for stocks, at least for the short term, that has been the narrative that is out there - that higher bond yields are weighing on stocks and this preoccupation with three percent,” said Willie Delwiche, investment strategist at Baird in Milwaukee. “So moving away from that, for today at least, provides a bid for equities.” Powell’s first public outing will be on Tuesday, when he will testify separately before the House and Senate committees. The Dow Jones Industrial Average .DJI rose 347.51 points, or 1.39 percent, to 25,309.99, the S&P 500 .SPX gained 43.34 points, or 1.60 percent, to 2,747.30 and the Nasdaq Composite .IXIC added 127.30 points, or 1.77 percent, to 7,337.39. Benchmark 10-year U.S. Treasury notes US10YT=RR last rose 13/32 in price to yield 2.8714 percent, from 2.917 percent late on Thursday. The dip in yields helped boost bond proxy sectors such as utilities .SPLRCU, up 2.66 percent, and real estate .SPLRCR, up 1.72 percent. The sectors have been among the worst performers so far this year on expectations of climbing rates. Tech shares .SPLRCT climbed 2.17 percent led by gains in Hewlett Packard Enterprise (HPE.N), which rose 10.5 percent and HP Inc (HPQ.N), up 3.5 percent. The two companies created from the split of Hewlett Packard Co in 2015, reported strong results and HPE also announced a plan to return $7 billion to shareholders. For the week, the Dow rose 0.37 percent, the S&P advanced 0.56 percent and the Nasdaq gained 1.35 percent. Blue Buffalo Pet Products (BUFF.O) jumped 17.23 percent after General Mills (GIS.N) said it would buy the natural pet food maker for $8 billion. General Mills was the biggest percentage decline on S&P 500, falling 3.59 percent. Advancing issues outnumbered declining ones on the NYSE by a 4.54-to-1 ratio; on Nasdaq, a 2.82-to-1 ratio favored advancers. The S&P 500 posted 10 new 52-week highs and one new low; the Nasdaq Composite recorded 64 new highs and 57 new lows. Volume on U.S. exchanges was 6.05 billion shares, well below the 8.38 billion average over the last 20 trading days.

✓ European Union leaders staked out opening positions on Friday for a battle over EU budgets that many conceded they are unlikely

to resolve before Britain leaves next year, blowing a hole in Brussels’ finances. At a summit to launch discussion on the size and shape of a seven-year budget package to run from 2021, ex-communist states urged wealthier neighbours to plug a nearly 10 percent annual revenue gap being left by Britain, while the Dutch led a group of small, rich countries refusing to chip in any more to the EU. Germany and France, the biggest economies and the bloc’s driving duo as Britain prepares to leave in March 2019, renewed offers to increase their own contributions, though both set out conditions for that, including new priorities and less waste. Underlining that a divide between east and west runs deeper than money, French President Emmanuel Macron criticised what he said were poor countries abusing EU funds designed to narrow the gap in living standards after the Cold War to shore up their own popularity while ignoring EU values on civil rights or to undercut Western economies by slashing tax and labour rules. Noting the history of EU “cohesion” and other funding for poor regions as a tool of economic “convergence”, Macron told reporters: “I will reject a European budget which is used to finance divergence, on tax, on labour or on values.” Poland and Hungary, heavyweights among the ex-communist states which joined the EU this century, are run by right-wing governments at daggers drawn with Brussels over their efforts to influence courts, media and other independent institutions. The European Commission, the executive which will propose a detailed budget in May, has said it will aim to satisfy calls for “conditionality” that will link getting some EU funding to meeting treaty commitments on democratic standards such as properly functioning courts able to settle economic disputes. But its president, Jean-Claude Juncker, warned on Friday against deepening “the rift between east and west” and some in the poorer nations see complaints about authoritarian tendencies as a convenient excuse to avoid paying in more to Brussels. At around 140 billion euros ($170 billion) a year, the EU budget represents just about 1 percent of economic output in the bloc or some 2 percent of public spending, but for all that it remains one of the bloodiest subjects of debate for members. The Commission has suggested that the next package should be increased by about 10 percent but there was little sign on Friday that the governments with cash are willing to pay that. “When the UK leaves the EU, then that part of the budget should drop out,” said Dutch Prime Minister Mark Rutte, who leads a group of hawks including Sweden, Denmark and Austria. “In any case, we do not want our contribution to rise and we want modernisation,” he added, saying that meant reconsidering the EU’s major spending on agriculture and regional cohesion in order to do more in defence, research and controlling migration. On the other side, Czech Prime Minister Andrej Babis said his priorities were “sufficient financing of cohesion policy” a good deal for businesses from the EU’s agricultural subsidies. German Chancellor Angela Merkel said there had been broad agreement that new priorities such as in defence, migration and research should get new funding and she called for a “debureaucratisation” of traditional EU spending programmes. Summit cha ir Donald Tusk praised the 27 leaders -- Prime Minister Theresa May was not invited as Britain will have left before the new budget round starts -- for approaching the issue “with open minds, rather than red lines”. But despite them all wanting to speed up the process, a deal this year was unlikely. Although all agree it would be good to avoid a repeat of the 11th-hour wrangling ahead of the 2014-20 package, many sounded doubtful of a quick deal even early next year. “It could go on for ages,” Rutte said. He added that it would be “nice” to finish by the May 2019 EU election: “But that’s very tight.” Among the touchiest subjects will be accounting for the mass arrival of asylum-seekers in recent years. Aggrieved that some eastern states refuse to take in mainly Muslim migrants, some in the west have suggested penalising them via the EU budget. Merkel has proposed that regions which are taking in and trying to integrate refugees should have that rewarded in the allocation of EU funding -- a less obviously penal approach but one which she had to defend on Friday against criticism in the east. It was not meant as a threat, the chancellor insisted. In other business at a summit which reached no formal legal conclusions, leaders broadly agreed on some issues relating to next year’s elections to the European Parliament and to the accompanying appointment of a new Commission for five years. They pushed back against efforts, notably from lawmakers, to limit their choice of nominee to succeed Juncker to a candidate who leads one

BAIPHIL Market Watch – 26 February 2018 Page 18 of 23

of the pan-EU parties in the May 2019 vote. They approved Parliament’s plan to reallocate some British seats and to cut others altogether and also, barring Hungary, agreed to a Macron proposal to launch “consultations” with their citizens this year on what they want from the EU.

✓ European Union leaders agreed on Friday to spend more on common defense and security policy, as well as on “fighting illegal

migration” in their next long-term budget after Britain leaves the bloc, the chairman of EU leaders, Donald Tusk, said. Speaking at a news conference after a meeting of 27 EU leaders in Brussels, Tusk said, however, that an ambitious deadline for reaching an agreement on the shape of the 2021-2027 budget by the end of the year seemed difficult. Tusk said many of the leaders were ready to contribute more money to the joint pot to compensate for the loss of revenue after Britain leaves in 2019, as well as to finance the new joint policies - but that others were less forthcoming.

✓ Banks in the European Union will have eight years to write down bad debts backed by collateral under proposals from the European

Commission designed to tackle their 759 billion euros ($933.19 billion) in soured loans, a source familiar with the matter said on Friday. The source, confirming a press report in Italian daily Il Messaggero, said the percentage of writedowns required every year once a loan is classed as impaired would rise gradually over time. High levels of bad debts, a legacy of the euro zone’s debt crisis, are blamed for holding back lending in the EU and for keeping the cost of capital high for banks, slowing their recovery and depressing profitability. The Commission, which is expected to publish its proposal on the new bad loan criteria on March 13, declined to comment. “In March, we will present a whole package of further proposals to help banks reduce non-performing loans and prevent their accumulation in future,” the Commission’s Vice-President Valdis Dombrovskis told a conference in Berlin on Friday. For unsecured loans, banks would be required to write them down by 35 percent in the first year and for the remaining 65 percent of their face value in the second, the source said. According to the draft, when a loan is only partly covered by the value of its collateral it would be considered as secured for that part and as unsecured for the rest, the source also said. The European Central Bank is also working on a new set of rules over banks’ bad debts to complement guidelines issued last year. The ECB’s guidelines, unlike the Commission‘s, are not mandatory but bank supervisors will expect banks to comply and reserve the right to enforce compliance if a bank does not justify any deviation. The ECB’s proposed new rules, which would apply to new bank loans turning sour, require banks to write down bad loans backed by collateral in seven years and unsecured loans in two years with writedowns split equally over the years. The ECB proposal, which was heavily criticized, particularly in Italy, is expected to be published on March 14.

✓ Even if Britain agrees a Brexit transition deal with the European Union next month, bankers and regulators say it is unlikely to

provide the legal certainty they are seeking. Britain’s 2016 vote to leave the EU prompted banks to call for a “standstill” transition and new trading terms to avoid hasty decisions on moving staff and operations to meet EU regulators’ demands to do so by “Brexit Day” in March 2019. “There won’t be legal certainty for a while even if they reach political agreement in March,” Oliver Moullin, head of Brexit at the Association for Financial Markets in Europe, said. That poses a “tricky question” for the banking trade body’s members in deciding how much they can rely on a political deal, which may not become legally watertight until year-end, as the basis for their Brexit planning, Moullin said. Transition is one part of a divorce deal which will not be formally approved by governments until October or later. The issue is hotly debated within the British government itself and Prime Minister Theresa May met with senior ministers on Thursday to agree on what sort of future trade deal to ask from Brussels to follow transition. Her acceptance of a status quo transition has been called a “betrayal” by Brexit hardliners in her party. Britain’s ministry for exiting the EU (DExEU) said that a time-limited implementation period is in the interests of both sides and it is confident of reaching a deal by the time of a European Council meeting scheduled for March. “Looking at what can they actually provide in March, it is not completely obvious how they would achieve it,” said Catherine McGuinness, head of policy at the City of London, which administers the capital’s main financial district. “It also needs to be clear that it will survive any agreement – or even no agreement - that is struck in October about the ultimate trading relationship,” she added. Any political agreement on transition must give regulators the flexibility not to insist on worse-case contingency planning, Stephen Jones, chief executive of UK Finance, a banking lobby, said. But EU regulators are racheting up the pressure, a senior banking official said, demanding Brexit plans be prepared as if transition will not happen, even if they also hint at `some flexibility in implementation. “Regulators have said to us that transition is very valuable but it could create moral hazard, that is banks rely on it and don’t prepare,” the banking official added. The European Central Bank (ECB) said it has received only eight licence requests, although regulatory sources say more are being negotiated between banks and regulators behind the scenes. Bundesbank board member Andreas Dombret said his biggest concern is that banks run out of time, leaving the EU without the full suite of financial services it gets from London. “We need those services for our export industries, for the Boschs, Siemens, Daimlers, and Volkswagens. We need to have it in a competitive way and in a legally sound way,” Dombret said. Banks in London should not rely on a transition deal or wait for full legal certainty, but submit licence applications that can be amended later on, Dombret told Reuters. “We don’t know if we will have an implementation period or not. Nobody can tell you now. You have to plan for a hard Brexit, as many are doing,” Dombret added. Banks have welcomed a proposal by Andrew Bailey, chief executive of Britain’s Financial Conduct Authority, who wants a transition deal that gives British and EU regulators cover for a cross-border cooperation pact. This would mean no longer assuming a “no deal” Brexit as the primary scenario and address “operational issues” like contract continuity, or ensuring that cross-border financial contracts like insurance policies that straddle Brexit Day can pay out. So far there has been no formal response from the EU, leaving banks faced with seeking the permission of customers to shift the legal basis of contracts from Britain to the EU. “We are completely prepared to have this type of cooperation agreement as there is a huge exchange of data between the UK and the EU, but we need clear agreement at the political level,” a senior EU regulator told Reuters.

✓ Investors are starting to doubt whether they can count on the protective embrace of an accommodative US central bank when

markets go haywire. Federal Reserve chair Jerome Powell has said little about the sharp fall in Wall Street stocks this month, besides offering the platitude at his swearing-in ceremony last week that "we will remain alert to any developing risks to financial stability." But the spotlight will be on the new Fed chair next week when he faces questions from both houses of the US Congress in semi-annual testimony starting on Tuesday, and his audience will include investors who unceremoniously greeted his early tenure with one of the fastest 10.0 percent falls in Wall Street stocks in history earlier this month. "I don't think it is a coincidence that this occurred at the same time as we saw the passing of the baton between two different Fed chairs," said Kristina Hooper, global market strategist at Invesco Ltd, an asset management company, adding that former Fed chair Janet Yellen had "lulled" markets into complacency. Powell could be very different from Yellen, she said. The notion that the Fed would always be there to prop up shell-shocked markets prompted the notion of a Fed "put" option under three prior Fed leaders - Janet Yellen, Ben Bernanke and Alan Greenspan. The term is a reference to the hedging strategy of using a put option to guarantee an investor a sale at a preset price to limit losses. While the Fed did not buy stocks or sell options in response to the 2007-2009 financial crisis, it did push short-term interest rates to historic lows and bought bonds, driving down yields. Starved for yield in recent years, investors were forced into the stock market, driving up equity valuations, thanks to the Fed's policies. "There was definitely a Yellen put, and it remains to be seen whether there will be a Powell put," said Hooper. Yellen's Fed did later raise interest rates though, starting in late 2015, but it did so more slowly than in earlier cycles and it backed off when markets were stressed. In 2015 and 2016, the rate-setting Federal Open Market Committee (FOMC) delivered just one rate hike per year. The Fed now faces pressure to move more quickly to guard against a possible overheating of the economy, as the Fed's balance sheet and global interest rates still bear the tidemarks of emergency policies. The minutes of the Fed's FOMC meeting on Jan. 30-31, published on Wednesday, showed policymakers expressing the need to keep raising

BAIPHIL Market Watch – 26 February 2018 Page 19 of 23

interest rates, with most believing that inflation will rise further. On Friday, the Fed's semi-annual monetary policy report to Congress, its first under Powell, said the Fed sees steady growth continuing and no serious risks on the horizon that might make the central bank pause its planned pace of rate hikes. "The economic expansion continues to be supported by steady job gains, rising household wealth, favorable consumer sentiment, strong economic growth abroad, and accommodative financial conditions," the report said. "This will be one of the more hawkish Feds we have experienced in 20 years," said Andrew Brenner, head of international fixed income at NatAlliance Securities LLC, a broker-dealer, in a note on Wednesday. A "hawkish" monetary policymaker is more aggressive in warding off inflation. Higher interest rates could lure cash out of the stock market and into bonds as yields rise. Higher rates could also tighten credit for consumers as well as companies that have struggled to grow their sales as quickly as their profits during this economic recovery. Some investors have even argued that the Fed's desire to avoid tripping up markets risks the central bank moving too late to prevent a rise in inflation and a market bubble. The argue that an economy that is overheating would require potentially destabilizing interest rate hikes later. The Fed needs to slow the economy down a bit for its own good, as so far the Fed's efforts at tightening financial conditions have not been successful, said Tony Crescenzi, market strategist and portfolio manager at Pacific Investment Management Co. Striking the right balance is not always easy though. In 2008 the Fed was preoccupied with inflation, while subprime mortgage products built up excessive leverage in bank balance sheets, provoking systemic problems in markets that lead to the worst global recession since the 1930s. In his first months as a Fed governor back in 2012, Powell was among those who pressured then-chair Bernanke for more clarity on his plan to "taper" the central bank's bond buying. When Bernanke made the plan public, it triggered the so-called "taper tantrum" sell-off in the bond market in the summer of 2013. Powell appeared to side with the "hawks" again in the summer of 2015 when he argued two interest rate rises might be needed, but the meltdown in the Chinese stock market that year meant he later backtracked and the Fed eventually raised rates only once that year in December. Over time Powell's speeches have come to emphasize how the long spell of loose US monetary policy has given the labor market time to recover, allowing the unemployment rate to fall from a high of 10 percent in 2009 to a 17-year low of 4.1 percent in January this year. "Market participants would rather see the Fed take actions that sustain the expansion, and that means more rate hikes," said Crescenzi. It is unlikely the Fed would "view a dip in the stock market - especially the one that was seen recently - as a reason to come to its rescue," he said.

✓ Federal Reserve policymakers are fretting that they could face the next U.S. recession with an arsenal of policies little different from

that used in the last downturn but robbed of much of their punch because interest rates are still low. In the midst of an unprecedented leadership transition, Fed officials are publicly debating how to prepare for the next downturn. Should they scrap their approach to inflation targeting? How big of a balance sheet should they retain? How much further can they raise interest rates and still keep the economy on a growth path? All this comes against a backdrop of an unexpectedly large boost from tax cuts and government spending that will drive up deficits, leaving less room for a fiscal rescue in the next recession. “The thing that keeps me up at night is that when that next recession happens, and hopefully not for a long time, I don’t think we have as strong a toolkit as we would like to have to respond to that,” San Francisco Federal Reserve Bank President John Williams said Friday at a Town Hall Los Angeles event. To pull out of the 2007-2009 recession, the Fed slashed short-term interest rates to near zero and bought $3.5 trillion in bonds to push down longer-term borrowing costs. Since late 2015 it has gradually reversed course. Its key rate is now in the range of 1.25 to 1.5 percent, and the Fed expects to end this year with rates between 2 percent and 2.25 percent. With an aging population slowing the economy’s growth potential, the Fed projects it can raise rates only to about 2.75 percent before borrowing costs will really start to brake the economy. Before the recession, most economists thought that neutral level was closer to 4 percent. With rates so low, there would be little room to cut them to provide stimulus when the world’s largest economy, which is heating up, eventually turns around. “We would be better off, rather than thinking about what we would do next time when we hit zero, making sure that we don’t get back there. We just don’t want to be there,” Boston Fed President Eric Rosengren told a New York conference of economists. Rosengren, one of only a few sitting policymakers who also served during the last downturn, said the expanding U.S. deficits could further erode the government’s ability to help curb any future recession. Since mid-December the Republican-controlled Congress and President Donald Trump aggressively cut taxes and boosted spending limits, which are expected to push the annual budget deficit above $1 trillion next year and expand the $20 trillion national debt. That stimulus, combined with synchronized global growth, signs of U.S. inflation perking up, and unemployment near a 17-year low could set the stage for overheating that ends one of the longest economic expansions ever. “We want more shock absorbers out there and really ... the main shock absorber is the ability to reduce the fed funds rate, which means that you want to get to a higher inflation rate so that the pre-shock fed funds rate is 4 (percent) and not 2,” said Paul Krugman, the Nobel Prize-winning economist and professor at City University of New York. The main research paper at the conference, hosted by the University of Chicago Booth School of Business, argued the central bank should focus on cutting rates in the next recession and avoid relying on asset purchases, which are less effective in stimulating investment and growth than previously thought. Still, as William Dudley, president of the New York Fed, said at the conference, the ability to again purchase bonds if and when rates hit zero “seems like a good tool to have.” The Fed’s approach to any economic slowdown, policymakers have said, would be to cut rates, pledge further stimulus and only then buy bonds. Rosengren and others dismissed the possibility of adopting negative interest rates - the practice of charging banks a fee to hold their money - as some other central banks have done. Some see this month’s succession of Fed Chair Janet Yellen by Jerome Powell as ideal timing to consider new frameworks that could help drive inflation, and rates, higher. Cleveland Fed President Loretta Mester, whom the White House is considering naming Fed vice chair, told the conference the central bank could begin to reassess the framework later this year, though she said the threshold for change should be high.

✓ Warren Buffett on Saturday lamented his inability to find big companies to buy, and said his goal is to make “one or more huge

acquisitions” of non-insurance businesses to bolster results at his conglomerate Berkshire Hathaway Inc. In his annual letter to Berkshire shareholders, Buffett admitted that finding things to buy at a “sensible purchase price” has become a challenge, and is a major reason Berkshire is awash with $116 billion of low-yielding cash and government bonds. Buffett said a “purchasing frenzy” binge by deal-hungry chief executives employing cheap debt has made that task difficult. Berkshire typically pays all cash for acquisitions. “Our smiles will broaden when we have redeployed Berkshire’s excess funds into more productive assets,” Buffett wrote. “Berkshire’s goal is to substantially increase the earnings of its non-insurance group. For that to happen, we will need to make one or more huge acquisitions.” It has been more than two years since Berkshire made a major purchase, the $32.1 billion takeover of aircraft parts maker Precision Castparts Corp. Last month, Buffett gave greater oversight of Berkshire’s non-insurance businesses such as the BNSF railroad, Precision Castparts and Dairy Queen ice cream to energy executive Gregory Abel, while insurance specialist Ajit Jain added supervision of insurance operations such as the Geico auto insurer. Both are considered candidates to eventually replace Buffett, 87, as Berkshire’s chief executive. Many investors consider Abel, who is a decade younger than Jain, the frontrunner. Berkshire on Saturday reported a record quarterly and annual profit, both of which received a $29.1 billion boost from the recent lowering of the U.S. corporate income tax rate, which reduced its deferred tax liabilities. Fourth-quarter net income increased roughly fivefold to $32.55 billion, or $19,790 per Class A share, from $6.29 billion, or $3,823 per share, a year earlier, while annual profit rose 87 percent to $44.94 billion. Those increases, however, masked declines in operating profit, which Buffett considers a better gauge of overall performance, and which fell 18 percent last year to $14.46 billion. A major reason for that decline was a $2.22 billion loss from insurance underwriting, Berkshire’s first full-year deficit since 2002, hurt by Hurricanes Harvey, Irma and Maria and wildfires in California. The lower tax rate also contributed to a 23 percent full-year boost in Berkshire’s book value, which measures assets

BAIPHIL Market Watch – 26 February 2018 Page 20 of 23

minus liabilities and Buffett considers a good indicator of Berkshire’s net worth, to $211,750 per Class A share. Meanwhile, insurance float, or premiums collected before claims are paid, and which gives Buffett more money to invest, was about $114 billion at year end.

✓ General Electric Co (GE.N) faces potential legal action by the U.S. Department of Justice over allegations that its GE Capital unit and

now-defunct WMC Mortgage Corp unit violated U.S. law in connection with subprime mortgages, according to a regulatory filing on Friday. The DOJ “is likely to assert” violation of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) “in connection with WMC’s origination and sale of subprime mortgage loans in 2006 and 2007,” the filing said. “WMC and GE Capital will explore whether an acceptable settlement of this matter can be reached. In the event that an acceptable settlement cannot be reached, DOJ may initiate legal proceedings against WMC and GE Capital. WMC and GE Capital believe they would have defenses to any such lawsuit,” GE’s 10-K filing added. GE said the warning about the potential action stems from a DOJ investigation and outcomes of investigations of other financial firms. GE said two years ago that the DOJ had issued subpoenas to WMC and GE Capital as part of an industry-wide investigation. WMC, now a defunct subprime lending unit, was sold by GE in 2007. GE declined to elaborate beyond the language in the filing. The Boston-based conglomerate also said in the filing that it added 18,000 employees to its worldwide workforce last year, a 6.1 percent increase that comes as it tries to cut costs to raise profits. GE said it had 313,000 employees at year-end, including 106,000 in the United States. The increase stemmed from acquisitions made last year, including Baker Hughes (BHGE.N) and LM Wind Power, and was “offset by divestitures and restructuring,” GE spokeswoman Jennifer Erickson said. “The headcount figures at the end of 2017 do not reflect all of the restructuring that we’ve announced previously,” she added. “Some of the restructuring projects take time to execute, so we’ll continue to reduce headcount as we go forward.” GE said it had the ability to repatriate approximately $10 billion of non-U.S. cash without incremental federal income tax because of recent U.S. tax law changes. Last month, GE posted nearly a $10 billion loss for the fourth quarter of 2017. Analysts said on Friday that they had expected GE’s headcount to fall as the company cuts costs, and were looking for updates to the WMC investigation.

➢ BSP Cir. No. 989: Guidelines on the Conduct of Stress Testing Exercises (Session I) – 02 March

2018 (8:30am to 12:00nn) ➢ BSP Cir. No. 989: Guidelines on the Conduct of Stress Testing Exercises (Session II) – 02 March

2018 (1:00pm to 5:00pm) ➢ Beyond Compliance: Managing Technology and Cyber Security Risk (Highlighting BSP Cir. No.

982: Enhanced Guidelines on Information Security Management) – 14 March 2018 ➢ Enhanced Corporate Governance Guidelines (BSP Cir. Nos. 969, 970, 971, 972) – 16 March 2018 ➢ BSP Cir. 706 as Amended by BSP Cir. No. 950, AMLA Law, and the AML Risk Rating System – 23

March 2018 ➢ "Implementing Sound Internal Controls and Validation Process for the ICAAP of Banks" (Guiding

Principles of BSP Circular 639 and 871) - Day 1 – 24 March 2018 ➢ Compliance with Operational Risk Management Guidelines – 06 April 2018 ➢ "Implementing Sound Internal Controls and Validation Process for the ICAAP of Banks" (Guiding

Principles of BSP Circular 639 and 871) - Day 2 – 07 April 2018 ➢ Estate Planning – 07 April 2018 ➢ Related Party Transactions – 20 April 2018 ➢ Updated Guidelines on Sound Credit Risk Management (Includes Cir 908: Agricultural Value

Chain Financing Framework and BSP Cir 941: Amendments to the Regulations on Past Due and NPLs – 20 & 21 April 2018

➢ A Regulatory Perspective on Trust Activities and Administration (2 Days) – 20 & 27 April 2018 ➢ "Implementing Sound Internal Controls and Validation Process for the ICAAP of Banks" (Guiding

Principles of BSP Circular 639 and 871) - Day 3 – 27 April 2018 ➢ BSP Cir. No. 706 as Amended by BSP Cir. No. 950, AMLA Law, and the AML Risk Rating System

(Board of Directors) – 27 April 2018 ➢ Macros Training for Bankers – 27 & 28 April 2018 ➢ Overview of Outsourcing Framework (Knowing the Essentials When Outsourcing) – 04 May 2018 ➢ Basic Course on Corporate Governance for Savings and Loan Associations, Rural Banks and

Cooperatives – 04 & 05 May 2018 ➢ Identity Theft: How To Effectively Combat It – 05 May 2018 ➢ Updated Guidelines on Sound Credit Risk Management (Includes Cir. 908: Agricultural Value

Chain Financing Framework and Cir. 941: Amendments to the Regulations on Past Due and NPLs) – 11 & 12 May 2018

➢ Trust Products – 11 & 18 May 2018 ➢ Counterfeit Detection – 12 May 2018 (CEBU CITY) ➢ Signature Verification & Forgery Detection – 26 May 2018 ➢ BSP Cir. No. 706 as Amended by BSP Cir. No. 950, AMLA Law, and the AML Risk Rating System

– 01 June 2018 ➢ Accounting for Non-Accountants with Financial Statements Analysis – 07 & 08 June 2018 ➢ Beyond Compliance: Managing Technology and Cyber Security Risk (Highlighting BSP Cir. No.

982: Enhanced Guidelines on Information Security Management) – 08 June 2018 ➢ Advanced Excel Training for Bankers – 15 & 16 June 2018 ➢ Macros Training for Bankers – 13 & 14 July 2018

For details, please contact BAIPHIL via telephone (853-4457/519-2433) or email (training@baiphil.org).

BAIPHIL Market Watch – 26 February 2018 Page 21 of 23

FEBRUARY 16-28

17 Lorna Leah G. Bongcayao - ANZ Bank

18 Rodelio S. Romblon - Philippine Postal Savings

19 Marlyn M. Marudo - Rizal Bank Inc

21 Irene DL Arroyo - PDIC

22 Aristeo A. Dequito - CARD SME Bank

23 Lourdes B. Dijan - CARD Bank

23 Domingo B. Gavino, Jr. - ING Bank NV

26 Mary Jane A. Perreras - CARD SME Bank

26 Elmore O. Capule - BSP

BAIPHIL Market Watch – 26 February 2018 Page 22 of 23

INTRINSIC VALUE – The intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Additionally, intrinsic value is primarily used in options pricing to indicate the amount an option is in the money. Value investors who follow fundamental analysis typically look at both qualitative (business model, governance and target market factors) and quantitative (ratios and financial statement analysis) aspects of a business to see if the business is currently out of favor with the market and is really worth much more than its current valuation. The discounted cash flow model is one commonly used valuation method used to determine a company's intrinsic value. The discounted cash flow model takes into account a company's free cash flow and weighted average cost of capital, which accounts for the time value of money.

CLUSTER - In computing, a cluster may refer to two different things: 1) a group of sectors in a storage device, or 2) a group of connected computers. Under Item 1, a sector is the smallest unit that can be accessed on a storage device like an HDD or SSD. A cluster, or allocation unit, is a group of sectors that make up the smallest unit of disk allocation for a file within a file system. In other words, a file system's cluster size is the smallest amount of space a file can take up on a computer. Most files require a large number of clusters, which means the file contents are spread across multiple clusters on the drive. Often the data can be written in contiguous blocks so that the file contents are stored in one physical location. However, when a hard drive begins to fill up, there may not be enough contiguous clusters available to save large files in a single area. Instead, they must be written in multiple locations on the disk. This is called fragmentation and can slow down the hard drive's read and write speeds. Under Item 2, a cluster can also refer to a group of machines that work together that perform a similar function. Unlike grid computing, a computer cluster is controlled by a single software program that manages all the computers or "nodes" within the cluster. The nodes work together to complete a single task. This process is called "parallel computing" since the nodes perform operations in tandem. Computer clusters can range from two machines to hundreds of connected computers. Small clusters are often used to improve the performance of web and online gaming services by handling multiple incoming requests in parallel. A web farm, for example, is a type of cluster that provides low latency access to websites. Large clusters can be used to perform scientific calculations or to run a large number of complex algorithms. For example, a large cluster may be used to apply textures and lighting effects to 3D models in each frame of an animated movie.

BAIPHIL Market Watch – 26 February 2018 Page 23 of 23

REFERENCE COMPILED AND PREPARED BY: RESEARCH AND INFORMATION COMMITTEE FY 2017-2018

➢ BPI Asset Management ➢ Business World ➢ Philippine Daily Inquirer ➢ Philippine Star ➢ GMA News ➢ ABS-CBN News ➢ Philippine Stock Exchange ➢ Philippine Dealing System ➢ Reuters ➢ Financial Times

➢ Business Mirror ➢ Bloomberg ➢ CNN / CNBC ➢ SCMP / Japan Times ➢ Wall Street Journal ➢ Investopedia ➢ Goodreads ➢ TechTerms ➢ IT Information Exchange ➢ Life Hacks

Director: Maria Teresita R Dean (China Bank Savings) Chair: Carlota A. Bacani (ANZ Bank) Members: Sheryll K. San Jose (Equicom Savings Bank) Rachelle A Fajatin (Equicom Savings Bank)

DISCLOSURE: The BAIPHIL Market Watch (BMW) is for informational purposes only. The content of the BMW is sourced from third party websites and may be subject to change without notice. Although the information was compiled from sources believed to be reliable, no liability for any error or omission is accepted by BAIPHIL or any of its directors, officers or employees, and BAIPHIL is not under any obligation to update or keep current this information

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