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November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?


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From Our Correspondent:
It's Not Just Stocks

The stock market's troubles are masking the Philippines' value

March 17, 2000
Web posted at 7:30 p.m. Hong Kong time, 6:30 a.m. EST

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There is debate on whether the worst is over for the Philippine stock market. At the present level of 1,600 index points, the Philippine Stock Exchange Index (Phisix) is down more than 23% from its peak and at its lowest level in 17 months. Two reasons caused the precipitous drop. One is so-called fundamentals. Many of the region's stock markets, from South Korea to Singapore, are down. Fear of higher interest rates in the U.S., that's why. The other reason is the price manipulation and insider trading scandal involving listed gaming concern BW Resources. The company is controlled by businessman Dante Tan, who is a friend of President Joseph Ejercito Estrada. The BW controversy undermined foreign investor confidence in the stock market.

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Perfecto Yasay, the outgoing chairman of the Securities and Exchange Commission, says he has sent summonses to 59 individuals, at least half of them brokers, to show cause why they should not be charged with insider trading and manipulation involving BW. The charges against them will be filed with the Department of Justice before Yasay leaves office on March 25. If convicted by a lower court, the accused could face five to 17 years imprisonment, plus fines.

The 16-man staff of the Compliance and Surveillance Group (CSG) of the Philippine Stock Exchange, headed by lawyer Ruben Almadro, has found "more than sufficient evidence for the SEC to initiate and establish a prima facie case for price manipulation and insider trading" against Dante Tan. Almadro's investigating panel also found eight brokers are part of Tan's "manipulative schemes and devices," while another three brokers are guilty of less serious violations.

The problem is that the PSE's 15-man board of governors does not agree with Almadro's findings and was prepared to gloss over the allegations of fraud. In other words, the erring 11 brokers would walk away, "with not even a slap on the wrist", says Almadro. That's understandable. After all, 12 of the PSE's 15 governors are brokers themselves. So, on March 7, Almadro and his entire CSG staff resigned en masse. They denounced the PSE's old-boys club mentality. "When brokers are in control, their tendency is to protect their own and cover their own tracks in cases of anomalies," he charged.

Taking his cue, SEC boss Yasay attempted to shut down the exchange on March 8 but was overturned by his four commissioners, who claimed the act was illegal. So trading proceeded on March 8, with a manageable drop in stock market values. On March 9, Almadro went to Yasay and demanded four reforms: 1) that the majority of the PSE's 15 governors be non-brokers; 2) that three of the PSE's five-person Business Conduct and Ethics Committee (BCEC) be non-brokers; 3) that no member of the CSG's professional staff be removed without SEC approval; and 4) that no broker can be a member of the PSE's professional management, from the president, vice president, and down to unit managers. The basic premise of the demands -- "brokers cannot be trusted," says Almadro.

Yasay ordered the PSE to adopt the reforms. No dice, says the PSE, whose governors in effect claim, "we know what we are doing." The SEC chief then slapped a P50,000 daily fine on the PSE until it complies with the order to reform. It's unimaginable, private businessmen running an enterprise under the SEC and yet defying its chief regulator.

In effect, the PSE is just running true to form. In more than 60 years as Asia's oldest stock exchange, no broker, trader nor businessman has ever been convicted of stock market fraud. So local courts do not even have the experience and the jurisprudence to try cases of price manipulation and insider trading as no such case has ever been brought to them before. But the main reason for that barren record, says SEC chairman Perfecto Yasay, "is lack of political will. Philippine society is so structured that those in economic power are also in political power. People who violate the securities law are also politically strong."

In the meantime, some analysts believe the Philippine market would have collapsed even without the BW scandal. "The market is out of synch," says congressman Jose Salceda, who used to be a leading stock market analyst before running for Congress. "There are few, if any, issues which are part of what you call the new economy or the Internet, information technology, convergence, broadband, e-commerce or e-business." Such a dearth explains the sudden popularity of issues like telephone company PLDT and media concern ABS-CBN. A year ago, ABS-CBN was No. 20 in market capitalization. Now, it is No. 10, observes Salceda. President Estrada agrees. "We should get more infotech stocks to list for the market to recover," he suggests. But first things first. Reform the brokers. Limit their control.

Estrada does not think the near-collapse of the market has deterred investments in the Philippines. "The stock market is only one small measure of investors' confidence in a country," contends the president. "The Philippines' record as an investment destination [such as never having expropriated any foreign investment] and its long term outlook are the better measures of investors' confidence," he points out.

The president cites examples of companies that have recently poured massive amounts of investments into the Philippines. The Development Bank of Singapore invested $700 million in the Bank of the Philippine Islands., Deutsche Telecom of Germany made an additional investment of $350 million in the combined enterprise of Globe Telecom and Isla Communications. Nippon Telegraph and Telecommunications bought 40% of telephone giant PLDT for $366 million. And the giant British-Dutch Shell group will invest $4 billion in the Malampaya offshore gas development near Palawan, in which Texaco of the U.S. has also taken a strategic 45% interest.

"These are the types of investors the Philippines attracts under the liberal, open market and investor-friendly climate created under my administration," says Estrada, "not short-term stock market investors who run at the first sign of rain. These big-ticket investors go long term and a long way. They have gone into banking, telecommunications and energy. All three are strategic areas with enormous potential for growth, profitability, technology-infusion and employment for our people."

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