Caltex, one of the country’s “Big 3” oil industry players, announced its plan to “switch to a 100% product import strategy by the end of the year” after a 16-month study to find out the most efficient source of long-term product supply pointed out to importation rather than refining oil.

Caltex’s Batangas refinery will thus be turned into a product import terminal. A statement released by the company stated that the facility is already “dated and it is not economic to make further significant investments to upgrade the plant.”

Looking at how deregulation and other changes in the business environment has transformed the oil industry in the last five years, Caltex’s move did not come entirely as a surprise. For one, to comply with certain provisions set by the Clean Air Act, the refiners will have to reconfigure equipment in order to produce environmentally friendly products – by reducing aromatics and benzene levels in fuel products. Local refiners are also faced with depressed margins as there is excess refining capacity of roughly 1.2 million bopd (barrels of oil per day) throughout the Middle East and Asia Pacific.

Since the oil industry was deregulated, all new players to enter the market have been importers and none have set up anything close to a refinery. Only time will tell if the limited refining capacity will affect the country’s oil security situation.

Opening the Skies

After several deferments over a span of 20 years, the 1982 RP-US Air Traffic Agreement finally takes effect on 1 October this year. This will lift capacity restrictions that limit the number of passenger flights between the Philippines and the United States.

The Philippine negotiating panel was hoping to postpone the agreement for another 12 years to give local airlines enough time to enhance their competitiveness and thus be ready for a liberalized aviation industry. The US panel was said to be willing to agree to this proposal in exchange for additional benefits such as code sharing rights for both passenger and cargo services and seventh freedom rights for US cargo carriers like United Parcel Service (UPS) and Federal Express (FedEx).

Code sharing is an agreement where an airline can share seating capacity in a single aircraft with another airline and split the revenues. Seventh freedom rights, on the other hand, allows an airline of one country to operate all-cargo services between the other country and a third country by way of flights that are not linked to its homeland.

The panels were unable to reach a compromise despite two rounds of talks in February and July this year. The Philippine panel said the US proposals contradicted the Constitution, which allows for only 40% foreign ownership for air carriers. Code sharing and seventh freedom rights, the Philippine panel reasoned, will enable US passenger and cargo planes to mount more flights to and from the Philippines and, in effect, operate like local carriers.

Many aviation groups – among them the Save Our Skies, the National Association of Independent Travel Agencies, and All Labor for Fair Skies – oppose the full implementation of the air traffic agreement. They say American airlines have no route restrictions and have unlimited access rights to the Philippine market, including passenger and cargo traffic between the Philippines and third countries while Philippine carriers will be subject to route and gateway restrictions and market barriers. They argue that local carriers’ operational viability and fair access to the US market is clipped.

Oppositors also argue that US subsidies to US carriers after the 11 September terrorist attacks puts Philippine carriers at a disadvantage. Subsidies include: $5 billion cash and loans, $3 billion in security enhancement facility services, state insurance cover to its airline industry for war risk, and $3 billion in emergency wartime support. Philippine carriers are not given the same privileges by the Philippine government.
But even if the air traffic agreement takes effect this year, it is unlikely that Philippine and American carriers would opt to mount more flights right away due to the current downturn of the global travel industry. As it is, carriers from both countries are unable to utilize their 36 flight restrictions, respectively.

Just the same, President Gloria Macapagal-Arroyo has already instructed Transportation Secretary Leandro Mendoza, Tourism Secretary Richard Gordon, and Foreign Affairs Secretary Blas Ople, to renegotiate the pact.

Moody’s Changes its Mood

Moody’s Investors Service in its 30 September assessment changed its outlook on Philippine foreign currency ratings from stable to negative. The New York-based ratings agency referred to the Ba1 foreign currency rating for government bonds, the Ba1 long-term foreign currency ceiling for bonds, and the Ba2 long-term foreign currency rating for bank deposits.

At the same time, Moody’s affirmed its negative outlook on Baa3 local currency rating for government bonds. According to Moody’s Sovereign Risk Managing Director Vincent Truglia and Vice President Thomas Byrne, the fiscal deficit remains unsustainable in the long-term despite improvements in revenue collections. Moreover, the shortfall broadens the public sector deficit, the external financing for which threatens the country’s balance of payments position.

Just last 3 September, Moody’s retained its stable outlook on Ba1 Philippine foreign currency rating and negative outlook on Baa3 rating for government obligations. The previous comment was confident of the Philippine government’s capacity to maintain political and economic stability as it faced a multi-front struggle against secessionists, terrorists, and insurrectionists. It assured that “as long as domestic and external conditions suggest that the government will be able to advance its overall economic program, the Philippines’ ratings will be maintained at current levels.”

Moody’s indicated that the status of Philippine foreign currency ratings now depends on the country’s ability “to maintain an adequate level of strength in the country’s external performance and payments position.” Recent developments in the country reflected deep political tensions. Moody’s pointed to “the brief coup attempt and legal maneuverings against senior officials in the central bank.”

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