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Philippine Business Magazine: Volume 12 No. 10 - Updates

MERALCO’S DEBT TO NPC
Power Struggle

Consumers may end up shouldering Meralco’s obligations to NPC

Manila Electric Co., the country’s largest power distributor, was the talk of the town in December when news broke out that it owes the state-owned National Power Corporation P42 billion. Meralco immediately denied this and clarified that it had already reached a settlement agreement with NPC in 2003 that brought down Meralco’s debt to P14.3 billion. The agreement has already been submitted to the Energy Regulatory Commission for approval.

Meralco’s debt is connected to a 10-year contract signed in 1994 that bound Meralco to buy electricity from NPC. Over the years, however, Meralco ended up buying less power than the amount it had committed to buy from NPC and buying more from independent power producers, particularly its sister companies First Gas Holdings Corp. and Quezon Power Philippines. NPC, itself saddled with enormous debts, decided to charge Meralco P42 billion for “unconsumed energy levels” for the December 2001–December 2004 period. The ERC stepped in to mediate and the two parties agreed to reduced Meralco’s obligation to P14.3 billion.

Around mid-December, though, a confidential memorandum revealing that the government is thinking of collecting Meralco’s debt in the form of equity was leaked to the press. By acquiring a stake in Meralco, the government would supposedly be able to take a more direct hand in bringing down the cost of electricity for consumers.

But news of the proposed debt-to-equity swap scheme only served to raise fears of the consequences of a government takeover of Meralco, resulting in heavy selling of the company’s shares in the stock market. Public sentiment is strongly against the government’s buying into a power company, a move that is contrary to the government’s long-term goal of power privatization.

Probably due to the outcry against it, the proposed debt-to-equity scheme has not taken off. Meanwhile, the settlement agreement pending before the ERC is petitioning that Meralco be allowed to pass on to consumers the amount it owes to NPC. The ERC hopes to reach a decision within the first half of 2006.

Signals

The inflation rate slowed down to 6.6% in December from 7.1% in November. Inflation for food, beverage, and tobacco and for services decelerated to 5.6% and 10.1%, respectively, from 6.3% and 10.9%. Meanwhile, inflation for fuel, light, and water rose to 14.8% from 14.4%. Core inflation dropped to 5.8% from 6.1% the previous month.

Driven by seasonal inflows of overseas Filipino workers’ remittances, the average peso-dollar reference rate appreciated for the third straight month, reaching P53.612/US$ in December from P54.561/US$ in November. The peso closed at P53.09/US$ on the last trading day of 2005, finishing as Asia’s best-performing currency for the year.

Net foreign portfolio investments dropped to US$4.9 million in December from US$61.3 million the previous month. December outflows of portfolio investments reached US$260.1 million, surpassing inflows of US$255.3 million.

Gross international reserves rose to US$18.4 billion in end-December from US$18.1 billion in end-November. A year ago, the level was at US$16.2 billion. The end-year reserves could cover 3.8 months’ worth of imports of goods and payments of services and income.

Domestic liquidity growth slowed down to 11.9% in November from 14.1% in October. The deceleration reflected the weak manufacturing demand. Nevertheless, OFW remittances continued to push liquidity growth.

The unemployment rate rose to 7.4% in October from 7.1% a year ago. The ranks of the unemployed rose 7.2% to 2.6 million from 2.4 million. This is based on the new definition of unemployment consistent with international standards.

The nonperforming loan ratio among commercial banks rose to 9.6% in end-October from 9.4% in end-September. Nevertheless, this was a big improvement over the end-October 2004 ratio of 14.2%.

Commercial bank lending grew faster at 1.3% in October, compared to 0.5% in September. But the rate is slower compared to 3.6% a year ago. Lending to agriculture, fishery, and forestry and to financial institutions, real estate, and business services expanded the fastest at 13.4% and 10.3%, respectively.

Updates