Bond transfer risk
Ownership and transfer of the bonds was to occur only on the books of the Depository Trust
Company in New York. As a result any investors legally required to take physical delivery of
such securities could be precluded from buying the bonds.
Currency risks
Because it was to receive revenues in local currency and pay debt obligations in foreign cur-
rency, the project company would be subject to foreign exchange rate risk and availability
risk. The foreign exchange rate risk was covered by the US dollar indexation of Meralco’s
peso-denominated payments under the PPA, but the project would still have foreign exchange
availability risk because there was no assurance that the Onshore Trustee would be able to
obtain dollars at a given time. The Monetary Board of the Central Bank has the power, with
the approval of the President of the Republic, temporarily to suspend or restrict foreign
exchange transactions during a national emergency or a foreign exchange crisis.
Country risk
The bond prospectus noted that any future political instability, low economic growth or gov-
ernment action concerning facilities vital to the nation, such as power plants, could have a
materially adverse impact on the project or on Meralco, the offtaker. In the past the
Philippines has experienced periods of significant political instability, slow or negative
growth, high inflation, significant currency devaluations, the imposition of exchange con-
trols, the restructuring of official and commercial indebtedness, and electricity shortages
affecting the industrial and service sectors of the economy.
Since the end of the regime of Ferdinand Marcos, in 1986, the political and economic sit-
uation has improved considerably. From 1987 to 1989 real GDP growth averaged 5.8 per cent.
Then, after a slower period of 1.2 per cent average real GDP growth from 1990 to 1993, the
economy picked up again, growing at a 5.0 per cent rate from 1994 to 1997 under the pro-busi-
ness administration of President Fidel Ramos, who was credited with lifting the country to ‘lit-
tle tiger’ status through measures such as deregulation, privatisation and liberalisation of rules
on foreign direct investment. Among the growing sectors was the assembly of electronic prod-
ucts, which now accounts for 60 per cent of the country’s exports. Because its economic
growth was not as overstretched, the Philippines suffered less than nearby Indonesia and
Thailand during the Asian currency crisis. Also, its banking sector was in better shape, with
stricter regulation and accounting standards. Nonetheless, real GDP declined by 0.6 per cent
in 1998 before recovering to a growth rate in the range of 3.5–4.0 per cent in 1999 and 2000.
After assuming office in June 1998, President Joseph Estrada got off to a reasonable start,
addressing the need to cut government spending, reduce the extraordinarily high levels of for-
eign debt (US$45 billion) and public-sector debt (US$55 billion), quickly resolve cases
against associates of former president Marcos, and improve the lot of the poor. In his first
‘state of the union’ address, in July 1998, Estrada called upon Congress to pass the long-
delayed legislation to privatise the NPC and said that the sale of government stakes in com-
panies such as the Philippine National Bank and Petron, the country’s largest petroleum
company, would start the following year.
In January 1999 the Philippines issued US$1 billion in sovereign bonds, the first non-
POWER PLANT