The stock market and corporate sector

(The market’s morning... to mourning)

straight line it was already boring most currency dealers.

Against this backdrop, market players confidently predicted that the Philippine composite index (Phisix) would test record highs as early as the first quarter; they were proven right.

The Phisix pierced the 3,400 level to reach an all-time high of 3,447.60 on Feb. 3. That rally was fueled by loads of money from foreign investors satisfied with the economy’s achievement in 1996.

However, the upbeat situation saw a reversal when foreign funds flowed out as swiftly as they came following the country’s parallelism with Thailand, whose property sector showed clear signs of fatigue by March. This triggered speculation over the health of local property companies, starting with businessman Andrew Tan’s Megaworld Properties and Holdings, Inc.

Consequently, the banking sector — the main funder of the real estate companies’ ambitious projects — got dragged into the picture as questions on the banks’ asset quality surfaced.

“You were seeing companies trying to join the bandwagon, setting up real estate firms to take advantage of the relatively easier (financing) environment. So, many of these property companies borrowed money, increased their leverage, just to build their landbank,” said Joel Mendoza, vice-president and research head at Santander Investment Securities, Inc.

Later on in the year, property firms realized that an extensive landbank can also work against them.

“The problem here is that because of the extent of the oversupply in some sectors in the real estate sector, that landbank also becomes a liability considering that it’s like an inventory that is not moving, but you are paying for the cost that you borrowed to acquire the property. So, that had a significant impact on the balance sheet of many banks,” explained Mr. Mendoza.