November 3, 1997
Dear Fellow Shareholders:
The September quarter of 1997 was a most difficult period for the
Philippine stock market and The First Philippine Fund. Along with other falling
stock markets in southeast Asia, the Philippine composite index (Phisix) plunged
by 26.8% in Philippine peso terms. Weighed down by a 30% depreciation of the
peso in the quarter, the Phisix dropped by 43.7% in US$-terms, the worst
quarterly performance of the index in seven years. The Fund's net asset value
(NAV) likewise depreciated by a record 43.6% in the period to end at $9.37 per
share. The Fund's share price closed at $9.9375 on September 30, 1997, a 6.1%
premium to NAV.
While the Fund's long term gains have been eroded, it continues to
outperform its benchmark. From the Fund's inception up to September 30, 1997,
the Fund's NAV has still shown a growth of 31.6% (adjusted for dividends and the
1995 rights offering) while the Phisix has now declined by 2.1% in US$-terms.
Over a one year period, the Fund's NAV declined by 49.4%, less than the Phisix's
drop of 50.3%. For the first nine months of 1997, both declined by 50.3%.
REVIEW OF THE SEPTEMBER QUARTER
The confluence of the following negative factors contributed to this
massive bleeding of value in the Philippine stock market:
o WEAKENING REGIONAL CURRENCIES. Starting with the floating of the Thai
baht on July 2, all southeast Asian currencies weakened significantly.
The Philippines allowed the peso to float on July 11, leading to a 30%
depreciation in the quarter.
o TIGHT MONETARY POLICY. In defense of the peso, the Bangko Sentral ng
Pilipinas (BSP) raised overnight interest rates to lofty levels. While
these have inched downwards, the cost of capital remains significantly
above pre-depreciation levels.
o EARNINGS DOWNGRADES. Despite decent first half results by some large
corporations, earnings took a backseat to currency and interest rate
movements as the primary mover of the index. Earnings forecasts have
been scaled down, especially at property firms, banks and corporations
with foreign debt exposure.
o A SLOWING ECONOMY. Good macroeconomic numbers, including lower than
expected inflation rates in July (4.8%) and August (4.5%) and
continued strong export growth, failed to lift the market. Second
quarter GDP growth remained healthy at 5.7%, but we forecast GDP
growth to slow down to 4.5-5.0% for 1997 and 3.0-4.0% in 1998.
o RISING NON-PERFORMING LOANS (NPLs). The announcement in the quarter by
two local companies of their inability to service their debt brought
into focus the risk of rising NPLs in an environment of high interest
rates and a weakening currency.
o REGIONAL DEVELOPMENTS. The announcement of the International Monetary
Fund (IMF) bail-out package for Thailand boosted regional sentiment in
August. However, Malaysia's imposition of stock trading restrictions
at the end of August sent regional bourses plunging.
o POLITICS. Political risk was heightened in September when a popular
demonstration was organized to protest against proposed changes in the
constitution to allow for revisions in term limits. Presidential
elections are scheduled for May 1998.
NEAR-TERM OUTLOOK TO REMAIN WEAK
We expect the Philippine stock market to continue to be weak in the coming
quarter. The economy will no doubt slow as it adjusts to the effects of the
devaluation. Tight liquidity and high interest rates will squeeze corporate
earnings. The anticipated drought brought about by El Nino looms to dampen
agricultural incomes. Also, the uncertainties surrounding the May elections will
keep foreign investors at bay, despite record low
<PAGE>
valuations of Philippine stocks. Outside the country, the political and economic
responses by neighboring Asian countries to this currency crisis contagion will
also affect the Philippine stock market's volatility.
Given this outlook, the Fund remains conservatively positioned to weather
any further weakness in the market. The Fund has substantially raised its cash
position, and has enhanced this position with investments in high yielding
Philippine treasury bills. The Fund has shifted to underweight positions in the
badly-hit property, banking and conglomerate sectors. These sectors will
continue to be vulnerable in the short term. The Fund has retained its
investments in quality companies, and remains poised to reinvest significantly
and take advantage of bargain prices when the outlook improves.
TURNING CRISIS INTO OPPORTUNITY
The current turmoil provides the Philippines with an ideal opportunity to
capitalize on its strengths. While Thailand and Indonesia have recently sought
the assistance of the IMF, the Philippines is in fact poised to exit from IMF
supervision with the passage of a tax reform program. Philippine banks are well
capitalized and have enough muscle to weather the storm. Furthermore, the BSP's
recent directives are aimed at increasing the transparency in and maintaining
the soundness of the banking sector. Philippine companies are relatively less
leveraged than their counterparts in southeast Asia and the property bubble in
the Philippines is nowhere near the magnitude of that in Thailand. The
government -- and most, if not all, of the leading presidential candidates --
have maintained a commitment to continuing the liberalization, deregulation and
the economic reform agenda of the Ramos administration.
We believe that as (1) the government's economic planners make the
appropriate adjustments to its fiscal and monetary policies in response to the
new economic realities, (2) currency stability returns to the country and to the
region, (3) the impact of the expected economic slowdown on earnings are fully
recognized, and (4) interest rates recede from their current lofty levels, we
could then see a restructured, more deregulated and globally competitive
economy. Having ridden the many ups and downs of both natural and man-made
calamities in the Philippines throughout the Fund's history, you will share my
confidence in the resiliency and capability of the country and its stock market
to bounce back.
As always, we appreciate your continued support in the Fund.
Sincerely,
By: /s/ Lilia C. Clemente
-------------------------------
Lilia C. Clemente
President and Director
2
<PAGE>
THE FIRST PHILIPPINE FUND INC.
SCHEDULE OF NET ASSETS
September 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Number of
Shares Value
<S> <C> <C>
- ------------------------------------------------------------------------------------------
PHILIPPINE SECURITIES (96.1%)
- ------------------------------------------------------------------------------------------
COMMON STOCK (81.3%)
Banking (9.5%)
Bankard, Inc. (b) 6,470,000 $ 584,837
Bank of the Philippine Islands 973,000 2,808,777
Far East Bank and Trust Company 200,088 300,467
Metro Bank & Trust Company 557,463 4,998,393
Philippine Savings Bank (b) 2,321,055 1,133,625
Security Bank Corp. (b) 147,072 92,201
Union Bank of Philippines (b) 200,000 116,636
- ------------------------------------------------------------------------------------------
10,034,936
- ------------------------------------------------------------------------------------------
Conglomerates (15.0%)
Alsons Consolidated Resources (b) 15,980,000 652,340
Ayala Corp -- A 24,856,554 9,784,618
Benpres Holdings GDR (b)(f) 742,491 3,344,922
First Philippine Holdings -- A(a) 2,570,399 1,311,619
Guoco Holdings (Phils), Inc. 4,360,000 180,528
Uniwide Holdings, Inc. (b)(d) 8,687,000 618,058
- ------------------------------------------------------------------------------------------
15,892,085
- ------------------------------------------------------------------------------------------
Construction/Engineering (2.6%)
Davao Union Cement -- A(a) 15,266,622 863,602
DMCI Holdings Inc. (b) 10,354,000 830,252
HI Cement Corp. (d) 5,430,000 474,997
Seacem Holdings (b) 32,640,000 552,011
- ------------------------------------------------------------------------------------------
2,720,862
- ------------------------------------------------------------------------------------------
Electronics (1.5%)
Ionics Circuits, Inc. 150,000 100,598
Matsushita Electric Philippines (a) 5,875,026 1,182,029
Solid Group, Inc. (d) 4,150,000 314,623
- ------------------------------------------------------------------------------------------
1,597,250
- ------------------------------------------------------------------------------------------
Food and Beverage (14.3%)
Alaska Milk Corp. (b) 10,708,000 543,284
La Tondena Distillers, Inc. 1,897,800 1,826,138
San Miguel Corp. -- A 9,820,484 12,026,836
Selecta Dairy Products, Inc. 2,500,000 145,794
Universal Robina 3,702,000 534,331
- ------------------------------------------------------------------------------------------
15,076,383
- ------------------------------------------------------------------------------------------
Oil (0.0%)
Philodrill Corp. -- B(b) 39,436,363 5,750
- ------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Number of
COMMON STOCK (Continued) Shares Value
<S> <C> <C>
- ------------------------------------------------------------------------------------------
Port Operations (4.0%)
Asian Terminals, Inc. (a)(b) 20,474,990 $ 2,000,035
International Container Terminal Services, Inc. (b) 10,392,000 2,151,427
Keppel Philippines Holdings -- A (a)(b) 1,037,463 41,142
- ------------------------------------------------------------------------------------------
4,192,604
- ------------------------------------------------------------------------------------------
Real Estate Development (21.1%)
Ayala Land, Inc. -- B 20,992,768 10,253,065
Belle Corporation (b) 17,900,008 2,348,740
C & P Homes, Inc. 8,616,750 829,138
Empire East Land Holdings (b)(d) 9,176,142 197,998
Filinvest Land, Inc. (b) 13,537,499 1,480,263
Pryce Corp. (b) 35,650,000 1,496,895
Robinson's Land -- B (a)(b) 19,000,000 1,096,953
SM Prime Holdings, Inc. 23,050,000 4,301,502
Universal Rightfield Property (b) 6,100,000 213,441
- ------------------------------------------------------------------------------------------
22,217,995
- ------------------------------------------------------------------------------------------
Telecommunications (8.8%)
Digital Telecommunications (a)(b)(g) 11,250,000 382,708
Globe Telecom (b) 925,417 168,650
Philippine Long Distance Telephone ADR (e) 311,020 8,436,418
Pilipino Telephone Company (b)(d) 1,217,500 319,507
- ------------------------------------------------------------------------------------------
9,307,283
- ------------------------------------------------------------------------------------------
Utilities (4.5%)
Manila Electric Co. -- A 1,092,210 2,356,715
Petron Corp. 18,870,001 2,420,994
- ------------------------------------------------------------------------------------------
4,777,709
- ------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $103,974,847) 85,822,857
- ------------------------------------------------------------------------------------------
WARRANTS (0.0%)
Real Estate
Belle Corporation (b) (Cost $0) 2,993,333 0
- ------------------------------------------------------------------------------------------
ENTITLEMENTS (0.0%)
Banking
Far East Bank and Trust Company (b)(h) (Cost $0) 100,044 0
- ------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF NET ASSETS (Continued) Maturity Par (000) Value
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
BONDS (1.0%)
Bacnotan Consolidated Ind. Convertible Bond
5.50%
(Cost $1,750,000) 06/21/04 $ 1,750 $ 1,093,750
- --------------------------------------------------------------------------------------------------
Par (000)*
- --------------------------------------------------------------------------------------------------
PHILIPPINE TREASURY BILLS (0.9%)
Philippine Treasury Bill 15.0%
(Cost $941,453) 12/03/97 30,834 941,453
- --------------------------------------------------------------------------------------------------
CALL ACCOUNTS (12.9%)
Philippine Peso (c)
(Cost $15,332,080) 13,629,370
- --------------------------------------------------------------------------------------------------
TOTAL PHILIPPINE SECURITIES 101,487,430
- --------------------------------------------------------------------------------------------------
Par (000)
- --------------------------------------------------------------------------------------------------
UNITED STATES SECURITIES (4.0%)
- --------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (4.0%)
Ford Motor Credit Corporation
5.77185%
(Cost $4,264,000) 10/01/97 $ 4,264 4,264,000
- --------------------------------------------------------------------------------------------------
TOTAL UNITED STATES SECURITIES 4,264,000
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS **
(Cost $126,262,380) 100.1 % 105,751,430
Liabilities in excess of other assets (0.1)% (528,503)
- --------------------------------------------------------------------------------------------------
TOTAL NET ASSETS
(applicable to 11,225,000 common
shares outstanding) 100.0 % $105,222,927
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
($105,222,927 divided by 11,225,000) $ 9.37
- --------------------------------------------------------------------------------------------------
* Denominated in Philippine Pesos.
** Cost of Total Investments:
Common Stock $103,974,847
Warrants 0
Entitlements 0
Bonds 1,750,000
Philippine Treasury Bills 941,453
Call Accounts 15,332,080
Commercial Paper 4,264,000
------------
$126,262,380
============
</TABLE>
(a) At fair value as determined by the Board of Directors.
(b) Non-income producing security.
(c) Daily interest is being accrued at a rate of 4% of the
outstanding balance.
(d) Pursuant to Rule 144A under the Securities Act of 1933, all
or a portion of these securities can only be sold to
qualified institutional investors.
(e) ADR -- American Depository Receipt.
(f) GDR -- Global Depository Receipt.
(g) Securities restricted for resale until November 27, 1997.
<TABLE>
<CAPTION>
Date of Average Percentage of Fair Value at
Description Acquisition Shares Cost Net Assets September 30, 1997
----------- ----------- ---------- ------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Digital Telecommunications 1/15/93 11,250,000 $0.0459 0.40% $382,708
</TABLE>
(h) Entitlements represent the right to subscribe to additional
shares of the respective company's common stock.
5
<PAGE>
(This Page Has Been Left Blank Intentionally)
6
<PAGE>
Directors and Officers
- ----------
Peter Favila
Director and Chairman
Lilia C. Clemente
Director and President
Leopoldo M. Clemente, Jr.
Director, Executive Vice President and Managing Director
Stephen Bosworth
Director
M.A.T. Caparas
Director
Adrian C. Cassidy
Director
Edgardo B. Espiritu
Director
Joseph A. O'Hare, S.J.
Director
Robert B. Oxnam
Director
Stephen J. Solarz
Director
Valentin A. Araneta
Executive Vice President and Managing Director
Thomas J. Prapas
Treasurer
William H. Bohnett
Secretary
Joaquin G. Hofilena
Vice President
Imelda Singzon
Vice President
Angelito C. Imperio
Assistant Secretary
Maria Distefano
Assistant Secretary
Executive Offices
- ----------
152 West 57th Street, New York, NY 10019
(For latest net asset value and market
data, please call 212-765-0700 or access
http://www.clementecapital.com.
For shareholder account inquiries, call
1-800-937-5449)
- ----------
Investment Adviser
Clemente Capital, Inc.
- ----------
Administrator
PFPC Inc.
- ----------
Transfer Agent and Registrar
American Stock Transfer & Trust Company
- ----------
Custodian
Brown Brothers Harriman & Co.
- ----------
Legal Counsel
Fulbright & Jaworski L.L.P.
- ----------
Independent Accountants
Price Waterhouse LLP
<PAGE>
SUMMARY OF GENERAL
INFORMATION
- ----------
THE FUND
The First Philippine Fund Inc. is a closed-end investment company whose
shares trade on the New York Stock Exchange. The Fund seeks long-term capital
appreciation primarily through investment in equity securities of Philippine
companies. The Fund is managed by Clemente Capital, Inc.
- ----------
SHAREHOLDER INFORMATION
Daily market prices for the Fund's shares are published in the New York
Stock Exchange Composite Transactions section of most newspapers under the
designation "FtPhil". The Fund's New York Stock Exchange trading symbol is FPF.
Net asset value (NAV) and market price information about The First Philippine
Fund Inc. shares are published each Monday in The Wall Street Journal, The New
York Times and in other newspapers. For general information visit us at our web
site http://www.clementecapital.com. For shareholder account inquiries call
1-800-937-5449.
- ----------
DIVIDEND REINVESTMENT PLAN
Through its voluntary Dividend Reinvestment Plan, shareholders of The First
Philippine Fund Inc. may elect to receive dividends and capital gains
distributions in the form of additional shares of the Fund.
This report, including the financial information herein, is transmitted to the
shareholders of The First Philippine Fund Inc. for their information. This is
not a prospectus, circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in this report.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase at market prices from time to
time shares of its common stock in the open market.
[First Philippine Fund Inc LOGO]
The First Philippine Fund Inc.
Quarterly Report
September 30, 1997
