November 2, 1998
Dear Shareholder:
After another difficult period for the Philippine stock market and The
First Philippine Fund (Fund) in the third quarter of 1998, we are pleased to
report that the stock market staged a significant turnaround at the beginning of
the fourth quarter. In October alone, the Philippine composite index (Phisix)
gained 51.8% in US dollar terms. The Fund, having remained significantly
invested at the end of the third quarter, shared in this spectacular gain. The
Fund's net asset value (NAV) rose by 50.8% in October to US$6.53 per share. The
Fund's share price appreciated by 41.3% to close at US$5.56 on October 30, 1998.
This stands in sharp contrast to the market's and the Fund's performance in
the third quarter. The Phisix continued to languish during this period,
declining by 31.7% in US dollar terms and surpassing the 29.3% contraction that
occurred in the previous quarter. The market's drop was magnified by a weakening
peso, which, at Php44.03 per US dollar on September 30, depreciated by another
4.5% in the quarter.
The Fund likewise saw its NAV plunge significantly. At US$4.33 per share at
the end of September, the Fund's NAV decreased by 33.5% in the past quarter. The
Fund's shares closed at a price of US$3.94 on September 30 and traded at a 9.06%
discount to NAV.
GLOBAL MARKETS PLUNGE IN THE THIRD QUARTER
The Philippines was surely not alone in its poor performance in the third
quarter. Stock markets around the world ended sharply down. Most Asia Pacific
markets continued their declines amid renewed worries over the region's economic
and financial crisis. The sharp weakening of the yen and further deterioration
of the Japanese economy was a major concern -- a healthy Japan is widely deemed
to be a requisite for a sustainable regional recovery. Elsewhere in Asia,
Malaysia's imposition of capital controls and the Hong Kong Monetary Authority's
intervention in the stock market exacerbated an already bearish sentiment on the
region.
Asia's crisis spilled over to other emerging markets. In August, Russia
devalued its currency and defaulted on its debt. This ignited fears that other
Eastern European and Latin American economies would do the same. Developed
markets were not spared. Increased provisioning levels, slower lending and
investment banking activity, and exposure to faltering hedge funds (e.g., Long
Term Capital Management) heightened worries on the health of global financial
institutions. Earnings forecasts of multinational corporations were downgraded
to reflect slower business in Asia.
DOMESTIC CONCERNS ADD TO POOR MARKET SENTIMENT
The peaceful transition of leadership from the Ramos to the Estrada
administration failed to boost the market. The honeymoon period was short, and
the new government had to grapple with some negative image in the press, in
addition to already overwhelming economic and social challenges.
In the third quarter, the domestic economy began to show signs of weakness:
o The economy contracted in the second quarter of 1998 -- GNP by 0.7% and
GDP by 1.2% -- due in large part to a massive decline in agricultural
output as a result of El Nino.
o Inflation spiked to 10.7% in June but has declined steadily since then.
o Weakness and volatility in the peso resumed, prompting the central bank
to raise overnight interest rates and increase banks' reserve
requirements.
<PAGE>
o Rating agencies affirmed the negative outlook on the country and
downgraded local banks because of deteriorating asset quality.
o While Treasury bill rates continued to inch downwards, a projected huge
fiscal deficit for the year was expected to put pressure on interest
rates.
o Philippine Airlines, the national flag carrier, shut down operations in
September after the union rejected a management offer, part of a major
rehabilitation effort. (With President Estrada's intervention, a
settlement between labor and management was reached in early October. The
airline has since resumed operations.)
o Exports, however, continued to show significant growth while imports
began to contract. These numbers help the current account and trade
balances.
A STRONG REBOUND IN OCTOBER
The market's October turnaround was driven by (1) falling interest rates in
the country and around the world; (2) a strengthening peso; (3) improving
sentiment on the government; (4) local mergers and acquisition activity; and (5)
the perception that Asian economies are on their way to recovery. These prompted
investors to return to what we believed to be severely undervalued Philippine
equities.
While the rally has been encouraging, we expect volatility to persist and
prefer to remain on the side of caution. While the regional economic picture is
indeed slowly improving, there is a long hard road ahead towards full recovery.
Given this, the Fund will continue to search out and be most heavily invested
only in the soundest Philippine companies, confident that these can overcome
today's challenges. We, the managers of your Fund, look forward to the task of
seeking value in the Philippines for our shareholders and participating in the
Philippines' imminent economic recovery.
As always, thank you for your continued support.
Sincerely,
/s/ Lilia C. Clemente
----------------------------------
Lilia C. Clemente
President and Director
2
<PAGE>
THE FIRST PHILIPPINE FUND INC.
SCHEDULE OF NET ASSETS
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Number of
Shares Value
<S> <C> <C>
- -------------------------------------------------------------------------------------
PHILIPPINE SECURITIES -- (96.4%)
- -------------------------------------------------------------------------------------
COMMON STOCK (93.7%)
Banking (10.4%)
Bank of the Philippine Islands 1,654,900 $1,823,032
Bankard, Inc. (b) 6,470,000 111,686
Far East Bank and Trust Company 300,132 235,186
Metropolitan Bank & Trust Company 712,746 2,428,326
PCI Leasing & Finance, Inc. (a)(b) 2,320,000 36,096
Philippine Commercial International Bank, Inc. 150,000 333,886
Security Bank Corp. (b) 167,294 41,798
Union Bank of Philippines 200,000 52,241
- -------------------------------------------------------------------------------------
5,062,251
- -------------------------------------------------------------------------------------
Conglomerates (14.4%)
Aboitiz Equity Ventures, Inc. (b) 8,300,000 192,291
Alsons Consolidated Resources, Inc. (a)(b) 15,980,000 156,072
Ayala Corporation 32,707,864 3,677,378
Benpres Holdings Corp. (b) 24,789,700 1,576,559
First Philippine Holdings Corp. -- A (a) 4,256,998 1,160,288
Guoco Holdings (Phils), Inc. 4,360,000 34,661
Metro Pacific Corp. (b) 11,700,000 162,105
Uniwide Holdings, Inc. (b) (d) 8,687,000 78,924
- -------------------------------------------------------------------------------------
7,038,278
- -------------------------------------------------------------------------------------
Construction/Engineering (2.4%)
Davao Union Cement Corp. (a) 15,266,622 169,910
DMCI Holdings Inc. (b) 32,404,000 647,683
HI Cement Corp. (d) 5,430,000 84,483
Southeast Asia Cement Holdings Inc. (b)(d) 32,640,000 259,477
- -------------------------------------------------------------------------------------
1,161,553
- -------------------------------------------------------------------------------------
Electronics (2.0%)
Ionics Circuits, Inc. 150,000 25,893
Matsushita Electric Philippines Corp. (a) 6,462,528 807,321
Music Corp. (b) 1,900,000 50,923
Solid Group, Inc. (b)(d) 4,150,000 48,073
- -------------------------------------------------------------------------------------
932,210
- -------------------------------------------------------------------------------------
Food and Beverage (17.0%)
Alaska Milk Corp. (b) 10,708,000 462,107
Cosmos Bottling Corp. 2,200,000 164,899
La Tondena Distillers, Inc. (b) 1,897,800 422,433
San Miguel Corp. -- A 7,603,584 6,908,110
Selecta Dairy Products, Inc. (a)(b) 2,500,000 79,497
Universal Robina Corp. 6,162,000 237,931
- -------------------------------------------------------------------------------------
8,274,977
- -------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Number of
COMMON STOCK (Continued) Shares Value
<S> <C> <C>
- ------------------------------------------------------------------------------------------
Port Operations (2.0%)
Asian Terminals, Inc. (b) 20,474,990 $ 297,635
International Container Terminal Services, Inc. (b) 18,865,500 642,748
Keppel Philippines Holdings, Inc. -- A (a)(b) 1,312,391 31,299
- ------------------------------------------------------------------------------------------
971,682
- ------------------------------------------------------------------------------------------
Real Estate Development (20.0%)
Ayala Land, Inc. 29,871,321 4,342,255
Belle Corporation (b) 17,900,008 325,255
C & P Homes, Inc. (b) 22,716,750 121,254
Empire East Land Holdings, Inc. (b)(d) 9,176,280 42,727
Filinvest Land, Inc. (b) 21,237,499 520,964
Pryce Corp. (a)(b) 35,650,000 825,925
Robinson's Land Corp. -- B (a)(b) 20,961,000 714,141
SM Prime Holdings, Inc. 23,050,000 2,827,129
Universal Rightfield Property Holdings, Inc. (b) 6,100,000 24,246
- ------------------------------------------------------------------------------------------
9,743,896
- ------------------------------------------------------------------------------------------
Telecommunications (16.1%)
Digital Telecommunications Phils., Inc. (b) 25,600,000 255,843
Philippine Long Distance Telephone Co. ADR (e) 371,020 7,513,155
Pilipino Telephone Corp. (b)(d) 1,217,500 45,352
- ------------------------------------------------------------------------------------------
7,814,350
- ------------------------------------------------------------------------------------------
Utilities (9.4%)
Manila Electric Co. -- A 1,940,000 2,864,152
Petron Corp. (b) 26,070,002 1,687,590
- ------------------------------------------------------------------------------------------
4,551,742
- ------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $113,894,758) 45,550,939
- ------------------------------------------------------------------------------------------
WARRANTS (0.4%)
Real Estate (0.0%)
Belle Corporation (b) 2,993,333 1,496
Food and Beverage (0.4%)
Jollibee Foods Corp. (b)(d) 1,000,000 211,234
- ------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $488,211) 212,730
- ------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Par
SCHEDULE OF NET ASSETS (Continued) Maturity (000) Value
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
BONDS (1.1%)
Bacnotan Consolidated Industries Inc.
Convertible Bond 5.50% (Cost $1,750,000) 06/21/04 $ 1,750 $ 525,000
- --------------------------------------------------------------------------------------------------
CALL ACCOUNTS (1.2%)
Philippine Pesos
(Cost $647,831) (c) 569,991
- --------------------------------------------------------------------------------------------------
TOTAL PHILIPPINE SECURITIES
(Cost $116,780,800) 46,858,660
- --------------------------------------------------------------------------------------------------
UNITED STATES SECURITIES (4.2%)
- --------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (4.2%)
American Express Credit Corp.
5.45% (Cost $2,024,000) 10/02/98 2,024 2,024,000
- --------------------------------------------------------------------------------------------------
TOTAL UNITED STATES SECURITIES 2,024,000
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS** 100.60%
(Cost $118,804,800) 48,882,660
Liabilities in excess of other assets (0.60%) (253,842)
- --------------------------------------------------------------------------------------------------
TOTAL NET ASSETS
(applicable to 11,225,000 common shares
outstanding) 100.00% $ 48,628,818
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
($48,628,818/11,225,000) $ 4.33
- --------------------------------------------------------------------------------------------------
** Cost of Total Investments
Common Stock $113,894,758
Warrants 488,211
Bonds 1,750,000
Call Accounts 647,831
Commercial Paper 2,024,000
------------
$118,804,800
============
</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.
5
<PAGE>
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<PAGE>
Directors and Officers
- ----------------------
Benjamin P. Palma Gil
Director and Chairman
Lilia C. Clemente
Director and President
Leopoldo M. Clemente, Jr.
Director, Executive Vice President and Managing Director
M.A.T. Caparas
Director
Adrian C. Cassidy
Director
John Anthony B. Espiritu
Director
Joseph A. O'Hare, S.J.
Director
Robert B. Oxnam
Director
Stephen J. Solarz
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
PricewaterhouseCoopers 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.
[LOGO]
THE FIRST PHILIPPINE FUND INC.
QUARTERLY REPORT
SEPTEMBER 30, 1998
