As filed with the Securities and Exchange Commission on June 13, 2003.

Registration No. 333-105868

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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO.1

REGISTRATION STATEMENT
UNDER SCHEDULE B
OF
THE SECURITIES ACT OF 1933
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NATIONAL POWER CORPORATION
(Name of Registrant)
POWER SECTOR ASSETS AND LIABILITIES
MANAGEMENT CORPORATION
(Co-Registrant)
REPUBLIC OF THE PHILIPPINES
(Co-Registrant and Guarantor)
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Name and Address of Authorized Representative in the United States

Hon. Linglingay Lacanlale
Consul General
Philippine Consulate
556 Fifth Avenue
New York, New York 10036-5095
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Copies of notices and communications to:

David F. Johnson, Esq. William F. Barron, Esq.
Allen & Overy Davis Polk & Wardwell
9th Floor, Three Exchange 18th Floor, The Hong Kong
Square Club Building
Central 3A Chater Road, Central
Hong Kong SAR Hong Kong SAR

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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 of 1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]

-----------------
The Registrant hereby amends this Registration Statement on such date as may
be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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The Information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state or jurisdiction where the offer or sale is not
permitted.

SUBJECT TO COMPLETION, DATED JUNE 13, 2003

PROSPECTUS
[LOGO]
[LOGO] PSALM
POWER SECTOR
ASSETS & LIABILITIES
MANAGEMENT CORPORATION
[LOGO] REPUBLIC OF THE PHILIPPINES

$500,000,000

National Power Corporation

% Guaranteed Bonds due

irrevocably and unconditionally guaranteed as to payment of

principal, interest and additional amounts, if any, by the

Republic of the Philippines

-----------------

The bonds will bear interest at the rate of % per year. Interest on the
bonds is payable on and of each year, beginning on , 2003. The
bonds will mature on , . Except as described under "Description of the
Bonds -- Redemption for Taxation Reasons," the bonds are not redeemable prior
to maturity.

The bonds will be our direct, unconditional, unsecured and general
obligations and will rank pari passu in priority of payment with all of our
other unsecured and unsubordinated external indebtedness (as defined herein).
The bonds will be irrevocably and unconditionally guaranteed by the Republic of
the Philippines. The guarantee will constitute the direct, unconditional,
unsecured and general obligation of the Republic and will rank pari passu with
all other unsecured and unsubordinated external indebtedness of the Republic,
and the Republic will pledge its full faith and credit for the performance of
the guarantee.

The Power Sector Assets and Liabilities Management Corporation ("PSALM")
may, without the consent of the holders of the bonds, assume the obligations of
National Power Corporation under the bonds, subject to certain conditions. If
PSALM assumes such obligations, the guarantee will be such that the obligations
of PSALM under the bonds shall be unconditionally and irrevocably guaranteed by
the Republic on the same basis as those of National Power Corporation.

The offering of the bonds and the guarantee is subject to receipt of the
approval of the Monetary Board of Bangko Sentral ng Pilipinas, the central bank
of the Republic ("Bangko Sentral").

Prior to this offering, there has been no public market for the bonds. We
have applied to have the bonds listed on the Luxembourg Stock Exchange, but
there can be no assurance that the application will be approved, and settlement
of the bonds is not conditioned on obtaining the listing.

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Neither the Securities and Exchange Commission nor any state securities
regulators have approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

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Per Bond Total
-------- -----

Public Offering Price % $
Underwriting Discount % $
Proceeds to National Power Corporation (before expenses) % $

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The underwriters expect to deliver the bonds to purchasers on or about ,
2003 through the book-entry facilities of The Depository Trust Company,
Euroclear and Clearstream, Luxembourg.

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Citigroup
June , 2003

TABLE OF CONTENTS

Page
----

Introductory Statements................................... i
Forward-Looking Information............................... ii
Summary................................................... 1
Use of Proceeds........................................... 17
National Power Corporation................................ 18
Electric Power Industry Restructuring and Privatization... 59
Power Sector Assets and Liabilities Management Corporation 70
Glossary of Selected Electricity Terms.................... 80
Republic of the Philippines............................... 81
Description of the Bonds.................................. 175
Taxation.................................................. 188
Underwriting.............................................. 193
Validity of the Bonds..................................... 196
Authorized Representative in the United States............ 197
Experts; Official Statements and Documents................ 197
Where You Can Find More Information....................... 197
Index to National Power Corporation's Financial Statements F-1
Index to Tables........................................... T-1

Until , all dealers that effect transactions in the Bonds, whether or
not participating in this offering, may be required to deliver a prospectus.

INTRODUCTORY STATEMENTS

This prospectus contains information you should consider when making your
investment decision. You should rely only on the information provided in this
prospectus. National Power Corporation, or NPC, has not authorized anyone else
to provide you with any other information.

NPC and PSALM are organized with limited liability under the laws of the
Republic of the Philippines, and all of their directors and officers and
substantially all of their assets are located in the Philippines. The Republic
of the Philippines is a foreign sovereign nation. Consequently, it may be
difficult for investors to realize upon judgments of courts in the United
States against NPC, PSALM or the Republic of the Philippines. See "Description
of the Bonds -- Jurisdiction, Consent to Service and Enforceability" elsewhere
in this prospectus.

The distribution of this prospectus and the offering and sale of the Bonds
may be legally restricted in some countries. If you wish to distribute this
prospectus, you should observe any applicable restrictions. This prospectus
should not be considered an offer, and it is prohibited to use it to make an
offer, in any state or country which prohibits such offering.

In any jurisdiction in which the offering and sale of the Bonds is required
to be made by a licensed broker or dealer and in which the dealer manager or
any of its affiliates are appropriately licensed, it will be deemed to be made
by the dealer manager or such affiliates on behalf of NPC.

NPC is furnishing this prospectus solely for use by prospective investors in
connection with the offering and sale of the Bonds. NPC confirms that:

. to its best knowledge and belief, the information contained in this
prospectus is true and correct in all material respects and is not
misleading;

. to its best knowledge and belief, it has not omitted facts the omission of
which makes this prospectus, as a whole, misleading; and

. it accepts responsibility for the information provided in this prospectus.

The Luxembourg Stock Exchange takes no responsibility for the correctness of
any of the statements made, or opinions expressed, in this prospectus. The
listing of the Bonds on the Luxembourg Stock Exchange is not to be taken as an
indication of the investment merits of the Bonds or National Power Corporation.

You should not assume that the information contained in this prospectus is
accurate as of any date other than the date on the front of this prospectus.

Unless the context clearly implies otherwise, "we", "us", the "Issuer", the
"Company" and "NPC" refer to National Power Corporation, and after the
assumption of the Company's obligations under the Bonds by PSALM, to PSALM.
"PSALM" refers to the Power Sector Assets and Liabilities Management
Corporation. The "Republic", the "Philippines", the "Government" and the
"Guarantor" refer to the Republic of the Philippines. "Bangko Sentral" refers
to Bangko Sentral ng Pilipinas.

The Company's financial statements are prepared in accordance with
government accounting and auditing standards in the Republic of the Philippines
("Philippine GAAS") which differ in certain respects from generally accepted
accounting principles in the Philippines and in certain other countries.

Unless otherwise specified, data relating to the gross national product,
gross domestic product and other national accounts of the Republic are
expressed in constant terms using 1985 prices.

In this prospectus, references to " (Peso)" and "peso" are to Philippine
pesos and references to "$", "US$" and "dollars" are to U.S. dollars. The
Company publishes its financial statements in pesos. This prospectus contains a
translation of certain peso amounts into dollars at specified rates solely for
the convenience of the reader. Unless otherwise specified, such conversions
were made at the exchange rate as stated by the Bangko Sentral Reference
Exchange Rate Bulletin published by the Treasury Department of the Bangko
Sentral on the relevant date. No representation is made that such peso amounts
actually represent such U.S. dollar amounts or could have been converted into
dollars at the rates indicated, at any particular rate or at all.

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The Republic is a subscriber to the International Monetary Fund's Special
Data Dissemination Standard, which is designed to improve the timeliness and
quality of information of subscribing member countries. The Special Data
Dissemination Standard ("SDDS") requires subscribing member countries to
provide schedules indicating, in advance, the date on which data will be
released or the so-called "Advance Release Calendar". For the Philippines,
precise dates or "no- later-than-dates" for the release of data under the SDDS
are disseminated three months in advance through the Advance Release Calendar,
which is published on the Internet under the International Monetary Fund's
Dissemination Standards Bulletin Board. Summary methodologies of all metadata
to enhance transparency of statistical compilation are also provided on the
Internet under the Dissemination Standards Bulletin Board. The Internet website
is located at http://dsbb.imf.org. The information at this and associated
websites does not form part of this prospectus.

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FORWARD-LOOKING INFORMATION

This prospectus may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, which we refer to as the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, which we refer to as the Securities Exchange Act. Statements that are
not historical facts are statements about our beliefs and expectations and may
include forward-looking statements. These statements are identified by words
such as "believe", "expect", "anticipate", "should" and words of similar
meaning. Forward-looking statements are inherently subject to risks and
uncertainties, many of which cannot be predicted with accuracy and some of
which might not even be anticipated. Future events and actual financial and
other results may differ materially from the results discussed in the
forward-looking statements. Therefore, you should not place undue reliance on
them.

SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information appearing elsewhere in this
prospectus. You should read the entire prospectus carefully, including the
"Recent Financial Results" section beginning on page 19. Certain capitalized
terms used in this summary are defined elsewhere in this prospectus. This
summary is not complete and may not contain all of the information that you
should consider before you purchase the Bonds. The "Description of the Bonds"
section of this prospectus contains more detailed information regarding the
terms and conditions of the Bonds.

National Power Corporation

Our Business

We are the principal entity in the Philippines engaged in the nationwide
generation and transmission of electricity. Power plants that we own produced
18,928 Gwh of electricity, accounting for approximately 40% of all electricity
produced in the Philippines in 2002. We are responsible for, in cooperation
with the private sector, the construction, operation, maintenance and
rehabilitation of electricity generation facilities in the Philippines. Our
plants generate electricity using oil, coal, geothermal steam, water and
natural gas. We have also been responsible for the operation, strategic
development, maintenance and rehabilitation of the power grids and
interconnection facilities in the Philippines. We operate major power grids in
Luzon, Visayas and Mindanao, as well as the Small Islands Grid. Our ability to
supply the Philippines with an affordable and reliable power supply is a key
factor in promoting the country's economic growth.

As of December 31, 2002, the electric power industry in the Philippines
consisted of:

. power generators including us and 32 independent power producers ("IPPs"),
some of which own and operate plants, and some of which have contracted to
operate plants we own;

. our major transmission grids that we operate nationwide, consisting of
approximately 20,731 circuit kilometers; and

. 141 power distributors, comprising 119 independent electric cooperatives,
18 privately-owned utilities and four municipal utilities.

We sell electricity to distributors, who in turn transmit electricity to
households, industries, commercial establishments and other end-users. We also
sell electricity directly to industrial and commercial users. Our largest
customer, and by far our largest distributor, in each case based on sales
volume, is the Manila Electric Company ("Meralco"), a private utility which
distributes electricity to Metro Manila and surrounding areas. Meralco
accounted for 55% of our total volume of electricity sales for 2000, 57% for
2001 and 49% for 2002. The Supreme Court recently ordered Meralco to refund up
to (Peso)30 billion in excess charges to its consumers. We do not know how this
ruling will affect Meralco's financial viability or our ability to collect
revenues from Meralco.

Recent Financial Results

Since mid-1997, we have experienced significant financial difficulties
resulting from the depreciation of the peso against the US dollar and other
major currencies, lower than expected electricity demand, the high levels of

our debt and capital lease obligations under our agreements with IPPs, and more
recently the mandatory removal of the Purchased Power Adjustment ("PPA"). The
PPA, a component of the fuel and purchased power cost adjustment mechanism, was
an automatic cost recovery mechanism that allowed us to pass on increased costs
associated with our US dollar obligations under our IPP contracts. In
connection with the unbundling of our rates, we have removed the PPA charge
since September 2002. On February 24, 2003, the ERC approved implementing rules
which would replace the PPA process with the Generation Rate Adjustment
Mechanism (the "GRAM"), and replace the FOREX, the automatic foreign exchange
adjustment mechanism, with the Incremental Currency Exchange Rate Adjustment
(the "ICERA"). The GRAM and the ICERA are intended, among other things, to
require review and approval of adjustments before they are passed on to
end-users and to limit changes in rates to once a quarter, as opposed to once a
month. See "National Power Corporation -- Power Rates -- Implementation of the
GRAM and the ICERA." Costs associated with power purchased from IPPs have
increased significantly because of the devaluation of the peso and the fact
that our price for such power is based in US dollars while our income is
principally received in pesos.

2001 and 2002 were difficult periods for us due to the continued
depreciation of the peso and continuing economic uncertainty in the Philippines
caused by the global economic slowdown. We suffered a net loss of (Peso)10.4
billion for 2001, compared with a net loss of (Peso)13.0 billion for 2000. In
2002, our net loss more than tripled to (Peso)33.7 billion. Also, in 2002, our
net operating income declined to (Peso)523 million as compared to (Peso)6.8
billion in 2001. Our interest expense increased by (Peso)2.8 billion to
(Peso)17.9 billion in 2002 as compared to 2001. Our return on rate base
declined to 0.22% in 2002 from 2.89% in 2001 under the Lender Formula, and to
0.21% in 2002 from 2.74% in 2001 under the Charter Formula. In addition, in
2002 we incurred a cash deficit after debt service and capital expenditures of
(Peso)63.5 billion, as compared to (Peso)21.2 billion in 2001. See "Summary
Financial Information of National Power Corporation" and our audited and
unaudited financial statements.

Our losses during 2002 were exacerbated primarily due to the following
developments:

. the continued impact of a reduction of our basic rates by (Peso)0.30 per
kWh effective June 26, 2001, which was mandated by Republic Act 9136 or
the Electric Power Industry Reform Act of 2001 (the "Act") and a further
mandatory reduction of our generation rate in September 2002;

. the (Peso)0.85 per kWh reduction in the PPA from (Peso)1.25 per kWh to
(Peso)0.40 per kWh effective May 8, 2002, which was mandated by
presidential directive and affirmed by the ERC on September 6, 2002 and
our removal of the PPA charge since late September 2002; and

. unrecovered costs of (Peso)2.1 billion relating to the Bakun I and II
power plant and of (Peso)1.35 billion relating to Casecnan power plant.

We expect that our operating revenues will be significantly lower, and our
net loss significantly higher, in 2003 as compared to 2002. In addition, if the
cost recovery mechanisms and rates that we are permitted by law to charge are
different from or lower than those we applied for, our ability to successfully
attract investors and complete our privatization could be impaired.

Regulatory Framework and Relationship with the Government

We are wholly owned by the Government. The President of the Philippines
appoints all nine members of our board of directors, each of whom is required
by law to be employed by the Government. The Government agencies listed below
have the following supervisory roles:

. The Philippine Congress, the Department of Energy (the "DOE") and the
Department of Budget and Management review and approve our annual budget.

. The Department of Budget and Management and the Department of Finance
monitor our finances.

. The Energy Regulatory Commission (the "ERC"), formerly the Energy
Regulatory Board (the "ERB"), is the primary regulator for the electric
power industry. The ERC must approve any change in our basic power rates
or overall rate structure. See "National Power Corporation -- Power Rates."

. The DOE and the Department of Environmental and Natural Resources monitor
our operations for compliance with environmental legislation, and
formulate policies on energy conservation and the use of indigenous and
environmentally friendly energy resources.

. The DOE undertakes all our research and development functions.

. The Joint Congressional Power Commission (the "Joint Power Commission")
sets guidelines and the overall framework to monitor and ensure the proper
implementation of the Act, evaluates industry participants, and monitors
adherence to the objectives and timelines set forth in the Act.

. The National Electrification Administration, under the supervision of the
DOE, develops and implements programs to enhance the viability of rural
electric cooperatives as electric utilities.

Restructuring of the Electric Power Industry and Our Privatization

General

On June 8, 2001, the Electric Power Industry Reform Act of 2001 (the "Act")
was signed into law by President Gloria Macapagal-Arroyo. The Act became
effective on June 26, 2001. The Act provides a legal framework for the
restructuring of the electric power industry and for our privatization. On
February 27, 2002, pursuant to the Act, the Joint Power Commission approved the
implementing rules and regulations (the "IRRs") which now govern the
restructuring of the electric power industry and our privatization. Our
privatization will occur following (i) the restructuring of the electric power
industry's various sectors, (ii) the creation of a new regulatory framework for
the electric power industry, (iii) the establishment of certain transition
mechanisms to minimize economic dislocation, and (iv) the establishment of
various open market devices to promote free and fair competition.

The Act mandates that the power industry be restructured to comprise four
sectors -- generation, transmission, distribution and supply. Under the new
regulatory framework, the ERC is the primary governmental agency responsible
for overseeing the power industry, and the DOE and Joint Power Commission
perform supervisory roles. To allow the industry to adjust to a market-oriented
setting, and to help mitigate adverse economic consequences of the
restructuring, the Act contains transition mechanisms dealing with, among other
issues, supply contracts, IPP contracts, and "stranded costs" which we will not
be able to dispose of in our privatization. See "Electric Power Industry
Restructuring and Privatization -- Transition Mechanisms".

The Act endeavors to create a regime of free and fair competition, and full
public accountability, to achieve greater economic and operational efficiency.
Toward this end, the Act calls for the establishment of open market devices
that will address, among other issues, the Wholesale Electricity Spot Market
("WESM"), retail competition, open access to markets, unbundling of rates, and
removal of subsidies. See "Electric Power Industry Restructuring and
Privatization -- Open Market Devices."

To reorganize our assets and liabilities, the Act provides for the creation
of two disposition entities:

. the Power Sector Assets and Liabilities Management Corporation ("PSALM")
which will take ownership of all of our existing generation assets,
liabilities, real estate, and other disposable assets, as well as certain
IPP contracts; and

. the National Transmission Corporation ("Transco"), an entity wholly owned
by PSALM, which will assume our electricity transmission assets.

Our generation assets will be privatized by PSALM through an open and
transparent public bidding process. PSALM will also coordinate the
privatization of our transmission assets through concession contracts, while
our sub-transmission assets will be operated and maintained by Transco until
their sale to qualified distribution utilities. We will continue to operate the
generation assets after they are transferred to PSALM, pursuant to an
operations and maintenance agreement, until they are sold. We are still
negotiating the operations and maintenance agreement with PSALM.

Under the Act, we will be allowed to impose on all end-users of electricity,
subject to certain exceptions which we do not expect to be material, a
"Universal Charge" to cover the payment of stranded debt and stranded contract
costs to the extent that such stranded costs are not assumed by the Government
under the Act. Stranded debt will consist of our unpaid financial obligations
which have not been liquidated by the proceeds from the sales of our assets and
will include unpaid financial obligations which are refinanced by PSALM.
Stranded contract costs will consist of costs associated with IPP contracts
that were approved by the ERC as of December 31, 2000.

On May 21, 2002, a majority coalition of senators who support the President
introduced a bill in the Senate which would amend various provisions of the
Act. This bill, if passed by Congress, would among other things:

. clarify that the Universal Charge would not be imposed on electricity
output produced by a self-generation facility owned and operated by an
end-user solely for its own consumption;

. exempt certain of our customers from imposition of the Universal Charge
and limit the Universal Charge to (Peso)0.42 per kWh;

. clarify that we, PSALM, Transco and any other entity created to privatize
our assets will not be subject to national taxes, charges, fees or other
assessments arising from the privatization;

. extend the life of PSALM from 25 years to 35 years; and

. clarify that the Republic may guarantee the payment of our obligations
assumed by PSALM from us and that such Guarantee will not count against
the maximum amount that the Republic is authorized to guarantee under
existing laws.

The majority coalition bill to amend the Act remains pending in Congress and
it is uncertain if the bill will be passed. Even if a bill to amend the Act is
eventually passed, it is unclear whether it will closely resemble the current
majority coalition bill described above.

The minority coalition has introduced legislation which differs in certain
material respects from the bill introduced on May 21, 2002. Most importantly,
the minority party's bill would set certain ceilings on amounts billable under
the Universal Charge, prevent the imposition of the Universal Charge on certain
entities and exempt certain end-users from payment of the PPA. While we expect
an amendment to the Act to be passed in the future, we cannot predict the final
form of the amendment or its effects on the restructuring of the electric power
industry, or on our results of operations. See "Electric Power Industry
Restructuring and Privatization -- Electric Power Industry Reform Act of 2001."

Recent Changes in Senior Management and Organizational Structure

In February, 2003 Rogelio M. Murga became our President and Chief Executive
Officer and in January 2003 Dr. Alan Ortiz, former vice-chairman of the
Development Bank of the Philippines, became the President of

Transco. We expect that there will be additional changes in our management as a
result of our ongoing restructuring. In November 2002, our Board of Directors
passed a restructuring plan that resulted in the termination of our entire
workforce of 11,182 employees in February 2003. We have rehired approximately
3,800 of these employees to work for us, 3,714 were rehired to work for Transco
and 29 were rehired to work for PSALM. We expect the total cost of separation
pay to be approximately (Peso)11.8 billion, all of which will be paid by us.
See "Power Sector Assets and Liabilities Management Corporation --
Privatization Mechanisms."

Our Privatization

Pursuant to the Act, on December 14, 2001, PSALM submitted a privatization
plan for both the transmission and generation businesses for endorsement by the
Joint Power Commission. The plan to privatize the transmission business was
endorsed by the Joint Power Commission in March 2002 and the plan to privatize
the generation business was endorsed by the Joint Power Commission in August
2002. The President approved the transmission and generation privatization
plans in October 2002.

We have commenced discussions with our bank creditors and bondholders
(including the World Bank, the Asian Development Bank and the Japan Bank for
International Cooperation ("JBIC")) regarding a number of contractual
provisions that restrict our ability to carry out the privatization. These can
be broadly categorized as (i) provisions restricting the transfer of our debt
obligations to PSALM, (ii) covenants restricting our ability to transfer our
generation and transmission assets to PSALM and Transco (and therefore also
restricting PSALM's ability to sell such assets to private investors) and (iii)
project-specific covenants relating to the construction and operation of
particular projects that our creditors have funded. As a result, to allow for
the transfer of our assets and liabilities to PSALM and Transco, we will need
consents from our lenders to either waive any defaults or amend the relevant
provisions.

Consents to waive or amend the relevant restrictions on privatization will
have to be obtained from creditors including public bondholders, commercial
banks and bilateral and multilateral creditors and bondholders. The process of
obtaining the consents necessary to allow us to transfer our assets and
liabilities to PSALM is underway. Approximately 90% of our commercial lenders,
which together account for approximately 15% of our debt, have approved the
transfer of debt to PSALM. We plan to prepay the outstanding remaining amounts
of our other commercial loans. In addition, we conducted an exchange offer for
our outstanding Yankee bonds and we will be conducting a consent solicitation
for our outstanding Eurobonds. As required under the Act, to the extent that
consents for the transfer of certain assets or liabilities cannot be obtained,
such assets and liabilities will remain with us. All stranded assets will
remain on our balance sheet, and such liabilities will be treated as stranded
debt. See "Power Sector Assets and Liabilities Management Corporation --
Privatization Issues Relating to Debt -- Consents from Creditors Needed for
Transfer of Assets and Liabilities."

Issues Relating to the Purchased Power Adjustment and the Universal Charge

Our contracts with IPPs contain various "take or pay" provisions that
require us to pay for a fixed amount of electricity even if we do not take
delivery of it and to pay capacity fees to IPPs. Because demand for electricity
has not reached the levels expected when the contracts were signed in the early
1990s, and because of the significant decline in the value of the peso as
compared to the US dollar since that time, we have incurred significant losses
relating to these IPP contracts. To permit us to recover these costs, beginning
in 1994, the Government granted us the ability to impose the PPA on all of our
direct customers. The PPA and other automatic cost adjustment mechanisms have
significantly increased the price of electricity to consumers over the past
several years. See "National Power Corporation -- Power Rates -- Overview of
Rate Structure." Under the Act, the Universal Charge will be imposed on all
end-users of electricity, subject to several exceptions which we do not think
will be material to us, and not just on our direct customers. Because of this
we believe we will generate greater revenues with the Universal Charge than we
did with the PPA.

Recently, the PPA and the proposed Universal Charge have come under intense
public and political scrutiny as electricity rates in the Philippines have
risen to among the highest in Asia. This scrutiny led President Arroyo, by
presidential directive, to reduce the current average PPA charge from
(Peso)1.25 per kWh to (Peso)0.40 per kWh, effective May 8, 2002. The ERC,
through an order issued on September 6, 2002, affirmed the presidential
directive. The reduction of the PPA alone caused us to lose (Peso)9.3 billion
from May 8, 2002 to September 30, 2002. Since late September 2002, in
connection with the unbundling of our transmission and generation rates, we
have not charged our customers the PPA, which has resulted in significant
additional losses to us.

On February 24, 2003, the ERC approved implementing rules for the GRAM, a
proposed mechanism for the recovery of generation costs, which is expected to
replace the PPA charge. The ERC has stated that the GRAM will not be replaced
by the Universal Charge, but that there will not be double recovery when the
Universal Charge is implemented. In April 2003, we filed an application with
the ERC for cost recovery under the GRAM. In May 2003, the ERC revised our
generation rates in response to this application. Because we consider the
revised generation rates to be too low, we plan to file a motion for
reconsideration of the rates with the ERC. See "National Power Corporation --
Power Rates -- Implementation of the GRAM and the ICERA." We do not know which
rate the ERC will approve in response to our application and subsequent motion
for reconsideration, nor do we know whether we will be able to recover some or
all of the actual loss incurred in connection with the suspension of the PPA
charge. If the rates approved by the ERC under the GRAM do not allow us to pass
on the costs associated with the generation of electricity, then our future
operating revenues could be adversely affected.

While the Arroyo administration has announced that the Universal Charge
needs to be implemented as a matter of policy, various members of Congress and
of the public continue to oppose the imposition of any Universal Charge. If the
Universal Charge is significantly lower than we expect, or if it is eliminated,
our financial condition will continue to deteriorate and we will need to obtain
additional financing to continue operations.

Other Rate Reductions Affecting Our Revenues

In addition to the rate reductions described above, the following reductions
in our basic electricity rates have been imposed:

The Act. The Electric Power Industry Reform Act of 2001 mandated an overall
rate decrease of (Peso)0.30 per kWh in June 2001.

Unbundling of Rates. In late September 2002, our transmission and
generation rates were unbundled, as mandated by the Act. In connection with
this unbundling, the ERC further lowered our generation rate. If our generation
rates are not further revised upwards under the GRAM, we expect our results of
operation for 2003 to be worse than originally projected. In addition, in May
2003 the ERC promulgated new rules for setting transmission wheeling rates.
While we cannot predict what effect the new rules will have on our transmission
rates, we expect that our revised transmission wheeling rates will not be
materially different from our current transmission rates.

Issues Relating to IPP Contracts

Pursuant to the Act, an inter-agency committee was formed to review each of
our 35 contracts with IPPs. On July 4, 2002, this inter-agency committee
submitted a report to President Arroyo that identified IPP contracts with
difficult financial and legal issues for the Government. With respect to the
IPP contracts which contained financial issues, we have commenced renegotiation
of the financial terms. Although we do not plan to impose unilateral changes to
the contracts with financial issues, we expect to reduce certain of our
obligations under these contracts through the renegotiation process. See
"National Power Corporation -- Power Generation -- Private Sector Participation
in Power Generation."

Republic of the Philippines

General

The Philippine archipelago has over 7,000 islands with a total land area of
approximately 300,000 square kilometers. The islands are grouped into three
geographic regions: Luzon, the largest island, in the north covering an area of
141,395 square kilometers, Visayas in the central region, covering an area of
55,606 square kilometers, and Mindanao in the south, covering an area of
101,999 square kilometers. Manila is the Republic's capital. As of December 31,
2002, the population of the Republic was approximately 82 million.

Government and Politics

Since 1935, the Republic has had three constitutions, the most recent of
which was adopted by a plebiscite held in February 1987. The ratification of
the new Constitution in 1987 restored a presidential form of government
consisting of three branches: executive, legislative and judiciary. Executive
power is exercised by the President who is elected by direct popular vote and
who may serve only a single term of six years. Legislative authority is vested
in the Congress of the Philippines, which consists of the Senate and the House
of Representatives. Judicial power is vested in the Supreme Court and in such
lower courts as may be established by law from time to time. In January 2001,
Gloria Macapagal-Arroyo assumed the office of the Presidency after the
impeachment and resignation of former President Joseph Estrada. Criminal
charges for perjury, illegal use of an alias, and plunder have been filed
against Mr. Estrada with the Sandiganbayan, a special court with jurisdiction
over criminal and civil cases involving graft and corruption. Hearings on these
charges are ongoing.

On December 30, 2002 President Gloria Macapagal-Arroyo announced that she
would not seek another term as president. The next presidential election is
scheduled to take place in May 2004. In her announcement, President Arroyo
explained that she wanted to be unburdened by politics and further concentrate
her efforts on her administration's economic reform plans.

Over the past three decades, groups of communist rebels and disaffected
Muslims in the Republic have periodically fought with Government forces. Armed
conflict has continued between the Government and various rebel groups, mainly
communist rebels and Muslim separatists. The United States government has sent
troops to the Philippines and pledged monetary aid to help the Republic in its
campaign against these rebel groups and against terrorism generally. See
"Republic of the Philippines -- Recent Political Developments -- Internal
Conflict with Rebel Groups."

Economy

The Philippines has a mixed economy in which the Government is directly
engaged in certain economic activities through government owned and controlled
corporations ("GOCCs") and Government Financial Institutions ("GFIs"). The
Government actively encourages domestic and foreign private investment, and has
sought to establish a broader and more balanced base for economic development.
Beginning in 1991, further liberalization of trade and investment in the
Philippines has been undertaken in tandem with the deregulation of the
financial system, foreign exchange liberalization, tax reforms, acceleration of
privatization, enhancement of competition in the provision and operation of
public utilities, and deregulation of the oil and power industries. The
Government has indicated that these steps are taken in conjunction with
conservative fiscal and monetary policies in an effort to accelerate economic
growth, contain inflation, create fiscal and external payment surpluses, and
increase foreign investor confidence.

In an attempt to promote macroeconomic stability and sustained growth of
income and employment, the Arroyo Administration proposed and passed its
Medium-Term Philippine Development Plan for 2001-2004. The

plan aims to expand and equalize access to economic and social opportunities,
inculcate receptivity to change and promote personal responsibility through its
primary policy objectives:

. comprehensive human development and protecting the vulnerable;

. good governance and rule of law;

. agricultural and fisheries modernization; and

. macroeconomic stability and equitable growth based on free enterprise.

The principal sectors of the Philippine economy are services, industry and
agriculture (including fishery and forestry). At constant market prices, the
services sector accounted for 45.8% of Gross Domestic Product ("GDP") in 2002,
led by trade (16.3% of GDP) transportation, communications and storage (7.7% of
GDP) and private services (7.5% of GDP). The industry sector accounted for
34.5% of GDP at constant market prices in 2002, of which 24.1% of GDP at
constant market prices came from manufacturing. The agriculture sector
accounted for 19.7% of GDP at constant market prices in 2002.

In 2002, GNP grew 4.5% and GDP grew 4.4%, compared with GNP growth of 5.6%
and GDP growth of 4.5% for 2001. The increased growth rates are, in part, a
result of lower interest and inflation rates, and in the administration's view,
reflect the success of the administration's macroeconomic strategy implemented
in 2001. The 2002 economic performance is the strongest recorded by the
Philippines since the 1997 Asian financial crisis. The first quarter of 2003
saw continued economic growth, as GNP grew 5.6% and GDP grew 4.5%, compared
with GNP growth of 4.3% and GDP growth of 3.8% in the first quarter of 2002.

Foreign trade plays a significant role in the Philippine economy. In 2002,
exports of goods and services accounted for approximately 45.9% of the
country's GNP and imports accounted for approximately 46.4% of GNP. The
country's trade strategy emphasizes export promotion. The expansion of
export-oriented, labor-intensive manufacturing operations, such as electronics,
drove total exports of goods to $34.4 billion in 2002 and produced an average
annual export growth rate of 3.9% from 1998 to 2002. Manufactured goods
comprise the most important category of the Republic's exports, accounting for
90% of the Republic's exports in 2002. Electronics, machinery and transport
equipment and garments have historically been the Republic's leading
manufactured exports. Exports of goods in 2002 were $34.4 billion, representing
an increase of 10.1% from 2001, largely due to higher export shipments of
machinery and transport equipment, clothing and apparel, and electronics.

The Republic disclosed in early 2003 that the reported current account
surplus for 2000, 2001 and 2002 had been overstated due to monitoring problems
giving rise to underreported imports. Reflecting the updated import data, the
current account for 2000 has been revised to a surplus of $6.3 billion from a
previously reported surplus of $8.5 billion, and the current account for 2001
has been revised to a surplus of $1.3 billion from a previously reported
surplus of $4.6 billion. At these revised levels, the current account surplus
stood at 7.9% and 1.7% of gross national product for 2000 and 2001,
respectively. However, the capital and financial account for 2000 has been
revised downward to a net outflow of $4.1 billion from a previously reported
net outflow of $6.5 billion, and the capital and financial account for 2001 has
been revised downward to a net outflow of $1.1 billion from a previously
reported net outflow of $3.7 billion. The Republic's balance of payments
recorded a surplus of $660 million for 2002, compared to a $192 million deficit
for 2001. The year-on-year turnaround was mainly attributed to higher
remittances from overseas workers and the growth in exports.

In the first two months of 2003, the Republic's balance of payments recorded
a surplus of $55 million, compared to a surplus of $654 million for the first
two months of 2002. The decline in the surplus was due mainly to the reduction
of the current account surplus to $409 million in the first two months of 2003,
from $1.6 billion in the first two months of 2002.

The Republic's external debt approved by and registered with Bangko Sentral
(which includes banking system debt, public sector debt whether or not
guaranteed by the Government and private sector debt) amounted to $53.9 billion
as of December 31, 2002, a 2.9% increase from the $52.4 billion recorded as of
December 31, 2001. The increase in debt in 2002 was due to additional borrowing
to settle maturing obligations and finance the Government's budget deficit, as
well as upward foreign exchange revaluation adjustments on third-currency
denominated debt resulting from the continued depreciation of the US dollar
against third-currencies. As of December 31, 2002, 73% of the Republic's
outstanding direct external debt, which amounted to $25.3 billion, carried
fixed rates while 23% had variable rates. The remaining 4% were non-interest
bearing. As of June 30, 2002, the average cost of fixed rate credits was about
6%. For liabilities with floating interest rates, the margin over base rate
ranged from 3.5% to 4.4%. The average interest rates for 91-day Treasury bills
decreased from an average of 9.86% in 2001 to 5.43% in 2002, following the
decline in global interest rates. As of December 31, 2002, approximately 58% of
the Republic's outstanding direct external debt was denominated in US dollars
while 33% was denominated in Japanese yen. As of December 31, 2002,
multi-currency loans from the World Bank, the International Monetary Fund and
the Asian Development Bank accounted for 15.3% of the Republic's external debt.

On June 12, 2003 Fitch Ratings downgraded the Republic's long-term foreign
currency rating from BB+ to BB on the grounds that current and prospective
fiscal trends amount to a material deterioration in sovereign credit
worthiness, notwithstanding the recent upturn in tax receipts. Fitch also
lowered the long-term local currency rating to BB+ from BBB- and changed the
outlook on both ratings from negative to stable. Fitch mentioned that the
change in outlook reflects Fitch's judgement that broader macro-economic trends
remain reasonable with respect to growth, inflation and the external current
account balance.

On April 24, 2003, Standard & Poor's Ratings Service downgraded the
Republic's long-term foreign currency rating from BB+ to BB, downgraded the
Republic's local currency rating from BBB+ to BBB and revised the long-term
ratings outlook from negative to stable. Standard & Poor's emphasized the
Government's high fiscal deficit, increased interest payments due to its high
debt burden, and heavy reliance on external capital for economic growth. On
January 8, 2003, Moody's Investors Service revised its outlook on the
Republic's local-currency rating for government bonds from stable to negative,
while affirming each of the Republic's foreign currency ratings. Moody's
recognized that revenue collections have improved in recent months, but noted
that poor revenue collection in prior periods has weakened long-term fiscal
prospects. On November 25, 2002, Fitch, Inc. downgraded the Republic's ratings
outlook from stable to negative. Fitch indicated that further evidence of
falling tax revenues had undermined the Government's fiscal credibility and
raised concerns about rising public indebtedness.

The Offering

Issuer........................... National Power Corporation.

Bonds............................ % Guaranteed Bonds Due , in an
aggregate principal amount equal to
$500,000,000.

Guarantee........................ The Republic of the Philippines will
irrevocably and unconditionally guarantee
the due and punctual payment of the
principal of, interest on and Additional
Amounts (as defined in this prospectus),
if any, in respect of the Bonds, whether
at maturity, on any interest payment date,
by declaration of acceleration, by call
for redemption or otherwise. See
"Description of the Bonds -- Guarantee"
elsewhere in this prospectus.

Interest Payment Dates for the
Bonds............................ and , commencing , 2003.

Maturity Date.................... The maturity date of the Bonds is .

Redemption....................... The Bonds will not be redeemable prior to
maturity, except that the Bonds will be
subject to redemption by us in whole, but
not in part, in the event of certain
changes affecting Philippine taxes. See
"Description of the Bonds -- Redemption
for Taxation Reasons" elsewhere in this
prospectus.

Ranking of the Bonds and the
Guarantee........................ The Bonds will constitute our direct,
unconditional, unsecured and general
obligations and will rank pari passu in
priority of payment with all our other
unsecured and unsubordinated External
Indebtedness (as defined elsewhere in this
prospectus). The payment obligations of
the Republic under the Guarantee will
constitute direct, irrevocable,
unconditional, unsecured and general
obligations of the Republic, and will rank
pari passu in priority of payment with all
other unsecured and unsubordinated
External Indebtedness of the Republic, and
the full faith and credit of the Republic
will be pledged for the performance of the
Guarantee. See "Description of the Bonds
-- Nature of Obligations" elsewhere in
this prospectus.

Negative Pledge of NPC and the
Republic for the Bonds........... With certain exceptions, we may not create
or permit to subsist, and will procure
that none of our subsidiaries create or
permit to subsist, (a) any Security
Interest (as defined elsewhere in this
prospectus) upon the whole or any part of
our respective undertakings, assets or
revenues to secure any External
Indebtedness (as defined elsewhere in this
prospectus) or (b) any preference or
priority in respect of any of our other
External Indebtedness pursuant to Article
2244(14) of the Civil Code of the
Republic, or any successor Philippine law
providing for preferences or priority in
respect of notarized External Indebtedness.

With certain exceptions, the Republic will
not create or permit to subsist (a) any
Lien (as defined in this prospectus) upon
the whole or any part of its assets or
revenues to secure any External Public
Indebtedness (as defined in this
prospectus) or (b) any preference or
priority in respect of any other External
Public Indebtedness of the Republic
pursuant to Article 2244(14) of the Civil
Code of the Republic, or any successor
Philippine law providing for preferences
or priority in respect of notarized
External Public Indebtedness. The
international reserves of Bangko Sentral
represent substantially all of the
official gross international reserves of
the Republic, and the Republic and Bangko
Sentral are of the view that international
reserves owned by Bangko Sentral are not
subject to the negative pledge covenant in
the Guarantee. Accordingly, Bangko Sentral
could in the future incur External
Indebtedness secured by such reserves
without securing amounts payable under the
Guarantee. See "Description of the Bonds
-- Negative Pledge of the Republic and Us"
elsewhere in this prospectus.

Substitution of the Issuer....... PSALM may, without the consent of the
holders of the Bonds, assume our
obligations under the Bonds, subject to
certain conditions. See "Description of
the Bonds -- Substitution of the Issuer"
elsewhere in this prospectus.

Fiscal Agent..................... Citibank, N.A.

Taxation......................... All payments of principal and interest in
respect of the Bonds and the Guarantee
shall be made free and clear of, and
without withholding or deduction for, or
on account of, any present or future
Philippine Taxes (as defined in this
prospectus) unless such withholding or
deduction is required by law or by the
administrative interpretation thereof. The
Philippine Bureau of Internal Revenue has
ruled that payments on foreign loans
originally incurred by us and transferred
to PSALM shall remain exempt from tax.
Therefore the assumption of the
obligations under the Bonds by PSALM shall
not subject payments of principal and
interest to withholding tax. In the event
Philippine Taxes are deducted or withheld
from any of the aforementioned payments,
we or, as the case may be, the Republic,
will pay such Additional Amounts (as
defined elsewhere in this prospectus) as
will result in receipt by the holders of
the Bonds of such amounts as would have
been received by them had no such
withholding or deduction been required,
subject to certain exceptions. See
"Description of the Bonds -- Payment of
Additional Amounts" and "Taxation --
Philippine Taxation" elsewhere in this
prospectus. For a description of certain
United States tax aspects of the Bonds,
see "Taxation -- U.S. Federal Income Tax
Considerations" elsewhere in this
prospectus.

Listing.......................... We have applied to have the Bonds listed
on the Luxembourg Stock Exchange, but
there can be no assurance that the
application will be approved, and
settlement of the Bonds is not conditioned
on obtaining the listing.

Further Issues................... We may, without the consent of the holders
of the Bonds, create and issue additional
securities with the same terms and
conditions as the Bonds (or that are the
same in all respects except for the amount
of the first interest payment and for the
interest paid on the Bonds prior to the
issuance of the additional securities). We
may consolidate such additional securities
with the outstanding Bonds to form a
single series.

Governing Law.................... New York, except that all matters
governing the authorization, execution and
delivery of the Bonds and the fiscal
agency agreements with respect to the
Bonds by us and the Guarantee and the
fiscal agency agreement by the Republic
will be governed by the laws of the
Philippines.

Global Bonds..................... The Bonds will be issued in fully
registered form in minimum denominations
of US$1,000 and integral multiples
thereof. The Bonds will be represented by
one or more Global Bonds registered in the
name of a nominee of DTC, as depositary.
Beneficial interests in the Global Bonds
will be shown on, and the transfer thereof
will be effected only through, records
maintained by DTC and its direct and
indirect participants (including Euroclear
and Clearstream, Luxembourg). Settlement
of all secondary market trading activity
in the Bonds will be made in immediately
available funds. Except in certain
circumstances as described under
"Description of the Bonds -- Form,
Denomination and Registration" elsewhere
in this prospectus, Bonds in definitive
certificated form will not be issued in
exchange for the Global Bonds.

Use of Proceeds.................. We will use the net proceeds of the
Offering, which are expected to be
approximately $ after deducting
estimated expenses and underwriting
discounts, for our general purposes.

Summary Financial Information of National Power Corporation

We prepare our financial statements in accordance with Philippine GAAS.
These standards differ in certain material respects from generally accepted
accounting principles in the Philippines and in certain other countries. Our
financial statements are audited by the Commission on Audit of the Philippines.
You should note that the financial information as of and for the twelve months
ended December 31, 2002 is unaudited.

1998 1999 2000 2001 2002
------------- ------------- ------------- --------------- ---------------
(in millions, except certain operating data) (unaudited)

Income Statement Data:
Net operating revenues.......................... (Peso) 86,611 (Peso) 89,686 (Peso)100,119 (Peso) 115,698 (Peso) 116,433
Operating income................................ 6,915 8,489 5,438 6,837 523
Gain/(loss) on foreign exchange fluctuation/(1)/ 359 (325) (1,062) (626) (6,738)
Interest expense................................ 11,005 12,955 15,064 15,108 17,876
Net income/(loss)/(2)/.......................... (3,617) (5,953) (12,964) (10,377) (33,735)
Balance Sheet Data (at end of Period):
Current assets.................................. (Peso) 36,342 (Peso) 33,946 (Peso) 41,165 (Peso) 40,806 (Peso) 60,258
Net utility plant/(3)/.......................... 255,463 255,488 243,805 242,759 232,356
Total assets.................................... 646,092 862,097 989,774 1,005,985 1,153,045
Long-term debt/(1)/............................. 444,986 238,825 292,001 290,135 376,316
Deferred foreign exchange differential/(1)/..... 123,963 139,655 246,839 251,764 271,724
Total liabilities/(1)/.......................... 479,453 736,724 878,643 912,471 1,092,189
Total proprietary capital/(4)/.................. 129,078 125,373 111,131 93,514 60,856
Investments and other assets.................... 22,363 46,653 53,988 61,613 78,266
Operating Data:
Capacity (MW)/(5)/.............................. 8,549 8,054 7,056 7,056 6,676
Electricity sales (GWh)/(6)/.................... 37,321 36,987 37,320 39,948 34,369
Capital expenditure/(7)/........................ (Peso) 25,312 (Peso) 12,314 (Peso) 14,212 (Peso) 18,502 (Peso) 16,625
Interest coverage ratio/(8)/.................... 3.10x 1.72x 2.30x 2.57x 2.08x
Return on rate base/(9)/
Lender Formula................................ 3.22% 3.37% 2.22% 2.89% 0.22%
Charter Formula............................... 3.07 3.25 2.13 2.74 0.21

- --------
(1) All foreign currency loans are stated in pesos on the balance sheet based
on the Bangko Sentral reference exchange rates as of the balance sheet
date. We adjust on an annual basis the outstanding balance, in peso terms,
of these loans to reflect the fluctuation in the exchange rate between the
peso and the relevant currencies. We record any decreases or increases in
the outstanding amount of these loans due to the appreciation (or
depreciation) of the peso as a gain (or loss) on foreign exchange
fluctuation.
We do not, however, record a gain (or loss) on foreign exchange fluctuation
for any foreign exchange gains (or losses) resulting from decreases or
increases, as applicable, in the balance of:
. foreign currency loans which are used for specific projects or have a term
of at least one year; and
. capital lease obligations denominated in foreign currencies.
Prior to 1995, adjustments in the peso balance of these loans and capital
leases were capitalized and recorded on the balance sheet as reductions or
additions, as applicable, in project construction costs. Since 1995, they
have been recorded as reductions or additions, as applicable, in the
deferred foreign exchange differential (a deferred charge). The deferred
foreign exchange differential is amortized over the remaining life of the
loans. Accordingly, most of the foreign exchange losses that we have
incurred due to the depreciation of the peso have not been reflected as
expenses in our income statement but have been capitalized on our balance
sheet.
(2) Net income (or loss) includes test-run revenue, lease/rental income, and
the amortization of the discount on the 1990 debt buy-back. Net income
reflects adjustments for the outstanding balance of our foreign currency
loans which have a term of less than one year and are used for working
capital purposes.
(3) Net utility plant excludes build-operate-transfer plants.
(4) Proprietary capital represents capital stock, donated capital, retained
earnings, and appraisal capital.

(5) Capacity means the installed capacity of operating plants that we own
(including those operated on our behalf by independent power producers and
including the Small Island Grid).

(6) Electricity sales include sales by plants that we own, sales by plants
owned and operated by IPPs, sales by the Small Islands Grid and One-Day
Power Sales.

(7) Capital expenditure is calculated using the accrual method.

(8) We determine our interest coverage ratio by dividing the aggregate of
operating income, depreciation, depletion, amortization of capacity fees
and bad debt expense by interest expense (gross). For the purpose of
calculating this ratio, interest expense does not include capitalized
interest and the interest component of payments under capital leases. For
the sum of each component used to determine our interest coverage ratio,
refer to our audited financial statements, the index to which is on page
F-1.

(9) The return on rate base is calculated by dividing our net operating income
by our rate base (which is the average current net value of our fixed
assets in operation at the beginning and end of the relevant period). We
calculate our return on rate base using two different formulae:

. the "Lender Formula" as set out in the loan agreements with certain of our
foreign lenders; or
. the "Charter Formula" as set out in our Charter.
Under the Charter Formula, in calculating the return on rate base for a
particular year, the rate base includes two months of the average monthly
working capital for such year. The Lender Formula does not require the
inclusion of such working capital in the rate base. Electricity plants and
assets acquired through build-operate-transfer contracts under capital lease
arrangements are excluded from the rate base for purposes of calculating the
return on rate base under both formulae. For the sum of each component used
to calculate our return on rate base, refer to our financial statements, the
index to which is on page F-1.

Summary Economic Information of the Republic of the Philippines

1998
------------

GDP (at current market prices)......................... (Peso) 2,665
GDP (at constant 1985 prices).......................... 888
GDP per capita (in US dollars at current market prices) $ 865
GDP (growth rate at constant 1985 prices).............. (0.6)%
GNP (growth rate at constant 1985 prices).............. 0.4%
Annual increase in consumer price index (1994 = 100)... 9.7%
Unemployment rate...................................... 10.1%
Total government revenues.............................. (Peso) 463
Total government expenditures.......................... 513
Surplus (deficit) of government........................ (50.0)
Public sector borrowing requirement/(2)/............... (111.3)
Consolidated public sector financial position/(3)/..... (83.2)

1999 2000 2001 2002
------------ ------------ ------------ ------------
(in billions, except as indicated)/(1)/

GDP (at current market prices)......................... (Peso) 2,977 (Peso) 3,308 (Peso) 3,674 (Peso) 4,023
GDP (at constant 1985 prices).......................... 918 958 1,002 1,046
GDP per capita (in US dollars at current market prices) $ 989 $ 952 $ 914 $ 966
GDP (growth rate at constant 1985 prices).............. 3.4% 4.4% 4.5% 4.4%
GNP (growth rate at constant 1985 prices).............. 3.7% 4.8% 5.6% 4.5%
Annual increase in consumer price index (1994 = 100)... 6.7% 4.4% 6.1% 3.1%
Unemployment rate...................................... 9.8% 11.2% 11.1% 11.4%
Total government revenues.............................. (Peso) 479 (Peso) 515 (Peso) 564 (Peso) 566
Total government expenditures.......................... 590 649 711 779
Surplus (deficit) of government........................ (111.7) (134.2) (147.0) (213)
Public sector borrowing requirement/(2)/............... (138.0) (174.6) (189.8) (268.3)
Consolidated public sector financial position/(3)/..... (100.5) (151.7) (147.6) (169.1)/(4)/

1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(in millions, except as indicated)

Goods trade -- exports.............. $ 29,496 $ 34,211 $ 37,295 $ 31,243 $ 34,383
Goods trade -- imports/(5)/......... (29,524) (29,252) (33,481)/(6)/ (31,986)/(6)/ (33,975)/(6)/
Services trade -- exports........... 13,917 4,803 3,972 3,148 3,056
Services trade -- imports........... (12,778) (7,515) (6,402) (5,198) (4,320)
Current transfer (net).............. 435 512 437 447 503
Current account (deficit)........... 1,546 7,219 6,258/(6)/ 1,323/(6)/ 4,197
As a percentage of GNP.............. 2.3% 9.0% 7.9% 1.7% 5.0%
Total capital and financial account. $ 478 $ (2,333) $ (4,119) $ (1,080) $ (2,104)
Overall balance of payments position 1,359 3,586 (513) (192) 660
As a percentage of GNP.............. 2.0% 4.5% (0.6)% (0.2)% 0.8%
Gross international reserves/(7)/... $ 10,806 $ 15,107 $ 15,024 $ 15,658 $ 16,180

1997 1998 1999 2000 2001
------------- ------------- ------------- ------------- -------------
(in billions, end of period)/(8)/

Direct domestic debt of the Republic/(9)/ (Peso) 749.6 (Peso) 850.9 (Peso) 978.4 (Peso)1,068.2 (Peso)1,247.7
Direct external debt of the Republic/(9)/ $ 15.0 $ 16.5 $ 19.8 $ 22.0 $ 22.1
Public sector domestic debt/(10)/........ (Peso)1,262.3 (Peso)1,396.2 (Peso)2,196.6 (Peso)2,542.0 (Peso)2,288.3
Public sector external debt/(12)/........ $ 24.5 $ 26.9 $ 31.8 $ 31.5 $ 25.1

2002
-------------

Direct domestic debt of the Republic/(9)/ (Peso)1,471.2
Direct external debt of the Republic/(9)/ $ 25.3
Public sector domestic debt/(10)/........ N/A/(11)/
Public sector external debt/(12)/........ $ 28.0

- --------
Sources: National Statistics Office; National Statistical Co-ordination Board;
Bureau of the Treasury; Department of Finance, Bangko Sentral.
(1) Amounts in pesos have been converted to US dollars using the average Bangko
Sentral reference exchange rates for the applicable year.
(2) Represents the aggregate deficit of the Government, the Central Bank-Board
of Liquidators (the "CB-BOL"), the Oil Price Stabilisation Fund and the 14
GOCCs whose debt comprises virtually all the debt incurred by GOCCs (the
"14 monitored GOCCs").
(3) Comprises the aggregate deficit or surplus of the Government, the CB-BOL's
accounts, the 14 monitored GOCCs, the Social Security System (the "SSS"),
the Government Service Insurance System (the "GSIS"), Bangko Sentral, the
Government financial institutions ("GFIs") and the local government units.
(4) For the first nine months of 2002.
(5) National Statistics Office data was adjusted to: (a) exclude aircraft
procured under operating lease arrangements amounting to $542 million for
1996, $45 million 1997 and $136 million for 1998 and (b) include an
additional $466 million worth of aircraft imported under capital lease
arrangements for 1997.

(6) Represents the final revised numbers released by the Inter-agency Task
Force on the Balance of Payments.

(7) Comprised of the holdings by Bangko Sentral of gold reserves, foreign
investments, foreign exchange and SDRs, including Bangko Sentral's reserve
position in IMF.

(8) Amounts in original currencies were converted to US dollars or pesos, as
applicable, using the Bangko Sentral reference exchange rates at the end of
each period.

(9) Represents debt of the Government only, and does not include other public
sector debt. Includes direct debt obligations of the Government, the
proceeds of which are on-lent to GOCCs and other public sector entities,
but excludes debt guaranteed by the Government and debt originally
guaranteed by other public sector entities for which the guarantee has been
assumed by the Government.

(10) Represents debt of the Government, the 14 monitored GOCCs, the CB-BOL,
Bangko Sentral and the GFIs.

(11) N/A means "not available".

(12) Includes public sector debt whether or not guaranteed by the Government.

USE OF PROCEEDS

We will use the net proceeds of the offering, which are expected to be
approximately $ after deducting estimated expenses and underwriting
discounts, for our general purposes.

NATIONAL POWER CORPORATION

Overview

We are the principal entity in the Philippines engaged in the generation and
transmission of electricity on a nationwide basis. In cooperation with the
private sector since 1987, we have been responsible for the construction,
operation, maintenance and rehabilitation of generating facilities, and we have
been solely responsible for the strategic development of the transmission grids
and interconnection facilities in the Philippines. Our ability to provide
affordable and reliable power in the Philippines is a key factor in promoting
the country's economic growth.

We were established as a non-stock corporation in the Philippines in 1936
and were converted into a stock corporation in 1960. We have limited liability
and, pursuant to our current charter, have a corporate life terminating in
2050. We have our principal executive offices at Quezon Avenue, corner of Agham
Road, East Triangle, Diliman, Quezon City, Metro Manila, Philippines.

Philippine Power Industry

As of December 31, 2002, the electric power industry in the Philippines
consisted of:

. power generators including us and 32 independent power producers (the
"IPPs"), some of which own and operate generation plants, and some of
which have contracted to operate and maintain generation plants we own;

. our major transmission grids that we operate nationwide, consisting of
approximately 20,731 circuit kilometers (as of December 31, 2002) and our
interconnection facilities; and

. 141 distributors, comprising 119 independent electric cooperatives, 18
privately-owned utilities, and four municipal utilities.

We have entered into various types of arrangements with IPPs for the
development and maintenance of our power plants. These arrangements, as of
December 31, 2002, provided us with 2,272 MW of installed capacity, which
represented approximately 34% of our total installed capacity (including the
Small Islands Grid). In addition, pursuant to other arrangements, IPPs which
own and operate their own power plants provide us with electricity. As of
December 31, 2002, these arrangements furnished us with 5,530 MW of installed
capacity.

We sell electricity to distributors for distribution to end-users such as
households, industries and commercial establishments. We also sell electricity
directly to industrial and commercial users. Our largest customer, and by far
our largest distributor, is the Manila Electric Company ("Meralco"), a private
utility which distributes electricity to Metro Manila and surrounding areas.
Meralco accounted for 55% of our total volume of electricity sales for 2000,
57% for 2001 and 49% for 2002.

Regulatory Framework and Relationship with the Government

The Philippine power industry is regulated by the following governmental
bodies:

. The Department of Energy (the "DOE") formulates the policies for the
energy sector. It prepares, coordinates and controls all programs,
projects and activities of the Government in energy exploration,
development, utilization, distribution and conservation.

. The Energy Regulatory Commission (the "ERC"), formerly the Energy
Regulatory Board, regulates the price of power and petroleum products,
including the prices charged by electricity generators and distribution
utilities. The ERC's prior approval is required before the implementation
of any proposed increase in power rates (other than certain changes which
may be implemented under an automatic adjustment mechanism to reflect
changes in fuel costs, purchased power costs and certain foreign exchange
rate adjustments).

. The National Electrification Administration (the "NEA") is responsible for
setting up electric cooperatives for the distribution and supply of
electricity. It also determines the coverage areas of private and
municipal utilities to achieve the total electrification of the country.

We are wholly owned by the Government and our board of directors is
comprised of Government officials. See "-- Management and Employees." The
Government agencies listed below have the following supervisory roles:

. the Philippine Congress, the DOE, the Department of Budget and Management
and the Joint Power Commission review and approve our annual budget;

. the Department of Budget and Management and the Department of Finance
monitor our finances;

. the ERC must approve any change in our power rates;

. the DOE and the Department of Environment and Natural Resources monitor
our operations for compliance with environmental legislation, and
formulate policies on energy conservation and the use of indigenous and
environmentally friendly energy resources;

. the DOE undertakes all of our research and development functions;

. the Joint Power Commission sets the guidelines and the overall framework
to monitor and ensure the proper implementation of the Act, and reviews
and evaluates the performance of the industry participants in relation to
the objectives and timelines set forth in the Act; and

. the NEA, under the supervision of the DOE, develops and implements
programs for purposes of enhancing the viability of rural electric
cooperatives as electric utilities.

Recent Financial Results

Since mid-1997, we have experienced significant financial difficulties
resulting mainly from the depreciation of the peso against the US dollar and
other major currencies, lower than expected electricity demand and the high
levels of our debt and capital lease obligations under our agreements with
IPPs. In 2002, a significant reduction in sales to Meralco, the reduction of
the PPA charge to (Peso)0.40 per kwh in May 2002 and the subsequent deferral of
the PPA charge in September 2002, the continued effect of a reduction in our
basic rates of (Peso)0.30 per kWh mandated by the Act, and higher loan balances
and capital lease obligations have also negatively impacted our financial
performance.

In 2002, we incurred a net loss of (Peso)33.7 billion, more than three times
the net loss of (Peso)10.4 billion in 2001. In late September 2002, our
transmission and generation rates were unbundled, as mandated by the Act. In
connection with this unbundling, the ERC further lowered our generation rate in
September 2002. In addition, we have been required to remove the PPA charge
since late September 2002, resulting in a significant loss to us since that
time. The ERC has approved implementing rules which will replace the PPA
formula with a new recovery mechanism, the GRAM. On April 4, 2003 we filed an
application for cost recovery with the ERC under the GRAM. In response to our
filing under the GRAM, on May 15, 2003, the ERC issued an order revising the
fuel and purchased power component of our generation rates for the Luzon,
Visayas and Mindanao grids. While we expect that the revised rates under the
GRAM will increase our revenues incrementally, the revised generation rates are
significantly lower than the rates we petitioned for in our April 2003
application to the ERC. By June 18, 2003, we plan to file a motion for
reconsideration of the ERC's order revising our generation rates

with the ERC. Until such motion for reconsideration is resolved, we will
continue to use our current generation rates. If the ERC sets rates for the
recovery of purchased power and fuel costs that are lower than those in our
application, our future revenues and financial condition will be materially and
adversely affected. In addition, in May 2003, the ERC promulgated new rules
revising the methodology for setting our transmission wheeling rates. While we
cannot predict what effect the new rules will have on our transmission rates,
we expect that our revised transmission rates will not be materially different
from our current transmission rates.

We expect that our operating revenues will be significantly lower, and our
net loss significantly higher, in 2003 compared to 2002. In addition, if the
cost recovery mechanisms and rates that we are permitted by law to charge are
lower than we petitioned for, our ability to successfully attract investors and
complete our privatization could be impaired.

On April 24, 2003, Standard & Poor's Rating Service lowered our local
currency rating to BBB- from BBB and our foreign currency rating to BB from
BB+. The outlook on our ratings from Standard & Poor's is stable.

2002 Compared with 2001

In 2002, net operating revenue totaled (Peso)116.4 billion as compared with
net operating revenue of (Peso)115.7 billion for 2001. The (Peso)0.7 billion
increase was the result of the (Peso)14.1 billion penalty we charged Meralco
based on the difference between their minimum demand obligation under our
current supply contract with them and the actual amount of power they
purchased, partially offset by the factors discussed below. See "-- Sales and
Customers -- Relationship with Meralco." The penalties have not been paid by
Meralco, and we had not accounted for the penalties as receivables or as
operating revenue in our financial statements for periods prior to 2002.
However, since our board of directors has determined that the recovery of the
accrued penalty is likely, we have booked the penalty accrued in 2002 as a
receivable and as operating revenue, while provisioning 10% of the penalty as
bad debt, consistent with our practice of recognizing as revenues receivables
that our board deems likely to be paid. If we are unable to collect any amount
of the accrued penalty which has been accounted for as a receivable and as
operating revenue, we will need to expense that unrecovered amount as a bad
debt in a future period. The increase in our operating revenues due to our
treatment of the penalties as a receivable and as revenue was partially offset
by the effect of the mandatory reduction in the PPA charge to (Peso)0.40 per
kWh which took effect on May 8, 2002, the removal of the PPA charge on
September 26, 2002, and reduction in our basic rates of (Peso)0.30 per kWh
mandated by the Act (exclusive of the power rate reduction associated with the
reduction in the PPA) which took effect on June 26, 2001. See "Electric Power
Industry Reform and Privatization -- Electric Power Industry Reform Act of
2001." Additional losses have also resulted from unrecovered costs of (Peso)2.1
billion relating to the Bakun I and II hydro electric power plants and
(Peso)1.35 billion relating to the Casecnan power project. Total sales demand
decreased sharply in 2002 to 34,369 GWh from 39,948 GWh for 2001, primarily as
a result of decreased sales to Meralco. See "-- Sales and Customers --
Relationship with Meralco." Our operating income in 2002 was (Peso)522.6
million, as compared with (Peso)6.8 billion in 2001. This decrease was
primarily a result of an increase in bad debts, including our recognition of
10% of the Meralco receivable as bad debt, increased amortization of capacity
fees and increased operating expenses attributable to our restructuring.

Higher interest expense and other charges in 2002 increased our net loss by
approximately 225% as compared with 2001. Our interest expense increased by
(Peso)2.8 billion during 2002 as compared with the previous year mainly due to
higher loan balances. In 2002, our return on rate base declined to 0.22% from
2.89% under the Lender Formula and to 0.21% from 2.74% under the Charter
Formula, in each case as compared with 2001. Electricity plants and assets
acquired through build-operate-transfer contracts under capital lease
arrangements are excluded from the rate base for purposes of calculating the
return on rate base under both formulae.

In 2002 we had a cash flow deficit after debt service and capital
expenditures of (Peso)63.5 billion, compared with a cash flow deficit after
debt service and capital expenditures of (Peso)21.2 billion in 2001. We
financed our cash flow deficit in 2002 with (Peso)73.8 billion from the
proceeds of foreign loans and bond flotations. As of

December 31, 2002, our total liabilities, expressed in peso terms, had
increased by 19.7% to (Peso)1,092.2 billion from (Peso)912.5 billion as of
December 31, 2001, primarily due to an increase in long-term debt.

2001 Compared with 2000

We recorded net operating revenues of (Peso)115.7 billion in 2001, a 15.6%
increase from (Peso)100.1 billion in 2000. The positive result was due
primarily to a 7% increase in sales volume and an increase in average rate per
kWh because of an increase in the fuel and purchased power adjustment ("FPCA")
charge as the price of fuel and purchased power rose. Sales growth increased
significantly from 37,320 GWh in 2000 to 39,948 GWh in 2001 principally because
of increases in One Day Power Sales. See "-- Sales and Customers -- Special
Rate Programs."

Despite our higher revenues in 2001, our interest and other charges caused
us to suffer a net loss of (Peso)10.4 billion, compared with a net loss of
(Peso)13.0 billion for 2000. Interest and other charges increased to (Peso)38.3
billion in 2001 from (Peso)34.9 billion in 2000. The (Peso)3.4 billion increase
was due primarily to an increase of (Peso)2.6 billion in the amortization of
deferred foreign exchange differential resulting from the weakness of the peso
against the US dollar, an increase in finance and bank charges of (Peso)606
million primarily due to guarantee fees, and an increase in depreciation
charges related to plants and property of (Peso)374 million due to the
reclassification of depreciated plants which were not used in 2001. In 2001,
our return on rate base increased to 2.89% from 2.22% under the Lender Formula
and to 2.74% from 2.13% under the Charter Formula, in each case as compared
with 2000.

In addition, in 2001 we had a cash flow deficit after debt service and
capital expenditures of (Peso)21 billion, compared with a cash flow deficit
after debt service and capital expenditures of (Peso)34.6 billion in 2000. We
financed our cash flow deficit after debt service and capital expenditures in
2001 with the proceeds of additional borrowings, including (Peso)14.0 billion
in Treasury bonds, (Peso)7.6 billion in external financing and (Peso)2.3
billion in advances from the Government. As of December 31, 2001, our total
liabilities, expressed in peso terms, had increased by 3.9% to (Peso)912.5
billion from (Peso)878.6 billion as of December 31, 2000, primarily due to an
increase in short term loans.

2000 Compared with 1999

We recorded net operating revenues of (Peso)100.1 billion in 2000, an 11.6%
increase from (Peso)89.7 billion in 1999. The positive result was due largely
to a (Peso)7.3 billion increase in the PPA charge associated with purchased
power cost adjustments, a (Peso)1.8 billion increase in transmission services
operating income and a (Peso)1.4 billion increase in utility operating income
due to an increase in the basic rate of (Peso)0.079/kWh starting in June 1999.
Sales demand growth was relatively flat, increasing only slightly to 37,320 GWh
in 2000 from 36,987 GWh in 1999, principally because of an increase in One Day
Power Sales.

Despite our higher revenues in 2000, our interest and other charges caused
us to suffer a net loss of (Peso)13.0 billion for the year, compared with a net
loss of (Peso)6.0 billion for 1999. Our interest and other charges increased to
(Peso)35.1 billion in 2000 from (Peso)23.9 billion in 1999. The (Peso)11.2
billion increase was due primarily to a (Peso)7.3 billion increase in our
amortization of deferred foreign exchange differential and a (Peso)2.1 billion
increase in our interest expense. In 2000, our return on rate base declined to
2.22% from 3.37% under the Lender Formula and to 2.13% from 3.25% under the
Charter Formula, in each case as compared with 1999. In addition, in 2000 we
had a cash flow deficit after debt service and capital expenditures of
(Peso)34.6 billion, compared with a cash flow deficit after debt service and
capital expenditures of (Peso)16.1 billion in 1999. We financed our cash flow
deficit in 2000 with the proceeds from bond offerings, while our cash flow
deficit in 1999 was financed with the proceeds of additional borrowings
incurred in late 1998 and 1999. As of December 31, 2000, our total liabilities,
expressed in peso terms, had increased by 19.3% to (Peso)878.6 billion from
(Peso)736.7 billion as of December 31, 1999 due to an increase in long-term
loans and an increase in lease obligations due to the expenses associated with
the commercial operation of our hydroelectric plant in Bakun.

Effects of Peso Depreciation

After reaching (Peso)49.48 on May 20, 2002, the peso depreciated to an
average of (Peso)52.13 per US dollar in September 2002 and (Peso)53.52 in
December 2002. This depreciation was due mainly to increased demand for dollars
from corporations and banks (to service foreign obligations arising from
increased imports), the vulnerability of emerging markets such as the
Philippines to the South American debt contagion, and the relative weakness of
Asian currencies. The peso then depreciated to (Peso)55.08 per US dollar on
March 12, 2003, its lowest level relative to the US dollar since January 2001.
The depreciation of the peso in early 2003 was attributed to uncertainty over
the war in Iraq, concerns over the rising fiscal deficit and continued
terrorist attacks and guerrilla activity in the Philippines. Since mid-March
2003, the peso has recovered to reach (Peso)52.23 per US dollar as of May 30,
2003.

We currently do not hedge foreign exchange exposures in our business or
financing operations. The fluctuations in the peso-US dollar exchange rate
affect our debt and debt service costs, fuel costs and operating costs,
obligations to IPPs, capital expenditures and certain other aspects of our
financial position. Substantially all of our revenues are in pesos, and we
maintain our financial statements in pesos. However, substantially all of our
debt and capital lease obligations are denominated in US dollars and other
foreign currencies. Accordingly, since 1997, the depreciation of the peso has
resulted in a substantial increase in our outstanding debt, capital lease
obligations, debt service costs and amortization of capacity fees as reported
in pesos in our financial statements.

Our foreign exchange losses resulting from increases in our foreign currency
debt and capital lease obligations due to the depreciation of the peso are not
recorded as expenses in our income statement. Rather, the amounts are
capitalized as a deferred foreign exchange differential and included in
deferred charges in the balance sheet, and are amortized and reflected as an
amortization expense in our income statements over the remaining life of the
respective loans after the restatement year. Our income statement does reflect,
however, increased interest expense on our foreign currency debt and increased
amortization expense on our foreign currency capital lease obligations
resulting from the depreciation of the peso. If the peso appreciates, resulting
in a reduction in the peso amounts of our foreign currency loans and capital
lease obligations, the resulting foreign exchange gains are recorded as a
reduction of the deferred foreign exchange differential. The deferred foreign
exchange differential amounted to (Peso)271.7 billion as of December 31, 2002,
an 8% increase from (Peso)251.8 billion recorded as of December 31, 2001.

For 2001, we recorded a loss on foreign exchange fluctuation (representing
the losses on the revaluation of working capital loans and losses on payments
of loans and capacity fees due to changes in exchange rates between the last
date of the prior fiscal year and the applicable date of payment) of
(Peso)626.5 million compared with a loss of (Peso)1.1 billion in 2000. In the
2002, we recorded a loss on foreign exchange fluctuation of (Peso)6.7 billion
compared with a loss of (Peso)626.4 million for 2001.

Destruction of Transmission Towers

Unidentified groups sabotaged certain NPC and Transco facilities in Mindanao
in February and March 2003. Over eighteen power transmission towers and poles
have been bombed since fighting resumed between the MILF and the AFP on
February 11, 2003. On February 26, 2003, the bombing of a Transco tower in
Baloi, Lanao del Norte caused a temporary power blackout in over 90% of
Mindanao. President Arroyo has blamed MILF rebels for the bombings, although
the MILF has denied responsibility. In addition, a new group of separatist
rebels, which calls itself True-Blooded Alharakatul Al-Islamiya, warned that it
will sabotage any peace talks entered into between a Muslim group and the
Government by destroying electric posts, towers and lines. We cannot predict
whether the bombing of NPC and Transco transmission towers and poles will
continue, and, if so, what effect this will have on our infrastructure and our
business.

Reduced Sales to Meralco

Sales to our largest customer, Meralco, represented approximately 63% of our
net operating revenue in the year ended December 31, 2001. Beginning in January
2002, Meralco reduced its monthly purchases from us by

approximately one-third, resulting in a reduction in our net operating revenue
from January through December 2002 of approximately (Peso)14.1 billion due
solely to such reduction. Meralco has reduced its electricity purchases from us
and increased its purchases of electricity from IPPs due to a dispute between
us and Meralco involving the total amount of power Meralco is required to
purchase from us under our power purchase agreement. We have currently entered
into third party mediation with Meralco seeking a resolution of the supply
contract dispute. We believe that we may soon reach agreement with Meralco on a
compromise to the dispute. As a result of the dispute, we imposed penalties of
(Peso)14.1 billion on Meralco from January to December 31, 2002. Although the
penalties have not been paid by Meralco, we have accounted for the penalties as
a receivable and as operating revenue (while provisioning 10% of the penalties
as bad debt) in our financial statements for the year ended December 31, 2002.
Although we believe we have a strong legal case against Meralco, it is not
certain that we will be paid for any or all of the penalties incurred. If we
are not paid for these penalties, the amount of the penalty will be written off
as bad debt, which may result in significant decreases in our net income.

On January 1, 2003, Meralco announced that the ERC had ruled that Meralco
could collect an estimated amount of between (Peso)5 billion and (Peso)7
billion in deferred PPA charges from consumers after having been prevented from
doing so by the ERC since April 2002. However, in related rulings on November
15, 2002 and April 10, 2003, the Supreme Court held that Meralco had
miscalculated its return on rate base and ordered Meralco to refund excess
charges to its consumers. Meralco recently announced that it estimates the
refund amount could be as high as (Peso)30 billion. We do not know how these
rulings will affect Meralco's continuing financial viability or our ability to
collect revenues or payments in connection with penalties from Meralco. Any
continuation of reduced sales to Meralco or any additional reduction in sales
will have a significant adverse effect on our future net operating revenues.
See "-- Sales and Customers -- Relationship with Meralco."

Increase in Fuel Costs and Other Operating Costs

A substantial portion of our fuel costs and other operating costs are
denominated in, or linked to, the US dollar or other foreign currencies. In
2002, 81% of our fuel costs and other operating costs were denominated in US
dollars and other foreign currencies and 19% of our fuel costs and other
operating costs were denominated in pesos. Accordingly, the general
depreciation of the peso since 1997 has resulted in substantially higher
operating costs in peso terms over the past several years. During 2002, our
generation expense rose to (Peso)71.7 billion, a 0.8% increase from (Peso)71.1
billion for 2001. In 2001, our generation expense increased by 20% from
(Peso)59.3 billion in 2000 due to depreciation of the peso against the US
dollar and increased generation expenses at our coal plants. Operating costs
increased by 77% from 1997 to 2002.

Increased Obligations to Independent Power Producers

Beginning in the early 1990's as a result of severe power shortages in the
Philippines, under the Government's Power Development Program, we substantially
increased our commitment to IPPs involved in the generation and transmission of
electricity. Our obligations consist of the payment of capacity fees, which are
linked to the installed and operating capacity of the plant, and payments for
purchases of electricity. A substantial portion of these obligations is
denominated in US dollars or in peso amounts that are linked to the prevailing
US dollar price, and these obligations have increased substantially, in peso
terms, as a result of the depreciation of the peso. We amortized capacity fees
at a rate of (Peso)746 million per month in 1999, (Peso)1.3 billion per month
in 2000, (Peso)1.4 billion per month in 2001 and (Peso)1.7 billion per month in
2002. The amortization of capacity fees is reflected in our income statement.
Actual cash payments of capacity fees, which are reflected in our cash flow
statements increased to (Peso)29.6 billion in 2001 compared with (Peso)23.4
billion in 2000. In 2002, actual cash payments of capacity fees increased to
(Peso)32.6 billion compared with (Peso)29.6 billion for the corresponding
period of 2001. Historically, we have been able to pass substantially all of
these increased costs to our customers under the PPA charge which increases the
actual rates we charge our customers. However, on May 8, 2002, President Arroyo
by presidential directive reduced the maximum average PPA charge from
(Peso)1.25 per kWh to (Peso)0.40 per kWh. This presidential directive was
affirmed by an ERC order on September 6, 2002. Since late September 2002 we
have deferred recovery of the PPA charge, in connection with the unbundling of
our transmission and

generation rates. In addition, we have filed an application with the ERC to set
our generation rates under the GRAM, the mechanism for the recovery of
generation costs which replaces the PPA charge. We are not certain which rate
the ERC will approve under the GRAM, and whether or not we will be able to
recover some or all of the actual loss incurred in connection with the deferral
of the PPA charge. See "-- Power Rates -- Implementation of the GRAM and the
ICERA." If the rates approved by the ERC under the GRAM do not allow us to pass
on the costs associated with the generation of electricity, then our future
operating revenues could be adversely affected.

The reduction in the PPA charge has caused us to suffer significant
additional losses. As a result, we have become more heavily reliant on the
Government to fund our operations, such as the provision of US$750 million
through loans in 2002. From May 8, 2002 through September 30, 2002, the
reduction in the PPA charge alone has caused us to lose (Peso)9.3 billion in
revenue. The effect of the reduction in the PPA together with the other factors
discussed above caused us to incur a substantial net loss of (Peso)33.7 billion
in 2002. Our financial position will continue to be adversely affected in the
future if there is no increase to the rates we can charge our customers under
the GRAM. See "-- Power Rates -- Recent Reductions in Basic Rates and the PPA"
and "Electric Power Industry Restructuring and Privatization -- Organization
and Operation of the Power Industry -- Universal Change."

For power projects structured as build-operate-transfer projects, our assets
are reflected in the balance sheet as electric plants under capital lease and
our liabilities are reflected as lease obligations. The amount for a particular
plant is initially recorded as our undiscounted future payment obligations for
capacity fees for the plant. The capital lease liability is reduced annually
based on actual cash payments of capacity fees under the relevant IPP contract.
The asset is amortized based on the estimated useful life of the asset, and the
amortization expense is reflected in our income statement as amortization of
capacity fees. Because the life of the asset generally exceeds the life of the
IPP contract, our actual cash payments of capacity fees substantially exceed
the amounts reflected in our income statement as amortization of capacity fees.
Total capital lease obligations were (Peso)505.0 billion for 2001 and
(Peso)595.1 billion for 2002.

Our power purchase payments to IPPs are reflected in the income statement
under generation expense. See our unaudited financial statements. The
depreciation of the peso has accounted for a significant portion of the
substantial increase in our generation expense since 1997. Amortization of
capacity fees, cash payments of capacity fees and power purchase expenses are
expected to increase in future years due in part to increased generation from
existing and new build-operate-transfer plants.

Increase in Maintenance and Rehabilitation Costs

We have, and expect to continue to have, substantial capital expenditure
requirements associated with maintenance and rehabilitation of our existing
power plants. A substantial portion of our capital expenditures have been and
are expected to continue to be denominated in foreign currencies because of our
substantial reliance on parts and maintenance expertise not available in the
Philippines. Accordingly, the depreciation of the peso has resulted in a
substantial increase in the expected amount of our capital expenditures for
these projects as expressed in pesos. We expect that these increased costs will
adversely affect our ability to carry out these capital expenditure plans. Due
in part to these increased costs, we have reduced or deferred certain planned
capital expenditures, including expenditures on our ongoing projects.

Our capital expenditure for maintenance and rehabilitation projects in 2002
was (Peso)16.6 billion and our projected capital expenditure for such projects
is (Peso)11.9 billion for 2003, (Peso)7.9 billion for 2004 and (Peso)9.1
billion for 2005. These projections cover only expenditures expected to be
incurred in connection with maintenance and rehabilitation of existing plants
and do not cover expenditures in connection with increasing capacity or
transmission line projects. Nevertheless, it is expected that we will have to
borrow funds to meet our maintenance and rehabilitation capital expenditure
needs.

To meet projected increases in demand, the 2000 Power Development Program
calls for a total increase in capacity of 9,844 MW from 2000 to 2011. The
increase in generation capacity will require capital expenditures of
(Peso)760.9 billion, excluding interest expense through 2011; however, we
expect the capital expenditures required to carry out the 2000 Power
Development Program to be incurred by IPPs and distribution utilities involved
with the privatization and not by us. See "Capital Requirements -- Power
Development Programs."

The 2002 Transmission Development Plan, covering transmission development
and rehabilitation projects from 2002 calls for an estimated total investment
of (Peso)109.4 billion, excluding interest during construction. Total
rehabilitation projects during this period are expected to total (Peso)1.35
billion. See "Capital Requirements -- 2002 Transmission Development Plan."

Other Factors that Affect Our Financial Performance

Our financial performance has also been adversely affected by certain other
factors, including the following:

. Increased Borrowings. We rely almost exclusively on borrowings for our
financing requirements. As of March 31, 2003, our total committed external
debt amounted to $8.6 billion, of which approximately $7.9 billion was
outstanding. We paid (Peso)55.7 billion in debt service costs in 2002. The
Government has contributed a total of approximately (Peso)27.1 billion in
equity to our company, representing less than 3% of our total assets as of
December 31, 2002.

. Unbundling of Power Rates. In late September 2002, our transmission and
generation rates were unbundled, as mandated by the Act. In connection
with this unbundling, the ERC further lowered our generation rate in
September 2002 and required us to remove the PPA charge. In May 2003, the
ERC set revised generation rates under the GRAM, the new generation costs
recovery mechanism. We plan to file a motion for reconsideration of these
new rates, and until such motion is resolved we will continue to maintain
our existing rates. See "-- Power Rates -- Implementation of the GRAM and
the ICERA." If the motion for reconsideration of our generation rates
under the GRAM is not approved and if our rates under the GRAM are lower
than we requested, we expect our results of operation for 2003 to be worse
than originally projected. In addition, on May 29, 2003, the ERC
promulgated revised guidelines for setting transmission wheeling rates. We
expect that implementation of the new performance-based methodology for
setting transmission wheeling rates will not have a material effect on our
revenues. See "-- Power Rates -- Recent Reductions in Basic Power Rates
and the PPA -- Unbundled Rate Petition."

. Uncollected Receivables. As of December 31, 2002, we had non-current
receivables of approximately (Peso)6.5 billion, including (Peso)3.1
billion owed by the Metropolitan Waterworks and Sewerage System ("MWSS")
and (Peso)1.7 billion in royalty fees in respect of unutilized geothermal
energy. We are currently negotiating with MWSS to settle our claim but
cannot estimate the amount that will be recovered, if any. See "-- Power
Generation -- Fuel Supplies -- Hydroelectric."

. Increased Competition. We are facing increased competition in the
generation business from IPPs which has caused reduced demand from our
customers and has reduced revenues.

. Outstanding Tax Refunds. As of December 31, 2002, we had approximately
(Peso)3.4 billion of unpaid tax and duty refund claims from the Government
and (Peso)689 million in unutilized tax credit certificates from the
Government. Since 1992, the Government has not paid a substantial portion
of the tax refunds owed to us nor have they permitted us to use a
substantial amount of tax credit certificates. See "-- Payment Obligations
to the Government -- Tax Status."

We incurred a cash deficit after debt service and capital expenditures of
(Peso)63.5 billion in 2002, and we expect to incur a significant cash deficit
in 2003. We expect our financial difficulties to continue in 2003 and in

future years due to the effects of the depreciation of the peso, the reduction
in the PPA, the basic rate reduction mandated by the Act, additional rate
reductions ordered by the ERC and the other factors described above. We expect
that any basic transmission rate reduction, as well as any continued
depreciation of the peso will further increase our cash deficit in 2003.

We are currently relying in part on short-term borrowings to finance capital
expenditures and increases in debt service attributable to the depreciation of
the peso. We have also relied on cash advances from the Government to finance
our debt service. For the year ended December 31, 2002, we received
approximately (Peso)3.9 billion from the Government in cash advances which we
have not repaid. We anticipate that we will need $1.2 billion in additional
financing to cover our total cashflow deficit in 2003. This additional
financing requirement will be met in part by the funds we expect to raise as a
result of the Offering. Our actual financing requirement may differ from this
estimate due to several factors, including our results from operations and our
actual level of capital expenditures for 2003. We can give no assurance that we
will be able to raise the funds required to meet all of our obligations or as
to the timing or terms of any additional financing we may obtain.

Our Financial Statements and Possible Accounting Changes

Our financial statements are audited by the Republic's Commission on Audit
("COA"), and are prepared in accordance with Philippine GAAS. You should note
the following factors relating to our financial statements:

. This prospectus does not include any audited financial statements for
periods after December 31, 2001. The prospectus includes unaudited
financial statements and other financial data for the year ended December
31, 2002. Such data is unaudited and could be subject to significant
adjustments as a result of the audit process for the year ending December
31, 2002 and the other factors described herein.

. The reports of COA relating to our audited financial statements included
in this prospectus are qualified with respect to certain matters described
in their reports.

. For power projects structured as build-operate-transfer projects, our
assets are reflected in the balance sheet as electric plant under capital
lease and our liabilities are reflected as lease obligations. The amount
for a particular plant is initially recorded as our undiscounted future
payment obligations for capacity fees for the plant. The capital lease
liability is reduced annually based on actual cash payments of capacity
fees under the relevant IPP contract. The asset is amortized based on the
estimated useful life of the asset, and the amortization expense is
reflected in our income statement as amortization of capacity fees.
Because the life of the asset generally exceeds the life of the IPP
contract, our actual cash payments of capacity fees substantially exceed
the amounts reflected in our income statement as amortization of capacity
fees. Total capital lease obligations were (Peso)535.4 billion as of
December 30, 2001 and (Peso)630.4 billion as of December 31, 2002.

. Our power purchase payments to IPPs are reflected in the income statement
under generation expense. See our unaudited financial statements. The
depreciation of the peso has accounted for a significant portion of the
substantial increase in our generation expense since 1997. Amortization of
capacity fees, cash payments of capacity fees and power purchase expenses
are expected to increase in future years due in part to increased
generation from existing and new build-operate-transfer plants.

. In connection with our proposed privatization, we intend to prepare
unofficial financial statements in accordance with Philippine GAAP. To
help us determine how to best accomplish this we engaged independent
accounting advisers. These advisers have recommended various changes to
our accounting policies intended to conform with Philippine GAAP. We are
in the process of reviewing the adviser's recommendations. This process
may result in significant changes to our accounting policies and the
methods we use to prepare our financial statements. These changes may
result in material adverse changes to our financial condition and results
of operations, including for certain periods covered by our historical

financial statements included in this prospectus. Such changes may relate
to, among other things, the following matters:

-- A change in our accounting for utility plants in our balance sheet,
which is currently based on appraised values.

-- A change in our accounting for losses and gains from our foreign
currency denominated liabilities based on changes in exchange rates.
Currently we do not expense these foreign exchange losses and gains but
capitalize them as deferred foreign exchange differential.

-- A change in our accounting for capital lease obligations.

Any changes to our accounting policies or financial statements would need to
be approved by COA. COA has informed us that they are not considering changing
our accounting standard from Philippine GAAS.

This prospectus does not include any historical financial statements of
PSALM or any pro forma financial statements for PSALM reflecting the proposed
transfer of certain NPC assets and liabilities from NPC to PSALM. A description
of the assets and liabilities proposed to be transferred is included under
"Power Sector Assets and Liabilities Management Corporation -- Transfer of Our
Generation and Other Disposable Assets to PSALM", although the transfers and
the timing thereof are subject to various conditions and other uncertainties.
We believe that the transferred assets and liabilities will initially be
recorded in PSALM's balance sheet at the amounts recorded in NPC's balance
sheet as of the date of the transfer, subject to any accounting changes that
may be made as described above. In addition, pursuant to the Act, the
Government is required to directly assume (Peso)200 billion of NPC's
liabilities. This debt assumption is expected to take place in annual
installments from 2004 to 2010. We cannot give any assurance regarding the
composition of the future financial statements of PSALM or as to PSALM's future
results of operations and financial condition.

Our Business

We are engaged in the generation and transmission of electricity, the
construction, operation, maintenance and rehabilitation of electricity
generation and transmission facilities, and the operation of power grids and
interconnection facilities throughout the Philippines.

Power Generation

We are responsible for constructing and operating electricity generation
facilities in the Philippines. Our plants generate electricity using oil, coal,
geothermal, hydroelectric and other sources. As of December 31, 2002, we owned
35 power plants in three transmission grids and the Small Islands, which had a
total installed capacity of 6,676 MW. IPPs participate in electricity
generation in the Philippines through the direct ownership of power plants or
through the operation on our behalf of power plants owned by us. As of December
31, 2002, these IPPs owned 23 plants and operated 9 plants on our behalf. See
"-- Private Sector Participation in Power Generation." In 2002, we purchased
power from IPP-owned power plants, which had an aggregate installed capacity of
5,530 MW. As of December 31, 2002, our plants (excluding those operated and
maintained by IPPs) generated 15,912 GWh, or approximately 33% of the
electricity generated in the Philippines. The total electricity generated by
our power plants, including our power plants which are operated and maintained
by IPPs, amounted to 18,928 GWh as of December 31, 2002. Power plants owned by
IPPs generated 18,147 GWh of electricity as of December 31, 2002.

Generation by Geographic Region

The following table sets out the installed capacity and output of our power
plants and IPP power plants which are owned by us but operated and maintained
by the IPPs for each regional grid for the periods indicated.

Installed Capacity and Output of Our Power Plants and IPPs' Power Plants/(1)/

1998 1999 2000 2001 2002
--------------- --------------- --------------- --------------- -----------------
Capacity Output Capacity Output Capacity Output Capacity Output Capacity Output
Grid MW % MW % MW % MW % MW %
- ---- -------- ------ -------- ------ -------- ------ -------- ------ -------- ------

Our plants/(2)/:
Luzon........... 6,224 27.4 5,985 27.4 4,983 31.8 4,983 40.1 4,619 28.8
Visayas......... 911 21.1 712 32.5 680 34.7 680 41.4 574 49.1
Mindanao........ 1,247 30.2 1,187 41.0 1,187 40.3 1,187 45.4 1,187 46.3
Small Island.... 167 18.2 170 26.9 206 23.1 206 21.2 296 20.4
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total......... 8,549 27.1 8,054 29.9 7,056 32.2 7,056 40.6 6,676 33.3
===== ==== ===== ==== ===== ==== ===== ==== ===== ====
IPPs:
Luzon........... 2,198 80.7 2,568 72.7 2,426 80.4 2,611 68.6 4,833 36.5
Visayas......... 701 35.3 701 20.3 701 26.1 701 26.4 306 57.5
Mindanao........ 353 62.4 351 30.9 351 41.3 351 32.1 391 33.4
Small Island.... 16 41.7 25 27.9 32 25.3 32 36.5 N/A/(3)/ N/A/(3)/
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total......... 3,268 68.6 3,645 58.3 3,510 65.2 3,695 56.8 5,530 37.5
===== ==== ===== ==== ===== ==== ===== ==== ===== ====

- --------

(1) The installed capacity is stated as of the end of the periods indicated and
the output percentage represents production as a percentage of installed
capacity for the periods indicated.

(2) Includes plants owned by us and operated by IPPs.

(3) "N/A" means "not available".

Luzon Grid

Luzon is the largest of the operational regions, where more than half of the
entire economic activity of the Philippines is concentrated in terms of GDP. We
currently own 18 power plants in this region, seven of which are owned by us
and operated by IPPs. As of December 31, 2002, our Luzon plants had an
installed capacity of 4,619 MW. Including an additional capacity of 4,833 MW
from plants not owned or operated by us, the total capacity of this grid was
sufficient to meet the peak demand of 5,646 MW in 2001. Electricity generated
by the power plants we own, excluding those operated by IPPs, decreased by 0.3%
to 13,831 GWh in 2001 as compared with 13,866 in 2000. Electricity generated by
power plants owned or operated by IPPs (including IPPs operating our plants)
increased by 13.2% from 19,360 GWh in 2001 as compared with 17,098 GWh in 2000.
In 2002, lower demand by our largest customer, Merlaco, caused a decrease in
the electricity generation of our plants by 29.2% to 9,795 GWh as compared with
13,831 GWh in 2001. Electricity generated by power plants owned or operated by
IPPs decreased by 10.5% from 19,360 GWh in 2001 to 17,319 GWh in 2002.

Due to their age, our oil-fired thermal plants in Luzon have been gradually
retired in recent years. We also operate a number of hydroelectric, coal and
geothermal plants in Luzon. We plan to replace the generating capacity from
retired oil-fired plants with capacity from new hydroelectric sources and from
the combined cycle natural gas power plant in Ilijan, although the Ilijan
plant's operations have been restricted due to line constraints, Batangas that
began operation in June 2002. New projects by IPPs will also replace a portion
of the retired generating capacity. See "-- Private Sector Participation in
Power Generation -- Contractual Arrangements with Independent Power Producers."

Visayas Grid

Visayas is composed of six major islands and numerous small islands. We
presently have sufficient capacity to serve current demand in Visayas. New
power stations are being developed in this region primarily for capacity

additions that will be transmitted to Luzon through our grid interconnection
program. We own six power plants in this region, one of which is owned by us
and operated by an IPP. Two power plants in this region are owned and operated
by IPPs. Plants which we own in Visayas, which include hydroelectric,
geothermal, coal, gas turbine, power barge and diesel power plants, had an
aggregate installed capacity of 574 MW as of December 31, 2002. In 2001,
electricity generation of plants we own, excluding those operated by IPPs,
increased by 0.5% to 2,076 GWh, as compared with 2,066 GWh in 2000, and the
electricity generation of plants owned or operated by IPPs (including IPPs
operating our plants) increased by 25.7% from 1,602 GWh in 2000 to 2,014 GWh in
2001. In 2002, electricity generated by our plants decreased 2.0% from 2,076
GWh in 2001 to 2,034 GWh in 2002, while electricity produced by IPPs decreased
2.0% from 2,014 GWh in 2001 to 1,973 GWh in 2002.

Mindanao Grid

Mindanao comprises one main island and a number of small islands. The
Mindanao grid, which serves the main island, is powered primarily by
hydroelectric power plants that take advantage of readily available water
resources. We own 10 power plants in this region, one of which is operated by
an IPP. As of December 31, 2002, these plants had an aggregate installed
capacity of 1,187 MW. Electricity produced by the power plants we own,
excluding those operated by IPPs, increased by 1.4% to 4,246 GWh in 2001 as
compared with 4,189 GWh in 2000. The electricity generation of plants owned or
operated by IPPs (including IPPs operating our plants) increased by 14.7% from
1,271 GWh in 2000 to 1,458 GWh in 2001. In 2002, the electricity generation of
our plants decreased 3.8% to 4,083 GWh in 2002 as compared with 4,246 GWh in
2001. Electricity generated by power plants owned or operated by IPPs increased
by 28.3% from 1,458 in 2001 to 1,871 in 2002.

In addition to the electricity generated by our own plants in this region,
we also purchase electricity from IPPs. As of December 31, 2002, we had six
contracts with IPPs in Mindanao providing us with a total of 1,144 GWh of
electricity.

Small Islands Grid

The Small Islands Grid comprises a number of power generation facilities and
transmission lines located in the small islands of the Philippine archipelago.
The generation facilities and transmission lines in the Small Islands Grid are
not connected to our three principal grids.

Due to the Small Islands' geographical location and lower population
density, the operating costs of the Small Islands Grid are higher than those of
the three other regional grids. To compensate for these higher costs, we
effectively provide an operating subsidy to the private enterprises to cover
operating costs which amounted to approximately (Peso)2.96 billion in 2001. In
2002, the Small Islands Grid generated 529 GWh of electricity.

Interconnection of Grids

We have undertaken several projects to interconnect our separate
transmission networks in different regions of the Philippines. Four of these
interconnection lines (linking the islands of Luzon, Leyte-Samar, Cebu, Negros,
Panay, and Bohol) are presently in operation, and two more (including an
upgrade of an existing line) are expected to be completed by 2006. A proposed
interconnection between Leyte and Mindanao, which would complete the link among
the three major regional grids, is currently under study for economic
viability. These interconnection projects are expected to reduce unused excess
capacity and to lower the wholesale price of electricity in the long term. See
"-- Power Transmission -- Interconnection Projects."

Fuel Costs

Fuel costs are a significant portion of our operating costs. Fuel costs
accounted for 29% of our operating costs in 2000, 33% in 2001 and 26% in 2002.
In 2002, our fuel costs accounted for 26% of our operating costs. In

addition to fuel costs relating to the operation of our plants, our contracts
with IPPs generally provide that we will supply and deliver all fuel required
for the operation of such IPP plants. As a result, we are also exposed to
fluctuations in fuel prices under such contracts.

Fuel prices for all power sources, other than hydroelectric and those fuels
sourced locally, are mostly denominated in US dollars, or denominated in pesos
and linked to the prevailing US dollar prices. This effectively makes
substantially all of our fuel costs subject to fluctuations in the US
dollar/peso exchange rate. Accordingly, the additional depreciation of the peso
against the US dollar beginning in the last quarter of 2000 resulted in higher
costs in peso terms to us for such fuel in 2001 and 2002 which is significant
because the majority of our income is in pesos. We plan to decrease our
dependence on imported fuel by continuing to develop the capacity to produce
power from other electricity sources so that we can reduce the impact of any
future fluctuations in the US dollar/peso exchange rate on our fuel costs.

Historically, we have been able to offset increases in fuel prices through
the fuel purchase cost adjustment mechanism which allows us to increase the
rates we charge our customers if the price we pay for fuel increases. The ERC
ruling on our unbundling petition issued on September 6, 2002 was unclear
regarding our ability to continue to adjust our rates for changes in prices we
pay for fuel. If we are unable to continue charging our customers this
adjustment it will have a material adverse effect on our financial condition.

To further minimize our fuel costs and to promote efficient use of our
generation facilities, we employ an order of dispatch based on efficiency and
demand so that during periods of low demand, we utilize the less expensive
plants to generate electricity and during periods of peak demand, we utilize
the more expensive plants to generate electricity. Oil-fired and gas turbine
plants that are more expensive to operate are operated only during peak demand
periods are known as peaking plants. The order of dispatch from our plants is
also affected by natural factors (for example, the level of water in lakes or
reservoirs in the case of hydroelectric plants), system failures and forced
outages.

Fuel Supplies

Oil Products

We have historically purchased most of our petroleum products from Petron
Corporation ("Petron"), Pilipinas Shell Petroleum Corporation ("Pilipinas
Shell") and Caltex Philippines, Inc. ("Caltex Philippines"). Petron supplied
64% of our total petroleum requirement for the one-year period from April 2001
to March 2002 and supplied 59% of our total requirement from April 2000 to
March 2001. Petron is 40% owned by the Philippine National Oil Company-Energy
Development Corporation ("PNOC-EDC"), a wholly-owned Government corporation.

Our oil-based fuel is acquired through a bidding process among six
recognized fuel suppliers. We have contracted to purchase our total requirement
of approximately 1.5 billion liters for the 18 month period from July 2002 to
December 2003 mainly from Petron (58.6%) and Pilipinas Shell (40.4%). Our
existing fuel supply contracts cover the fuel requirements of specified power
plants operated by us and IPPs. The fuel prices under these contracts are based
on the Mean of Platt's Singapore (MOPS). Under this system the delivered price
for fuel for the current month is based on the average of the daily mean
(average of the high and low quotations in Singapore) of the particular oil
product in the previous month. Fuel prices are denominated in US dollars, which
we convert to pesos using the prevailing US dollar/peso exchange rate. We then
pay for oil in pesos. We may partially or completely terminate our fuel
purchase obligations under certain circumstances, including if the IPPs that
operate the plants covered by the contract assume direct responsibility for the
purchase of fuel for such plants. For power plants not covered by the Petron
and Pilipinas Shell contracts, we purchase fuel from other suppliers. Our
current purchase contracts with Petron and Shell will terminate in December
2003. Before these current contracts expire, we will open new contracts to
tender as required by Philippine law. We expect that these new contracts will
secure our fuel requirements for 2004.

Coal

Our annual total coal requirement was approximately 4.5 million metric tons
in 1999, 6.2 million metric tons in 2000 and 6.5 million metric tons in 2001.
Our coal requirement in 2002 was 5.9 million metric tons. We obtain
approximately 80% to 85% of our coal requirement from foreign sources such as
Australia, Indonesia and China and the remaining amount from domestic sources.
We pay for coal purchased from foreign sources in US dollars, and since 1997,
the cost of such coal in peso terms has increased as a result of the
depreciation of the peso and the overall increase in current coal spot market
prices.

Our main domestic coal supplier is Semirara Coal Corporation, a private
Philippine company. We entered into a 15-year coal supply contract with
Semirara in November 1995 for the supply of coal to our coal-fired Calaca I and
Calaca II power plants. The price of coal under this contract is denominated in
pesos and linked to the prevailing US dollar/peso exchange rate. The guaranteed
minimum tonnage was approximately 700,000 metric tons per year and the maximum
tonnage was approximately 1.2 million metric tons per year. In April 2003, we
amended our coal supply contract with Semirara to increase the guaranteed
minimum tonnage to 100,000 metric tons per month.

In 1996, another coal-fired plant with an installed capacity of two 350 MW
units commenced operation in Pagbilao. Due to its technical specifications, a
substantial portion of this power plant's coal requirement of approximately 1.8
million metric tons per year is imported, mainly from Indonesia (1.6 million
metric tons per year). The Masinloc coal-fired plant, with an installed
capacity of two 300 MW units, commenced operation in 1998. This plant had a
coal requirement of approximately 1.3 million metric tons for 2002. The Sual
plant, with an installed capacity of two 500 MW units, commenced operations in
1999 and it had a coal requirement of approximately 2.05 million metric tons
for 2001. The required coal quality specifications for both the Masinloc and
Sual plants have a wider range than that of the Pagbilao plant, which enables
us to import the coal required from other sources including Australia and
China. In April 2003, we awarded two coal supply contracts, worth approximately
$20.8 million dollars, for the Sual and Masinloc plants. All coal supply
contracts beginning in 2003 are for one year terms because of the pending
privatization of our plants. In addition, we are seeking to diversify our
sources of coal in 2003.

Geothermal

We obtain the steam supply for our geothermal plants from Philippine
Geothermal Inc. ("Philippine Geothermal") and PNOC-EDC. Philippine Geothermal
supplied the steam which generated 46% of our total geothermal energy
production in 2001 and 44% during the first three months of 2002. The remainder
of our steam requirement is supplied by PNOC-EDC.

We have an ongoing dispute with Philippine Geothermal regarding their
ability to unilaterally renew a service contract with us, which expired in
1996. Our dispute, which went to arbitration, was dismissed without prejudice.
We filed a joint motion with Philippine Geothermal in the Supreme Court for
authority to suspend the proceedings and are currently negotiating a settlement
agreement. See "-- Litigation -- Philippine Geothermal -- Service Contract
Renewal." Pending resolution of the dispute, we entered into a series of
interim agreements with them to continue the supply of steam to our Tiwi and
Makban plants on the same terms as in the expired service contract. Under the
interim agreements, we agreed to pay for all of Philippine Geothermal's
exploration costs (which are denominated in US dollars) and for the quantity of
steam purchased (which is denominated in pesos). We recently entered into a
compromise agreement with Philippine Geothermal pursuant to which we will
proceed from a transition period to a new supply contract based on actual steam
generated. However, the contract will not go into effect until we obtain
approvals from the Supreme Court, the Commission on Audit, and other Government
agencies.

Our steam sales contracts with PNOC-EDC are take-or-pay contracts with terms
ranging between 20 and 25 years. Prices for the supply of steam under these
contracts are denominated in pesos. In general, we are required

to take or pay for steam to run the plants at between 70% to 75% of the
installed plant capacity. Our geothermal plants ran at an average capacity of
63% in 2001 and 61% in 2002. We are involved in the disputes described below
with PNOC-EDC regarding their billings for steam supplied to our geothermal
plants, and have commenced discussions with them to settle these disputes:

. Bac-Man I Geothermal Plant. In March 1995, we agreed with PNOC-EDC to pay
our outstanding balance with respect to billings of approximately
(Peso)489 million in 36 installments over three years, commencing January
1995. In April 1997, we suspended the monthly payment because PNOC-EDC
failed to establish that it was ready to supply the full steam requirement
of the plant, which was a condition of our agreement to pay the
outstanding balance.

. Tongonan Geothermal Plant. We have a dispute with PNOC-EDC regarding
outstanding billings of (Peso)754 million for steam supplied to this
plant. We have refused to pay the outstanding amount and have invoked a
provision in the steam sales contract which provides that such balance
should be settled by the Government. We have not recognized the disputed
amount as a liability in our financial accounts.

Hydroelectric

We have 24 hydroelectric plants located in different parts of the country,
two of which are operated under rehabilitate-operate-lease arrangements. See
"-- Private Sector Participation in Power Generation -- Contractual
Arrangements with Independent Power Producers." As of December 31, 2002, the
total generating capacity of our hydroelectric plants was 2,479 MW. In 2002,
the electricity output of our hydroelectric plants in the Luzon and Mindanao
grids was positively affected by weather patterns including increased rainfall.

From 1992 until 1998, our Angat hydroelectric plant suffered losses of
capacity and revenue due to construction work undertaken by MWSS during that
time. MWSS has agreed to compensate us for the losses we suffered during the
period of construction. As of December 31, 2002, we have claimed a total of
(Peso)3.1 billion from the MWSS and we are currently in settlement discussions.

Natural Gas

In the early 1990s, large sources of natural gas were discovered off the
west coast of the Philippines. In December 1997, we entered into a purchase and
sale agreement with the developers of the gas field which include Shell
Philippines Exploration B.V., Texaco, Pilipinas Shell and PNOC-EDC. Under the
terms of the purchase and sale agreement, beginning in January 2002, we and
First Philippine Holdings must each purchase 50% of the natural gas supplied by
the developers for a term of 20 years. Half of the purchase obligations under
the agreement are denominated in pesos, while the other half of these
obligations are denominated in US dollars.

Private Sector Participation in Power Generation

The Government has permitted private sector participation in power
generation projects since 1987 and regards private sector participation in the
power industry as essential given the level of capital expenditure necessary to
implement power expansion and maintenance programs. Private sector participants
in the power industry include private investors in various power projects and
IPPs. From 1991 to 2002, we completed 28 power projects with private sector
participation which together provided an additional installed capacity of
8,305 MW. Seven of these projects, with a total installed capacity of 1,505 MW,
involved the rehabilitation of our existing plants. However, eleven of these
plants have since been closed, reducing capacity by 978 MW. In 1993, in
response to a power crisis in the Philippines, the Electric Power Crisis Act
was passed granting the President of the Philippines emergency powers with
respect to the power industry for one year. Under that legislation, President
Ramos concluded seven power contracts for projects providing 1,376 MW.

Our current policy is to invite private participation in all future power
plant construction. When selecting private sector participants, we conduct a
tender process and are required by law to award the contract to the most

competitive bidder. There are currently five power generation plants which are
being constructed, or are planned to be constructed, by IPPs. The plants under
construction are scheduled to commence operations between 2003 and 2006 and
will provide an additional 2,829 MW of capacity.

Contractual Arrangements with Independent Power Producers

We have entered into various types of contractual arrangements with IPPs for
the development of new power plants, and for the supply or conversion of power
at our existing power plants and the rehabilitation, operation or maintenance
of our existing power plants. The following table sets out a summary of
operational projects that IPPs have undertaken as of December 31, 2002.

Total
No. of Capacity
Type of Contractual Arrangement Projects (MW)
------------------------------- -------- --------

Build-operate-transfer............. 11 4,213.9
Build-transfer-operate............. 4 835.7
Build-operate-own.................. 4 295.2
Rehabilitate-operate-manage........ 4 1,033.1
Build-rehabilitate-operate-transfer 1 403
Power Purchase Agreement........... 9 1,021.1
-- -------
Total............................ 33 7,802
== =======

The following table sets out a summary of projects under development that
had not been undertaken by IPPs as of December 31, 2002.

Total
No. of No. of Capacity
Type of Contractual Arrangement Projects Plants (MW)
------------------------------- -------- ------ --------

Build-operate-transfer..... 2 2 545
Build-operate-own.......... 1 1 304
- - ---
Total.................... 3 3 849
= = ===

The principal terms of the various contractual arrangements are summarized
below:

. Build-Operate-Transfer. A 1991 law commonly referred to as the BOT Law
authorized us to enter into build-operate-transfer contracts with the
private sector. For projects governed by these contracts, we have
developed model project documentation under which the private contractor
undertakes the construction and financing of the power plant and also
operates and maintains the plant for a period ranging from 10 to 29 years.
We agree to supply the operator with the necessary fuel to operate the
plant (thereby assuming the risk of fuel price fluctuations) and to
purchase the power generated at a price which enables the operator to
recover its operating and maintenance expenses and capital investment in
the project plus a reasonable rate of return. At the end of the fixed
term, the contractor transfers the plant to us.

. Build-Transfer-Operate. The contractor undertakes the construction and
subsequent operation of the plant. However, we own the plant, fund its
construction and pay the contractor a monthly operation and maintenance
fee.

. Build-Operate-Own. Under this arrangement, the contractor undertakes and
finances the construction of the plant and agrees to operate and own it,
and the plant is never transferred to us. However, we agree to supply fuel
to the contractor and the contractor is obliged to sell us all of the
power generated for an agreed period of time.

. Rehabilitate-Operate-Manage. Under this arrangement, the contractor
undertakes and finances the rehabilitation of our plant and then operates
and maintains it, typically for a fixed term of up to 15 years.

. Build-Rehabilitate-Operate-Transfer. Under this arrangement, the
contractor undertakes the financing and construction of a new plant and
the concurrent rehabilitation of an old plant that we own. The contractor
then operates and maintains both plants for a period of 10 to 25 years. At
the end of the fixed term, the contractor transfers the plants back to us.

. Power Purchase Agreements. We have entered into power purchase agreements
with certain power producers to purchase electricity generated by plants
owned and operated by them. These take-or-pay arrangements, which are
described below, are mainly with PNOC-EDC for power generated by their
geothermal plants.

. Energy Conversion Agreements. Under this type of arrangement, a
contractor is under contract with us to construct a power plant. Once the
plant is constructed, we supply all the fuel, which the contractor or
third party is contractually obligated to convert into electric power. The
plant is operated by such contractor (or third party) on our behalf.

We have entered into several power purchase agreements with PNOC-EDC to
purchase electricity generated by geothermal plants operated by them. In
connection with one such agreement, since March 1996 we have been subject to a
minimum payment of approximately (Peso)200 million per month for electricity
that was to have been generated by PNOC-EDC and transmitted over the Leyte-Cebu
interconnection. However, this interconnection was not completed on schedule
due to damage to four submarine cables caused by third parties. In August 1996,
we commenced making the minimum payments of (Peso)200 million per month. We
agreed with PNOC-EDC that such payments should be credited as "stored energy"
at the rate of 155 GWh per month, representing the contracted energy that we
were not able to take, and that PNOC-EDC would schedule the delivery of such
stored energy to us at a later date. Due to the delayed completion of that
project, we entered into a supplemental agreement with PNOC-EDC extending the
minimum payment requirement and delaying the delivery of the stored energy upon
completion of the project. Under the agreement, PNOC-EDC would deliver the
stored energy only when we had exceeded the contracted energy. The Leyte-Cebu
(Leyte A) interconnection began commercial operation in November 1997, and the
Leyte-Luzon (Leyte B) interconnection began commercial operation in August
1998. These two projects combined generated 4,096 GWh in 2000, 4,381 GWh in
2001 and 2,649 GWh in the first seven months of 2002.

We entered into a build-operate-transfer contract with the Korea Electric
Power Company ("KEPCO") in November 1997, under which they developed, financed,
constructed and, beginning in June 2002, operate a 1,200 MW combined cycle
natural gas power plant in Ilijan, Batangas. We provide the fuel to operate the
plant from the natural gas purchased by us under our 20-year contract with
Shell Philippines Exploration. The contract with KEPCO is also for a term of 20
years, with either party having an option to renew for a further two years. The
total projected cost for this project is approximately $4.2 billion, of which
we expect to fund approximately $185 million. The remaining funding
requirements for this project will be arranged by KEPCO.

Review of IPP Contracts

Under the Act, an inter-agency committee ("IAC"), composed of the Secretary
of Finance, the Secretary of Justice and the NEDA Director-General, was created
for the task of completing a thorough review of all of our IPP contracts. On
July 4, 2002, the IAC completed its review and submitted a detailed report to
President Arroyo. According to the report, 19 out of the 35 IPP contracts met
enough of the committee's qualifications to pass their review. Of the 19 which
passed, six passed all the financial and legal tests set out by the committee,
while the other 13 were found to have minor financial and legal issues that
need to be addressed to ensure that the Government and the public are not being
financially prejudiced.

According to the report, the remaining 16 IPP contracts contain more
difficult legal and financial issues that must be resolved. The committee has
recommended that these contracts be renegotiated, and officials from PSALM, the
DOE, the DOJ and the DOF are now in the process of such renegotiation. The
Government has

initiated a dialogue with these IPPs to seek mutually acceptable solutions that
will allow fair returns on their investment while still resulting in lower
electricity costs for us and ultimately the consumer. Officials involved in the
renegotiations have achieved certain concessions and many of the IPPs have
agreed, among other things, to reduce their capacity nominations, which will
decrease the amount of power we will have to purchase under the contracts.
Although the Government does not plan to impose unilateral changes to the
problematic contracts, the Government expects to reduce some of our obligations
under these contracts through the renegotiation process. Currently, ten
contracts remain largely unresolved and must be renegotiated. An inability to
reach agreement with any IPPs on the transfer of such contracts to PSALM could
delay the privatization process.

Power Transmission

Overview

We have the sole responsibility for the network of power transmission
facilities in the Philippines. We operate transmission grids in Luzon, Visayas,
and Mindanao, as well as the Small Islands Grid. As of December 31, 2002, our
transmission system covered a total length of 20,731 circuit-kilometers
(ckt-km) including 10,145 ckt-km in Luzon, 4,958 ckt-km in Visayas, and 5,628
ckt-km in Mindanao.

In Luzon, the main transmission lines are rated at 230kV and above. They
include a 500kV AC transmission backbone from northern to southern Luzon, and a
350kV direct current link connecting southern Luzon to Visayas. The
sub-transmission lines in Luzon, rated 115kV and below, emanate from bulk
substations to serve distribution companies, electric cooperatives, and some of
our directly connected customers.

In Visayas, the interconnections among island grids are rated at 350kV,
230kV, and 138kV. Internally, the Visayas islands distribute bulk power through
138kV and 69kV overhead lines and sub-transmission lines are also rated at
either 138kV and 69kV.

In Mindanao, the main transmission lines are rated at 138kV, and
sub-transmission lines are rated at 69kV. Across all grids, the
sub-transmission lines represent approximately 30% of total line length.

The following table sets out our total circuit-kilometers transmission lines
for the Luzon, Visayas and Mindanao grids as well as the total
circuit-kilometers of transmission lines in the Philippines as of December 31,
2002.

Philippines
Luzon Visayas Mindanao Total
- ------ ------- -------- -----------
(number of circuit kilometers)

500-kilovolt transmission lines.......... 1,126 -- -- 1,126
350-kilovolt transmission lines.......... 390 564 -- 954
230-kilovolt transmission lines.......... 4,808 375 -- 5,183
138-kilovolt transmission lines.......... -- 1,6470 3,211 4,881
115-kilovolt transmission lines and below 3,821 2,349 2,417 8,587
------ ------ ----- ------
Total.................................. 10,145 4,958 5,628 20,731
====== ====== ===== ======

As of December 31, 2001, we had sub-stations capacity of 23,629
megavolt-amperes ("MVA"), excluding generation step-down transformers.

Under the Act, Transco is required to assume our authority and
responsibility for the planning, construction, and centralized operation and
maintenance of all our high voltage transmission facilities, including grid
interconnections and ancillary services. Upon the privatization of Transco, the
Act provides that the concessionaire will be responsible for the improvement,
expansion, operation and/or maintenance of Transco's transmission assets and
the operation of any related business. See "Power Sector Assets and Liabilities
Management Corporation -- Privatization Mechanisms -- Privatization of Our
Transmission Assets."

Although the southern portion of the Luzon Grid has an installed capacity of
approximately 6,320 MW, not all of this capacity can be delivered to Metro
Manila because of limitations in the existing transmission lines. Primarily,
the bottleneck at the Binan-Dasmarinas 230kV transmission line limits the
amount of power the south plants can deliver to Metro Manila. Some plants in
southern Luzon are operated at below capacity in order not to overload
adjoining transmission lines. Current efforts are focused on increasing the
transfer capability of the southern portion of the Luzon Grid. New transmission
lines are presently being put in place to relieve the congested portion of the
grid and plans are underway to upgrade identified bottlenecks to increase the
generation output of affected power plants.

Interconnection Projects

We have undertaken several projects to interconnect our separate
transmission networks in various regions of the Philippines. These projects,
and their completion (or expected completion) dates, are as follows:

. Negros-Panay interconnection (1990);

. Negros-Cebu interconnection (1993);

. Leyte-Cebu interconnection (1997);

. Leyte-Luzon interconnection (1998);

. Leyte-Bohol, Stage 1 (2000);

. Leyte-Cebu interconnection upgrade (2005);

. Leyte-Bohol interconnection, Stage 2 (2004); and

. Leyte-Mindanao interconnection (2011) (postponed indefinitely).

The first stage of the Leyte-Bohol interconnection project connecting the
island of Bohol to the main Visayas grid was completed in 2000. The
interconnection enables cheaper electricity generated in the main Visayas grid
to be transmitted to the Bohol grid. This project is being undertaken in two
stages. The first stage, which is complete, connected the two grids using
69-kilovolt transmission lines. The second stage, which will upgrade the
connection to 138-kilovolt transmission lines, is targeted for completion in
2004.

The upgrade of the Leyte-Cebu interconnection is expected to be completed in
2005. Once the upgrade is completed, the interconnection will enable customers
who source power from the Visayas power grid to access the excess power
capacity in the Luzon power grid. This interconnection project is expected to
use 32 kilometers of submarine cable with a capacity of 200MW at an estimated
cost of $68.5 million. Transco has issued the invitation to bid for the
upgrading of the Leyte-Cebu interconnection. The winning bidder is expected to
be announced by October 2003 and the project is expected to be commissioned by
2004.

The interconnection of the Leyte grid (in Visayas) and the Mindanao grid is
currently undergoing a feasibility study. This interconnection project is
expected to use 455 kilometers of 250-kilovolt direct current overhead
transmission lines, 28 kilometers of 138/230-kilovolt alternating current
overhead transmission lines, 22 kilometers of 250-kilovolt high voltage direct
current submarine cable, 29 kilometers of electrode lines and two converter
stations. The Leyte-Mindanao interconnection project was originally expected to
be completed by 2011. However, the project has been suspended indefinitely
subject to further analysis of its economic viability.

If the Leyte-Mindanao interconnection project is completed, we plan to
transmit excess power from Luzon to Mindanao through the interconnection of the
Mindanao grid with the Visayas and Luzon grids. If

implemented, these interconnections should help to stabilize our ability to
satisfy peak demand for generation capacity by maximizing the use of geothermal
power resources from Visayas and hydroelectric power resources from Mindanao,
improve overall system reliability and facilitate more efficient use of
generating capacity through the pooling of reserves.

To complete the Leyte-Cebu upgrading interconnection project, the
Leyte-Bohol interconnection project and the Leyte-Mindanao interconnection
project, we project our capital expenditures in the amount of (Peso)23.8
billion.

Other Transmission Projects

In addition to the interconnection projects, our existing transmission
networks in Luzon, Visayas and Mindanao are being upgraded to accommodate
additional generating capacity. During the period 2002 to 2012 we plan to
construct and install the following:

. For Luzon, 388 circuit kilometers of 500-kilovolt of extra high voltage
transmission lines, 3,303 circuit kilometers of 230-kilovolt transmission
lines, 160 circuit kilometers of 115-kilovolt lines, and 794 circuit
kilometers of 69-kilovolt and below transmission lines and a corresponding
12,555 MVA of substation capacity.

. For Visayas, 340 circuit kilometers of 250-kilovolt HVDC transmission
lines, 32 circuit kilometers of 230-kilovolt transmission lines, 1,266
circuit kilometers of 138-kilovolt transmission lines and 736 circuit
kilometers of 69-kilovolt and below transmission lines and a corresponding
2,800 MVA of substation capacity.

. For Mindanao, 616 circuit kilometers of 250-kilovolt HVDC transmission
lines, 660 circuit kilometers of 230-kilovolt transmission lines, 1,636
circuit kilometers of 138-kilovolt and 1,241 circuit kilometers of
69-kilovolt and below transmission lines, and a corresponding 5,265 MVA of
substation capacity.

Sales and Customers

Overview

We serve three types of customers:

. distributors and utilities;

. industrial and commercial customers that are directly reconnected to our
grid network; and

. other miscellaneous customers, such as universities, military camps and
Government agencies, which need substantial amounts of electricity.

The distributors purchase electricity from us for distribution to end-users
such as households, industries and commercial establishments. Meralco is by far
our largest electricity distributor, accounting for 57% of our total volume of
electricity sales for 2001 and 49% of our total electricity sales for 2002.

We also supply electricity to large industrial and commercial users
directly. In April 1998, the DOE repealed an energy regulation that had limited
our bulk electricity sales only to customers with electricity demand of at
least 2 MW of generation capacity. We can now directly supply electricity to
customers that demand at least 0.1 MW of generation capacity. We expect to
increase direct sales to such users in the future.

The following table sets out the breakdown of our electricity sales by
customer type and region for 2002. The number of customers set out in the table
is as of December 31, 2002.

2002 Energy Sales Customer Distribution/(1)/

Luzon Visayas
-------------------------- -------------------------
Number Number
of % of %
Customers GWH Share Customers GWH Share
--------- --------- ------ --------- -------- ------

Distributors and Utilities...... 62 21,622.87 93.81 31 3,006.39 87.89
--- --------- ------ -- -------- ------
Meralco......................... 1 15,773.43 68.43
Private Utilities............... 9 913.48 3.96 2 929.14 27.16
Cooperatives.................... 44 4,428.97 19.21 27 1,946.91 56.92
Municipal/City Utilities........ 4 183.76 0.80 1 57.41 1.68
Ecozones/Other Private Utilities 4 323.23 1.40 1 72.94 2.13
Industrial and Commercial....... 56 1,337.62 5.80 12 406.61 11.89
--- --------- ------ -- -------- ------
Cement.......................... 7 391.91 1.70 2 85.99 2.51
Chemical Products............... 9 103.02 0.45 2 90.96 2.66
Food Processing................. 4 44.67 0.19 5 28.77 0.84
Iron & Steel.................... 6 239.22 1.04 2 197.10 5.76
Mining.......................... 7 188.09 0.82 1 3.79 0.11
Paper & Paper Products.......... 4 294.96 1.28
Other Customers................. 19 75.76 0.33
Miscellaneous................... 31 90.23 0.39 11 7.63 0.22
--- --------- ------ -- -------- ------
TOTAL......................... 149 23,050.73 100.00 54 3,420.63 100.00
=== ========= ====== == ======== ======

Mindanao Philippines
------------------------- --------------------------
Number Number
of % of %
Customers GWH Share Customers GWH Share
--------- -------- ------ --------- --------- ------

Distributors and Utilities...... 32 4,682.16 83.6 125 29,311.42 91.37
-- -------- ------ --- --------- ------
Meralco......................... 1 15,773.43 49.17
Private Utilities............... 4 1,950.67 34.79 15 3,793.29 11.83
Cooperatives.................... 27 2,730.92 48.71 98 9,106.80 28.39
Municipal/City Utilities........ 5 241.17 0.75
Ecozones/Other Private Utilities 1 0.56 0.01 6 396.73 1.24
Industrial and Commercial....... 22 920.52 16.42 90 2,664.76 8.31
-- -------- ------ --- --------- ------
Cement.......................... 4 430.86 7.68 13 908.76 2.83
Chemical Products............... 2 76.41 1.36 13 270.38 0.84
Food Processing................. 6 105.75 1.89 15 179.19 0.56
Iron & Steel.................... 2 156.30 2.79 10 592.62 1.85
Mining.......................... 2 5.55 0.10 10 197.44 0.62
Paper & Paper Products.......... 4 144.04 2.57 8 438.99 1.37
Other Customers................. 2 1.63 0.03 21 77.39 0.24
Miscellaneous................... 9 4.36 0.08 51 102.22 0.32
-- -------- ------ --- --------- ------
TOTAL......................... 63 5,607.04 100.00 266 32,078.40 100.00
== ======== ====== === ========= ======

- --------

(1) Includes sales by plants that we own and sales by plants owned and operated
by IPPs. Excludes One-Day Power Sales and sales in the Small Islands Grid.
Excludes sales after December 25, 2002, the end of our December billing
period.

Our Largest Customers

Our ten largest customers purchased 25,886.97 GWH of electricity in 2001,
representing 70% of our total electricity sales. For 2002, our ten largest
customers purchased 20,008.17 GWH of electricity, representing 63% of our total
electricity sales. After Meralco, our second largest customer, Davao Light &
Power Company, which serves Davao City and its surrounding areas, accounted for
3.6% of total electricity sales in the first six months of 2002.

Our standard power supply sales contract with most of our customers is for a
term of 10 years at the rates authorized by the ERC. The standard contract
allows both our customers and us to alter the amount of power called for in the
contract if one or both parties cannot supply or receive the contracted level
of power. We bill customers on a monthly basis and require payment within 30
days. The majority of our customers paid within the required 30 days of being
invoiced during 2001 and the first six months of 2002. We penalize late
payments by charging interest and, ultimately, by disconnecting the defaulting
customer's power supply. We also provide discounts in the form of power
delivery voltage discounts (2.5%-3.5% if the customer is directly connected to
69kV-230kV transmission line), prompt payment discounts (3% if payment is made
within 10 days after receipt of power bill) and power factor adjustment
penalties or bonuses. The power factor represents the proportion of transmitted
current that reaches the end-user as metered electricity. A lower power factor
indicates increased costs to us that are not covered by our basic power rates.
To encourage end-users to improve their power factor with more efficient
equipment, we impose a penalty upon customers with a power factor below 85% and
grant a bonus to customers with a power factor above 90%.

Relationship with Meralco

We entered into our first power supply contract with Meralco in 1978. Our
current supplies to Meralco are governed by a ten-year power contract which
took effect on January 1, 1995. Before signing our most recent contract,
Meralco, unlike our other customers, was only charged for power actually
supplied to them. However, since January 1998, under the current contract,
Meralco has been subject to the same guaranteed demand obligation as our other
customers. In January 2002, Meralco began buying less power from us than they
had contracted for, claiming a letter agreement allowed them to do so. We have
disagreed with this position and continue to charge Meralco a penalty based on
the difference between their minimum demand obligation under our current supply
contract with them and actual power purchased. Meralco has reduced their
minimum power purchase from 3,600 MW per month to an average of 2,900 MW per
month, leading to penalties of (Peso)14.1 billion incurred from January to
December 31, 2002. The penalties have not been paid by Meralco and prior to
2002, we did not account for the penalties as a sale or a receivable in our
financial statements. However, in our financial statements for the year ended
December 31, 2002, consistent with our practice of recognizing receivables that
our Board deems likely to be paid, we account for the (Peso)14.1 penalties as a
receivable and as operating revenue, while provisioning 10% of the penalties as
bad debt. Although we believe we have a strong legal case against Meralco, it
is not certain that we will be paid for all or any of the penalties incurred.
Any amount not recovered from Meralco which has been accounted for as a
receivable and as revenue would have to be expensed as a bad debt in a future
period.

Meralco is sourcing certain of its power requirements from IPPs that it
owns, including the gas-powered Sta. Rita and San Lorenzo plants, leading to
them reducing the amount of power purchased from us in violation of our power
supply contract. However, Meralco claims that we have violated the terms of the
power supply contract by supplying electricity to end-users in Meralco's
exclusive territory. Despite this claim, we believe that such customers fall
outside of the agreement because they are unwilling to purchase power from
Meralco, thus requiring us by law to meet their electricity requirements.

On March 25, 2003, we entered into third-party mediation with Meralco
seeking a resolution of our power supply contract dispute. We believe that we
may be close to formulating a mutually acceptable compromise with Meralco.

In an earlier contract we entered into with Meralco in 1981 for power supply
to Balintawak, we provided a discount as an incentive for Meralco to invest in
the transmission facilities at the Balintawak power station. The discount was
expressed as a percentage of the monthly power bill. As of December 31, 2002,
the aggregate amount of the discount was approximately (Peso)2.7 billion and
had substantially exceeded Meralco's total capital expenditure on the
Balintawak power station. We are also engaged in discussions with Meralco to
reduce or eliminate the discount.

On November 15, 2002, the Supreme Court ordered Meralco to refund an
estimated (Peso)11.5 billion that it had overcharged customers since 1994. In
its ruling, the Supreme Court explained that Meralco had improperly

included income tax in operating expense for purposes of calculating its return
on rate base. The President has stated that her administration will act in
accordance with the Supreme Court decision, as well as take steps to ensure
that Meralco does not default on its debt obligations. On April 9, 2003, the
Supreme Court denied with finality Meralco's motion for reconsideration of its
November 2002 order and ruled that Meralco must refund to its customers excess
charges incurred since February 1994. While the Supreme Court did not quantify
the amount to be refunded, Meralco has stated that the refund could be as much
as (Peso)30.4 billion. In addition, consumer groups have asked the ERC to
clarify whether or not Meralco will be required to refund an additional
(Peso)6.2 billion to (Peso)6.8 billion in interest on the excess charges
incurred. As part of the implementation of the Supreme Court's ruling, Meralco
is required to submit a proposed procedure on the refund process. On May 12,
2003, the ERC approved the first phase of a two-step plan to refund Meralco's
customers. During this initial phase, beginning on June 6, 2003, Meralco must
offer a one-time refund to its customers consuming 100 kWh or less of
electricity per month. Meralco estimates that this refund, which will be paid
in cash or in deductions from future billings, will amount to between (Peso)1.7
billion and (Peso)2.2 billion. A separate refund scheme for mid-tier and large
customers is expected to be submitted to the ERC for approval by in June 2003.
Meralco has stated that it will ask the ERC for a nine-year phase-in period for
this part of the refund scheme. While Meralco has announced it will convert
$350 million in short-term loans to secured mid-term loans to address the
company's immediate cash flow difficulties associated with the consumer refund,
it is not clear that Meralco will be able to secure the additional borrowings
it will need under the refund scheme. The Supreme Court's ruling and the ERC's
refund plan may significantly impair Meralco's financial condition and thus
impair our ability to collect revenues or compensation from Meralco. If
Meralco's financial viability continues to decline, it may be unable to meet
its contractual commitments to us which would have a significant adverse effect
on our results of operations.

The Government directly owns 10% of Meralco, and guarantees 32% of Meralco's
(Peso)22 billion debt in long-term loans. For the last 4 years, Meralco has
been in technical default on certain financial covenants with its lenders
prescribing minimum return-on-rate base (RORB) requirements. On February 3,
2003, Meralco announced that it will again petition its lenders to waive the
minimum RORB requirements. However, Meralco's treasurer stated that Meralco may
default on loan payments if it does not get a rate increase by June 2003. In
March 2003, the ERC approved a rate increase for Meralco of (Peso)0.22 per
kilowatt-hour, commencing in May 2003. While this rate adjustment will allow
Meralco to recover some deferred power purchase costs, it is significantly
lower than the (Peso)1.12 increase sought by Meralco in its unbundling
petition. In addition, the ERC has ruled that Meralco can renegotiate its power
purchase agreements with us and with its contracted IPPs. On January 1, 2003,
Meralco announced that the ERC had ruled that Meralco could collect an
estimated amount of between (Peso)5 billion and (Peso)7 billion in deferred PPA
charges from consumers after having been prevented from doing so by the ERC
since April 2002. We do not know how these recent rulings will affect Meralco's
continuing financial viability or our ability to collect revenues from Meralco.

Special Rate Programs

Dump Power Program

When there is excess inflow of water into Lake Lanao in Mindanao, we have in
the past channeled water down the Agus River for safety reasons. In 1995, we
began the "Dump Power Program", offering to customers the electricity generated
by the excess water inflow at a rate that is approximately half the grid's
basic rate. This program minimizes the waste of water, provides electricity
cost savings for customers, improves our hydroelectric plants' utilization
rates and provides us with additional revenue. The program is dependent on the
availability of excess water; thus, for example, it was suspended during late
1997 due to insufficient water inflow relating to the El Nino climatic
disturbance.

One-Day Power Sales Program

We developed this program in 1997 to optimize our unutilized generation
capacity by offering such capacity on a day-to-day basis to customers with
self-generating capacity. We determine our unutilized capacity for each day of
operation and offer such capacity to customers through a process of bidding
over a floor price that we

publish on a running seven-day basis. We expect this program to continue to
have the benefit of maximizing our existing generation capacity, improving
system efficiency, diversifying our customer base and increasing revenue. The
customers benefit by obtaining power at a cost below the cost of producing
power using their own generating facilities.

Economic Recovery Assistance Program

We introduced this program in 1999 to assist industrial customers affected
by the regional economic downturn and to promote economic recovery. Under this
program, we offer a discount of up to (Peso)0.45 per kWh to eligible industrial
customers on electricity consumption in excess of their usual baseline load. We
aim to encourage industrial customers to increase their production and
electricity consumption, thereby generating more revenues for us.

Special Program to Enhance Electricity Demand

On October 11, 2002, the ERC approved our application to implement a fixed
discount on power rates for industrial users. This pricing scheme, called
Special Program to Enhance Electricity Demand ("SPEED"), was intended to
introduce price incentives to stimulate incremental demand, increase
utilization of existing power plants and lower the average power cost for large
end-users. We originally planned to implement SPEED in three phases over two
years based on customer consumption, and to offer a discount of approximately
25% off the current purchase price of electricity for these large end-users.
However, in May 2003, we filed an application with the ERC to reduce the
discount to our industrial customers in Luzon and suspend SPEED in Visayas and
Mindanao. We filed this application in response to our lowered revenues due to
the September 6, 2003 ERC order reducing our generation rates.

Power Rates

Overview of Rate Structure

Our power rates have been structured to generate sufficient revenues to
recover our expenditures and provide a sufficient return on our investment to
meet the goals under our Power Development Program. Currently, our effective
selling rate is composed of a basic charge and certain automatic cost
adjustments including a fuel and purchased power cost adjustment and a foreign
exchange adjustment. The FPCA includes adjustments for the cost of fuel for our
generation plants as well as costs associated with power purchased from IPPs,
also known as the PPA. We have deferred recovery of the PPA charge since
September 2002 as mandated by the ERC.

The basic charge consists of the demand charge and the energy charge. The
demand charge is intended to recover the fixed or capacity-related costs of
power generation, while the energy charge is intended to recover the variable
or energy-related costs of power generation. Any proposed change to the basic
charge must be submitted to the ERC for approval. The FPCA and the FOREX
adjustments are intended to cover the additional operating costs that are not
recovered through the basic charge. The FPCA and the FOREX adjustments are
expected to be replaced by the GRAM and the ICERA. See "-- Implementation of
the GRAM and the ICERA." By Presidential decree, the PPA element of the FPCA
has been capped at (Peso)0.40/kWh. Details of the FPCA and FOREX adjustments
are as follows:

. Fuel and Purchased Power Cost Adjustment. The FPCA is a means to
implement automatic adjustments to power rates using a stipulated formula
to reflect changes in fuel costs and purchased power costs. Upon obtaining
the approval of the Energy Regulatory Board, the predecessor of the ERC,
we implemented the fuel component in April 1994. Current fuel prices are
compared against fuel prices used to calculate our power rate in 1993, and
any incremental costs arising from the change in fuel prices are passed on
to our customers. The PPA traditionally allowed us to recover increased
costs associated with our cost of power purchased from IPPs, however this
component of the FCPA has been capped at (Peso)0.40 per kWh by
presidential decree which does not allow us to recover our purchase power
costs. We have deferred recovery of the PPA since late September 2002.

. Foreign Exchange Adjustment. The FOREX implements automatic adjustments
to power rate using a stipulated formula to reflect the effect of foreign
exchange rate fluctuations on the principal repayment amounts of our loans
(but not interest payment amounts), insurance premiums and other foreign
currency operating expenses. Using the FOREX adjustment, we pass on to our
customers a portion, but not all, of our gains or losses relating to such
expenses that arise from foreign exchange rate fluctuations. We
implemented the FOREX adjustment in September 1994 after obtaining the
approval of the Energy Regulatory Board.

The FPCA and FOREX have varied significantly from month to month, and can
give rise to either a positive or negative adjustment. If there is a negative
adjustment, we refund to our customers the amount of the difference.

In setting power rates, we must continue to ensure that our return on rate
base (which is calculated as our net operating income divided by the average
current net value of fixed assets in operation at the beginning and end of the
relevant period), does not exceed the maximum return on rate base of 12%
stipulated in our Charter. In addition, we are required by covenants in certain
of our loan agreements, including agreements with the Asian Development Bank,
to maintain power rates sufficient to achieve a minimum return on rate base of
either 7% or 8% depending on the particular agreement. We are currently in the
process of negotiating with our lenders to remove these covenants. See "-- Debt
- -- Return on Rate Base Covenants."

Implementation of the GRAM and the ICERA

In an order dated February 24, 2003, the ERC approved the implementing rules
and regulations for new adjustment mechanisms. Under the implementing rules,
the proposed fuel and purchased power adjustment, known as the GRAM, and the
proposed foreign exchange adjustment, known as the ICERA will replace the FCPA
and the FOREX in connection with the unbundling of our generation and
transmission rates and will continue indefinitely. On April 4, 2003, we filed
an application with the ERC under the GRAM seeking the recovery of fuel and
purchased power costs. While the ERC has confirmed that the GRAM and the ICERA
will survive the implementation of the Universal Charge, the ERC has stated
that it will ensure there will be no double recovery under the GRAM and the
Universal Charge.

. The GRAM. The implementing rules of the GRAM establish the procedures to
be followed for the recovery of deferred energy cost incurred by a
distribution utility. Under the GRAM, a utility must file with the ERC, on
a quarterly basis, a deferred generation cost accounting application
setting calculations of its generation rate based on a formula set forth
under the GRAM implementing rules. Under the GRAM, unlike under the PPA, a
utility may not include transmission components, system loss and franchise
tax in the computation of the rate adjustment. In addition, the GRAM
allows a utility to include a carrying charge representing the financing
costs associated with the deferred recovery or refund of cost computed at
the rate of the 91-day Treasury Bill plus 300 basis points, but not
exceeding 12%. The ERC is required to issue a decision on each application
no later than 45 days from the date the petition is accepted for filing.
Should the ERC fail to act within 45 days, the petition is deemed approved
in full. When the petition is approved, and upon the effective date of a
new generation rate, the utility has a maximum recovery period for fuel
and purchased power costs of six months.

. The ICERA. The implementing rules of the ICERA establish the procedures
to be followed for the recovery of incremental currency exchange
adjustments incurred by a utility. Under the ICERA, a utility must file
with the ERC, on a quarterly basis, a deferred currency exchange
accounting application setting calculations of the ICERA. In addition, the
ICERA allows a utility to include a carrying charge representing the
financing costs associated with the deferred recovery or refund of the
incremental currency exchange adjustment computed at the rate of the
91-day Treasury Bill rate plus 300 basis points, but not exceeding 12%.
The ERC is required to issue a decision on the application no later than
45 days

from the date the petition is accepted for filing. Should the ERC fail to
act within 45 days, the petition is deemed approved in full. When the
petition is approved, and upon the effective date of a new ICERA rate, the
utility has a maximum recovery period for currency exchange costs of six
months.

While the implementing rules of the GRAM and the ICERA state that the new
adjustment mechanisms are effective immediately, the ERC has not yet authorized
new rates for us under the mechanisms. The implementing rules provide that
NPC's current rates will remain in effect until the ERC authorizes new rates
under the GRAM. On April 4, 2003, we filed an application with the ERC to set
our rates under the GRAM. On May 15, 2003, in response to our application, the
ERC further revised our generation rates, resulting in an increase of
(Peso)0.16 per kWh in Visayas and a reduction of (Peso)0.07 per kWh in Luzon.
While we expect that this revision of our rates will increase our revenue
incrementally, as compared to our current rates, the overall revised generation
rate is significantly lower than the rate we requested in our April 2003
application to the ERC. Thus, we plan to file a motion for reconsideration of
the ERC's order by June 18, 2003, the end of the permitted period for filing
such a motion. Until our motion for reconsideration of the rates is resolved,
we will continue to charge our current generation rates, which do not allow for
recovery of fuel and purchased power costs. However, we cannot predict when or
whether the new adjustment mechanisms will be implemented, which rates the ERC
will actually approve for us, or whether or not we will be able to recover some
or all of the actual loss incurred in connection with our deferral of the PPA
charge. If the rates approved by the ERC under the GRAM and the ICERA do not
allow us to pass on the costs associated with the generation of electricity,
then we expect that the new rates will have a significant adverse effect on our
financial results.

Recent Reductions in Basic Power Rates and the PPA

In 2001 and 2002, the average rates at which we sell electricity were
significantly reduced by legislation, and by mandates from the President and
the ERC. The recent rate reductions and ERC orders described below have
effectively superseded our automatic mechanisms for calculating rates. We
incurred significant losses in revenue as a direct result of the following rate
reductions:

. The Act. Effective June 26, 2001, the Act mandated a reduction of
(Peso)0.30 per kWh in the basic rate to residential end-users.

. PPA. Effective May 8, 2002, a directive from President Arroyo mandated an
average (Peso)0.85 per kWh reduction in the PPA from (Peso)1.25 to
(Peso)0.40 per kWh. This rate reduction was affirmed by the ERC on
September 6, 2002. In connection with the unbundling of our rates, we have
deferred the PPA charge since late September 2002, resulting in a loss of
(Peso)2.8 billion between October 2002 and March 2003. The ERC has
approved implementing rules which will replace the PPA formula with a new
recovery mechanism, the GRAM. We will file an application with the ERC to
set our recovery rate under GRAM.

. Unbundled Generation Rates. In late September 2002, our transmission and
generation rates were unbundled. In connection with this unbundling, the
ERC further lowered our generation rates. On May 15, 2003, the ERC revised
our generation rates. Although these revised rates are slightly higher
than our current rates, they are significantly lower than the generation
rates we applied for with the ERC. Thus we plan to file a motion for
reconsideration of the revised rates with the ERC, and the revised rates
will not come into effect until this motion for reconsideration is
resolved. In addition, in May 2003 the ERC promulgated new rules revising
the methodology for setting transmission wheeling rates.

Unbundled Rate Petition

The Act mandates that our rates be unbundled between transmission and
generation rates, and that the rates reflect the respective costs of providing
each service. Pursuant to the Act, we filed with the ERC an application for
revised, unbundled rates. Our rate application requested an average overall
rate increase of (Peso)0.17 per kWh. However, in a ruling issued June 26, 2002,
the ERC denied our application, and instead imposed an average overall rate
decrease of (Peso)0.07 per kwh with respect to the combination of generation
and transmission rates. The ERC ordered us and Transco to implement the revised
rates by September 26, 2002.

We then filed a motion for reconsideration of our unbundled rate petition
with the ERC. To compute our rate base, which in turn determines our rates, the
ERC relied on a valuation of our assets that was completed in 1996. However,
since 1996, the value of our assets has declined significantly due to the
devaluation of the peso caused by the 1997-1998 Asian financial crisis.
Therefore, it is our view, expressed in the motion for reconsideration, that
the return on rate base calculated by the ERC is significantly higher than our
actual return on rate base. Since our electricity rates are calculated to
provide us revenues sufficient to attain a certain return on rate base, we
believe that ERC's overvaluation of our rate base caused them to erroneously
lower the rates we charge our customers.

In its ruling on unbundled rates issued June 26, 2002, the ERC ordered us to
file an updated application detailing our most recent fuel and purchased power
costs. On September 6, 2002, after we had filed the required update, the ERC
ordered us to ignore the overall rate increase imposed in their June 26 ruling
and to reduce the generation-related portion of our rates by (Peso)1.10 in
Visayas, (Peso)0.27 in Luzon and (Peso)0.40 in Mindanao. We filed a motion for
reconsideration of this order. However, in late September 2002, the ERC further
lowered our generation rates, in connection with the unbundling of our rates.
On May 15, 2003, the ERC further revised our generation rates, increasing rates
by (Peso)0.16 in Visayas, reducing rates by (Peso)0.07 in Luzon and leaving
rates unchanged in Mindanao.

On May 29, 2003, the ERC promulgated new rules on transmission wheeling
rates. In these rules, the ERC introduced a performance-based methodology. The
guidelines, which adopt a revenue cap methodology, are intended to be
applicable initially until year-end 2015; there is a transitional period which
ends December 31, 2005, followed by two five-year regulatory periods.

The ERC will determine the wheeling rates by reference to the annual maximum
allowed revenue ("MAR"). The MAR will be determined in accordance with the
price control formulae set out in the guidelines. During the transitional
period, the maximum allowed revenue shall be consistent with the revenue which
could have been earned pursuant to the ERC tariff order issued on September 20,
2002. During the second regulatory period, the guidelines require the ERC to
calculate the rates by reference to an annual allowed revenue. The annual
allowed revenue will be determined generally by reference to the utility's
regulated asset base, operating and maintenance expenditure, tax payments,
depreciation and working capital, among other variables. Each year, the MAR
will be adjusted to reflect inflation, exchange rate movements and actual
adjustment factors which correct for the over or under recovery in the previous
regulatory year. During the third regulatory period, the ERC will continue to
apply a revenue cap determined in accordance with the original MAR price
control formulae. However, during this period, the ERC may alter the values of
the components of the formulae, such as the efficiency factor. After the end of
the third regulatory period, the ERC may alter the revenue-setting methodology
and the price control formulae, but the approach must remain consistent with
the overall structure applied in the initial three regulatory periods.

The stated purpose of the revised methodology is to improve the efficiency
of utility operations and ultimately provide consumers with more affordable and
reliable electric service. Because the wheeling rate guidelines incorporate
many variables in setting transmission rates, we cannot predict what effect the
guidelines will have on our rates. However, we do not anticipate that the
revised transmission rates will be materially different from our current
transmission rates.

Power Development Programs

2000 Power Development Program

Our 2000 Power Development Program, which was prepared by us in
collaboration with the DOE, outlines our proposals for a coordinated expansion
of generation and transmission facilities to meet forecasted energy demand
through the year 2010. The 2000 Power Development Program sets out detailed
recommendations for the development of new plants, and the expected
interconnection of the Luzon, Visayas and Mindanao Grids in

anticipation of the expected increase in demand for power in the Philippines
and the restructuring and privatization of the power industry.

Our 2000 Power Development Program was intended to serve as a model for
future transmission projects, upon the transfer of our transmission assets to
Transco. However, since our generation assets will be completely privatized by
PSALM, there is no guarantee that our 2000 Power Development Program for
generation projects will be implemented. Also, the transmission aspects of the
2000 Power Development Program will be superseded by the 2002 Transmission
Development Plan (the "2002 TDP") if the 2002 TDP is approved by the DOE and
the Congress. See "-- 2002 Transmission Development Program" below.

The 2000 Power Development Program specifies plans for:

. the commissioning of new hydroelectric, coal and natural gas power plants
between 2001 and 2010;

. the development of indigenous energy resources in order to increase
self-sufficiency in energy supply;

. the interconnection of the Small Islands Grid, the development of a
transmission line backbone and the extension of new lines for
reinforcement and local development;

. the strengthening of the existing transmission networks; and

. the expansion of the high voltage transmission network and substation
capacity to increase the system's ability to accommodate the capacity
additions indicated in the 2000 Power Development Program.

The 2000 Power Development Program calls for an increase in the system's
capacity (which includes our power plants' capacity and the capacity provided
by independent power producers) from 11,699 MW in 1999 to 19,650 MW in 2010
(after deducting approximately 1,762 MW of system capacity expected to be
retired during the same period). To meet the projected system demand, a total
increase in capacity of 9,844 MW must be commissioned during the period
2000-2010. Approximately one-half of our required increase in capacity will
come from our on-going and committed projects. The restructuring of the power
industry will require independent IPPs and distribution utilities to meet the
remainder of the demand.

The 2003 Power Development Program, which will supersede the 2000 Power
Development Program, has been drafted but has not yet been approved.

Generation Projects in the 2000 Power Development Program

As a part of our system capacity requirement through 2010, we have committed
to undertake the following generation projects.

Committed Generation Projects

Capacity Expected
Plant Type (MW) Commencement Location
- ----- ---- -------- ------------ --------

Kalayaan 3 & 4... Pump Hydro 350 2004 Laguna, Luzon
San Pascual Cogen Nat. Gas 304 N/A/(1)/ Batangas, Luzon
San Roque........ Hydro 345 2004-2005 Pangasinan, Luzon
Mindanao Coal.... Coal 200 Jan 2006 Misaris Oriental, Mindanao

- --------

(1) "N/A" means "not available."

In Luzon, our three committed generation projects are intended to develop
and utilize indigenous energy resources including natural gas for base-load
generation and hydro for mid-range and peaking operations.

Mindanao Coal, our only committed project in Mindanao, is intended to
augment current capacity in this region which is mainly dependent on
hydroelectric generation. In Mindanao, the pending completion of the

Leyte-Mindanao interconnection in 2011 and the 200 MW Mindanao coal-fired power
plant scheduled for completion in 2006 will sufficiently address our power
requirements projected for 2007 onwards.

In Visayas, we have not committed to build or contract for additional
capacity. Our near-term solution to address peaking requirements includes
upgrading certain inter-connection links to increase the transfer of geothermal
power, a strategic allocation of power barges and/or the transfer of land-based
gas turbines from Luzon.

In Mindanao, the Leyte-Mindanao inter-connection, together with a power
purchase agreement with a coal plant in Mindanao will sufficiently address our
power requirements through 2007. Implementation of the Leyte-Mindanao
interconnection project is currently delayed.

We expect the overall capacity of our committed generation projects to
generate 1,199 MW, or approximately 12%, of the 9,844 MW programmed system
capacity we need to generate to meet demand through 2010.

In addition, from 2003 to 2005, in Luzon, we will also retire a total of
1,762 MW of oil-based capacity resulting in total net capacity loss of 8,082
MW. In Luzon, this capacity comprises the 75 MW Bataan, 1,200 MW Manila Thermal
1&2, 500 MW Sucat 1&4, and 240 MW gas turbine units in Malaya, Bataan and
Sucat. It is expected that by the end 2002, the 350 MW Sucat Thermal 2&3 will
also be retired, followed by the 310 MW Hopewell GT units in 2009.

In Visayas, the plants slated for retirement include the 22 MW Bohol Diesel
Plant I after full completion of Leyte-Bohol interconnection project in 2003,
the 36.5 MW Panay Diesel I in 2004, and the 4x32-MW Power Barges in 2005.

Among the committed generation projects of the private sector for the period
2000-2010 are plants being developed by IPPs in provincial areas totaling 16.4
MW and Meralco's committed generation projects with a combined capacity of
2,195 MW. The provincial IPPs consist of the 6.4 MW First Cabanatuan Venture
and the 10 MW United Coconut Chemical. Meralco's IPPs include the 130 MW
Duracom II diesel plant, the 460 MW Quezon Coal-fired plant, the 1,040 MW Sta.
Rita, the 525 MW San Lorenzo natural gas fired power plants and the 40 MW
Bulacan Biomass Plant. Our contracted capacities with IPPs that will expire by
the end of 2010 will be terminated, but we assume these IPPs will continue
operating and selling electricity to us. Because of the deregulation of the
power industry, certain distribution companies and large industrial companies
have resorted to self-generation and/or have contracted for capacity from IPPs.

The 2000 Power Development Plan indicated the need for an additional 5,028
MW of capacity to be identified and commissioned before 2010 in addition to
ours and Meralco's committed projects. However, because of the current
restructuring of the power industry, we are no longer in a position to build or
contract for additional capacity. We expect IPPs, in cooperation with the
distribution utilities, to provide the additional capacity.

2002 Transmission Development Program

The proposed 2002 TDP prepared by Transco will update and supersede our 2000
Power Development Program with respect to transmission facilities. The 2002 TDP
has been submitted to the DOE for review and, after approval by the DOE, will
be submitted to Congress for approval. The DOE has commissioned a study of the
proposed 2002 TDP by an independent consulting firm, which could result in
changes to the 2002 TDP.

To meet future power demand, the 2002 TDP envisions additional capacity of
6,715 MW over the next 10 years, with approximately 5,700 MW of this additional
capacity to be provided by the private sector over the next 10 years. As part
of Transco's long-term objectives, the 2002 TDP includes a continuing effort to
interconnect

the major grids in the Philippines. Transco will also be required to provide
the necessary transmission facilities in order to integrate incoming plants
into the transmission system.

The 2002 TDP will entail an estimated total investment requirement of
approximately (Peso)109.4 billion, excluding interest during construction. We
estimate that foreign-currency denominated investment will cover approximately
$1.8 billion of the costs, and that local investment will cover approximately
(Peso)20.8 billion, including approximately (Peso)1.4 billion in rehabilitation
projects.

Of the total investment set out in the 2002 TDP, Transco's financial
exposure will total approximately (Peso)88.0 billion out of approximately
(Peso)109.4 billion. Under the 2002 TDP as proposed, generation companies and
IPPs will contribute (Peso)18.1 billion in investment, and electric
cooperatives will cover the remaining (Peso)3.3 billion. To ensure a 10% return
on investment, we estimate that Transco's costs will translate into an average
increase in power rates of (Peso)0.16/kWh in 2006 and (Peso)0.193/kWh in 2012.

We and Transco have concluded that the existing transmission system in
general is congested, and that some parts of the current transmission power
grid do not meet our standard reliability criteria (which are meant to ensure
that a problem with one element of the transmission power system does not
affect power delivery in other parts of the grid). Therefore, the 2002 TDP is
focused on the following objectives:

. accommodate additional generation and higher demand;

. increase power capacity of transmission lines;

. meet our standard reliability criteria; and

. maintain the voltages within the limit prescribed under the grid code.

The required infrastructure projects necessary to achieve these objectives
can be described as either on-going projects (those already under construction
and with a financing source), projects for implementation (those identified as
necessary, but without a funding source at present), and indicative projects
(those identified as necessary from 2005 to 2012, but which require further
study).

The following table summarizes projects to construct lines and substation
capacity identified in the 2002 Transmission Development Program.

Projects for
On-going Projects Implementation Indicative Projects
------------------- ------------------- -------------------
(2002-2005)/(1)/ (2003-2006)/(1)/ (2005-2012)/(1)/
------------------- ------------------- -------------------
Substation Substation Substation
Lines Capacity Lines Capacity Lines Capacity
(ckt-km) (MVA) (ckt-km) (MVA) (ckt-km) (MVA)

Luzon... 577 1,350 1,533 1,655 2,535 9,550
Visayas. 660 1,280 1,307 570 747 950
Mindanao 495 800 2,304 590 1,354 3,875
----- ----- ----- ----- ----- ------
Total. 1,732 3,430 5,144 2,815 4,636 14,375
===== ===== ===== ===== ===== ======

- --------
(1) Expected commencement.

On-going Transmission Projects

On-going transmission projects are defined as those which have already
secured funding and are currently under construction. These projects are
scheduled for commencement between 2002 and 2005.

Luzon. The on-going transmission projects in Luzon involve the construction
of 577 ckt-km of lines and the installation of 1,350 MVA of substation
capacity. The highest-priority projects are intended to deliver power

from incoming generation plants (Ilijan, Casecnan, San Roque, Santa Rita, and
San Lorenzo). On-going transmission projects also include substation expansions
intended to prevent our transformers from overloading from higher demand, and
sub-transmission projects to provide reliable power delivery to electric
cooperatives.

Visayas. In Visayas, on-going transmission projects involve the
construction of 660 ckt-km of lines and the installation of 1,280 MVA of
substation capacity. The major projects in Visayas involve the construction and
reinforcement of interconnections among the Visayas islands. In particular,
Stage II of the Leyte-Bohol interconnection will increase the capacity of the
interconnection from 40 MW to 100 MW, and will also require the expansion of
capacity in the Bohol substation to accommodate the increase in demand. An
interconnection link between Cebu and Mactan will provide an additional 100 MW
to Mactan. Finally, the Leyte-Samar interconnection, which is currently
vulnerable to damage from typhoons, will be reinforced to meet our reliability
criteria. Other on-going projects in Visayas are line upgrades intended to
increase reliability, expansion of substations to meet increasing demand, and
looping of lines to provide a more dependable power supply to electric
cooperatives.

Mindanao. In Mindanao, on-going transmission projects involve the
construction of 495 ckt-km of lines and 800 MVA of substation capacity. Major
projects, aimed to accommodate increased demand, include the reinforcement of
the line from General Santos to Tacurong, and the implementation of the
Sangali-Potogo line. Other on-going projects include a 171 km extension of
lines to connect substations of electric cooperatives, as well as the expansion
and construction of substations to ensure supply reliability and accommodate
increased demand.

Transmission Projects for Implementation

Projects for implementation have been identified as necessary, but have not
yet secured funding. These projects will require the approval of the ERC, as
mandated by the Act. They will also require the approval of NEDA, as part of
the Government's investment program. Transmission projects for implementation
are scheduled for commencement from 2003 to 2004.

Luzon. Projects for implementation in Luzon involve the construction of
1,533 ckt-km of lines and 1,655 MVA of substation capacity. The
highest-priority projects for implementation in Luzon include the upgrading and
reinforcement of existing transmission lines connected to Metro Manila.

Visayas. In Visayas, projects for implementation involve the construction
of 1,307 ckt-km of lines and the installation of 570 MVA of substation
capacity. High-priority projects for implementation in Visayas include the
strengthening of the northern, western, and southern Panay backbone to meet our
reliability criteria, the upgrading of the Leyte-Cebu interconnection to
increase transfer capacity from 200 MW to 400 MW, and the construction of an
interconnection to link Cebu and the small island of Bantayan.

Mindanao. Projects for implementation in Mindanao, involve the construction
of 2,304 ckt-km of lines and the installation of 590 MVA of substation
capacity. High-priority projects include the expansion of existing substations,
installation of three new substations, reinforcement of transmission links
between major power plants and substations, reinforcement of the eastern
portion of the Mindanao grid, and extension of the transmission system in
northwestern Mindanao.

Indicative Transmission Projects

Indicative projects are those expected to commence in the latter half of the
program period, from 2005 to 2012. They include lines associated with
generating plants included in the Power Development Plan whose sites have not
yet been identified, as well as reinforcements of the transmission system to
accommodate projected additional generation and higher demand.

Luzon. Indicative projects in Luzon, include the construction of an
estimated 2,535 ckt-km of lines and the installation of 9,550 MVA of substation
capacity and various projects to construct new lines to transmit power from
proposed power plants, projects to expand substations, and upgrade existing
transmission lines.

Visayas. Indicative projects in Visayas, cover the construction of 747
ckt-km of lines and the installation of 950 MVA of substation capacity and new
generation-associated transmission lines, the construction and upgrading of
lines connected to substations of electric cooperatives, and the strengthening
of the backbone of the Bohol grid.

Mindanao. Indicative projects in Mindanao, include the construction of an
estimated 1,354 ckt-km of lines and the installation of 3,875 MVA of substation
capacity. The most important indicative project is the deferred Leyte-Mindanao
Interconnection project. This major link is currently planned for completion in
2011, but will require further economic viability study. Other major projects
include the reinforcement of major transmission lines, the construction of
generation-associated lines, the expansion of substations, and the completion
of a 230 kV backbone in Mindanao.

Major Interconnection Projects

An important goal of the transmission and substation expansion plan is the
completion of a unified Philippine grid to allow effective sharing of reserves.
In a continuing effort towards interconnecting the major grids, we will pursue
the interconnection of the islands of Bohol and Mindanao with the presently
interconnected islands of Luzon, Leyte-Samar, Cebu, Negro and Panay. Existing
interconnection links will also be reinforced to accommodate higher transfer
capacity.

Capital Requirements

Power Development Programs

Substantial capital is necessary to carry out our 2000 Power Development
Program. For the period from 2002 through 2011, our projected capital
expenditures are approximately (Peso)470.6 billion, excluding interest expenses
during construction. These projected expenditures are not expected to be
incurred by us but by the entities purchasing assets in the privatization.
These projects do not include approximately (Peso)32 billion in expenditures
associated with plant maintenance and rehabilitation expected to be incurred by
us through 2005. See "-- Power Development Programs -- 2000 Power Development
Program."

The 2002 Transmission Development Program, covering transmission development
and rehabilitation projects from 2002, calls for an estimated total investment
of (Peso)109.4 billion, excluding interest during construction. Total
rehabilitation projects during this period are expected to total approximately
(Peso)1.35 billion. See "-- Power Development Programs -- 2002 Transmission
Development Program."

Rehabilitation and Maintenance

In addition to daily maintenance, our power plants require regular
overhauling at intervals ranging from one to five years for hydroelectric
plants, to every one or two years for oil-and coal-fired plants. We have
experienced a continual decline in plant operating efficiency over the past
several years primarily as a result of the lack of maintenance and the
continuing use of old plants operating beyond their scheduled working lives.
With the introduction of new plants, we will shut down certain old plants that
we cannot rehabilitate in a cost-effective manner; and we have commenced and
will continue with our rehabilitation efforts and major overhaul of other
plants. In carrying out major rehabilitation work, we either appoint
independent contractors or enter into rehabilitate-operate-lease or
rehabilitate-operate-manage contracts, which effectively transfer the
rehabilitation cost and subsequent operation of the plant to the private
sector. We have budgeted capital expenditures for maintenance and
rehabilitation of (Peso)8.4 billion for 2002, (Peso)15.9 billion in 2003,
(Peso)7.9 billion in 2004 and (Peso)9.1 billion in 2005.

Insurance

We are required under Philippine law to insure our assets with the
Government Service Insurance System ("GSIS"), a state-owned agency. We insure
our assets under an all risk insurance policy on a cost of replacement (new)
basis. We do not, however, insure transmission lines and distribution lines
beyond a certain radius of our power plants or dams of hydroelectric plants and
we are not insured for losses relating to the interruption of our business. We
also carry general liability insurance. Our all-risks insurance policy with
GSIS covers assets worth $6.1 billion. Through a joint bidding process, Heath
Lambert Group was chosen by both us and GSIS as the reinsurance broker to
arrange the placement of 95% of our risks in the international reinsurance
market.

Our current reinsurance policy, originally due to expire on December 31,
2002, was extended through January 31, 2003. Public bidding for the renewal of
the reinsurance policy took place on January 23 and 27, 2003. However, we
declared the bidding a failure after prospective bidders failed to qualify for
the bid. On January 31, 2003 we negotiated a reinsurance contract under which
GSIS reinsures 70% of our risk and accredited local reinsurance companies will
reinsure the remaining 30%.

In 2001 and 2002, our expenditures on insurance were (Peso)76 million and
(Peso)803 million, respectively. The increase in our insurance expense in 2002
was primarily due to the effect of the attacks of September 11, 2001 on
insurance premiums as well as the fact that some of our insurance premiums in
2001 were counted as expenditures in 2000. We estimate our expenditures on
insurance will reach (Peso)1.3 billion in 2003, excluding insurance for Transco
assets.

Philippine Nuclear Power Plant

In July 1973, the Government decided to build a nuclear power plant in
Bataan, Luzon. When it was eventually completed, the Government, under the
Aquino Administration, decided not to operate the plant. The loss of a
potential 620 MW of additional capacity from the plant contributed to our
failure to generate sufficient power to meet demand in the early 1990s.

In 1987, we agreed to transfer the plant to the Government. However, certain
of our loan agreements restricted our ability to dispose of our assets at that
time and a formal legal transfer of the plant was not completed until 1997. The
Government has assumed all our obligations under the foreign and domestic loans
incurred to finance the construction of the plant. We continue to maintain,
insure and provide security for the plant, and the Government has agreed to
reimburse us for the cost of doing so.

From July 1986 to December 2000, we incurred costs of (Peso)1.2 billion
associated with the plant, of which (Peso)456 million was reimbursed by the
Government as a cash payment prior to 1995. Additionally, (Peso)22.8 million
was received by us from the sale of unused materials in 1997 and 1998 and we
received a total of (Peso)26.0 million in cash subsidies from the Government
during the period 1986 through 2000. We treat the unreimbursed expenses as a
receivable from the Government in our accounts which including interest (except
for interest for the fourth quarter of 2002) amounted to (Peso)3.4 billion as
of December 31, 2002. We have billed the Government for interest on the
outstanding balance, but the Government has not made any cash reimbursements to
us and there can be no assurance that we will be reimbursed for amounts already
paid or to be paid by us in future. We consider the probability of collecting
interest on the outstanding amounts to be remote. To minimize further expenses
on the plant, strict cost-cutting measures have been implemented. To facilitate
recovery of these costs, we have organized an asset disposal project team that
will sell all of the plant's assets not needed to convert the plant into a
conventional power plant. Inventory and valuation of the plant's assets is
currently approximately 30% complete.

Environmental Protection

We are committed to reducing emissions and discharges from our plants and
work closely with the Department of the Environment and Natural Resources to
implement pollution control at our plants. The emissions from our plants have
remained within authorized limits to date, pending full implementation of the

Philippine Clean Air Act of 1999, and we have not been involved in any major
environmental incident. Under our 2000 Power Development Program, we are
committed to:

. optimize the use of indigenous and environmentally friendly energy
resources which produce less harmful by-products;

. encourage energy conservation; and

. implement reforestation programs around our plants and the watersheds we
maintain for hydroelectric and geothermal plants to preserve the natural
environment.

With the availability of electricity from new power plants, we are retiring
several of our older oil-fired plants pursuant to our Power Development
Program. Two of the plants to be retired are in the Metro Manila area where the
Department of the Environment and Natural Resources is implementing more
stringent emission standards. Due to the age of these plants, compliance with
the new emission standards is not economically feasible.

The Department of the Environment and Natural Resources requires us and our
contractors to obtain an Environmental Compliance Certificate before embarking
on any power project in the Philippines and to set aside an environmental
guarantee fund for such projects. We have set aside an environmental guarantee
fund of (Peso)50 million for our power plants and facilities.

The Philippine Clean Air Act of 1999 provides for a comprehensive air
pollution control policy. We are formulating the necessary compliance strategy
for our power plants to address the requirements of the legislation. We do not
expect compliance with this legislation to have a material effect on our
financial statements or results of operations.

Research and Development

Prior to 1997, we funded our own research and development efforts, which
focused primarily on the development of new sources of energy, combustion
technologies, the use of alternative fuels and processes to recycle waste
products. In 1997, the DOE assumed all our research and development functions.

Litigation

We have summarized below the most significant legal proceedings in which we
are involved.

Philippine Geothermal -- Service Contract Renewal

In 1971, we entered into a service contract with Philippine Geothermal, a
subsidiary of Unocal Corporation, for the exploitation of geothermal resources
in Tiwi and Makban. The contract had a term of 25 years and was renewable for
another 25 years at Philippine Geothermal's option. Before the contract expired
in 1996, Philippine Geothermal informed us of its intention to renew the
contract. We were, however, concerned that the contract's renewal might not be
valid under the 1987 Philippine Constitution, which provides that only the
President of the Philippines may enter into agreements with foreign-owned
corporations involving financial or technical assistance for large-scale
projects for exploration, development and utilization of minerals, petroleum
and other mineral oils.

In July 1996, Philippine Geothermal filed for arbitration with the
International Chamber of Commerce, or ICC, against us and the Government.
Philippine Geothermal sought (1) a declaration that it had validly exercised
its right to renew the contract and (2) damages for alleged wrongful
termination of the contract. We objected to the arbitration on grounds, among
others, that the arbitration provision in the contract did not cover the
dispute and that the constitutional issues implicated by the dispute were
beyond the scope of the arbitration provision. The International Court of
Arbitration of the ICC ruled that arbitration should proceed in Singapore
before a three member arbitral tribunal. Both we and Philippine Geothermal
filed various submissions with the arbitral tribunal. The tribunal decided to
bifurcate the proceedings: it would first decide on whether it had jurisdiction
over the case before proceeding to decide on the substantive issues in the case.

In August 1996, we petitioned the Regional Trial Court of Quezon City for
declaratory relief and, in December 1996, the Regional Court issued an order
stating that the dispute should be resolved before a Philippine court rather
than an ICC tribunal. Philippine Geothermal subsequently filed an appeal with
the Philippine Court of Appeals to reverse the Regional Court's decision. The
matter was pending before the Court of Appeals when we entered into an interim
agreement with Philippine Geothermal. The interim agreement provided for
Philippine Geothermal to continue operations in Tiwi and Makban in accordance
with the terms of the expired contract pending resolution of the dispute. In
November 1997, the ICC arbitral tribunal issued an interlocutory order that
required the parties to continue implementing the interim agreement until the
dispute was settled.

Prior to January 2001, our case before the ICC was dismissed without
prejudice and a joint motion to suspend the proceedings was filed by the
parties in the Supreme Court. However, Philippine Geothermal indicated that it
planned to revive the arbitration case and to demand payment for damages of
US$600 million. Depositions of Philippine Geothermal's witnesses were taken in
November 2001 in Los Angeles, California. As of July, 2002, we and Philippine
Geothermal were negotiating a settlement of the dispute while the court cases
continued to be suspended.

On March 17, 2003, we signed a compromise agreement with Philippine
Geothermal pursuant to which both parties agreed to a transition period
followed by a new geothermal sales contract. Under the new contract, payments
will be based on actual steam generated. However, the contract will not go into
effect until we obtain approvals from the Supreme Court, the Commission on
Audit, and other Government agencies.

Claims by Electricity Distribution Cooperatives

Certain electricity distribution cooperatives in the Philippines commenced
legal action against us in 1984. They comprised the Ilocos Norte Electric
Company, some members of the Federation of Electric Cooperatives of the
Philippines and the Agusan del Norte Electric Company. They alleged that, in
breach of our Charter, we calculated power rates such that increases in fuel
prices and interest on foreign loans were wrongfully passed on to them. They
claimed reimbursement for overpayments by them for power supplied in 1984.
These cases are pending a decision from the ERC. The electricity cooperatives
have not petitioned for a specific amount, but they have introduced evidence to
allege a claim for (Peso)6.0 billion representing overpayments as of 1990. We
have filed a demurrer with the ERC against the claims of the cooperatives.

Other Proceedings

We are also involved in other legal or administrative proceedings of a
nature considered typical of our business, including litigation related to
rates charged to customers, expropriation of properties and rights-of-way for
our generation and transmission projects, and contractual claims. In addition,
the Presidential Anti-Graft Commission in the Philippines is in the process of
investigating former NPC President and current NPC senior Vice-President Roland
Quilala, former Transco President Asisclo Gonzaga, former NPC Corporate
Secretary Alberto Pangcog and former regional project manager Marcelino
Abesamis in connection with charges of corruption involving a contract between
NPC and an independent power producer. Mr. Gonzaga, Mr. Pangcog and Mr.
Abesamis have since retired. Because of the nature of these proceedings, we are
not able to predict the ultimate outcomes of these proceedings, some of which
may be unfavorable to us. However, we do not expect the outcome of these
proceedings, either individually or in the aggregate, to have a material
adverse effect on our financial position or results of operations.

Debt

Domestic Debt

Our domestic debt consists of obligations due to the Philippine Government
and its Agencies and borrowings under short-term credit facilities with
maturities of one year or less. As of December 31, 2002, we had outstanding
domestic debt of (Peso)7.3 billion.

External Debt

The following table sets out our principal repayment schedule for the total
amount of our committed external funded debt as of March 31, 2003.

Committed External Funded Debt/(1)/

US Japanese Other
Year of Maturity Dollars Yen/(2)/ Currencies/(2)/ Total
---------------- -------- -------- -------------- --------
(in millions of dollars)

2003-2006......... $1,076.5 $ 675.9 $627.3 $2,379.7
2007.............. 172.6 135.8 15.2 323.6
2008-2012......... 2,785.8 934.8 51.8 3,772.3
2013-2017......... 583.9 412.7 47.8 1,044.3
Thereafter........ 356.5 697.2 74.8 1,128.4
-------- -------- ------ --------
Total........... $4,975.2 $2,856.3 $816.8 $8,648.3
======== ======== ====== ========
% of External Debt 57.5% 33.0% 9.4% 100%
======== ======== ====== ========

- --------

(1) Excludes our capital lease obligations which, as of March 31, 2003, were
(Peso)27.8 billion (current portion) and (Peso)597.1 billion (long term
portion). Of our $8.6 billion in total committed external debt,
approximately $7.9 billion was outstanding as of March 31, 2003.

(2) We have converted amounts payable in currencies other than the US dollar to
US dollars using the Bangko Sentral reference exchange rates as of March
31, 2003. The exchange rates used include the following: (Peso)53.53200 =
$1.00, $0.008350 = 100 Japanese Yen, $0.551531 = 1 Deutsche Mark, $0.730514
= 1 Swiss Franc, $1.078 = 1 Euro, $0.164447 = 1 French Franc, $1.5737 = 1
Pound Sterling, $77.323700 = Kuwaiti Dinar, and $0.000794 = 100 Korean Won.

We currently do not hedge foreign exchange exposures in our business or
financing operations. As of March 31, 2003, approximately 58% of our external
debt was denominated in US dollars and approximately 33% was denominated in
Japanese yen. At such date, we had approximately $8.6 billion in committed
facilities from foreign lenders, of which approximately $7.9 billion was
outstanding. Substantially all of our foreign debt is guaranteed by the
Government as to the payment of interest or principal or both.

We believe that we have a good relationship with our principal lenders,
namely the World Bank and the Asian Development Bank. As of March 31, 2003, we
had approximately $826.2 million in loan commitments from the World Bank, of
which approximately $543.2 million was outstanding, and we had approximately
$1.4 billion in loan commitments from the Asian Development Bank, of which
approximately $733.8 million was outstanding.

Return on Rate Base Covenants

We are required under loan agreements with lenders such as the World Bank,
Asian Development Bank, Kreditanstalt fur Wiederaufbau ("KFW") and the
Export-Import Bank of Japan (now called the Japan Bank of International
Cooperation ("JBIC")) to achieve a minimum return on rate base of either 7% or
8% in our operating results. The return on rate base, according to the "Lender
Formula" as set out in our agreements with these lenders, is calculated as our
net operating income divided by the average current net value of fixed assets
in operation at the beginning and end of the relevant period.

In addition, we calculate our return on rate base according to the "Charter
Formula" as set out in our current charter, which is the formula used to
determine compliance with the Electric Power Crisis Act of 1993. The difference
between the Lender Formula and Charter Formula is that the rate base under the
Charter Formula includes two months of the average monthly working capital for
each year. Inclusion of such working capital is not required under the Lender
Formula. There are slight variations in computing the Lender Formula under our

various loan agreements. For example, the World Bank and the Asian Development
Bank have agreed that we may exclude from the rate base the plant assets
acquired through build-operate-transfer contracts and under capital lease
arrangements. This adjustment effectively increases the calculated return on
rate base. No such agreement is in place with respect to other lenders.

Our return on rate base in 2001 was 2.89% under the Lender Formula and 2.74%
under the Charter Formula. This compares to our return on rate base in 2002 of
0.22% under the Lender Formula and 0.21% under the Charter Formula. The
permitted level of our power rates is a key factor in enabling us to meet our
minimum return on rate base under the Lender Formula. Conversely, in setting
power rates we must ensure that our return on rate base under the Charter
Formula does not exceed the maximum permissible return of 12% stipulated under
the Electric Power Crisis Act.

We satisfied the minimum return on rate base requirement in 1983, 1984,
1985, 1994 and 1996. Accordingly, we were in breach of the return on rate base
covenants contained in certain loan agreements in 1986 through 1993, 1995 and
1997 onwards. We have obtained waivers or amendments to loan agreements with
respect to such breaches from some of our lenders. Certain other lenders, who
have not provided us with waivers or amendments to such loan agreements, have
continued to provide us with financing notwithstanding our defaults. We expect
our return on rate base to continue to be below the 7% or 8% level required by
the terms of many of our outstanding foreign loans for the foreseeable future.
This will result in continued return on rate base covenant defaults under a
number of our foreign loans. As a result of such defaults, we intend to
continue to request waivers of these defaults from the relevant lenders. We
obtained waivers from all of our lenders with respect to the return on rate
base covenant default for 1997, 1998, 1999 and 2000. With respect to our return
on rate base covenant defaults in 2001, we have received a waiver from the
Asian Development Bank. Also, effective in 2000 we agreed with the World Bank
to delete the return on rate base covenant from our loan agreements with them.
On May 6, 2002, we received a waiver from the Asian Development Bank with
respect to our return on rate base covenant in all relevant agreements with
them. We have not received waivers from JBIC or KFW for our return on rate base
covenant defaults in 2001 or 2002. While we have been able to obtain waivers
from our lenders in the past, there can be no assurance that our lenders will
grant such waivers in the future.

Debt Service Covenants

We face significant cash requirements to fund debt repayments. As of March
31, 2003, our total external debt amounted to $8.6 billion, and such
liabilities are expected to continue to grow as a result of our substantial
borrowing program. Debt service cost for these loans amounted to (Peso)55.7
billion in 2002. We paid (Peso)30.6 billion in debt service costs in 1999,
(Peso)47.4 billion in 2000 and (Peso)41.3 billion in 2001.

The peso's depreciation over the past several years has resulted in a
substantial increase in our outstanding debt as reported in our financial
statements and has increased our debt service costs. A number of our loan
agreements contain provisions that prohibit us from incurring additional debt
unless a reasonable forecast of our revenues and expenses shows that estimated
revenues, during the term of the debt, will be at least 1.3 times the debt
services requirements. Similarly, other loan agreements require us to maintain
internal cash generation of at least 1.3 times our debt service requirements.

In 2000, 2001 and 2002, we did not satisfy the minimum debt service
covenants in our loan agreements with the Asian Development Bank, the World
Bank, KFW and JBIC. On January 23, 2002, we submitted written letters
requesting a waiver of the covenant to the Asian Development Bank and the World
Bank. On May 6, 2002, we received a waiver from the Asian Development Bank in
which they agreed to waive our debt service covenants from our existing loan
agreements upon the granting of the concession contract to an experienced
private operator who will finance, operate, expand, maintain and manage the
transmission facilities that we will transfer to Transco upon completion of the
privatization of our transmission facilities. We are required to meet a 1.0
times debt service coverage ratio until granting of the concession. After the
granting of the concession,

PSALM will be required to maintain a debt service coverage ratio of 1.0 times
and Transco will have to maintain a debt service coverage ratio of 1.0 times
until 2008 and 1.3 times after 2008. With respect to JBIC, we submitted a
letter on May 2, 2002 requesting a waiver of covenants that will allow us to
incur additional indebtedness in 2002. We have yet to receive a response to
this request. Since JBIC has indicated it will not include any waivers of
covenants in its debt transfer documents, we submitted a draft letter
requesting a separate waiver in November 2002, but have not yet received a
response. We have not yet received a response from the World Bank with respect
to our request for a waiver of our 2001 debt service covenants, and have not
requested or received a waiver for our 2002 violations of those covenants.
However, the World Bank has agreed to amend such covenants on the date of
transfer of our debt so that PSALM shall only be required to maintain a debt
service coverage ratio of 1.0 times. The new covenants for Transco are under
negotiation. We have not requested and have not received waivers for our 2001
and 2002 debt service covenant violations with KFW. However, KFW has agreed to
reduce our debt service coverage ratio to 1.0 times upon transfer of our assets
to Transco. Because we have not received waivers of our debt service covenants
from all of our lenders we are technically restricted from incurring additional
debt under those agreements. Thus, our 2002 debt issuances violated such
agreements and our 2003 debt issuances, including the debt being offered
hereby, will violate such agreements.

Restrictions on Transfer Covenants

Pursuant to our privatization, we are transferring to PSALM, to the extent
possible, all of our assets and our debt obligations under approximately 140
loan agreements and ten bond issues. The documentation relating to these loan
agreements and bonds (together, the "Documents") contain a number of provisions
that restrict the privatization. These can be broadly categorized as (i)
provisions restricting the assignment/transfer of our debt obligations under
the relevant Documents to PSALM, (ii) covenants restricting our ability to
transfer our generation and transmission assets to PSALM, and therefore also
restricting PSALM's ability to sell such assets to private investors and (iii)
project specific covenants relating to the construction and operation of
particular projects, which the relevant creditors have funded. As a result, we
will need consents from our lenders to either waive any defaults or amend these
provisions in the Documents to allow for the transfer of our assets and
liabilities to PSALM. We are currently in the process of obtaining each of the
consents necessary to allow us to transfer our assets and liabilities to PSALM.
Such consents will have to be obtained from creditors including public
bondholders, commercial banks and bilateral and multilateral creditors and
bondholders. Approximately 90% of our commercial lenders, which together
account for approximately 15% of our debt, have approved the transfer of debt
to PSALM. We plan to prepay the outstanding amounts of our other commercial
lenders. In addition, we conducted an exchange offer for our outstanding Yankee
bonds and we will be conducting a consent solicitation for our outstanding
Eurobonds. We received tenders in the exchange offer representing approximately
98.6% of the principal amount outstanding. To the extent that consents for the
transfer of certain assets and liabilities cannot be obtained, such assets and
liabilities will remain with us. Such assets will remain on our balance sheet,
and such liabilities will be treated as stranded debt.

Other Covenants

Certain of our older loan agreements with the World Bank contain covenants
which required us to form an entity to hold our transmission facilities by
March 1997 and to submit a proposal to the Energy Regulatory Board to implement
various tariff reforms by October 1996. We did not comply with these covenants,
and there can be no assurance that the World Bank will not take action to
enforce its rights with respect to this non-compliance.

In addition, in connection with the issue of bonds by the Government in 1992
as part of its and our debt restructuring program, we made certain cash
advances to the Bureau of the Treasury that may give rise to potential claims
of breach of covenant that restrict our ability to secure debt. We obtained
waivers for those cash advances from some, but not all, of the banks that are
parties to the relevant agreements.

Possible Consequences of Breach of Debt Service Covenants

A number of our loan agreements and other debt instruments contain
provisions that allow lenders to declare a default because of our covenant
violations and accelerated repayment of indebtedness under those agreements

or instruments. In addition, a number of our loan agreements contain
cross-default provisions which provide the lenders the right to demand
repayment of their loans if we are in default under other loan agreements. To
date, we have not experienced any demand for early repayment as a result of
acceleration of any of our loans or withholding of further advances as a result
of any of the defaults or potential defaults described above.

To the extent that any lender declared a default because of our covenant
violations and accelerated repayment of indebtedness, we may not be able to
meet such repayment obligations. The consequences of us not meeting a repayment
obligation in this situation would most likely lead to cross defaults under our
other outstanding debt obligations and calls for the Government to satisfy its
guarantee obligations on such indebtedness.

Debt Record

We have not defaulted on the payment of principal or interest on any of our
external debt within the past 20 years.

Payment Obligations to the Government

Dividend Payments

Our current charter requires us to use our profits to fund our capital
expenditures, subject to the Philippine law requirement that 50% of all annual
profits earned by Government corporations be paid to the Government as a
dividend in the form of cash or stock. Prior to 1995, we declared all such
dividends in stock and used the cash generated from net income to fund our
capital expenditures. From 1995 through 1997, the Government required us to pay
a portion or all of such dividends in cash. In 1997, we agreed with the
Government that we would pay cash dividends with respect to net income for 1995
and 1996 aggregating (Peso)945 million, representing approximately 10% of net
income for each of those years. In addition, we made an advance payment of
(Peso)1.5 billion, representing 50% of our estimated net income for 1997. We
had a cash deficit and suffered a net loss from 1998 to 2002, and did not pay
any cash dividend to the Government for those years. We do not expect to pay
any dividend in 2003 or in any subsequent year until our financial performance
improves.

Guarantee Fees

As with other Government corporations, we are required to pay a fee to the
Government for its guarantee of our loans and other borrowings. This fee is
currently set at 1.0% per year on the amount of outstanding loans or
borrowings. As of December 31, 2002 we owed the Government guarantee fees
amounting to (Peso)0.43 billion.

Tax Status

General

Subject to the Bureau of Internal Revenue ruling dated May 13, 2002 (see "--
Taxes Related to Our Privatization") we are exempt from Philippine income tax
pursuant to our current charter. However, we pay certain other taxes and
duties, including taxes and duties on imports funded by cash generated from our
operations and by commercial bank loans, as well as on interest income and
imports of coal and oil. In addition, we are subject to local government taxes.

Taxes Related to Our Privatization

We requested a ruling from the Bureau of Internal Revenue with respect to
the tax implications of our privatization. The BIR ruling affirmed that we
would not be taxed on the transfer of our assets or liabilities to PSALM and
Transco. On May 13, 2002, the BIR ruled that:

. PSALM is not liable for income tax or value-added tax on the sale of its
generation assets; however, the sale of real property by PSALM is subject
to documentary stamp tax;

. the tax consequences of the proceeds and concession fees to be received by
Transco from the award of the concession to a qualified concessionaire (or
concessionaires) will depend on the specific terms and conditions of the
concession contract;

. the Universal Charge collected by either the distribution utilities or
PSALM will not form part of their taxable income; and

. interest arising from our loans transferred to PSALM is exempt from income
tax.

Taxes and Duties on Local Petroleum Product Purchases

Prices of petroleum products paid by us to local petroleum products
suppliers include taxes and custom duties. However, we may claim refunds for
such taxes and custom duties by filing a claim with supporting documentation to
the Bureau of Internal Revenue or the Bureau of Customs. If these revenue
agencies validate our refund claims, they will issue refunds to us in the form
of tax credit certificates. We may use these certificates to settle our taxes
and other payables to the Government such as import duties, Government advances
or loan guarantee fees. Since 1992, the Government has not paid a substantial
portion of the tax refunds owing to us or permitted us to use a substantial
amount of tax credit certificates. As of December 31, 2002, we had
approximately (Peso)5.3 billion of unpaid tax and duty refund claims and
(Peso)689 million of unutilized tax credit certificates.

Management and Employees

Pursuant to the Electric Power Crisis Act of 1993, we were reorganized into
five regional profit centers allowing for greater control and monitoring of
regional operations and greater productivity. The regions correspond to the
major geographical regions in which we operate, namely Luzon (which is itself
broken down into Metro Manila, Northern Luzon and Southern Luzon), Visayas and
Mindanao. Our reorganization was completed in 1994 and there have been no
changes to our organization since the completion of our reorganization in 1994.
In addition, we developed a scheme whereby employees of the regional profit
centers would be entitled to bonuses based upon the performance of the center
over a one-year period.

Effective February 1, 2003, Roland S. Quilala was replaced by Rogelio M.
Murga as President and Chief Executive Officer.

Board of Directors

Our Board members are as follows:

Name Position
- -------------------------- ---------------------------------------------------------

Jose Isidro N. Camacho.... Chairman, Secretary of the Department of Finance
Vincent S. Perez.......... Vice-Chairman, Secretary of the Department of Energy
Rogelio M. Murga.......... Member, President and CEO of NPC
Emilia T. Boncodin........ Member, Secretary of the Department of Budget and
Management
Luis P. Lorenzo........... Member, Secretary of the Department of Agriculture
Elisea G. Gozun........... Member, Secretary of the Department of Environment and
Natural Resources
Romulo L. Neri............ Member, Director General of the National Economic and
Development Authority
Jose D. Lina.............. Member, Secretary of the Department of Interior and Local
Government
Manuel S. Roxas........... Member, Secretary of the Department of Trade and
Industry
Victor Gaudencio C. Garcia Corporate Secretary

The business address of each member is Quezon Avenue, corner of Agham Road,
East Triangle, Diliman, Quezon City, Metro Manila, Philippines.

Management Committee

As of February 14, 2003, our management committee is as follows:

Name Position
- -------------------------------- ------------------------------------------------------

Atty. Victor Gandencio C. Garcia Corporate Secretary (Department Manager)
Josefina C. Montero............. Department Manager, Accounts Division
Juan Carlos J. Guadarrama....... Vice President Logistics
Pio J. Benavidez................ Senior Vice President, Generations and Watershed, Dams
and Flood Forecasting Management
Melburgo S. Chu................. Vice President, Hydro Generation
Reynaldo J. Santiago............ Vice President, Geothermal Generation
Dr. Eduardo R. Eroy............. Vice President, Thermal Generation
Dr. Pasayud M. Macarambon....... Vice President, Mindanao Generation
Silvano C. Zanoria.............. Senior Vice President, Missionary Electrification and
Technical and Maintenance Services
Lorenzo S. Marcclo.............. Vice President, Small Power Utilities Group
Danilo Sedilla.................. Vice President, Technical and Maintenance Services
Roland S. Quilala............... Senior Vice President, Corporate Sales
Froilan A. Tampinio............. Vice President, Sales and Services
Edmund P. Anguluan.............. Vice President, Finance, Human Resources and
Administration
Atty. Rainier B. Butalid........ Vice President, Office of the General Counsel
Oscar C. Lorico................. Head, IPP Contracts Management

Employees

We have three employee associations: a union of rank-and-file employees, an
association of supervisors, and an association of executives. Although
membership is voluntary, almost all our employees belong to one of the
associations. We have never experienced a serious dispute with any employee
association.

The privatization of the industry has affected all of our employees. On
November 18, 2002, our Board of Directors passed a restructuring plan which
substantially reduced our workforce in early 2003. In line with our
restructuring plan, on February 28, 2003, we terminated our entire workforce of
11,182 employees. We have rehired approximately 3,800 of these employees to
work for us, while 3,714 have been rehired to work for Transco and 29 to work
for PSALM.

As a result of our privatization, we have agreed to provide our employees
with a separation package. Under the separation agreement, in addition to
receiving a separation package, each employee will be entitled to 1.5 months of
salary for every year of service with us. We expect the total cost of
separation pay to be approximately (Peso)11.8 billion, all of which will be
paid by us. We have begun to pay these separation benefits. The separation
agreement also provides that each employee, depending on their expertise, will
be transferred to one of the privatized companies under a short-term employment
contract. Upon the expiration of their short-term contract, each employee will
have the opportunity to re-negotiate their terms of employment with their
private sector employer.

ELECTRIC POWER INDUSTRY RESTRUCTURING AND PRIVATIZATION

Electric Power Industry Reform Act of 2001

Overview

The Government has a general policy to privatize Government corporations and
established the Committee on Privatization to implement its privatization
program. The Government plans to restructure and privatize the Philippine power
industry with a view to achieving three primary objectives:

. the transfer of the power sector from public to private ownership;

. introduction of competition to the power generation and transmission
sector; and

. introduction of a stable regulatory framework for the electric power
industry.

Republic Act 9136 was signed into law by President Gloria Macapagal-Arroyo
on June 8, 2001 and became effective on June 26, 2001. Officially named the
Electric Power Industry Reform Act of 2001 (the "Act"), it was the first major
legislation to be passed under the Arroyo administration. Its stated purposes
are:

. to ensure and accelerate the total electrification of the country;

. to ensure quality, reliability, security and affordability of the supply
of electric power;

. to ensure transparent and reasonable prices of electricity in a regime of
free and fair competition and full public accountability to achieve
greater operational and economic efficiency and enhance the
competitiveness of Philippine products in the global market;

. to enhance the inflow of private capital and broaden the ownership base of
the power generation, transmission and distribution sectors;

. to ensure fair and non-discriminatory treatment of public and private
sector entities in the process of restructuring the electric power
industry;

. to protect the public interest against unreasonable increases in the rates
and unreliable services by electric utilities and other providers of
electric power;

. to assure environmentally safe energy sources and infrastructure;

. to promote the utilization of indigenous and new and renewable energy
resources in power generation in order to reduce dependence on imported
energy;

. to provide for an orderly and transparent privatization of our assets and
liabilities;

. to establish a strong and purely independent regulatory body and system to
ensure consumer protection and enhance competitiveness in the electricity
market; and

. to encourage the efficient use of energy to meet electricity demand.

The passage of the Act along with the satisfaction of additional conditions
precedent, will facilitate the release of up to an additional $950 million in
loans from multilateral agencies. Approximately $550 million of these loans is
expected to be used for various interconnection projects, while the remaining
$400 million is expected to be used by us and by the Government for its
budgetary purposes.

Implementing Rules and Regulations

The IRRs were promulgated under the authority of the DOE to formulate, in
consultation with relevant government agencies, electric power industry
participants, non-government organizations, end-users and consumers, such rules
and regulations as may be necessary to implement the objectives of the Act and
pursuant to the exercise of such other powers as may be necessary or incidental
to attain the objectives of the Act. The IRRs govern the relations and
responsibilities of the electric power industry participants and governmental
authorities, including the DOE, NPC, NEA, ERC and PSALM. On February 27, 2002,
the Joint Power Commission approved and signed the IRRs. The IRRs set out,
among other things, the responsibilities of each government entity involved in
implementing the structural reforms for the power industry in the Republic.

Pursuant to the IRRs, the DOE is assigned the task of supervising the entire
power industry restructuring process. Under the IRRs, the DOE must prepare and
update the Philippine Energy Plan ("PEP") and the Philippine Power Development
Program ("PDP"). The PEP must include a policy direction towards privatization
of government agencies related to energy, and must include the implementation
of the Act. The PDP must be developed and integrated with the PEP, and must
consider and integrate plans for the transmission, generation and distribution
sectors of the electric power industry. The DOE must also integrate the
transmission development plan, prepared by Transco, with the PEP and the PDP.

The ERC has the responsibility to promote competition, encourage market
development, ensure customer choice, and penalize abuse of market power in the
electric power industry. The ERC will set transmission and distribution
wheeling charges and retail electricity rates, including the Universal Charge
to be imposed on all electricity end-users, subject to certain exceptions which
we do not expect to be material to us. The IRRs also require the ERC to perform
all other regulatory functions necessary to ensure the successful restructuring
and modernization of the electric power industry. In particular, the ERC must
implement rules and guidelines requiring generation companies and distribution
utilities to offer no less than 15% of their common shares to the public before
the end of 2006.

The IRRs also include, in pertinent part:

. an exemption for four years from the Universal Charge for households,
hospitals and other medical facilities that have their own power
generating facilities;

. the elimination of value-added tax on the sale of electricity; and

. the reaffirmation that our power supply contracts with distribution
utilities and electric cooperatives will be respected.

Proposed Amendments to the Act

On May 21, 2002, a bill to amend various provisions of the Act was
introduced in the Senate by members of the majority party, which supports the
Arroyo administration. This bill, if passed, would, among other things:

. grant the power of eminent domain to the buyer or concessionaire of our
transmission business;

. clarify that the Universal Charge would not be imposed on electricity
output produced by a self-generation facility owned and operated by an
end-user solely for its own consumption;

. exempt certain of our customers from imposition of the PPA, and create a
ceiling of (Peso)0.42 per kWh on the Universal Charge;

. clarify that we, PSALM, Transco and any other entity created to privatize
NPC's assets, will not be subject to national taxes, charges, fees and
other assessments arising from the privatization of such assets

(see "National Power Corporation -- Payment Obligations to the Government
-- Tax Status -- Taxes Related to Our Privatization");

. extend the life of PSALM from twenty-five years to thirty-five years; and

. clarify that the Republic may guarantee the payment of obligations assumed
by PSALM from us and that such guarantee should not count against the
maximum amount that the Government is authorized to guarantee under
existing laws.

The majority party's bill to amend the Act is currently pending in Congress.

The minority party in the Senate has also introduced legislation which
differs in significant respects from the majority party's bill, including
provisions which would reduce, and in some cases eliminate, the Universal
Charge. Although we expect an amendment to the Act to be passed at some time in
the future, we cannot predict the final form of the amendment, nor can we
predict its effects on the privatization or our results of operations.

Legal Challenges to the Act

A group of non-governmental organizations filed a petition with the
Philippine Supreme Court questioning the constitutionality of certain
provisions of the proposed Act even before the Act became law. After the Act's
enactment, these organizations filed a motion to amend their petition, but
their motion was not acted on by the Philippine Supreme Court.

We are also subject to a class action lawsuit, led by a former Senator,
which challenges the constitutionality of certain provisions of the Act.
Specifically, the plaintiffs are seeking nullification of Section 34 of the
Act, which gives us the power to impose the Universal Charge. We believe this
lawsuit is without merit and will be dismissed.

Restructuring of the Electric Power Industry

Our reorganization will occur through a restructuring of the electric power
industry, including the creation of a new regulatory framework, the setting up
of certain transition mechanisms to minimize economic dislocation and the
establishment of various open market devices to promote free and fair
competition. For a discussion of the transition mechanisms, see "-- Open Market
Devices."

The following chart shows the existing structure of the electric power
industry.

Existing Industry Structure

[FLOW CHART]

Our Plants Independent
Power Plants

Transmission System (Operated by Us)

Distributors

Large Users Consumers

The Act divides the electric power industry into four sectors including
generation, transmission, supply and distribution. The generation and supply
sectors will be competitive while the transmission and distribution sectors
will remain regulated. The following diagram shows the new structure of the
electric power industry as required under the Act.

Proposed Industry Structure

[FLOW CHART]

DOE = Department of Energy
DUs = Distribution Utilities
ECs = Electricity Cooperatives
ERC = Energy Regulatory Commission
GENCOs = Any entity authorized by the ERC to operate facilities to generate electricity
JCPC = Joint Congressional Power Commission
NEA = National Electrification Administration
NPC = National Power Corporation
PUs = Production Utilities
SPUG = Small Power Utilities Group
Transco = National Transmission Corporation
WESM = Wholesale Electricity Spot Market

Organization and Operation of the Power Industry

Overview

The Act provides a framework for the organization and operation of the
electric power industry in connection with its restructuring. It mandates that
the industry be divided into four sectors, and provides rules for each sector.
These four sectors are:

. Generation. The Act states that power generation is not to be considered
a public utility operation. Thus, generation companies are not required to
secure a national franchise, and there are no restrictions on the ability
of non-Filipinos to own and operate generation facilities. These companies
must, however, obtain a certificate of compliance from the ERC, and they
will be subject to the ERC's rules and regulations on abuse of market
power and anti-competitive behavior. Once open access rules are
promulgated, retail prices charged by generation companies will be
determined by competition and the prices charged by generation companies
for the supply of electricity will not, as a general rule, be subject to
regulation by the ERC.

. Transmission. Our privatization will involve the transfer of our
electricity transmission function to Transco. See "Power Sector Assets and
Liabilities Management Corporation -- Privatization Mechanisms -- Transfer
of Our Transmission Assets to Transco" for a discussion of the timing and
mode of transfer of our transmission assets to Transco.

Transco will act as the system operator of the nationwide electrical
transmission and sub-transmission system. Transco's principal function is
to ensure and maintain the reliability, adequacy, security, stability and
integrity of the nationwide electrical grid in accordance with the
Philippine Grid Code. Transco will provide open and non-discriminatory
access to its transmission system, at rates regulated by the ERC, to all
electric power industry participants.

. Distribution. The distribution of electricity to end-users will be a
regulated common carrier business requiring a national franchise from the
Philippine Congress. However, with respect to cooperatives, responsibility
for the approval, renewal and cancellation of their franchises shall
remain with the NEA for five years from enactment of the Act. Distribution
of electric power to all end-users may be undertaken by private
distribution utilities, cooperatives, local government units presently
undertaking this function, and other duly authorized entities, subject to
regulation by the ERC.

Distribution utilities will have the obligation of providing distribution
services and system connections for any end-users within its franchise
area consistent with the Philippine Distribution Code. They must provide
open and non-discriminatory access to the distribution system to all end
users. Distribution utilities will be entitled to impose and collect
distribution wheeling charges and connection fees from such end-users as
approved by the ERC.

. Supply. Supply of electricity means the sale of electricity by a party
other than a generator or a distributor in the franchise area of a
distribution utility using the wires of such distribution utility. As with
electricity generators, suppliers do not have to obtain a local or
national franchise but must secure a license from the ERC and will be
subject to the rules and regulations to be promulgated by the ERC
regarding abuse of market power and other anti-competitive or
discriminatory behavior.

Creation of the New Regulatory Framework

Creation of the ERC

The Act created the ERC, an independent, quasi-judicial regulatory body to
promote competition, encourage market development, ensure customer choice, and
penalize abuse of market power. The ERC is composed of a chairperson and four
members to be appointed by the President.

Among the ERC's key functions are to:

. enforce the IRRs and the Act;

. promulgate and enforce a National Grid Code and a Distribution Code which
will include, among others, performance and financial capability standards;

. enforce the rules and regulations governing the operations of the
Wholesale Electricity Spot Market (see "-- Open Market Devices --
Wholesale Electricity Spot Market");

. determine the level of cross-subsidies in the existing retail rate until
the cross-subsidies are removed;

. amend or revoke, after due notice and hearing, the authority to operate of
any person which fails to comply with the Act, the IRRs, or any of its
orders or resolutions;

. establish and enforce a methodology for setting transmission and
distribution wheeling rates and retail rates for the captive market of a
distribution utility;

. exercise original and exclusive jurisdiction over all cases contesting
rates, fees, fines and penalties imposed by the ERC;

. oversee certain regulatory aspects of Transco's operations;

. set a lifeline rate for marginalized end-users;

. monitor and penalize abuse of market power, cartelization, and
anti-competitive or discriminatory behavior by any electric power industry
participant;

. grant, revoke, review, or modify certificates of public convenience and/or
necessity, licenses or permits of franchised electric utilities;

. act on applications for cost recovery and return on demand-side management
projects; and

. ensure generally the successful restructuring and modernization of the
electric power industry.

On October 7, 2002, ERC Commissioner Leticia Ibay was appointed as acting
ERC chairperson. She replaced Fe Barin, who was appointed to the Monetary Board
after a five-year term at the head of the energy regulatory agency. We cannot
predict what effect the appointment of a new ERC chairperson may have on the
ERC's policies and rulings. See "National Power Corporation -- Power Rates --
Recent Reduction in Basic Rates and the PPA."

Role of the DOE

In addition to its existing powers and functions, the DOE is mandated by the
Act to supervise the restructuring of the electric power industry. Under the
Act, the DOE shall:

. formulate policies for the planning and implementation of a comprehensive
program for the economical use of energy;

. prepare and update annually the PEP and the PDP, and integrate the PDP
into the PEP;

. ensure the reliability, quality, and security of supply of electric power;

. exercise supervision and control over all government activities pertaining
to energy projects;

. encourage private investments in the electricity sector and promote
development of indigenous and renewable energy sources for power
generation;

. facilitate reforms in the structure and operations of distribution
utilities for greater efficiency and lower costs;

. promote incentives to encourage industry participants, including new
generating companies and end-users, to provide adequate and reliable
electric supply;

. undertake (in coordination with us, the ERC, NEA and the Philippine
Information Agency) a campaign to educate the public on the restructuring
of the electricity sector and the privatization of our assets;

. establish the WESM in cooperation with the electric power industry
participants, and formulate rules governing its operations;

. create and facilitate free and active private sector participation and
investment in all energy activities;

. assist in the management of energy research and development programs for
the optimal development of energy production and utilization technologies;

. provide incentives, penalties, and other programs to encourage the
judicious and efficient use of energy;

. promote development of non-conventional energy systems and the
commercialization of their applications;

. ensure that the regions and localities which host energy resources and
generation facilities directly benefit from their resources and
facilities, to the extent that other regions and localities are not
deprived of their energy requirements; and

. encourage the widest possible public ownership of privately-owned energy
corporations.

Joint Congressional Power Commission

The Joint Power Commission, created under the Act, consists of 14 members
from the Senate and the House of Representatives. Under the Act, the Joint
Power Commission, pursuant to proposed legislation, shall:

. monitor and ensure the proper implementation of the Act;

. endorse PSALM's initial privatization plan for approval by the President;

. ensure transparency in public bidding procedures regarding the
privatization of our generation and transmission assets;

. evaluate the adherence of industry participants to the Act's objectives
and timelines;

. determine inherent weaknesses in the law and recommend necessary remedial
legislation or executive measures; and

. perform such other duties and functions as may be necessary to attain its
objectives.

Transition Mechanisms

Missionary Electrification

Notwithstanding the privatization of our assets and IPP contracts, we will
remain a Government owned and controlled corporation responsible for generating
and delivering power in areas that are not connected to the transmission
system. The missionary electrification function will be carried out through the
Small Power Utilities Group ("SPUG"), and will be funded with revenues from
missionary areas and from the Universal Charge.

Conversion of Electric Cooperatives

Electric cooperatives are given the option to convert either into a stock
cooperative under the Cooperatives Development Act or into a stock corporation
under the Corporation Code. PSALM will assume all outstanding financial
obligations of electric cooperatives to NEA and to other Government agencies
incurred for the purpose of financing the rural electrification program.
However, within five years of the assumption of debt, any electric cooperative
which transfers ownership or control of its assets, franchise, or operation
must repay PSALM the debt assumed, including accrued interest.

Universal Charge

The Act states that within one year from its effective date, the ERC shall
calculate and impose a Universal Charge on all electricity end-users. As of
December 1, 2002, the Universal Charge had not yet been imposed (apart from its
environmental charge component and with respect to missionary electrification)
pending the outcome of a lawsuit challenging the constitutionality of the
Universal Charge. See "Electric Power Industry Reform Act of 2001 -- Legal
Challenges to the Act." The Universal Charge is intended to:

. pay for stranded debt in excess of the amount assumed by the Government
and our stranded contract costs as well as qualified stranded contract
costs of distribution utilities resulting from the restructuring of the
industry;

. provide power generation and its associated power delivery systems to
areas that are not connected to the transmission system, also known as
missionary electrification;

. equalize the taxes and royalties applied to indigenous or renewable
sources of energy with those applied to imported energy fuels; and

. account for all forms of cross-subsidies (for a period not exceeding three
years).

Under the Act, the Universal Charge shall also include an environmental
charge equivalent to one-fourth of one centavo per kilowatt-hour
((Peso)0.0025/kWh) which shall accrue to an environmental fund to be used
solely for watershed rehabilitation and management. The environmental fund
shall be managed by us under existing arrangements. The environmental component
of the Universal Charge is currently being imposed.

The ERC has stated that the Universal Charge will not replace the GRAM, but
that there will be no double recovery. See "National Power Corporation -- Power
Rates -- Implementation of the GRAM and the ICERA."

Like the PPA and the GRAM, the Universal Charge has come under intense
public and political scrutiny. While the Arroyo administration recently
announced that as a matter of policy the Universal Charge would need to be
implemented, there is still opposition from various members of the legislative
branch and from the public as to any imposition of the Universal Charge. There
has also been legislation introduced by the opposition in the Senate that seeks
to reduce the maximum allowable rate of and in some instances remove, the
Universal Charge. It is unclear in what form the currently proposed legislation
will be passed. See "-- Electric Power Industry Reform Act of 2001 -- Proposed
Amendments to the Act". If the Universal Charge is significantly lower than the
amount necessary to cover the liabilities described above or if it is
eliminated, PSALM will need to rely on funding from other sources to continue
operations.

Stranded Costs

Our "stranded costs" consist of stranded debt and stranded contract costs.
Stranded debt refers to our debt obligations that will remain unpaid after the
disposal and transfer of our assets. Stranded contract costs refer to the
differences between the costs of electricity to us under existing supply
contracts and the actual market prices of electricity following our
privatization.

To pay for a portion of our stranded costs, as mandated by the Act, the
Government will directly assume up to (Peso)200 billion of our financial
obligations. We expect that our remaining stranded debt and stranded contract
costs will be recovered from all electricity end-users (with some minor
exceptions) through the Universal Charge. Under the Act, the recovery of
stranded costs shall be implemented over a period of 15 to 25 years, and the
ERC is to annually review the amount of the charge.

In particular, stranded contract costs of distribution utilities refer to
the excess of the contracted cost of electricity over the actual selling price
of the contracts in the market. Within a year of implementation of open access
to distribution wires, distribution utilities must file an application with the
ERC to recover their stranded contract costs. The ERC shall then determine the
reasonable amounts to be recovered, as well as the manner and duration of full
recovery of stranded costs. As with our stranded costs, the ERC shall conduct
an annual review of the reasonableness of the level of charges related to the
recovery of stranded costs.

Open Market Devices

The Act establishes the following open market devices to create a regime of
free and fair competition, to ensure full public accountability, and to achieve
greater economic and operational efficiency.

Wholesale Electricity Spot Market.

Under the Act, the DOE is required to establish the Wholesale Electricity
Spot Market ("WESM"), which WESM is expected to provide an efficient,
competitive, transparent, and reliable market for the sale and purchase of
electricity in the Philippines. The price of electricity determined under the
WESM will be used to value our assets during the privatization process.
Therefore, implementation of the WESM is an essential prerequisite to our
successful privatization.

In cooperation with electric power industry participants, the DOE is
required to formulate detailed rules for the WESM within one year of the Act's
effective date. These rules will provide a mechanism to set electricity prices
that are not covered by bilateral contracts between electricity buyers and
sellers. The price determination mechanisms will be subject to ERC approval.

The WESM will be implemented by a "market operator". The market operator
will include the DOE as well as equitable representation from electric power
industry participants. The market operator will initially fall under the
administrative supervision of Transco. Then, no later than one year after the
establishment of the WESM, an independent entity will be formed to take over
the functions, assets, and liabilities of the market operator.

A working group chaired by the DOE recently determined that an interim spot
market, which is intended to test WESM systems and procedures, educate energy
industry participants, and establish bid benchmarks, can be established. The
interim market is expected to be functioning by late June 2003. In October
2002, the PSALM Board of Directors approved the provision of financial and
project-management assistance to the DOE in establishing the interim market,
and approved the establishment of an electricity trading and risk management
group. PSALM has requested that the interim WESM and the trading group be
financed from a development project fund from Kreditanstalt fur Wiederaufbau
("KFW"). An endorsement from the Department of Finance and approval from KFW
are both necessary for the KFW funds to be used for the interim WESM. The
software and hardware systems for the interim market have been completed and
participant training is currently being undertaken. We currently expect the
WESM to begin operations during the fourth quarter of 2003 or as soon as is
otherwise practicable.

Retail Competition and Open Access

Retail competition and open access on distribution wires is expected to be
implemented no later than June 2004, subject to the following conditions:

. establishment of the WESM;

. approval of unbundled transmission and distribution wheeling charges;

. removal of cross-subsidies;
. privatization of at least 70% of the total capacity of our generating
assets in Luzon and Visayas; and
. transfer of the management and control of at least 70% of the total energy
output of power plants under contract with us to the IPP Administrators.
See "Power Sector Assets and Liabilities Management Corporation --
Privatization Mechanisms -- Transfer of Our Generation and Other
Disposable Assets to PSALM."

For electric cooperatives, retail competition and open access shall take
place not earlier than five years from the date the Act became effective.

Unbundling of Rates and Removal of Subsidies

The Act provides that our rates must be unbundled between transmission and
generation rates and that the rates shall reflect the respective costs of
providing each service. Inter-grid and intra-grid cross-subsidies for both the
transmission and generation rates must be removed in accordance with the Act.
Similarly, distribution utilities are required to file revised rates with the
ERC for their approval. The distribution wheeling charge will be unbundled from
the retail rate and the rates must reflect the respective costs of providing
each service. For both the distribution retail wheeling and supplier's charges,
inter-class subsidies will be removed in accordance with the Act.

In June 2002, the ERC, after reviewing our unbundling petition, denied our
request to revise our basic rates upwards by (Peso)0.17 per kWh and instead
ordered us to reduce our basic rates by (Peso)0.07 per kWh before the end of
September 2002. In its ruling issued in June, 2002, the ERC ordered us to file
an updated application detailing our most recent fuel and purchased power
costs. On September 6, 2002, after we had filed the required update, the ERC
ordered us to ignore the overall rate increase imposed in their June ruling and
to reduce the generation-related portion of our rates by (Peso)1.10 in Visayas,
(Peso)0.27 in Luzon and (Peso)0.40 in Mindanao. We filed a motion for
reconsideration of this order. However, in late September, 2002, our
transmission and generation rates were unbundled. In connection with this
unbundling, the ERC further lowered our generation rate in September 2002. In
April, 2003, we filed an application with the ERC to recover fuel and purchased
power costs under the GRAM. However, the generation rates the ERC set in May
2003, in response to our application, are significantly lower than the rates we
had requested, and we have filed for a motion for reconsideration of the
revised rates with the ERC. See "-- National Power Corporation -- Power Rates
- -- Implementation of the GRAM and the ICERA." In addition, on May 29, 2003, the
ERC promulgated new rules on transmission wheeling rates. While we cannot
predict our transmission rates under the new rates, we expect the revised
rates, which incorporate a performance-based rate setting methodology, will not
be materially different from our current transmission rates. See "National
Power Corporation -- Power Rates -- Recent Reductions in Basic Rates and the
PPA."

The Act states that cross-subsidies shall be phased out of the Universal
Charge over a period not exceeding three years from the establishment by the
ERC. However, the ERC may extend the period for the removal of cross-subsidies
for a maximum of one year if it determines there will be a material adverse
effect upon the public interest or an irreparable financial adverse effect on a
distribution utility.

The Act also provides for socialized pricing mechanisms to be set by the ERC
for low-income captive market end-users who cannot afford to pay the full cost
of electricity. These users will be exempt from the cross-subsidy phase for a
period of 10 years, unless extended by law.

Reduction of Taxes and Royalties on Indigenous Energy Resources

To equalize prices between imported and indigenous fuels, the Act mandates
that the President reduce the royalties, returns and taxes collected for the
exploitation of all indigenous sources of energy to effect parity of tax
treatment with existing rates for imported fuels. We believe that lower rates
for end-users will result from the ERC reducing the rates of power from all
indigenous sources of energy.

Cross-Ownership, Market Power Abuse and Anti-Competitive Behavior

The Act prohibits cross-ownership between generation companies or
distribution utilities, including related parties and interests, with Transco
or its concessionaires or their related parties or interests. Other safeguards
adopted to promote market competition include:

. No company or related group can own, operate or control more than 30% of
the installed generating capacity of a grid or 25% of the nationally
installed generating capacity.

. For the purpose of preventing market power abuse between associated firms
engaged in generation and distribution, no distribution utility is allowed
to source from bilateral power supply contracts more than 50% of its total
demand from an associated firm engaged in generation. This limitation does
not apply to contracts entered into prior to the effectivity of the Act.

. For the first five years from the establishment of the WESM, no
distribution utility may obtain more than 90% of its total demand from
bilateral power supply contracts.

Grids not connected to the high-voltage transmission system are exempted
from these restrictions.

De-Monopolization and Shareholding Dispersal in Distribution Utilities

The Act provides that, in compliance with the constitutional mandate for
dispersal of ownership and de-monopolization of public utilities, holdings in a
distribution utility and its respective holding companies cannot exceed 25% of
the voting shares of stock unless the utility, the company holding the shares,
or its controlling stockholders are already listed in the Philippine Stock
Exchange. However, those rules on de-monopolization and share dispersal will
not apply to electric cooperatives.

POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION

Overview

PSALM was formed on June 26, 2001 under Section 49 of the Act. In the
absence of a separate charter, the Act and the IRRs are PSALM's charter. As
such, the continuing existence and status of PSALM is a matter for legislative
action, and PSALM may be dissolved only by an act of Congress. PSALM's
principal executive offices are located at 2nd Floor, SGV II Building, Ayala
Avenue, Makati City, Metro Manila, Republic of the Philippines.

PSALM, which is wholly-owned by the Government, was created to manage the
orderly sale, disposition and privatization of our generation assets,
liabilities, contracts with IPPs, real estate, and other disposable assets.
PSALM's objective is to liquidate all of our financial obligations and stranded
contract costs in an optimal manner. To accomplish this, PSALM has, among
others, the following powers:

. to take title to and possession of our generation assets, and to sell or
dispose of these assets;

. to take title and possession of our IPP contracts, and to appoint
qualified independent entities ("IPP Administrators") to administer,
conserve, and manage contracted energy output;

. to restructure and assume our stranded debt;

. to liquidate our stranded contract costs; and

. to calculate the amount of our stranded debt and stranded contract costs
for use by the ERC in calculating the Universal Charge.

PSALM was funded through our internal cash generation for calendar years
2002 and will be so funded for calendar year 2003 pursuant to the General
Appropriations Act. Thereafter, PSALM will submit its own operating budget to
the Department of Budget and Management for approval. The approved budget will
be funded through its revenues, borrowings and proceeds received from the
privatization and disposition of assets.

Although there is a proposed amendment to the Act which would, among other
things, increase PSALM's term of existence to 35 years, under the current law,
PSALM's corporate existence is for 25 years. It is expected that by the end of
its term of existence PSALM will have sold or privatized all of our generation
assets, liabilities, contracts with IPPs and other disposable assets and will
have liquidated all of our financial obligations and stranded costs. After
PSALM's term of existence ends, any remaining assets and liabilities on PSALM's
balance sheet will be assumed by the Government.

Capitalization and Financial Matters

The capital structure of PSALM is mandated by the Act and will consist of
all of the assets transferred to PSALM from us and from the Government
including PSALM's initial budget of (Peso)87.4 million for 2001 and (Peso)429.1
million and additional contributions for our operating requirements of
(Peso)228 million for 2002. These transfers will be treated as equity
contributions from the Government on PSALM's opening balance sheet. Under the
Act, PSALM is also required to assume all of our liabilities, other than
stranded costs. These liabilities will be considered deferred assets to the
extent such liabilities exceed the total assets transferred to PSALM.

The assets of PSALM will comprise the following:

. our generation assets, real estate, IPP contracts, other disposable
assets, proceeds from the sale or disposition of our assets, and any
residual assets;

. transfers from the Government, including the (Peso)200 billion in assumed
liabilities which is expected to be transferred to PSALM annually in seven
annual installments beginning in 2004;

. proceeds from loans incurred to restructure or refinance our transferred
liabilities;

. proceeds from the Universal Charge allocated for our stranded costs and
stranded debts;

. revenues from plants which PSALM will continue to own;

. net profit from Transco;

. official assistance, grants and donations from external sources; and

. other sources of funds as may be determined by PSALM.

The liabilities of PSALM will comprise the following:

. our transferred liabilities;
. our stranded contract costs;
. liabilities transferred from the Government; and
. any newly incurred liabilities.

As Government owned and controlled corporations, we and PSALM are required
to adopt Philippine GAAS as implemented by COA, the official auditor for the
Government and all state-owned entities in the Philippines. However, in
preparation for the privatization of our assets, we engaged independent
accounting advisors to review our financial statements and the appropriateness
of our current accounting policies. Based on this advice, PSALM may decide to
prepare its financial statements in accordance with both GAAS and Philippine
GAAP. Philippine GAAP differs in certain significant respects from GAAS. As a
result, if PSALM decides to prepare its financial statements in accordance with
Philippines GAAP, PSALM will be required to make several adjustments to its
Philippine GAAS financial statements. These adjustments would significantly
reduce the value of our assets on a pro-forma basis for 2000, 2001 and 2002.

In addition, the realizable value of certain of our assets is lower than the
stated or book value of those assets. As a result, upon approval of COA we will
have to write-down the value of these assets, which may lead to a significant
reduction in the stated or book value of those assets. We also believe that
there are differences between our recorded assets and our actual physical
assets which have led to an overstatement of the value of our assets. As a
result, when these differences are reconciled, we will have to make downward
adjustments to the stated or book value of certain of our assets. We have not
firmly determined the amount of any Philippine GAAP adjustments for asset
write-downs, or when these changes would be made.

PSALM does not have as a public policy objective the maximization of
profits. However, PSALM must seek to maximize the value of all assets it sells.
All earnings of PSALM from the operation and sale of our transferred assets,
together with up to (Peso)200 billion from the Government, will be used to pay
the liabilities transferred to PSALM. The (Peso)200 billion infusion is
expected to be made in seven annual installments beginning in 2004. It is
expected that any shortfall between PSALM's earnings and payment obligations
will be offset by the Universal Charge.

Privatization Mechanisms

Transfer of Our Generation and Other Disposable Assets and Our Liabilities to
PSALM

PSALM Deed

Pursuant to Section 49 of the Act, which governs the transfer of our
existing generation assets, liabilities, IPP contracts, real estate and other
disposable assets to PSALM, a deed providing for this transfer (the "PSALM

Deed") was executed by our president and the president of PSALM on December 21,
2001. Section 5 of the PSALM Deed provides that the transfers of our assets and
the assumption of our liabilities will only take effect on the date at which
all the conditions precedent contained in the PSALM Deed are either fulfilled
or waived by the parties (the "PSALM Transfer Date").

Transfer of Assets.

The PSALM Deed provides for the transfer of all of our rights, titles and
interests regarding all of our generation facilities, leases, easements,
inventory, operating and power supply contracts, idle assets, and other
miscellaneous facilities. A complete inventory of what we are to transfer to
PSALM is contained in schedules attached to the PSALM Deed.

However, the PSALM Deed also provides that we will retain ownership over
certain assets, including (i) those assets that will be used by SPUG in
pursuing its missionary electrification function, (ii) certain real property to
be enumerated in the PSALM Deed, (iii) assets being transferred to Transco,
(iv) all IPP contracts, and (v) all of our assets that are used exclusively in
connection with electric generation facilities owned by IPPs or used in support
of our obligations to one or more IPPs.

To comply fully with the Act, IPP contracts will be transferred to PSALM as
soon as all the legal and financial issues have been resolved.

Assumption of Liabilities.

In addition, the PSALM Deed provides for the assumption by PSALM of certain
of our liabilities including loans, bonds and other debts (identified in
schedules attached to the PSALM Deed) as well as all liabilities and
obligations arising under operating and power supply contracts.

However, certain liabilities shall remain our sole responsibility and shall
be retained, paid, performed and discharged by us, including:

. any liability arising out of, or relating to, activities or services
occurring, or sold or otherwise provided prior to the PSALM Transfer Date;

. any liability under any operating contract transferred to PSALM that
arises out of or relates to any breach that occurred prior to the PSALM
Transfer Date;

. any liability under any contract or agreement not transferred to PSALM;

. any environmental, health and safety liability arising out of or relating
to the operation of our business, or our leasing, ownership or operation
of real property;

. any liability under employee plans or relating to payroll, vacation, sick
leave, worker's compensation, unemployment benefits, retirement and
pension benefits, separation benefits, employee stock option or
profit-sharing plans, health care plans or benefits or any other employee
plans or benefits of any kind for our employees or former employees or
both;

. any liability under any employment, severance, retention or termination
agreement with any of our employees;

. any liability arising out of our employee grievance procedure whether or
not the affected employee is subsequently hired by PSALM;

. any liability arising out of or that is the subject of any proceeding
pending as of the PSALM Transfer Date;

. any liability arising out of or that is the subject of any proceeding
commenced after the PSALM Transfer Date and arising out of or relating to
any occurrence or event happening prior to the PSALM Transfer Date; and

. any liability arising out of or resulting from our non-compliance with any
legal requirement or order of any governmental entity.

Conditions Precedent.

The transfer of our assets and the assumption of our liabilities will not
take effect until all of the conditions precedent outlined in the PSALM Deed
are either fulfilled or waived by us and PSALM.

One of the conditions precedent is that we and PSALM enter into an operation
and maintenance agreement. This operation and maintenance agreement will set
out the terms under which we will operate and maintain certain assets which are
transferred to PSALM before they are sold. Currently, we are still negotiating
the terms and conditions of the operation and maintenance agreement with PSALM.

Another condition precedent is that we and PSALM enter into assignment and
assumption agreements necessary to effectively transfer our rights and
obligations to PSALM arising under any contract, agreement, indenture, bond or
other instrument in accordance with the law governing such instrument.

It is also necessary that the conditions precedent in the Transco Deed be
fulfilled or waived so that the Transco Deed becomes effective on the PSALM
Transfer Date.

Under the PSALM Deed, we must also continue to procure and maintain the
appropriate insurance for the assets transferred under the PSALM Deed as may be
required by standard industry practice. The PSALM Deed also requires that PSALM
be named as a co-insured party on all property insurance covering the
transferred assets.

We are now in the process of fulfilling all conditions precedent required by
the PSALM Deed to the transfer of assets and the assumption of liabilities
under the PSALM Deed. The parties may opt to waive compliance with any of the
conditions precedent. However, we cannot assure you that these conditions
precedent will be met in the near future or at all.

Privatization of Our Generation and Other Assets

In December 2001, PSALM submitted its privatization plan to the Joint Power
Commission. PSALM received the final endorsement of the plan by the Joint Power
Commission in August 2002, and received approval of the plan by the President
in October 2002.

Some of the guidelines adopted for the privatization are as follows.

. The participation by Filipino citizens and corporations in the purchase of
our assets shall be encouraged.

. Our plants, our IPP contracts assigned to IPP Administrators, related
assets, and assigned liabilities will be grouped to promote the viability
of the resulting generation companies, ensure economic efficiency,
encourage competition, foster reasonable electricity rates, and optimize
returns to the government from the sale and disposition of such assets in
a manner consistent with the objectives of the Act.

. The Agus and the Pulangui power generation complexes in Mindanao may not
be privatized until 10 years after the effective date of the Act.

. The steam field assets and generating plants of each geothermal complex
will be sold as one package.

. No later than three years from the effective date of the Act, and in no
case later than the initial implementation of open access, at least 70% of
the total capacity of our generating assets and of the power plants under
contract with us located in Luzon and Visayas should be privatized,
provided that any unsold capacity should be privatized not later than
eight years from the effective date of the Act.

. PSALM may generate and sell electricity only from undisposed generating
assets.

. IPP contracts and PSALM shall not incur any new obligations to purchase
power through bilateral contracts with generation companies or other
suppliers.

In the grouping of our generation assets and IPP contracts, we will aim to:

. promote competition;

. attract local and international investors with a range of small and large
assets;

. achieve management and operational synergy through portfolios of plants
and IPP contracts; and

. maximize value to both potential investors and to the Government.

Creation of Transco

Transco, which is wholly owned by PSALM, was created pursuant to the Act.
Transco is expected to assume our electrical transmission function. Our
transmission assets will be privatized through a concession contract. The
sub-transmission assets will be operated and maintained by Transco. Once sold,
the distribution utilities will operate, maintain and upgrade these assets.
PSALM will assume all liabilities related to our transmission and
sub-transmission assets.

Transco's powers are exercised through a seven-member Board of Directors.
The Secretary of the Department of Finance acts as the Chairman of the Board of
Directors. The other members include the Secretary of the Department of Energy,
the Secretary of the Department of Environment and Natural Resources, the
President of Transco and three other members, representing Luzon, Visayas and
Mindanao, to be appointed by the President.

As a Government-owned corporation, Transco will prepare financial statements
in accordance with GAAS and its financial statements will be audited by the COA.

Transfer of Our Transmission Assets to Transco

Pursuant to the Act, we are required to transfer to Transco all of our
transmission and sub-transmission facilities, our nationwide franchise for the
operation of the transmission system and the grid and all other assets related
to our transmission operation. A deed providing for such transfer (the "Transco
Deed") was executed by our president and the president of Transco on December
21, 2001. The Transco Deed provides that the transfer of each of our assets to
Transco will take effect on the date on which all the conditions precedent
contained in the Transco Deed are either fulfilled or waived by the parties
thereto.

Our transmission and sub-transmission assets include operating contracts,
personal properties, transferable warranties and guarantees, infrastructure
work in progress, and other miscellaneous facilities and inventory.

Assets to be transferred to Transco also include intellectual property, as well
as causes of action against third parties relating to any of the assets that
will be transferred by us to Transco. All assets that we are to transfer to
Transco will be enumerated in schedules to be attached to the Transco deed. We
are currently finalizing the schedules to be attached to the Transco Deed.

The Transco Deed also provides that we will retain ownership over certain
assets, including those assets that will be used by SPUG in pursuing its
missionary electrification function, and assets that we will need to fulfill
our obligations arising out of any IPP Contract.

The conditions precedent to the transfer of assets from us to Transco
include the following:

. Each owner of land burdened by an easement enjoyed by us must consent to
the transfer to Transco, unless the easement is freely transferable.

. For certain of the operating contracts to be transferred by us, we and
Transco must enter into assignment and assumption agreements necessary to
effectively transfer our rights and obligations to Transco arising under
any contract, agreement, indenture, bond or other instrument in accordance
with the law governing that instrument.

. We and Transco must enter into an agreement which provides for the
assignment of our transmission employees to Transco.

. Insurance with respect to the assets that have been transferred to Transco
must be properly apportioned.

. The transfer date of the PSALM Deed must be achieved on the day that our
board of directors and that of Transco authorize the execution and
delivery of the Transco Deed.

We are now in the process of fulfilling all the conditions precedent
contained in the Transco Deed. However, we cannot assure you that all these
conditions precedent will be met in the near future or at all. Specifically, as
to the conditions precedent described above, (i) we have obtained the necessary
consents for the transfer of easements, (ii) we are in the process of entering
into the agreements necessary for the transfer of operating contracts, (iii) we
are drafting the agreement which provides for the assignment of employees, (iv)
we are currently negotiating insurance with respect to assets to be
transferred, and (v) we have received the necessary resolution from the board
of directors. The parties may opt to waive compliance with any of these
conditions precedent.

Privatization of Our Transmission Assets

PSALM submitted Transco's privatization plan to the Joint Power Commission
in late 2001. Endorsement of the plan was granted in March 2002. Presidential
approval of the transmission privatization plan was granted in October 2002.
Under the privatization plan, Transco's transmission facilities, including grid
interconnections and ancillary services, are subject to open, competitive
bidding to qualified parties. The bids will be for execution of a concession
contract.

The awardee must be financially and technically capable with proven
experience and expertise with a transmission system of comparable capacity and
coverage as the Philippines. In case a concession contract is awarded, the
contract shall have a duration of 25 years, subject to review and renewal for a
maximum period of another 25 years.

The Act provides for the transfer of our nationwide franchise for the
operation of the transmission system and the grid to Transco. However, the Act
is silent on whether Transco could transfer the franchise to the concessionaire
without Congressional approval. The uncertainty in obtaining Congressional
approval for the

transfer of such franchise may affect the price of the bids that will be
submitted and may affect the winning concessionaire's ability to source
financing. On September 3, 2002, the House of Representatives passed a bill
that would grant a separate franchise to Transco and allow Transco to assign
its franchise rights to the winning concessionaire without Congressional
approval. The bill is currently awaiting approval in the Senate. Although the
Arroyo administration has strongly supported this bill, it has faced opposition
from some Senators in initial hearings because it would constitute delegation
of the Congressional power to grant franchise. There is no assurance that the
bill will be passed by the Senate in its current form or at all.

On January 23, 2003, PSALM decided to implement an alternative plan,
approved by President Arroyo, which allows for the privatization of
transmission assets to be carried out in two phases. During the first phase,
which can be implemented immediately, the winning bidder is awarded the
concession and may engage in any activity that does not legally require the
franchise, such as maintenance, financing and the construction of new lines,
but may not perform those functions which must be performed by a franchisee,
such as systems operation. Such functions will continue to be the
responsibility of Transco until the Congress approves the transfer of the
franchise to the concessionaire. At that point, phase two of the plan
commences, pursuant to which the concessionaire replaces Transco as the grid
operator and operates the entire transmission system.

Currently, ten companies have expressed interest in bidding for the Transco
concession but only two companies have begun the due diligence and
pre-qualification process for prospective bidders. For the bid to be valid, at
least one of the bids must exceed a base price. PSALM currently plans to
complete the bidding process by July 18, 2003 and to sign the concession
contract by July 23, 2003 although it is uncertain whether or not these target
dates will be met. The delay in the passage of the bill granting a separate
franchise to Transco increases the difficulty in obtaining a successful bid.

Transco has also announced that it intends to auction sub-transmission
assets, valued at approximately (Peso)5 billion to private bidders. The bidding
is expected to take place in June, following approval by the Transco board of
directors.

Privatization Issues Relating to Debt

Consents from Creditors Needed for Transfer of Assets and Liabilities

We are required to obtain consents from our creditors in connection with the
following transactions:

. the substitution of PSALM for us as borrower/issuer of our loans, bonds
and other debt obligations which are being transferred to PSALM;

. transfer of our generation and other assets to PSALM;

. transfer of our transmission and sub-transmission assets to Transco;

. transfer of generation and other assets from PSALM to the private sector;
and

. privatization of transmission and sub-transmission assets.

Obtaining these consents is a condition precedent to the transfer of assets
and liabilities under both the PSALM Deed and the Transco Deed.

Consents must be obtained from approximately 36 creditors comprising
bondholders, commercial banks and bilateral and multilateral agencies. A large
portion of our debt obligations are bilateral loans requiring the consent of
only one creditor. In general, our syndicated facilities require the consent of
banks holding 66 2/3% of the outstanding loans. We are in advanced discussions
with each of our creditors to obtain the necessary consents

to move forward with the privatization. Two bond issues, one dollar denominated
and one yen-denominated, require a quorum of 75% of bondholders to attend a
meeting at which 50% of those in attendance must consent to the transfer of the
obligations. In each case, if the resolution for transfer fails, 25% of the
bondholders must be present at a subsequent meeting, with 50% of these present
voting in favor of transfer. The dollar-denominated bond also requires the
consent of the IBRD to the transfer, while the yen-denominated bond requires
the consent of the ADB. In addition, we have conducted an exchange offer of
certain of our Yankee bonds to facilitate the transfer of such bonds to PSALM.
We received tenders in the exchange offer representing approximately 98.6% of
the principal amount outstanding.

Our creditors have been requested to agree to the following: (1) the
substitution of PSALM in all the relevant contracts, (2) the privatization of
substantially all of our assets and (3) the waiver of any contractual defaults
and/or amendment of any relevant provisions in the various financing documents.
In this regard, letters requesting for formal consents were sent to all our
creditors in November 2001, and discussion with our creditors are ongoing. Once
all the consents are obtained, we will draft and execute the documentation
needed to substitute PSALM for us in all the relevant contracts.

Service of Transferred Debt

PSALM will service the debt transferred to it from us with revenues to be
generated from its operations and through the sale of assets transferred to it
pursuant to the PSALM Deed. In addition, under the Act, PSALM will have access
to the Universal Charge. The Universal Charge is intended to pay for, among
other things, our stranded debt in excess of the amount assumed by the
Government (which shall not exceed (Peso)200 billion) and our stranded contract
costs. See "Electric Power Industry Restructuring and Privatization --
Transition Mechanisms -- Universal Charge."

Pursuant to the Act, all of our bond and other obligations must be
transferred to and assumed by PSALM. However, if a lender does not consent to
the transfer of its obligation to PSALM, we will continue to service that
obligation through cash from our remaining operations and a portion of our
share of the Universal Charge.

Pursuant to our current Charter, interest arising from loans, credits and
indebtedness are exempt from all taxes by the Republic or any of its agencies
or political subdivisions. Thus, we do not withhold tax on interest payments
made in connection with these loans. Although the Act does not provide for the
same tax exemption for the loans that are to be transferred by us to PSALM, our
tax and accounting advisers filed a request for a Bureau of Internal Revenue
ruling to the effect that interest income or yield earned from certificates of
indebtedness of more than five years are excluded from gross income in
accordance with Section 32(B)(7)(9) of the 1997 Internal Revenue Code.

Transition Supply Contracts

Under the Act, we are obligated to obtain the ERC's approval of all
transition supply contracts duly negotiated with the distribution utilities
containing the terms and conditions of supply and a corresponding schedule of
rates, including adjustments and/or indexation formulas. However, the term of
these contracts cannot extend beyond one year from implementation of Open
Access or when any qualified entity may use the transmission system by paying
the rates approved by the ERC.

Privatization Uncertainties

The proposed transfer of assets and liabilities by us to PSALM and Transco
and the privatization of PSALM and Transco described above are subject to a
number of risks and uncertainties, including with regard to the following
matters:

. possible changes in applicable laws and regulations;

. possible failures to obtain required third party consents;

. our future financial condition and results of operations;

. PSALM's future financial condition and results of operations;

. the success of the proposed privatization, including the level of interest
by potential bidders, the amounts of any proceeds to PSALM and the timing
thereof and the likelihood of obtaining Congressional approval for the
transfer of the Transco franchise;

. future regulatory actions relating to electricity rates and other
regulated activities in the Philippine electric power industry;

. the amount, structure and timing of the proposed Government assumption of
NPC liabilities in the amount up to (Peso)200 billion; and

. future economic, political and social developments in the Philippines.

These and other factors could adversely affect our and PSALM's ability to
perform its transferred and any newly incurred obligations.

Management and Employees

Management

PSALM is administered, and its powers and functions exercised, by its Board
of Directors. Pursuant to the Act, the Board of Directors is composed of seven
members, each of which is a Government employee. Thus the Government is the
supervisory authority of PSALM. The Board of Directors meets as necessary to
allow it to properly discharge its functions and responsibilities. The presence
of at least four members of the Board of Directors is required to hold a
meeting and the vote of at least three members is required to approve any
action of the Board of Directors.

The President of PSALM acts as its Chief Executive Officer. PSALM's
President has the power to execute and administer the policies approved by the
Board of Directors, including (but not limited to) (i) the efficient discharge
of management functions, (ii) the preparation of PSALM's budget, (iii) the
supervision of the PSALM's operation and internal administration, (iv) the
preparation of PSALM's annual report and (v) the representation of PSALM in all
dealings and transactions with other offices, agencies and instrumentalities of
the Government and all other private, public, foreign or domestic entities.

Board of Directors

PSALM's board members are as follows:

Name Position
- ---------------------- --------------------------------------------------------

Jose Isidro N. Camacho Chairman of the Board of Directors, Secretary of the
Department of Finance
Edgardo M. del Fonso.. Director, President and Chief Executive Officer
Vincent S. Perez, Jr.. Director, Secretary of the Department of Energy
Emilia T. Boncodin.... Director, Secretary of the Department of Budget and
Management
Ruber S. Reinoso, Jr.. Director, Infrastructure Staff, National Economic and
Development Authority
Manuel A.J. Teehankee. Undersecretary, Secretary of the Department of Justice
Gregorio L. Domingo... Undersecretary, Secretary of the Department of Trade and
Industry

The business address of each member is located at 2nd Floor, SGV II
Building, Ayala Avenue, Makati City, Metro Manila, Republic of the Philippines.

PSALM's officers are as follows:

Name Position
---------------------- -------------------------------------------------------

Edgardo M. del Fonso.. President and Chief Executive Officer
Antonio T. Corpuz..... Senior Vice President
Nonito R. Bernardo, Jr Vice President, Finance
Maria Luz L. Caminero. Vice President, General Counsel and Corporate Secretary

Employees

PSALM had a total of 50 permanent employees and 36 contractors as of June 1,
2003. There are no trade unions or labor organizations within PSALM.

GLOSSARY OF SELECTED ELECTRICITY TERMS

The following explanations are not technical definitions, but they could
assist you in understanding some of the terms used in this document.

Generating unit.................. An electric generator together with the
Turbine or other device which drives it.

Gigawatt (GW).................... 1,000,000,000 watts (1,000 megawatts).

Gigawatt hour (GWh).............. One gigawatt of power supplied or demanded
for one hour.

Installed capacity............... The maximum power which could be produced
continuously throughout a prolonged period
of operation. All equipment is assumed to
be fully operational.

Kilovolt (kV).................... 1,000 volts.

Kilowatt (kW).................... 1,000 watts.

Kilowatt hour (kWh).............. One kilowatt of power supplied or demanded
for one hour.

Megawatt (MW).................... 1,000,000 watts (1,000 kilowatts).

Megawatt hour (MWh).............. One megawatt of power supplied or demanded
for one hour.

Megavolt ampere (MVA)............ 1,000,000 volts ampere.

Substation....................... Equipment which switches and/or changes or
regulates the voltage of electricity in a
transmission and distribution system.

Volt............................. The basic unit of electric force analogous
to water pressure in pounds per square
inch.

Volt ampere...................... The basic unit of apparent electrical
power.

Watt............................. The basic unit of active electrical power.

REPUBLIC OF THE PHILIPPINES

Recent Political Developments

Renewed Close Ties Between the Republic and the United States. In May 2003,
President Arroyo visited the United States and received pledges of aid to
finance anti-terrorism measures and economic development in Mindanao. During
the visit, US President George W. Bush, in recognition of the Republic's
support of the US-led war on terrorism, designated the Republic a "major
non-NATO ally", which would allow the Republic increased access to US military
research and supplies. Commitments made by the Bush administration during
President Arroyo's visit include:

. $30 million in counter-terrorism equipment and training;

. $30 million in development assistance for Mindanao;

. $25 million to train and equip a anti-terrorism combat engineering unit;

. US military support for Philippine military operations against the Abu
Sayyaf guerrilla group;

. initiatives to help reduce transaction fees on remittances from overseas
Filipinos; and

. trade preferences on certain Philippine agricultural products.

Internal Conflict with Rebel Groups. Over the past three decades, groups of
communist rebels and disaffected Muslims in the Republic have periodically
fought with Government forces. Armed conflict has continued between the
Government and various rebel groups, mainly communist rebels and Muslim
separatists.

Since March 2003, a series of bombings and raids in the southern region of
Mindanao have killed almost 100 civilians. The AFP has launched sustained
military offensives against the Moro Islamic Liberation Front ("MILF") and the
Abu Sayyaf guerrilla group, both of which the Government holds responsible for
the recent attacks. Leaders of the MILF, the largest Muslim separatist group in
the Philippines, have condemned the recent attacks and denied that they target
civilians.

As part of the Government's response to recent terrorist attacks, a number
of anti-terrorism bills have been proposed in Congress. President Arroyo has
urged the Congress to pass these bills quickly to give the military and the
police increased power in fighting terrorism. The draft bills include, among
other items, measures that would improve the state's ability to intercept
communications, conduct surveillance, freeze bank accounts, make warrantless
arrests and extend detentions.

As part of the recent heightened cooperation between the Republic and the
United States in the campaign against terrorism, the US has sent troops and
military advisers to assist the AFP in defeating the Abu Sayyaf guerrilla group
in Mindanao. In July 2002, the United States and the Republic entered into a
sustained military cooperation agreement. Pursuant to the agreement, more than
1,000 US troops have arrived in the Philippines since October 2002 to
participate in joint military exercises and to train the AFP in
counter-terrorism strategy and tactics.

Philippine and US defense officials are currently negotiating the terms of
reference to govern the deployment of additional US troops in Sulu in an
operation known as "Balikatan 03-1". The Government has indicated that US
involvement in Sulu will be limited to joint training exercises under the
supervision of the Philippine military; however, some Philippine legislators
and local Mindanao governments have expressed concern about the possibility of
direct US participation in combat against Abu Sayyaf guerrillas. According to
the AFP, 5,000 soldiers are currently in pursuit of the Abu Sayyaf, and heavy
fighting between the AFP and the Abu Sayyaf has continued in Mindanao. The AFP
has announced that it intends to intensify military action

against the Abu Sayyaf. According to military officials, fewer than 500 Abu
Sayyaf guerrillas remain in Mindanao.

Since January 2003, fierce fighting has resumed between the MILF and the
AFP. Recent clashes, concentrated near a MILF stronghold in southern Mindanao
known as the Buliok complex, have forced an estimated 40,000 to 80,000
civilians to evacuate their homes. Both the AFP and the MILF claim that they
have inflicted heavy casualties on the opposing side. Also, according to the
military, the MILF has also destroyed at least 20 transmission towers and poles
in retaliation against the military's incursion into the Buliok complex. MILF
leaders have denied responsibility for the recent attacks on the power
transmission grid. The Philippine National Police believe that the MILF has
ties to the Indonesian group Jemaah Islamiah, which is widely believed to be
responsible for the terrorist bomb attack in Bali (see -- "Terrorist Attacks in
the United States and Related Events") and also to be linked to the al-Qaeda
terrorist organization. MILF leaders have denied that the group is responsible
for the recent terrorist bombings in the Philippines and have denied any link
to Jemaah Islamiah or al-Qaeda.

Peace talks between the Government and the MILF have been suspended since
2001. Informal peace negotiations between the Government and the MILF had been
scheduled in Malaysia for April 2003; however, these negotiations were put on
hold after the renewed attacks on civilians in Mindanao. President Arroyo has
said that she will officially declare the MILF a terrorist organization if the
MILF does not stop attacks on civilians, publicly renounce terrorism, surrender
the perpetrators of recent attacks, and release the locations of its fighters.
The "terrorist" designation would allow the Government to freeze assets and cut
off foreign funding of the rebel group. The MILF rejected these conditions but
declared a unilateral, 10-day cease fire beginning on June 2, 2003. The
Government has publicly stated that it does not believe the MILF was sincere in
declaring the ceasefire.

In 2002, the United States and the European Union placed the Communist Party
of the Philippines (the "CPP") and the CPP's armed affiliate, the New People's
Army (the "NPA"), on their lists of "foreign terrorist organizations". As a
result, the United States and European governments have frozen financial
accounts linked to these groups and restricted travel of CPP-NPA members in the
United States and the European Union. In response to several recent bombings
and kidnappings attributed to the CPP, the AFP has initiated a military
offensive to end the insurgency. However, the Government continues to be open
to peace negotiations with the National Democratic Front ("NDF"), the political
organization of the NPA. Since September 2002, formal peace talks between the
Arroyo administration and the NDF have been suspended by order of the
President. The NDF has announced that it will not participate in peace talks
until the US and the European Union remove the CPP and the NPA from their lists
of "foreign terrorist organizations".

Uncertainty in Iraq and North Korea. In April 2003, an international
coalition led by the United States defeated the regime of former Iraqi
President Saddam Hussein. The victory of the coalition forces in Iraq, followed
by the passage of a United Nations resolution to lift economic sanctions on
Iraq, has eased much of the previous uncertainty over the stability of
international markets and the supply of oil from the Middle East. However,
coalition military forces continue to occupy Iraq and a new national government
has yet to be formed. The US and coalition governments have not officially
stated when they expect to restore political and economic stability to Iraq.

North Korea's recent announcement that it would reactivate its nuclear
weapons program has drawn harsh criticism and further economic sanctions from
the United States. It is unclear how any potential military action by or
against North Korea or embargoes or sanctions against North Korea will affect
the international financial markets or the Philippine economy.

Severe Acute Respiratory Syndrome. The recent outbreak of Severe Acute
Respiratory Syndrome ("SARS") has seriously disrupted several Asian economies
and continues to impede global travel and trade. Since February 2003, the
disease has spread from China to more than 25 countries around the world; at
least 7,900 people have been infected and more than 700 of them have died. Hong
Kong, China, Taiwan, and Singapore have been especially hard hit by the disease.

On May 21, 2003, the World Health Organization ("WHO") lifted its advisory
against travel to the Philippines. The WHO noted that there had been no new
locally transmitted SARS cases in the Philippines in 20 days, twice the maximum
incubation period of the disease. In total, there have been 12 cases of SARS
reported in the Philippines, two of them fatal.

The effect of SARS on the Republic's economic growth was minimal in the
first quarter of 2003; however, SARS may adversely affect the Republic's GDP
and GNP growth in the second quarter of 2003 because of decreased tourism and
the general decline of the services sector across Asia. In April 2003,
President Arroyo announced the creation of a (Peso)1.5 billion contingency fund
to stem a potentially more serious outbreak of SARS in the Philippines.
President Arroyo also formed a crisis management team including labor, health,
immigration, and military officials. Although the spread of SARS appears to be
on the decline in some regions, it is impossible to predict the long-term
effect of SARS on Philippine public health or on the Philippine economy.

Changes in the Arroyo Administration. On December 30, 2002 President Gloria
Macapagal-Arroyo announced that she would not seek another term as president.
The next presidential election is scheduled to take place in May 2004. In her
announcement, President Arroyo explained that she wanted to be unburdened by
politics and further concentrate her efforts on her administration's economic
reform plans.

There have been several resignations among senior members of the Arroyo
administration. Vice-President Teofisto Guingona resigned from his position as
Secretary of Foreign Affairs, effective July 15, 2002, citing, among other
things, his objection to the presence of US military troops in the Philippines.
Education Secretary Raul S. Roco resigned on August 13, 2002, after learning
that the President had endorsed a complaint accusing him of corruption. The
Commissioner of the Bureau of Internal Revenue ("BIR"), Rene G. Banez, resigned
on August 19, 2002, citing pressure from subordinates who were resisting
reforms at the BIR. President Arroyo has appointed Senator Blas F. Ople as the
new Secretary of Foreign Affairs, Dr. Edilberto C. de Jesus as the new
Secretary of Education, and former Customs Commissioner Guillermo Parayno as
BIR Commissioner.

The Secretary for Justice, Hernando Perez, resigned on January 2, 2003, amid
allegations that he had extorted money from a Manila congressman. On December
19, 2002, the Presidential Anti-Graft Commission had charged Mr. Perez with
obstruction of justice for prohibiting the Bureau of Immigration from divulging
the travel records of high-ranking government officials, including himself. On
January 16, 2003, Simeon Datumanong, former Secretary for Public Works and
Highways, officially replaced Mr. Perez as Secretary for Justice.

In December 2002, President Arroyo announced several changes in her cabinet.
In particular, the President replaced Secretary of Socio-Economic Planning
Dante P. Canlas with Romulo Neri, former director-general of the Congressional
Planning and Budget Office. President Arroyo also announced the replacement of
the Secretary of Agriculture, Leandro Montemayor, with Luis Lorenzo, Jr., a
former businessman and presidential advisor on job creation and the replacement
of the Secretary of Environment and Natural Resources, Heherson Alvarez, with
Elizea Gozun, an environmental consultant.

The President has also re-arranged some of her cabinet members. In January
2003, Ignacio Bunye, the President's Press Secretary, was appointed as the
President's spokesperson in place of Rigoberto Tiglao, who was named as the
President's Chief of Staff. Also in January 2003, Hernani Braganza, Secretary
of Agrarian Reform, was appointed as the new Press Secretary. Roberto
Pagdanganan, chairman of the Board of Administrators of the Cooperative
Development Authority, has been appointed to replace Mr. Braganza as Secretary
of Agrarian Reform.

Although the effect of these recent developments is unclear, the Government
does not believe that President Arroyo's decision not to seek re-election or
the changes in leadership positions will materially affect the stability or
effectiveness of the Arroyo administration.

Terrorist Attacks in the United States and Related Events. The evolving
response of the United States and other nations to the terrorist attacks of
September 11, 2001 in New York City and Washington, D.C. has resulted in
continuing political and economic uncertainty and in increased volatility in
the world's financial markets. The US-led military action in Afghanistan, which
began in October 2001, successfully defeated the Taliban government and
weakened the al-Qaeda forces blamed for the September 11 attacks. However, the
US government has indicated that al-Qaeda continues to operate in countries
around the world and continues to threaten and plan additional terrorist
attacks.

In May 2003, bombings in Casablanca, Morocco and Riyadh, Saudi Arabia killed
dozens of civilians and renewed concern over international terrorism by
al-Qaeda and affiliated groups. Also in October 2002, a terrorist bombing in
Bali, Indonesia killed at least 190 people, including many foreign tourists. It
is not known whether those responsible for the Bali attack were connected to
al-Qaeda or to previous attacks in the Philippines. In response to the recent
attacks, the United States and the United Kingdom have issued advisories
against travel to Mindanao, where rebel groups are most active. It is unclear
how the Philippine economy or the international financial markets will be
affected in the future by terrorism-related events either inside or outside the
Philippines.

Possible Constitutional Change. Fourteen senators have signed a resolution
calling for a constitutional convention after 2004 that could result in various
changes to the Philippine Constitution of 1987, including converting the
Government to a parliamentary system and changing to a unicameral legislature.
The resolution has been referred to the Senate committee on constitutional
amendments and revision of laws. However, a majority in the House of
Representatives prefers to convene a constituent assembly as the means of
effecting constitutional change. In March 2003, the House of Representatives
passed a resolution proposing such an assembly. However, the Government does
not expect constitutional change to take place in the near term, given the
different processes favored by the legislative bodies.

Criminal Charges Against Estrada. Criminal charges for perjury, illegal use
of an alias, and plunder filed against former President Joseph Estrada in 2001
by the Ombudsman (the office mandated under the Constitution of the Republic to
investigate and prosecute all complaints of corruption against public officials
and government employees) continue to be tried in the Sandiganbayan, a special
court with jurisdiction over criminal and civil cases involving graft and
corruption.

On May 19, 2003, Mr. Estrada filed a motion to dismiss the charges against
him, arguing that he is still the legitimate president of the Philippines and
immune from prosecution. The Sandiganbayan has not yet ruled on Mr. Estrada's
motion to dismiss. The defense is scheduled to begin presenting its evidence in
June 2003.

Recent Economic Developments

The interim period indicators of economic performance for any particular
year set out in this section "Recent Economic Developments" for GNP, GDP,
domestic credit growth and balance of payments indicators (including exports,
imports, goods, services, trade and income) are comparisons to the
corresponding interim period of the immediately prior year (known as
year-on-year comparisons), in each case unless otherwise noted.

Background. Economic growth was sustained in 2002 and the first quarter of
2003 although growth momentum slowed due to a series of adverse developments
such as:

. the rapid increase in the Government's budget deficit, which stood at
(Peso)212.7 billion for the full year 2002 (higher than the original
full-year forecast for 2002 of (Peso)130 billion, although lower than the
fourth quarter revised deficit target of (Peso)223 billion), caused by
higher than expected expenditures and lower than expected revenue
collections from the BIR;

. the ongoing conflict with rebel groups in Mindanao, the conflict with
communist rebels, the bombings and bomb threats in the Republic, the
terrorist bombing in Bali, Indonesia, uncertainty over effects of the war
in Iraq and the response to terrorism by the Government, the United States
and other countries; and

. Standard & Poor's Rating Service's downgrade of the Republic's long-term
foreign currency rating from BB+ to BB, and their downgrade of the
Republic's local currency rating from BB+ to BBB and Moody's Investors
Service's and Fitch Ratings' revised outlooks on the Republic's long-term
foreign currency sovereign credit ratings from stable to negative.

Despite these challenges and the generally weak global conditions, in the
first quarter of 2003, GNP growth was 5.6%, compared to 4.3% for the first
quarter of 2002, and GDP growth was 4.5%, compared to 3.8% for the first
quarter of 2002. The increased growth rates are, in part, a result of lower
interest and inflation rates, and in the Government's view reflect the success
of the administration's macroeconomic strategy.

Recent Economic Indicators. The following table sets out the performance of
certain of the Republic's principal economic indicators for the periods
indicated. Growth in GDP, GNP, inflation, exports, imports and domestic credit
growth is indicated on an annualized basis.

2001 2002 2003
---- ---- ----

Real GDP growth (%)................. 4.5 4.4 4.5/(1)/
Real GNP growth (%)................. 5.6 4.5 5.6/(1)/
Inflation rate (%).................. 6.1/(2)/ 3.1/(2)/ 2.7/(3)/
Unemployment rate (%)............... 11.1/(4)/ 11.4/(4)/ 10.6/(5)/
91-day T-bill rate (%).............. 9.86/(2)/ 5.43/(2)/ 6.39/(6)/
External position
Balance of payments ($ million).... (192) 660 55/(7)/
Trade-in-goods balance/GNP (%)..... (0.6) 0.5 N/A
Export growth (%)................ 17.3 10.1 3.2/(7)/
Import growth (%)................ (4.5) 6.2 31.7/(7)/
External debt ($ billion)/(8)/..... 52.4 53.9 N/A
International reserves
Gross ($ billion)................ 15.7 16.2 16.0/(9)/
Net ($ billion).................. 11.4 12.8 12.5/(9)/
Months of retained imports/(10)/. 5.0 4.7 4.5/(9)/
Domestic credit growth (%).......... 0.9 4.8 6.1/(11)/

- --------

(1) First quarter 2003.

(2) Full year average.

(3) Year on year as of May 2003.

(4) Average of the January, April, July and October applicable statistics based
on the January, April, July and October labor force surveys for the
relevant year.
(5) As of January 31, 2003.

(6) Average over the first five months of 2003.

(7) First two months of 2003.

(8) External debt includes debt approved by and registered with Bangko Sentral,
which includes banking system debt and public sector debt, whether or not
guaranteed by the Government, and private sector debt.

(9) As of May 31, 2003.

(10) Number of months of average imports of merchandise goods and payments of
services and income that can be financed by gross reserves.

(11) Growth from February 2002 to February 2003.

Arroyo Administration Economic Policy. In January 2003, after announcing
that she would not run for re-election, President Arroyo announced that her
administration would focus on the provisions of the Medium-Term Philippine
Development Plan, originally set out in the National Socio-Economic Summit of
2001. See "Philippine Economy -- National Socio-Economic Summit of 2001". In
particular, President Arroyo urged Congress to quickly approve the remaining
financial and fiscal reforms recommended in the National Socio-Economic Summit
of 2001, as well as the absentee voting bill, which would allow overseas
Filipinos to vote in national elections, and the dual citizenship bill, which
would grant dual citizenship to Filipinos abroad to encourage them to invest in
the Philippines.

In October 2002, President Arroyo outlined an eight-point work program for
the Government for the following six months. The program includes:

. keeping transportation fares down;

. reducing transport costs from Mindanao to Luzon;

. stimulating small- and medium-scale enterprises;

. encouraging housing developments;

. encouraging private investments in agriculture;

. continuing to build infrastructure to decongest Metro Manila;

. ensuring that the Presidential Commission on Good Government contributes
to fiscal resources; and

. making Makati City a tourist destination.

In addition, in December 2002, President Arroyo announced the following
additional measures to enhance productivity:

. increasing government credit for small- and medium-scale enterprises to
(Peso)10 billion in 2003;

. forming a new anti-smuggling task force; and

. improving the oversight system for government procurements.

Government Revenues and Expenditures. In the first four months of 2003,
Government revenues were (Peso)202.5 billion and expenditures were (Peso)268.0
billion, for a deficit of (Peso)65.5 billion. The four-month deficit was 21.1%
lower than the (Peso)83.0 billion deficit reported for the first four months of
2002. Of the (Peso)202.5 billion in revenues for the first four months of 2003,
(Peso)140.3 billion came from the Bureau of Internal Revenue, (Peso)35.5
billion from the Bureau of Customs, (Peso)17.2 billion from the Bureau of the
Treasury, and (Peso)9.5 billion from other agencies. The (Peso)268.0 billion in
expenditures in the first four months of 2003 included (Peso)86.8 billion for
personal services, (Peso)82.1 billion for interest payments, and (Peso)38.8
billion for capital outlays.

Government revenues for 2002 totaled (Peso)567.1 billion, of which
(Peso)496.4 billion were from tax revenues and (Peso)69.7 billion were from
non-tax revenues. Total revenues for 2002 increased 0.6% from total revenues
for 2001. Of total tax revenues during 2002, the BIR accounted for (Peso)394.6
billion and the Bureau of Customs accounted for (Peso)96.3 billion. Treasury
remittances accounted for (Peso)47.2 billion in revenue in 2002, and other
government offices accounted for the remaining (Peso)29.0 billion.

The BIR's collection of (Peso)394.6 billion in 2002 was 1.5% more than the
(Peso)388.7 million collected in 2001. The lower than expected amounts
collected for 2002 have been mainly attributed to the BIR's continued
difficulty in generally enforcing the Republic's tax laws as well as the
relatively low interest rate environment. However, the BIR's collection of
(Peso)36.9 billion for the month of December 2002 was a 9.2% increase over the
(Peso)33.8 billion collected in December 2001. Under the recently appointed BIR
Commissioner, Guillermo Parayno, the BIR has implemented a program to identify,
report, and prosecute taxpayers and companies that under-declare their value
added taxes ("VAT"). A BIR program for voluntary assessment and availment of
unpaid VAT and other income taxes has been put in place to collect unpaid taxes
that were discovered by the BIR. This investigation concluded that
underreporting of income from businesses has resulted in (Peso)10 billion in
uncollected tax revenue. The BIR is making a concerted effort to recover as
much of this revenue as possible. In the first four

months of 2003, the BIR increased collection of VAT by 10.3% over the first
four months of 2002. In addition, in order to encourage better tax compliance,
the BIR under the new Commissioner has simplified the filing process and the
payment of taxes. In the first four months of 2003, the BIR had total tax
collections on net income and profit of (Peso)140.3 billion, 8.7% higher than
for the same period in 2002 but 1.2% below its four-month goal.

Government expenditures in 2002 were (Peso)777.9 billion, compared to
(Peso)710.8 billion in 2001. The increase in expenditures from 2001 to 2002 was
due in part to higher expenditures for infrastructure, personal services,
education, veterans' pensions, and allotments to local government units for
anti-poverty programs and security measures.

The deficit in 2002 was (Peso)210.7 billion, which exceeded the Government's
original target of (Peso)130 billion for 2002, but was lower than the fourth
quarter revised 2002 budget deficit forecast of (Peso)223 billion. This rapid
increase in the 2002 budget deficit was caused by lower than expected revenue
collections from the BIR, and higher than expected expenditures.

Credit Ratings. On June 12, 2003 Fitch Ratings downgraded the Republic's
long-term foreign currency rating from BB+ to BB on the grounds that current
and prospective fiscal trends amount to a material deterioration in sovereign
credit worthiness, notwithstanding the recent upturn in tax receipts. Fitch
also lowered the long-term local currency rating to BB+ from BBB- and changed
the outlook on both ratings from negative to stable. Fitch mentioned that the
change in outlook reflects Fitch's judgement that broader macro-economic trends
remain reasonable with respect to growth, inflation and the external current
account balance.

On April 24, 2003, Standard & Poor's Ratings Service downgraded the
Republic's long-term foreign currency rating from BB+ to BB downgraded the
Republic's local currency rating from BBB+ to BBB and revised the long-term
ratings outlook from negative to stable. Standard & Poor's emphasized the
Government's high fiscal deficit, increased interest payments due to its high
debt burden, and heavy reliance on external capital for economic growth. On
January 8, 2003, Moody's Investors Service revised its outlook on the
Republic's local-currency rating for government bonds from stable to negative,
while affirming each of the Republic's foreign currency ratings. Moody's
recognized that revenue collections have improved in recent months, but noted
that poor revenue collection in prior periods has weakened long-term fiscal
prospects. On November 25, 2002, Fitch Ratings downgraded the Republic's
ratings outlook from stable to negative. Fitch indicated that further evidence
of falling tax revenues had undermined the Government's fiscal credibility and
raised concerns about rising public indebtedness. Fitch indicated that further
evidence of falling tax revenues had undermined the Government's fiscal
credibility and raised concerns about rising public indebtedness. Fitch noted
that the persistence of the current account surplus has prevented the
appearance of an external financing gap.

Philippine Stock Exchange. From its close of 1,018.4 at the end of December
2002, the Philippine Stock Exchange composite index rose to 1,088.83 on June 3,
2003. The resolution of the war in Iraq, higher than expected growth of the
Philippine economy in the first quarter of 2003, and improved revenue
collection by the Government have contributed to the recent rise in the
composite index.

GNP/GDP. In the first quarter of 2003, GNP grew by 5.6% and GDP grew by
4.5%, compared to GNP growth of 4.3% and GDP growth of 3.8% in the first
quarter of 2002. The service sector led the first quarter 2003 expansion,
growing by 5.6%. Growth in the service sector was due mainly to significant
growth in consumer banking, insurance, communications, information technology
services. Trade growth arising from modest inflation also spurred growth in the
services sector. The industry sector grew by 4.0%, with continued growth in the
mining and quarrying and the manufacturing subsectors offset by a decline in
construction due to cutbacks in government projects. The agriculture, fishery
and forestry sector posted growth of 2.9% compared to 4.8% growth for the first
quarter of 2002. The relative slowdown in agriculture, fishery and forestry was
due mainly to declines in palay production and fishing caused by the El Nino
weather phenomenon.

All production sectors showed better than expected growth in 2002: the
service sector grew by 5.5%, the industry sector grew by 3.7% and the
agriculture, fishery and forestry sector grew by 3.3%. All subsectors of the
service sector showed growth in 2002, particularly transportation,
communications and storage, which grew 8.9% primarily because of increased
computerized operations for Government services, and trade, which grew 5.8%
primarily because of increased regional operations by the large domestic
retailers. Growth in the private services (5.5%), finance (3.4%) and ownership
of dwellings and real estate (1.7%) subsectors also contributed to the upbeat
performance of the service sector (though finance and real estate have yet to
regain their pre-1997 performance levels).

Agriculture, Fishery, and Forestry. In 2002, though the 3.3% growth in the
agriculture, fishery, and forestry sector was higher than expected, it showed a
slight decline compared to the 4.7% growth for 2001. Growth in agriculture was
driven by increases in palay and livestock production, although all subsectors
also showed growth in 2002. In the first quarter of 2003, the agriculture,
fishery and forestry sector grew by 2.9% compared to 4.8% in the first quarter
of 2002.

Industry. In 2002, the industry sector grew 3.7%, compared to growth of
4.8% for 2001. The growth in industry was driven by improvement in all
subsectors. In the first quarter of 2003, the industry sector grew by 4.0%
compared to 2.1% in the first quarter of 2002. In 2002, the mining and
quarrying subsector rebounded from a previous decline of 5.4% in 2001 with
growth of 51.0% in 2002. Most of the growth in the mining and quarrying
subsector was attributable to production from the Camago-Malampaya Gas Project.
The mining and quarrying subsector grew by 8.9% in the first quarter of 2003
compared to growth of 49.3% in the first quarter of 2002. The annual growth
rate in the manufacturing subsector was 3.5% for 2002 up from 2.9% for 2001.
Food processing, leather products, footwear and apparel, metal industries and
electrical machinery showed improved results while output remained negative in
chemical products, paper products, rubber products, petroleum and coal products
and non-electrical machinery products. In the first quarter of 2003, the
manufacturing subsector grew by 5.3% compared to 2.4% in the first quarter of
2002. The construction subsector declined by 3.3% in 2002, as compared to an
expansion of 18.3% in 2001. In the first quarter of 2003, the construction
subsector declined 3.2% compared to a 7.7% decline in the first quarter of
2002. The electricity, gas and water subsector grew by 4.3% for 2002, compared
to growth of 0.7% for 2001. In the first quarter of 2003, the electricity, gas
and water subsector grew by 3.1% compared to 1.7% growth in the first quarter
of 2002.

Services. The services sector remains the largest contributor to GDP,
having contributed approximately 46.0% of GDP at constant market prices in the
first quarter of 2003, 45.8% of GDP in 2002 and 45.3% in 2001. Growth in the
services sector was driven mainly by expansion of the trade and transportation,
communications and storage subsectors. In the first quarter of 2003, the
services sector grew 5.6% compared to 4.8% growth in the first quarter of 2002.

The transportation, communications and storage subsector posted 8.9% growth
in 2002 compared to 8.8% growth for 2001. The transportation, communications
and storage subsector grew by 8.6% in the first quarter of 2003 compared to
10.1% growth in the first quarter of 2002. The trade subsector grew 5.8% in
2002, compared to growth of 5.6% for 2001. The trade subsector comprised the
biggest contribution to total output of the service sector at 35.7% and alone
contributed 16.3% of total GDP in 2002. The trade subsector grew 5.5% in the
first quarter of 2003 which equaled the 5.5% growth in the first quarter of
2002. The finance subsector grew by 3.4% in 2002 compared to growth of 1.2% for
2001. The finance subsector grew by 5.0% in the first quarter of 2003 compared
to a decline of 0.6% in the first quarter of 2002. The ownership of dwellings
and real estate subsector grew 1.7% in 2002, compared to a contraction of 0.5%
for 2001. The ownership of dwellings and real estate subsector grew by 3.1% in
the first quarter of 2003 compared to 2.3% growth in the first quarter of 2002.
The

private services subsector grew 5.5% in 2002 compared to growth of 4.4% for
2001. The private services subsector grew by 5.3% in the first quarter of 2003
compared to 5.1% growth in the first quarter of 2002. The Government services
subsector grew by 4.7% in 2002 compared to growth of 0.9% for 2001. The
Government services subsector grew by 5.1% in the first quarter of 2003
compared to 2.2% growth in the first quarter of 2002.

External Debt of the Republic. The Republic's external debt approved by
and registered with Bangko Sentral (which includes banking system debt, public
sector debt whether or not guaranteed by the Government and private sector
debt) amounted to $53.9 billion as of December 31, 2002, a 0.6% increase from
the $53.6 billion recorded as of September 30, 2002 and a 2.9% increase from
the $52.4 billion recorded as of December 31, 2001. The increase in debt in
2002 was due to additional borrowing to settle maturing obligations and finance
the Government's budget deficit, as well as upward foreign exchange revaluation
adjustments on third-currency denominated debt resulting from the continued
depreciation of the US dollar against third-currencies. As of December 31,
2002, 73% of the Republic's outstanding direct external debt, which amounted to
$25.3 billion carried fixed rates while 23% had variable rates. The remaining
4% were non-interest bearing. As of June 30, 2002, the average cost of fixed
rate credits was about 6%. For liabilities with floating interest rates, the
margin over base rate ranged from 3.5% to 4.4%. The average interest rates for
91-day Treasury bills decreased from an

88.1

average of 9.86% in 2001 to 5.43% in 2002, following the decline in global
interest rates. As of December 31, 2002, approximately 58% of the Republic's
outstanding direct external debt was denominated in US dollars while 33% was
denominated in Japanese yen. As of December 31, 2002, multi-currency loans from
the World Bank, the International Monetary Fund and the Asian Development Bank
accounted for 15.3% of the Republic's external debt.

Since December 31, 2002, the Government has borrowed a total of $700 million
and (Euro)300 million in the international capital markets. In response to
recent increases in the Government's debt, some members of the Senate have
proposed legislation that would place certain limits on Government borrowings.
One Senate bill would set a limit on total debt and tie this limit to the
Republic's GDP, while another would set a cap only on future borrowings.
Hearings on these bills are ongoing. Some members of Congress have also called
for the repeal of the law which currently mandates automatic appropriation for
debt service in the annual budget. It is unclear whether either of these
proposed measures will be implemented or if implemented what impact these
measures would have on the Republic.

Inflation. The national year-on-year inflation rate was 2.7% in May 2003,
slightly lower than the 2.8% year-on-year inflation rate in April 2003 and
substantially lower than the 3.6% rate in May 2002. The recent slowdown in
inflation is mainly due to the deceleration of inflation rates for fuel, light
and water and for services. The national inflation rate averaged 3.1% in 2002
compared to an average inflation rate of 6.1% in 2001. Inflation continues to
be benign despite the recent increases in domestic oil prices, and despite an
increase in food prices due to weather-related reductions in supplies of rice,
fruits, and vegetables. Reductions in Bangko Sentral's policy interest rates
and efforts to maintain fiscal discipline, which have led to lower market
lending rates and lower costs of capital for businesses, also had a favorable
impact on inflation. Equally important, inflationary pressures caused by more
demand than supply continue to be subdued due in part to current levels of
unemployment and spare capacity as well as restrained, though increasing,
domestic demand.

Employment. In January 2003, the national unemployment rate was 10.6%,
compared to 10.3% in January 2002. The decline in employment was due to an 0.8%
decrease in employment in the industry sector, which offset increases in
employment in agriculture and services. In 2002, the national unemployment rate
rose slightly to 11.4% from 11.1% in 2001.

Interest Rates. Currently, the Bangko Sentral overnight borrowing rate is
7.0% and the overnight lending rate is 9.25%. These are the lowest interest
rate levels in ten years. After being cumulatively lowered by the Monetary
Board of Bangko Sentral by 800 basis points starting December 2000, the rates
have remained unchanged since March 15, 2002. Although market interest rates
followed a steady downtrend in the first six months of 2002, they rebounded
slightly over the next six months. From an average of 8.9% in December 2001,
the 91-day Treasury bill rate decreased to 4.8% in June 2002 and then increased
to an average of 5.2% in December 2002. As of May 26, 2003 the 91-day Treasury
bill rate had increased to 6.3% which reflected a risk premium for the
continued threat of terrorism and instability in the Middle East.

Balance of Payments. In the first two months of 2003, the Republic's
balance of payments recorded a surplus of $55 million, compared to a surplus of
$654 million for the first two months of 2002. The decline in the surplus was
due mainly to the reduction of the current account surplus to $409 million in
the first two months of 2003, from $1.6 billion in the first two months of
2002. Exports of goods for the first two months of 2003 grew by 3.2% to reach $
5.3 billion, while imports of goods in the first two months of 2003 grew by
31.7% to reach $5.6 billion. The resulting trade-in-goods deficit of $266
million was a turnaround from the surplus of $904 recorded in the first two
months of 2002. The capital and financial account for the first two months of
2003 recorded a net outflow of $208 million, 63.9% lower than the net outflow
of $576 million in the first two months of 2002.

For the full year 2002, the Republic's balance of payments recorded a
surplus of $660 million, compared to a $192 million deficit for 2001. The
year-on-year turnaround was mainly attributed to higher remittances from
overseas workers and the growth in exports.

In January 2003, the Republic disclosed that the previously reported current
account surplus had been overstated due to monitoring problems giving rise to
underreported imports. An inter-agency task force on the balance of payments
considered the effects of this problem on the Republic's consolidated financial
position, specifically the Republic's current account and capital and financial
account. The inter-agency task force has revised the Republic's balance of
payments data for the years 2000 and 2001, but will not review prior years due
to incomplete information. The inter-agency task force worked within the
guidelines of the IMF's reporting system and included representatives of the
Bangko Sentral, the National Statistics Office, the National Economic and
Development Authority, the National Statistics Coordination Board, the Bureau
of Customs and the Philippine Export Zone Authority.

Reflecting the updated import data, the current account for 2000 has been
revised to a surplus of $6.3 billion from a surplus of $8.5 billion, and the
current account for 2001 has been revised to a surplus of $1.3 billion from a
surplus of $4.6 billion. At these revised levels, the current account surplus
stood at 8.4% and 1.8% of gross national product for 2000 and 2001,
respectively. However, the capital and financial account for 2000 has been
revised downward to a net outflow of $4.1 billion from a previously reported
net outflow of $6.5 billion, and the capital and financial account for 2001 has
been revised downward to a net outflow of $1.1 billion from a previously
reported net outflow of $3.7 billion.

Current Account. After having been revised to reflect updated import data
the current account recorded a surplus of $4.2 billion in 2002, more than three
times the $1.3 billion surplus for 2001. Largely contributing to this
development was the higher surplus in the trade-in-goods account and the higher
net inflow in the income account. The trade-in-goods account posted a surplus
of $408 million in 2002. The increase in the net income account surplus to $4.6
billion in 2002 also helped strengthen the current account balance. In the
first two months of 2003, the current account posted a surplus of $409 million,
a 73.7% decrease from the same period in 2002.

Exports. Total exports of goods in 2002 were $34.4 billion or 10.1% higher
than in 2001. Higher demand for Philippine goods from other Asian countries
made up for a decrease in exports to the United States and Japan, which
together account for approximately 40% of the Republic's export market (25% for
the United States and 15% for Japan in 2002). In the first two months of 2003,
total exports were $5.8 billion, a 2.2% increase from total exports of $5.7
billion in the same period in 2002.

Imports. Imports of goods in 2002 were up 6.2% at $34.0 billion. This was a
reversal of the 4.5% decline for 2001. The import growth reflected sustained
domestic demand, especially for electronics components. In the first two months
of 2003 imports of goods were $6.3 billion, a 28.3% increase from the same
period in 2003.

Services. The trade-in-services account in 2002 posted a net outflow of
$1.3 billion. The 38.3% narrowing of the deficit from the same period in 2001
was caused by lower net payments for transportation services and for
miscellaneous business, professional and technical services. Net receipts from
travel services were $869 million in the first seven months of 2002, due to a
relative decline in travel payments. Lower travel payments reflected in part
the weaker peso and the government program to promote domestic tourism among
local residents. In the first two months of 2003, the trade-in-services account
posted a net outflow of $242 million, an increase of 63.5% over a net outflow
of $148 million in the same period in 2003.

Income. The income account posted a net inflow of $4.6 billion in 2002, an
increase of 24.0% from 2001. The higher surplus was due to the 2.6% rise in the
number of overseas Filipino workers, which caused remittances from overseas
workers to reach $7.2 billion in 2002. However, as the global economic
slowdown, instability in the Middle East, and the SARS epidemic affect some of
the countries where Filipinos are working, the Government has intensified its
marketing efforts to increase hiring of Filipinos abroad. In the first two
months of 2003, the income account posted a net inflow of $813 million, a 11.4%
increase from the same period in 2003.

Capital and Financial Account. In 2002, the net outflow in the capital and
financial account was $2.1 billion, compared to a net outflow of $1.1 billion
in 2001. From 2001 to 2002, an increase in net inflows into the portfolio
account were more than offset by decreases in net inflows from the direct
investment account and increases in net outflows from the other investment
account. In the first two month of 2003, the net outflow in the capital and
financial account was $208 million, a 63.9% decline from the same period in the
prior year.

Portfolio investments in 2002 recorded a net inflow of $1.9 billion,
compared to a net inflow of $1.1 billion in 2001, following increased
non-residents' investments in resident-issued foreign denominated debt
securities, particularly government-issued medium-term bonds. Portfolio
investments in the first two months of 2003 recorded a net inflow of $541
million representing a 22.4% decrease when compared to a net inflow of $697
million in the same period in 2002.

Non-residents' investments in the Philippines increased by 39.5% to $3.4
billion in 2002 due mainly to the investment of $544 million worth of shares by
a Japanese firm in the San Miguel Corporation, a local brewery company, in
March 2002. The remaining investment was directed to other manufacturing
companies, financial institutions, mining corporations and construction
companies. The major sources of direct investments were the United States,
Singapore, the United Kingdom and the Netherlands. Non-residents' investments
in the Philippines in the first two month of 2003 was $855 million which
represented a 5.5% decrease compared to $905 million in the first two month of
2002.

The net outflow in the other investment account expanded by 54.1% to $5.0
billion in 2002. This was due to withdrawals of foreign currency deposits by
non-residents, as well as higher net deposits abroad by resident non-banks, a
majority of which were corporations involved in build-operate-transfer
arrangements, to cover foreign-related obligations. In the first two months of
2003 the other investment account posted a $736 million net outflow, a 50.0%
decrease compared to the $1.5 billion outflow for the first two months of 2002.

International Reserves. Bangko Sentral's gross international reserves,
including the reserve position in the IMF, were $16.0 billion at the end of May
2003, slightly less than $16.2 billion as of the end of December 2002. The
end-May level is equivalent to 4.5 months of imports of goods and payments of
services and income and was 1.3 times the amount of short-term external
obligations of the Republic based on residual maturity or 2.6 times the amount
of short-term external debt of the Republic based on original maturity. The
preceding figures were not affected by the revised import data reported by the
inter-agency task force on the balance of payments. Bangko Sentral's net
international reserves decreased to $12.5 billion at the end of May 2003 from
$12.8 billion at the end of December 2002.

Peso/US$ Exchange Rate. After reaching (Peso)49.48 on May 20, 2002, the
peso steadily depreciated to an average of (Peso)52.13 per US dollar in
September 2002 and (Peso)53.52 in December 2002. This depreciation was due
mainly to increased demand for dollars from corporations and banks (to service
foreign obligations arising from increased imports), the vulnerability of
emerging markets such as the Philippines to the South American debt contagion,
and the relative weakness of Asian currencies. The peso then depreciated to
reach (Peso)55.53 per US dollar on March 21, 2003, its lowest level relative to
the US dollar since January 2001. The depreciation of the peso in early 2003
was attributed to uncertainty over the potential war in Iraq, concerns over the
rising fiscal deficit and continued terrorist attacks and guerrilla activity in
the Philippines.

On March 13, 2002, in a measure intended to reduce currency speculation, the
Monetary Board of Bangko Sentral reduced the amount of US dollars that banks
are allowed to buy in the spot currency market. The ruling by the Monetary
Board lowered the amount of US dollars that banks could purchase above clients'
requirements to $5 million or 2.5% of the bank's unimpaired capital, whichever
is lower. The overbought limit had previously been set at the lesser of $10
million or 5% of the bank's unimpaired capital. The Monetary Board also limited
to six months the duration of forward contracts to cover long-term foreign
currency requirements; however, the Monetary Board continues to encourage the
use of forward currency contracts as insurance against potential currency
fluctuations and as an alternative to direct purchases of foreign currency in
the market.

Since mid-March 2003, the peso has recovered to reach (Peso)53.63 per US
dollar as of June 13, 2003. The recent increase in the relative value of the
peso was due to both the measures implemented by the BSP to curb currency
speculation and the resolution of the war in Iraq.

Banking System Non-Performing Loans. As of March 31, 2003, the ratio of
non-performing loans to total loans in the commercial banking system stood at
15.5%, higher than the 15.0% ratio as of December 31, 2002 but still an
improvement over the 18.0% ratio recorded at the end of March 2002. The recent
increase in the NPL ratio was attributed to a rise in uncollectable loans
combined with a contraction in commercial banks' total loan portfolio. The
improvement in the NPL ratio since the end of March 2002 was due in part to a
redefinition of "non-performing loan" which took effect September 19, 2002 (the
redefinition allows banks to exclude from

"non-performing loans" uncollectable or worthless loans that have been fully
covered by allowance for probable losses). The decrease in the non-performing
loan ratio was also attributed to increased foreclosure, restructuring
proceedings, and generally improving performance of the commercial banking
sector. The non-performing loans coverage ratio (loan reserves to
non-performing loans) decreased to 49.9% at the end of March 2003 from 50.2% at
the end of February 2003.

In December 2002, Congress approved the Special Purpose Asset Vehicle
("SPAV") bill. The SPAV bill provides the legal framework for the creation of
private asset management companies that are expected to relieve a major portion
of the banking system's non-performing assets and thereby promote bank lending
to support economic growth. President Arroyo signed the bill into law on
January 10, 2003. The SPAV bill's implementing rules and regulations took
effect on April 12, 2003.

Anti-Money Laundering Efforts. On March 7, 2003, President Arroyo signed
into law amendments to the Anti-Money Laundering Act of 2001 ("AMLA") that are
intended to comply with the demands of the Financial Action Task Force
("FATF"). The FATF, established by the Organisation for Economic Cooperation
and Development to combat money laundering, is backed by most of the world's
industrialized nations.

The amendments lowered the threshold amount for bank transactions
automatically subject to reporting requirements from (Peso)4 million to
(Peso)500,000. The amendments also expanded the definition of "suspicious
transactions" that are, regardless of amount, subject to the scrutiny of the
Anti-Money Laundering Council ("AMLC"), the agency charged with enforcing the
law. However, under the amended law, a court order will be required for the
AMLC to examine suspicious transactions or freeze bank accounts other than
those suspected to be related to terrorism, kidnapping, hijacking, and drug
trafficking. The new law remains silent on whether it will apply retroactively,
leaving the courts to decide whether regulators may scrutinize suspicious
transactions made before the original act's passage in 2001. The implementing
rules and regulations of the AMLA have been submitted by the AMLC to a
bicameral Congressional committee for final review.

The Government believes that the money-laundering law, as amended, conforms
to FATF requirements. However, the FATF must still review the amended law,
evaluate its implementing rules and regulations, and monitor its enforcement
against international standards before it removes the Philippines from its
"non-cooperative" list and rules out the possibility of sanctions. The
Government has indicated that this approval process could take one to two years.

The Consolidated Financial Position. For the first nine months of 2002, the
consolidated financial position of the Republic (not including Bangko Sentral)
recorded a deficit of (Peso)169.1 billion, 59.7% higher than the (Peso)105.9
billion target for the period. The Government recorded a (Peso)166.5 billion
deficit, the Central Bank restructuring accounted for an additional (Peso)11.8
billion deficit, and the monitored Government-owned corporations accounted for
a (Peso)25.7 billion deficit. The total public sector borrowing requirement of
(Peso)199.5 billion was offset in part by a combined surplus of (Peso)30.5
billion for the other public sector entities during the first six months of
2002. Of the surplus, (Peso)20.5 billion was attributable to the social
security institutions.

Government Budget for 2003. On March 11, 2003, a bicameral Congressional
committee approved a (Peso)804.0 national government budget for 2003. The
budget approved by the bicameral committee reflected a (Peso)200 million
reduction from the (Peso)804.2 billion budget originally proposed by President
Arroyo. The 2003 budget includes appropriations of (Peso)804.0 billion, a 3.0%
increase from the (Peso)780.8 billion budgeted for 2002. The 2003 budget
includes an automatic appropriation of (Peso)223 billion to service the
Government's foreign and domestic debts. The 2003 budget forecasts (Peso)602
billion in revenue collections against the (Peso)804 million in budgeted
expenditures which would result in a deficit of (Peso)202 billion for the year
2003.

Relationship with the IMF. The International Monetary Fund ("IMF")
currently maintains a close dialogue with the Government, within the framework
of a post-program monitoring arrangement ("PPM"). The PPM involves program
assessments which are based on a regular review of economic developments and
policies rather than the attainment of specific quantitative targets. This
arrangement does not involve a financing component.

In December 2002, the IMF completed a 10-day review of the Philippine
economy as part of the PPM. The IMF emphasized the need for the reduction of
the fiscal deficit through increased revenues. In particular, the IMF
recommended additional taxes on telecommunications, "sin" products and
automobiles, and measures to improve the efficiency of tax collection. The IMF
also recommended improvements in energy regulation, including a stronger and
more independent ERC and the passage of the Transco franchise bill.

In May 2003, the IMF completed its most recent 10-day review of the
Philippine economy as part of the PPM. The IMF continued to emphasize the need
for measures to reduce the Government fiscal deficit, including improvements in
the efficiency of NPC and an increase in basic power rates.

On January 31, 2003, the Government announced that intends to discontinue
the PPM when the program expires in September, 2003. The Republic will continue
to be subject to the IMF's annual Article 4 review, which is standard for all
IMF members.

Money Supply. The Republic's money supply, as measured by domestic
liquidity, reached (Peso)1.6 trillion as of April 30, 2003, a 2.8% increase
from April 30, 2002. The rate of growth in money supply was lower than the 9.5%
growth for the year ending December 31, 2002. The decrease in growth through
April 2003 was attributed to the continuing effects of the increase in the
liquidity reserve requirement for banks, the removal of the tiering scheme on
banks' placements under the Bangko Sentral's Reverse Repurchase Facility, and a
shift in deposits from peso accounts to foreign currency accounts.

History, Land and People

History. Spain governed the Philippines as a colony from 1521 until 1898.
On June 12, 1898, during the Spanish-American War, the Filipinos declared their
independence. The United States claimed sovereignty over the Philippines under
the 1898 Treaty of Paris, which ended the Spanish-American War, and governed
the Philippines as a colony until 1935 when the Philippines became a
self-governing commonwealth. On July 4, 1946, the Philippines became an
independent republic.

Geography and General Information. The Philippine archipelago, located in
Southeast Asia, comprises over 7,000 islands and a total land area of
approximately 300,000 square kilometers. The Republic groups the islands into
three geographic regions: Luzon in the north, covering an area of 141,395
square kilometers, Visayas in the center, covering an area of 55,606 square
kilometers, and Mindanao in the south, covering an area of 101,999 square
kilometers. The Republic is also divided into 15 administrative regions.

Forests cover approximately 50% of the Philippines and 47% of the country is
under agricultural cultivation. In 2000, agriculture, forestry and fishery
employed 37.1% of the labor force and provided 4.4% of the Republic's export
earnings (including exports of agriculture-based products). The Republic is
generally self-sufficient in staple cereals and is a major exporter of certain
agricultural products. Manufactured goods comprise the most important category
of the Republic's exports, accounting for 89.2% of the Republic's exports in
2000. Electronics, machinery and transport equipment and garments have
historically been the Republic's leading manufactured exports.

The Republic's population is currently approximately 80 million. The
Republic's capital, Manila, located in Luzon, has an estimated population of
1.7 million. The cities of Manila, Pasay, Kalookan, Quezon City, Mandaluyong,
Las Pinas, Muntinlupa, Marikina, Pasig and Makati, together with seven
surrounding municipalities, make up the National Capital Region or Metro
Manila. Metro Manila, the most populous of the administrative regions, has an
estimated population of 9.9 million people.

The majority of Filipinos have Malay ethnic origins. Filipino culture also
includes strong Spanish, Chinese and American influences. Filipino is the
national language, but English is the primary language used in business,
government and education. The population speaks over 80 other dialects and
languages, including Chinese and Spanish. Based on a 1999 survey, the
Republic's literacy rate is 95.1%, ranking among the highest in Asia.

Christianity, primarily Roman Catholicism, is the predominant religion in
the Philippines. A significant Muslim minority lives in Mindanao.

Government and Politics

Governmental Structure. Since 1935, the Republic has had three
Constitutions. The country adopted the current Constitution by plebiscite in
February 1987 after the ousting a year earlier of Ferdinand E. Marcos, who had
ruled for 20 years, in favor of Corazon C. Aquino after a people's uprising.
The new Constitution restored a presidential form of government comprised of
three branches: executive, legislative and judicial.

The principal features of each branch are as follows:

. Executive -- A President, directly elected for a single, six-year term,
exercises executive power. If the President dies, becomes permanently
disabled or is removed from office or resigns, the Vice President acts as
President for the remainder of the term. If the Vice President cannot
serve, the President of the Senate or, if he cannot serve, the Speaker of
the House of Representatives, acts as President until the election and
qualification of a new President or Vice President. The person acting as
President for any remaining term may, if elected, serve a six-year term as
President.

In May 1998, the country elected Joseph Estrada as President and Gloria
Macapagal-Arroyo as Vice President. In January 2001, after a people's
uprising, there was a transition of power to President Arroyo. See "--
Recent Political Developments."

. Legislative -- The Congress, comprised of the Senate and the House of
Representatives, exercises the country's legislative authority. The
Constitution mandates a Senate of 24 members and a House of
Representatives of not more than 250 members, all elected by popular vote.
Senators serve for a term of six years and members of the House of
Representatives for a term of three years. The country held elections for
13 Senators and all members of the House of Representatives in May 2001.
The other 11 Senators were elected in May 1998.

. Judicial -- The Supreme Court and any lower courts established by law
exercise the country's judicial authority. The country's court system is a
multi-tiered system of courts of general jurisdiction that includes the
Supreme Court and the Court of Appeals. Below these, the Regional Trial
Courts, Metropolitan Trial Courts, the Municipal Trial Courts and the
Municipal Circuit Trial Courts constitute courts of original jurisdiction.

Special or administrative tribunals and quasi-courts also exercise
judicial functions. Included in this category are constitutional
commissions, the Sandiganbayan, the court that handles Government graft
and corruption cases, the Court of Tax Appeals, the Shari'ah courts, which
handle matters governed by Islamic law, and administrative agencies that
handle specialized areas such as labor relations and securities regulation.

A Chief Justice and 14 Associate Justices constitute the Supreme Court,
which supervises all lower courts and related personnel. The Supreme Court
and the Court of Appeals may review decisions and rulings of lower courts
and quasi-judicial tribunals. The President appoints each Supreme Court or
Court of Appeals justice and lower court judge from at least three
candidates nominated by the Judicial and Bar Council.

Political Parties. The Republic's multi-party system currently has several
registered political parties. For the May 2001 elections, President Arroyo was
supported by the People Power Coalition which was comprised of the
Lakas-NUCD-UMDP, the Liberal Party, Reporma, Promdi, Aksyon Demokratiko and
other pro-Arroyo administration parties. In turn, parties identified with
former President Estrada formed the Puwersa ng Masa ("Force of the Masses")
coalition which was comprised of the Nationalist People's Coalition, the Laban
ng

Demokratikong Pilipino, Partido ng Masang Pilipino, the People's Reform Party
and the Kilusang Bagong Lipunan (the party organized by the late President
Ferdinand Marcos and his political allies).

Administrative Organization. As of April 30, 2001, there were 1,626 local
Government units, 16 regions, 79 provinces, 114 cities, 1,496 municipalities
(subdivisions of provinces) and 41,943 barangays (villages, which are the basic
units of the political system) -- comprising the country's basic political and
administrative structures. Highly urbanized cities function independently of
any province, while other cities are subject to the administrative supervision
of their home provinces.

The Government is mainly organized around the 20 departments and
department-equivalent agencies of the executive branch, which implement the
various programs and projects of the Government. The departments and
department-equivalent agencies are in turn organized into sectors.

Sector Major Departments
- ------------------------------------ ---------------------------------------------------------

Social services..................... Health; Education, Culture and Sports; Labor and
Employment; Social Welfare and Development
Economic services................... Agriculture; Agrarian Reform; Energy; Environment and
Natural Resources; Tourism, Trade and Industry; Public
Works and Highways; Transportation and
Communications; Science and Technology
Defense............................. National Defense
General public services............. Foreign Affairs; Finance; Budget and Management;
Interior and Local Government; Justice; National
Economic and Development Authority; Office of the Press
Secretary
Constitutional offices.............. Elections; Audit; Civil Service; Office of the Ombudsman;
Human Rights
Autonomous Region of Muslim Mindanao Not applicable
Cordillera Administrative Region.... Not applicable

Agencies attached to the various departments perform regulatory, policy
formulation and coordination functions.

The projects and programs in the Autonomous Region of Muslim Mindanao and
Cordillera Administrative Region are implemented by various departments from
different sectors. The total budget allocated for projects in the Autonomous
Region of Muslim Mindanao was (Peso)5.4 billion for 2002. For 2002, (Peso)50.0
million or 0.9% of budget was allocated to infrastructure projects, with
locally-funded road and flood control projects implemented by the Department of
Public Works and Highways. The remainder of the budget was allocated for
governance and institutions development projects. The total budget allocated
for projects in the Cordillera Administrative Region was (Peso)4.0 billion for
2002. For 2002, (Peso)517.7 million or 12.9% of the budget was allocated to
infrastructure projects, with locally-funded road and flood control projects
implemented by the Department of Public Works and Highways. Approximately 20%
of the 2002 budget was allocated for agriculture, natural resources and
agrarian reform projects. The remainder of the budget will pay for social
reform and development projects.

The Government also owns or controls a number of corporations that provide
essential goods and services and work with the private sector to encourage
economic growth and development. Traditionally restricted to basic public
services and national monopolies, the number of Government corporations grew
from 13 in the 1930s to 301 by 1984. In 1988, the Government launched a reform
program to reduce the number of Government corporations, establishing the legal
and policy framework for the country's privatization program. See "--
Government and Politics -- Privatization."

Currently, there are approximately 100 Government corporations, including
subsidiaries. Each of these corporations is attached to a department for policy
and program coordination.

The Government closely monitors 14 major non-financial Government
corporations engaged in various major business activities by recording their
individual contribution to the public sector deficit or surplus position and
other financial indicators. These 14 corporations and their areas of activity
are as follows:

Government Corporation Business Activity
------------------------------------------- ----------------------

National Power Corporation................. power
Philippine National Oil Company............ holding company, power
National Electrification Administration.... electric utilities
Metropolitan Waterworks and Sewerage System water utilities
Local Water Utilities Administration....... water utilities
Philippine Export Zone Authority........... area development
National Food Authority.................... agriculture
National Irrigation Administration......... agriculture
Philippine National Railways............... transportation
Light Rail Transit Authority............... transportation
Philippine Ports Authority................. transportation
National Development Company............... holding company
National Housing Authority................. housing
Home Guaranty Corporation.................. housing insurance

As of December 31, 2001, these 14 corporations had aggregate domestic and
external debt of approximately (Peso)1,143 billion, which comprised virtually
all the debt incurred by Government corporations.

To facilitate the implementation of better business practices, the
Government intends to expand its monitoring of Government corporations,
including to the National Home Financing Corporation, which provides mortgage
financing for low-income housing.

The Government currently records the contribution to the public sector
deficit or surplus, and other financial indicators, of three Governmental
financial institutions that provide credit to enterprises in support of public
policies including two specialized Government banks -- the Development Bank of
the Philippines and the Land Bank of the Philippines. For a description of the
Development Bank and the Land Bank, see "-- The Philippine Financial System --
Structure of the Financial System." The third institution, the Trade and
Investment Development Corporation of the Philippines (formerly Philippine
Export and Foreign Loan Guarantee Corporation), guarantees foreign currency
loans to exporters and contractors. As of March 30, 2001, the monitored
Governmental financial institutions had aggregate domestic and external debt of
approximately (Peso)353.4 billion.

Privatization. The Government has privatized a number of Government
corporations. The country's privatization program has broadened the ownership
base of Government assets and developed the domestic capital markets.

Prior to 2001, the Committee on Privatization, an executive office under the
office of the President chaired by the Secretary of Finance, oversaw the
Government's privatization program. The Committee was responsible for
formulating privatization policies and guidelines, identifying disposable
assets, monitoring progress and approving the price for and the buyers of the
assets. The marketing of assets was handled by disposition entities, including
the Asset Privatization Trust, the Presidential Commission on Good Government
and the National Development Company. The division of responsibilities between
the Committee on Privatization and the disposition entities served as a check
and balance mechanism and enhanced transparency.

The terms of the Committee on Privatization and the Asset Privatization
Trust expired on December 31, 2000. Since January 1, 2001, the Privatization
Council has been responsible for the privatization of the remaining Government
corporations scheduled to be privatized. The Privatization Council, a
policy-making body, is chaired by the Secretary of Finance and includes
representatives from the Department of Tourism, The Department of Trade and
Industry, the Department of Budget and Management, the Department of Justice,
the National Economic and Development Authority, the National Treasury and the
Presidential Commission on Good Government. Along with the Privatization
Council, there are two new disposition entities, the Land Bank of the
Philippines, which is responsible for the disposition of the financial assets
previously held by the Asset Privatization Trust, and the Privatization and
Management Office, which is responsible for the disposition of physical assets.
To maintain a check and balance system, all disposition entities must submit
their privatization plans to the Privatization Council for its review and
approval and file a report containing the results of each privatization
transaction.

The following table summarizes certain information regarding the
Government's principal privatizations to date.

Government
Ownership Gross
After Privatization
Year of Sale Sale Proceeds/(1)/
----------------------- ---------- -------------
(in billions)

International Corporate Bank.................... 1987; 1993 0.0% (Peso) 2.2
Union Bank of the Philippines................... 1988; 1991; 1992 13.0 1.3
Philippine National Bank........................ 1989; 1992; 1995; 1996;
2000 16.0/(2)/ 6.5
Philippine Plaza Holdings....................... 1991 0.0 1.5
Manila Electric Company......................... 1991; 1994; 1997 30.0/(3)/ 16.3
Philippine Airlines............................. 1992 0.97/(2)/ 10.7
Petron Corporation.............................. 1993; 1994 40.0 25.0
National Steel Corporation...................... 1994; 1997 12.5 17.1
Paper Industries Corporation of the Philippines. 1994 8.0 2.4
Philippine Shipyard and Engineering Corporation. 1994 9.0 2.1
Fort Bonifacio Development Corporation.......... 1995 45.0 39.2
Metropolitan Waterworks and Sewerage System..... 1997 --/(4)/ --/(4)/
Philippine Associated Smelting and Refining Corp 1999 4.26 3.3
Philippine Phosphate Fertilizer Corporation..... 2000 0.0 3.1

- --------
Source: Privatization Council.

(1) Net remittances to the Government upon the privatization of its assets are,
in certain circumstances, less than the gross proceeds from the sale of
such assets, based on agreements between the Government and the privatized
entities.
(2) Government's ownership was diluted in 2001 by a pre-emptive rights offering.
(3) Government ownership includes ownership by agencies and Government
financial institutions.
(4) The privatization of Metropolitan Waterworks and Sewerage System involved
awarding two 25-year concessions to rehabilitate, expand and operate the
system. Over the term of the concessions, the concessionaires obligated
themselves to make improvements by, among other things, providing for water
services, sewerage services, and interconnection facilities between
themselves and paying concession fees to the Metropolitan Waterworks and
Sewerage System. The estimated cost of these improvements is $7.0 billion,
which is expected to be incurred over the 25-year concession period.

As of May 31, 2002, 26 Government corporations, 144 assets handled by the
Privatization and Management Office and certain personal property assets held
by the Presidential Commission on Good Government were scheduled for
privatization. With the initial privatization phase approximately 80% complete,
during 2003 the Government plans to focus on selling its remaining shares in
Manila Electric Company, fully privatizing the

Philippine National Bank, privatizing the Philippine National Construction
Corporation, disposing of certain assets held by the Presidential Commission on
Good Government and selling the International School of Manila property. The
current economic slowdown, however, may, in the near term, affect investors'
propensity to invest, or the prices that they are willing to pay for the
Government's assets, which would thereby reduce the proceeds received from any
privatized assets. In the medium term, the Government plans to privatize the
National Power Corporation, PNOC Energy Development Corporation, the
International Broadcasting Corporation, Food Terminal Inc. and the Philippine
Postal Corp. In the long term, the Government intends to concentrate on
establishing public- private partnerships to provide social services,
especially in the health, education and pension sectors and also on privatizing
the operations and management functions of selected Government corporations.
The Government has also encouraged "build-operate-transfer" arrangements and
other initiatives to enable the private sector to meet more of the country's
infrastructure needs, especially in the power, water, transportation and
telecommunications sectors. By pursuing its privatization goals, the Government
hopes the private sector will provide for infrastructure and social needs,
simultaneously stimulating the economy and relaxing the demand on public
resources.

From January through May 2002, remittances to the National Treasury from
privatizations amounted to (Peso)140 million, increasing total remittances to
approximately (Peso)128 billion as of May 31, 2002. Although the Government's
privatization proceeds target for 2002 was originally (Peso)5 billion, the
target has been revised to (Peso)1 billion because of significant delays in the
privatization of National Power Corporation and the significant reduction of
value of Meralco.

International Relations. The Philippines places a high priority on
expanding global trade through a multilateral framework of principles and rules
that respect national policy objectives and the level of economic development
of individual countries. The country's participation in various international
organizations, like the World Trade Organization of the United Nations, the
IMF, the International Bank for Reconstruction and Development (also known as
the World Bank) and the Asian Development Bank, allows it to encourage
liberalized global trade and investment and to discuss financial and
development issues that will affect the Republic's economic development.

The following table shows the Republic's capital participation in, and loans
obtained from, major international financial organizations.

MEMBERSHIP IN INTERNATIONAL FINANCIAL ORGANIZATIONS

As of December 31, 2001
------------------------------------------
Capital
Date Of Capital Paid Loans
Name Of Organization Admission Subscribed Share In Outstanding
-------------------- ------------- ---------- ------- ---------- ------------
(in millions, except for percentages)

International Monetary Fund/(1)/.......................... November 1945 SDR 879.9 -- SDR 879.9 SDR 1,559.2
International Bank for Reconstruction and Development/(2)/ December 1945 $ 6,844.0 0.4% $ 48.9 $ 3,802.1
Asian Development Bank/(3)/............................... December 1966 $ 1,091.9 2.4% $ 78.0 $ 7,994.3

- --------
(1) Source: IMF.
(2) Source: World Bank Annual Report.
(3) Source: Asian Development Bank Annual Report.

The Philippines also promotes its economic interests through close ties with
neighboring countries and membership in the following regional organizations:

. the Association of Southeast Asian Nations ("ASEAN");

. South East Asia, New Zealand and Australia Central Banks;

. South East Asian Central Banks;

. ASEAN Free Trade Area;

. Asia-Pacific Economic Cooperation; and

. Executives Meeting of East Asia and Pacific Central Banks.

The Philippines seeks advances in bilateral relations and peaceful solutions
to regional issues through frequent consultations, visits and cooperative
activities. For example, in 1995, the country adopted a series of bilateral
codes of conduct regarding the Spratly Islands, an archipelago in the South
China Sea claimed by several Asian countries, to reduce the chances of
accidental conflict and is working toward the adoption of a regional code of
conduct with ASEAN and China. Nevertheless, several incidents related to the
disputed islands have occurred since 1995.

Philippine Economy

Overview. Like many developing countries after World War II, the
Philippines protected local industry from foreign competition through measures
such as import tariffs and quotas, hoping to replace imported finished goods
with domestically produced goods over time. Successive Governments also
intervened in the country's economic affairs by imposing quantitative trade
barriers, price controls and subsidies. Initially, the economy grew rapidly,
with real GNP growing at an average rate of 5.8% per annum from 1970 to 1980
largely due to increased exports and Government investments. Infrastructure
spending increased, and state ownership of commercial enterprises became
prevalent. By the early 1980s, however, the country faced ballooning budget
deficits, growing levels of foreign and domestic borrowing, rising inflation,
climbing interest rates, a depreciating Peso, declining investment capital, and
slowing economic growth or, at times, a contraction in GDP. The country's
unstable political situation during that period, highlighted by the
assassination of opposition leader Benigno Aquino in 1983, exacerbated its
economic problems.

The general optimism brought about by the peaceful removal of the unpopular
Marcos administration in 1986 helped economic recovery. Real GNP grew by 3.6%
in 1986, increasing to 7.2% in 1988 before decelerating to 0.5% in 1991. The
deceleration was caused principally by underlying macroeconomic imbalances,
compounded by supply bottlenecks, natural disasters, political instability, the
global recession and the Persian Gulf crisis.

The Government of President Corazon Aquino, who came to power in 1986,
embarked on a stabilization program aimed at preventing an upsurge in
inflation, controlling the fiscal deficit and improving the external current
account position. The economy responded favorably to these measures, posting
increases in real GNP, investments, private consumption and imports in 1992.
The Aquino administration also recognized that the country's economic
difficulties in large part resulted from its protectionist policies. The Aquino
administration, therefore, initiated reforms to open the economy to market
forces and reduce the size and role of the Government in the Philippine
economy. The Government of President Fidel Ramos, who assumed office in 1992,
accelerated the reform efforts initiated by the Aquino administration.

Despite undertaking a review of a number of the policies and programs
initiated by previous administrations, the Estrada administration continued
many of the financial policies and market-oriented reforms of the Aquino and
Ramos administrations.

Prior to the onset of the Asian economic crisis in mid-1997, real GDP grew
at an average annual rate of 5.0% from 1994 to 1996 while real GNP grew at an
average annual rate of 5.8% during the same period. The exchange rate between
the Peso and the US dollar was stable, ranging from (Peso)24 to (Peso)27 per US
dollar from 1994 to 1996. The consolidated public sector financial position
swung from a deficit of (Peso)8.4 billion in 1994 to a surplus of (Peso)7.3
billion in 1996. Total net foreign investments increased from $1.6 billion to
$3.5 billion during the same period and the unemployment rate declined from
9.5% in 1994 to 8.6% in 1996.

After the onset of the Asian economic crisis in mid-1997, the Philippines
experienced economic turmoil characterized by currency depreciation, a decline
in the performance of the banking sector, interest rate volatility, a
significant decline in share prices on the local stock market and a reduction
of foreign currency reserves. These factors led to a slowdown in the Philippine
economy in 1997 and 1998 with real GDP contracting by 0.6% in 1998. The
Philippines' economic performance in 1998 was also adversely affected by the
decline in agricultural production caused mainly by the effects of the drought
related to the El Nino phenomenon and later the typhoons related to the La Nina
phenomenon. In response, the Government adopted a number of policies to address
the effects of the Asian economic crisis by strengthening the country's
economic fundamentals. In 1999 and 2000, a number of the Philippines' economic
indicators showed more favorable results. In 1999, real GNP growth improved to
3.7% while real GDP expanded by 3.4%. The trend continued in 2000 with real GNP
growing by 4.8% and GDP growing by 4.4%. In 2001, the real GNP grew by 3.4% and
the real GDP grew by 3.2%. The GNP and GDP growth for 2001 remained strong,
although growing at a slower pace than 2000, primarily due to strong
agricultural output, a strong services sector and rapid growth in the
telecommunications industry, which was able to offset the manufacturing sector
suffering from weak global demand.

The Arroyo administration has prepared a medium-term development plan for
2001 to 2004 to fight poverty and unemployment. Major features of the
medium-term development plan are devoted to ensure good and effective
governance and improve public finances to reduce the number of poor families
and reduce unemployment.

National Socio-Economic Summit of 2001. On December 10, 2001, President
Arroyo convened the National Socio-Economic Summit of 2001, in which over 1,000
leaders of Government, business, labor organizations and civil society
participated. President Arroyo called the summit in recognition that the
September 11 terrorist attacks on the United States had given rise to new
uncertainties and decreased the prospects of a global recovery initially
anticipated by the Government to start in the latter part of 2001. The
Government was concerned that these uncertainties, together with the delay in
the recovery, could adversely affect the welfare of the Philippine people and
the domestic economy, particularly export-oriented sectors, tourism-related
industries and the financial markets. Towards this end, the Government
recognized the need to take immediate steps to safeguard jobs and social
services, enhance competitiveness and productivity of the economy and
strengthen investor confidence by improving peace and order and governance, and
eliminate the structural and implementation bottlenecks in agriculture,
industry and services. In a speech before Congress on January 14, 2003,
President Arroyo called for Congress to speed up passage of a number of these
measures.

The specific items agreed upon during the summit include:

Peace, Order and Security.

. Accelerate the integration and coordination of intelligence activities and
resources of law enforcement and security agencies; maximize all
mechanisms to identify, locate and neutralize kidnap for ransom groups,
drug syndicates, terrorists, smugglers, and coup plotters; and improve the
reward system for information on these groups; and
. Mobilize the peace and order councils more actively and organize
self-defense units, which will be authorized to carry firearms and effect
citizen's arrests pursuant to existing laws under close supervision of the
Department of Interior and Local Government and the Philippine National
Police.

Financial and Fiscal Reforms.

. Increase Bureau of Internal Revenue collection through administrative
measures with a focus on industry benchmarking, review of big contract
items in the budget with significant tax leakages, monitoring of local
government unit remittances, undertaking measures to improve the
collection of value-added tax and the 2% minimum corporate income tax and
the passage of legislation on the indexation of the excise tax;

100

. Strictly implement seizure orders and stop issuances by Government
agencies of documents legitimizing smuggling and other measures to combat
smuggling;

. Pass legislation needed to facilitate the recovery of the financial sector
and enhance access to credit such as the Special Purpose Vehicle Act, the
Securitization Act, new legislation removing documentary stamp taxes on
secondary trading transactions, amendments to the Bangko Sentral and
Philippine Deposit Insurance Corporation charters, the Corporate Recovery
Act and the Personal Equity Retirement Act; and

. Enhance private sector access to official development assistance including
for Build-Operate-Transfer projects, railway and other private
sector-initiated infrastructure projects and private education
institutions.

Agriculture.

. Achieve food security and generate jobs by using hybrid and certified
seeds in rice and corn production and facilitating marketing contracts
between agricultural producers and business corporations;

. Enhance the effectiveness of the Government fund set up to increase
agricultural competitiveness and ensure that appropriate tariffs are
transferred to this fund;

. Reform lending procedures at the Land Bank of the Philippines to increase
the number of loans made for agricultural purposes; and

. Maintain budgeted funding for programs on agriculture, fisheries,
indigenous peoples, agrarian reform, community based forest management and
watershed protection and management.

Trade and Industry.

. Pass amendments to existing legislation to rationalize the country's
investment incentives scheme to match those of other Asian nations and
ensure that appropriate incentives will be granted to information
technology services;

. Support small and medium enterprises by streamlining business
documentation requirements, strengthening the guarantee fund system and
developing on-line credit application;

. Promote micro-finance banks in all provinces; and

. Modernize the cargo transport system by reviewing existing legislation and
passing new legislation on air cargo liberalization.

Tourism-related Industries.

. Amend existing legislation to allow for rechanneling of 40% of travel tax
collections to tourism-related projects and programs;

. Improve access to tourist-generating markets by liberalizing visa
requirements and fees for Chinese tourists;

. Institutionalize a mechanism to allow for an automatic increase in
frequency of flights once a carrier's current flights achieve a 70% load
factor; and

. Aggressively promote programs geared towards domestic and international
tourism.

101

Telecommunications and Information Technology.

. Facilitate granting of permits and licenses for increased deployment by
private sector telecommunications service providers of broadband services
and other telecommunications facilities in key locations, such as
industrial parks and regional centers, to develop and encourage e-commerce
and e-business;

. Increase the demand for information technology services by accelerating
the implementation of an e-development program for small, micro and medium
enterprises; and

. Expand the implementing rules and regulations of the
Build-Operate-Transfer Law to address specific requirements of information
technology projects, consistent with the law.

Labor and Employment.

. Address the needs of workers by providing assistance in terms of
employment facilitation services such as job matching and referrals,
guidance counseling and livelihood and entrepreneurship development;

. Implement a job corps program by January 2002 to promote, among other
things, entrepreneurship among workers and generate local jobs and
facilitate overseas employment; and

. Conduct skills training, retraining and upgrading to meet the requirements
of fast changing technologies and equip workers with in-demand skills.

On January 25, 2002, a memorandum of agreement was released implementing a
job corps program promoting volunteerism, civic consciousness among the
country's youth, community development and employment projects.

Infrastructure.

. Unlock bottlenecks for the implementation of identified solid waste
disposal projects in Metro Manila and other urban centers;

. Reduce traffic congestion in Metro Manila and other urban centers by close
coordination among the Metro Manila Development Authority and other
implementing agencies, utilities, malls and private contractors; and

. Utilize more labor-based construction methods, especially for small rural
infrastructure projects to generate employment.

Housing.

. Streamline housing permits and processes by prescribing time periods for
the issuance of housing related permits and clearances and instituting a
mechanism to monitor compliance with the new processes;

. Promote rent-to-own and other similar schemes; and

. Pass legislation to index "sin" taxes and earmark (Peso)5 billion of the
Government's share of those taxes to subsidize a targeted socialized
housing program.

Health and Other Social Services.

. Expand coverage of services under the National Health Insurance Program
and accelerate the rollout of areas for the indigent health program;

102

. Reduce by one half the prices as of July 2002 of medicine commonly used by
the poor by increasing the number and type of distribution points; and

. Pass legislation on domestic violence and anti-trafficking of women.

A monitoring body composed of presidential advisers and assistants is to
provide quarterly status reports on the above action items to the
Legislative-Executive Development Advisory Council.

GDP and Major Financial Indicators

Gross Domestic Product. Gross domestic product, or GDP, measures the market
value of all final goods and services produced within a country during a given
period and is indicative of whether the country's productive output rises or
falls over time. By comparison, gross national product, or GNP, measures the
market value of all final goods and services produced by a country's citizens
during a given period, whether or not the production occurred within the
country.

Economists show GDP in both current and constant market prices. GDP at
current market prices values a country's output using the actual prices of each
year, whereas GDP at constant market prices values output using the prices from
a base year, thereby eliminating the distorting effects of inflation.

The following tables present the GDP of the Philippines by major sector at
both current and constant market prices.

GROSS DOMESTIC PRODUCT BY MAJOR SECTORS
(AT CURRENT MARKET PRICES)

Percentage
of GDP
------------
1998 1999 2000 2001 2002 1998 2002
------------- ------------- ------------- ------------- ------------- ----- -----
(in billions, except as indicated)

Agriculture, fishery and forestry............ (Peso) 451.6 (Peso) 510.5 (Peso) 525.9 (Peso) 548.7 (Peso) 592.1 16.9% 14.7%
------------- ------------- ------------- ------------- ------------- ----- -----
Industry sector
Mining and quarrying....................... 20.1 18.0 21.2 21.7 33.5 0.8 0.8
Manufacturing.............................. 582.9 644.0 745.9 831.6 915.2 21.9 22.8
Construction............................... 157.4 162.9 174.4 222.1 235.4 5.9 5.9
Electricity, gas and water................. 78.0 86.1 97.5 116.3 124.1 2.9 3.1
------------- ------------- ------------- ------------- ------------- ----- -----
Total..................................... 838.4 911.1 1,039.0 1,191.7 1,308.2 31.5 32.5
Service sector
Transportation, communications and storage. 139.7 159.3 199.0 247.6 276.9 5.2 6.9
Trade...................................... 361.2 419.3 473.0 517.6 556.3 13.6 13.8
Finance.................................... 130.3 141.6 149.1 160.1 170.5 4.9 4.2
Ownership of dwellings and real estate..... 189.3 208.9 220.9 236.7 252.9 7.1 6.3
Private services........................... 280.6 335.4 381.6 433.7 484.9 10.5 12.1
Government services........................ 274.1 290.8 319.8 337.7 380.9 10.3 9.5
------------- ------------- ------------- ------------- ------------- ----- -----
Total..................................... 1,375.0 1,555.3 1,743.4 1,933.2 2,122.3 51.6 52.8
------------- ------------- ------------- ------------- ------------- ----- -----
Total GDP.................................... (Peso)2,665.1 (Peso)2,976.9 (Peso)3,308.3 (Peso)3,673.7 (Peso)4,022.7 100.0% 100.0%
============= ============= ============= ============= ============= ===== =====
Total GNP.................................... (Peso)2,802.1 (Peso)3,136.2 (Peso)3,496.9 (Peso)3,918.7 (Peso)4,290.2
Total GDP (in billions of US dollars)/(2)/... $ 65.2 $ 76.2 $ 74.9 $ 72.0 $ 78.0
GDP per capita (in US dollars)/(2)/.......... $ 864.0 $ 992.0 $ 985.0 $ 914.0 $ 966.0

- --------
Source: National Statistical Coordination Board.

(1) First three months of 2003

(2) Calculated using the average exchange rate for the period indicated. See
"-- Monetary System -- Foreign Exchange System."

103

GROSS DOMESTIC PRODUCT BY MAJOR SECTORS
(AT CONSTANT MARKET PRICES/(1)/)

1998 1999 2000 2001 2002
----------- ----------- ------------- ------------- -------------
(in billions, except as indicated)

Agriculture, fishery and forestry............ (Peso)173.2 (Peso)184.5 (Peso) 190.7 (Peso) 199.6 (Peso) 206.2
----------- ----------- ------------- ------------- -------------
Industry sector
Mining and quarrying....................... 10.6 9.7 10.7 10.1 15.3
Manufacturing.............................. 221.2 224.7 237.3 244.1 252.6
Construction............................... 51.8 51.0 51.7 61.2 59.2
Electricity, gas and water................. 30.3 31.3 32.6 32.8 34.2
----------- ----------- ------------- ------------- -------------
Total..................................... 313.9 316.7 332.3 348.2 361.2
Service sector
Transportation, communications and storage. 58.6 61.7 68.2 74.2 80.8
Trade...................................... 138.6 145.4 152.9 161.5 170.8
Finance.................................... 45.4 46.3 46.7 47.3 48.9
Ownership of dwellings and real estate..... 48.1 48.4 48.3 48.1 48.9
Private services........................... 63.9 67.6 70.9 74.0 78.0
Government services........................ 46.2 47.7 48.5 48.9 51.2
----------- ----------- ------------- ------------- -------------
Total..................................... 400.9 417.0 435.5 454.0 478.7
----------- ----------- ------------- ------------- -------------
Total GDP.................................... (Peso)888.0 (Peso)918.2 (Peso) 958.4 (Peso)1,001.7 (Peso)1,046.1
=========== =========== ============= ============= =============
Total GNP.................................... (Peso)934.5 (Peso)969.3 (Peso)1,016.1 (Peso)1,073.1 (Peso)1,121.0
Percentage change in GDP..................... (0.6)% 3.4% 4.4% 4.5% 4.4%
Percentage change in GNP..................... 0.4% 3.7% 4.8% 5.6% 4.5%

Percentage of
GDP
------------
1998 2002
----- -----

Agriculture, fishery and forestry............ 19.5% 19.7%
----- -----
Industry sector
Mining and quarrying....................... 1.2 1.5
Manufacturing.............................. 24.9 24.1
Construction............................... 5.8 5.7
Electricity, gas and water................. 3.4 3.3
----- -----
Total..................................... 35.4 34.5
Service sector
Transportation, communications and storage. 6.6 7.7
Trade...................................... 15.6 16.3
Finance.................................... 5.1 4.7
Ownership of dwellings and real estate..... 5.4 4.7
Private services........................... 7.2 7.5
Government services........................ 5.2 4.9
----- -----
Total..................................... 45.2 45.8
----- -----
Total GDP.................................... 100.0% 100.0%
===== =====
Total GNP....................................
Percentage change in GDP.....................
Percentage change in GNP.....................

- --------
Source: Economic and Social Statistics Office; National Statistical
Coordination Board.

(1) Based on constant 1985 prices.

The following table shows the percentage distribution of the country's GDP
at constant 1985 prices.

DISTRIBUTION OF GROSS DOMESTIC PRODUCT BY EXPENDITURE
(AT CONSTANT MARKET PRICES/(1)/)

1998 1999 2000 2001 2002
----- ----- ----- ----- -----

Personal consumption......... 79.7% 79.1% 77.3% 77.8% 77.5%
Government consumption....... 7.9 8.2 8.2 7.5 7.4
Capital formation
Fixed capital.............. 23.1 21.8 22.2 23.1 22.6
Changes in stocks.......... (0.9) (0.8) (0.1) 1.3 (0.1)
----- ----- ----- ----- -----
Total capital formation... 22.2 21.0 22.1 24.4 22.5
Exports of goods and services 41.4 41.5 45.8 43.0 42.6
Imports of goods and services (54.5) (51.3) (50.4) (50.7) (50.9)
Statistical discrepancy...... 3.3 1.5 (2.9) (1.9) 0.9
----- ----- ----- ----- -----
Total........................ 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====

- --------
Source: Economic and Social Statistics Office; National Statistical
Coordination Board.

(1) Based on constant 1985 prices.

Principal Sectors of the Economy

Agriculture, Fishery and Forestry

Agriculture. The country's principal agricultural products include cereals,
such as palay (rice) and corn, cultivated primarily for domestic use, and
crops, such as coconuts, sugar cane and bananas, produced for both the

104

domestic market and export. The Philippines' diverse agricultural system
contains many coconut plantations farmed by agricultural tenants and workers,
sugar haciendas farmed either under labor administration or by tenants, and
large "agro-business" plantations devoted mainly to non-traditional export
crops such as bananas and pineapples. Rice, corn and coconuts each account for
approximately one-quarter of the country's cultivated area. The country
occasionally needs to import rice and corn.

Through its economic stimulus activities, the Government has begun to
implement a number of programs to boost agricultural output. The principal
programs are as follows:

. The Agriculture and Fisheries Modernization Act of 1997, which is the
Government's blueprint for the modernization of the agriculture and
fisheries sectors. The Act provides for, among other things, the
establishment of development zones for production, processing and
marketing agencies responsible for the enforcement of quality standards,
the simplification of access to credit, and the grant of tariff exemptions
on the importation of certain equipment.

. A national productivity program designed to increase the yield and
competitiveness of the five major agriculture subsectors: rice, corn, high
value crops, livestock and fisheries.

. Improvement of support services to farmers, particularly irrigation,
roads, post-harvest facilities, training, credit and marketing assistance.

. Stabilization of prices and supply of agricultural commodities.

Fishery. The Philippines' fishing industry contributes significantly to the
country's foreign exchange earnings. Pollution of coastal waters as a result of
population growth, mining activities and wasteful fishing methods have damaged
the marine and inland resources in some areas in recent years, leading to
decreases in production.

Forestry. The country's forests, one of the Philippines' main natural
resources, contain a large quantity of hardwood trees. Over the years
population growth, shifting cultivation, illegal logging and inadequate
reforestation depleted the forests, leading to a Government-imposed total ban
on logging activity and the subsequent continuing decline of the forestry
subsector.

Recent Results. The agriculture, fishery and forestry sector grew by 3.3%
in 2002 compared to growth of 4.7% in 2001 at constant market prices, due to
the positive performance of the agriculture and fishery subsectors, offsetting
the decrease in the forestry subsector. The agriculture and fishery industry
subsector grew by 3.7% in 2002 compared to growth of 4.9% in 2001. In addition
to favorable weather conditions, the Government's revitalized support for
agriculture through various means including the distribution of certified
seeds, rehabilitation of irrigation facilities and the use of modern equipment,
especially in the fishery subsector, contributed to the growth in the
agriculture and fishery subsectors. The forestry subsector contracted by 66.4%
in 2002 compared to a 27.3% contraction in 2001. For 2002, the agriculture,
fishery and forestry sector contributed 19.7% to the total GDP growth rate of
4.4%. Meteorologists have reported that the weather system effect known as El
Nino could extend into and worsen in the first part of 2003, leading to drier
weather conditions, which could have an effect on crop harvests. However, the
El Nino effect is expected to be moderate compared to the prolonged drought of
1997.

Industry Sector

The sector comprises, in order of importance, manufacturing, construction,
electricity, gas and water and mining and quarrying. The sector contributed
approximately 35.4% of GDP in 1998 and 34.5% in 2002, at constant market
prices. The sector grew by 4.8% in 2001, mainly due to the global economic
slowdown. In 2002, the industry sector grew by 3.7%, where the growth was
driven by improvements in all subsectors.

105

Mining and Quarrying. The mining and quarrying subsector contracted by 5.4%
in 2001, compared to growth of 10.0% during 2000. This considerable decline was
caused primarily by the decline in growth of gold production and contraction in
the production of stone quarrying, clay and sandpits and other non-metallic
mining. Increases in the growth of chromium and other metallic mining did not
have a significant impact on the growth of the subsector as a whole. However,
in 2002 the mining and quarrying subsector rebounded from the previous
declines, with growth of 51.0%.

Manufacturing. The country's manufacturing subsector comprises three major
industry groups:

. consumer goods, including the food, footwear and garment industries;

. intermediate goods, including the petroleum, chemical and chemical product
industries; and

. capital goods, including the electrical machinery and electronics
industries.

The following table presents, at constant market prices, the gross value
added, which equals the value of sales minus the cost of raw material and
service inputs, for the manufacturing sector by industry or industry group.

GROSS VALUE ADDED IN MANUFACTURING BY INDUSTRY GROUP
(AT CONSTANT MARKET PRICES/(1)/)

Industry/ Industry Group 1998 1999 2000 2001 2002
- ------------------------ ------------- ------------- ------------- ------------- -------------
(in millions)

Food manufactures................. (Peso) 78,744 (Peso) 83,049 (Peso) 84,590 (Peso) 88,227 (Peso) 95,010
Beverage industries............... 9,003 8,896 9,175 8,820 8,907
Tobacco manufactures.............. 5,538 5,681 5,886 6,133 6,535
Textile manufactures.............. 5,085 4,660 4,128 3,778 4,067
Footwear/wearing apparel.......... 12,699 10,801 12,327 12,801 13,822
Wood and cork products............ 2,769 2,451 2,220 2,060 2,063
Furniture and fixtures............ 2,881 2,852 3,172 3,232 3,065
Paper and paper products.......... 2,132 2,033 2,627 2,258 2,032
Publishing and printing........... 3,093 3,055 2,964 2,967 3,173
Leather and leather products...... 224 222 229 254 293
Rubber products................... 1,849 2,065 2,115 1,743 1,705
Chemical and chemical products.... 14,169 13,868 13,523 14,648 13,961
Petroleum and coal products....... 37,472 37,137 39,896 38,929 34,361
Non-metallic mineral products..... 6,614 5,834 5,625 5,215 5,708
Basic metal industries............ 4,745 4,206 3,600 3,851 3,625
Metal industries.................. 4,231 4,272 4,645 5,257 5,977
Machinery (except electrical)..... 3,540 3,555 4,219 5,326 4,200
Electrical machinery.............. 19,284 22,277 27,678 29,009 34,192
Transport equipment............... 1,810 1,984 2,125 2,325 2,379
Miscellaneous manufactures........ 5,269 5,769 6,527 7,249 7,061
------------- ------------- ------------- ------------- -------------
Gross value added in manufacturing (Peso)221,151 (Peso)224,667 (Peso)237,271 (Peso)244,082 (Peso)252,136
============= ============= ============= ============= =============

- --------
Source: Economic and Social Statistics Office; National Statistical
Coordination Board.

(1) Based on constant 1985 prices.

From 1998 through the first quarter of 1999, weak demand and high operating
costs forced a number of businesses to close or cut back operations.
Import-dependent industries, including transport equipment and rubber,
chemical, petroleum and coal products, experienced declining output.
Export-related industries, however, including furniture and fixtures,
electrical machinery and leather products, grew, as did food manufactures.

106

In 1999, the manufacturing subsector reversed its 1.1% contraction in 1998
to a growth of 1.6%. The sector recorded positive growth for the last three
quarters of 1999. The major gainers for the sector included electrical
machinery, which registered a growth of 15.5% and transport equipment, which
registered a growth of 9.6%. The decliners in the subsector were led by
footwear/ wearing apparel, which recorded a 14.9% contraction.

The manufacturing subsector grew by only 2.9% in 2001, compared to 5.6%
growth in 2000. This reduction was caused primarily by lower growth in the
manufacture of apparel, furniture and electrical machinery and by contraction
in the manufacture of beverages, paper products, rubber products, petroleum and
coal products, and non-metallic mineral products. Gains in growth in the
manufacture of food, tobacco, leather products, nonelectrical machinery,
chemical products and basic metal products contributed positively to the
manufacturing subsector, although they were unable to fully offset the declines
in the subsector as a whole.

In 2002, the annual growth rate of the manufacturing subsector was 3.5%, up
from 2.9% for 2001. The growth in manufacturing was due mainly to growth in the
manufacture of electrical machinery, leather products and footwear and apparel.

Construction. The construction subsector's contribution to GDP, at constant
market prices, decreased slightly from 5.8% in 1998 to 5.7% in 2002. The
construction subsector increased by 18.3% in 2001 compared to an increase of
1.4% in 2000. For 2001, the industry sector contributed 0.6% to the total GDP
growth rate of 3.4%. In 2002, the construction subsector contracted by 3.3%
from the previous year primarily due to a decrease in public construction.

Electricity, Gas and Water. The electricity, gas and water subsector grew
by 0.7% in 2001, compared to 4.2% in 2000. The slower growth was attributable
primarily to reduced electricity demand and decreased water sales resulting
from the rehabilitation of water mains and pipes. The subsector grew 4.3% in
2002.

With limited natural resources available for energy development, the
Philippines satisfies most of its energy needs with imports of coal and oil,
which it then converts into electric power. In August 1996, the Government
deregulated oil prices by introducing an automatic mechanism that adjusted
petroleum product prices monthly in accordance with Singapore posted prices. In
February 1997, the Downstream Oil Industry Deregulation Act of 1996 superseded
the automatic-pricing mechanism and allowed domestic oil prices to fluctuate
freely based on market conditions. On November 5, 1997, however, the Philippine
Supreme Court declared the act unconstitutional on the basis that it inhibited
fair competition, encouraged monopolies, interfered with free market forces and
nullified the principle of deregulation. On February 10, 1998, the Government
enacted a new oil industry deregulation act, which allowed oil prices to
fluctuate and eased the entry of new players into the industry.

The 1998 oil industry deregulation act has increased investment activity and
attracted new players into the downstream oil industry, with approximately
(Peso)4 billion of new investments in LPG refilling, bulk storage and retail
outlets since deregulation of the industry. Prices of petroleum products have
fluctuated in response to market prices and competition has increased. Retail
petrol prices declined by a total of 50-65 centavos per litre between October
1998 and January 1999 in response to increased competition, however prices have
since increased due to the increase in world crude oil prices. Increases in
world crude oil prices led the country to increase coal imports and decrease
oil imports.

107

The following table sets out the country's energy consumption by source.

ENERGY CONSUMPTION BY SOURCE

Energy Source 1998 1999 2000 2001
------------- ----- ----- ----- -----
(% of total consumption)

Domestic sources
Oil...................... 0.1% 0.1% 0.0% 0.1%
Coal..................... 2.0 1.6 1.6 1.9
Hydro.................... 3.6 5.5 5.0 5.1
Geothermal............... 6.4 7.5 7.8 7.2
Other/(1)/............... 28.6 28.8 27.8 30.7
----- ----- ----- -----
Total domestic sources.. 40.7 43.5 42.2 45.0
----- ----- ----- -----
Imported sources
Oil...................... 53.7 50.2 45.5 46.0
Coal..................... 5.5 6.3 12.3 10.1
----- ----- ----- -----
Total imported sources.. 59.2 56.5 57.8 56.1
----- ----- ----- -----
Total.................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====

- --------
Source: Department of Energy.

(1) Other includes gas, fuelwood and biomass fuel.

National Power Corporation is the principal entity engaged in the
development, generation and transmission of electric power on a nationwide
basis. It establishes and maintains transmission line grids, generating
facilities and inter-island connections throughout the Republic.

In August 1998, the Department of Energy proposed a number of measures to
restructure the Republic's electric power industry, including:

. eliminating subsidies for less populated service areas, which are
currently generated by requiring all service areas to pay the same prices
for electricity;

. restructuring and privatizing the National Power Corporation;

. creating competition in power generation; and

. providing free access to the transmission and distribution system.

The reforms, especially the restructuring and privatization of National
Power Corporation, would allow distributors and large customers to choose their
electricity supplier. Commercial, regulatory and tariff reforms will be put in
place in response to the additional burdens on the regulatory agency, the
distribution sector and the other industry players resulting from increased
competition in the industry. The Electric Power Industry Reform Act, which
provides a legal framework for the restructuring of the electric power industry
and the privatization of the assets and liabilities of the National Power
Corporation, was enacted on June 8, 2001. See "-- Recent Economic Developments
- -- Electric Power Industry Reform Act and -- Privatization of the National
Power Corporation."

Service Sector

The sector comprises, in order of importance, trade, finance and housing,
private services, transportation, communications and storage and Government
services. The service sector was the largest contributor to GDP in 2000,
contributing approximately 45.8% of GDP. Overall, in 2002, the services sector
grew by 5.5%.

108

Trade. The trade subsector, which consists of wholesale and retail
activities, accounted for 16.3% of GDP at constant market prices in 2002. The
trade subsector grew by 5.6% in 2001 at constant market prices, compared to
5.2% growth in 2000. This increase was caused by a notable growth in wholesale
trade, which accounts for one-fourth of trade output. The trade subsector grew
by 5.8% in 2002.

Finance. The finance subsector's contribution to GDP at constant market
prices decreased slightly from 5.1% in 1998 to 4.7% in 2002.

The finance subsector grew by 3.4% in 2002 after growing by 1.2% in 2001 and
0.9% in 2000. For a discussion of the country's financial system, see "-- The
Philippine Financial System."

Ownership of Dwellings and Real Estate. The ownership of dwellings and real
estate subsector grew by 1.6% in 2002 at constant market prices after
contracting by 0.5% in 2001 and registering zero growth in 2000, at constant
market prices.

Private Services. The private services subsector includes educational,
medical and health, recreational and hotel and restaurant services. The
subsector contributed approximately 7.5% to GDP at constant market prices in
2002. Except for business services and personal services, which experienced
higher rates of growth, all private services experienced lower, although
positive, growth. The private services subsector grew by 5.5% in 2002 compared
to growth of 4.4% in 2001.

Government Services. The Government services subsector grew by 4.7% in 2002.

Transportation, Communications and Storage. The geographically diverse
nature of the Philippines makes it important to have well developed road, air
and sea transportation systems. The Government has encouraged, build, operate
and transfer, projects and other private sector initiatives to provide basic
transportation services and strengthen inter-regional and urban links to ensure
safe and efficient movement of people and goods. Important ongoing build,
operate and transfer projects (or its variants) and joint venture projects
include the Metro Rail Transit Project, Metro Manila Skyway Project, the
Manila-Cavite Expressway Project and the South Luzon Expressway Extension.

The country's road network is the most important transportation system
carrying about 65% of freight and 90% of passenger traffic. The road network
covers more than 200,000 kilometers. About 1.8 million vehicles use the road
network, including 236,000 vehicles for public use, principally in Metro
Manila. Traffic remains congested in the capital region, despite traffic
management and various engineering measures. The Government has built and
continues to emphasize alternative road networks and mass rapid urban transit
rail facilities to ease the problem.

In 2000, about 1,194 miles of national roads were constructed or
rehabilitated while 7,100 lineal meters of bridges along national roads were
converted to permanent structures. This improved the percentage of paved
national arterial roads to 77% and that of national secondary roads to 52% at
the end of 2000.

109

Usage of the country's rail facilities has declined largely because of the
outdated facilities of the Philippine National Railways. The Government has
constructed a two-line light-rail transit system in Metro Manila, financed by a
build, lease and transfer arrangement, and has started work on a third line of
the light-rail transit system, which is expected to be operational by year 2004
and will provide additional maximum capacity of 500,000 passengers per day for
the Metro Manila commuters.

In addition to a more conducive environment for private sector participation
brought about by the amendment of the Build-Operate-Transfer Law, the
light-rail transit system Line 1 South Extension Project is expected to be
undertaken under a joint venture agreement. The 27-kilometer extension line
will expand the existing light-rail system Line 1 service southward to the
cities of Paranaque and Las Pinas and the adjoining municipality of Bacoor. The
project will connect the north and south ends of the existing railway system.

Four international airports, in Manila, Cebu, Clark and Subic, and 83 other
facilities throughout the country help meet the country's air transport needs.
The Government plans to upgrade several major airports to international
standards and generally to modernize air navigation and communications
operations in the country. The new Manila International Airport terminal's
project is expected to commence in early 2003. The Government has formulated a
plan for the transition from land-based to satellite-based technology in civil
aviation. It approved the implementation of the new communications, navigation
surveillance and air traffic management systems project, which will implement
satellite-based technology designed to control and manage the air traffic
within the respective flight information region. Once financing is obtained and
implementation is completed, the system will increase air travel safety,
shorten flight duration for air passengers and improve aircraft operating
efficiency due to more flexible flight paths and increased airspace capacity.

Philippine Airlines, Inc., the primary national air carrier, several smaller
domestic airlines and airlines from various countries provide air service to,
from and within the country. Philippine Airlines retains a leading position in
domestic routes, but since the beginning of 1998, Philippine Airlines has had
increasing financial difficulties and labor problems.

The airline's finances, however, began to improve in its fiscal year 1999
(ending on March 31, 2000). After registering six consecutive years of losses,
Philippine Airlines reported a net profit of (Peso)45.8 million in fiscal year
1999. In the fiscal year 2000 (ending on March 31, 2001), the airline realized
an 815% rise in profits, registering a net profit of (Peso)419 million.

The country's geography also requires an effective water transport system to
ferry cargo and passengers among islands. Currently, the water transport system
handles about 40% of total freight traffic and 10% of total passenger traffic
in the Philippines. The regulatory policy during the past decade has been to
open the industry to competition, ensuring lower cargo passage rates and
improving the quality of service. The Government plans to construct or improve
96 national ports, approximately 300 municipal, feeder and fishing ports and
river landings and special handling facilities for grains and bulk cargo in
other selected ports.

Faced with historical shortages of telephone lines and long waits for basic
telephone service, especially outside Metro Manila, the Government opened the
telecommunications industry in 1993 to intensify competition and to increase
substantially the number of telephone lines and interconnections. The
Government has continued to implement programs designed to provide telephone
lines, exchanges and transmission facilities to underserved regions of the
country. As of December 31, 2001, a cumulative total of more than 6.9 million
lines have been installed, which translates to a telephone density of 9.0 main
telephone lines per 100 inhabitants.

The country has 11 international long distance providers and five cellular
mobile telephone operators, as well as a number of competitors in the local
telephone market. The privately-owned Philippine Long Distance Telephone
Company ("PLDT") continues to exert strong influence over the
telecommunications market through its ownership and operation of the public
switch telecommunications network, to which other companies are interconnected.

110

The transport, communications and storage subsector's contribution to GDP,
at constant market prices, grew from 6.6% in 1998 to 7.7% in 2002. The
subsector grew by 8.8% in 2001, compared to growth of 10.5% in 2000. This
reduced growth was caused primarily by decreases in the growth rate of most
facets of transportation and storage, most notably a contraction in water
transport and a significant decrease in growth of air transport. Growth in
communications partially offset the slowdowns in transportation and storage,
although the growth rate in communications has declined on a quarterly basis
since the first three months of 2001. In 2002, the subsector grew by 8.9%,
compared to 8.8% in 2001.

Prices, Employment and Wages

Inflation

The Philippines reports inflation as the annual percentage change in the
consumer price index, which measures the average price of a standard "basket"
of goods and services used by a typical consumer. In June 1998, the Government
began employing a 1994-based CPI basket of goods and services, which since 1999
has been the sole official measurement. For Metro Manila, the 1994 CPI basket
consists of 705 commodities. In addition, the 1994 CPI basket for areas outside
Metro Manila focuses on provinces or cities.

The following table sets out the principal components of the 1994 CPI basket.

PRINCIPAL COMPONENTS OF 1994 CPI BASKET

Category Basket
-------- ------

Food items (including beverages and tobacco) 55.1%
Rice...................................... 11.8
Non-food items.............................. 44.9
Housing and repairs....................... 14.7
Services.................................. 12.3
Fuel, light and water..................... 5.7
Clothing.................................. 3.7
Miscellaneous............................. 8.5

The following table sets out the consumer price index and the manufacturing
sector's equivalent, the producer price index, as well as the annual percentage
changes in each index based on the 1994 CPI basket.

CHANGES IN CONSUMER AND PRODUCER PRICE INDEX

1998 1999 2000 2001 2002 2003
----- ----- ----- ----- ----- -----

Consumer Price Index....................... 136.8 145.9 152.3 161.6 166.6 169.8/(3)/
Increase over Previous Year................ 9.7% 6.6% 4.4% 6.1% 3.1% N/A
Producer Price Index for Manufacturing/(1)/ 131.7 137.9 141.5 165.6 170.4 183.0/(4)/
Increase/(Decrease) over Previous Year/(1)/ (11.0)% 4.7% 2.6% 17.0% 5.5%/(2)/ N/A

- --------
Source: National Statistics Office.

(1) Measured by the 1994 PPI benchmark.
(2) Represents the increase from November 2001 to November 2002.
(3) First three months.
(4) As of January, 2003.

Inflation in 1998 increased because of the Peso depreciation and lower
agricultural output caused principally by the drought related to the El Nino
phenomenon and a number of typhoons related to the La Nina phenomenon. The 1998
inflation rate was 9.7%. In December 1999, the monthly inflation rate was 4.3%,
down from a high for the year of 11.5% in January 1999. The decline was due
primarily to a sharp fall and subsequent stability in food prices resulting
from strong performance in the agriculture sector leading to increased food
supply, which partially offset the effects of increases in world crude oil
prices.

111

The easing of inflationary pressures in the second half of 1999 extended up
to the second quarter of 2000. Inflation remained in single digits at 4.4% for
2000 compared with the 6.6% recorded in 1999. Moderate inflation was achieved
notwithstanding an increase in economic activity, inflationary pressures
arising from wage adjustments and increases in oil prices and transport fares.

Inflation was kept low in 2001, at an average of 6.1%, which was within the
Government's target of 6-7%. Favorable food and oil prices, stable exchange
rates and moderate growth in demand all contributed to low inflation.

The national inflation rate averaged 3.1% for 2002 and 2.8% year on year as
of May 2003. Inflation continues to be benign despite the recent adjustments in
domestic oil prices, which increased by 11.2% at December 31, 2002 as compared
with December 31, 2001 (in part because the adjustments have not been passed on
to transport charges), and despite an increase in food prices due to
weather-related reductions in supplies of rice, fruits, and vegetables.
Reductions in Bangko Sentral's policy interest rates and efforts to maintain
fiscal discipline, which have led to lower market lending rates and lower costs
of capital for businesses, also had a favorable impact on inflation. Equally
important, inflationary pressures caused by more demand than supply continue to
be subdued due in part to current levels of unemployment and spare capacity as
well as restrained, though increasing, domestic demand. The reduction in the
PPA of NPC, effective May and the decision of the Manila Waterworks and
Sewerage System to delay petitions for water rate increases also helped to keep
inflation rates relatively low.

Employment and Wages

The following table presents selected employment information for various
sectors of the economy.

SELECTED EMPLOYMENT INFORMATION/(1)/

1998 1999/(2)/ 2000/(2)/ 2001/(2)/ 2002/(2)/
------ -------- -------- -------- --------

Labor force (in thousands).................. 29,674 30,759 30,911 32,809 33,936
Unemployment rate........................... 10.3% 9.8% 11.2% 11.1% 11.4%
Employment share by sector:
Agriculture, fishery and forestry........... 37.9% 38.8% 32.9% 37.2% 37.0%
Industry sector
Mining and quarrying...................... 0.4 0.4 0.4 0.4 0.4
Manufacturing............................. 10.2 9.9 10.0 10.0 9.5
Construction.............................. 5.9 5.5 5.4 5.4 5.3
Electricity, gas and water................ 0.5 0.5 0.4 0.4 0.4
------ ------ ------ ------ ------
Total industry sector.................... 17.1% 16.3% 16.2% 16.2% 15.6%
Service sector
Transportation, communication and storage. 6.8 6.9 7.2 7.3 7.2
Trade..................................... 15.6 15.7 16.3 18.0 18.7
Finance and housing....................... 2.5 2.6 2.6 2.8 2.8
Services.................................. 20.1 19.7 20.5 18.6 18.7
------ ------ ------ ------ ------
Total services sector.................... 45.0% 44.9% 46.6% 46.7% 47.4%
------ ------ ------ ------ ------
Total employed.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======

- --------
Source: Bureau of Labor and Employment Statistics -- Current Labor Statistics;
National Statistics Office -- Labor Force Survey.

(1) Figures for 1998 to 2002 are the average of the applicable statistic for
each quarter in the relevant period.
(2) Figures generated using 1995 census-based population projections.

At the end of 2002, the Filipino labor force totalled 33.9 million people.
The Filipino labor force is relatively young. They are employed primarily in
service industries, such as nursing and education, and in

112

manufacturing export industries, such as electronics and garments. A total of
832,449 Filipino workers were working overseas from January to November 2002,
an increase of approximately 2.5% from the same period in 2001.

Regional tripartite bodies consisting of representatives of Government,
businesses and workers establish minimum wage requirements, which vary based on
region and industry. Under the law, minimum wage requirements may only be
increased once in any twelve month period. The minimum wages for workers in
Metro Manila and the surrounding areas are the highest in the country. Across
the regions, daily minimum wages range from a low of (Peso)114.0 to a high of
(Peso)280.0.

The economic difficulties that began in the second half of 1997, including
the slower growth of the country's industrial production, drove the average
unemployment 10.3% in 1998, before improving to 9.8% in 1999. The unemployment
rate increased to 11.2% in 2000 amidst uncertainties over the allegations of
corruption surrounding former President Estrada and fears of subsequent
economic slowdown. In Metro Manila, where 13.8% of the country's labor force is
located, unemployment ranged from 13.8% to 16.4% from 1997 to 1999 and from
17.9% to 17.7% from 2000 to 2002. In response to the economic slowdown in 2001,
employers and workers agreed to the Social Accord for Industrial Harmony and
Stability under which they confirmed the commitment to refrain from layoffs,
closures, work stoppages or slowdowns except as a last resort.

Labor and employment conditions improved in 2001 as the economy grew
stronger than expected during the year. The substantially reduced number of
strikes, increased rates of deployment of workers overseas and improved
legislated wage indicators reflect broadly improved labor, employment and wage
conditions during the year.

The number of employed persons increased by 6.2% to 29.2 million in 2001
from 27.5 million in 2000, due largely to the strong performance of the
services sector, particularly in the wholesale and retail trade subsector, as
well as the agriculture, fishery and forestry sector. The employment rate,
however, improved slightly by only 0.1% to 88.9% from 88.8% in 2000 as the 6.2%
growth in the number of employed persons was accompanied by a 6.1% increase in
the labor force.

Meanwhile, the number of unemployed persons was 3.1 million in October 2002,
a 6% decline from October 2001. The largest number of unemployed persons was
located in Metro Manila, which posted a 16.7% unemployment rate as of October
2002.

Social Security System and Government Service Insurance System

The Philippines does not pay any unemployment compensation or make any
general welfare payments other than through the Social Security System and the
Government Service Insurance System. The Social Security System provides
private sector employees, including self-employed persons and their families,
with protection against disability, sickness, old age and death. Monthly
contributions by covered employees and their employers, and investment income
of the Social Security System fund the system. The Social Security System
invests its funds in Government securities and in local equity securities.

The Government Service Insurance System administers social security benefits
for Government employees, including retirement benefits, life insurance,
medical care and sickness and disability benefits. The system also administers
the self-insurance program for Government properties, such as buildings and
equipment. The Government Service Insurance System also oversees loan programs,
including housing loans for Government employees. Monthly contributions by
covered employees and their employers fund the system. Government agencies must
include in their annual appropriations the amounts needed to cover their share
of the contributions and any additional premium required based on the hazardous
nature of the work. The Government Service Insurance System invests its funds
in a manner similar to the Social Security System.

113

Savings

The following table sets out the ratio of gross national savings, total
investment and the savings-investment gap as a percentage of GDP.

1998 1999 2000 2001 2002
---- ---- ---- ---- ----

Gross national savings 22.7% 27.5% 26.2% 22.5% 24.7%
Gross investments..... 20.3% 18.8% 18.4% 20.7% 19.3%
Savings-investment gap 2.4% 8.8% 7.8% 1.8% 5.4%

- --------

Source: National Accounts, NSCB.

Government steps to stimulate the savings rate in the Philippines include:

. launching a nationwide savings consciousness campaign to inform savers
about different types of financial assets;

. shifting by the Philippine Stock Exchange from merit-based regulation to
self-regulation;

. tightening disclosure and insider trading rules;

. removing double taxation of mutual funds;

. allowing increased foreign equity participation in investment and
financing companies;

. rationalizing financial taxes (e.g., gross receipts tax, documentary stamp
tax, initial public offerings tax);

. broadening of the scope and coverage of small denominated Treasury-bills
which were offered beginning in November 1998;

. establishing a Small and Medium Enterprises Board at the Philippine Stock
Exchange; and

. lengthening of the yield curve of government securities.

Balance of Payments

Balance of Payments Performance

Balance of payments figures measure the relative flow of goods, services and
capital into and out of the country as represented in the current account and
the capital and financial accounts. The current account tracks a country's
trade in goods, services, income and current transfer transactions. The capital
and financial account includes the capital account, which covers all
transactions involving capital transfers and acquisition or disposition of
non-produced, non-financial assets, and the financial account, which covers all
transactions associated with changes of ownership in the foreign financial
assets and liabilities of an economy. A balance of payments surplus indicates a
net inflow of foreign currencies, thereby increasing demand for and
strengthening the local currency. A balance of payments deficit indicates a net
outflow of foreign currencies, thereby decreasing demand for and weakening the
local currency.

114

The following table presents basic balance of payments information for 1996
through 1998.

BALANCE OF PAYMENTS/(1)/

1996 1997 1998
-------- -------- --------
(in millions)

Current account:
Goods trade
Exports............................................. $ 20,543 $ 25,228 $ 29,496
Imports............................................. (31,885)/(2)/ (36,355)/(2)/(29,524)/(2)/
Services trade
Receipts............................................ 19,006 22,835 13,917
Payments............................................ (12,206) (17,139) (12,778)
Transfers
Inflow.............................................. 1,185 1,670 758
Outflow............................................. (596) (590) (323)
-------- -------- --------
Total current account (deficit).................... $ (3,953) $ (4,351) $ 1,546
Capital and financial account:
Medium and long-term loans
Availment........................................... $ 6,540 $ 7,724 $ 6,025
Repayment........................................... (3,699) (2,900) (3,285)
Trading of bonds in the secondary market
Resale of bonds..................................... 4,148 3,072 3,307
Purchase of bonds................................... (4,185) (3,748) (4,390)
Investments, net/(3)/
Non-resident investments in the Philippines......... 3,621 843 2,016
Resident investments abroad......................... (104) (81) (344)
Change in the net foreign assets of commercial banks. 4,214 1,188 (4,347)
Short-term capital, net.............................. 540 495 1,205
-------- -------- --------
Net capital and financial account...................... $ 11,075 $ 6,593 $ 187
Monetization of gold/(4)/.............................. 198 105 118
Revaluation adjustments/(5)/........................... (203) (465) (22)
Net unclassified items................................. (3,010) (5,245) (470)
-------- -------- --------
Overall balance of payments position................... $ 4,107 $ (3,363) $ 1,359
======== ======== ========

- --------
Source: Bangko Sentral.

(1) As described below, the framework for compiling and reporting the balance
of payments has been revised based on the new concept under the IMF Balance
of Payment Manual, 5th Edition.
(2) National Statistics Office data was adjusted to exclude the value of
aircraft amounting to $542 million in 1996, $45 million in 1997 and $136
million in 1998 procured under operating lease arrangements, and to include
an additional $466 million worth of aircraft imported under capital lease
arrangements in 1997.
(3) Revised to reflect proper classification of balance of trade related
transactions from non-resident to resident transactions.
(4) Represents gold purchased by Bangko Sentral from domestic gold producers
that becomes part of its official reserves, and profits from the sale of
gold by Bangko Sentral.
(5) Represents changes in valuation of monetary assets and liabilities as a
result of changes in the exchange rate of the US dollar against the Special
Drawing Rights and other foreign currencies that form part of the reserve
assets and monetary liabilities of Bangko Sentral, as well as discounts
accruing to Bangko Sentral in connection with debt-to-equity conversion
programs and other debt reduction schemes.

New Framework

Beginning in January 2000, Bangko Sentral adopted a new framework for the
balance of payments compilation and reporting based on the fifth edition of the
Balance of Payments Manual, or BPM5, of the International Monetary Fund.

115

The following table presents a comparative summary of major revisions in the
format of balance of payments reports.

Comparative Summary of Major Revisions in the Balance of Payments Report Format

BOP Categories Old Format New Format
- ----------------------- ----------------------------------------- --------------------------------------

Current Account Consists of: Consists of:
. Goods . Goods
. Services . Services
. Transfers . Income
. Current transfers
Goods Includes data on all goods leaving the Excludes shipments of goods that do
country and entering any of the not involve a change in ownership
seaports and airports of entry in the
Philippines that are properly cleared
through the Bureau of Customs
Services Includes both factor services (services Includes only non-factor services;
of labor and capital) and non-factor factor services are lodged separately
services (transport services, travel, and under "Income Account"
other services not reported separately)
Income Included in the "Services Account" Includes income for factor services
Transfers Includes both current and capital Includes only current transfers.
transfers Capital transfers are lodged under the
"Capital Account", a sub-account under
Capital and Financial Consists of: Consists of:
Account . Medium- and long-term loans Capital Account which includes:
. Trading of bonds in the secondary . Capital transfers
market . Acquisition or disposition of
. Investments non-produced non-financial assets
. Change in commercial banks' net (e.g. goodwill, patent, copyrights)
foreign assets Financial Account which is composed
. Short-term capital of:
Medium- and Long-Term Consists of: Consists of:
Loans . Non-bank loans including inter- . Non-bank loans, excluding
company loans intercompany loans, are categorized
. Bonds issued and redeemed by the as Other Investments.
original issuer . Inter-company loans are treated as
Direct Investments
. Bonds are classified under
Portfolio Investments
Trading of Bonds in the Refers to the purchase and sale abroad Classified as Portfolio Investments
Secondary Market of resident-issued bonds in the (together with bonds treated as
secondary market by residents (other medium- and long-term loans under the
than the original issuer) from non- old framework)
residents

116

BOP Categories Old Format New Format
- ---------------------- --------------------------------------- ---------------------------------------

Investments Includes: Includes:
. Direct Investments which covers: . Direct investments which cover:
. Investments in equities . Investment in equities
. Portfolio Investments . Reinvested earnings
For non-residents, covers investments . Inter-company loans
in: . Portfolio Investments
. Equities of resident firms For Non-Residents, covers
acquired through the stock exchange investments in:
. Resident debt securities issued in . Equities of resident firms
the local market acquired through the stock exchange
For residents, covers investments in: . Debt securities (bills and bonds)
. Equities listed in foreign stock issued by both the public and
exchanges private sectors, banks and
non-banks, in the local market
and abroad. These include bonds
which were treated as medium- and
long-term loans under the old
framework
For Residents, covers investments
in:
. Equities listed in foreign
stock exchanges
. Foreign debt securities of bank
and non-banks
Change in Commercial Change in net foreign asset position of Distributed among direct, portfolio and
Banks Net Foreign commercial banks other investments accounts
Assets
Short-Term Capital Consists of non-bank short-term loans Included in other investments
and net trade credits
Other Investments Includes:
. Net trade credits
. Loans of banks and non-banks
. Currencies and deposits of resident
banks abroad, and currencies and
deposits non-residents with
resident banks (net change)
. Other assets and liabilities of
banks (net change)
Others Includes: No longer part of the computation of
. Monetization of gold the balance of payments
. Revaluation adjustments
Net Unclassified Items Includes: Includes:
. Errors and omissions . Errors and omissions
. Floats . Floats
Overall BOP Computed as the sum of the Current Computed as the sum of the Current
Account and Capital and Financial Account and Capital and Financial
Account plus Others and Net Account plus Net Unclassified Items
Unclassified Items

117

The following table sets out the consolidated financial position on a cash
basis for the Republic for the periods indicated.

BALANCE OF PAYMENTS/(1)(2)/

Years Ended December 31
-----------------------------------
1999 2000 2001 2002
-------- ------- ------- -------
(in millions)

Current account:/(2)/.................................................... $ 7,219 $ 6,258 $ 1,323 $ 4,197
-------- ------- ------- -------
Goods and services:...................................................... 2,247 1,384 (2,793) (856)
Exports/(3)/........................................................... 39,014 41,267 34,391 37,439
Imports/(3)/........................................................... 36,767 39,883 37,184 38,295
Goods.................................................................. 4,959 3,814 (743) 408
Credit: Exports/(3)/.................................................. 34,211 37,295 31,243 34,383
Debit: Imports/(3)/................................................... 29,252 33,481 31,986 33,975
Services............................................................... (2,712) (2,430) (2,050) (1,264)
Credit: Exports....................................................... 4,803 3,972 3,148 3,056
Debit: Imports........................................................ 7,515 6,402 5,198 4,320
Income:.................................................................. 4,460 4,437 3,669 4,550
Credit: Receipts...................................................... 8,082 7,804 7,152 7,931
Debit: Disbursements.................................................. 3,622 3,367 3,483 3,381
Current transfers:....................................................... 512 437 447 503
Credit: Receipts...................................................... 607 552 517 594
Debit: Disbursements.................................................. 95 115 70 91
Capital and financial account:/(2)/...................................... (2,333) (4,119) (1,080) (2,104)
Capital account:....................................................... (8) 38 (12) (19)
Credit: Receipts...................................................... 44 74 12 2
Debit: Disbursements.................................................. 52 36 24 21
Financial account:..................................................... (2,325) (4,157) (1,068) (2,085)
Direct investment..................................................... 1,754 1,453 1,142 1,026
Debit: Assets, residents' investments abroad......................... (29) (108) (160) 85
Credit: Liabilities, non-residents' investments in the Philippines... 1,725 1,345 982 1,111
Portfolio Investment:................................................. 6,874 207 1,050 1,921
Debit: Assets, residents' investments abroad......................... 807 812 399 369
Credit: Liabilities, non-residents' investments in the Philippines... 7,681 1,019 1,449 2,281
Other Investment:..................................................... (10,953) (5,817) (3,260) (5,023)
Debit................................................................ 18,639 15,313 13,898 13,214
Credit............................................................... 7,686 9,496 10,638 8,191
Net unclassified items:.................................................. (1,300) (2,652) (435) (1,433)
-------- ------- ------- -------
Overall BOP position:/(4)/............................................... $ 3,586 $ (513) $ (192) $ 660
======== ======= ======= =======

- --------
Source: Bangko Sentral.

(1) Beginning January 2000, the Republic adopted the fifth edition of the
International Monetary Fund's Balance of Payments Manual ("BPM5"). For the
purpose of assessing comparative performance, the 1999 balance of payments
was reconstructed to conform with the conceptual coverage of the BPM5.

(2) The Republic has disclosed that the reported current account surplus has
been overstated due to monitoring problems giving rise to underreported
imports. See "-- Recent Economic Developments -- Balance of Payments."

Reflecting the revisions in imports, the current account for 2000 has been
revised to a surplus of $6.3 billion from a previously reported surplus of
$8.5 billion, and the current account for 2001 has been revised to a surplus
of $1.3 billion from a previously reported surplus of $4.1 billion. At these
revised levels, the current account surplus stood at 7.9% and 1.7% of gross
national product for 2000 and 2001, respectively. However, the capital and
financial account for 2000 has been revised downward to a net outflow of
$4.1 billion from a previously reported net outflow of $6.5 billion, and the
capital and financial account for 2001 has been revised downward to a net
outflow of $1.1 billion from a previously reported net outflow of $3.7
billion.

118

(3) Data on exports and imports from the National Statistics Office were
adjusted to exclude temporary exports and imports and returned goods.
(4) The overall BOP position results from the change in net international
reserves that is purely due to transactions excluding the effects of
revaluation of reserve assets and selected reserve liabilities, gold
monetization and Special Drawing Rights allocation.

In 1998, the balance of payments registered an overall surplus of $1.4
billion, compared to a $3.4 billion deficit in 1997. The current account
yielded a surplus of $1.5 billion compared to a deficit of $4.4 billion in 1997
primarily because of an increase in merchandise exports and a reduction of
imports that led to a 99.7% improvement in the goods trade balance. The capital
and financial account fell 97.2% from $6.6 billion in 1997 to $187 million in
1998, due mainly to a significant decline in net medium and long-term loans and
a negative change in the net foreign asset position of commercial banks arising
largely from the reduction in commercial banks' foreign liabilities. Net
unclassified items fell to $470 million in 1998 versus $5.2 billion in 1997,
due to more effective monitoring by the authorities, further contributing to
the improved balance of payments position.

In 1999, under the BPM5 framework, the balance of payments registered an
overall surplus of $3.6 billion. This resulted from a surplus of $7.2 billion
in the current account due to an improvement in the goods trade balance and net
inflows from the income account. The capital and financial account recorded a
deficit of $2.3 billion in 1999, although there were sustained inflows of
direct investment and portfolio investment by nonresidents.

In 2000, under the BPM5 framework, the balance of payments position showed a
deficit of $513 million following the weaker capital and financial account even
as the current account continued to perform favorably. The current account
posted a surplus of $6.3 billion for 2000, or 13.3% lower than the level
registered in 1999. The net outflow in the capital and financial account
totalled $4.1 billion following the weakening in the financial account. Inflows
of both direct and portfolio investments offset some of the outflows in the
other investments account. However, portfolio investments were down
considerably in 2000 to a net inflow of $207 million from a net inflow of $6.1
billion in 1999.

The overall balance of payments showed a deficit of $192 million in 2001,
compared to a deficit of $513 million in 2000. This positive development was
caused by lower net outflows of $1.1 billion in the capital and financial
account in 2001, as compared to $4.1 billion in 2000, which overshadowed a
substantial decline in the current account surplus of $1.3 billion in 2001, as
compared to $6.2 billion in 2000. Exports of goods contracted by 16.2% and
inflows in the services trade account decreased by 20.7% due to lower travel
receipts arising from perceived security concerns and the travel scare that
followed the terrorist attacks in the United States. Imports of goods declined
by 4.5%, and outflows in the services trade account declined by 18.8%. Foreign
direct investments posted a sustained net inflow of $982 million compared to a
$1.3 billion net inflow in 2000. From a net inflow of $207 million in 2000,
portfolio investments increased, posting a net inflow of $1.1 billion in 2001.

119

In 2002, the balance of payments registered a surplus of $660 million,
compared to a deficit of $192 million in 2001. This improvement can mainly be
attributed to the strong performance of the current account, which offset the
weak performance of the capital and financial account. The current account
surplus more than tripled to $4.2 billion for 2002 from $1.3 billion in 2001.
This positive development was mainly caused by higher net inflows in the income
accounts, the reversal of the trade-in-goods balance to a surplus from a
deficit and lower net outflows in services. Higher net inflows from current
transfers also helped strengthen the current account's performance for the
year. The trade-in-goods balance for 2002 posted a surplus of $408 million as
compared to a deficit of $743 million for 2001 as growth of exports outpaced
that of imports. The strong export performance was supported by increasing
intra-regional trade in Asia, absorbing the reduction in demand from the US and
Japan, the Republic's traditional trading partners, and by a new export plan
focusing on aggressive marketing and developing small and medium enterprises.
The trade-in-services account for 2002 showed a net outflow of $1.3 billion,
38.3% lower compared to the level in 2001, mainly on account of the lower net
payments for transportation services, construction services and for
miscellaneous business, professional and technical services. Net inflows of
income account for 2002 grew by 24.0% to $4.6 billion. The higher surplus was
due mainly to an increase in the number deployed overseas foreign workers who
continued to send remittances from abroad. The current transfers account for
2002 amounted to $503 million, 12.5% higher than the level registered in 2001.
The improvement was due to the higher transfers from migrant workers as well as
receipts in the form of gifts, grants and donations from individuals and
non-governmental institutions. However, the capital and financial account for
2002 posted a higher net outflow of $2.1 billion, compared with a net outflow
of $1.1 billion in 2001. The weaker performance of this account was attributed
to the decline in net inflow of direct investments, which fell to $1.0 billion,
or 10.2% below the level posted in 2001, as well as the higher net outflow in
other investments which rose to $5.0 billion in 2002 from $3.3 billion in 2001.
These changes offset the positive impact of higher net inflow of portfolio
investments, which rose to a net inflow of $1.9 billion, an increase of 82.1%
from the net inflow of $1.1 billion in 2001 due mainly to the substantially
higher non-residents' investments in resident-issued foreign-denominated debt
securities.

The following discussion of the 2000 and 2001 balance of payments does not
reflect recent revision to the Republic's balance of payments. See "-- Recent
Economic Developments -- Balance of Payments." However, the discussion of the
2002 balance as payments reflects all such revisions.

Current Account

Goods Trade. Trading in goods significantly affects the Philippine economy.
To imports for 2000 and 2001 (see "-- Recent Economic Developments -- Balance
of Payments"), from 1998 to 2002, exports accounted for an average of
approximately 44% of the country's GNP and imports accounted for an average of
approximately 40% of GNP. The country's trade strategy emphasizes export
promotion. The rapid expansion of export-oriented, labor-intensive
manufacturing operations, such as electronics and textiles, drove total exports
to $32.1 billion in 2001 and produced an average annual export growth rate of
4.4% from 1998 to 2002.

A significant proportion of exports, estimated at 40% to 50% in 2000,
depends on imported raw materials or other inputs, rendering the country's
exports vulnerable to any import decline resulting from a Peso depreciation.
The Government aims to reduce the importance of imports for producing the
country's exports by implementing a number of different policies, including
infrastructure development and tariff reform.

120

Exports. The following table sets out the country's exports of manufactures
by major commodity group.

MERCHANDISE EXPORTS BY SECTOR

Percentage
of Total
Exports
------------
1998 1999 2000 2001 2002 1998 2002
------- ------- ------- ------- ------- ----- -----
(in millions, except percentages)

Manufactures
Electronics and electrical equipment/parts................... $17,388 $21,558 $22,517 $16,894 $18,746 58.9% 53.5%
Garments..................................................... 2,356 2,267 2,562 2,403 2,392 8.0 6.8
Textile yarns/fabrics........................................ 243 221 249 226 249 0.8 0.7
Footwear..................................................... 147 86 76 73 48 0.5 0.1
Travel goods and handbags.................................... 183 154 177 174 83 0.6 0.2
Wood manufactures............................................ 118 128 210 119 112 0.4 0.3
Furniture & fixtures......................................... 323 353 383 298 316 1.1 0.9
Chemicals.................................................... 340 295 328 318 361 1.2 1.0
Non-metallic mineral manufactures............................ 106 111 134 123 113 0.4 0.3
Machinery and transport equipment............................ 3,329 4,971 5,930 6,198 7,118 11.3 20.5
Processed food and beverages................................. 306 264 280 345 388 0.1 1.1
Iron and steel............................................... 28 18 25 14 17 0.1 0.0
Baby carriages, toys, games and sporting goods............... 169 158 165 145 140 0.6 0.4
Basketwork, wickerwork and other articles of plaiting
materials................................................... 85 84 95 83 74 0.3 0.2
Miscellaneous manufactured articles, not elsewhere specified. 207 214 231 230 243 0.7 0.7
Others....................................................... 786 852 1,002 984 1,015 2.7 2.9
------- ------- ------- ------- ------- ----- -----
Total manufactures.......................................... 26,114 31,734 34,364 28,627 31,415 88.5 89.6
Agro-based products
Coconut products............................................. 832 458 569 525 478 2.8 1.4
Sugar and sugar products..................................... 100 71 57 32 46 0.4 0.1
Fruits and vegetables........................................ 447 456 535 552 541 1.5 1.5
Other agro-based products.................................... 466 476 495 428 455 1.6 1.3
------- ------- ------- ------- ------- ----- -----
Total agro-based products................................... 1,845 1,461 1,656 1,537 1,520 6.3 4.3
Mineral products............................................... 591 645 649 536 512 2.0 1.5
Petroleum products............................................. 129 216 436 242 353 4.4 1.0
Forest products................................................ 24 20 42 21 24 0.1 0.1
Others......................................................... 794 956 932 1,186 1,237 2.7 3.5
------- ------- ------- ------- ------- ----- -----
Total....................................................... $29,497 $35,032 $38,079 $32,149 $35,061 100.0% 100.0%
======= ======= ======= ======= ======= ===== =====

- --------
Source: National Statistics Office.

Exports of manufactured goods grew at an average rate of 4.4% per year from
1998 to 2002. However in 2001 a decline of 18.7% was recorded. As a percentage
of total exports, manufactured goods increased from 88.5% in 1998 to 89.6% in
2002. Exports of electronics, electrical equipment and parts, and
telecommunications equipment declined as a proportion of total exports from
58.9% in 1998 to 53.5% in 2002. During the same period, exports of garments as
a proportion of total exports decreased from 8.0% in 1998 to 6.8% in 2002
because of increased international competition and a general decline in
world-wide demand. Exports of agro-based products, including coconut products,
sugar products, fruits and vegetables also declined considerably as a
proportion of total exports from 6.3% in 1998 to 4.3% in 2002. On the other
hand, increased production helped exports of machinery and transport equipment
grow at an average annual rate of 20.9% from 1998 to 2002. As a percentage of
total exports machinery and transport grew from 11.3% in 1998 to 20.5% in 2002.

In 1998, total exports increased by 16.9% to $29.5 billion compared with
1997. The start-up of a number of new semiconductor and microprocessor
factories boosted exports of semiconductors, the top export earner. The
depreciation of the peso helped exports and offset the adverse effects of the
Asian financial crisis on a number of the Republic's trading partners.

121

In 1999, total exports grew by 18.8% to $35.0 billion, compared with 16.9%
over 1998. Electronics, machinery and transport equipment and garments were the
leading export earners. Higher shipments of mineral products, fruits and
vegetables and furniture and fixtures also contributed to the expansion of
exports in 1999.

In 2000, exports totalled $38.1 billion and accounted for 43.9% of the GNP.
Merchandise exports in 2000 grew by 8.7%. Among the merchandise exports,
electronics maintained its position as the top earner and continued growing,
but at a decelerated rate of 4.5% in 2000 compared to 24.0% in 1999. Garments,
the third top earner, had a 13.0% increase in 2000 after a 3.9% contraction in
1999. Machinery and transport, the second top earner in 2000, experienced
decelerated growth, from 49.3% in 1999 to only 19.3% in 2000. Merchandise
exports during 2000 amounted to $38 billion translating to an 8.7% growth, a
deceleration from the 18.8% growth registered in 1999.

In 2001, exports declined by 16.7% to $34.4 billion. The decline reflected
the slump in demand by the country's leading trading partners, namely the US
and Japan, as well as the downtrend in demand in the information technology
sector. Exports of semiconductor components experienced declines in both volume
and price. All major commodity groups posted declines except fruits and
vegetables, which registered a 3.2% modest growth. Electronics, machinery and
transport equipment and garments remained the top three export commodities.

Total exports of goods for 2002 were $34.4 billion or 10.1% higher than
exports of goods in 2001. Higher demand for Philippine goods from Taiwan, Hong
Kong, South Korea, Malaysia and China made up for a decrease in exports to the
United States and Japan, which together account for approximately 36% of the
country's export market (25% for the United States and 15% for Japan in 2002).
The following table sets out the destinations of the country's exports.

EXPORTS BY DESTINATION

Percentage of
Total Exports
------------
1998 1999 2000 2001 2002 1998 2002
------- ------- ------- ------- ------- ----- -----
(in millions, except percentages)

United States.................. $10,098 $10,446 $11,365 $ 8,980 $ 8,653 34.2% 24.7%
Japan.......................... 4,234 4,664 5,609 5,057 5,278 14.4 15.1
ASEAN countries/(1)/........... 3,723 4,917 5,895 4,914 5,276 12.6 15.0
United Kingdom................. 1,757 1,766 1,506 997 2,341 5.6 2.6
Hong Kong SAR.................. 1,326 1,947 1,907 1,580 927 4.5 6.7
The Netherlands................ 2,319 2,865 2,982 2,976 2,777 7.9 7.9
Germany........................ 1,035 1,229 1,329 1,323 1,386 3.5 4.0
Taiwan......................... 1,757 2,993 2,861 2,127 2,484 6.0 7.1
South Korea.................... 509 1,032 1,173 1,044 1,340 1.7 3.8
People's Republic of China/(2)/ 344 575 663 793 1,352 1.2 3.9
Others......................... 2,394 2,608 2,788 2,359 3,252 8.1 9.3
------- ------- ------- ------- ------- ----- -----
Total........................ $29,496 $35,042 $38,078 $32,150 $35,066 100.0% 100.0%
======= ======= ======= ======= ======= ===== =====

- --------
Source: Foreign Trade Statistics, National Statistics Office.

(1) Includes only Brunei, Indonesia, Malaysia, Singapore and Thailand.
(2) Excludes Hong Kong SAR.

The United States absorbed, on average, 29.3% of total exports from 1998 to
2002. Japan accounted for, on average, 14.8% of Philippine exports from 1998 to
2002. Recognizing the danger of over-reliance on so few export markets, the
country has attempted to increase its exports to other countries, particularly
ASEAN countries. The Republic is a party to the ASEAN Free Trade Agreement that
provides for the implementation of the common effective preferential tariff
that will reduce tariffs among ASEAN nations by 2008 to between 0%

122

and 5% for all manufactured goods and non-sensitive agricultural and processed
agricultural products. Additional activities to support the free trade area
include plans for intra-regional investments, industrial linkages and banking
and financial integration.

Imports. The import data for 2000, 2001 and 2002 have been revised. See "--
Recent Economic Developments -- Balance of Payments."

For 2002, the value of total imports as reported by the National Statistics
Office has been adjusted from $33.5 billion to $38.3 billion. For 2001, the
value of total imports has been adjusted from $29.6 billion to $37.2 billion.
For 2000, the value of total imports has been adjusted from $31.4 billion to
$36.5 billion.

Since a more detailed breakdown of these revised numbers is not yet
available, the following charts and accompanying discussion reflect previously
reported import data.

IMPORTS BY COMMODITY GROUP

Percentage
of
Total
Imports
------------
1998 1999 2000 2001 2002 1998 2002
------- ------- ------- ------- ------- ----- -----
(in millions, except percentages)

Raw materials and intermediate goods
Unprocessed raw materials/(1)/............... $ 1,170 $ 1,517 $ 1,337 $ 1,368 $ 1,371 3.9% 4.1%
Semi-processed raw materials/(2)/............ 10,415 11,078 10,724 10,078 11,791 35.1 35.2
------- ------- ------- ------- ------- ----- -----
Total raw materials and intermediate goods. $11,585 $12,595 $12,061 $11,446 $13,162 39.1% 39.3%
Capital goods................................ 12,185 11,829 12,161 11,437 13,432 41.1 40.1
Consumer goods
Durable.................................... 902 1,091 1,072 949 984 3.1 2.9
Non-durable................................ 1,721 1,553 1,452 1,534 1,595 5.8 4.8
------- ------- ------- ------- ------- ----- -----
Total consumer goods....................... $ 2,623 $ 2,644 $ 2,524 $ 2,483 $ 2,579 8.8% 7.7%
Mineral fuels and lubricants................. 2,020 2,420 3,877 3,372 3,234 6.8 9.7
Other........................................ 1,246 1,238 765 812 1,066 4.2 3.2
------- ------- ------- ------- ------- ----- -----
Total..................................... $29,659/(3)/ $30,776 $31,388 $29,550 $33,471 100.0% 100.0%
======= ======= ======= ======= ======= ===== =====

- --------
Source: National Statistics Office.

(1) Includes wheat, corn, unmilled cereals excluding rice and corn, inedible
crude materials and unmanufactured tobacco.
(2) Includes chemicals and chemical compounds, manufactured goods that are not
capital or consumer goods, materials for the manufacture of electrical and
electronic equipment and parts and embroideries.
(3) Excludes the value of aircraft amounting to $136 million procured under
operating lease arrangements.

In 1998, weakening demand because of the economic slowdown and the
depreciation of the peso forced imports down 21.2% to $29.7 billion compared
with $35.9 billion for 1997. Lower imports of machinery transport equipment,
partly due to Philippine Airlines' financial difficulties and temporary
closure, fertilizers and artificial resins led the decline. A number of
exporters decreased their imports and elected instead to draw down their
inventories to alleviate the impact of the weak peso, also hurting overall
imports.

In 1999, imports totalled $30.8 billion. This represented an increase of
3.8% from imports for 1998. The increase was due mainly to an increase in
imports of electronics and components, minerals, fuel and lubricants. Imports
in December 1999 increased by 28.7% compared to December 1998, the highest
monthly growth in imports in three and a half years.

In 2000, imports increased by 2.1% to $31.4 billion compared to a 4.1%
increase in 1999. The growth was due to higher imports of capital goods which
rose by 2.8%, as well as the increase in imports of mineral fuel and

123

lubricants which grew by 59.3% following the hike in the average price of
petroleum crude to $27.89 per barrel compared to $16.31 per barrel in 1999.

In 2001, imports fell by 5.9% to $29.5 billion, a reversal of the 3.8%
increase registered in 2000. This decline resulted primarily from the reduction
in imports of raw materials and intermediate goods and capital goods used for
exports and domestic production as well as the reduced appetite for
foreign-made goods as a result of the weak peso. Except for the months of April
to June, imports were down, with November posting the largest year-on-year
contraction at 23.6%.

In 2002, imports of goods increased by 13.3% to reach $33.5 billion. All
major categories of goods imports except for mineral fuels and lubricants
increased from 2001 to 2002. Of the total $33.5 billion in imports of goods,
capital goods accounted for $13.4 billion, or 40.1%, raw materials and
intermediate goods accounted for $13.2 billion, or 39.3%, mineral fuels and
lubricants accounted for $3.2 billion, or 9.7%, and consumer goods accounted
for $2.6 billion, or 7.7%.

The following table sets out the sources of the Philippines' imports by
country, without reflecting import data revisions. See "-- Recent Economic
Developments -- Balance of Payments."

IMPORTS BY SOURCE

Percentage
of
Total
Imports
------------
1998/(1)/ 1999 2000 2001 2002 1998 2002
-------- ------- ------- ------- ------- ----- -----
(in millions, except percentages)

Japan.......................... $ 6,029 $ 6,136 $ 6,027 $ 6,098 $ 6,957 20.3% 20.8%
United States.................. 6,560 6,365 5,323 4,989 6,381 22.1 19.1
ASEAN countries/(2)/........... 4,050 4,248 4,796 4,379 4,457/(3)/ 13.7 13.3/(3)/
Hong Kong SAR.................. 1,300 1,226 1,217 1,259 1,570 4.4 4.7
Saudi Arabia................... 606 810 1,048 887 998 2.0 3.0
Taiwan......................... 1,415 1,614 1,948 1,607 1,636 4.8 4.9
South Korea.................... 2,189 2,723 2,350 1,950 2,579 7.4 7.7
Australia...................... 683 757 816 645 N/A 2.3 N/A
Germany........................ 822 800 734 734 N/A 2.8 N/A
People's Republic of China/(4)/ 1,198 1,040 768 953 1,231 4.0 3.7
Others......................... 4,808 5,023 6,360 6,050 7,662/(5)/ 16.2 22.9/(5)/
------- ------- ------- ------- ------- ----- -----
Total........................ $29,660 $30,742 $31,387 $29,548 $33,471 100.0% 100.0%
======= ======= ======= ======= ======= ===== =====

- --------
Source: Foreign Trade Statistics, National Statistics Office. Economic Indices
and Indicators Division, Industry and Trade Statistics Department, Republic of
the Philippines.

(1) Foreign trade statistics were adjusted to exclude aircraft procured under
operational lease arrangements to conform with the new balance of payments
framework.
(2) Includes only, Indonesia, Malaysia, Singapore and Thailand.
(3) Malaysia, Singapore and Thailand only.
(4) Excludes Hong Kong SAR.
(5) Includes Australia, Germany, Brunei and Indonesia.

124

The following table sets out the country's services trade by sector compiled
in accordance with the BPM5 framework for the periods indicated.

SERVICES TRADE

1999 2000 2001 2002
------- ------- ------- -------
(in millions)

Total services trade.................................... $(2,712) $(2,112) $(2,050) $(1,264)
Exports............................................... 4,803 3,972 3,148 3,056
Imports............................................... 7,515 6,084 5,198 4,320
Transportation.......................................... (1,369) (1,785) (1,758) (1,605)
Exports............................................... 575 891 659 631
Imports............................................... 1,944 2,676 2,417 2,236
of which: Passenger................................... (117) (73) (237) (302)
Exports.............................................. 15 243 99 87
Imports.............................................. 132 316 336 389
of which: Freight..................................... (1,167) (1,638) (1,452) (1,225)
Exports.............................................. 428 481 380 445
Imports.............................................. 1,595 2,119 1,832 1,670
of which: Other....................................... (85) (74) (69) (78)
Exports.............................................. 132 167 180 99
Imports.............................................. 217 241 249 177
Travel.................................................. 1,246 1,129 494 869
Exports............................................... 2,554 2,134 1,723 1,740
Imports............................................... 1,308 1,005 1,229 871
Communication services.................................. (307) (79) 113 224
Exports............................................... 424 182 328 310
Imports............................................... 731 261 215 86
Construction services................................... (108) (27) (235) (95)
Exports............................................... 58 97 64 28
Imports............................................... 166 124 299 123
Insurance services...................................... (30) (90) (75) (259)
Exports............................................... 51 66 48 35
Imports............................................... 81 156 123 294
Financial services...................................... (250) (389) (42) (13)
Exports............................................... 67 80 33 32
Imports............................................... 317 469 75 45
Computer and information services....................... (38) (18) (61) (25)
Exports............................................... 57 76 22 21
Imports............................................... 95 94 83 46
Royalties and license fees.............................. (104) (190) (158) (229)
Exports............................................... 6 7 1 1
Imports............................................... 110 197 159 230
Other business services................................. (1,672) (595) (320) (139)
Exports............................................... 929 359 219 224
Imports............................................... 2,601 954 539 363
Merchanting and other trade-related services......... (230) (200) 16 29
Exports............................................. 186 59 24 35
Imports............................................. 416 259 8 6
Operational leasing services......................... (47) (58) (61) (16)
Exports............................................. 15 23 10 7
Imports............................................. 62 81 71 23
Misc. business, professional and technical services.. (1,395) (337) (275) (152)
Exports............................................. 728 277 185 182
Imports............................................. 2,123 614 460 334
Personal, cultural and recreational.................. (81) (87) (42) (10)
Exports............................................. 58 43 15 7
Imports............................................. 139 130 57 17
Audio-visual and related............................. (3) (9) (10) (10)
Exports............................................. 14 15 6 6
Imports............................................. 17 24 16 16
Other personal, cultural and recreational services... (78) (78) (32) 0
Exports............................................. 44 28 9 1
Imports............................................. 122 106 41 1
Government services, n.i.e.............................. 1 19 34 18
Exports............................................... 24 37 36 27
Imports............................................... 23 18 2 9

- --------
Source: Bangko Sentral.

125

In 1997, receipts from the services trade totalled $22.8 billion, growing
from 13.5% of GNP in 1993 to 26.6%. Increasing receipts from overseas Filipino
workers and Peso conversions of foreign currency deposits contributed to the
growth in the service receipts. Payments for services grew from approximately
9.0% of GNP in 1993 to 20% in 1997, when payments totalled $17.1 billion.
Greater trade and travel-related outflows spurred the increase in service
payments. Freight and merchandise insurance payments and investment expenses
also increased significantly.

In 1998, service receipts declined by 39.1% from their 1997 levels, and
service payments fell 25.4% compared with the 1997 levels, principally as a
result of the regional economic decline. Total services receipts declined in
1998 principally because of declining receipts from Peso conversion of foreign
currency deposits and lower investment income during the year. Services
payments also declined because of the significant decline in other services
disbursements reported by commercial banks.

In 1999, under the BPM5 framework, the services account recorded a net
outflow of $2.71 billion following higher service payments. Net outflows were
noted in transportation, communication, construction, insurance, financial,
computer and information, royalties and license fees, and other personal,
cultural and recreational services with the exception of travel services which
recorded a net inflow of $1.2 billion.

For 2000, under the BPM5 framework, the services account recorded a net
outflow of $2.11 billion, 22.1% lower than the net outflow of $2.71 billion in
1999. This development was due to lower net outflows in communication,
construction, miscellaneous business, professional and technical services,
computer and information and other trade-related services.

For 2001, under the BPM5 framework, the services trade account posted a
deficit of $2.05 billion, 2.9% lower than the $2.11 billion deficit recorded in
2000. The deficit in 2001 was brought about by decreased inflows from passenger
and travel services. However, the reduction in the deficit from 2001 was due
mainly to the lower net outflows in freight following the decline in good
imports, royalties and fees, financial services and other business services.
The reversal in communication services account to a net inflow from a net
outflow also contributed to the narrower deficit.

The trade-in-services account posted a net outflow of $1.3 billion in 2002,
38.3% lower than the level in the comparable period in 2001. The narrowing of
the deficit was triggered by lower net payments for transportation services,
construction services and for miscellaneous business, professional and
technical services. Meanwhile, increased net receipts from travel services,
which rose by 75.9% to $869 million, helped trim the net outflow in the
services account. This was due to the higher rate of decline in travel payments
relative to that of travel receipts. The lower travel payments reflected in
part the weaker peso and the Government program to promote tourism among both
local and foreign tourists.

126

The following table sets out the Republic's income compiled in accordance
with the BPM5 framework for the periods indicated. Prior to the adoption of the
BPM5 framework, income was included in services trade. Entries with "zero"
balances indicate either that there are no relevant transactions during the
period or that the Republic has not yet begun to track and record the relevant
entry.

INCOME

1999 2000 2001 2002
------- ------- ------- -------
(in millions)

Total income....................................................... $ 4,604 $ 3,216 $ 3,669 $ 4,550
Receipts......................................................... 8,082 7,804 7,152 7,931
Disbursements.................................................... 3,478 4,588 3,483 3,381
Compensation of employees, incl. border, seasonal and other workers 6,794 6,050 6,031 7,171
Receipts......................................................... 6,794 6,050 6,031 7,171
Disbursements.................................................... 0 0 0 0
Investment income.................................................. (2,190) (2,834) (2,362) (2,621)
Receipts......................................................... 1,288 1,754 1,121 760
Disbursements.................................................... 3,478 4,588 3,483 3,381
Direct investment income......................................... (772) (802) (608) (792)
Receipts........................................................ 63 163 10 18
Disbursements................................................... 835 965 618 810
Income on equity................................................ (718) (819) (527) (770)
Receipts....................................................... 35 57 10 18
Disbursements.................................................. 753 876 537 788
Dividends and distributed branch profits....................... (184) (240) (654) (650)
Receipts..................................................... 35 57 10 18
Disbursements................................................ 219 297 664 668
Reinvested earnings and undistributed branch profits........... (534) (579) (127) (120)
Receipts..................................................... 0 0 0 0
Disbursements................................................ 534 579 (127) 120
Income on debt (interest)....................................... (54) 17 (81) (22)
Receipts....................................................... 28 106 0 0
Disbursements.................................................. 82 89 81 22
Portfolio investment income...................................... (607) (445) (545) (746)
Receipts........................................................ 451 645 634 425
Disbursements................................................... 1,058 1,090 1,179 1,171
Income on equity (dividends).................................... (22) (8) (23) (16)
Receipts....................................................... 16 8 6 0
Disbursements.................................................. 38 16 29 16
Monetary authorities........................................... 0 0 0 0
Receipts..................................................... 0 0 0 0
Disbursements................................................ 0 0 0 0
General government............................................. 0 0 0 0
Receipts..................................................... 0 0 0 0
Disbursements................................................ 0 0 0 0
Banks.......................................................... 0 0 0 0
Receipts..................................................... 0 0 0 0
Disbursements................................................ 0 0 0 0
Other sectors.................................................. (22) (8) (23) (16)
Receipts..................................................... 16 8 6 0
Disbursements................................................ 38 16 29 16
Income on debt (interest)....................................... (585) (437) (522) (730)
Receipts....................................................... 435 637 628 425
Disbursements.................................................. 1,020 1,074 1,150 1,155
Bonds and notes................................................ (525) (429) (554) (739)
Receipts..................................................... 430 621 584 413
Disbursements................................................ 955 1,050 1,138 1,152
Monetary authorities......................................... 180 305 304 141
Receipts.................................................... 266 443 417 297
Disbursements............................................... 86 138 113 155
General government........................................... (501) (469) (642) (701)
Receipts.................................................... 0 0 0 0

127

1999 2000 2001 2002
----- ------ ------ ------
(in millions)

Disbursements........... 501 469 642 701
Banks.................... 35 0 0 0
Receipts................ 35 0 0 0
Disbursements........... 0 0 0 0
Other sectors............ (239) (265) (216) (179)
Receipts................ 129 178 167 116
Disbursements........... 368 443 383 295
Money market instruments... (60) (8) 32 9
Receipts................. 5 16 44 12
Disbursements............ 65 24 12 3
Monetary authorities..... (6) (5) 0 0
Receipts................ 0 0 0 0
Disbursements........... 6 5 0 0
General government....... 0 0 0 0
Receipts................ 0 0 0 0
Disbursements........... 0 0 0 0
Banks.................... 0 0 0 0
Receipts................ 0 0 0 0
Disbursements........... 0 0 0 0
Other sectors............ (54) (3) 32 9
Receipts................ 5 16 44 12
Disbursements........... 59 19 12 3
Other investment income.... (811) (1,587) (1,209) (1,083)
Receipts................. 774 946 477 317
Disbursements............ 1,585 2,533 1,686 1,400
Monetary authorities..... 135 184 (31) (45)
Receipts................ 313 472 232 116
Disbursements........... 178 288 263 161
General government....... (795) (1,462) (724) (621)
Receipts................ 0 0 0 0
Disbursements........... 795 1,462 724 621
Banks.................... 187 161 (102) (120)
Receipts................ 382 397 206 144
Disbursements........... 195 236 308 264
Other sectors............ (338) (470) (352) (297)
Receipts................ 79 77 39 57
Disbursements........... 417 547 391 354

In 2001, the income account continued to be in surplus totaling $3.7
billion, which was 14.1% higher than the 2000 surplus of $3.2 billion. The net
outflow in the investment income account declined by 16.7% to $2.4 billion as
falling global interest rates had a greater impact on investment income
(particularly interest income on placements in portfolio and other investments)
than on interest repayments. Disbursements mainly consisted of divided
repatriation and interest payments on loans.

In 2002, the surplus in the income account increased by 24.0% from its $3.7
billion mark for 2001 to reach $4.5 billion.

In 2002, the investment income account yielded a net outflow of $2.6
billion, which represented an increase from 2001 of 11.0%, a lower rate of
increase compared to 46.4% in 2001, than 2001 as interest payments on portfolio
and other investments fell with the continued drop in global interest rates.

Remittances from overseas Filipino workers amounted to $7.2 billion in 2002,
an increase of 18.9% from 2001. The income account's recorded surplus of $4.5
billion was propelled by the 2.6% rise in the number of overseas Filipino
workers, especially in the Middle East, Europe, and Asia. As the global
economic slowdown affects some of the countries where Filipinos are working,
the Government has intensified its marketing efforts to increase hiring of
Filipinos abroad.

128

Capital and Financial Account

Foreign Investments. The Philippines monitors investment flows into and out
of the country, keeping track of direct and portfolio investments by
non-residents in the Philippines and by Filipino residents abroad. Direct
investments are the category of international investment in which a resident
entity in one economy obtains a lasting interest in an enterprise resident in
another economy. A direct investment is established when a resident in one
economy owns 10% or more of the ordinary shares or voting power of an
incorporated enterprise or the equivalent of an unincorporated enterprise in
another economy. Portfolio investments include investments in equity and debt
securities, that is, bonds, notes and money market instruments, and financial
derivatives. The essential characteristic of instruments classified as
portfolio investments is that they are traded or tradable.

129

The following table sets out the foreign investment flows into and out of
the Philippines by type for the periods indicated. Entries with "zero" balances
indicate either that there are no relevant transactions during the period or
that the Republic has not yet begun to track and record the relevant entry.

FOREIGN INVESTMENTS

1997 1998 1999 2000 2001
------- ------- -------- ------- -------
(in millions)

Non-resident investments in the Philippines
Direct investments
Placements
New foreign investments in the Philippines........... $ 1,073 $ 1,631 $ 1,241 $ 1,207 $ 697
Reinvested earnings.................................. 56 85 534 579 488
Technical fees and others converted to equity........ 0 0 26 2 0
Bond conversions..................................... 114 36 0 0 0
Imports converted into investments................... 6 0 0 0 0
Others............................................... 0 0 0 0 0
Withdrawals/(1)/...................................... 0 0 (122) (185) (69)
------- ------- -------- ------- -------
Total direct investments............................... $ 1,249 $ 1,752 $ 1,679 $ 1,603 $ 1,116
======= ======= ======== ======= =======
Portfolio investments
Placements............................................ 6,947 4,297 15,490 3,704 1,486
Withdrawals........................................... (7,353) (4,033) (14,080) (3,887) (1,103)
------- ------- -------- ------- -------
Total portfolio investments............................ $ (406) $ 264 $ 1,410 $ (183) $ 383
======= ======= ======== ======= =======
Total non-resident investments in the Philippines/(2)/. $ 843 $ 2,016 $ 3,089 $ 1,420 $ 1,499
======= ======= ======== ======= =======
Less Resident Investments Abroad
Direct investments
Placements
Residents' investments abroad........................ 136 160 63 46 33
Withdrawals.......................................... 0 0 (108) (141) (195)
------- ------- -------- ------- -------
Total direct investments............................... $ 136 $ 160 $ (45) $ (95) $ (162)
======= ======= ======== ======= =======
Portolio investments
Placements............................................ 184 184 788 1,866 4,080
Withdrawals........................................... (239) 0 (300) (1,417) (4,022)
------- ------- -------- ------- -------
Total portfolio investments............................ $ (55) $ 184 $ 488 $ 449 $ 58
======= ======= ======== ======= =======
Other investments/(3)/................................. -- -- 1,317 177 589
------- ------- -------- ------- -------
Total resident investments abroad........................ 81 344 1,760 531 485
------- ------- -------- ------- -------
Total foreign investments, net........................... $ 762 $ 1,672 $ 1,329 $ 889 $ 771
======= ======= ======== ======= =======

- --------
Source: Bangko Sentral.

(1) Non-resident withdrawals of direct investments include capital recovery
under the build-operate-transfer scheme.
(2) Excludes net flows arising from the trading of Philippine debt papers in
the secondary market abroad.
(3) Includes residents' deposits in banks abroad. From 1997 to 1998, other
investments were not separately tracked.

129.1

After the implementation of the BPM5 framework, the Financial Account is now
divided into three categories: direct investments, portfolio investments and
other investments. The following table sets out the Republic's direct
investments compiled in accordance with the BPM5 framework for the periods
indicated. Entries with "zero" balances indicate either that there are no
relevant transactions during the period or that the Republic has not yet begun
to track and record the relevant entry.

DIRECT INVESTMENTS

1999 2000 2001 2002
------- ------ ------ ------
(in millions)

Total direct investments.................................. $ 608 $1,348 $1,142 $1,026
======= ====== ====== ======
Assets: Residents' investments abroad..................... (30) (107) (160) 86
Equity capital.......................................... (45) (95) (162) 77
Claims on affiliated enterprises....................... (45) (95) (162) 77
Placements.......................................... 63 46 33 85
Withdrawals......................................... 108 141 195 8
Liabilities to affiliated enterprises.................. 0 0 0 0
Reinvested earnings..................................... 0 0 0 0
Other capital........................................... 15 (12) 2 8
Liabilities: Non-residents' investments in the Philippines 578 1,241 982 1,111
Equity capital.......................................... 1,145 1,024 628 945
Liabilities to direct investors........................ 1,145 1,024 628 945
Placements............................................ 1,267 1,209 697 995
Withdrawals........................................... 122 185 69 50
Reinvested earnings..................................... 534 579 (127) 120
Other capital.......................................... (1,101) (362) 481 46
Claims on direct investors............................. 0 0 0 0
Liabilities to direct investors......................... (1,101) (362) 481 46

- --------
Source: Bangko Sentral.

130

The following table sets out the Republic's portfolio investments compiled
in accordance with the BPM5 framework for the periods indicated. Entries with
"zero" balances indicate either that there are no relevant transactions during
the period or that the Republic has not yet begun to track and record the
relevant entry.

PORTFOLIO INVESTMENTS

1999 2000 2001 2002
------- ------- ------ ------
(in millions)

Total portfolio investments.................................. $ 6,064 $ (113) $1,060 $1,912
======= ======= ====== ======
Assets: Residents' investments abroad........................ 586 806 399 369
Equity securities.......................................... 55 42 4 21
Placements................................................ 75 219 4 23
Withdrawals............................................... 20 177 0 2
Debt securities............................................ 531 764 395 348
Banks..................................................... 98 357 341 341
Other sectors............................................. 433 407 54 7
Placements............................................... 713 1,647 4,076 3,829
Withdrawals.............................................. 280 1,240 4,022 3,872
Money-market instruments.................................. 0 0 0 0
Liabilities: Non-residents' investments in the Philippines. 6,650 693 1,449 2,281
Equity securities......................................... 1,410 (183) 383 410
Placements............................................... 15,490 3,704 1,486 1,381
Withdrawals.............................................. 14,080 3,887 1,103 971
Debt securities........................................... 5,240 876 1,066 1,071
Monetary authorities..................................... 1,158 88 11 55
General Government....................................... 2,912 2,223 950 999
Banks.................................................... 0 0 239 368
Other sectors............................................ 1,170 (1,435) (134) 449
Money-market instruments................................. 0 0 0 0
Financial derivatives.................................... 0 0 0 0

- --------
Source: Bangko Sentral.

131

The following table sets out the country's other investments compiled in
accordance with the BPM5 framework for the periods indicated. Entries with
"zero" balances indicate either that there are no relevant transactions during
the period or that the Republic has not yet begun to track and record the
relevant entry.

OTHER INVESTMENTS

First Nine
Months
1999 2000 2001 2002
------- ------- ------- ----------
(in millions)

Total other investments................................... $(8,467) $(7,742) $(3,260) $(5,023)
======= ======= ======= =======
Assets: Residents' investments abroad..................... 18,647 15,311 13,898 13,214
Trade credits/(1)/...................................... 16,381 17,401 13,774 12,880
Loans/(2)/.............................................. 262 (1,309) 830 346
Currency and deposits................................... 2,278 (757) (509) 218
Banks.................................................. 961 (934) (1,098) (490)
Other sectors.......................................... 1,317 177 589 708
Other assets/(3)/....................................... (274) (24) (197) (230)
Liabilities: Non-residents' investments in the Philippines 10,180 7,569 10,638 8,191
Trade credits/(1)/...................................... 9,958 7,157 10,981 9,958
Loans................................................... 575 354 178 225
Monetary authorities................................... 0 51 177 (40)
Drawings/(4)/......................................... 0 105 117 118
Repayments/(4)/....................................... 0 54 50 158
General Government..................................... 340 (125) 16 (131)
Drawings/(4)/......................................... 1,465 933 931 870
Repayments/(4)/....................................... 1,125 1,058 915 1,001
Banks/(5)/............................................. 626 (250) (647) 920
Other sectors.......................................... (391) 678 692 (974)
Long-term............................................. (494) 952 916 (780)
Drawings............................................ 2,610 2,428 3,142 1,030
Repayments.......................................... 3,104 1,476 2,226 1,810
Short-term............................................ 103 (274) (224) (194)
Currency and deposits/(6)/.............................. (466) (120) 401 (1,637)
Other Liabilities/(7)/.................................. 113 178 (922) 95

- --------
Source: Bangko Sentral.

(1) All trade credits are short-term credits in non-governmental sectors.
(2) All loans are short-term bank loans.
(3) All other assets are short-term bank assets.
(4) Long-term loans.
(5) Short-term loans.
(6) All bank currency and deposits.
(7) All short-term bank liabilities.

The following discussion does not take into account the 2000 and 2001
revisions to the Balance of Payments. See "-- Recent Economic Developments --
Balance of Payments."

Domestic macroeconomic policies and structural reforms have significantly
affected the flow of foreign investment into the Philippines. The Foreign
Investment Act of 1991, as amended, introduced a more favorable investment
environment to the Philippines. The act permits foreigners to own 100% of
Philippine enterprises, except in certain specified areas included in a
"negative list" with respect to which the Constitution or applicable statute
limits foreign ownership, generally to a maximum of 40% of the enterprise's
equity capital. The Constitution also prohibits foreign ownership in certain
sectors, such as the media.

In January 1997, Bangko Sentral attempted to enhance the investment climate
by lifting the limits on domestic borrowing by foreign firms. Beginning in
mid-1997, however, due to the regional economic crisis,

132

production dropped, interest rates climbed, the peso depreciated, the balance
of payments position deteriorated and international reserves fell, leading to a
flight of capital from the country.

In 1998, net investment inflows increased significantly to $1.7 billion
compared with $762 million recorded in 1997. New foreign direct investments in
the Philippines grew 52% to $1.6 billion, compared with $1.1 billion in 1997.

In 1999, net investment inflows declined by 20.5% to $1,329 million compared
to 1998. New foreign direct investments declined by 23.9% to $1.2 billion,
compared with $1.6 billion for 1998. In 1999, under the BPM5 framework, a net
outflow of $1.8 billion was registered in the capital and financial account due
to the net outflow of $9.5 billion in the other investment accounts. The
continued inflows of direct and portfolio investments, on the other hand,
cushioned the impact of these outflows.

In 2000, under the BPM5 framework the net outflow in the financial account
reached $6.5 billion, an increase of 262.5% from the net outflow of $1.8
billion recorded in 1999. However, sustained net inflows of both direct and
portfolio investments mitigated the contraction in the financial account. This
developed due to the net outflows posted in the portfolio and other investment
accounts.

In 2001, the financial account registered a net outflow of $1.1 billion, a
83.6% decline from the net outflow of $6.5 million recorded in 2000. The direct
investment account posted a sustained net inflow while the portfolio investment
account gained strength as it made a turnaround to a net inflow of $1.1 billion
in 2001. Meanwhile, the cumulative net outflow in the other investment account
of $3.3 billion was lower by 57.9% than $7.7 billion in 2001.

In 2002, the net outflow in the capital and financial account almost doubled
to $2.1 billion (including a net outflow of $19 million from the capital
account) during 2002. The expansion of the net inflow in the portfolio
investment account to $1.9 billion from a net inflow of $1.1 billion in 2001
(due to success in the capital markets of the government and GOCCs) dampened
the negative impact of the higher net outflow of other investment and the lower
net inflow of direct investments.

Non-residents' direct investments in equity capital increased by 50.5% to
$945 million during 2002. The bulk of non-residents' equity investments came
from Japan, including the investment of $544 million in a local brewery company
in March 2002. Additional investments were directed to other manufacturing
companies, financial institutions, mining corporations and construction
companies. The major sources of direct investments were the United States,
United Kingdom, Singapore and Taiwan. Total direct investments for the first
half of 2002 registered a net inflow of $726 million. The 46.7% drop from the
same period in 2001 was due mainly to repayments on intercompany loans,
particularly in June and residents' placements of equity capital abroad.

In 2002, the portfolio investments account yielded a net inflow of $1.9
billion compared to the net inflow of $1.1 billion in 2001 due mainly to the
higher non-residents' investments in resident issued foreign-denominated debt
securities, particularly government-issued medium-term bonds. Meanwhile, net
inflows of non-residents' investments in equity securities rose slightly by
7.0% to $410 million in 2002.

Non-residents' investments in equity capital increased by 50.5% to $945
million in 2002, most of which were chanelled to manufacturing companies,
financial institutions, mining corporations, and construction companies.

The net outflow in other investments increased by 54.1% to $5.0 billion in
2002. This developed mainly on account of withdrawals by non-residents of their
maturing foreign currency deposits as well as increased deposits abroad by
resident non-banks -- most of which were corporations involved in
build-operate-transfer schemes -- to fund their debt service and import
payments.

133

Over the past few years, the Government has undertaken a number of programs
to encourage capital investment, including introducing build, operate and
transfer programs, reforming the legal regimes governing foreign investment and
the foreign exchange payment system and restructuring the tariff regime. In
August 1995, the Government implemented a schedule of tariff reductions to
correct distortions caused by past policies. Rates will be reduced to 3% for
raw materials and to 10% for finished goods by 2003 and tariffs will be further
adjusted to a range from 0% to 5% by 2004. The Philippines also lifted
quantitative restrictions on all regulated agricultural products, except rice,
and replaced them with tariffs permitted under the Uruguay Round agreements. In
early 1996, the authorities further reduced import costs by changing the system
of import duty valuation from "home consumption value" to actual transaction
value. The Philippines is also a member of the ASEAN Free Trade Area, which
provides for the gradual reduction to 5% or less or elimination of tariffs in
2003 on the trade of goods among ASEAN countries pursuant to a Common Effective
Preferential Tariff scheme. Currently, the Philippines restricts imports of
certain products only for reasons of health, security, safety and environmental
protection.

The Republic's Board of Investments coordinates with national agencies and
local Governments on investment policies and procedures and establishes and
administers annual investment priority plans to promote certain sectors of the
economy by providing special investment incentives to specific industries. The
Government's 2001 Investments Priorities Plan is working to promote the
following areas:

. poverty alleviation and eradication for all Filipinos;

. a business and policy environment to promote economic health; and

. a business community that is prepared to compete in the global e-commerce
business community.

Businesses that promote the Republic's investment priorities are eligible
for a package of incentives which can last for up to 10 years, including:

. income tax holidays;

. exemption from wharfage fees;

. unlimited use of consigned equipment;

. additional tax deductions for labor expenses; and

. fewer restrictions on the employment of foreign nationals.

The Government grants additional incentives to industries located in
less-developed areas or administered by the Philippine Export Zone Authority
and the Subic and Clark special economic zones.

In March 2000, the Retail Trade Liberalization Act was enacted. The law aims
to promote efficiency and competition among domestic industries and foreign
competitors which will result in better service and lower prices for the
consumers. Prior to its enactment, only citizens of the Philippines and
corporations wholly-owned by Filipino citizens could engage in the retail
business in the Philippines. Under the law, a foreigner is allowed to own 100%
of a retail business in the Philippines provided it makes an investment of at
least $7.5 million in the Philippines. If a foreigner makes an investment of
between $2.5 million to $7.5 million, the foreigner is allowed to own up to 60%
of the retail business in the Philippines for the first two years.

134

The following table sets out foreign investment in the Philippines
registered with Bangko Sentral by sector.

FOREIGN EQUITY INVESTMENTS REGISTERED
WITH BANGKO SENTRAL BY SECTOR

1998 1999 2000 2001 2002
------ -------- -------- ------ --------
(in millions)

Banks and other financial institutions $193.1 $ 258.3 $ 483.9 $476.4 $ 153.0
Manufacturing......................... 245.5 1,049.1 171.7 262.9 943.1
Mining................................ 161.2 27.3 239.5 66.2 114.6
Commerce and real estate.............. 161.9 166.3 62.3 23.2 26.6
Services.............................. 12.1 16.7 5.2 8.4 21.5
Public utilities...................... 67.9 552.5 423.5 20.6 131.8
Others/(1)/........................... 43.0 36.5 12.2 0.2 40.9
------ -------- -------- ------ --------
Total investments..................... $884.7 $2,106.7 $1,398.2 $857.8 $1,431.5
====== ======== ======== ====== ========

- --------
Source: International Operations Department, Bangko Sentral.

(1) Includes construction and agriculture, fishery and forestry.

International Reserves. The following table sets out the gross
international reserves of Bangko Sentral, compiled in a manner consistent with
the revised balance of payments framework and the treatment of IMF accounts in
the monetary survey published in the IMF's International Financial Statistics.

GROSS INTERNATIONAL RESERVES OF BANGKO SENTRAL

As of December 31,
-------------------------------------------
1998/(1)/ 1999/(1)/ 2000/(2)/ 2001 2002
-------- -------- -------- ------- -------
(in millions, except months and percentages)

Gold/(3)/................................................. $ 1,569 $ 1,782 $ 1,973 $ 2,216 $ 3,036
SDRs...................................................... 1 19 2 14 10
Foreign Investments/(4)/.................................. 8,738 12,881 12,371 12,786 13,570
Foreign Exchange.......................................... 376 222 565 533 445
Reserve Position in the IMF/(5)/.......................... 122 120 113 109 118
------- ------- ------- ------- -------
Total..................................................... $10,806 $15,024 $15,024 $15,658 $16,180
======= ======= ======= ======= =======
Total as number of months of imports of goods and services 3.1 4.4 4.4 5.0 4.8
As a % of short-term debt
Original maturity....................................... 150.4% 261.5% 252.6% 258.9% 275.6%
Residual maturity....................................... 98.2 168.4 141.8 130.7 134.9

- --------
Source: International Operations Department, Bangko Sentral.

(1) Represents official figures from Bangko Sentral's Treasury Department under
the old system where monetary gold under the swap arrangement was not part
of gross international reserves.
(2) Beginning January 2000, a new system was adopted revising the treatment of
monetary gold under the swap arrangement, including it as part of gross
international reserves. To allow comparability with 2000 data, the revised
treatment of monetary gold under the swap arrangement would have resulted
in an upward adjustment of the gross international reserves level as of
December 31, 1999 to $15,107 million.
(3) Of these amounts 82.3% in 1997, 75.3% in 1998, and 83.3% in 1999 served as
collateral for gold-backed loans. Under the new accounting system adopted
in 2000, 82.6% of the amount as of December 31, 2000, 85.7% as of December
31, 2001, and 65.9% as of May 31, 2002 served as collateral for gold-backed
loans and gold swap arrangements.
(4) Consists of time deposits, investments in securities issued or guaranteed
by government or supranational organizations and repurchase agreements.
(5) The reserve position in the IMF is an off-balance sheet item and is
recorded by Bangko Sentral's Treasury Department as a contingent asset with
a matching contingent liability.

135

The gross international reserves controlled by Bangko Sentral constitute
substantially all of the Philippines' official international reserves.

In 1998, the Government took a number of steps to boost reserves, including
obtaining a $610 million one-year loan from a syndicate of mainly domestic
banks in September 1998 and drawing upon the $1.4 billion standby facility
provided by the IMF. The IMF disbursed $278 million under the stand-by facility
in November 1998 and $133 million in December 1998.

In 1998, the reserve level was also increased by $500 million of foreign
currency deposits with Bangko Sentral from foreign banks, $492 million in net
proceeds from the Republic's global bond offering in April 1998, a $750 million
club loan from a consortium of foreign banks, $210 million in net foreign
exchange purchases by Bangko Sentral and increased investment inflows resulting
from improvements in the currency markets. Foreign exchange outlays of $1.9
billion by the Government and $532 million by Bangko Sentral were used to
service maturing foreign obligations, however, reduced reserve levels.

In 1999, gross international reserves increased significantly to reach $15.0
billion as of the end of 1999, equivalent to 4.4 months of imports of goods and
payment of services and income. The increase in reserve level was due to higher
public sector borrowing, renewed private capital flows and stronger external
trade performance. Among other reasons, the reserve level was increased by the
Republic's $1.2 billion global bond offerings in January and February 1999,
4350 million eurobond offering in March 1999, $292 million global bond offering
in October 1999 and $400 million re-opening of its 2019 bonds in December 1999.
Further, the IMF disbursed $130 million under the stand-by facility in March
1999 and $214 million in July 1999. In June 1999, the Republic refinanced the
$610 million syndicated loan facility it obtained in 1998 with three-year fixed
and floating rate notes and, in December 1999, the Republic completed a $260
million eurobond offering to partially refinance the $610 million one-year loan.

In January 2000, Bangko Sentral revised its method of accounting for
international reserves at the recommendation of the IMF. Under the previous
accounting system, a gold swap transaction was treated as a sale of gold which
reduced the amount of gold holdings. Under the revised system, a gold swap
transaction is treated as a loan transaction collateralized by gold that
remains a part of the international reserves. In addition, under the revised
system, the accrued interest payable on Bangko Sentral's short-term liabilities
is netted out of gross international reserves when calculating net
international reserves, reducing the level of net international reserves.

As of December 31, 2000, gross international reserves stood at $15.0
billion, equivalent to 4.4 months of imports of goods and payment of services
and income. Major sources of foreign exchange inflows in 2000 were the
Republic's $1.6 billion Yankee bond offering in March, a $500 million Bangko
Sentral syndicated loan in April, (Yen)35 billion Samurai bond offering and
$400 million syndicated loan in October, $200 million private placement of
Yen-denominated eurobonds in November and $200 million private placement of
eurobonds in December. These inflows were partially offset by a decline in
portfolio investments by non-residents from their 1999 levels. As of December
31, 2000, net international reserves totalled $11.3 billion, compared to $11.8
billion as of December 31, 1999 (after adjustment for the BPM5 framework).

As of December 31, 2001, gross international reserves rose to $15.7 billion
compared to $15.0 billion as of December 31, 2000. The increase in gross
international reserves during the year 2001 was attributed mainly to foreign
exchange inflows arising from various foreign loans and bond flotations. The
various loans and bond flotations include, among others, the Republic's $199
million Floating Rate Notes due 2004; the Republic's $100 million Facility Loan
Agreement; the Republic's $220 million Cross Currency Swap; the Republic's $119
million Treasury Bills to pre-fund the Government's 2002 requirements; the
Asian Development Bank ("ADB") Non-Bank Financial Program Loan of $75 million;
the ADB Power Sector Loan of $100 million; the Republic's $444 million Fixed
Rate Bonds due 2006; the Republic's Shibosai $365 million Fixed Rate Guaranteed
Bonds due 2011; Bangko Sentral's $740 million 3-year Term Loan Facility; Bangko
Sentral's $200 million Floating Rate Notes due 2003; Bangko Sentral's $550
million 9% Notes due 2005 and Bangko Sentral's $700 million loan from other
foreign financial institutions. The impact of these inflows was partly
mitigated by the servicing of

136

foreign exchange requirements of the Government and Bangko Sentral. Net
international reserves totaled $11.4 billion as of December 31, 2001.

The Bangko Sentral's gross international reserves rose to $16.2 billion at
the end of December 31, 2002. This was a 3.3% increase as compared to the level
at the end of December 2001 of $15.7 billion. The increase in gross
international reserves during the period was due mainly to foreign exchange
inflows in the form of net deposits by the Treasury. However, these were partly
offset by outflows to meet the foreign exchange requirements of the Bangko
Sentral and the Republic. At December 31, 2002 the Bangko Sentral's gross
international reserves were adequate to cover 4.7 months' worth of imports of
goods and payment of services and income. Using other reserve coverage
measures, the level of reserves was 2.9 times the amount of the country's
short-term external debt based on original maturity or, alternatively, 1.4
times the amount of short-term external debt based on residual maturity. In
2002, the majority of reserves consisted of foreign investments (77.7%), while
the balance consisted of gold (18.8%), foreign exchange (2.8%), and combined
SDRs and reserve position in the IMF (0.7%). Reserves (other than gold) were
held in following foreign currencies: US dollars (92.0%), Japanese yen (3.7%),
pound sterling (1.7%) and the balance (2.6%) in other foreign currencies. The
preceding figures were not affected by the revised import data reported by the
inter-agency task force on the balance of payments. Bangko Sentral's net
international reserves decreased to $12.5 billion at the end of May 2003 from
$12.8 billion at the end of December 2002.

Bangko Sentral occasionally enters into options with respect to gold,
foreign exchange and foreign securities for purposes of managing yield or
market risk. It also enters into financial swap contracts to optimize yield on
its gold reserves.

Monetary System

Monetary Policy. In 1993, the Government established Bangko Sentral, the
Republic's central bank, pursuant to the New Central Bank Act. Bangko Sentral
replaced the old Central Bank of the Philippines, which had incurred
substantial deficits in connection with:

. quasi-fiscal activities, including entering into foreign exchange forward
cover contracts and swaps with certain banks and Government corporations
and assuming the foreign exchange liabilities of certain Government and
private corporations during the Philippines' foreign exchange crisis in
the early 1980s;

. development banking and financing; and

. open market operations financed by the issuance of domestic securities at
high interest rates.

Bangko Sentral functions as an independent central monetary authority
responsible for policies in the areas of money, banking and credit as
authorized under Section 3 of Republic Act No. 7653, otherwise known as the New
Central Bank Act. As such, it does not engage in the quasi-fiscal activities
that caused the old Central Bank to fail. The New Central Bank Act also
prohibits Bangko Sentral from engaging in development banking or financing.
Additionally, Bangko Sentral does not engage in any commercial banking
activities.

Bangko Sentral's primary objective is to maintain price stability conducive
to a balanced and sustainable growth of the economy, as well as to promote and
maintain monetary stability and the convertibility of the peso. To achieve the
price stability objective, Bangko Sentral undertakes monetary management mainly
through adjustments to policy rates and the conduct of open market operations,
including the purchase and sale of Government securities, rediscounting
transactions and adjustments in reserve requirements.

Bangko Sentral's functions include:

. conducting monetary policy;

. issuing the national currency;

137

. managing foreign currency reserves;

. acting as depository for the Government, its political subdivisions and
instrumentalities and for Government owned corporations; and

. supervising and regulating banks and quasi-banks in the Philippines.

The Government owns all of the capital stock of Bangko Sentral. A seven
member Monetary Board, comprised of Bangko Sentral's Governor, a member of the
Cabinet designated by the President and five full-time private sector
representatives, governs Bangko Sentral. The President appoints each of the
seven Monetary Board members to six-year terms except the Cabinet
representative.

Philippine law requires Bangko Sentral to maintain a net positive foreign
asset position. As of November 2002, Bangko Sentral had total assets of
(Peso)1.21 trillion, of which net international reserves accounted for
(Peso)660.5 billion ($12.8 billion). Bangko Sentral's remaining assets consist
mainly of foreign exchange receivables, loans and advances and Government
securities, and its liabilities consist mainly of deposits of financial
institutions and, the Government and Government-owned corporations and foreign
liabilities in the form of loans and bonds payable.

Money Supply. The following tables presents certain information regarding
the Philippines' money supply:

MONEY SUPPLY

As of December 31
--------------------------------------------------------------------------
1998 1999 2000 2001 2002/(1)/
------------- ------------- ------------- ------------- -------------
(in billions, except for percentages)

M1/(2)/
Currency in circulation. (Peso) 146.1 (Peso) 218.5 (Peso) 192.3 (Peso) 194.7 (Peso) 220.0
Current account deposits 135.4 175.6 194.7 193.3 250.0
------------- ------------- ------------- ------------- -------------
Total................... 281.5 394.1 387.0 388.0 470.1
percentage increase... 9.0% 40% (1.8)% 0.3% 21.2%
M2/(3)/................. (Peso)1,138.4 (Peso)1,357.9 (Peso)1,423.2 (Peso)1,521.1 (Peso)1,666.3
percentage increase... 8.0% 19.3% 4.8% 6.9% 9.5%
M3/(4)/................. (Peso)1,144.6 (Peso)1,365.1 (Peso)1,427.0 (Peso)1,525.0 (Peso)1,669.7
percentage increase... 7.4% 19.3% 4.6% 6.8% 9.5%

- --------
Source: Bangko Sentral, Department of Economic Research.

(1) Preliminary.
(2) Consists of currency in circulation and demand deposits.
(3) Consists of M1, savings deposits and time deposits.
(4) Consists of M2 and deposit substitutes.

The following table presents information regarding domestic interest and
deposit rates.

DOMESTIC INTEREST AND DEPOSIT RATES

1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(weighted averages in percentages
per period)

91-day Treasury bill rates....... 15.3% 10.2% 9.9% 9.9% 5.4%
90-day Manila Reference rate/(1)/ 13.8% 10.1% 8.8% 10.1% 6.4%
Bank average lending rates/(2)/.. 18.4% 11.8% 10.9% 12.4% 8.9%

- --------
Source: Bangko Sentral, Department of Economic Research.

(1) Based on promissory notes and time deposit transactions of sample
commercial banks.
(2) Starting January 2002, monthly rates reflect the annual percentage
equivalent of all commercial banks' actual monthly interest income on
peso-denominated loans to the total outstanding levels of their
peso-denominated demand/time loans, bills discounted, mortgage contract
receivables and restructured loans.

138

The Asian economic crisis complicated Bangko Sentral's task of balancing the
need for readily available credit against the fear of rising inflation. To
control the inflationary effect of the peso's depreciation, Bangko Sentral
initially reduced the supply of pesos by raising interest rates and reserve
requirements. Bangko Sentral raised its overnight borrowing rate to 32% in July
1997 from 15% at the end of June 1997 and its overnight lending rate to 34% in
July 1997 from 17% at the end of June 1997. On August 20, 1997, Bangko Sentral
temporarily suspended its overnight lending facility. Bangko Sentral also
increased liquidity reserve requirements on Peso deposit liabilities from 2% in
July 1997 to 8% in August 1997 in addition to the bank's 13% statutory reserve
requirement. In November 1997, as signs of improvement appeared, Bangko Sentral
lowered liquidity reserve requirements to 4% of Peso deposit liabilities.

Bangko Sentral and the Bankers' Association of the Philippines also took
measures to encourage reductions in bank lending rates to avoid potential
corporate bankruptcies. Bangko Sentral approved certain liquidity easing
measures in January 1998, including the opening of a 30-day lending window, the
opening of a swap window for banks without Government securities holdings and
the purchase of Government securities at market prices. In April 1999, Bangko
Sentral decreased the liquidity reserve requirement from 5% to 4% and lowered
the statutory reserve requirement from 13% to 10% on March 1998. These measures
were intended to lower bank intermediation costs and thereby reduce the banks'
domestic lending rates. Bangko Sentral further reduced the statutory reserve
requirement to 9% in July 1999 to help reduce the cost of money and increase
funds available for lending. At the same time, Bangko Sentral maintained
liquidity by raising the proportion of reserves which earns interest to 40%
from 25%. In July 2001, Bangko Sentral raised banks' liquidity reserve
requirement from 7.0% to 9.0%. The statutory reserve requirement remained
unchanged at 9.0%. Bangko Sentral also reduced, from $10,000 to $5,000, the
amount of US currency an individual could buy over-the-counter from banks
without documentation. The measures were intended to siphon excess liquidity in
the economy that could lead to higher inflation or be used to speculate on the
Peso. On August 10, 2001, Bangko Sentral raised required liquidity reserves by
another 2% points to 11%.

As the inflation rate eased from 11.5% in January 1999 to 6.7% for the
full-year 1999, Bangko Sentral implemented 21 rate cuts in its overnight
borrowing rate (for a cumulative reduction of 462.5 basis points) and 20 rate
cuts in its overnight lending rate (for a cumulative reduction of 377.5 basis
points).

The inflation rate in 2000 averaged 4.4%, which is well below the 6.7%
recorded in 1999. Emerging inflationary pressures and volatility in the foreign
exchange market due to narrowing interest rate differentials prompted monetary
tightening actions in 2000. In May 2000, Bangko Sentral increased its overnight
borrowing and lending rates by a total of 125 basis points to 10.0% and 12.3%,
respectively. Policy rates were raised in September 2000 by 100 basis points
and by an additional 400 basis points in October 2000 to address the upside
risks of inflation due to the sharp depreciation of the Peso and the narrowing
interest rate differential. The October 2000 rate increase was accompanied by a
4-percentage point increase in banks' liquidity reserve requirements intended
to siphon off excess liquidity, which was feeding speculative activity in the
foreign exchange market. As a result of these tightening moves, the average
91-day Treasury bill rate rose from 8.9% in January to 15.8% in November.

The temporary tightening measures helped keep inflationary pressures in
check, restored general stability in the foreign exchange market and provided
room for the gradual easing of the monetary policy stance. In December 2000,
Bangko Sentral began the process of restoring policy rates to pre-crisis levels
by reducing the overnight rates by a cumulative 150 basis points. This induced
a gradual downtrend in interest rates, with the 91-day Treasury bill rate
falling to 13.6% in December.

In early 2001, Bangko Sentral successively reduced interest rates to
encourage economic activity. From January to May 2001, sustained monetary
easing reduced Bangko Sentral policy rates by a total of 450 basis points to
9.0% and 11.25% for the overnight borrowing rates and lending rates,
respectively. These rates remained unchanged from May 18 to October 4, 2001.
Subsequently, relative stability in the financial markets and the containment
of inflation allowed Bangko Sentral to further ease monetary policy. Moreover,
the worldwide reduction in interest rates by many central banks, following
significant monetary policy easing by the

139

US Federal Reserve, made possible a comfortable interest rate differential and
mitigated the risk of abrupt shifts in short- term investment funds toward
foreign-currency denominated assets. Thus, Bangko Sentral's policy rates were
reduced successively in the fourth quarter of 2001, resulting in a cumulative
reduction of 575 basis points from December 2000. At the end of December 2001,
the overnight borrowing rates and lending rates stood at 7.75% and 10.0%,
respectively. The reduction in policy rates in December was accompanied by a
two percentage point reduction in banks' liquidity reserve requirements
intended to encourage a further downtrend in market interest rates.

The tiering system on banks' overnight placements with Bangko Sentral
(initially adopted in June 2000) was temporarily removed on August 3, 2001 to
help ease pressure on the Peso. In November 2001, the tiering scheme was
subsequently restored to induce banks to lend their funds to the various
productive sectors of the economy. In December 2001, a change in the structure
of the tiering scheme of Bangko Sentral's overnight rates window was effected
as follows: 7.75% for placements of up to (Peso)5 billion, 5.75% for the next
(Peso)5 billion, and 3.75% for placements in excess of (Peso)10 billion.

During the first three months of 2002, Bangko Sentral eased policy rates
three times for a cumulative reduction of 75 basis points to reach 7.0% and
9.25% for the overnight borrowing and lending rates, respectively. These are
the lowest levels in Bangko Sentral's policy rates in 10 years. The rate
reductions were accompanied by corresponding changes in the structure of the
tiering scheme for interest rates on banks' overnight placements with Bangko
Sentral. As of March 15, 2002, the rates under the tiering structure for banks'
placements in the overnight rates placements with Bangko Sentral were as
follows: 7.0% for placements of up to (Peso)5 billion, 4.0% for the next
(Peso)5 billion, and 1.0% for placements in excess of (Peso)10 billion. The
tiering scheme was also modified to cover placements in special deposit
accounts ("SDAs") and was required to be applied on a consolidated basis. These
changes were aimed at inducing banks to channel the additional liquidity into
lending for productive activities. Bangko Sentral also reduced the liquidity
reserve requirement on deposits by two percentage points to 7.0% effective
January 18, 2002, a move which restored the liquidity reserves to their
pre-July 2001 level.

Through December 2002, the Monetary Board kept the Bangko Sentral's policy
rates at 7.0% and 9.25% for the overnight borrowing and lending rates,
respectively. The current policy rates have been maintained since March 15,
2002.

On March 17, 2003, Bangko Sentral approved guidelines that would allow local
banks to issue US-dollar-denominated unsecured subordinated debt, in addition
to such debt denominated in pesos. The new guidelines are intended to increase
liquidity in the credit markets.

The Monetary Board believes that past reductions in its policy rates and
ample liquidity in the financial system should allow the economy to expand
without the need for further monetary stimulus. Bangko Sentral has indicated
that it will base its monetary policy on inflation, which is forecasted to
remain stable in the near term, rather than on foreign exchange rates. However,
monetary officials recognize that a possible war in Iraq, the El Nino weather
phenomenon, and a rising fiscal deficit could increase inflationary pressures
over the next several months.

The benchmark 91-day Treasury bill rate declined from an average of 12.2% in
January 2001 to 7.9% in January 2002 and to 5.2% in January 2003. As of March
3, 2003, the 91-day Treasury bill rate had increased to 6.1%. Commercial bank
lending rates have also begun to ease, from a range of 17.1%-19.0% in January
2001 to a range of 11.6%-13.3% in January 2002 and further to a range of
8.1%-10.0% in January 2003.

Foreign Exchange System. The Republic maintains a floating exchange rate
system under which market forces determine the exchange rate for the Philippine
Peso. Bangko Sentral may, however, intervene in the market to maintain orderly
market conditions and limit sharp fluctuations in the exchange rate.

140

The following table sets out exchange rate information between the Peso and
the US dollar.

EXCHANGE RATES OF PESO PER US DOLLAR

Period Period
Year End Average/(1)/
---- ------ -----------

1998 39.059 40.893
1999 40.313 39.089
2000 49.998 44.194
2001 51.789 50.993
2002 53.096 51.604

- --------
Source: Reference Exchange Rate Bulletin, Treasury Department, Bangko Sentral.

(1) The average of the monthly average exchange rates for each month of the
applicable period.

In 1993, the Government significantly reformed the Republic's foreign
exchange payment system by, among other things:

. eliminating the requirement to surrender export proceeds;

. removing restrictions on current account transactions;

. easing access to foreign currency loans for exporters and producers; and

. relaxing the regulations governing investments outside the Philippines.

Foreign exchange may be freely sold and purchased outside the banking system
and deposited in foreign currency accounts. Both residents and non-residents
may maintain foreign currency deposit accounts with authorized banks in the
Philippines, and residents may maintain deposits abroad without restriction.

Payments related to foreign loans registered with Bangko Sentral and foreign
investments approved by or registered with Bangko Sentral may be serviced with
foreign exchange purchased from authorized agent banks. Bangko Sentral must
approve and register all outgoing investments by residents exceeding $6 million
per investor per year if the funds will be sourced from the banking system. For
a discussion of Bangko Sentral's loan approval regime, see "-- The Philippine
Financial System -- Foreign Currency Loans."

While the Government imposes no currency requirements for outgoing payments,
all exchange proceeds from exports, services and investments must be obtained
in any of 22 prescribed currencies. Authorized agent banks may convert the
acceptable currencies to pesos.

Bangko Sentral maintains an Exporters' Dollar Facility to facilitate the
conversion of export proceeds in US dollars into Pesos. In 1999, Bangko Sentral
expanded the facility to include a Japanese yen rediscounting facility and
renamed it the Exporters' Dollar and Yen Rediscount Facility.

Individual or corporate non-residents may open peso bank accounts without
Bangko Sentral's approval. The export or electronic transfer out of the
Philippines of peso amounts exceeding (Peso)10,000 requires prior authorization
from Bangko Sentral.

The value of the peso relative to the US dollar and other foreign currencies
declined substantially in 1997 and early 1998. Bangko Sentral initially
responded to the peso depreciation in July 1997 by increasing its sales of US
dollars and raising interest rates. In 1997, total net sales of US dollars by
Bangko Sentral amounted to over $2.6 billion, including $2.1 billion in June
and July 1997. Despite Bangko Sentral's intervention, sales of pesos

141

proved stronger than expected and as a result, Bangko Sentral allowed the peso
to float on July 11, 1997. The value of the peso then declined over time,
reaching a low of (Peso)45.42 per US dollar on January 8, 1998. As the
Government implemented various monetary, foreign exchange and fiscal policies
to curb speculation and restore confidence in the economy, the peso began to
strengthen. On December 31, 1998, Bangko Sentral's reference exchange rate was
(Peso)39.06 per US dollar and on December 31, 1999, the exchange rate was
(Peso)40.31 per US dollar.

For the first four months of 2000, the peso-dollar rate was relatively
stable, averaging (Peso)40.78 per US dollar. However, the exchange rate began
to exhibit volatility starting in mid-May and exceeded (Peso)45.00 per US
dollar on July 27, 2000. It exceeded (Peso)50.00 per US dollar on October 27,
2000, and reached a record average low of (Peso)51.68 per US dollar in November
2000. The Peso recovered briefly in November, bringing the rate up to
(Peso)49.39 per US dollar on November 29, 2000. This trend, however, was not
sustained as the peso depreciated to an average of (Peso)49.99 per US dollar by
the end of 2000.

The weakness of the Peso in 2000 may be attributed to a number of factors,
including the rise in US interest rates, which reduced the interest rate
differential between domestic and international interest rates, concerns over
the rising fiscal deficit, and some domestic, non-economic factors, which
included the tension in Mindanao, some issues pertaining to public governance,
and the ensuing political uncertainties surrounding the impeachment trial of
former President Estrada.

The peso depreciated further in 2001. From (Peso)49.998/US$1 at end-2000,
transitory shocks caused the peso to reach a low of (Peso)55.013/US$1 on
January 19, 2001. The peso strengthened thereafter and was relatively stable
for most of February and March. From early April, however, the peso traded in
the (Peso)50-(Peso)51/US$1 range. The pressure on the peso again intensified
starting late June until the first week of August but the peso subsequently
appreciated to an average of (Peso)51.250/US$1 in September, from an average of
(Peso)53.224/US$1 in July. The peso weakened again starting the second week of
October before appreciating towards the latter part of December as market
conditions stabilized. Overall, during 2001 the peso depreciated by 13.8%
compared to the average peso-dollar exchange rate for 2000.

The fluctuations in the peso-dollar rate during 2001 were caused by a
confluence of domestic and external factors. In early January, the political
crisis involving the impeachment proceedings of the former President negatively
affected the peso. However, the speedy and peaceful resolution of the political
crisis enabled the Peso to recover and gain some stability beginning in the
third week of January. Starting April until the first week of August, the peso,
along with other regional currencies, was again weakened against the dollar due
primarily to bearish market sentiment brought about by concerns over the
economic slowdown in the US and in Japan. The weakness of the peso was also
attributed to: (1) the continued tension resulting from the Abu Sayyaf hostage
crisis and the spate of kidnappings in Metro Manila; (2) the downgrading of
growth projections by the government due to the contraction in exports and the
slowdown in industrial output; (3) worries over the budget deficit; (4) rising
corporate dollar demand for mid-year import requirements and dividend
repatriation; and (5) renewed weakening of investor sentiment on emerging
market currencies due to the debt crisis in Argentina. Heightened uncertainty
after the September 11 terrorist attacks in the United States was mainly behind
the depreciation pressure on the peso in the last quarter of the year.

After reaching (Peso)49.48 on May 20, 2002, the peso depreciated to reach
(Peso)55.08 per US dollar on March 13, 2003, its lowest level relative to the
US dollar since January 2001. See "-- Recent Economic Developments -- Peso/US$
Exchange Rate."

Stabilization of the Peso. Since it allowed the peso to move within a wider
range on July 11, 1997, Bangko Sentral has intervened minimally in the foreign
exchange market. It has, however, adopted certain measures related to foreign
exchange trading including:

. requiring prior approval of Bangko Sentral to sell non-deliverable forward
contracts to non-residents to decrease the demand for foreign currency
(Bangko Sentral believes that speculators used non-deliverable forward
contracts to increase artificially the demand for foreign currency);

142

. reducing banks' permitted long or overbought foreign exchange position to
the lower of $10 million or 5% of unimpaired capital, to limit a bank's
ability to speculate in foreign exchange;

. lifting temporarily, subject to periodic review by Bangko Sentral, the 20%
limit on banks' short or oversold foreign exchange position, to increase
the foreign exchange available in the market;

. limiting the types of forward contracts that can be used as deductions
when valuing a bank's overbought foreign exchange position;

. requiring banks to consolidate their foreign exchange accounts with those
of their subsidiaries when calculating net open foreign exchange positions
so that a bank cannot circumvent the rules by engaging in foreign exchange
transactions through a subsidiary or affiliate;

. decreasing the maximum amount of foreign exchange that banks can sell
over-the-counter on an undocumented basis to $5,000 from $100,000, thus
moderating demand for foreign exchange;

. prohibiting banks from extending peso loans to non-residents to curb undue
speculation in the foreign exchange market and to further reinforce the
regulation that peso deposits should be funded from inward foreign
exchange remittance;

. requiring banks with foreign exchange corporations to submit a report
containing details of foreign exchange purchases and sales;

. issuing rules and regulations to combat money laundering. See "-- The
Philippine Financial System -- Structure of the Financial System."

In addition, in December 1997, Bangko Sentral introduced the currency risk
protection program, which is a hedging facility provided by Bangko Sentral
through commercial banks under which, on the maturity of a forward contract,
the difference between the contract rate and the market rate is settled and
paid in pesos. The program allows eligible borrowers with unhedged foreign
exchange liabilities to borrow from the program to hedge their unmatured
liabilities with reference to foreign currency deposit units of banks. This
reduces their foreign exchange exposure and generally reduces demand for
foreign currency in the spot market. In early 1998, as a part of the program,
Bangko Sentral expanded oil companies' access to commercial bank funds by
permitting them to borrow foreign currencies, in addition to obtaining loans
and advances, to pay for their non-crude and non-refined imports and to meet
their short-term working capital requirements.

In January 2000, Bangko Sentral imposed a 90-day minimum holding period for
foreign investments placed in peso time deposits with Philippine banks to
tighten its monitoring of the foreign exchange market and discourage the inflow
of short-term speculative funds. The holding period applies only to peso time
deposits and not to other investments such as equities, government securities
or commercial paper. Peso time deposits that are terminated within the 90-day
period will not be converted by Philippine banks to foreign currency, but may
be transferred to other peso-denominated investments.

In June 2000, Bangko Sentral began to require banks and their subsidiaries
with foreign exchange operations to submit detailed reports of foreign exchange
purchases and sales transactions involving more than $250,000 with the
objective of closely monitoring and supervising the foreign exchange operations
of those banks and subsidiaries.

In October 2000, Bangko Sentral introduced guidelines on the foreign
exchange trading activities for foreign exchange corporations or corporations
that are subsidiaries or affiliates of banks, quasi-banks or non-bank
intermediaries. Under the guidelines, foreign exchange corporations must
require a written, notarized application

143

and supporting documentation for sales of foreign exchange in excess of $10,000
to Philippine residents for trade and non-trade purposes. Additionally, foreign
exchange corporations are required to confirm that the $10,000 limit is not
breached by splitting the foreign exchange purchases into smaller amounts to
make it appear that the purchase does not violate the prescribed limit. Bangko
Sentral also increased the minimum paid-in capital for foreign exchange
corporations to (Peso)50 million. In October 2000, Bangko Sentral also
expressly prohibited banks from engaging in engineered swap transactions
because Bangko Sentral believes these transactions contributed to the
volatility of the peso-US dollar exchange rate during 2000.

In 2001 and 2002, Bangko Sentral implemented the following measures to
address dollar speculation and exchange rate volatility:

. in July 2001, it expanded the eligibility rules of the currency risk
protection program, a hedging facility established in 1997, to include US
dollar trust receipts; net importers; registered foreign
currency-denominated bonds and foreign currency deposit loans with the
original maturities longer than one year and up to five years; and trade
transactions of clients other than oil companies. The coverage of the
currency risk protection program was further expanded in September 2001 to
include Bangko Sentral-registered short-term trade-related borrowings of
oil companies from offshore banking units and offshore banks. The measures
are expected to further relieve the pressure on the spot market created by
investors who seek to front-load their future foreign currency
requirements and by borrowers who seek to cover unmatured foreign currency
obligations;

. it reduced the ceiling on undocumented over-the-counter sales of foreign
exchange to $5,000 to prevent abuse through the splitting of foreign
exchange sales;

. it kept policy rates unchanged since May 18, 2001 to preserve an
appropriate interest rate differential to encourage investors to maintain
their Peso-denominated assets, while concurrently addressing the risk of
inflation arising from the pass-through effects of the Peso depreciation.
Bangko Sentral's overnight borrowing and lending rates were subsequently
reduced after the third quarter of 2001 to their current levels of 7.0%
and 9.25%, respectively;

. it increased the monetary penalty and introduced non-monetary sanctions
for those violating foreign exchange rules and regulations; and

. it required effective from January 1, 2002, any person who brings into or
out of the Philippines foreign currency in excess of $10,000 or its
equivalent to declare the same in writing and to furnish information on
the source and purpose of the transport of such currency.

144

The Philippine Financial System

Composition. The following table sets out the total assets of the
Philippine financial system by category of financial institution.

TOTAL ASSETS OF THE FINANCIAL SYSTEM/(1)/

As of December 31,
---------------------------------------------------------------------
1998 1999 2000 2001 2002/(2)/
------------- ------------- ------------- ------------- -------------
(in billions)

Banks
Commercial banks................ (Peso)2,512.2 (Peso)2,722.3 (Peso)3,013.6 (Peso)3,070.5 (Peso)3,250.2
Thrift banks.................... 216.4 223.5 245.8 259.0 273.01
Rural banks..................... 60.0 61.9 67.4 73.8 81.3/(3)/
------------- ------------- ------------- ------------- -------------
Total banks.................... 2,788.6 3,007.7 3,326.8 3,403.3 3,604.5
------------- ------------- ------------- ------------- -------------
Non-bank financial institutions. 656.2 733.6 773.8 691.3 707.2
------------- ------------- ------------- ------------- -------------
Total assets................... (Peso)3,444.8 (Peso)3,741.3 (Peso)4,100.6 (Peso)4,094.6 (Peso)4,311.7
============= ============= ============= ============= =============

- --------
Source: Bangko Sentral

(1) Excludes assets of Bangko Sentral.
(2) Provisional.

(3) As of September 30, 2002

The Philippine financial system consists of banks and non-bank financial
institutions. Banks include all financial institutions that lend funds obtained
from the public primarily through the receipt of deposits. Non-banks include
financial institutions other than banks which lend, invest or place funds, or
at which evidences of indebtedness or equity are deposited with or acquired by
them, either for their own account or for the account of others. Non-bank
financial institutions may have quasi-banking functions. Quasi-banking
functions include borrowing money to relend or purchase receivables and other
obligations by issuing, endorsing or accepting debt or other instruments or by
entering into repurchase agreements with 20 or more lenders at any one time.

The Supervision and Examination Sector of Bangko Sentral supervises all
banks and non-banks with quasi-banking functions, including their subsidiaries
and affiliates engaged in related activities, with Bangko Sentral's Monetary
Board having ultimate supervisory authority.

Structure of the Financial System. The Philippine financial system is
comprised of commercial banks, thrift banks, rural banks, specialized
Government banks and non-bank financial institutions. Each type of bank
participates in distinct business activities and geographic markets.

Commercial banks perform the following activities:

. accept drafts;

. issue letters of credit, discount and negotiate promissory notes, drafts,
bills of exchange and other evidences of indebtedness;

. receive deposits;

. buy and sell foreign exchange and gold and silver bullion; and

. lend money on a secured or unsecured basis.

Expanded commercial banks, otherwise known as universal banks, in addition
to regular commercial banking activities may also engage in investment banking
activities, invest in non-bank businesses and own

145

allied financial undertakings other than commercial banks. As of March 31,
2002, the country had 44 commercial banks, with 4,282 branch offices. Of such
commercial banks, 41 were privately owned, including 13 foreign-controlled
banks and six subsidiaries of foreign banks.

The following table sets out the outstanding loans of commercial banks
classified by sector.

COMMERCIAL BANKS' OUTSTANDING LOANS BY SECTOR

--------------------------------------------
1998 1999
------------------------ ------------------

Agriculture, fishery and
forestry.......................... (Peso)62,930 4.7% (Peso)58,859
Mining and quarrying............... 20,048 1.5 16,466
Manufacturing...................... 357,455 26.5 382,267
Electricity, gas and water......... 47,284 3.5 53,274
Construction....................... 54,972 4.1 53,384
Wholesale and retail............... 210,191 15.6 203,177
Transportation, storage and
communication..................... 98,636 7.3 91,024
Financial institutions, real estate
and business services............. 347,339 25.7 342,673
Community, social and personal
services.......................... 149,336 11.1 153,104
------------------ ----- ------------------
Total............................ (Peso) 1,348,191 100.0% (Peso) 1,354,228
================== ===== ==================

As of December 31,
------------------------------------------------------------------------------------
2000 2001 2002/(1)/
------ ------------------------ ------------------------ ------------------------
(in millions, except percentages)

Agriculture, fishery and
forestry.......................... 4.3% (Peso)62,101 4.3% (Peso)56,823 4.1% (Peso)72,413 4.5%
Mining and quarrying............... 1.2 21,166 1.5 19,890 1.4 14,448 0.9
Manufacturing...................... 28.2 404,224 27.8 372,906 26.7 381,258 23.9
Electricity, gas and water......... 3.9 75,398 5.2 70,359 5.0 71,437 4.5
Construction....................... 4.0 46,949 3.2 42,151 3.0 35,543 2.2
Wholesale and retail............... 15.0 201,233 13.9 210,306 15.0 218,898 3.7
Transportation, storage and
communication..................... 6.7 99,653 6.9 83,068 5.9 71,914 4.5
Financial institutions, real estate
and business services............. 25.3 386,797 26.6 359,199 25.7 589,167 37.0
Community, social and personal
services.......................... 11.3 153,983 10.6 184,534 13.2 151,467 9.5
----- ------------------ ----- ------------------ ----- ------------------ -----
Total............................ 100.0% (Peso) 1,451,504 100.0% (Peso) 1,399,236 100.0% (Peso) 1,597,975 100.0%
===== ================== ===== ================== ===== ================== =====

- --------
Source: Bangko Sentral.

(1) Preliminary.

Thrift banks invest their capital and the savings of depositors in:

. financings for homebuilding and home development;

. marketable debt securities;

. commercial paper and accounts receivable, drafts, bills of exchange,
acceptances or notes arising out of commercial transactions; or

. short-term working capital and medium and long-term loans to small and
medium-sized businesses and individuals engaged in agriculture, services,
industry, housing and other financial and allied services in its market.

As of March 31, 2002, the country had 100 thrift banks, with 1,242 branch
offices.

Rural banks extend credit in the rural areas on reasonable terms to meet the
normal credit needs of farmers, fishermen, cooperatives and merchants and in
general, the people in the rural communities. As of March 31, 2002, the country
had 782 rural banks, with 1,137 branch offices.

The specialized Government banks are the Development Bank of the
Philippines, the Land Bank of the Philippines and the Al-Amanah Islamic
Investment Bank of the Philippines. The Development Bank generally provides
banking services to meet the medium and long-term needs of small and
medium-sized agricultural and industrial enterprises, particularly in rural
areas. The Land Bank primarily provides financial support for agriculture and
all phases of the Republic's agrarian reform program. In addition to their
special functions, the

146

Development Bank and the Land Bank may operate as universal banks. The
Al-Amanah Islamic Investment Bank promotes and accelerates the socio-economic
development of the Autonomous Region of Muslim Mindanao by offering banking,
financing and investment services based on Islamic banking principles and
rulings.

Non-bank financial institutions are primarily long-term financing
institutions that engage in productive ventures and, to a minor extent,
facilitate short-term placements in other financial institutions. As of
December 31, 2001, Bangko Sentral regulated or supervised 36 investment houses,
48 finance companies, 26 security dealers/brokers, 5,018 pawnshops, 11
investment companies, nine lending investors, 86 non-stock savings and loan
associations, four venture capital corporations, six mutual building and loan
associations, four Government non-bank financial institutions and seven credit
companies.

Over the past several years, the Government has reformed the financial
sector to eliminate controls, enhance competition and promote stronger and more
efficient financial institutions. The reforms include:

. unifying and gradually reducing reserve requirements to reduce
intermediation costs of banks and improve their efficiency;

. using the extension of credit by Bangko Sentral to banks against
promissory notes and other collateral or rediscounting as a mechanism for
liquidity control rather than pure credit allocation;

. broadening securities dealing in Philippine Treasury bills to allow the
market to determine interest rates;

. prescribing more stringent standards for the establishment of new banks;

. easing the entry and operation of foreign banks to attract foreign
investments, promote competition and reduce intermediation costs;

. simplifying the entry rules for rural banks to improve competition and
promote efficiency; and

. increasing minimum capital requirements to promote stronger financial
institutions.

The minimum bank capitalization requirements as of December 2000 is
(Peso)4.95 billion for universal banks, (Peso)2.4 billion for commercial banks
and (Peso)325 million for thrift banks based in Metro Manila.

The economic downturn affected banks in the Philippines primarily in two
ways. First, due to the economic troubles, bank deposits increased only
minimally which in turn limited the ability of banks to extend new loans.
Aggregate assets of the banking system increased by 21.8% from year-end 1997 to
February, 2002. Second, the depreciation of the Peso, declining equity prices
and higher domestic interest rates weakened the quality of the assets of
Philippine banks. This caused a number of relatively small financial
institutions to fail and created concerns about the stability of the Philippine
financial system.

147

The following table provides information regarding non-performing loans for
the banking system for the periods indicated.

TOTAL LOANS (GROSS) AND NON-PERFORMING LOANS BY TYPE
OF COMMERCIAL BANKS

As of December 31,
-----------------------------------------------------------------------
1998 1999 2000 2001
------------- ------------- ------------- -------------
(in billions except percentages)

Expanded commercial banks/(1)/
Total loans.................................. (Peso)1,080.1 (Peso)1,086.1 (Peso)1,025.0 (Peso) 992.2
Total non-performing loans................... 112.4 141.6 172.4 192.6
Ratio of non-performing loans to total loans. 10.4% 13.0% 16.8% 19.4%
Non-expanded commercial banks/(2)/
Total loans.................................. 120.8 139.7 184.3 182.7
Total non-performing loans................... 16.5 23.0 32.4 41.7
Ratio of non-performing loans to total loans. 13.6% 16.4% 17.6% 22.8%
Government banks/(3)/
Total loans.................................. 185.9 201.0 222.4 200.3
Total non-performing loans................... 18.8 25.4 33.5 35.7
Ratio of non-performing loans to total loans. 10.1% 12.6% 15.1% 17.8%
Foreign banks/(4)/
Total loans.................................. 155.7 156.2 196.5 249.9
Total non-performing loans................... 12.2 5.4 7.5 11.9
Ratio of non-performing loans to total loans. 7.9% 3.5% 3.8% 4.8%
Total loans.................................... (Peso)1,542.5 (Peso)1,582.9 (Peso)1,628.2 (Peso)1,625.1
Total non-performing loans..................... 160.0 195.4 245.8 281.9
Ratio of non-performing loans to total loans... 10.4% 12.3% 15.1% 17.4%

--
2002
-------------

Expanded commercial banks/(1)/
Total loans.................................. (Peso)1,041.9
Total non-performing loans................... 188.0
Ratio of non-performing loans to total loans. 17.3%
Non-expanded commercial banks/(2)/
Total loans.................................. 155.8
Total non-performing loans................... 26.9
Ratio of non-performing loans to total loans. 17.2%
Government banks/(3)/
Total loans.................................. 192.6
Total non-performing loans................... 30.3
Ratio of non-performing loans to total loans. 15.7%
Foreign banks/(4)/
Total loans.................................. 249.0
Total non-performing loans................... 7.9
Ratio of non-performing loans to total loans. 3.2%
Total loans.................................... 1,639.4
Total non-performing loans..................... 245.1
Ratio of non-performing loans to total loans... 15.0%

- --------
Source: Bangko Sentral, Department of Economic Research/Supervisory Reports
and Studies Office.

(1) Includes ING Bank (foreign bank) and excludes Land Bank of the Philippines
and Development Bank of the Philippines. Starting May 2001, three expanded
commercial banks (Standard Chartered Bank, HSBC and ING Bank) were
reclassified as foreign banks.
(2) Excludes Orient Bank.
(3) Consists of Land Bank, Development Bank and Al-Amanah Islamic Bank.
(4) Consists of 13 foreign banks; excludes three foreign banks' subsidiaries.

The rise in NPLs weighed down on the asset quality of banks in 2001. The
commercial banking system's NPLs as a percent of total loans rose from 15.1% in
December 2000 to 17.4% in December 2001. This weakening resulted from the
depreciation of the peso, which contributed to a rise in loan defaults, and the
slowdown in business activity that saw a drop in credit demand.

In late 2000 and early 2001, Bangko Sentral extended (Peso)30 billion in
emergency loans to Equitable PCI and (Peso)25 billion in emergency loans to
Philippine National Bank ("PNB") to help the banks alleviate short-term
liquidity problems attributed to heavy withdrawals during the Estrada
impeachment trial.

As of December 31, 2002, the ratio of non-performing loans to total loans in
the commercial banking system stood at 15.0%, lower than the 16.1% as of
November 30, 2002 and 17.4% as of December 31, 2001. The improvement in the NPL
ratio from the previous year was due in part to a redefinition of
"non-performing loan" which took effect September 19, 2002 (the redefinition
allows banks to exclude from "non-performing loans" uncollectable or worthless
loans that have been fully covered by allowance for probable losses); however,
even under the previous definition of "non-performing loan", the NPL ratio at
the end of December would have

148

decreased to 15.8% compared to 16.8% at the end of November 2002. The yearly
decrease in the non-performing loan ratio was also attributed to increased
foreclosure, restructuring proceedings, and generally improving performance of
the commercial banking sector. The non-performing loans coverage ratio (loan
reserves to non-performing loans) increased to 51.2% in December 2002 from
48.2% in November 2002.

The recent passage of the Special Purpose Asset Vehicle bill is expected to
further reduce the NPL ratio. See "-- Recent Economic Developments -- Banking
System Non-Performing Loans."

The average capital adequacy ratio of the banking system based on the old
concept was 16.6% as of February 28, 2002, above the statutory floor of 10%.

After the onset of the Asian economic crisis, Bangko Sentral adopted a
number of measures to protect the financial position and soundness of the
country's banks, including measures relating to:

. Limits on a bank's transactional capacity by:

. reducing the maximum loan value for real estate loans from 70% to 60% of
the appraised value of the real estate collateral;

. limiting bank's real estate loans to no more than 20% of a bank's loan
portfolio, subject to certain exceptions that could increase the
percentage to 30% overall;

. requiring that 30% of the 100% cover of a bank's foreign currency deposit
units' foreign exchange liabilities be kept in liquid assets; and

. requiring banks to mark-to-market their trading portfolios in line with
existing market conditions at the execution of every transaction at the
end of each month.

. Measures relating to delinquent and restructured loans:

. in cases of loans payable in monthly or quarterly installments, reducing
the number of missed monthly payments from six to three and quarterly
payments from two to one before a loan must be classified as
non-performing. To align domestic regulations with international
standards, in May 1999 Bangko Sentral extended the date to classify a loan
as non-performing for loans payable on a lump sum basis and loans payable
in quarterly, semi-annual or annual installments to 30 days after their
past-due date;

. revising the treatment of restructured loans to provide that they should
be treated as performing loans or interest income related to them should
accrue if they are current and fully secured by real estate with loan
value up to 60% of the appraised value of the real estate security plus
ensured improvements. In May 1999, Bangko Sentral further tightened
regulations regarding the appraisal of collateral for restructured loans
and stipulated additional criteria for reclassifying restructured loans as
performing;

. mandating general loan loss provisions over and above the provision for
probable losses linked to individually identified bad accounts.
Incremental loans granted over and above the loan portfolio level of
banks, net of allowable exclusions, as of March 31, 1999 are no longer
subject to the provisioning requirements requiring banks to reserve an
amount equal to 2% of their gross loan portfolio (less certain accounts)
as an allowance for probable losses. In December 2001, Bangko Sentral
lowered the provisioning ratio from 2% to 1% of the latest outstanding
balance of unclassified loans other than restructured loans (less loans
which are considered non-risk under existing laws and regulations) to
increase new lending, and imposed a 5% reserve on the outstanding balance
of unclassified restructured loans (less the outstanding balance of
restructured loans which are considered non-risk under existing
regulations), to reflect the higher risks attached to such loans even if
they are presently performing. These adjustments were implemented to
reduce disincentives to lending activities of banks with otherwise sound
loan portfolios; and

149

. tightening provisioning requirements to include new categories of loans
especially mentioned, regardless of whether such loans are secured by
collateral (loan loss provisions of 5% of outstanding loan amount), and
secured loans classified as substandard (loan loss provisions of 25% of
outstanding loan amount). Guidelines on the allowance required on loan
accounts classified as substandard-secured were subsequently issued.

. Measures relating to capitalization:

. increasing minimum capital requirements for universal banks to (Peso)4.95
billion by December 31, 2000 and for commercial banks to (Peso)2.4 billion
by December 31, 2000;

. implementing additional penalties for a bank's failure to comply with
minimum capital requirements; and

. categorizing banks by the degree of undercapitalization and adopting
prompt corrective measures as appropriate.

. Measures relating to disclosure and management:

. improving bank disclosures regarding interest rates, non-performing loans,
classified loans, loan loss reserves, allowances for probable losses and
loss provisions;

. improving bank management by outlining and expanding the duties of boards
of directors;

. requiring banks to appoint compliance officers to ensure the bank's
compliance with banking rules and regulations; and

. requiring external auditors to provide more information to Bangko Sentral.

. Measures relating to regulatory control and bankruptcy:

. shifting the regulatory approach to a risk-based approach of examination
and consolidated supervision as opposed to one focused exclusively on
transaction testing and verifying the existence and value of assets;

. issuing stricter guidelines to establish and operate new banks so that new
banks will have suitable stockholders, adequate financial strength, an
appropriate legal structure in line with its operational structure and
appropriate management with sufficient expertise and integrity to operate
the bank in a sound and prudent manner. In 1999, Bangko Sentral put in
place an indefinite moratorium on the establishment of new banks with
certain exceptions such as new banks resulting from mergers and
consolidations. In March 2001, Bangko Sentral issued implementing
guidelines to enforce section 8 of the General Banking Law of 2000. These
guidelines provided for a moratorium on the establishment of commercial
banks, with certain exceptions such as new banks arising from the
acquisition by a foreign bank of 100% of the voting stock of an existing
domestic commercial bank; and

. adopting strategies for restructuring a failed bank before closing it,
including rehabilitating the troubled bank, buying-in another bank or
financial institution or merging the troubled bank with another financial
institution.

Bangko Sentral worked to amend the banking laws to:

. allow Bangko Sentral to adopt internationally accepted risk-based capital
requirements,

. define unsound banking practices and increase the frequency of bank
examinations,

150

. impose sanctions on banks and related persons for violations of banking
regulations,

. issue regulations requiring banks and affiliates to maintain balanced
positions in their foreign currency transactions, and

. grant loans to banks for liquidity purposes.

To stimulate economic recovery and encourage greater bank lending, Bangko
Sentral relaxed the general loan loss provisioning requirement in April 1999 so
that banks would not have to make general loan loss provisions for loans
granted after March 31, 1999 (the general loan loss provision prior to March
31, 1999 was 1.5% of the total amount of outstanding loan). The requirements
for specific loan loss provisions still apply.

The General Banking Law of 2000, signed in May 2000, amended the General
Banking Act and enhanced Bangko Sentral's supervisory powers, tightened
prudential norms and liberalized foreign ownership of banks. Bangko Sentral now
has the power to conduct more in-depth examinations of banks and undertake more
effective prompt corrective action. The General Banking Law, however, repealed
the Philippine Deposit Insurance Corporation's independent right to conduct
on-site supervision and require information from banks. Since August 2000,
Bangko Sentral has been issuing the implementing guidelines for the General
Banking Law. The General Banking Law reforms introduced include:

. a strong legal basis for consolidated supervision;

. formal adoption of Basel risk-based capital requirements effective
beginning July 1, 2001;

. fit-and-proper criteria for directors and officers;

. stronger safeguards against connected lending and more comprehensive
coverage of single borrower's limit;

. inclusion of the declaration of a bank holiday as a ground for placing a
bank under receivership;

. the legal basis for formulating standards determining unsafe and unsound
bank practices;

. ownership ceilings by foreign and domestic banks;

. increases in monetary penalties; and

. improved transparency and disclosure standards.

As part of the global fight against money laundering, since July 2000,
Bangko Sentral has required banks to report on unusually large transactions and
all unusual patterns of transactions which have no apparent or visible lawful
purpose. On July 26, 2001, Bangko Sentral also reduced the ceiling on
undocumented over-the-counter sales of foreign exchange from $10,000 to $5,000.
Additionally, Bangko Sentral has issued a number of administrative measures
that bring the country's regulatory regime relating to money laundering closer
to international standards. See "Recent Economic Developments -- Anti-Money
Laundering Act of 2001." These measures include:

. requiring banks and non-bank financial institutions to take reasonable
measures to establish and record the true identity of their clients and to
update their records at least every other year;

. requiring banks and non-bank financial intermediaries to submit their
respective plans of action to comply with the above requirements;

. requiring banks to take necessary measures to establish and record the
true identity of their clients in cases of numbered foreign currency
accounts authorized under existing law;

151

. precluding banks from issuing cashier's, manager's checks, certified
checks or other instruments payable, to cash, bearer or numbered accounts
in amounts exceeding $10,000;

. requiring banks with foreign exchange subsidiaries or affiliates to
report, on a daily basis, the counterparties and other details of all
foreign exchange sales and purchases. For transactions of $250,000 and
above, banks are required to specify the identities and addresses of the
parties as well as the purpose of the transaction;

. instructing foreign exchange corporations, for sales of foreign exchange
exceeding $5,000 or more to residents for trade and non-trade purposes, to
require foreign exchange purchasers to submit a notarized application and
supporting documents; and

. requiring any person to declare in writing the amount, source and purpose
of the transfer of foreign currency into and out of the country for
amounts equivalent to or exceeding $10,000.

In September 2002, the Monetary Board relaxed the formula for the
calculation of NPLs, by allowing banks to deduct loan accounts for which they
have provided 100% provisioning from their non-performing loans. To qualify for
the revised NPL computation, banks must maintain adequate provisions for
probable losses commensurate to the quality of their asset portfolio. Bangko
Sentral predicts that the ruling will reduce the ratio of NPLs to total loans
by 2%. The policy is also expected to encourage banks to write off loans that
are considered uncollectible or worthless.

Foreign Currency Loans

Bangko Sentral imposes a combination of prior approval, registration and
reporting requirements on all non-Peso denominated loans. The regime is as
follows:

Type of Loan Regulatory Requirement
- -------------------------------------------- -------------------------------------------

Private sector loans: Prior approval, subsequent registration and
.. guaranteed by a public sector entity or a reporting requirements.
local commercial bank;
.. granted by foreign currency deposit units
that are specifically or directly funded
from, or collateralized by, offshore
loans or deposits;
.. obtained by banks and financial
institutions with a term exceeding one
year which will be relent to public and
private enterprises; or
.. serviced using foreign exchange purchased
from the banking system, unless
specifically exempted from the approval
requirement.
Private sector loans which are specifically Subsequent registration and reporting
exempted and which will be serviced with requirements.
foreign exchange purchased in the banking
system.
All private sector loans to be serviced with Reporting requirements.
foreign exchange not purchased from the
banking system.
Public sector offshore loans except: Prior approval and reporting requirements.
.. short-term foreign currency deposit loans
for trade financing; and
.. short-term interbank borrowings.

152

The Philippine Securities Markets

History and Development. The securities industry in the Philippines began
with the opening of the Manila Stock Exchange in 1927. In 1936, the Government
established the Securities and Exchange Commission (the "SEC") to oversee the
industry and protect investors. Subsequently, the Makati Stock Exchange opened
in 1963 and merged with the Manila Stock Exchange to form the Philippine Stock
Exchange in 1994. Until economic and political difficulties in the 1970s caused
its decline, the Philippine securities market was the most active in Asia.
Since 1992, the Government has attempted to improve the capital market, attract
more companies to list on the Philippine Stock Exchange and allow more
investors to participate in the market by emphasizing market deregulation and
self-regulation.

On December 6, 1996, the SEC granted the Philippine Central Depository, Inc.
a temporary operating license. The central depository, a private institution,
implemented a book-entry system to simplify the mechanism for issuing and
transferring securities. By December 1997, the central depository had enrolled
all active listed issues in the book entry system.

On June 29, 1998, the SEC granted the Philippine Stock Exchange
self-regulatory organization status, empowering it to supervise and discipline
its members, including by examining a member's books of account and conducting
audits.

To broaden the range of securities eligible for listing, the Philippine
Stock Exchange established a board for small- and medium-sized enterprises with
an authorized capital of (Peso)20 million to (Peso)99.9 million of which at
least 85% must be subscribed and fully paid. The Philippine Stock Exchange
intends to eventually list debt securities and equity derivatives as well.

On July 19, 2000, the Securities Regulation Code of 1999 was signed into
law. The new Act:

. shifts the focus of securities regulation from a merit-based system to a
disclosure-based system;

. strengthens the anti-fraud provisions of the securities laws;

. utilizes self-regulatory organizations to enforce greater investor
protection;

. updates the regulations governing the securities industry consistent with
international practices; and

. strengthens the rule-making and corporate reorganization powers of the SEC.

As of June 10, 2002, the Philippine Stock Exchange had 151 local and 33
foreign members and 236 listed companies.

Share prices of companies listed on the Philippine Stock Exchange fell
significantly in 1997. The falling stock market and resultant heavy selling of
Philippine equity securities by foreign investors hurt the value of the Peso
and the foreign currency positions of financial institutions in the
Philippines. The Philippine Stock Exchange Composite Index declined by 45.8% in
Peso terms from 3,447.6 on February 3, 1997 to 1,869.2 on December 29, 1997.
The Philippine Stock Exchange Composite Index was quite volatile and continued
to fall during most of 1998, reaching an historic low of 1,082.2 on September
11, 1998.

The stock market rebounded in late 1999, as the Philippine Stock Exchange
Composite Index reached 2,143.0 at the end of December 1999, a 8.9% increase
from its level at the end of December 1998. The recovery, however, was
short-lived as the Philippine Stock Exchange Composite Index contracted for
three consecutive quarters in 2000, declining 31.1% for the first nine months
due to political turmoil, weakening economic fundamentals and a stock market
manipulation scandal involving BW Resources Corporation ("BW"), a publicly
traded company, and Mr. Dante Tan, its largest shareholder. During 1999, Mr.
Tan, in his own name, under alias

153

names and through associates, bought and sold large quantities of BW shares in
an attempt to control the price of the shares. Mr. Tan was charged with, among
other things, price manipulation and insider trading. Mr. Tan's case is
currently pending with the Department of Justice. The stock market's overall
capitalization grew 33% in 2000. As of December 31, 2000, overall
capitalization was approximately (Peso)2.5 trillion, compared to (Peso)1.9
trillion as of December 31, 1999 and (Peso)1.4 trillion as of December 31,
1998. As a percentage of GNP, market capitalization declined from 86.4% in 1999
to 77.6% by the end of 2000. The Philippine Stock Exchange Composite Index
closed at 1,494.5 on December 31, 2000.

On June 20, 2001, the Philippine Stock Exchange announced that the SEC had
approved its proposal for its demutualization, or conversion from a mutual or
membership organization into a publicly-held stock corporation. Under the
demutualization, the Exchange created a new corporation which assumed
approximately 80% of the Exchange's total assets. Exchange member
broker-dealers surrendered membership rights to the Exchange and, in return,
received shares of the new corporation, shares of the Exchange and trading
rights. On July 20, 2001, the Philippine Stock Exchange approved the plan to
demutualize the stock exchange. On August 8, 2001, the Philippine Stock
Exchange completed its conversion to a stock corporation that is publicly held.
As its first shareholders, each of the 184 member-brokers subscribed and fully
paid for 50,000 shares. The second part of the demutualization which is the
public offering and listing of its shares on the Exchange is still under
planning.

The Philippine Stock Exchange Composite Index reached 1,168.08 at the end of
December 2001, a 21.8% decrease from its level at the end of December 2000. At
the end of September 2001, the composite index closed the month at 1,126.63, a
decrease of 21.5% from end of September 2000. In October 2001, amid the onset
of the US-led attacks against the Taliban government in Afghanistan, fears and
uncertainties about the prospects of the global economy due to the subsequent
threat of war and recession and apprehensions over the Philippine economic and
political environment, the composite index continued its decline, finishing the
month at 993.35, or 11.8% lower than September 2001. In November 2001, the
composite index rose to finish the month at 1,128.47, or 13.6% higher than the
prior month, due to the release of better-than-expected domestic economic data,
a lower budget deficit for October 2001 than was targeted and favorable news on
the US-led attacks against the Taliban in Afghanistan. In December 2001, the
composite index increased to 1,168.08 at month-end, or 3.5% higher than at the
end of November 2001.

In 2002, the composite index rose to a high of 1,452.51 on February 20, but
has since decreased to 1,018.4 at the end of December 2002. The Philippine
Stock Exchange closed at 1,037.26 on February 5, 2003. The higher budget
deficit, concerns of a global economic slowdown, increased crime and
kidnappings, the accounting scandals that affected certain large corporations
in the United States and the proposed partial sale by First Pacific Company
Limited of its 24.4% controlling stake in the Philippine Long Distance
Telephone Company to the Gokongwei Group contributed to a decline in the
composite index.

Government Securities Market. The Government securities market is dominated
by short-term Treasury bills with maturities not exceeding one year. Responding
to investor preferences and to create a yield curve for long-term domestic
securities, the Government issued securities with longer maturities, including
five-year fixed rate treasury bonds in June 1995 and seven and ten-year fixed
rate treasury bonds in 1996. The restructuring of the Republic's domestic debt
in favor of longer-term securities kept the issuance of Treasury bills of
(Peso)17.9 billion below budget in 1996, while the issuance of fixed rate
Treasury bonds exceeded expectations by (Peso)13.5 billion. In 1997, the
Government sold, for the first time, 20-year Treasury bonds in the amount of
(Peso)2 billion. The Government's outstanding direct domestic debt totalled
(Peso)1,247.7 billion as of December 31, 2001, an increase of 46.6% from
(Peso)850.9 billion as of December 31, 1998.

In June 1999, the Government issued (Peso)11.6 billion small-denominated
Treasury bonds. These bonds, which have a maturity of five years and are
available in blocks of as low as (Peso)5,000, are aimed at Philippine retail
investors. The bonds are intended to reduce the Government's dependence on
weekly auctions and to provide the Government with another source of long-term
funding. The Government intends to continue to issue small- denominated
Treasury bonds and expects the program to reduce demand for short-term funding
and contribute to reduced pressure on interest rates.

154

The Government has taken steps to further the development of the secondary
market in Treasury securities, including establishing of the Registry of
Scripless Securities which computerizes the sales and purchases of Treasury
securities in the secondary market.

International Bond Market. In February 1997, Bangko Sentral approved
guidelines governing the issuance of Peso-denominated instruments in the
international capital markets. Bangko Sentral will require the receipt of
foreign currency by the Philippines and its exchange into Pesos in the local
banking system.

Public Finance

The Consolidated Financial Position. The consolidated public sector
financial position measures the overall financial standing of the Republic's
public sector. It is comprised of the public sector borrowing requirement and
the aggregate deficit or surplus of the Social Security System and the
Government Service Insurance System, Bangko Sentral, the Government financial
institutions and the local Government units. The public sector borrowing
requirement reflects the aggregate deficit or surplus of the Government, the
Central Bank-Board of Liquidator's accounts, the Oil Price Stabilization Fund
and the 14 monitored Government owned corporations.

The following table sets out the consolidated financial position on a cash
basis for the periods indicated.

CONSOLIDATED PUBLIC SECTOR FINANCIAL POSITION OF THE REPUBLIC

1998 1999 2000 2001
------------ ------------ ------------ ------------
(in billions, except percentages)

Public sector borrowing requirement:
National Government............................................ (Peso) (50.0) (Peso)(111.7) (Peso)(134.2) (Peso) (147)
Central Bank-Board of Liquidation.............................. (26.4) (20.5) (19.1) (23.5)
Oil Price Stabilization Fund/(1)/.............................. 0.7 1.9 0.3 0.8
Monitored Government owned corporations........................ (38.0) (4.6) (19.2) (24.5)
Government transfers to Government owned corporations.......... 0.9 3.0 4.2 4.5
Other adjustments.............................................. 1.5 (6.1) (6.6) 0.0
------------ ------------ ------------ ------------
Total public sector borrowing requirement..................... (Peso)(111.3) (Peso)(138.0) (Peso)(174.6) (Peso)(187.0)
------------ ------------ ------------ ------------
As a percentage of GNP........................................... (4.0)% (4.4)% (5.0)% (5.1)%
Other public sector:
Social Security System and Government Service Insurance System. (Peso) 17.8 (Peso) 36.4 (Peso) 15.5 (Peso) 9.3
Bangko Sentral/(3)/............................................ 3.2 (4.0) 0.2 (0.1)
Government financial institutions.............................. 5.4 3.3 2.8 3.9
Local Government units......................................... 2.0 3.2 3.8 4.2
Timing adjustment of interest payments to Bangko Sentral....... (0.3) (2.3) 0.5 (0.2)
Other adjustments.............................................. 0.0 0.8 0.1 0.1
------------ ------------ ------------ ------------
Total other public sector..................................... 28.1 37.5 22.9 17.2
------------ ------------ ------------ ------------
Consolidated public sector financial position................. (Peso) (83.2) (Peso)(100.5) (Peso)(151.7) (Peso)(147.6)
============ ============ ============ ============
As a percentage of GNP........................................... (3.0)% (3.2)% (4.3)% (4.5)%

2002/(4)/
------------

Public sector borrowing requirement:
National Government............................................ (Peso)(210.7)
Central Bank-Board of Liquidation.............................. (15.13)
Oil Price Stabilization Fund/(1)/.............................. 0.0
Monitored Government owned corporations........................ (46.36)
Government transfers to Government owned corporations.......... 3.9
Other adjustments.............................................. 0.0
------------
Total public sector borrowing requirement..................... (Peso)(268.3)
------------
As a percentage of GNP........................................... N/A/(2)/
Other public sector:
Social Security System and Government Service Insurance System. (Peso) 25.6
Bangko Sentral/(3)/............................................ 4.2
Government financial institutions.............................. 5.4
Local Government units......................................... 3.4
Timing adjustment of interest payments to Bangko Sentral....... (1.6)
Other adjustments.............................................. 0.0
------------
Total other public sector..................................... 37.0
------------
Consolidated public sector financial position................. (Peso)(169.1)
============
As a percentage of GNP........................................... N/A/(2)/

- --------
Source: Fiscal Policy and Planning Office, Department of Finance.

(1) The Oil Price Stabilization Fund was created by the Government to stabilize
the domestic price of oil products. Prior to deregulation in 1997, if
exchange rates and international crude oil prices exceeded certain levels,
oil companies received money from the fund, but if exchange rates and crude
oil prices fell below those levels, oil companies contributed to the fund.
The fund was technically abolished with the full deregulation of the oil
industry in February 1998. The Government will settle claims against the
fund, amounting to (Peso)2.6 billion in 1997, by granting the claimants tax
credits over a 15-month period.
(2) N/A means "not available".
(3) Amounts are net of interest rebates, dividends and other amounts remitted
to the Government and the Central Bank-Board of Liquidation.
(4) Preliminary.

155

For 1998, the consolidated financial position recorded a deficit of
(Peso)83.2 billion, or 3.0% of GNP at current prices, because of increased
public sector borrowing requirement to finance higher deficits incurred by the
Government and the Government owned corporations. Costs relating to the
restructuring of the old Central Bank contributed (Peso)26.4 billion to the
deficit.

For 1999, the consolidated financial position recorded a deficit of
(Peso)100.5 billion, or 3.2% of GNP at current market prices, compared to a
deficit of (Peso)83.2 billion in 1998. The Government's position was (Peso)15.2
billion off its target of (Peso)85.3 billion for the year. The Government
accounted for (Peso)111.7 billion of the total deficit for the period, in line
with its objective of stimulating the economy. Restructuring costs for the old
Central Bank also contributed (Peso)20.5 billion to the total public sector
borrowing requirement.

Led by the Government deficit, the consolidated financial position deficit
increased to (Peso)151.7 billion in 2000 or 4.3% of GNP at current market
prices, compared with the previous year's deficit of (Peso)100.5 billion. The
consolidated public sector deficit was largely due to a public sector borrowing
requirement of (Peso)174.6 billion, which included (Peso)19.1 billion for costs
relating to the restructuring of the old Central Bank and the (Peso)19.2
billion deficit of the 14 monitored non-financial Government corporations. The
Government owned corporations' budget gap deteriorated from the single-digit
deficit posted in 1999 as both current and capital expenditures increased. The
greatest contributors to the deficit were the Philippine National Oil Company,
the National Power Corporation, the Light Rail Transit Authority, the National
Development Corporation and the National Food Authority. The other public
sector entities had a combined surplus of (Peso)22.9 billion in 2000, largely
due to the substantial surpluses of the local government units and the social
security institutions such as the Government Services and Insurance System and
Social Security System.

For 2001, the consolidated financial position recorded a deficit of
(Peso)172.5 billion or 4.5% of GDP at current market prices. The Government
accounted for (Peso)147.0 billion of the deficit, the Central Bank
restructuring accounted for (Peso)23.5 billion and the monitored
Government-owned corporations accounted for (Peso)24.5 billion. The other
public sector entities had a combined surplus of (Peso)17.2 billion during
2001, of which (Peso)9.3 billion was attributable to the social security
institutions.

For the first nine months of 2002, the consolidated financial position of
the Republic (not including Bangko Sentral) recorded a deficit of (Peso)169.1
billion, 59.7% higher than the (Peso)105.9 billion target for the period. The
Government recorded a (Peso)166.5 billion deficit, the Central Bank
restructuring accounted for an additional (Peso)11.8 billion deficit, and the
monitored Government-owned corporations accounted for a (Peso)25.7 billion
deficit. The total public sector borrowing requirement of (Peso)199.5 billion
was offset in part by a combined surplus of (Peso)30.5 billion for the other
public sector entities during the first six months of 2002. Of the surplus,
(Peso)20.5 billion was attributable to the social security institutions.

156

Government Revenues and Expenditures. The following table sets out
Government revenues and expenditures for the periods indicated.

GOVERNMENT REVENUES AND EXPENDITURES

--------------------------
1998 1999
----------- ------------

Revenues
Tax revenues
Bureau of Internal Revenue.............................. (Peso)337.2 (Peso) 341.3
Bureau of Customs....................................... 76.0 86.5
Others/(3)/............................................. 3.4 3.9
----------- ------------
Total tax revenues..................................... 416.6 431.7
As a percentage of GNP................................ 14.9% 13.9%
Non-tax revenues
Bureau of the Treasury income/(5)/...................... (Peso) 22.5 (Peso) 26.2
Fees and other charges/(6)/............................. 21.0 16.0
Privatizations/(7)/..................................... 1.7 4.2
Comprehensive Agrarian Reform Program (land acquisition
and credit)............................................ 0.0 0.2
Foreign grants............................................ 0.4 0.3
----------- ------------
Total non-tax revenues................................. 45.5 46.5
----------- ------------
Total revenues........................................ 462.5 478.5
----------- ------------
As a percentage of GNP.............................. 16.6% 15.2%
Expenditures
Personnel services........................................ (Peso)172.9 (Peso) 167.0
Maintenance and operating expense......................... 118.3 141.6
Other current operating expense........................... 0.2 5.5
Interest payments
Foreign................................................. 26.3 31.3
Domestic................................................ 73.5 75.0
----------- ------------
Total interest payments................................ 99.8 106.3
Subsidies to Government corporation....................... 4.7 6.8
Allotment to local government units....................... 72.0 96.4
Transfers to the Oil Price Stabilization Fund............. 0.0 0.7
Comprehensive Agrarian Reform Program (land acquisition
and credit).............................................. 0.5 0.0
Infrastructure and other capital outlays.................. 43.5 61.2
Equity and net lending.................................... 1.1 4.7
----------- ------------
Total expenditures...................................... 512.5 590.2
----------- ------------
As a percentage of GNP................................. 18.4% 18.8%
Surplus/(Deficit)......................................... (Peso)(50.0) (Peso)(111.7)
Financing
Domestic financing...................................... (Peso) 37.6 (Peso) 28.9
Net domestic borrowings................................ 76.5 98.8
Non-budgetary accounts................................. (56.0) 32.6
Use of cash balances.................................... 17.1 37.4
Foreign financing...................................... 12.3 82.8
----------- ------------
Total financing....................................... (Peso) 50.0 (Peso) 111.7
=========== ============

Actual
-----------------------------------------
2000 2001 2002
------------ ------------ ------------
(in billions, except percentages)

Revenues
Tax revenues
Bureau of Internal Revenue.............................. (Peso) 360.8 (Peso) 388.7 (Peso) 394.6/(2)/
Bureau of Customs....................................... 95.0 96.2 96.3
Others/(3)/............................................. 4.2 4.9 5.6
------------ ------------ ------------
Total tax revenues..................................... 460.0 489.8 496.4/(2)/
As a percentage of GNP................................ 13.2% 13.3% 12.3
Non-tax revenues
Bureau of the Treasury income/(5)/...................... (Peso) 30.8 (Peso) 46.4 (Peso) 47.2
Fees and other charges/(6)/............................. 17.9 24.3 21.9
Privatizations/(7)/..................................... 4.6 1.2 0.6
Comprehensive Agrarian Reform Program (land acquisition
and credit)............................................ 0.1 0.0 0.0
Foreign grants............................................ 1.4 2.0 1.1
------------ ------------ ------------
Total non-tax revenues................................. 53.4 71.9 69.7
------------ ------------ ------------
Total revenues........................................ 514.8 563.7 576.1
------------ ------------ ------------
As a percentage of GNP.............................. 14.7% 15.3% 14.3%
Expenditures
Personnel services........................................ (Peso) 182.7 (Peso) 190.9 N/A/(4)/
Maintenance and operating expense......................... 149.3 155.6 N/A/(4)/
Other current operating expense........................... 3.6 0 N/A/(4)/
Interest payments
Foreign................................................. 47.3 62.2 65.9
Domestic................................................ 93.6 112.6 120.0
------------ ------------ ------------
Total interest payments................................ 140.9 174.8 185.9
Subsidies to Government corporation....................... 9.1 9.4 7.6
Allotment to local government units....................... 100.0 118.2 140.5/(8)/
Transfers to the Oil Price Stabilization Fund............. 0.0 0.0 N/A/(4)/
Comprehensive Agrarian Reform Program (land acquisition
and credit).............................................. 2.3 0.0 N/A/(4)/
Infrastructure and other capital outlays.................. 60.4 57.4 N/A/(4)/
Equity and net lending.................................... 3.2 4.4 5.4
------------ ------------ ------------
Total expenditures...................................... 649.0 710.8 777.9
------------ ------------ ------------
As a percentage of GNP................................. 18.5% 18.6% 18.4%
Surplus/(Deficit)......................................... (Peso)(134.2) (Peso)(147.0) (Peso)(210.7)
Financing
Domestic financing...................................... (Peso) 55.5 (Peso) 124.1 (Peso) 104.7
Net domestic borrowings................................ 119.5 152.3 155.1
Non-budgetary accounts................................. (57.6) (50.4) (214.9)
Use of cash balances.................................... (6.5) 22.2 1.1
Foreign financing...................................... 78.8 22.9 109.1
------------ ------------ ------------
Total financing....................................... (Peso) 134.2 (Peso) 147.0 (Peso) 214.9
============ ============ ============

Budget
------------------------------
2001/(1)/ 2002
------------ ------------

Revenues
Tax revenues
Bureau of Internal Revenue.............................. (Peso) 388.1 (Peso) 447.6
Bureau of Customs....................................... 105.1 115.1
Others/(3)/............................................. 5.7 8.6
------------ ------------
Total tax revenues..................................... 498.9 571.3
As a percentage of GNP................................ 13.0% 13.7%
Non-tax revenues
Bureau of the Treasury income/(5)/...................... (Peso) 24.9 (Peso) 22.2
Fees and other charges/(6)/............................. 23.2 25.6
Privatizations/(7)/..................................... 10.0 5.0
Comprehensive Agrarian Reform Program (land acquisition
and credit)............................................ 0.0 0.0
Foreign grants............................................ 1.2 0.3
------------ ------------
Total non-tax revenues................................. 59.3 53.0
------------ ------------
Total revenues........................................ 558.2 624.3
------------ ------------
As a percentage of GNP.............................. 14.5% 15.0%
Expenditures
Personnel services........................................ N/A/(4)/ (Peso) 251.3
Maintenance and operating expense......................... N/A/(4)/ 80.8
Other current operating expense........................... N/A/(4)/ N/A/(4)/
Interest payments
Foreign................................................. 63.2 64.0
Domestic................................................ 116.2 140.3
------------ ------------
Total interest payments................................ 179.4 204.3
Subsidies to Government corporation....................... N/A/(4)/ 5.0
Allotment to local government units....................... N/A/(4)/ 103.9
Transfers to the Oil Price Stabilization Fund............. N/A/(4)/ 28.6
Comprehensive Agrarian Reform Program (land acquisition
and credit).............................................. N/A/(4)/ 5.6
Infrastructure and other capital outlays.................. 101.0 67.8
Equity and net lending.................................... 4.1 7.1
------------ ------------
Total expenditures...................................... 703.2 754.3
------------ ------------
As a percentage of GNP................................. 18.3% 18.0%
Surplus/(Deficit)......................................... (Peso)(145.0) (Peso)(130.0)
Financing
Domestic financing...................................... (Peso) 118.7 (Peso) 79.0
Net domestic borrowings................................ 165.2 63.3
Non-budgetary accounts................................. (24.3) 15.1
Use of cash balances.................................... 22.2 N/A/(4)/
Foreign financing...................................... 26.3 0.7
------------ ------------
Total financing....................................... (Peso) 145.0 (Peso) 130.0
============ ============

- --------
Source: Department of Finance; Department of Budget and Management.

(1) Revised as of July 17, 2001.
(2) Figure for BIR tax revenues includes other tax revenues.
(3) Represents tax revenues of the Department of Environment and Natural
Resources, Bureau of Immigration and Deportation, Land Transportation
Office and other Government entities.

157

(4) N/A means "not available".
(5) Represents interest on deposits, interest on advances to Government owned
corporations, interest on securities, dividends from Government owned
corporations, earnings received from the Philippine Amusement and Gaming
Corporation, earnings and terminal fees received from Ninoy Aquino
International Airport, guarantee fees and others.
(6) Represents receipts from the Land Transportation Office, Department of
Foreign Affairs and other Government agencies.
(7) Represents remittances to the National Government from the sale of
interests in Government owned corporations, Government financial
institutions and other Government-owned assets and from the sale of assets
by the Presidential Commission on Good Government and the Asset
Privatization Trust.
(8) Includes capital transfers to local government units.

Revenues

Sources. The Government derives its revenues from both tax and non-tax
sources. The main sources of revenue include income tax, value added tax and
customs duties. The main sources of non-tax revenue consist of interest on
deposits, amounts earned from Government owned corporations and privatization
receipts.

In 1995 the Ramos Government submitted the Comprehensive Tax Reform Package
for Congressional action. The objective of the proposal was to establish a
simple, broad-based and efficient tax system, with minimal scope for discretion
on the part of Government officials, that would provide a self-sustaining
revenue base that would keep pace with the budgetary needs of a growing
economy. The comprehensive tax reform package was enacted in 1997 and provides
a three-tiered excise tax on cigarettes and converts beer taxation from ad
valorem to specific excise taxes. The comprehensive tax reform package also
restructured and simplified the tax rates for business and professional income,
reduced the corporate income tax rate, and reformed certain elements of tax
administration.

The Government expanded the coverage of the value-added tax system in 1996
and 1997 to include Government contracts and suppliers, telecommunication
services, road freight and other transportation, real property, restaurants and
caterers, hotels and motels, and broadcasting. The new regime raised (Peso)6.7
billion out of total value-added tax revenues of (Peso)40.9 billion in 1996,
(Peso)6.4 billion out of total value-added tax revenues of (Peso)47.3 billion
in 1997 and (Peso)0.2 billion out of total value-added tax revenues of
(Peso)47.5 billion in 1998. Total value-added tax revenues amounted to
(Peso)55.2 billion for 1999 and (Peso)55.3 billion for 2000.

The tax effort in 2001 will be increased through policies designed to result
in the collection of additional tax revenues and non-tax revenues such as fees
and charges. Increased tax revenue is expected to come from a program of
intensified collection through enforcement of tax laws, improvement of
corporate governance and plugging of leakages in the tax system. The Bureau of
Internal Revenue is currently implementing tax administration improvements
which include the following:

. resolution of delinquent accounts or disputed assessments which are either
being litigated in the courts or being challenged by taxpayers;

. use of electronic documentary stamp metering machines to accurately assess
and monitor documentary stamp taxes;

. broadening the tax base to increase the number of registered taxpayers;

. issuance of revenue regulations regarding automobiles which are subject to
excise tax; and

. implementing a ceiling on deductible representation expenses as mandated
by the Tax Code of 1997.

158

Moreover, the Department of Finance is in the process of identifying
measures to address the areas in which tax collection is deficient in an effort
to increase revenues in 2001. Likewise, necessary controls need to be
instituted to ensure the correct declaration of revenues and deductions, and
controls need to be established on the claims of input taxes.

Beginning January 1, 2003, the 10% value-added tax ("VAT") on services
rendered by banks, non-bank financial intermediaries and finance companies is
being implemented by the BIR in lieu of the 5% tax on gross receipts to which
these entities were previously subject. The VAT is due on financial
intermediation services, financial leasing, net foreign exchange gains, net
trading gains, certain real estate sales and sales of other properties acquired
through foreclosure, sales of goods and properties and all other income derived
by banks and non-bank financial intermediaries.

However, the DOF has asked President Arroyo to certify as urgent a bill
seeking to replace the VAT with the gross receipts tax ("GRT") scheme,
contending that it would be difficult to impose VAT on banks.

Results. In 1998, Government revenues decreased to (Peso)462.5 billion
compared with (Peso)471.8 billion for 1997 due, in part, to the general
contraction of the economy and lower imports. Revenues collected by the Bureau
of Internal Revenue increased to (Peso)337.2 billion from (Peso)314.7 billion,
but were (Peso)17.9 billion short of target estimates. Revenues from customs
duties fell to (Peso)76 billion from (Peso)94.8 billion, just below the target
for the year.

In 1999, Government revenues amounted to (Peso)478.5 billion, a 3.5%
increase compared with 1998. The 1999 figure was, however, (Peso)12.2 billion
less than the revised target. Non-tax revenues reflected a (Peso)5.6 billion
dividend payment from Bangko Sentral and (Peso)3.3 billion in proceeds from the
sale of Philippine Associated Smelting and Refining Corp. Revenues collected by
the Bureau of Internal Revenue were (Peso)12.2 billion less than the revised
target. The shortfall was primarily attributable to the slow recovery of the
industry sector. Revenues collected by the Bureau of Customs were (Peso)2.9
billion more than the revised target.

In 2000, Government revenues amounted to (Peso)514.8 billion, a 7.6%
increase over 1999 revenues. The 2000 amount was (Peso)47.6 billion short of
the April 2000 IMF revenue target. Revenues collected by the Bureau of Internal
Revenue increased to (Peso)360.8 billion but were (Peso)37.0 billion short of
target estimates. The shortfall was attributable primarily to lower Bureau of
Internal Revenue collections of items such as documentary stamp tax and capital
gains tax. The slowdown in the financial and real estate sectors also adversely
affected collections in 2000. Bureau of Customs revenue increased to (Peso)95.0
billion, (Peso)3.1 billion more than targeted. Intensified customs collection
and anti-smuggling operations accounted for the Bureau of Custom's
overperformance. Even with the marked slowdown in its collections from 1999
levels, the Bureau of the Treasury continued to surpass its target. The
Treasury collected (Peso)30.8 billion in non-tax revenue from dividends on its
shares of stocks and income from investments. Privatization efforts generated
only (Peso)4.6 billion in remittances, compared to a target of (Peso)22.9
billion, as unfavorable market prices prevented the government from disposing
of its assets. Privatization remittances consisted of proceeds from the sale of
the Philippine National Bank, Philippine Phosphate Fertilizer Corporation, and
a package of International Broadcasting Corporation's radio stations.

Government revenues in 2001 were (Peso)563.7 billion, of which (Peso)489.8
billion were tax revenues and (Peso)71.9 billion were non-tax revenues. Revenue
collections for 2001 were (Peso)5.5 billion higher than the budgeted amount of
(Peso)558.2 billion and 9.5% higher than revenue collections for 2000. The
increase was mainly attributable to the Bureau of the Treasury which collected
(Peso)21.5 billion more than its target of (Peso)24.9 billion, offsetting a
(Peso)8.9 billion shortfall from the targeted amount of cash collections by the
Bureau of Customs. The Bureau of Internal Revenue surpassed its target by
(Peso)621 million for the period, collecting (Peso)388.7 billion. Privatization
revenues for 2001 were (Peso)1.2 billion, compared to the budgeted amount of
(Peso)10 billion, as unfavorable market conditions prevented the disposition of
Government assets targeted for privatization.

Government revenues in 2002 totaled (Peso)567.1 billion, of which
(Peso)496.4 billion were from tax revenues and (Peso)69.7 billion were from
non-tax revenues. Total revenues for 2002 increased 0.6% from total revenues
for 2001. Of total tax revenues during 2002, the BIR accounted for (Peso)394.6
billion and the Bureau of Customs accounted for (Peso)96.3 billion. Treasury
remittances accounted for (Peso)47.2 billion in revenue in 2002, and other
government offices accounted for the remaining (Peso)29.0 billion.

159

Expenditures

Expenditures in 1998 increased to (Peso)512.5 billion compared to
(Peso)470.3 billion in 1997. These expenditures compared together with revenues
of (Peso)462.5 billion resulted in a deficit of (Peso)50.0 billion in the
Government's fiscal position for 1998, compared to a fiscal surplus of
(Peso)1.6 billion in 1997.

Expenditures in 1999 increased to (Peso)590.4 billion compared to
(Peso)512.5 billion in 1998. The total expenditures were (Peso)14.1 billion
more than the revised target. The increase in expenditures in 1999 was due in
large part to economic stimulus efforts by the Government and in part to the
repayment of certain accounts payable that were outstanding from previous
Government administrations. Revenues of (Peso)478.5 billion resulted in an
overall deficit of (Peso)111.7 billion in 1999.

Expenditures in 2000 increased to (Peso)649.0 billion compared to
(Peso)590.4 billion in 1999. The total expenditures were (Peso)19.5 billion
more than the Government's target. The increase in expenditures was due
primarily to higher interest payments which increased by (Peso)16 billion as a
result of high interest rates for Treasury bills and fixed rate Treasury bonds.
Other contributing factors included the depreciation of the peso, compared to
the US dollar, an increase in LIBOR and the unprogrammed interest payment for
the Metro Rail Transit obligation. Revenues of (Peso)514.8 resulted in an
actual Government deficit of (Peso)134.2 in 2000.

Government expenditures for 2001 were (Peso)710.8 billion, (Peso)7.5 billion
more than the budgeted amount of (Peso)703.2 billion and 9.5% higher than
expenditures for 2000. The actual Government deficit for 2001 was (Peso)147.0
billion compared to the budgeted deficit of (Peso)145.0 billion.

The deficit in 2002 was (Peso)210.7 billion, which exceeded the Government's
original target of (Peso)130 billion deficit 2002 but was lower than the
revised 2002 budget deficit forecast of (Peso)223 billion. This rapid increase
in the budget deficit has been caused by lower than expected revenue
collections from the BIR, and higher than expected expenditures.

The Government Budget

The Budget Process. The Administrative Code of 1987 requires the Government
to formulate and implement a national budget. Various planning and fiscal
agencies coordinate to determine expected revenue, expenditure and debt based
on growth, employment and inflation targets. The budget also reflects national
objectives regarding domestic and foreign debt, domestic credit and balance of
payments.

The President submits the budget to Congress within 30 days of the opening
of each regular session of Congress, which occurs on the fourth Monday of each
July. The House of Representatives reviews the budget and transforms it into a
general appropriations bill. The Senate then reviews the budget. A conference
committee composed of members of both houses of Congress then formulates a
common version of the bill. Once both houses approve the budget, the bill goes
to the President for signing as a general appropriations act.

160

Debt

External Debt. The following table sets out the total outstanding Bangko
Sentral-approved and registered external debt.

BANGKO SENTRAL APPROVED EXTERNAL DEBT/(1)/

As of December 31,
-------------------------------------------
1998 1999 2000 2001 2002
------- ------- ------- ------- -------
(in millions, except percentages)

By Maturity:
Short-term/(2)/........................................... $ 7,185 $ 5,745 $ 5,948 $ 6,049 $ 5,558
Medium and long-term...................................... 40,632 46,466 46,112 46,306 48,315
------- ------- ------- ------- -------
Total.................................................... $47,817 $52,210 $52,060 $52,355 $53,874
======= ======= ======= ======= =======
By Debtor:/(3)/.............................................
Banking system............................................ $12,777 $11,726 $11,462 $11,537 $10,880
Public sector/(4)/........................................ 26,873 31,795 31,498 25,149 28,017
Private sector............................................ 17,507 17,410 17,648 15,669 14,977
------- ------- ------- ------- -------
Total.................................................... $47,817 $52,210 $52,060 $52,355 $53,874
======= ======= ======= ======= =======
By Creditor Type:
Multilateral.............................................. $10,058 $10,245 $ 9,665 $ 9,553 $ 8,970
Bilateral................................................. 14,926 16,429 15,336 14,531 15,621
Banks and financial institutions.......................... 9,672 10,340 11,176 12,003 12,015
Bondholders/noteholders................................... 11,209 12,951 13,447 13,678 14,785
Others.................................................... 1,952 2,245 2,436 2,590 2,482
------- ------- ------- ------- -------
Total....................................................... $47,817 $52,210 $52,060 $52,355 $53,874
======= ======= ======= ======= =======
Ratios:
Debt service burden to exports of goods and services/(5)/. 11.7% 14.1% 12.5% 16.0% 16.6%
Debt service burden to GNP................................ 7.4% 8.3% 7.7% 8.8% 9.2%
External debt to GNP...................................... 69.8% 65.1% 65.8% 69.3% 65.7%

- --------
Source: Bangko Sentral.

(1) Excludes a $75 million loan to be made by the Asian Development Bank
pursuant to an agreement between the Asian Development Bank and the
Republic in October 2001.
(2) Debt with original maturity of one year or less.
(3) Classification by debtor is based on the primary obligor under the relevant
loan or rescheduling documentation.
(4) Includes public sector debt whether or not guaranteed by the Government.
(5) This ratio is based on the debt service burden for the relevant period
relative to the total exports of goods and receipts from services and
income during such period based on the BPM5 framework.

The Republic's external debt amounted to $53.9 billion as of December 31,
2002, a 2.0% decrease from the $54.9 billion recorded as of June 30, 2002 and a
2.9% increase from the $52.4 billion recorded as of December 31, 2001. The
decrease in external debt in the third quarter of 2002 was attributed to an
increase in the purchases by Filipinos of Government dollar-denominated bonds,
currency revaluation adjustments and direct repayment of debt. In addition to
new borrowings, the increase in debt in the second quarter of 2002 was due to
upward foreign exchange revaluation adjustments on third-currency denominated
debt resulting from the continued depreciation of the US dollar against
third-currencies; and the increase in debt in the first quarter of 2002 was due
to net loan availments, upward adjustments to reflect audited results and late
reporting of transactions which occurred in prior periods. The Government has
also borrowed to pay for financial and economic reforms, power and energy
development projects, and manufacturing, transportation, and communications
infrastructure.

The public sector remained the biggest borrower, accounting for $26.7
billion of foreign financing as of March 31, 2002 compared to $25.1 billion as
of December 31, 2001. The increase was due primarily to net loan

161

availments by the Government and adjustments made on prior periods'
transactions. Meanwhile, private sector debt as of March 31, 2002 remained
unchanged from the previous quarter at $15.6 billion. Some private companies
have taken steps to manage the effects of the currency depreciation on their
ability to repay their external debt. These steps include netting foreign
currency obligations and entering into forward contracts to hedge their
currency risks. Certain companies also benefit from natural hedges intrinsic to
their businesses. These companies either generate foreign exchange revenues or
are allowed by law to pass on to clients the impact of exchange rate
adjustments. Bangko Sentral also introduced the currency risk protection
facility, or the non-deliverable forward facility, to allow eligible borrowers
to limit their foreign exchange risk on unhedged outstanding foreign exchange
obligations to foreign currency deposit units of banks.

The Government has obtained funds under the so-called "Miyazawa initiative"
to help finance projects contemplated by the country's spending program. The
Miyazawa initiative was launched by the Japanese government in October 1998
with an assistance package totalling the equivalent of $30 billion. The package
consists of support measures to assist five Asian countries, including the
Philippines, overcome their economic difficulties. Under the Miyazawa
initiative, the Government requested co-financing from Japan of approximately
$900 million of program loans from the Asian Development Bank and the World
Bank, $300 million each for the banking sector reform program with the World
Bank, the power sector restructuring program with the Asian Development Bank
and the Metro Manila air quality enhancement program with the Asian Development
Bank. As of the end of 2002, the Government had received disbursements of $100
million under each of the banking sector and power sector program loans and
$200 million under the air quality program loan. While the Government remains
committed to the policies of the banking sector reform program, in early 2001
the Government canceled the balance of the parallel financing of the banking
sector reform loan following the cancellation by the World Bank of its
participation.

The Government initiated discussions with Japan relating to the second
tranche of funding under the Miyazawa initiative. The Government expects to
receive an allocation of $1 billion. Under the second tranche, the Government
is seeking financing of $100 million for a grains sector development loan, to
be co-financed by the Asian Development Bank, $150 million for the Pasig River
Rehabilitation program and $200 million for social expenditures, to be
co-financed by the World Bank. The Government has also continued to negotiate
with the World Bank for loans of up to $365 million to finance various
development projects, including public finance restructuring, investments in
water supply, environment, public services and judicial reforms, for the years
2003 to 2005.

The Government is also seeking financing under the Special Yen Loan Package,
or "Obuchi Fund", which is a $5 billion loan facility offered to all countries
and concentrating primarily on project type activities. Under this program, the
Government has secured financing for six projects in the amount of
approximately $931 million.

The Government hopes to finance the restructuring of small and medium-sized
enterprises with a portion of the $10 billion expected to be available under
the Asian Growth and Recovery Initiative. The United States, Japan, the Asian
Development Bank and the World Bank established the Asian Growth and Recovery
Initiative in 1998 to accelerate the pace of bank and corporate restructuring,
increase trade finance, mobilize new private sector capital financing by
multilateral agencies and enhance technical assistance to corporations
undergoing restructuring.

With the passage of the Electric Power Industry Sector Reform Act on June 8,
2001, certain multilateral agencies are expected to release up to $950 million
in loans for additional infrastructure projects and government budgetary needs.

New ODA-assisted projects in the agricultural-industrial area include Credit
Lines for Small and Medium Enterprises, Grains Sector Development Program and
the Pasig River Environmental Management and Rehabilitation. The social
development area received 9% ($117.3 million) of the total commitments. Other
ODA-assisted projects in the social development area include the Technical
Education and Skills Development Project and the Expansion of the Contraceptive
Social Marketing Project.

162

On April 24, 2003, Standard & Poor's Ratings Service downgraded the
Republic's long-term foreign currency rating from BB+ to BB, downgraded the
Republic's local currency rating from BBB+ to BBB and revised the long-term
ratings outlook from negative to stable. Standard & Poor's emphasized the
Government's high fiscal deficit, increased interest payments due to its high
debt burden, and heavy reliance on external capital for economic growth. On
January 8, 2003, Moody's Investors Service changed its rating outlook on the
Republic's local-currency rating for government bonds to negative from stable,
while affirming each of the Republic's foreign-currency ratings. Moody's
recognized that revenue collections have improved in recent months, but noted
that poor revenue collection in prior periods has weakened long-term fiscal
prospects. On November 25, 2002, Fitch Ratings downgraded the Republic's
ratings outlook from stable to negative. Fitch indicated that further evidence
of falling tax revenues had undermined the Government's fiscal credibility and
raised concerns about rising public indebtedness. Fitch noted that the
persistence of the current account surplus has prevented the appearance of an
external financing gap. Fitch affirmed the Republic's long-term foreign
currency rating of BB+, the Republic's short-term foreign currency rating of B,
and the Republic's local currency rating of BBB-- (triple B minus).

The following table sets out the changes in credit ratings or rating
outlooks for the Republic from February 1998 to the date of this prospectus.

Credit Rating or
Date Rating Agency Instrument Rating Outlook
- ------------------- ----------------- ----------------------- ----------------------

February 23, 1998.. Standard & Poor's Republic's long-term Lowered to BBB+ Rating
local currency rating outlook changed to
"negative" from
"stable"/(1)/
Republic's short-term Lowered to A2/(1)/
local currency rating
Bangko Sentral's long- Lowered to BBB+
term local currency
rating
Bangko Sentral's short- Lowered to A2
term local currency
rating
April 7, 1998...... Moody's Republic's bonds and Lowered to Ba1/NP/(2)/
notes Rating outlook changed
to "cloudy"/(2)/ from
"stable"
January 6, 1999.... Standard & Poor's Republic's long-term Rating outlook changed
foreign currency rating to stable from
negative/(3)/
March 30, 2000/(4)/ Moody's Republic's bonds and Rating outlook changed
notes to "stable" from
"cloudy"/(2)(4)/
October 19, 2000... Standard & Poor's Republic's long-term Rating outlook changed
local and foreign from "stable" to
currency rating "negative"/(5)/

163

Credit Rating or
Date Rating Agency Instrument Rating Outlook
- ----------------- ----------------- ------------------------ -----------------------

October 27, 2000. Moody's Republic's bonds and Raised to Ba1 Rating
notes outlook changed to
"negative" from
"stable"/(6)/
March 15, 2001... Fitch-IBCA Long-term local currency Rating outlook changed
obligations to "stable" from
"positive"/(7)/
May 3, 2001...... Moody's Republic's bonds and Affirmed Ba1 Rating
notes outlook remains
"negative"/(8)/
June 19, 2001.... Standard & Poor's Republic's long-term Affirmed BB+ Rating
foreign currency rating outlook remains
"negative"/(9)/
Republic's short-term Affirmed B
foreign currency rating
Republic's long-term Affirmed BBB+
local currency rating Rating outlook remains
"negative"/(9)/
Republic's short-term Affirmed A-2
local currency rating
July 30, 2001.... Fitch-IBCA Republic's foreign Affirmed BB+
currency rating
Republic's local Affirmed BBB--
currency rating
February 4, 2002. Moody's Republic's long-term Upgraded outlook from
foreign currency rating "negative" to
"stable"/(11)/
April 4, 2002.... Standard & Poor's Republic's long-term Upgraded outlook from
foreign currency rating "negative" to
"positive"/(12)/
June 27, 2002.... Fitch-IBCA Republic's long-term Affirmed BB+/(13)/
foreign currency rating
September 4, 2002 Moody's Republic's bonds and Affirmed Ba1
notes
Rating outlook remains
"stable"
October 7, 2002.. Fitch-IBCA Republic's long-term Affirmed BB+
foreign currency rating
Republic's short-term Affirmed B
foreign currency rating
Republic's local Affirmed BBB--
currency rating
Outlook remains
stable/(10)/
October 29, 2002. Standard & Poor's Republic's long-term Affirmed BB+
foreign currency rating
Downgraded outlook from
"stable" to
"negative"/(14)/
Republic's short-term Affirmed B
foreign currency rating

164

Credit Rating or
Date Rating Agency Instrument Rating Outlook
- ----------------- ----------------- -------------------------- -----------------------

Republic's long-term Affirmed BBB+
local currency rating
Republic's short-term Affirmed A-2
local currency rating
November 25, 2002 Fitch-IBCA Republic's long-term Affirmed BB+
foreign currency rating
Republic's short-term Affirmed B
foreign currency rating
Republic's local BBB--
currency rating
Downgraded outlook from
"stable" to
"negative"/(15)/
January 8, 2003.. Moody's Republic's local Downgraded outlook from
currency rating "stable" to
"negative"/(16)/
April 24, 2003... Standard & Poor's Republic's long-term Downgraded from BB+ to
foreign currency rating BB/(17)/
Republic's local currency Downgraded to BBB from
rating BBB+/(17)/
June 12, 2003.... Fitch Ratings Republic's long term Downgraded from BB+ to
foreign currency rating BB
Republic's long-term local Downgraded from BBB- to
currency rating BB+
Changed outlook from
"Negative" to "Stable"

- --------
(1) Standard & Poor's noted the deterioration in the bank asset quality and the
expected 1998 budget deficit, as well as the depreciation of the Peso and
the risk of increased spending around the time of the presidential
elections in May 1998. Also, on February 23, 1998, Standard & Poor's
affirmed the country's long-term and short-term foreign currency ratings.
(2) NP (Moody's): Not prime. Cloudy: With speculative elements/uncertainty of
position.
(3) Standard & Poor's noted the diminished likelihood of a deterioration in
external liquidity and financial flexibility and the improved prospects for
policy continuity from the Ramos administration to the Estrada
administration.
(4) Moody's noted that the changes in the Philippines' credit rating in 2000
reflected changes in the domestic climate and continued momentum from the
previous government's success in reform.
(5) Standard & Poor's noted the political uncertainty relating to former
President Joseph Estrada's alleged corrupt practices, the rising budget
deficit and growing concerns about the Government's ability to undertake
effective economic management during a period of political uncertainty.
(6) Moody's noted that unfolding political developments associated with
then-president Estrada could impair policy-making and hamper the
Government's ability to defend its external payments position.
(7) Fitch noted the continuing deterioration of public finances and its impact
on public indebtedness.
(8) Moody's noted that the negative outlook reflected the challenges from
structural economic and political problems in the country, deterioration in
the budget and in the external conditions particular to the country and
increases in Government debt.
(9) Standard & Poor's noted that the negative outlook on the Republic reflected
its high Government debt, rising fiscal inflexibility, narrow tax base and
weak banking sector.
(10) Fitch noted that the main considerations for the Republic ratings will be
arresting the decline in public revenues and maintaining a downward trend
in the deficit-to-GDP and to public debt-to-GDP ratios.
(11) Moody's noted that the upgrade reflected the Republic's success in meeting
its fiscal targets and a stronger economic outlook.

165

(12) Standard & Poor's noted that the upgrade reflected the Government's
improved economic management under the Arroyo administration and the
Republic's adequate external liquidity.
(13) Fitch noted that the change in political leadership has restored investor
and business confidence and curbed capital flight but noted concern over
the country's fiscal situation.
(14) Standard & Poor's noted that the downgrade reflected diminishing prospects
for the fiscal consolidation that is necessary to stabilize and reduce the
Government's debt burden and sustain investor confidence.
(15) Fitch noted that further evidence of falling tax revenues had undermined
the Government's fiscal credibility and raised concerns about rising
public indebtedness.
(16) Moody's recognized that revenue collections have improved in recent
months, but noted that poor revenue collection in prior periods has
weakened long-term fiscal prospects.
(17) Standard & Poor's noted the Government's high fiscal deficit, increased
interest payments due to its high debt burden, and heavy reliance on
external capital for economic growth.

(18) Fitch noted that current and prospective fiscal trends amount to a
material deterioration in sovereign credit worthiness.

166

Public Sector Debt. The following table describes the country's outstanding
public sector debt.

OUTSTANDING PUBLIC SECTOR DEBT/(1)/

As of December 31,
----------------------------------------------------------
1998 1999 2000 2001
------------- ------------- ------------- -------------
(in billions, except percentages)

Government/(2)/
Domestic........................................ (Peso) 850.9 (Peso) 986.7 (Peso)1,068.2 (Peso)1,247.7
External........................................ 645.3 797.0 1,098.5 1,137.2
------------- ------------- ------------- -------------
Total.......................................... (Peso)1,421.1 (Peso)2,142.2 (Peso)2,648.9 (Peso)3,079.5
============= ============= ============= =============
Monitored GOCCs/(3)/
Domestic........................................ 143.5 644.8 810.6 744.9
External........................................ 548.0 286.1 308.1 395.0
------------- ------------- ------------- -------------
Total.......................................... (Peso) 691.5 (Peso) 930.9 (Peso)1,118.7 (Peso)1,139.9
============= ============= ============= =============
CB-BOL/(4)/
Domestic........................................ 0.0 0.0 0.0 0.0
External........................................ 102.2 74.9 81.8 73.9
------------- ------------- ------------- -------------
Total.......................................... (Peso) 102.2 (Peso) 74.9 (Peso) 81.8 (Peso) 73.9
============= ============= ============= =============
Bangko Sentral/(4)/
Domestic........................................ 197.3 193.5 202.6 118.3
External........................................ 190.3 299.3 385.2 475.5
------------- ------------- ------------- -------------
Total.......................................... (Peso) 387.6 (Peso) 492.8 (Peso) 587.8 (Peso) 593.8
============= ============= ============= =============
GFIs/(3)/
Domestic........................................ 204.5 379.9 460.6 175.3
External........................................ 68.9 95.3 74.3 126.1
------------- ------------- ------------- -------------
Total.......................................... (Peso) 273.4 (Peso) 475.2 (Peso) 534.9 (Peso) 301.4
============= ============= ============= =============
Less loans on-lent or guaranteed by the Government
Domestic........................................ 8.7 8.3 12.5 23.2
External........................................ 370.6 441.4 562.3 555.2
------------- ------------- ------------- -------------
Total.......................................... (Peso) 379.3 (Peso) 449.7 (Peso) 574.8 (Peso) 578.4
============= ============= ============= =============
Total public sector/(5)/
Domestic........................................ 1,396.2 2,196.6 2,542.0 2,288.3
External........................................ 1,479.6 1,469.7 1,855.2 2,125.1
------------- ------------- ------------- -------------
Total.......................................... (Peso)2,875.8 (Peso)3,666.3 (Peso)4,397.2 (Peso)4,413.4
============= ============= ============= =============
As a percentage of GNP (at current prices)
Public sector debt/(5)/......................... 102.9% 116.9% 125.7% 114.5%
Public sector domestic debt/(5)/.................. 50.0% 70.0% 72.7% 59.3%
Public sector external debt/(5)/.................. 53.0% 46.9% 53.1% 55.1%
National Government debt/(2)/..................... 37.3% 54.0% 59.3% 59.7%
National Government domestic debt/(2)/............ 30.5% 31.5% 30.9% 33.0%
National Government external debt/(2)/............ 20.4% 36.8% 44.8% 41.8%

- --------
Source: Fiscal Policy and Planning Office, Department of Finance.

(1) Amounts in original currencies were converted to pesos using the applicable
Bangko Sentral reference exchange rates at the end of each period.
(2) Includes debt that is on-lent to Government owned corporations and other
public sector entities and debt that has been assumed by the Government and
contingent liabilities.
(3) Includes net lending from the Government, and borrowings on-lent or
guaranteed by the Government.
(4) Liabilities, including deposits, less currency issue and inter-government
accounts.
(5) Includes the Government, the monitored Government owned corporations, the
Central Bank -- Board of Liquidation, Bangko Sentral and Government
financial institutions. Does not include other public sector debt that is
not guaranteed by the Government.

167

The outstanding public sector debt, comprised of the debt of the Government,
the monitored Government corporations, the Central Bank-Board of Liquidation,
Bangko Sentral and the Government financial institutions amounted to
(Peso)4,413.4 billion as of December 31, 2001 and (Peso)4,397.2 billion as of
December 31, 2000. As of December 31, 2001, the Government accounted for
(Peso)3,079.5 billion, or 69.8%, of outstanding public sector debt. Public
sector debt as a proportion of GNP decreased from 125.7% as of December 31,
2000 to 114.5% as of December 31, 2001.

Government Debt. The following table summarizes the outstanding direct debt
of the Republic as of the dates indicated.

SUMMARY OF OUTSTANDING DIRECT DEBT OF THE REPUBLIC/(1)(2)/

As of December 31,
--------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
--------------- --------------- --------------- --------------- ----------------------------
(in millions)

Medium/long-term debt/(3)/
Domestic................ (Peso) 408,809 (Peso) 513,667 (Peso) 600,925 (Peso) 822,269 (Peso)1,065,976 $20,094
External................ $ 16,525 $ 19,800 $ 21,992 $ 22,082 $ 25,340/(4)/ $25,340/(4)/
Short-term debt/(5)/
Domestic................ (Peso) 442,121 (Peso) 464,737 (Peso) 467,275 (Peso) 425,414 (Peso) 405,226 $ 7,639
--------------- --------------- --------------- --------------- --------------- -------
Total debt.............. (Peso)1,496,221 (Peso)1,775,356 (Peso)2,166,700 (Peso)2,384,917 (Peso)2,815,468 $53,072
=============== =============== =============== =============== =============== =======

- --------
Source: Bureau of the Treasury, Department of Finance.

(1) Includes Government debt that is on-lent to Government owned corporations
and other public sector entities. Excludes debt guaranteed by the
Government and debt originally guaranteed by other public sector entities
for which the guarantee has been assumed by the Government. The table
reflects debt of the Government only and does not include any other public
sector debt.
(2) Amounts in original currencies were converted to US dollars or pesos, as
applicable, using Bangko Sentral's reference exchange rates at the end of
each period.
(3) Debt with original maturities of one year or longer.
(4) The Government has incurred an aggregate of $700 million and (Euro)300
million of external debt since December 31, 2002.
(5) Debt with original maturities of less than one year.

168

Domestic Debt of the Republic. The following table summarizes the
outstanding direct domestic debt of the Republic as of the dates indicated.

SUMMARY OF OUTSTANDING DIRECT DOMESTIC DEBT OF THE REPUBLIC/(1)(2)/

As of December 31,
-----------------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------- ------------- --------------- --------------- -----------------------
(in millions)

Loans
Direct............... (Peso) 38,789 (Peso) 39,743 (Peso) 15,541 (Peso) 15,317 (Peso) 15,609 $ 294
Assumed.............. 24,355 20,369 19,117 13,858 8,251 156
------------- ------------- --------------- --------------- --------------- -------
Total loans......... 63,144 60,112 34,658 29,175 23,860 450
Securities
Treasury bills....... 442,121 464,737 467,275 425,414 405,226 7,639
Treasury notes/bonds. 345,665 453,555 566,267 793,094 1,042,115 19,644
------------- ------------- --------------- --------------- --------------- -------
Total securities.... 787,786 918,292 1,033,542 1,218,508 1,447,342 27,283
------------- ------------- --------------- --------------- --------------- -------
Total debt.......... (Peso)850,930 (Peso)978,404 (Peso)1,068,200 (Peso)1,247,683 (Peso)1,471,202 $27,732
============= ============= =============== =============== =============== =======

- --------
Source: Bureau of the Treasury, Department of Finance.

The following table sets forth the direct domestic debt service requirements
of the Republic for the years indicated.

DIRECT DOMESTIC DEBT SERVICE REQUIREMENT OF THE REPUBLIC/(1)/

Principal Interest
Year Repayments Payments Total Total/(2)/
---- ------------- ------------- ------------- ---------
(in millions)

1998..... (Peso) 28,761 (Peso) 73,525 (Peso)102,286 $2,619
1999..... 61,552 74,980 136,532 3,392
2000..... 45,429 93,575 139,004 2,783
2001..... 54,039 112,592 166,631 3,268
2002..... 72,749 127,723 200,472 3,919
2003/(3)/ 101,583 149,304 250,887 4,905
2004/(3)/ 104,137 169,879 274,016 5,357
2005/(3)/ 117,504 180,295 297,799 5,822
2006/(3)/ 109,451 183,754 293,205 5,732

- --------
Source: Bureau of the Treasury, Department of Finance.

(1) Excludes debt service in respect of Government debt that is on-lent to
Government owned corporations and other public sector entities guaranteed
by the Government and debt originally guaranteed by other public sector
entities for which the guarantee has been assumed by the Government. The
table reflects debt of the Government only, and does not include any other
public sector debt.
(2) Amounts in pesos were converted to US dollars using the applicable Bangko
Sentral reference exchange rates at the end of each period. For 2003
through 2006, amounts in pesos were converted to US dollars using the
applicable Bangko Sentral reference exchange rates as of December 27, 2002.
(3) Projected, based on debt outstanding as of December 31, 2002.

169

The Government's outstanding direct domestic debt increased 17.9% to
(Peso)1,471.2 billion as of December 31, 2002, from (Peso)1,247.7 billion as of
December 31, 2001.

External Debt of the Republic. The following table summarizes the
outstanding external direct debt of the Republic as of the dates indicated.

SUMMARY OF OUTSTANDING DIRECT EXTERNAL DEBT OF THE REPUBLIC/(1)(2)/

As of December 31,
---------------------------------------
1998 1999 2000 2001 2002
------- ------- ------- ------- -------
(in millions)

Loans
Multilateral....... $ 4,665 $ 4,468 $ 4,388 $ 4,323 $ 4,390
Bilateral.......... 7,944 9,055 8,193 7,236 8,167
Commercial......... 208 256 651 841 925
------- ------- ------- ------- -------
Total loans....... 12,817 13,779 13,232 12,400 13,482
Securities
Eurobonds.......... -- 352 514 915 1,062
Brady Bonds........ 2,173 1,482 1,385 1,287 1,190
Yen Bonds.......... 345 391 655 949 959
Notes.............. -- -- 810 1,010 400
Global Bonds....... 1,190 3,796 5,396 5,396 8,246
T-Bills............ -- -- -- 125 --
------- ------- ------- ------- -------
Total securities.. 3,708 6,021 8,760 9,682 11,857
------- ------- ------- ------- -------
Total............ $16,525 $19,800 $21,992 $22,082 $25,340/(3)/
======= ======= ======= ======= =======

- --------
Source: Bureau of the Treasury, Department of Finance.

(1) Includes Government debt that is on-lent to Government owned corporations
and other public sector entities. Excludes debt guaranteed by the
Government and debt originally guaranteed by other public sector entities
for which the guarantee has been assumed by the Government. The table
reflects debt of the Government only, and does not include any other public
sector debt.
(2) Amounts in original currencies were converted to US dollars using the
applicable Bangko Sentral reference exchange rates at the end of each
period.
(3) The Government has incurred an aggregate of $700 million and (Euro)300
million of external debt since December 31, 2002.

Outstanding direct external debt increased 0.4% to $22.1 billion as of
December 31, 2001, from $22.0 billion as of December 31, 2000. The Government
borrowed to finance power and energy development projects, financial and
economic reforms and manufacturing, transportation and communication and other
infrastructure undertakings. The currency depreciation during 1997
significantly increased the amount of external debt in Peso terms. As of
December 31, 2001, the Government owed 32.8% of outstanding direct external
debt to bilateral creditors, mainly the United States and Japan, 47.6% to banks
and other commercial creditors and 19.6% to multilateral creditors.

As of December 31, 2002, more approximately 58% of the Republic's external
obligations were denominated in US dollars while approximately 33% were
denominated in Japanese yen.

170

The following table sets forth, by designated currency and the equivalent
amount in US dollars, the outstanding direct external debt of the Republic as
of December 31, 2002.

SUMMARY OF OUTSTANDING DIRECT EXTERNAL
DEBT BY THE REPUBLIC BY CURRENCY/(1)/
(as of December 31, 2002)

Amount Equivalent
in Amount
Original in US % of
Currency dollars/(2)/ Total
-------- ----------- ------
(in millions, except percentages)

US Dollar............. 14,725 $14,725 58.11%
Japanese Yen.......... 998,443 8,326 32.86
European Currency Unit 913 948 3.74
Special Drawing Rights 701 947 3.74
French Franc.......... 826 131 0.52
Austrian Schilling.... 1,301 98 0.39
Deutsche Mark......... 121 64 0.25
Pound Sterling........ 14 22 0.09
Swiss Franc........... 46 33 0.13
Belgian Franc......... 718 18 0.07
Danish Kroner......... 57 8 0.03
Kuwait Dinar.......... 2 7 0.03
Korean Won............ 4,223 4 0.01
Italian Lire.......... 8,718 5 0.02
Sweden Kroner......... 18 2 0.01
Canadian Dollar....... 2 1 0.01
------- ------
Total............... $25,340/(3)/ 100.00%
======= ======

- --------
Source: Bureau of the Treasury, Department of Finance.

(1) Includes Government debt that is on-lent to Government owned corporations
and other public sector entities. Excludes debt guaranteed by the
Government and debt originally guaranteed by other public sector entities
for which the guarantee has been assumed by the Government. The table
reflects debt of the Government only, and does not include any other public
sector debt.
(2) Amounts in original currencies were converted to US dollars using the
applicable Bangko Sentral reference exchange rates as of December 27, 2002.
(3) The Government has incurred an aggregate of $700 million and (Euro)300
million of external debt since December 31, 2002.

171

The following table sets forth the direct external debt service requirements
of the Republic for the years indicated.

DIRECT EXTERNAL DEBT SERVICE REQUIREMENTS OF THE REPUBLIC/(1)(2)/

Principal Interest
Year Repayments Payments Total
---- ---------- -------- ------
(in millions)

1998..... $ 907 $ 584 $1,491
1999..... 933 778 1,711
2000..... 831 947 1,778
2001..... 887 1,209 2,095
2002..... 1,718 1,243 2,961
2003/(3)/ 1,698 1,501 3,199
2004/(3)/ 1,788 1,583 3,371
2005/(3)/ 1,811 1,646 3,457
2006/(3)/ 1,671 1,658 3,329
2007/(3)/ 1,345 1,660 3,005

- --------
Source: Bureau of the Treasury, Department of Finance.

(1) Excludes debt service in respect of Government debt that is on-lent to
Government owned corporations and other public sector entities or
guaranteed by the Government, other than debt originally guaranteed by
other public sector entities for which the guarantee has been assumed by
the Government. The table reflects debt of the Government only, and does
not include any other public sector debt.
(2) For 1997 through 2002, amounts in original currencies were converted to US
dollars using the applicable Bangko Sentral reference exchange rates
prevailing on the date of payment. For 2003 through 2007, amounts in
original currencies were converted to US dollars using the applicable
Bangko Sentral reference exchange rates as of February 19, 2003.
(3) Projected, based on debt outstanding as of December 31, 2002.

Government Guaranteed Debt. The following table sets forth all Republic
guarantees of indebtedness, including guarantees assumed by the Government, as
of the dates indicated.

SUMMARY OF OUTSTANDING GUARANTEES OF THE REPUBLIC/(1)(2)/

As of December 31,
----------------------------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ------------ ------------ --------------------
(in millions)

Domestic (Peso)8,677 (Peso)8,320 (Peso)12,451 (Peso)23,167 (Peso)19,070 $ 359
External $7,568 $8,908 $ 9,402 $ 9,177 $10,757 $10,757
----------- ----------- ------------ ------------ ------------ -------
Total. $11,117
=======

- --------
Source: Bureau of the Treasury, Department of Finance.

(1) Includes debt originally guaranteed by the Government and debt guaranteed
by other public sector entities for which the guarantee has been assumed by
the Government.
(2) Amounts in original currencies were converted to US dollars or pesos, as
applicable, using Bangko Sentral's reference exchange rates at the end of
each period.

Payment History of Foreign Debt. In early 1985 and in 1987, the Government
rescheduled principal maturities of most medium- and long-term liabilities owed
to commercial bank creditors falling due between October 1983 and December
1992. The Philippines normalized its relationship with foreign bank creditors
in 1992 after issuing Brady Bonds in exchange for its commercial bank debt.

172

The Philippines rescheduled portions of its obligations to official
creditors, such as foreign Governments and their export credit agencies, five
times between 1984 and 1994 as follows.

New Maturity
(From Date of
Amount Rescheduling
Date of Rescheduling Agreement Rescheduled Agreement) Grace Period
------------------------------ ------------ ------------- ------------

December 1984......... $896 million 10 years 5 years
January 1987.......... $1.1 billion 10 years 5.5 years
May 1989.............. $1.8 billion 8.5 years 5 years
June 1991............. $1.5 billion 15-20 years 6.5 years
July 1994*............ $498 million 15-20 years 8-10 years

- --------
* Not implemented. See discussion in following paragraph.

In December 1994, the Government decided not to avail itself of the July
1994 rescheduling agreement to accelerate the country's graduation from
rescheduling country status. As of June 30, 1999, the Republic's rescheduled
obligations with its bilateral creditors amounted to $2.2 billion, with Japan
at $1.2 billion and the United States at $506 million having the largest
exposures.

In addition to debt restructuring, the Republic has engaged in debt buyback,
debt-to-equity, debt-for-debt, debt-for-nature and other debt reduction
arrangements to reduce its debt by at least $6 billion. The Republic intends to
maintain various efforts to manage its debt portfolio to improve yield and
maturity profiles. The Republic may utilize proceeds from debt issues for the
purpose of repurchasing outstanding debt through a variety of methods,
including public auctions and repurchases of debt securities in the open
markets.

While there have been a number of reschedulings of the Republic's debt to
its bilateral creditors in the past few years, the Republic has not defaulted
on, and has not attempted to restructure, the payment of principal or interest
on any of its external securities in the last 20 years.

Brady Bonds. In 1992, the Philippines issued approximately $3.3 billion of
Brady Bonds, maturing between 2007 and 2018, in exchange for commercial bank
debt, and secured, as to repayment of principal at stated maturity, $1.9
billion of the bonds with zero-coupon bonds purchased by the Republic in the
open market. As of year-end 1997, cash and short-term investment grade
securities deposited with the Federal Reserve Bank of New York, as collateral
agent, secured the payment of approximately 12 to 14 months of interest on $1.6
billion of the Brady Bonds.

In October 1996, the Government exchanged $6.5 million of Series A Principal
Collateralized Interest Reduction Bonds due 2018 and approximately $628 million
of Series B Principal Collateralized Interest Reduction Bonds due 2017 for $551
million of its $690 million 8.75% Bonds due 2016. After the exchange,
approximately $2.3 billion of the Brady Bonds remained outstanding. The
exchange generated significant savings in debt service and the release of the
US Treasury securities held as collateral and established a liquid and
long-term sovereign benchmark extending the maturity of the Philippine debt
profile. The exchange resulted in the redemption, at a discount, of
approximately $635 million of Brady Bonds. In addition, the Brady Bond exchange
freed more than $124 million in cash from the collateral released in the
retirement of the Brady Bonds.

In October 1999, the Government exchanged approximately $401 million of its
Principal Collateralized Interest Reduction Bonds, $165 million of its Interest
Reduction Bonds and $54 million of its Floating Rate Debt Conversion Bonds for
approximately $544 million of 9.50% Global Bonds due 2024. After the exchange,
approximately $1.5 billion of the Brady Bonds remained outstanding. Similar to
the October 1996 exchange, this exchange generated significant savings in debt
service and the release of the US Treasury securities held as collateral and
established a sovereign benchmark extending the maturity of the Philippine debt
profile. The exchange freed approximately $149 million in cash from the
collateral released in the retirement of the Brady Bonds.

173

The following table sets out the foreign currency bonds issued by the
Republic.

FOREIGN BONDS ISSUED BY THE REPUBLIC

Outstanding
Balance
Outstanding as of
Balance December
as of Issue 31,
Date 2002
----------- -----------
(in millions)

Brady Bonds/(1)/
Interest Reduction Bonds.......................... $ 757 $ 250
Principal Collateralized Interest Reduction Bonds. 1,894 583
Debt Conversion Bonds............................. 697 357
------- -------
Total............................................ $ 3,348 $ 1,190
Japanese Yen Bonds/(2)/
Sixth Series...................................... 250 250
Seventh Series.................................... 292 292
Shibosai Series A................................. 417 417
------- -------
Total............................................... $ 959 $ 959
Notes............................................... 1,010 400
Global bonds........................................ 8,246 8,246
Eurobonds/(2)/...................................... 1,062 1,062
T-Bills............................................. 125 --
------- -------
Total foreign bonds............................. $14,751 $11,857/(3)/
======= =======

- --------
Source: Bureau of the Treasury, Department of Finance.

(1) The difference between the amount of the Brady Bonds originally issued and
the amount currently outstanding represents repurchases of such Bonds by
the Republic in the secondary market (or their acquisition in connection
with debt for equity and similar transactions), the 1998 Brady Bond
exchange, the cancellation of such acquired Bonds and principal repayments.
(2) Yen and Euro denominated bonds were converted to US dollars using Bangko
Sentral's reference exchange rate as of December 27, 2002.
(3) The Government has incurred an aggregate of $700 million and (Euro)300
million of external debt since December 31, 2002.

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DESCRIPTION OF THE BONDS

General

The Bonds will be issued pursuant to the Fiscal Agency Agreement. The
following description briefly summarizes some of the provisions of the Bonds,
the guarantee of the Bonds by the Republic (the "Guarantee") and the Fiscal
Agency Agreement, the forms of which will be filed as exhibits of the
Registration Statement filed by us with the SEC on , 2003 (No.
333-105868) and will be available for inspection at the offices of Citibank
International plc (Luxembourg Branch), 58, Boulevard Grande-Duchesse Charlotte,
L-1330 Luxembourg. This description does not purport to be complete and is
qualified in its entirety by reference to the text of those documents.

Principal of the Bonds will be payable on , . Interest on the
Bonds will be payable semi-annually in arrears in equal installments on
and of each year at the rate of % per annum. Interest will be
payable to holders of record at the close of business on the preceding or
, respectively. Interest on the Bonds will be computed on the basis of a
360-day year of twelve 30-day months. The principal of and interest on the
Bonds will be payable in lawful money of the United States of America and will
be made available at the office of Citibank, N.A., as fiscal agent under the
Fiscal Agency Agreement (the "Fiscal Agent") in The City of New York as set out
below.

Except as described below, the Bonds will not be redeemable prior to
maturity at our option or at the option of the registered holders. No sinking
fund will be provided by us for the amortization of the Bonds. For a
description of our obligations and the obligations of the Republic to pay
Additional Amounts (as defined below), if any, with respect to the Bonds, see
"-- Payment of Additional Amounts."

Guarantee

The Republic will irrevocably and unconditionally guarantee the due and
punctual payment of the principal of, interest on and premium and Additional
Amounts, if any, in respect of the Bonds, whether at maturity, on any interest
payment date, by declaration of acceleration, by call for redemption or
otherwise. The Republic agrees that its obligations under the Guarantee will be
as if it were principal obligor and not merely surety, and will be enforceable
irrespective of any invalidity, irregularity or unenforceability of the Bonds
or the Fiscal Agency Agreement or the absence of any action to enforce the
same. The Guarantee will not be discharged except by complete performance of
the obligations contained in the Bonds and the Guarantee. Moreover, if at any
time any amount paid under any Bonds is rescinded or must otherwise be
restored, the rights of the holders of the Bonds under the Guarantee will be
reinstated with respect to such payments as though such payments had not been
made.

The Republic's obligations under the Guarantee will be irrevocable and
unconditional. Without limiting the generality of the foregoing, such
obligations will not be affected by (i) any event or circumstance affecting us
or any of our Subsidiaries (as defined below) including, without limitation, as
a result of any privatization (including any sale of all or part of the
Republic's ownership or other interests in us), restructuring, sale of assets,
business combination or similar transaction affecting us or any of our
Subsidiaries or (ii) the transfer to, and assumption by, PSALM of NPC's
obligations under the Bonds.

Nature of Obligations

The Bonds will constitute our direct, unconditional, unsecured and general
obligations. Subject to the discussion below of Article 2244(14) of the Civil
Code of the Philippines, the Bonds will rank pari passu in priority of payment
with all of our other unsecured and unsubordinated External Indebtedness (as
defined herein).

The payment obligations of the Republic under the Guarantee will constitute
direct, unconditional, unsecured and general obligations of the Republic and
the full faith and credit of the Republic is pledged for the

175

performance thereof. Subject to the discussion below of Article 2244(14) of the
Civil Code of the Philippines, the Guarantee ranks pari passu in priority of
payment with all other unsecured and unsubordinated External Indebtedness of
the Republic.

"Indebtedness" means any indebtedness for money borrowed or any guarantee of
indebtedness for money borrowed.

"External Indebtedness" means Indebtedness which is denominated or payable
by its terms in, or at the option of the holder thereof payable in, a currency
or currencies other than the lawful currency of the Republic.

Under Philippine law, in the event of insolvency or liquidation of a
borrower, unsecured debt of the borrower (including guarantees of debt) which
is evidenced by a public instrument as provided in Article 2244(14) of the
Civil Code of the Philippines ranks ahead of unsecured debt of the borrower
which is not so evidenced. Under Philippine law, debt becomes evidenced by a
public instrument when it has been acknowledged before a notary or any person
authorized to administer oaths in the Philippines. Our debt evidenced by a
public instrument will rank ahead of the Bonds in the event we are unable to
service our debt obligations.

The Republic is of the view that debt of the Republic is not subject to the
preferences granted under Article 2244(14) or cannot be evidenced by a public
instrument without the cooperation of the Republic. This matter has never been
addressed by Philippine courts, however, and it is therefore uncertain whether
a document evidencing peso or non-peso denominated debt (including External
Indebtedness) of the Republic, notarized without the knowledge or consent of
the Republic, would be considered a public instrument. If such debt were
considered evidenced by a public instrument, it would then rank ahead of the
Guarantee in the event the Republic is unable to service its debt obligations.

In connection with the issuance of the Bonds, we will represent that we have
not in respect of any Indebtedness prepared, executed or filed any public
instrument as provided in Article 2244(14) of the Civil Code of the
Philippines, or consented to or assisted in the preparation or filing of any
such public instrument. We will also agree in the Bonds that we will not create
any preference or priority in respect of any External Indebtedness (as defined
below) pursuant to Article 2244(14) of the Civil Code of the Philippines unless
amounts payable under the Bonds are granted preference or priority equally and
ratably therewith.

The Republic, in connection with the issuance of the Bonds, will represent
that it has not in respect of any External Indebtedness prepared, executed or
filed any public instrument as provided in Article 2244(14) of the Civil Code
of the Philippines, or consented to or assisted in the preparation or filing of
any such public instrument. The Republic will also agree in the Guarantee
related to the Bonds that it will not create any preference or priority in
respect of any External Public Indebtedness (as defined below) pursuant to
Article 2244(14) of the Civil Code of the Philippines unless amounts payable
under the Bonds are granted preference or priority equally and ratably
therewith.

Negative Pledge of the Republic and Us

We will undertake that so long as the Bonds remain outstanding, we will not
create or permit to subsist, and will procure that none of our Subsidiaries
create or permit to subsist (a) any mortgage, deed of trust, charge, pledge,
lien or other form of encumbrance or security interest (a "Security Interest")
upon the whole or any part of our respective undertakings, assets or revenues,
present or future, to secure any External Indebtedness, unless all of our
obligations under the outstanding Bonds are secured equally and ratably
therewith or (b) any preference or priority in respect of any other External
Indebtedness of ours pursuant to Article 2244(14) of the Civil Code of the
Republic, or any successor Philippine law providing for preferences or priority
in respect of notarized External Indebtedness, unless amounts payable under the
outstanding Bonds are granted preference or priority equally and ratably
therewith.

176

Notwithstanding the above, we may create or permit to subsist any Security
Interest (i) upon any property or asset at the time of purchase, improvement,
construction, development or redevelopment thereof solely as security for the
payment of the purchase, improvement, construction, development or
redevelopment costs of such property or asset, (ii) in existence on ,
2003, (iii) existing on any property or asset at the time of its acquisition or
arising after such acquisition pursuant to contractual commitments entered into
prior to and not in contemplation of such acquisition and any extension or
renewal of that Security Interest which is limited to the original property or
asset and secures any extension or renewal of the original secured financing,
(iv) arising out of the extension, renewal or replacement of any External
Indebtedness that is permitted to be subject to a Security Interest pursuant to
any of the foregoing clauses, provided, however, that the principal amount of
the External Indebtedness so secured, as at the date of which such External
Indebtedness was originally incurred, is not increased, (v) arising in the
ordinary course of our business activities in connection with a banking
transaction which secures External Indebtedness maturing not more than one year
after the date on which it was incurred except for any extension, renewal or
replacement of such External Indebtedness, (vi) which (A) arises pursuant to an
attachment, distraint or similar legal process arising in connection with court
proceedings so long as the execution or other enforcement thereof is
effectively stayed and the claims secured thereby are being contested in good
faith by appropriate proceedings or (B) secured the reimbursement obligation
under any bond given in connection with the release of property from any
Security Interest referred to in (A) above, provided that in each of (A) and
(B) such Security Interest is released or discharged within one year of its
imposition or (vii) arising by operation of law, provided that any such
Security Interest created by operation of law is not created by or at our
direction or at the direction of any of our Subsidiaries for the purpose of
securing any External Indebtedness.

The Republic will undertake that so long as the Bonds remain outstanding, it
will not create or permit to subsist (a) any mortgage, deed of trust, charge,
pledge, lien or other encumbrance or preferential arrangement which has the
practical effect of constituting a security interest whether in effect on the
date of the prospectus pursuant to which the Bonds were offered or thereafter
("Lien") upon the whole or any part of its assets or revenues to secure any
External Public Indebtedness, unless the Republic shall procure that all
amounts payable under the Guarantee relating to the Bonds are secured equally
and ratably or (b) any preference or priority in respect of any other External
Public Indebtedness of the Republic pursuant to Article 2244(14) of the Civil
Code of the Republic, or any successor Philippine law providing for preferences
or priority in respect of notarized External Public Indebtedness, unless
amounts payable under the Guarantee relating to the Bonds are granted
preference or priority equally and ratably therewith.

Notwithstanding the above, the Republic may create or permit the creation of
any Lien (i) upon any property or asset (or any interest therein) at the time
of purchase, improvement, construction, development or redevelopment thereof
solely as security for the payment of the purchase, improvement, construction,
development or redevelopment costs of such property or assets, (ii) securing
Refinanced External Public Indebtedness, (iii) arising in the ordinary course
of banking transactions to secure External Public Indebtedness maturing not
more than one year after the date on which such External Public Indebtedness
was incurred, (iv) existing on any property or asset at the time of its
acquisition or arising after such acquisition pursuant to contractual
commitments entered into prior to and not in contemplation of such acquisition
and any extension or renewal of that Lien which is limited to the original
property or asset and secures any extension or renewal of the original secured
financing, (v) any Lien arising out of the extension, renewal or replacement of
any External Public Indebtedness that is permitted to be subject to a Lien
pursuant to any of the foregoing clauses (i), (ii) or (iv), provided, however,
that the principal amount of the External Public Indebtedness so secured is not
increased, (vi) which (A) arises pursuant to an attachment, distraint or
similar legal processing arising in connection with court proceedings so long
as the execution or other enforcement thereof is effectively stayed and the
claims secured thereby are being contested in good faith by appropriate
proceedings or (B) secures the reimbursement obligation under any bond given in
connection with the release of property from any Lien referred to in (A) above,
provided that in each of (A) and (B) such Lien is released or discharged within
one year of its imposition or (vii) arising by operation of law, provided that
any such Lien is not created or permitted to be created by the Republic for the
purpose of securing any External Public Indebtedness.

177

The international reserves of Bangko Sentral represent substantially all of
the official gross international reserves of the Republic. See "Foreign Trade,
Balance of Payments and Foreign Investment -- International Reserves." Because
Bangko Sentral is an independent entity, the Republic and Bangko Sentral are of
the view that international reserves owned by Bangko Sentral are not subject to
the negative pledge covenant in the Guarantee and accordingly that Bangko
Sentral could in the future incur External Public Indebtedness secured by such
reserves without securing amounts payable under the Guarantee. Moreover, there
is currently outstanding other External Indebtedness of the Republic that has
the benefit of a negative pledge covenant that expressly includes the
international reserves of the Republic (including the international reserves of
Bangko Sentral).

"External Public Indebtedness" means any External Indebtedness which is in
the form of, or represented by, bonds, debentures, notes or other similar
instruments or other securities and is, or is eligible to be, quoted, listed or
ordinarily purchased and sold on any stock exchange, automated trading system
or over-the-counter or other securities market.

"Refinanced External Public Indebtedness" means the $130,760,000 Series A
Interest Reduction Bonds 2007 issued by the Republic on December 1, 1992, the
$626,616,000 Series B Interest Reduction Bonds Due 2008 issued by the Republic
on December 1, 1992, the $153,490,000 Series A Principal Collateralized
Interest Reduction Bonds Due 2018 issued by the Republic on December 1, 1992
and the $1,740,600,000 Series B Collateralized Interest Reduction Bonds Due
2017 issued by the Republic on December 1, 1992.

"Subsidiary" means any subsidiary (as defined below) engaged primarily in
the business of generating, transmitting or distributing electricity.

"subsidiary" means any corporation, association, partnership or other
business entity of which more than 50% of the total voting power of shares of
capital stock or other interests (including partnership interests) entitled
without regard to any contingency until the occurrence of such contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) us (ii) us and one or more
of our subsidiaries or (iii) one or more of our subsidiaries.

Notices

Any notices we send will be in writing in the English language and will be
mailed to holders of Bonds (which will be DTC's nominee as long as the Bonds
are held in global form) at their registered addresses and shall be deemed to
have been given on the date of the mailing. For so long as the Bonds are listed
on the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange
so require, notices to holders of the Bonds will be valid if published in a
daily newspaper of general circulation in Luxembourg (which is expected to be
the Luxembourger Wort). Any notice given in the manner described above shall be
deemed to have been given on the date of publication, or if published more than
once, on the first date on which publication is made. If publication is not
practicable, we will have validly given notice if we give notice in accordance
with the rules of the Luxembourg Stock Exchange.

Governing Law

The Fiscal Agency Agreement, the Bonds and the Guarantee will be governed by
and interpreted in accordance with the laws of the State of New York without
regard to any conflicts of laws principles thereof that would require the
application of the laws of a jurisdiction other than the State of New York, and
except that all matters governing the authorization, execution and delivery of
the Bonds and the Fiscal Agency Agreement by us and the Guarantee and the
Fiscal Agency Agreement by the Republic are governed by the laws of the
Republic.

Jurisdiction, Consent to Service and Enforceability

We are a company organized with limited liability under the laws of the
Republic and the Republic of the Philippines is a foreign sovereign nation.
Consequently, it may be difficult for investors to realize upon judgments of
courts in the United States against us or the Republic.

178

Both we and the Republic will irrevocably waive, to the fullest extent
permitted under applicable law, any immunity, including sovereign immunity,
from jurisdiction to which it might at any time be entitled in any action
arising out of or based on the Bonds, the Fiscal Agency Agreement or the
Guarantee, which may be instituted by any holder of the Bonds in any federal
court in the Southern District of New York, any state court in the Borough of
Manhattan, The City of New York or in any competent court in the Philippines.
Both we and the Republic have irrevocably waived immunity from attachment of
its assets or from execution of judgments in any such action. To the extent
required under Philippine law, the Republic's waiver of immunity does not
extend to any property or assets of the Republic that are used by a diplomatic
or consular mission of the Republic (except as may be necessary to effect
service of process) or property of a military character and under the control
of a military authority or defense agency or otherwise dedicated to public or
governmental use (as distinguished from patrimonial property or property
dedicated to commercial use). Neither the Republic nor we, however, will waive
our sovereign immunity in connection with any action arising out of or based on
United States federal or state securities laws.

We and the Republic will each appoint the Philippine Consul General in New
York, New York as its authorized agent upon whom process may be served in any
action arising out of or based on the Bonds, the Fiscal Agency Agreement or the
Guarantee, which may be instituted in any federal court in the Southern
District of New York or any state court in the Borough of Manhattan, The City
of New York by any holder of the Bonds, and we and the Republic will
irrevocably submit to the non-exclusive jurisdiction of any such court in
respect of any such action. Such appointments are irrevocable until all amounts
in respect of the principal, interest, premium and Additional Amounts, if any,
due or to become due on or in respect of all the Bonds issuable under the
Fiscal Agency Agreement have been paid by us or the Republic to the Fiscal
Agent or unless and until both we and the Republic shall have appointed a
successor as authorized agent and such successor shall have accepted such
appointment. We and the Republic each will agree that we will at all times
maintain an authorized agent to receive such service, as provided above.

The Philippine Consul General in New York, New York, however, is not the
agent for service for actions arising out of or based on the United States
federal securities laws or state securities laws, and neither our nor the
Republic's waiver of immunity extends to such actions. Because neither we nor
the Republic waived our sovereign immunity in connection with any action
relating to such claims, it will only be possible to obtain a United States
judgment against us or the Republic based on such laws if a court were to
determine that NPC or the Republic, as applicable, is not entitled under the
Foreign Sovereign Immunities Act of 1976 to sovereign immunity with respect to
such actions.

Although there is no statutory enforcement in the Republic of final
judgments obtained in the United States, such judgment would be conclusive and
binding upon each of NPC and the Republic and may be enforced through a
separate action to enforce such judgment in the courts of the Republic without
retrial or re-examination but subject to the procedural requirements relating
to enforcement and recognition of foreign judgments and provided that (1) the
court rendering such judgment had jurisdiction over the subject matter of the
action in accordance with its jurisdictional rules, (2) NPC or the Republic, as
the case may be, had notice of proceedings before the appropriate court, (3)
such judgment was not obtained by collusion or fraud, (4) such judgment was not
based on a clear mistake of fact or law, and (5) such judgment is not contrary
to the laws, public policy, good morals and customs of the Republic.

Fiscal Agent

The Fiscal Agent's duties are governed by the Fiscal Agency Agreement. We
and the Republic may replace the Fiscal Agent at any time, subject to the
appointment of a replacement fiscal agent. We and the Republic may maintain
deposit accounts and conduct other banking transactions in the ordinary course
of business with the Fiscal Agent. The Fiscal Agent is our agent and the
Republic's agent and is not a trustee for the holders of the Bonds and does not
have the same responsibilities or duties to act for such holders as would a
trustee. For so long as the Bonds are listed on the Luxembourg Stock Exchange,
and the rules of the Luxembourg Stock Exchange so

179

require, we and the Republic will appoint and maintain a paying agent and a
transfer agent in Luxembourg, who shall initially be Citibank International plc
(Luxembourg Branch), for any certificated Bonds issued in exchange for Global
Bonds. Holders of the certificated Bonds will be able to receive payments
thereon and effect transfers thereof at the offices of the paying and transfer
agent in Luxembourg.

Substitution of the Issuer

PSALM may, without the consent of the holders of the Bonds, assume the
obligations of the Issuer under and in respect of the Bonds, provided that:

(a) an amendment to the Fiscal Agency Agreement is executed by PSALM, the
Republic and Citibank, N.A., as fiscal agent, in a form which gives full
effect to such assumption and which includes, without limitation:

. a covenant by PSALM in favor of the holders of the Bonds to be bound by
the terms of the Fiscal Agency Agreement as if it had been named
therein as the Issuer;

. a covenant by PSALM to indemnify each holder of the Bonds for the costs
or expenses relating to the substitution;

. provisions to the effect that the obligations of PSALM under the Bonds
and the amended Fiscal Agency Agreement shall be unconditionally and
irrevocably guaranteed by the Republic on the same basis as those of
the Issuer under the Fiscal Agency Agreement; and

. an acknowledgement of the right of every holder of the Bonds to receive
a copy of the amended Fiscal Agency Agreement.

(b) all actions, conditions and things required to be taken, fulfilled and
done (including the obtaining of any necessary consents) to ensure that
the Bonds represent valid, binding and enforceable obligations of PSALM
and, in the case of the Guarantee, of the Republic, have been taken,
fulfilled and done and are in full force and effect;

(c) PSALM shall have become a party to the amended Fiscal Agency Agreement,
with any appropriate consequential amendments, as if it had been an
original party to the Fiscal Agency Agreement;

(d) PSALM shall have delivered to the Fiscal Agent an opinion of US counsel
of recognized standing in the United States and either an opinion of the
Department of Justice of the Philippines or an opinion of the General
Counsel of PSALM, each to the effect that:

(i) the amended Fiscal Agency Agreement constitutes a valid, binding and
enforceable obligation of PSALM;

(ii) the Bonds constitute valid, binding and enforceable obligations of
PSALM; and

(iii) the Guarantee constitutes a valid, binding and enforceable obligation
of the Republic in respect of the principal of, interest on and
premium and Additional Amounts, if any, payable by PSALM in respect
of the Bonds under the amended Fiscal Agency Agreement (subject to,
in all of the foregoing clauses, customary exceptions concerning
creditors' rights and equitable principles); and

(e) such other documents and agreements shall have been executed as would
have been necessary if PSALM had been the issuer of the Bonds in place
of the Issuer.

180

Upon the assumption by PSALM of our obligations under and in respect of the
Bonds, we will be released from such obligations and, thereafter, all
references in the Bonds and the amended Fiscal Agency Agreement to National
Power Corporation shall be deemed to be references to PSALM.

The amended Fiscal Agency Agreement shall be deposited with and held by the
fiscal agent until all the obligations of PSALM under and in respect of the
Bonds have been discharged in full. Notice of the assumption by PSALM of the
Issuer's obligations under and in respect of the Bonds shall promptly be given
to the holders of the Bonds by the Issuer.

Further Issues

We may, without the consent of the holders of Bonds, create and issue
additional securities with the same terms and conditions as such Bonds (or that
are the same in all respects except for the amount of the first interest
payment and for the interest paid on the Bonds prior to the issuance of the
additional securities). We may consolidate such additional securities with the
outstanding Bonds, to form a single series. Any further securities forming a
single series with outstanding Bonds shall be constituted by an agreement
supplemental to the Fiscal Agency Agreement.

We may offer additional securities with original issue discount ("OID") for
US federal income tax purposes as part of a further issue. Purchasers of
securities after the date of any further issue will not be able to
differentiate between securities sold as part of the further issue and
previously issued Bonds. If we were to issue additional securities with OID,
purchasers of the securities after such further issue may be required to accrue
OID (or greater amounts of OID than they would otherwise have accrued) with
respect to their securities. This may affect the price of outstanding Bonds
following a further issue. Prospective holders of the Bonds are urged to
consult their own advisors with respect to the implications of any further
decision we may make to issue additional securities with OID.

Default; Acceleration of Maturity

The occurrence and continuation of any of the following events will
constitute an event of default (an "Event of Default") under the Bonds: (i) a
default in any payment of the principal of or interest on any of the Bonds and,
in the event of a default in the payment of interest, such default shall not be
cured by payment thereof within 30 days, (ii) we or the Republic shall default
in the performance of any other covenant in the Bonds or the Guarantee, as
applicable, and, if such default is capable of remedy, such default shall
continue for a period of 60 days after written notice thereof shall have been
given to us at the corporate trust office of the Fiscal Agent in The City of
New York by the holder of any Bond, (iii) the principal of any other External
Indebtedness of us or any of our Subsidiaries having an aggregate principal
amount equal to or in excess of $25,000,000 or its equivalent (determined on
the basis of the middle spot rate for the relevant currency against the U.S.
dollar as quoted by on the date of determination) becomes (or, as a
result of a payment default, becomes capable of being declared) due and payable
prior to its stated maturity otherwise than at our option, or any such External
Indebtedness is not paid when due or, as the case may be, within any applicable
grace period, (iv) any event or condition shall occur which results in the
acceleration of the maturity (other than by optional or mandatory prepayment or
redemption) of any External Public Indebtedness of the Republic or of the
central monetary authority of the Republic (as of the date of this prospectus,
the Bangko Sentral) having an aggregate principal amount equal to or in excess
of $25,000,000 or its equivalent (determined on the basis of the middle spot
rate for the relevant currency against the U.S. dollar as quoted by on
the date of determination), (v) any default shall occur in the payment of
principal of, or premium or prepayment charge (if any) or interest on, any
External Public Indebtedness of the Republic or of the central monetary
authority of the Republic (as of the date of this prospectus, the Bangko
Sentral) having an aggregate principal amount equal to or in excess of
$25,000,000 or its equivalent (determined on the basis of the middle spot rate
for the relevant currency against the U.S. dollar as quoted by on the
date of determination), when and as the same shall become due and payable, if
such default shall continue for more than the period of grace, if any,
originally applicable thereto, (vi) we or any of our

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Subsidiaries (A) is (or is deemed by law or a court to be) insolvent or
bankrupt or generally unable to pay its debts, (B) stops, suspends or threatens
to stop or suspend payment of all or a material part of its debts or (C)
proposes or makes a general rescheduling of its debts, (vii) a general
moratorium is declared in respect of or affecting all or any material part of
our debts or the debts of any of our Subsidiaries, (viii) an order is made or
an effective resolution passed by a competent authority for the winding-up or
dissolution of us or any of our Subsidiaries, or we cease or take steps to
cease all or substantially all of our business or operations (other than in any
such case through the disposal of our assets to its subsidiaries or pursuant to
a reconstruction, amalgamation, reorganization, merger or consolidation, or
transfer of assets effected in accordance with any privatization plan or
program), except for the purpose of and followed by a reconstruction,
amalgamation, reorganization, merger or consolidation, or transfer of assets
(A) with the written consent of the holders of a majority of the principal
amount of the Bonds at the time outstanding, or (B) in the case of a
Subsidiary, whereby the undertaking and assets of the Subsidiary are
transferred to or otherwise vested in us or another of our subsidiaries, (ix)
it is unlawful for us or the Republic to perform or comply with any one or more
of our respective obligations under any of the Bonds, the Guarantee or the
Fiscal Agency Agreement or our obligations or the obligations of the Republic
under the Bonds or the Fiscal Agency Agreement cease to be binding on, or
enforceable against, us or the Republic, as applicable, or we or the Republic
contend that our respective obligations under the Bonds, the Guarantee or the
Fiscal Agency Agreement, as applicable, are not valid, binding on or
enforceable against us, (x) the Guarantee is not (or is claimed by the Republic
not to be) in full force and effect, (xi) the Republic declares a general
moratorium with respect to the repayment of the External Indebtedness of either
the Republic or of the central monetary authority of the Republic (as of the
date of this prospectus, the Bangko Sentral) or (xii) the Republic shall cease
to be a member of the International Monetary Fund ("IMF") or shall cease to be
eligible to use the general resources of the IMF; provided that in the case of
paragraphs (ii), (vii) and (ix) and, in the case of the Subsidiaries,
paragraphs (vi) and (viii), such event is materially prejudicial to the
interests of the holders of the Bonds. In the case of any Event of Default
described in clause (ii), the holders of not less than 25% in aggregate
principal amount of the Bonds then outstanding, by notice to us, the Republic
and the Fiscal Agent as provided in the Bonds may declare the principal of all
the Bonds and the interest accrued thereon, to be due and payable immediately,
and in the case of any other Event of Default, any holder of a Bond then
outstanding, by notice to us, the Republic and the Fiscal Agent as provided in
the Bonds, may declare the principal of such Bond and the interest accrued
thereon, to be due and payable immediately. Notwithstanding the foregoing, the
Bonds shall not be due and payable immediately if, prior to the time when we
and the Republic receive such notice, all Events of Default provided for in the
Bonds and the Fiscal Agency Agreement shall have been cured. No periodic
evidence is required to be furnished by us as to the absence of defaults.

It should be noted that the Fiscal Agency Agreement does not provide for
notification to the holders of the Bonds of an Event of Default or for the
right of a holder thereof to examine any Bonds register.

Modification

We may modify any of the terms or provisions contained in the Bonds in any
way with the written consent of the holders of not less than a majority of the
principal amount of the Bonds at the time outstanding, provided that if any
such modification would (i) change the stated maturity of the principal of, or
any installment of interest on, any Bond, (ii) reduce the principal amount of
any Bond, or the portion of such principal amount which is payable upon
acceleration of the maturity of any Bond or the interest rate thereon, (iii)
change the coin or currency in which payment of the principal of or interest on
any Bond is payable, (iv) change our obligation to pay Additional Amounts or
(v) if any such modification would reduce the aforesaid percentage needed for
authorization of such modification, the consent of the holders of all
outstanding Bonds is required.

Payment of Additional Amounts

All payments of principal and interest in respect of the Bonds and the
Guarantee shall be made free and clear of, and without withholding and
deduction for, or on account of, any present or future taxes, levies, imposts,
duties, assessments or other charges of whatever nature, imposed, levied,
collected, withheld or assessed by or

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within the Republic or any department, agency or other political subdivision or
any taxing authority therein or thereof ("Philippine Taxes"), unless such
withholding or deduction is required by law or by the administrative
interpretation thereof. See "Taxation -- Philippine Taxation." In the event
Philippine Taxes are deducted or withheld from any of the aforementioned
payments, we or, as the case may be, the Republic, will pay such additional
amounts ("Additional Amounts") as will result in receipt by the holders of the
Bonds of such amounts as would have been received by them had no such deduction
or withholding been required, except that no such Additional Amounts shall be
payable in respect of the Bonds, or the Guarantee, as applicable (a) held by,
or on behalf of, a person who is subject to such Philippine Taxes in respect of
the Bonds by reason of such person having some connection with the Republic
other than the mere holding of the Bonds or the receipt of payments with
respect thereto, or (b) presented for payment more than thirty days after the
Relevant Date, except to the extent that the holder thereof would have been
entitled to such Additional Amounts on presenting the Bond for payment on the
last of such thirty days. As used herein, "Relevant Date" means the later of
the due date and, if such payment has not been duly made to the Fiscal Agent on
or before such date, such later date by which such payment has been so made and
notice thereof given. Any reference to "principal" and/or "interest" in this
Prospectus with respect to the Bonds and the Guarantee shall be deemed to
include any Additional Amounts which may be payable under the Bonds.

Redemption for Taxation Reasons

If (i) as a result of any change in or amendment to the laws (or any
regulations or rulings promulgated thereunder) of the Republic or of any
political subdivision or taxing authority therein or thereof affecting
taxation, or any change in official position regarding application or
interpretation of such laws, regulations or rulings (including a holding by a
court of competent jurisdiction), which change or amendment became or becomes
effective on or after 2003, we have or will become obliged to pay
Additional Amounts (in excess of the additional amounts we would be obliged to
pay if amounts were subject to withholding or deduction at a rate equal to
25%), and (ii) such circumstances are evidenced by the delivery to the holders
of the Bonds of (A) a certificate signed by two of our officers stating that
the obligation to pay the holders of the Bonds of such Additional Amounts
cannot be avoided by us taking reasonable measures available to us and (B) an
opinion of the Department of Justice of the Republic, to the effect that we
have or will become obliged to pay such Additional Amounts as a result of such
change or amendment, which certificate and opinion shall constitute sufficient
evidence of such obligation and shall be conclusive and binding on the holders
of the Bonds, the Bonds will be subject to redemption by us in whole, but not
in part, at any time on giving not less than 30 nor more than 60 days'
irrevocable notice to the holders of the Bonds, in the manner set out in the
next paragraph, at a redemption price equal to the principal amount thereof
together with accrued and unpaid interest (including such Additional Amounts)
to the date fixed for redemption; provided, however, that (x) no such notice of
redemption may be given earlier than 90 days prior to the earliest date on
which we would be obligated to pay such Additional Amounts were a payment in
respect of the Bonds then due, and (y) at the time such notice of redemption is
given, such obligation to pay such Additional Amounts remains in effect.
Notwithstanding the foregoing, we shall not have the right to redeem the Bonds
unless the obligation to pay Additional Amounts cannot be avoided by our taking
reasonable measures available to us.

Notice to the holders of Bonds required by the preceding paragraph of any
such redemption shall be effected by publication in a daily newspaper in The
City of New York.

All Bonds so redeemed will be immediately cancelled and may not be re-issued
or resold.

Form, Denomination and Registration

The Bonds will be issued in the form of one or more fully registered Global
Bonds (the "Global Bonds") which will be deposited on with, or on behalf
of, DTC Trust Company, New York, New York ("DTC") and registered in the name of
Cede & Co., DTC's nominee. Beneficial interests in the Global Bonds will be
represented through book-entry accounts of financial institutions acting on
behalf of beneficial owners as direct

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and indirect participants in DTC. Investors may elect to hold interests in the
Global Bonds through either DTC (in the United States) or Clearstream Banking,
Societe anonyme ("Clearstream, Luxembourg") or Euroclear Bank S.A./N.V., as
operator of the Euroclear System ("Euroclear") (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. Clearstream Luxembourg and Euroclear will hold
interests on behalf of their participants through customers' securities
accounts in Clearstream Luxembourg's and Euroclear's names on the books of
their respective depositaries, which in turn will hold such interests in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank, N.A. will act as depositary for Clearstream Luxembourg and for
Euroclear (in such capacity, the "U.S. Depositary"). Beneficial interests in
the Global Bonds will be held in denominations of $1,000 and integral multiples
thereof. Except as set forth below, the Global Bonds may be transferred, in
whole and not in part, only to another nominee of DTC or to a successor of DTC
or its nominee In addition, no beneficial owner of an interest in a Global Bond
will be able to transfer that interest except in accordance with DTC's
applicable procedures (in addition to those under the Fiscal Agency Agreement
and, if applicable, those of Euroclear and Clearstream, Luxembourg). The laws
of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and such
laws may impair the ability to own, transfer or pledge beneficial interests in
a Global Bond.

Any payment of principal, interest or premium or Additional Amounts, in
either case if any, due on the Bonds on any interest payment date or at
maturity will be made available by us to the Fiscal Agent on such date. As soon
as possible thereafter, the Fiscal Agent will make such payments to DTC or its
nominee, as the case may be, as the registered owner of the Global Bond
representing the Bonds in accordance with arrangements between the Fiscal Agent
and DTC. We expect that DTC or its nominee, upon receipt of any payment of
principal, interest or premium or Additional Amounts, in either case if any,
will credit immediately participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Bond as shown on the records of DTC or its nominee. We also
expect that payments by participants to owners of beneficial interests in the
Global Bond held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name,"
and will be the responsibility of such participants. Neither we nor the Fiscal
Agent will have any responsibility or liability for any aspect of the records
relating to payments made on account of beneficial ownership interests of a
Global Bond or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.

So long as DTC, or its nominee, is the registered owner of a Global Bond,
DTC or such nominee, as the case may be, will be considered the sole owner and
holder of the Bonds represented by the Global Bond for all purposes of the
Bonds. Owners of beneficial interests in a Global Bond will not be entitled to
have the Bonds represented by the Global Bond registered in their names, will
not receive or be entitled to receive physical delivery of Bonds in definitive
form upon exchange or otherwise and will not be considered the owners or
holders of any Bonds represented by the Global Bond and will consequently have
no direct rights to enforce such interests while the Bonds are in global form.
The giving of notices and other communications by DTC to DTC participants, by
DTC participants to persons who hold accounts with them and by such persons to
holders of beneficial interests in a Global Note will be governed by
arrangements between them, subject to any statutory or regulatory requirements
as may exist from time to time. Accordingly, such person owning a beneficial
interest in a Global Bond must rely on the procedures of DTC and, if such
person is not a participant, on the procedures of the participant through which
such person owns its interest, to exercise any rights of a holder of Bonds. We
understand that, under existing industry practice, in the event that an owner
of a beneficial interest in a Global Bond desires to take any action DTC, or
its nominee, as the holder of the Global Bond, is entitled to take, DTC would
authorize the participants to take such action, and that the participants would
authorize beneficial owners owning through such participants to take such
action or would otherwise act upon the instructions of beneficial owners owning
through them.

A Global Bond may not be transferred except as a whole by DTC to a nominee
of DTC or by a nominee of DTC to DTC or any other nominee of DTC, or by DTC or
any such nominee to a successor of DTC or a nominee

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of such successor. Bonds represented by a Global Bond are exchangeable for
Bonds in definitive form (i) if DTC notifies us that it is unwilling or unable
to continue as depository for the Global Bond or if at any time DTC ceases to
be a clearing agency registered under the Exchange Act, at a time when it is
required to be so registered, and a replacement depository is not appointed,
(ii) we in our discretion at any time determine not to have all of the related
Bonds represented by the Global Bond or (iii) if an event of default, or an
event which the notice, lapse of time or both would be an event of default,
entitling the holders of the related Bonds to accelerate the maturity thereof
has occurred and is continuing. Any Bond that is exchangeable pursuant to the
preceding sentence is exchangeable for Bonds in definitive form registered in
such names as DTC shall direct. Bonds in definitive form may be presented for
registration of transfer or exchange at the office of the Fiscal Agent in The
City of New York, and principal thereof and interest and premium and Additional
Amounts, if any, thereon will be payable at such office of the Fiscal Agent,
provided that interest thereon may be paid by check mailed to the registered
holders of the Bonds. Subject to the foregoing, a Global Bond in respect of the
Bonds is not exchangeable, except for a Global Bond or Global Bonds of the same
aggregate denominations to be registered in the name of DTC or its nominee.

DTC advises us that it is a limited-purpose trust company organized under
the laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities of its participants
("DTC Participants") and to facilitate the clearance and settlement of
securities transactions among DTC Participants in such securities through
electronic book-entry changes in accounts of DTC Participants, thereby
eliminating the need for physical movement of securities certificates. DTC
Participants include securities brokers and dealers (including the
underwriters), banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own DTC. Access to
DTC's book-entry system is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly. DTC agrees
with and represents to DTC Participants that it will administer its book-entry
system in accordance with its rules and by-laws and requirements of law.

Clearstream, Luxembourg advises that it is incorporated under the laws of
Luxembourg as a professional depositary. Clearstream, Luxembourg holds
securities for its participating organizations ("Clearstream, Luxembourg
Participants") and facilitates the clearance and settlement of securities
transactions between Clearstream, Luxembourg Participants through electronic
book-entry changes in accounts of Clearstream, Luxembourg Participants, thereby
eliminating the need for physical movement of certificates. Clearstream,
Luxembourg provides to Clearstream, Luxembourg Participants, among other
things, services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream, Luxembourg interfaces with domestic markets in several countries.
As a professional depositary, Clearstream, Luxembourg is subject to regulation
by the Luxembourg Monetary Institute. Clearstream, Luxembourg Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the underwriters. Indirect
access to Clearstream, Luxembourg is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Clearstream, Luxembourg Participant either directly or
indirectly.

Distributions with respect to the Bonds held beneficially through
Clearstream Luxembourg will be credited to cash accounts of Clearstream
Luxembourg Participants in accordance with its rules and procedures, to the
extent received by the U.S. Depositary for Clearstream Luxembourg.

Euroclear advises that it was created in 1968 to hold securities for
participants of Euroclear ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries. Euroclear

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is operated by Euroclear Bank S.A./N.V. (the "Euroclear Operator"), under
contract with Euro-clear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the underwriters. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.

The Euroclear Operator was launched on December 31, 2000, and replaced
Morgan Guaranty Trust Company of New York as the operator of and banker to the
Euroclear system. Euroclear Bank S.A./N.V. has capital of approximately EUR 1
billion.

Distributions with respect to the Bonds held beneficially through Euroclear
will be credited to the cash accounts of Euroclear Participants in accordance
with the Terms and Conditions, to the extent received by the U.S. Depositary
for Euroclear.

Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System, and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities
and cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.

The Bonds have been assigned the following Euroclear and Clearstream,
Luxembourg Common Code Number, International Security Identification Number
(ISIN) and CUSIP Number:

Euroclear and Clearstream Luxembourg Common Code:

ISIN:

CUSIP:

Global Clearance and Settlement Procedures

Initial settlement for the Bonds will be made in immediately available
funds. Secondary market trading between DTC Participants will occur in the
ordinary way in accordance with DTC rules and will be settled in immediately
available funds using DTC's Same-Day Funds Settlement System. Secondary market
trading between Clearstream, Luxembourg Participants and/or Euroclear
Participants will occur in the ordinary way in accordance with the applicable
rules and operating procedures of Clearstream, Luxembourg and Euroclear and
will be settled using the procedures applicable to conventional eurobonds in
immediately available funds.

Cross-market transfers between persons holding directly or indirectly
through DTC on the one hand, and directly or indirectly through Clearstream,
Luxembourg or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its U.S. Depositary; however, such cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in such system in accordance with its rules
and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to its U.S. Depositary to
take action to effect final settlement on its behalf by delivering or receiving
Bonds in DTC, and making or receiving

186

payment in accordance with normal procedures for same-day funds settlement
applicable to DTC. Clearstream, Luxembourg Participants and Euroclear
Participants may not deliver instructions directly to their respective U.S.
Depositaries.

Because of time-zone differences, credits of Bonds received in Clearstream,
Luxembourg or Euroclear as a result of a transaction with a DTC Participant
will be made during subsequent securities settlement processing and dated the
business day following DTC settlement date. Such credits or any transactions in
such Bonds settled during such processing will be reported to the relevant
Euroclear or Clearstream, Luxembourg Participants on such business day. Cash
received in Clearstream, Luxembourg or Euroclear as a result of sales of Bonds
by or through a Clearstream, Luxembourg Participant or a Euroclear Participant
to a DTC Participant will be received with value on DTC settlement date but
will be available in the relevant Clearstream, Luxembourg or Euroclear cash
account only as of the business day following settlement in DTC.

Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Bonds among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform such procedures and such
procedures may be discontinued at any time.

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TAXATION

General

We urge you to consult your own tax advisors to determine your particular
tax consequences in respect of the offering, ownership and disposition of the
Bonds, including whether any state, local or foreign tax laws apply to you.

Philippine Taxation

The following is a discussion of the material Philippine tax consequences
applicable to non-Philippine holders of the Bonds in connection with the
holding and disposition of the Bonds, and no information is provided regarding
the tax aspects of holding or disposing of the Bonds under tax laws of other
applicable jurisdictions, and the specific Philippine tax consequences in light
of particular situations of holding and disposing of the Bonds in such other
jurisdictions. Each holder should consult its own tax adviser as to the
particular tax consequences of the holding and disposing of the Bonds,
including the applicability and effect of any state, local and national tax
laws.

We use the term "non-Philippine holders" to refer to beneficial owners of
Bonds who are (1) non-residents of the Philippines who are neither citizens of
the Philippines nor engaged in trade or business within the Philippines or (2)
non-Philippine corporations not engaged in trade or business in the Philippines.

The summary is based on Philippine laws, rules and regulations now in
effect, all of which are subject to change. It is not intended to constitute a
complete analysis of the tax consequences under Philippine law of the receipt,
ownership or disposition of the Bonds, in each case by non-Philippine holders,
nor to describe any of the tax consequences that may be applicable to residents
of the Philippines.

Taxation of Interest on the Bonds.

The Philippine National Internal Revenue Code of 1997 ("Tax Code") generally
provides that interest on notes or other interest bearing obligations of
Philippine residents are Philippine-sourced income subject to Philippine income
tax. Generally, interest on loans received by non-resident foreign individuals
engaged in a trade or business in the Philippines is subject to a 20%
withholding tax, while that received by non-resident foreign individuals not
engaged in trade or business is taxed at the rate of 25%. Interest income
received by non-resident foreign corporations on foreign loans is subject to a
20% withholding tax. "Foreign loans" are loan contracts, including all debt
items, whether in kind or in cash, which are payable in foreign currency or in
kind, entered into by a Philippine resident, corporate or otherwise, with a
non-resident. Therefore, the Bonds will constitute "foreign loans". The tax
withheld constitutes a final settlement of Philippine income tax liability with
respect to such interest.

The withholding tax rate may be reduced in accordance with applicable tax
treaties in force between the Philippines and the country of residence of the
non-resident holder. Most tax treaties to which the Philippines is a party,
including the Philippine-United States Tax Treaty (the "RP-US Treaty"),
generally provide for a reduced tax rate of 15% in cases where the interest
arises in the Philippines and is paid to a resident of the other contracting
state. In addition, under the RP-US Treaty, the withholding tax rate may be
reduced to 10% in cases where the interest arises in respect of a public issue
of bonded indebtedness and such interest is paid by a Philippine resident to a
resident of the United States. However, most tax treaties, including the RP-US
Treaty, also provide that reduced withholding tax rates will not apply if the
recipient of the interest, who is a resident of the other contracting state,
carries on business in the Philippines through a permanent establishment and
the holding of the Bonds is effectively connected with such permanent
establishment.

Under our charter, principal and interest payable in respect of our foreign
indebtedness (including the Bonds) are exempt from Philippine income tax in
respect of which withholding would be required. The

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Philippine Bureau of Internal Revenue has ruled that payments on foreign loans
originally incurred by us and transferred to PSALM shall remain exempt from
tax. Therefore the assumption of the obligations under the Bonds by PSALM will
not subject payments of principal and interest to withholding tax.

If any withholding is required in respect of payment of principal and
interest in respect of the Bonds, however, the Company and the Republic have
undertaken as provided in the terms of the Bonds to pay Additional Amounts in
respect of any such withholding, subject to certain exceptions therein.

Taxation of Capital Gains.

Under the Tax Code, any gain realized from the sale or retirement of
securities, debentures and other certificates of indebtedness with an original
maturity date of more than five years (measured from the date of the issuance
of such securities, debentures or other certificates of indebtedness) will not
be subject to Philippine income tax. Since the Bonds have a maturity date of
more than five years from the date of issuance, any gains realized by any
resident or non-resident holder from the sale of the Bonds effected within or
outside the Philippines will not be subject to Philippine income tax.

Non-Philippine holders of the Bonds will not be subject to Philippine tax as
a result of the transfer of our obligations under the Bonds to PSALM in
connection with our restructuring.

Documentary Stamp Taxes.

The Republic imposes a documentary stamp tax upon the issuance of debentures
and certificates of indebtedness (including the Bonds) issued by the government
or any of its instrumentalities at the rate of (Peso)0.30 on each (Peso)200.00,
or fractional part thereof, of the face value of such securities.

We have undertaken to pay the documentary stamp tax payable on the issuance
of the Bonds prior to their issue.

Value Added Tax

The transfer of the Bonds in the Philippines by banks, non-bank financial
intermediaries, finance companies and dealers in securities may be subject to
value added tax at the rate of 10% based on their net trading gains or gross
income from the sale.

Estate and Donor's Taxes.

The transfer of the Bonds by way of succession upon death of a
non-Philippine holder will be subject to Philippine estate tax at progressive
rates from 5% to 20% if the value of the net estate of properties located in
the Philippines is over (Peso)200,000.00.

The transfer of the Bonds by gift to an individual who is related to the
non-Philippine holder will generally be subject to a Philippine donor's tax at
progressive rates from 2% to 15% if the value of the net gifts of properties
located in the Philippines exceed (Peso)100,000.00 during the relevant calendar
year. Gifts to unrelated donees are generally subject to tax at a flat rate of
30%. An unrelated donee is a person who is not a (1) brother, sister (whether
by whole or half blood), spouse, ancestor, or lineal descendant or (2) relative
by consanguinity in the collateral line within the fourth degree of
relationship. Since the Bonds represent obligations of a Philippine
corporation, the Bonds are deemed to have a Philippine situs.

The foregoing apply even if the holder is a non-Philippine holder. However,
the Republic will not collect estate and donor's taxes on the transfer of the
Bonds by gift or succession if the deceased at the time of death, or the donor
at the time of donation, was a citizen and resident of a foreign country that
provides certain reciprocal

189

rights to citizens of the Philippines (a "Reciprocating Jurisdiction"). For
these purposes, a Reciprocating Jurisdiction is a foreign country which at the
time of death or donation (1) did not impose a transfer tax of any character in
respect of intangible personal property of citizens of the Philippines not
residing in that foreign country or (2) allowed a similar exemption from
transfer or death taxes of every character or description in respect of
intangible personal property owned by citizens of the Philippines not residing
in that foreign country. The Philippines does not view the United States as
allowing such a reciprocal exemption.

U.S. Federal Income Tax Considerations

The following discussion is a summary of certain material U.S. federal
income tax consequences of the purchase, ownership and disposition of the Bonds
by U.S. Holders (as defined below). The summary is not a complete analysis or
description of all potential tax consequences to U.S. Holders and does not
address all tax considerations that may be relevant to all categories of
potential purchasers (such as dealers or traders in securities, commodities, or
currencies, tax-exempt investors, investors whose "functional currency" is not
the U.S. dollar, financial institutions, thrifts, regulated investment
companies, insurance companies, grantor trusts, individual retirement accounts
or other tax-deferred accounts, investors that hold the Bonds as part of a
"hedging", "integrated", "conversion" or constructive sale transaction or a
"straddle", persons who have ceased to be U.S. citizens or to be taxed as
resident aliens, or investors liable for the alternative minimum tax).
Prospective purchasers of the Bonds are urged to consult their own tax advisors
concerning the U.S. federal, state, and local tax consequences of the purchase,
ownership and disposition of the Bonds.

This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), judicial decisions, administrative pronouncements, and existing and
proposed U.S. Treasury Regulations, changes to any of which after the date of
this prospectus could apply on a retroactive basis and affect the tax
consequences described herein.

The term "U.S. Holder" means a beneficial owner of a Bond that: (1)
purchases the Bond in the offering at the issue price (as defined below); (2)
holds the Bond as a capital asset; and (3) is, for U.S. federal income tax
purposes:

. a citizen or resident of the United States;

. a corporation, or other entity treated as a corporation, created or
organized in or under the laws of the United States or any state thereof
(including the District of Columbia);

. an estate, the income of which is subject to U.S. federal income taxation
regardless of its source; or

. a trust:

(a) the administration of which is subject to the primary supervision of
a court within the United States and for which one or more U.S.
persons have the authority to control all substantial decisions; or

(b) that has a valid election in effect under applicable U.S. Treasury
Regulations to be treated as a U.S. person.

If a partnership holds Bonds, the U.S. federal income tax treatment of a
partner generally will depend upon the status of the partner and the activities
of the partnership. Partners of partnerships holding the Bonds should consult
their own tax advisors concerning the associated tax consequences.

The "issue price" of a Bond is equal to the initial offering price to the
public (not including bond houses, brokers or similar persons or organizations
acting in the capacity of underwriters, placement agents or wholesalers) at
which a substantial amount of the Bonds is sold for money.

190

Payments of Interest

Payments of interest on a Bond will be includible in the gross income of a
U.S. Holder as ordinary income from foreign sources at the time it is received
or accrued, in accordance with the U.S. Holder's method of accounting for U.S.
federal income tax purposes.

Interest payments on a Bond will generally be treated as "passive" income
for purposes of computing the U.S. Holder's foreign tax credit allowable under
U.S. federal income tax law. The rules relating to foreign tax credits and the
timing thereof are complex and U.S. Holders should consult their own tax
advisors regarding the availability of a foreign tax credit and the application
of foreign tax credit limitations to their particular situation.

Sale, Exchange, Retirement and Other Disposition of the Notes

Upon the sale, exchange, retirement or other disposition of a Bond, a U.S.
Holder will generally recognize taxable gain or loss equal to the difference
between the amount realized (not including any amounts received that are
attributable to accrued and unpaid interest, which will be taxable as interest
income) and the U.S. Holder's tax basis in the Bond.

Gain or loss will be capital gain or loss, and will be long-term capital
gain or loss if the Bond was held for more than one year at the time of the
disposition. Certain U.S. Holders (including individuals) are eligible for
reduced rates of U.S. federal income tax in respect of long-term capital gain.
The deduction of long-term capital losses is subject to significant
limitations. Gain or loss recognized by a U.S. Holder generally will be treated
as U.S. source income or loss for the purposes of calculating such U.S.
Holder's foreign tax credit limitation. Prospective investors should consult
their own tax advisors with respect to the treatment of capital gains and
losses.

The Obligor Change

Although there is no precedent directly on point, it is more likely than not
that the subsequent change in obligor of the Bonds from NPC to PSALM (the
"Obligor Change") will be tax-free under U.S. federal income tax principles.
Neither the Internal Revenue Service (the "Service") nor the courts are bound
by this conclusion and may disagree with it.

The Obligor Change will not be a taxable event under U.S. federal income tax
principles unless it constitutes a "modification" that is "significant". The
Obligor Change should be regarded as a modification for this purpose. Treasury
Regulations Section 1.1001-3 sets forth guidelines for determining whether a
modification is significant, and indicates that a modification will be
significant unless a specific exception applies. Such an exception would apply
to the Obligor Change if, in connection therewith, PSALM acquires
"substantially all" of the assets (based on the fair market value of such
assets) of NPC and certain other conditions are met. The regulation does not
specify what constitutes "substantially all" of NPC's assets. Pursuant to its
privatisation plan, NPC will transfer most of its assets and liabilities to
PSALM and Transco, its wholly owned subsidiary.

Among other things, the conclusion reached above assumes that the transfer
of assets by NPC directly to Transco is included in the determination of
whether "substantially all" of NPC's assets have been acquired by the obligor,
PSALM, for purposes of Treasury Regulations Section 1.1001-3. Neither the
Service nor the courts are bound by this assumption and may disagree with it.

If the Obligor Change is tax-free, a U.S. Holder's holding period and tax
basis in the Bonds will remain unchanged.

Consequences In the Event of a Taxable Obligor Change

If the Service successfully challenges the conclusion that the Obligor
Change is not a tax-free event, U.S. Holders will recognise gain or loss upon
the Obligor Change based on the difference between (A) their tax basis

191

in the unmodified Bonds, and (B) the fair market value of the modified Bonds
less any accrued but unpaid interest not previously included in income (which
will be taxable as ordinary interest income). Gain or loss will be capital gain
or loss, and will be long-term capital gain or loss if the Bond was held for
more than one year at the time of the disposition. Certain U.S. Holders
(including individuals) are eligible for reduced rates of U.S. federal income
tax in respect of long-term capital gain. The deduction of long-term capital
losses is subject to significant limitations. Gain or loss recognized by a U.S.
Holder generally will be treated as U.S. source income or loss for the purposes
of calculating such U.S. Holder's foreign tax credit limitation. In the event
the Obligor Change were taxable, the modified Bonds will be treated as issued
for their fair market value on the date of the modification (excluding any
accrued but unpaid interest as of such date with respect to the related
unmodified Bonds). A portion of the first interest payment on the modified Bond
that corresponds to such accrued but unpaid interest would be treated as a
non-taxable return of pre-issuance interest and therefore not treated as
interest payable on the modified Bond.

The fair market value of the modified Bonds on the date of a significant
modification (less any accrued but unpaid interest with respect to the related
unmodified Bonds) will become the U.S. Holder's tax basis in such Bonds. A
significant modification should be treated as a taxable exchange of the
unmodified Bond for all U.S. federal income tax purposes, including for
information reporting and backup withholding purposes. See "-- Information and
Backup Withholding" below for a general discussion of these rules.

Backup Withholding and Information Reporting

U.S. backup withholding and information reporting requirements generally
will apply to certain payments to certain non-corporate U.S. Holders of Bonds.
Information reporting requirements will apply to interest on, and to proceeds
from the sale, exchange, retirement or other disposition of, Bonds paid by
certain U.S.-related financial intermediaries or by a paying agent within the
United States to a U.S. Holder (other than an "exempt recipient", including a
corporation and certain other persons who, when required, demonstrate their
exempt status). Paying agents that are subject to the backup withholding rules
will be required to backup withhold on interest on, and the proceeds from the
sale, exchange, retirement or other disposition of, Bonds paid within the
United States to a U.S. Holder (other than an "exempt recipient") if the U.S.
Holder fails to (i) furnish its correct taxpayer identification number; (ii)
certify that such U.S. Holder is not subject to backup withholding; or (iii)
otherwise comply with applicable backup withholding requirements.

Backup withholding is not an additional tax. Amounts withheld as backup
withholding may be credited against a holder's U.S. federal income tax
liability. A holder may obtain a refund of any excess amounts withheld under
the backup withholding rules by filing the appropriate claim for a refund with
the IRS and furnishing any required information.

192

UNDERWRITING

Citigroup Global Markets Inc. and are acting as representatives of
the underwriters named below.

Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus, each underwriter named below has agreed to
purchase, and we have agreed to sell to that underwriter, the principal amount
of notes set forth opposite the underwriter's name.

Principal
Amount
Underwriter of Bonds
----------- ---------

Citigroup Global Markets Inc. $
388 Greenwich Street
New York, New York 10013
USA
--
Total....................... $
==

The underwriting agreement provides that the obligations of the underwriters
to purchase the Bonds included in this offering are subject to approval of
legal matters by counsel and to other conditions. The underwriters are
obligated to purchase all the Bonds if they purchase any of the Bonds.

The underwriters propose to offer some of the Bonds directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the Bonds to dealers at the public offering price less a concession not
to exceed % of the principal amount of the Bonds. The underwriters may
allow, and dealers may reallow a concession not to exceed % of the
principal amount of the Bonds on sales to other dealers. After the initial
offering of the Bonds to the public, the underwriters may change the public
offering price and concessions.

Each of NPC and the Republic has agreed that it will not, until the expiry
of a period of 10 business days following the closing date of the offering,
without the prior written consent of the representatives of the underwriters,
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly in the United States, or announce the offering in the United States
of, any securities issued or guaranteed by it (other than the Bonds).

The Bonds have not been offered or sold and, prior to the expiry of a period
of six months from the closing date, will not be offered or sold, to persons in
the United Kingdom, except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of The Public Offers of Securities Regulation 1995
(as amended). No person has communicated or caused to be communicated or will
communicate or cause to be communicated any invitation or inducement to engage
in investment activity (within the meaning of section 21 of The Financial
Services and Markets Act of 2000 ("FSMA")) received by it in connection with
the issue or sale of any Bonds in circumstances in which section 21(1) of the
FSMA does not apply to us. All applicable provisions of the FSMA with respect
to anything done by it in relation to the Bonds, in, from or otherwise
involving the United Kingdom have been, and will be, complied with.

The Bonds have not been and will not be registered under the Securities and
Exchange Law of Japan and have not been offered or sold and will not be offered
or sold, directly or indirectly, in Japan or to, or for the account or benefit
of, any resident of Japan or to, or for the account or benefit of, any resident
for reoffering or resale, directly or indirectly, in Japan or to, or for the
account or benefit of, any resident of Japan except:

. pursuant to an exemption from the registration requirements of, or
otherwise in compliance with, the Securities and Exchange Law of Japan; and

193

. in compliance with the other relevant laws of Japan.

The Bonds have not been offered or sold, and will not be offered or sold in
Hong Kong, by means of any document, other than to persons whose ordinary
business is to buy or sell shares or debentures, whether as principal or agent,
or in circumstances which do not constitute an offer to the public within the
meaning of the Companies Ordinance (Cap. 32) of Hong Kong. No advertisement,
invitation or document relating to the Bonds, whether in Hong Kong or
elsewhere, has been or will be issued, which is directed at, or the contents of
which are likely to be accessed or read by, the public in Hong Kong (except if
permitted to do so under the securities laws of Hong Kong) other than with
respect to Bonds which are or are intended to be disposed of only to persons
outside Hong Kong or only to "professional investors" within the meaning of the
Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made
thereunder.

The Bonds being offered (i) qualify as exempt securities under Section
9.1(a) of the Philippine Securities Regulation Code and are not subject to
registration requirements with the Philippine Securities and Exchange
Commission, and (ii) will not be offered for sale or distribution in the
Philippines except through Philippine registered investment houses,
brokers/dealers in securities or universal banks with the appropriate
underwriting license.

This prospectus has not been and will not be registered as a prospectus with
the Monetary Authority of Singapore under the Securities and Futures Act,
Chapter 289 of Singapore (the "SFA"). Accordingly, this prospectus and any
other document or material in connection with offer or sale, or invitation for
subscription or purchase, of the Bonds may not be circulated or distributed,
nor may the Bonds be offered or sold, or be made the subject of an invitation
for subscription or purchase, whether directly or indirectly, to the public or
any member of the public in Singapore other than:

. to an institutional investor or other person specified in Section 275 of
the SFA;

. to a sophisticated investor, and in accordance with the conditions,
specified in Section 275 of the SFA; or

. otherwise pursuant to, and in accordance with the conditions of, any other
applicable provision of the SFA.

The Bonds may not be offered, transferred, delivered or sold, whether
directly or indirectly, to any individual or legal entity in the Netherlands as
part of the initial distribution or at any time thereafter, other than to
individuals or legal entities who, or which, trade or invest in securities in
the conduct of their profession or trade (which include banks, brokers,
dealers, asset management companies, investment funds, insurance companies,
pension funds, other institutional investors and treasury departments of large
commercial enterprises).

No action has been or will be taken to obtain an authorization from CONSOB
for the public offering of the Bonds in the Republic of Italy. The Bonds, this
prospectus and any other offering material relating to the Bonds have not been
offered, sold or delivered and will not be offered, sold or delivered and have
not been distributed and will not be distributed and have not been made and
will not, directly or indirectly, be made available in the Republic of Italy
except to "qualified investors" (operatori qualificati), as defined in Article
31.2 of CONSOB Regulation No. 11522 of July 1998 as amended ("Regulation No.
11522"), pursuant to Article 30.2 and 100.1, lett. A) of Legislative Decree No.
58 of 24 February 1998 ("Decree No. 58"), or in any other circumstance where an
express exemption from compliance with the solicitation restrictions provided
by Decree No. 58 or CONSOB Regulation No. 11971 of 14 May 1999 as amended
applies, provided however, that any such offer, sale or delivery of the Bonds
or distribution of copies of this prospectus or any other offering material
relating to the Bonds in the Republic of Italy must be:

. made by investment firms, banks or financial intermediaries permitted to
conduct such activities in the Republic of Italy in accordance with
legislative Decree No. 385 of 1 September, 1993 as amended ("Decree No.
385"), Decree No. 58, Regulation No. 11522 and any other applicable laws
and regulations;

194

. in compliance with Article 129 of Decree No. 385 and the implementing
instructions of the Bank of Italy, pursuant to which the Issue, trading or
placement of securities in Italy is subject to prior notification to the
Bank of Italy, unless an exemption applies; and

. in compliance with any other applicable notification requirement or
limitation which may be imposed by CONSOB or the Bank of Italy.

The following table shows the underwriting discounts and commissions that we
are to pay to the underwriters in connection with this offering.

Paid by
NPC
-------

Per Bond $

In connection with the offering, Citigroup, on behalf of the underwriters,
may purchase and sell Bonds in the open market. These transactions may include
over-allotment, syndicate covering transactions and stabilizing transactions.
Over-allotment involves syndicate sales of Bonds in excess of the principal
amount of Bonds to be purchased by the underwriters in the offering, which
creates a syndicate short position. Syndicate covering transactions involve
purchases of Bonds in the open market after the distribution has been completed
in order to cover syndicate short positions. Stabilizing transactions consist
of bids for or purchases of Bonds made for the purpose of preventing or
retarding a decline in the market price of the Bonds while the offering is in
progress.

The underwriters may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling commission from a member of the syndicate
when Citigroup, in covering syndicate short positions or making stabilizing
purchases, repurchases Bonds originally sold by that syndicate member.

Any of these activities may have the effect of preventing or retarding a
decline in the market price of the Bonds. They may also cause the price of the
Bonds to be higher than the price that otherwise would exist in the open market
in the absence of these transactions. The underwriters may conduct these
transactions in the over-the-counter market or otherwise. If the underwriters
commence any of these transactions, they may discontinue them at any time.

We estimate that our total expenses for this offering will be .

We expect to deliver the Bonds against payment for the Bonds on or about the
date specified in the last paragraph of the cover page of this prospectus,
which will be the fifth business day following the date of the pricing of the
Bonds. Under Rule 15c6-1 of the Exchange Act, trades in the secondary market
generally are required to settle in three business days, unless the parties to
a trade expressly agree otherwise. Accordingly, purchasers who wish to trade
Bonds on the date of pricing or the next succeeding business day will be
required, by virtue of the fact that the Bonds initially will settle in T+5, to
specify alternative settlement arrangements to prevent a failed settlement.

The underwriters have performed investment banking and advisory services for
us from time to time for which they have received customary fees and expenses.
The underwriters may, from time to time, engage in transactions with and
perform services for us in the ordinary course of their business. In addition,
Citigroup is a lender to us and has provided project financing to us. Citigroup
also holds yen and peso bonds of NPC.

A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters.

We, the Republic and PSALM have agreed, jointly and severally, to indemnify
the underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the underwriters may be
required to make because of any of those liabilities.

195

VALIDITY OF THE BONDS

The validity of the Bonds will be passed upon on our behalf by Ranier B.
Butalid, our General Counsel and the validity of the Guarantee will be passed
upon on behalf of the Republic by Hon. Simeon A. Datumanong, the Secretary of
Justice of the Republic, each as to Philippine law. As to U.S. federal and New
York State law, the validity of the Bonds and the Guarantee will be passed upon
on our behalf and on behalf of the Republic by Allen & Overy, Hong Kong, United
States counsel for us and the Republic. Certain legal matters will be passed
upon for the underwriters by Davis Polk & Wardwell, Hong Kong and New York, New
York, United States counsel for the underwriters, as to matters of U.S. federal
and New York State law, and by Romulo, Mabanta, Buenaventura, Sayoc & de los
Angeles, Manila, Philippines, Philippine counsel for the underwriters, as to
matters of Philippine law. Allen & Overy will rely as to all matters of
Philippine law upon the opinions of Mr. Butalid and Mr. Datumanong. All
statements in this prospectus with respect to matters of Philippine law
relating to us have been passed upon by Mr. Butalid and are made upon his
authority.

196

AUTHORIZED REPRESENTATIVE IN THE UNITED STATES

The authorized agent of National Power Corporation, Power Sector Assets and
Liabilities Management Corporation and the Republic of the Philippines in the
United States is Hon. Linglingay Lacanlale, Consul General, the Philippine
Consulate General, 556 Fifth Avenue, New York, New York 10036-5095.

EXPERTS; OFFICIAL STATEMENTS AND DOCUMENTS

Rogelio M. Murga, in his official capacity as President and Chief Executive
Officer of National Power Corporation, reviewed the information set out in the
prospectus relating to National Power Corporation, which information included
in the prospectus on his authority.

Edgardo M. Del Fonso, in his official capacity as President of Power Sector
Assets and Liabilities Management Corporation, reviewed the information set out
in the prospectus relating to Power Sector Assets and Liabilities Management
Corporation, which information included in the prospectus on his authority.

Hon. Jose Isidro N. Camacho, in his capacity as Secretary of the Department
of Finance of the Republic, reviewed the information set out in the prospectus
relating to the Republic, which information is included in the prospectus on
his authority.

WHERE YOU CAN FIND MORE INFORMATION

National Power Corporation, Power Sector Assets and Liabilities Management
Corporation and the Republic of the Philippines filed a registration statement
with respect to the Bonds with the Securities and Exchange Commission under the
US Securities Act of 1933, as amended, and its related rules and regulations.
You can find additional information concerning National Power Corporation,
Power Sector Assets and Liabilities Management Corporation and the Republic of
the Philippines and the New Bonds in the registration statement and any pre- or
post-effective amendment, including its various exhibits, which may be
inspected at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information
about how to access the documents we have filed with it.

197

GENERAL INFORMATION

1. The Bonds have been accepted for clearance through DTC, Euroclear and
Clearstream, Luxembourg under the Common Code of . The International
Securities Identification Number ("ISIN") for the Bonds is .

2. The issue of the Bonds was approved by the President of the Republic on
August 15, 2002. Approval in principle by Bangko Sentral to the issue of the
Bonds was obtained on May 15, 2003 and final approval was obtained pursuant to
a resolution adopted on , 2003. Final approval by the Board of
Directors of NPC for the issue of the Bonds was obtained on May 14, 2003.

3. Except as disclosed in this prospectus, there has been no significant
change in the condition (financial political, economic or otherwise) or the
affairs of NPC, PSALM or the Republic which is material in the context of the
issue of the Bonds since December 31, 2002.

4. Application has been made to list the Bonds on the Luxembourg Stock
Exchange.

5. Copies of the prospectus, the underwriting agreement, the fiscal agency
agreement and annual reports and budgets published by NPC, PSALM and the
Republic will, for so long as the Bonds are listed on the Luxembourg Stock
Exchange, be available during usual business hours on any weekday (except
Saturdays and public holidays) at the offices of the paying agent in
Luxembourg. So long as the Bonds are represented by Global Bonds, the paying
agent in Luxembourg will act as intermediary between the Luxembourg Stock
Exchange and NPC and the holders of the Bonds.

6. Neither NPC, PSALM nor the Republic is involved in any litigation or
arbitration proceedings relating to claims or amounts which are material in the
context of the issue of the Bonds, and, to the knowledge of NPC and the
Republic, no such litigation or arbitration is pending or threatened.

7. According to Chapter VI, Article 3, point A/II/2 of the Rules and
Regulations of the Luxembourg Stock Exchange, the Bonds shall be freely
transferable and therefore no transaction made on the Luxembourg Stock Exchange
shall be cancelled.

198

INDEX TO NATIONAL POWER CORPORATION'S FINANCIAL STATEMENTS

Report of Commission on Audit, Auditors to National Power Corporation relating to Audited Financial
Statements for the Year ended December 31, 2001.................................................. F-2
Audited Income Statement for the Year ended December 31, 2001...................................... F-3
Audited Balance Sheet as at December 31, 2001...................................................... F-4
Audited Statement of Cash Flows for the Year ended December 31, 2001............................... F-5
Notes to Audited Financial Statements.............................................................. F-7
Report of Commission on Audit, Auditors to National Power Corporation relating to Audited Financial
Statements for the Year ended December 31, 2000.................................................. F-16
Audited Income Statement for the Years ended December 31, 1999 and 2000............................ F-17
Audited Balance Sheet as at December 31, 1999 and 2000............................................. F-18
Audited Statement of Cash Flows for the Years ended December 31, 1999 and 2000..................... F-19
Notes to Audited Financial Statements.............................................................. F-21
Statement regarding Unaudited Financial Statements for the Year ending December 31, 2002........... F-30
Unaudited Income Statement for the Year ended December 31, 2002.................................... F-31
Unaudited Balance Sheet as at December 31, 2002.................................................... F-32
Unaudited Statement of Cash Flows for the year ended December 31, 2002............................. F-33
Notes to Unaudited Financial Statements............................................................ F-35

F-1

REPUBLIC OF THE PHILIPPINES
COMMISSION ON AUDIT
Commonwealth Avenue, Quezon City, Philippines

The Board of Directors
National Power
Corporation Diliman,
Quezon City

We have audited the accompanying balance sheet of the National Power
Corporation as of December 31, 2001, and the related statements of income,
retained earnings, and cash flows for the year then ended, pursuant to Section
2, Article IX-D of the Philippine Constitution and pertinent provisions of
Presidential Decree No. 1445. These financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

Except as discussed in the following paragraphs, we conducted our audit in
accordance with generally accepted state auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance that
the financial statements are free of material misstatement/s. Our audit
included examining, on a test basis, evidence supporting the amount and
disclosures in the financial statements. It is also included assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. We believe that our
audit provides reasonable basis for our opinion.

As discussed in Finding 1, the accuracy of the balance of Land and Land
Holdings account amounting to (Peso)7.332 Billion cannot be
determined/ascertained as the acquisition cost were not indicated in the
inventory. Likewise, as stated in Finding 2, the result of the annual physical
inventory yielded an overage variance of (Peso)712.572 Million when compared
with the balance per books, casting doubt on the validity of the materials,
supplies and equipment inventory account balance.

As disclosed in Note 32 to the financial statements, the Corporation has
contingent claims in several lawsuits amounting to (Peso)342.24 Million while
its contingent liabilities amount to (Peso)15.236 Billion. The ultimate outcome
of these lawsuits cannot presently be determined and no provision for any
contingent liability that may result therefrom has been made in the financial
statements.

In our opinion, except for the effects of the matters discussed in the two
preceding paragraphs, the financial statements referred to above present
fairly, in all material respects, the financial position of the National Power
Corporation as of December 31, 2001, and the results of its operations and its
cash flows for the year then ended in accordance with applicable laws, rules
and regulations and in conformity with generally accepted state accounting
principles.

COMMISSION ON AUDIT

BY: /s/ ATTY. NORBERTO D.
CABIBIHAN
-----------------------------
Atty. Norberto D. Cabibihan
State Auditor V
Corporate Auditor

April 30, 2002

F-2

NATIONAL POWER CORPORATION

AUDITED INCOME STATEMENT
For the Year Ended December 31, 2001

2001
---------------------
pesos

OPERATING REVENUES
Utility Operating Income............................ (Peso) 69,065,009,226
Add: Fuel Cost Adjustment.......................... 47,302,179,043
Other Demand and Energy Adjustment Income......... (2,613,377,800)
Forex Adjustments................................. 3,782,435,442
Transmission Svcs Operating Income................. 391,952,271
---------------------
Total Operating Revenues........................... 117,928,198,182
Less: Prompt Payment Discount...................... 851,913,966
Voltage Discount.................................. 638,007,757
Power Factor Adjustment Income.................... 740,622,373
---------------------
NEW OPERATING REVENUE................................. 115,697,654,086
---------------------
OPERATING EXPENSES
Generation.......................................... 71,070,791,331
Depreciation and Depletion (Note 2A & 2B)........... 14,184,474,000
Amortization of Capacity Fees....................... 17,148,463,963
Transmission & Distribution......................... 1,769,046,259
Administration & General............................ 1,976,310,001
Other Operating Expenses............................ 2,123,249,818
Bad Debts (Note 2F)................................. 588,395,775
---------------------
Total Operating Expenses........................... 108,860,731,147
---------------------
OPERATING INCOME...................................... 6,836,922,939
---------------------
OTHER INCOME
Interest Income (Net)............................... 710,521,349
Revenues from Lease of Electric Plant............... 126,244
Forex Recovery (Note 26)............................ 19,917,458,364
Gain/(Loss) on Diesel/Fuel Transfer................. 122,425,984
Gain on Retirement of Asset......................... 4,291,389
Miscellaneous Income................................ 293,655,353
---------------------
Total Other Income................................. 21,048,478,683
---------------------
INTEREST AND OTHER CHARGES
Interest Expense.................................... 15,108,027,958
Depreciation -- Other Plants/Property............... 1,484,690,185
Finance & Other Bank Charges........................ 2,813,479,630
Privatization & Subsidiarization Expenses (Note 27). 870,561,333
Amortization -- Deferred Forex Differential......... 17,193,385,729
Loss on FOREX Fluctuation........................... 626,456,071
Miscellaneous Expenses.............................. 166,191,314
---------------------
Total Interest and Other Charges................... 38,262,792,220
---------------------
NET INCOME/(LOSS)..................................... (Peso)(10,377,390,598)
=====================

F-3

NATIONAL POWER CORPORATION

AUDITED BALANCE SHEET
For the Year Ended December 31, 2001

2001
-----------------------
pesos

ASSETS
UTILITY PLANT at Appraised Values (Notes 2 & 3)..................................................... (Peso) 474,118,605,369
Less: Accum. Depr'n & Depletion (Notes 2 & 3)..................................................... 231,359,914,604
-----------------------
Net Utility Plant................................................................................. 242,758,690,765
Construction Work in Progress (Note 4)............................................................ 27,310,991,924
-----------------------
Total Utility Plant.............................................................................. 270,069,682,689
-----------------------
EPS UNDER CAPITAL LEASE (Note 5).................................................................... 367,173,171,879
-----------------------
INVESTMENT and OTHER ASSETS
Investment in Government and Other Corporation (Note 6)........................................... 162,767,475
Non-Utility Property -- Net (Note 7).............................................................. 5,960,963,868
Accounts and Other Receivables -- Net (Note 8).................................................... 5,449,627,284
Const. Work in Progress -- Mat'ls and Supplies (Note 4)........................................... 1,843,961,666
Other Assets (Note 9)............................................................................. 48,195,770,090
-----------------------
Total Investments and Other Assets............................................................... 61,613,090,383
-----------------------
CURRENT ASSETS
Cash and Cash Equivalent (Note 10)................................................................ 1,648,274,527
Accounts Receivables..............................................................................
Power Customers -- Net (Note 11).................................................................. 19,653,716,589
Others -- Net (Note 12)........................................................................... 5,317,947,967
Materials and Supplies for Operation (Note 13).................................................... 13,052,966,448
Advances (Note 14)................................................................................ 269,727,203
Prepayments (Note 15)............................................................................. 691,107,757
Court and Other Deposits (Note 31)................................................................ 165,371,478
Cash Advances -- Officers and Employees........................................................... 7,235,119
-----------------------
Total Current Assets............................................................................. 40,806,347,088
-----------------------
DEFERRED CHARGES (Note 16).......................................................................... 264,912,584,737
-----------------------
CONTINGENT ASSETS (Note 17)......................................................................... 1,410,403,117
-----------------------
TOTAL ASSETS........................................................................................ 1,005,985,279,893
-----------------------
PROPRIETARY CAPITAL and LIABILITIES
PROPRIETARY CAPITAL
Capital Stock (Peso)100 par value
Authorized -- (Peso)50,000,000,000 dividend into 500,000,000 shares Issued -- 270,488,708 in 1999
(Note 18)........................................................................................ (Peso) 27,048,870,789
Donated Capital (Note 19)......................................................................... 3,985,874,212
Retained Earnings (Note 20)....................................................................... (34,730,276,282)
Appraisal Capital................................................................................. 95,799,031,296
Contingent Surplus................................................................................ 1,410,403,117
-----------------------
Total Proprietary Capital........................................................................ 93,513,903,132
-----------------------
LONG-TERM DEBT (Net of Current Portion) (Note 21)................................................... 290,135,460,939
-----------------------
LEASE OBLIGATION -- BOT (Note 23)................................................................... 505,036,916,006
-----------------------
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses............................................................. 33,385,182,416
Retention on Contract Payments.................................................................... 989,483,811
Deposits and Trust Funds (Note 21 and Note 24).................................................... 4,470,664,388
Dividends Payable................................................................................. 30,215,838
Lease Payable (Note 23)........................................................................... 30,392,832,482
Notes Payable (Note 22)........................................................................... 11,874,613,870
Interest Payable.................................................................................. 6,469,450,114
Current Portion of Long-Term Debts................................................................ 25,557,948,766
-----------------------
Total Current Liabilities......................................................................... 113,170,391,685
-----------------------
DEFERRED CREDITS (Note 25).......................................................................... 4,128,608,131
-----------------------
TOTAL PROPRIETARY CAPITAL and LIABILITIES........................................................... (Peso)1,005,985,279,893
=======================

F-4

NATIONAL POWER CORPORATION

AUDITED STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2001

2001
---------------------
pesos

CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)............................................................... (Peso)(10,377,390,598)
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Depreciation.................................................................. 14,736,840,185
Depletion..................................................................... 932,324,000
Amortization of Capacity fee.................................................. 17,148,463,963
Amortization of Discount on Debt buy-back..................................... --
Amortization of Bank Charges on DBB........................................... --
Amortization of Bond issue cost............................................... 221,104,569
Amortization of Bond Discount................................................. 129,183,418
Amortization of Deferred Forex Differential................................... 17,193,385,728
Amortization of SPEED Benefit................................................. 856,402,007
Amortization of Financial Assistance.......................................... 185,751,251
Revaluation of Loan charged to Gain on FOREX Fluctuation...................... (670,181,752)
Revaluation of KEPCO Trust Deposit charged to Gain on FOREX Fluctuation....... 47,471,692
(Gain)/Loss on Retirement/Disposal of Assets.................................. (1,207,248)
Currency Conversion........................................................... (7,466)
Condonation of loan charge to Gain on CERA....................................
Changes in Operating Assets and Liabilities
Net of Effects from --
Decrease (Increase) in:
Power Customers Receivables.................................................. 889,142,995
Other Current Receivables.................................................... (1,251,151,081)/(a)/
Materials and Supplies for Operations........................................ 522,483,803
Advances..................................................................... 358,377,272
Prepayments.................................................................. (44,479,436)
Court and Other Deposits..................................................... (62,739,000)
Cash Advances to Officer & Employees......................................... (3,836,384)
Invest. In Gov't Bonds and Other Corp........................................
Accounts and Other Non-Current Receivables................................... 59,732,523
Other Assets................................................................. 414,429,156/(c)(d)/
Other Deferred Charges....................................................... (675,072,571)/(e)/
Increase (Decrease) in:
Accounts Payable and Accrued Exp............................................. (3,084,917,193)
Retention on Contract Payments............................................... 346,205,343
Deposits and Trust Funds..................................................... 1,009,202,320
Interest Payable............................................................. 824,448,921
Other Deferred Credits....................................................... (1,278,679,611)
Receipt of Tax Credit Certificates............................................
Correction of Prior Years Income.............................................. (5,252,580,056)
Total Adjustments............................................................... 43,640,097,348
---------------------
Net Cash Provided for Operating Activities...................................... (Peso) 33,262,706,750
=====================
CASH FLOWS FROM INVESTING ACTIVITIES
Construction Expenditures..................................................... (Peso)(13,824,334,716)
Additions to:.................................................................
Utility Plant................................................................
Non-Utility Property.........................................................
Sale of Power Barges.........................................................
(Inc)/Dec in Preliminary Surveys and Investigations.......................... (109,423,940)/(e)/
(Inc)/Dec in Investment in MEC............................................... (30,393,692)/(d)/
Net Cash Used in Investing Activities........................................... (13,964,152,348)

F-5

NATIONAL POWER CORPORATION

AUDITED STATEMENT OF CASH FLOWS -- (Continued)
For the Year Ended December 31, 2001

2001
---------------------
pesos

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings..................................................... (Peso) 6,854,686,924/(h)/
Bond Flotation................................................. 23,087,781,317
Increase/(Decrease) in Notes Payable........................... 11,524,117,224/(f)/
Grants......................................................... --
Due to Phil. Government........................................ --
Advances -- National Government................................ 2,354,774,661
Payment of Capacity Fees -- BOT................................ (29,571,161,240)
Payment of Advances Bureau of Treasury......................... --
Payment of Loans............................................... (24,183,329,367)/(g)/
Payment of KEPCO Deposit....................................... (449,982,000)
Advances to SRMPP Non Power Components......................... (771,709,716)/(d)/
(Increase)/Decrease in Bond Sinking Fund....................... (13,441,284)/(b)/
(Increase)/Decrease in Other Assets -- Cash Restricted Account. (9,234,133,461)/(d)/
Net Cash Provided (Used) by Financing Activities................. (20,402,396,942)
---------------------
Net Increase (Decrease) in Cash and Cash Equivalent.............. (1,103,842,540)
---------------------
Cash and Cash Equivalent @ Beginning of Year..................... 2,752,117,067
=====================
Cash and Cash Equivalents @ End of Year.......................... (Peso) 1,648,274,527

- --------
(a) Includes Application of Tax Credit Certificates amounting to
(Peso)130,819,342.
(b) Increase in Bond Sinking Fund was accounted as part of financing activities
which consists of principal payment and accrual for interest income of
(Peso)2,697,126 and (Peso)10,744,158 respectively.
(c) Includes the amount withdrawn from the stored energy of Leyte Luzon
corresponding to the surplus energy amounting to (Peso)423,888,603.
(d) The Cash Restaurant and Advances to SRMPP are presented under financing
activities while Investment in MEC is accounted as part of investing
activities.
(e) Includes (Peso)232,465,500 deferred debits pertaining to the payment of
upfront fee on the Euro 500M bond issuance. Preliminary Survey and
Investigation is accounted under investing activities.
(f) Increase in Notes Payable represents the net of the availment of loan of
(Peso)14,750,661,492 and repayments of (Peso)3,226,544,268.
(g) Includes payment of the current portion of Long Term Debt.
(h) Includes availment from foreign loans amounting to (Peso)3,313,628,572 and
other long term debts of (Peso)3,541,058,352.

F-6

NATIONAL POWER CORPORATION

NOTES TO AUDITED FINANCIAL STATEMENTS

1. Primary Function

The primary function of the Corporation is the total electrification of the
Philippines through the development of power from all sources to meet the needs
of consumers, in coordination with/and supported by the agencies of the
government.

2. Significant Accounting Policies

A. Utility Plant and Depreciation

Utility plant is carried in the books at appraised values, except for
additions during the year which are recorded at cost. These assets are revalued
in consonance with NPC's loan covenants with creditor banks and in pursuance to
SFAS No. 12 which permits revaluation of properties, plant and equipment.

B. Appraisal of Utility Plant

Electric Plant in Service are recorded at appraised values in compliance
with ADB's and World Bank's loan covenants and in pursuance to Statement of
Financial Accounting Standard No. 12 which permits the appraisal of property,
plant and equipment.

An independent appraiser conducts the review and appraisal of NPC's assets
once every four years. In the interim, NPC undertakes the internal revaluation
which is adjusted when there are variances between internally appraised figures
and those of the independent appraisers.

The difference between the new over the old appraised values is recorded
under the Appraisal Capital account. This account is treated as a permanent
account and is not diminished by any depreciation charges, following Par. 17 of
SFAS No. 12.

C. Capitalization of Interest

Interest incurred on external borrowings which relate to capital projects in
progress and prior to the commencement of operation are capitalized.

D. Allocation of Support Group Expenses

Expenses of the Home Office Support Group are allocated between operation
and construction. The allocation rate is based on the extent of support
services rendered to operations and capital projects. The present ratio of
operating expenses to capital expenses is 75/25.

Cost Center services that cannot be clearly classified as well as expenses
identified as having no direct effect to projects are treated as one hundred
percent operating expenses.

E. Investments

Local investments are valued at purchase price while foreign investments are
recorded at the date of the transaction using standard booking rates equivalent
to the Bangko Sentral ng Pilipinas (BSP) guiding rate on the last working day
of the preceeding year. Foreign investment balances are then revalued at the
end of each year using the BSP guiding rates.

F-7

Interest earnings on placements follow the accrual method of accounting;
however for short dated placements of less than a month, the interest earnings
are recognized in the books at maturity dates.

F. Receivables

Power and other receivables are stated net of allowance for doubtful
accounts. Allowances are determined through the specific identification of
uncollectible accounts.

G. Materials and Supplies for Operation

Materials and supplies for operation can be categorized into fuel (and its
related products) and non-fuel. The Fuel M & S are composed of the fuel oil,
diesel, coal & thermal chemical stock used by NPC plants for power generation.
These inventories are valued using the last-in-first out (LIFO) method.

The non-Fuel M & S, on the other hand, are valued using the moving average
method and valued using the moving average method and can be further broken
down into the non-fuel M & S of NPC plants and areas and those non-Fuel M & S
assigned to private IPPs.

H. Deferred Taxes and Duties

By virtue of FIRB# 17-87 of the Department of Finance, the Corporation is
exempt from payment of taxes and duties on local oil purchases. Oil suppliers
bill NPC at gross selling price inclusive of taxes and duties. Fuel deliveries
and consumption are recorded in the books net of taxes and duties. Said taxes
and duties are recognized as Deferred Taxes and Duties representing claims from
the Bureau of Internal Revenue and Bureau of Customs. Upon receipt of Tax
Credit Certificates (TCC), the refund is debited to Accounts Receivable-Others
and a colollary entry is made by a debit to Other Expense and a credit to Other
Income.

I. Accounting for Foreign Exchange Fluctuation

Transactions denominated in foreign currencies are recorded at standard
booking rate and then restated at the end of the year using the rate of
exchange ruling at the balance sheet date. Foreign exchange differentials
accruing on loans for projects under construction are recorded as project cost
while differentials on the restatement of outstanding loans used for operating
plants are debited to deferred FOREX Differential account and are amortized
over the remaining life of the loan.

On the other hand, foreign exchange difference from restatement of working
capital loans are recorded as gain/loss on foreign exchange (Forex)
fluctuation. Payments of loans and interest thereof are recorded at prevailing
exchange rate at date of transaction. Any difference thereof from the booking
rate is likewise treated as gain/loss on Forex fluctuation.

J. Accounting for BOT Projects

Total capacity fees for the duration of the cooperation period are
recognized outright in the books by a debit to Electric Plant under Capital
Lease account and a corresponding credit to Lease Obligation under the
Long-Term Debts. Hopewell Pagbilao and Sual Coal Fired Thermal Power Plant are
amortized over 29 and 25 years, respectively while the rest of BOT assets are
amortized over 20 years.

Lease Obligation denominated in foreign currencies are restated at year-end
standard booking rates. Foreign exchange differentials on these restatements
are debited to the Deferred FOREX Differential and amortized over the remaining
economic life of the individual IPP plants.

F-8

K. Income Determination

The Corporation uses the accrual method and an all inclusive concept of
income determination wherein all ordinary and extraordinary items pertaining to
current period are considered in computing net income while items applicable to
prior periods are recorded as adjustment of prior years' income and are
reflected in the Statement of Retained Earnings.

L. Composition of Rate Base

Rate Base is the average value of the net fixed assets in operation at the
beginning and at the end of each year. The value of net fixed assets in
operation equals the gross value of the operating assets less the amount of
accumulated depreciation.

Plants undergoing major rehabilitation/repair and which are out of operation
for less than one calendar year are included in the computation of Rate Base.

3. Utility Plant

Total Utility Plant consists of the following:

Historical Cost Appraised Cost
--------------------- ---------------------
Plant Type 2001 2001
- ---------- --------------------- ---------------------

ELECTRIC PLANTS SERVICE:
DEPRECIABLES:
Steam Production Plant........................... (Peso) 74,983,944,816 (Peso)164,650,140,807
Hydraulic Production Plant....................... 16,016,984,144 94,379,263,510
Other Production Plant........................... 18,153,230,133 38,439,987,459
Transmission Plant............................... 104,214,228,788 158,180,182,240
Distribution Plant............................... 71,730,213 166,399,209
General Plant.................................... 7,182,894 10,713,968
LANDS AND LANDHOLDINGS:
Steam Production Plant........................... 632,318,826 1,622,737,814
Hydraulic Production Plant....................... 222,211,238 1,624,921,710
Other Production Plant........................... 18,694,702 120,134,221
Transmission Plant............................... 973,028,030 2,501,666,344
General Plant.................................... 10,394,260 1,462,241,000
EPS Land on Lease.................................. 0 0
OTHER UTILITY PLANTS:.............................. 7,424,187,688 10,960,217,087
--------------------- ---------------------
(Peso)222,728,135,732 (Peso)474,118,605,369
--------------------- ---------------------
ACCUMULATED DEPRECIATION and DEPLETION DEPRECIATION
Steam Production Plant............................. 23,570,950,991 66,476,026,390
Hydraulic Production Plant......................... 6,978,228,405 60,257,116,228
Other Production Plant............................. 9,901,848,788 22,043,201,989
Transmission Plant................................. 25,032,192,192 60,088,378,119
Distribution Plant................................. 73,128,431 198,277,428
General Plant...................................... 56,746,239 70,470,329
DELETION........................................... 5,599,633,089 16,483,657,160
OTHER UTILITY PLANTS............................... 3,199,612,872 5,742,786,961
--------------------- ---------------------
74,412,341,007 231,359,914,604
===================== =====================
NET UTILITY PLANTS................................. (Peso)148,315,794,725 (Peso)242,758,690,765
===================== =====================

F-9

4. Construction Work in Progress (CWIP)

Cost of projects under constructions is presented as Construction Work in
Progress while stock inventory intended for projects but still in the custody
and within the responsibility of project custodians and stock inventory still
in transit are segregated from the account and classified under Investment and
Other Assets, as follows:

2001
--------------------

Construction Work in Progress -- Work Order............ (Peso)27,310,991,924
Construction Work in Progress -- Materials and Supplies 1,843,961,666
--------------------
(Peso)29,154,953,590
====================

5. Electric Plant under Capital Lease

This account represents the total computed capacity fees of BOT Projects for
the duration of the cooperation period.

2001
---------------------

Electric Plant under Capital Lease (Peso)432,378,241,532
Accumulated Amortization.......... (65,205,069,653)
---------------------
(Peso)367,173,171,879
=====================

6. Investment in Government and Other Corporations

Investments in government and other corporations consist substantially of
investments in sinking funds held for the Corporation's long-term bonds payable.

7. Non-Utility Property

Non-utility property account consists of:

Appraised
Historical Cost Cost
-------------------- --------------------
2001 2001
-------------------- --------------------

Non-Utility lands....... (Peso) 138,873,244 (Peso) 516,113,713
Non-Utility Plants...... 11,134,305,549 38,940,300,204
-------------------- --------------------
11,273,178,793 39,456,413,917
-------------------- --------------------
Accumulated Depreciation (Peso) 8,524,981,138 (Peso)33,495,450,049
-------------------- --------------------
NON-UTILITY PROPERTY Net (Peso) 2,748,197,655 (Peso) 5,960,963,868
==================== ====================

8. Account & Other Receivables

This account consist of:

2001
-------------------

Non-Current Receivables...... (Peso)5,122,080,697
Non-Current Power Receivables 952,052,124
Non-Current Lease Receivable. 2,818,529
-------------------
Total........................ 6,076,951,350
Allowance for Bad-Debts...... (627,324,066)
-------------------
Net.......................... (Peso)5,449,627,284
===================

Non-current receivable includes the (Peso)1.694 Billion Royalty Fees paid to
PNOC-EDC for the unutilized geothermal energy for July 1996 to December 1998
and the (Peso)3.133 Billion receivables from MWSS for their utilization of
Angat Dam pursuant to the optimization project of the government from 1992 to
1997.

F-10

9. Other Assets

Other assets substantially consists of:

2001
--------------------

Stored Energy -- Leyte A & B............. (Peso) 5,241,828,596
Cash-Restricted.......................... 23,119,379,487
Investment in Maintenance Eng'g Ctr...... 208,372,493
Advances to San Roque Non-Power Component 19,577,538,268
Stock for Disposal....................... 48,651,246
--------------------
TOTAL.................................. (Peso)48,195,770,090
====================

The Cash Restricted pertains to the funds intended for the purposes other
than current operations and therefore not immediately available to management
for any disbursement transactions other than its specified purpose.

Stored energy which is booked under Court and other Deposit is presented in
the Balance Sheet as Other Assets in the amount of (Peso)2.016 Billion and
(Peso)3.226 Billion for Leyte A&B, respectively. The said amounts represent
advance payments made to PNOC-EDC for the cost of contracted energy for Leyte
A&B.

The San Roque Multi Purpose Project (SRMP) pertains to the construction of
the Non-Power components such as Watershed management, water quality, flood
control and irrigation of the project. The Memorandum of Agreement (MOA)
covering this said project provides that NPC shall be reimbursed by Department
of Agriculture/National Irrigation Administration, Department of Environment
and Natural Resources (DENR) and Department of Public Works and Highways (DPWH)
in the amount and terms specified in the MOA, through the Department of Finance
(DOF).

10. Cash and Cash Equivalents

This account is composed of:

2001
-------------------

Cash in Bank (Peso)1,435,462,752
Cash on Hand 174,785,445
Working Fund 38,026,330
-------------------
(Peso)1,648,274,527
===================

11. Power Customers Receivables

Receivable from power customers consists of:

2001
--------------------

Power Receivables............. (Peso)17,113,145,790
Accrued Utility Revenue....... 5,309,507,692
Restructured Power Receivables 143,347,323
--------------------
Total......................... 22,566,000,805
Allowance for Bad Debts....... (2,912,284,216)
--------------------
(Peso)19,653,716,589
====================

F-11

12. Other Receivables

Other receivables consists of:

2001
-------------------

Tax Credit Certificates.............. (Peso) 755,598,162
Receivables from National Government. 1,934,240,033
Interest............................. 269,193,021
Rent................................. 333,406,326
Receivables from Officers & Employees 10,196,954
Recoverable from Insurance Co........ 725,680
Receivable -- Others................. 2,483,472,825
-------------------
Total................................ 5,786,833,001
Allowance for Bad Debts.............. (468,885,034)
-------------------
(Peso)5,317,947,967
===================

Receivable -- Others account consists of:

2001
-------------------

Receivables from Private Co..... (Peso)2,142,518,270
Others.......................... 261,161,770
Receivable -- Fuel Oil Suppliers 79,792,785
-------------------
(Peso)2,483,472,825
===================

13. Materials and Supplies for Operation

The account consists of:

2001
--------------------

Materials, Supplies & Equip. Invty....... (Peso) 5,628,661,463
Asset in Trust for Prvt. Pwr. Contractors 3,379,023,176
MSE in Transit -- Operating Plants....... 1,527,317,639
Stock Transfer Clearing Accounts......... 1,086,359,556
Diesel................................... 99,725,462
Materials, Supply Temporary Adj.......... 71,519,879
Coal..................................... 573,194,759
Fuel Oil................................. 388,198,152
Aviation Fuel & Other Oil Products....... 120,561,981
Thermal Chemicals........................ 54,533,612
Stock for Transshipment.................. 21,086,371
Fuel Temporary Adjustment Acct........... 100,418,828
Gasoline................................. 2,365,570
--------------------
Total.................................... (Peso)13,052,966,448
====================

14. Advances

Advances consist of:

2001
-----------------

Advances to Contractors.................. (Peso)195,001,111
Advances to Philippine Geothermal........ 39,647,320
Advances to Gov't Bodies and Institutions 35,078,772
-----------------
Total.................................... (Peso)269,727,203
=================

F-12

15. Prepayments

Prepayments consist of:

2001
-----------------

Marginal and Guaranty Deposits* (Peso)676,132,599
Prepaid Charges/Expenses....... 14,975,158
-----------------
Total.......................... (Peso)691,107,757
=================

- --------
* This consist of transactions requiring deposits to guarantee for the
fulfilment of an obligation.

16. Deferred Charges

Deferred charges includes:

2001
---------------------

Deferred FOREX Differential........ (Peso)251,763,753,104
Other Deferred Debits.............. 6,471,947,205
Deferred Taxes & Duties............ 3,442,810,037
Preliminary Surveys & Investigation 1,313,273,937
Deferred Financial Assistance...... 1,078,284,083
Discount on NPC Bonds Payable...... 478,492,943
Deferred Repairs & Maintenance..... 150,268,842
Other.............................. 213,754,586
---------------------
Total.............................. (Peso)264,912,584,737
=====================

The Deferred FOREX Differential mainly includes the restatement of the
outstanding balances of foreign currency denominated loans and lease obligation
on BOT plants while the bulk of Other Debits includes expenses set up for the
SPEED benefits of NPC employees. The Deferred Taxes and Duties pertain to the
tax and duty exemption privileges of the Corporation in its purchase of
petroleum products which are paid by the Corporation at gross. Such taxes and
duties shall become refundable by tax collecting agencies such as BIR and the
Bureau of Customs.

17. Contingent Assets/Surplus

The account consists of disallowances in post-audit, as well as claims for
unrelieved losses of NPC properties and claims for all established inventory
shortages of Property Custodians. The contra account for these Contingent
Assets is Contingent Surplus which is presented as part of the capital accounts
in the Balance Sheet.

18. Capital Stock

No additional Capital Stock was issued in 2001. The last issuance was made
in 1999 equivalent to 5,918,550 shares representing partial payment of the
stock dividend declared in CY 1994.

19. Donated Capital

These are grants received from foreign governments and lending institutions
which were used to finance the implementation of various projects of NPC.

20. Retained Earnings

Retained Earnings were appropriated for Bond Sinking Fund equivalent to 5%
of Net Operating Income as provided for by the NPC Charter.

F-13

21. Long-Term Debts

This account consists of:

2001
---------------------

Foreign Loans & Other Long-term Debts... (Peso)204,702,339,727
NPC Bonds Payable....................... 100,042,590,000
Due to Phil. Gov't & its Agencies....... 7,427,305,978
KEPCO Security Deposit.................. 3,521,174,000
---------------------
Total................................... (Peso)315,693,409,705
---------------------
Less: Current Portion
-- Foreign Loans & Other Long-term Debts 17,301,773,678
-- NPC Bonds Payable.................... 7,710,600,000
-- Due to Phil. Gov't & its Agencies.... 545,575,088
25,557,948,766
---------------------
Total................................... (Peso)290,135,460,939
=====================

Foreign loans are restated at year-end based on the following BSP guiding
rates on foreign currencies:

BP
Guiding
Rates
--------
12-31-01
--------

Dollar............. $1 51.4040
Yen................ (Yen)1 .3904
Austrian Schilling. AS1 3.2990
Deutsche Mark...... DM1 23.2100
French Franc....... FF1 6.9204
Swiss Franc........ SFR1 30.6177
Great Britain Pound GBP1 74.7106

22. Notes Payable

This account consist of short term loan availed from the Bureau of treasury
and due for payment in February 2002.

23. Lease Obligation -- BOT

This account consists of:

2001
---------------------

Lease Obligation..... (Peso)535,429,748,488
Less: Current Portion 30,392,832,482
---------------------
Total................ (Peso)505,036,916,006
=====================

Total capacity fees for BOT Plants were recorded as Electric Plant under
Capital Lease with a corresponding credit to Lease Obligations. Estimated
capacity fees amounting to (Peso)30 Billion payable in 2001 was set-up to
current liabilities under the Current Portion of Lease Obligation account.

24. Deposits and Trust Funds

The account substantially consists of the (Peso)4.278 Billion total payments
made thru Escrow agent representing 60% of the service fees required in the
provisional agreement executed with Philippine Geothermal, Inc. (PGI). The
original service contract with PGI expired on September 30, 1996.

F-14

25. Deferred Credits

Deferred Credits include advances for other work in progress, advances from
Bureau of Treasury for servicing the indebtedness of NPC.

26. FOREX Recovery

For proper matching of cost and revenue, recovery from FOREX I, which is a
recovery of peso fluctuation on principal repayments, is recorded as other
income while FOREX II, which is a recovery of foreign denominated other
operating expenses is recorded as part of operating revenue.

Effective August 26, 1994, the corporation included in the customer's power
bills Foreign Exchange Adjustment charges intended to recover the Corporation's
foreign exchange losses arising from the servicing of its principal
indebtedness (FOREX I) and related foreign operating expenses (FOREX II).

27. Privatization and Subsidiarization

Pursuant to Board Resolution No. 96-148 dated June 24, 1996, privatization
related expenses were classified from Operating Expenses to Other Expenses. In
1997, these included the cost of retirement benefits such as gratuity pay,
terminal and accrued leaves and expenses incurred by Privatization and
Restructuring External Office (PREO). However, since the imminent privatization
of NPC is clearly unrelated to its ordinary and typical activities, which is
expected to benefit one or more future periods, the corresponding cost of
retirement benefits, such as gratuity pay, terminal and accrued leaves related
to operation was treated as deferred debits to be amortized over two (2) years
starting the succeeding year, while the cost of benefit pertaining to
Engineering was treated as part of the Construction Work in Progress.

For CY 2001, the amount certified for obligation is (Peso)170 Million and
(Peso)1,630 Million for Engineering and Non-Engineering, respectively.

28. Taxes & Licenses

Pursuant to BIR Ruling #018-2000, Section 32 (B) (7) (b) of the Code (supra)
dated January 20, 2002, the income of the National Power Corporation from its
operations as a public utility shall be exempt from corporate income tax.

The enactment of the local government code has empowered the Local
Government Units to create their own sources of revenue and to levy taxes.
Pursuant to this, effective January 1992, the payment of realty, franchise tax
and Local Government Unit's share in the national wealth became a contracted
obligation of NPC. Total taxes in 2001 amounted of (Peso)1.178 Billion.

29. PNOC-EDC Shortfall Billings

PNOC-EDC has informed the Corporation that it has outstanding receivables on
fuel shortfall from NPC in the amount of (Peso)754.0 Million. The account has
been left under advisement until the same can be included in the design of NPC
power rates. NPC has not recognized this account.

30. Pending Cases

The Corporation has contingent claims in several lawsuits amounting to
(Peso)342.24 million while its contingent liabilities amount to a total of
(Peso)15.236 billion.

31. Court and Other Deposits

This account includes the amount deposited with the provincial, municipal or
city courts and with other entities as a guaranty for the fulfillment of
obligation and for other purposes.

F-15

REPORT OF COMMISSION ON AUDIT, AUDITORS TO NATIONAL POWER CORPORATION

REPUBLIC OF THE PHILIPPINES
COMMISSION ON AUDIT
Commonwealth Avenue, Quezon City, Philippines

STATE AUDITOR'S REPORT ON THE FINANCIAL STATEMENTS

The Board of Directors
National Power
Corporation Diliman,
Quezon City

We have audited the accompanying balance sheet of the National Power
Corporation as of December 31, 2000, and the related statements of income,
retained earnings, and cash flows for the year then ended, pursuant to Section
2, Article IX-D of the Philippine Constitution and pertinent provisions of the
Presidential Decree No. 1445. These financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an option on
these financial statements based on our audit.

We conducted our audit in accordance with generally accepted state auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance that the financial statements are free of material
misstatement/s. Our audit included examining, on a test basis, evidence
supporting the amount and disclosures in the financial statements. It also
included assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audit provides reasonable basis for our
opinion.

As discussed in Finding 1, the cash in bank balance is unreliable as it
included abnormal and closed accounts, and deposits not yet posted by the banks
in the amount of (Peso)32.088M. Likewise, as stated in Finding 2, the balance
of Materials and Supplies for Operation account is doubtful due to the
substantial difference between the balance per book and balance per count
amounting to (Peso)347.225M and the inclusion of (Peso)44.238M worth of
obsolete and unserviceable stocks.

As disclosed in Note 32 to the financial statements, the Corporation is a
defendant in several lawsuits involving a total of (Peso)7,922 billion and a
claimant in other lawsuits amounting to (Peso)3,376 billion. The ultimate
outcome of these lawsuits cannot presently be determined and no provision for
any contingent liability that may result has been made in the financial
statements.

In our opinion, except for the effects of the matters discussed in the two
preceding paragraphs, the financial statements referred to above present
fairly, in all material respects, the financial position of the National Power
Corporation as of December 31, 2000, and the results of its operations and its
cash flows for the year then ended in accordance with applicable laws, rules
and regulations and in conformity with generally accepted state accounting
principles.

COMMISSION ON AUDIT

BY: /s/ NORBERTO D. CABIBIHAN
-----------------------------
Norberto D. Cabibihan
State Auditor V
Auditor-In-Charge

May 14, 2001

F-16

NATIONAL POWER CORPORATION

AUDITED INCOME STATEMENT
For the Years Ended December 31, 1999 and 2000

1999 2000
-------------------- ---------------------
pesos pesos

OPERATING REVENUES
Utility Operating Income........................... (Peso)65,229,050,334 (Peso) 66,632,376,294
Add: Fuel Cost Adjustment......................... 24,400,940,028 31,688,162,750
Other Demand and Energy Adjustment income........ 68,488,324 113,235,032
Forex Adjustments................................ 1,614,171,396 1,691,150,626
Transmission Svcs Operating Income............... 279,956,566 2,038,817,194
-------------------- ---------------------
Total Operating Revenues.......................... 91,592,606,648 102,163,741,896
Less: Prompt payment Discount..................... 730,098,997 788,318,396
Voltage Discount................................. 569,806,335 594,472,349
Power factor Adjustment Income................... 607,034,839 661,536,002
-------------------- ---------------------
NET OPERATING REVENUE................................ 89,685,666,477 100,119,415,149
-------------------- ---------------------
OPERATING EXPENSES
Generation......................................... 51,861,373,373 59,314,800,427
Depreciation and Depletion (Note 2A & 2B).......... 4,193,443,806 13,304,703,750
Amortization -- Elec. Plant Under Capacity Lease... 8,946,617,561 15,327,380,562
Transmission & Distribution........................ 1,609,049,474 1,887,484,052
Administration & General Lease..................... 1,987,579,458 1,755,975,451
Other Operating Expenses........................... 1,981,223,689 2,531,399,177
Bad Debts (Note 2F)................................ 617,471,966 560,015,907
-------------------- ---------------------
Total Operating Expenses.......................... 81,196,759,327 94,681,759,326
-------------------- ---------------------
OPERATING INCOME..................................... 8,488,907,150 5,437,655,823
-------------------- ---------------------
OTHER INCOME
Subsidy/(Tax Credit Certificate)................... 69,440,348 --
Interest Income (Net of Withholding Tax)........... 465,030,689 1,251,994,599
Revenues from Lease of Electric Plant.............. 165,044,938 157,223,306
Discount Amortization -- Debt Buy Back............. 119,035,527 --
Forex Recovery (Note 25)........................... 8,205,425,841 14,723,293,764
Gain on Retirement of Asset........................ 148,331 1,282,965
Miscellaneous Income............................... 402,843,831 354,492,665
-------------------- ---------------------
Total Other Income................................ 9,426,969,505 16,488,287,299
-------------------- ---------------------
INTEREST AND OTHER CHARGES
Interest Expense................................... 12,954,658,624 15,064,480,046
Subsidy/Tax Credit Certificate..................... 69,440,348 --
Depreciation -- Other Plants/Property.............. 854,331,587 1,110,831,704
Finance & Other Bank Charges....................... 1,717,928,991 2,207,844,618
Privatization & Subsidiarization Expense (Note 26). 448,865,614 782,554,777
Amortization -- Deferred Forex Differential........ 7,345,360,953 14,605,367,977
Loss on FOREX Fluctuation.......................... 324,534,235 1,061,801,370
Loss (Gain on Diesel/Fuel Transfer)................ (31,335,122) 14,379,872
Miscellaneous Expenses............................. 185,450,506 42,450,294
-------------------- ---------------------
Total Interest and Other Charges.................. 23,869,235,736 34,889,710,658
-------------------- ---------------------
NET INCOME/(LOSS).................................... (Peso)(5,953,359,081) (Peso)(12,963,767,536)
==================== =====================

See accompanying Notes to Financial Statements.

F-17

NATIONAL POWER CORPORATION

AUDITED BALANCE SHEET
As at December 31, 1999 and 2000

1999
---------------------
pesos

ASSETS
UTILITY PLANT at Appraised Values (Notes 2 & 3)............................................... (Peso)477,323,171,780
Less: Accum. Depr'n and Depletion (Notes 2 & 3)............................................. 221,875,070,379
---------------------
Net Utility Plant........................................................................... 255,448,101,401
Construction Work in Progress (Note 4)...................................................... 22,159,382,891
---------------------
Total Utility Plant........................................................................ 277,607,484,292
---------------------
EPS under CAPITAL LEASE (Note 5).............................................................. 350,860,269,346
---------------------
INVESTMENTS and OTHER ASSETS
Investment in Government and Other Corporations (Note 6).................................... 136,837,178
Non-Utility Property -- Net (Note 7)........................................................ 2,609,173,343
Accounts and Other Receivables -- Net (Note 8).............................................. 5,447,430,506
Constr. Work in Progress -- Mat'ls and Supplies (Note 4).................................... 2,662,774,289
Other Assets (Note 9)....................................................................... 35,796,320,125
---------------------
Total Investments and Other Assets......................................................... 46,652,535,441
---------------------
CURRENT ASSETS
Cash and Cash Equivalents (Note 10)......................................................... 3,487,637,621
Accounts Receivables
Power Customers -- Net (Note 11).............................................................. 13,247,044,313
Others -- Net (Note 12)..................................................................... 2,957,382,546
Materials and Supplies for Operation (Note 13).............................................. 12,167,667,587
Advances (Note 14).......................................................................... 1,122,626,627
Prepayments (Note 15)....................................................................... 789,216,744
Court and Other Deposits.................................................................... 167,039,668
Cash Advances -- Officers and Employees..................................................... 7,406,071
---------------------
Total Current Assets....................................................................... 33,946,021,177
---------------------
DEFERRED CHARGES (Note 16).................................................................... 151,609,042,292
---------------------
CONTINGENT ASSETS (Note 17)................................................................... 1,421,294,485
---------------------
TOTAL ASSETS.................................................................................. 862,096,647,033
=====================
PROPRIETARY CAPITAL and LIABILITIES
PROPRIETARY CAPITAL
Capital Stock (Peso)100 par value
Authorized -- (Peso)50,000,000,000 divided into 500,000,000 shares Issued -- 270,488,708 in
1999 (Note 18)............................................................................. (Peso) 27,048,870,789
Donated Capital (Note 19)................................................................... 4,027,817,707
Retained Earnings (Note 20)................................................................. (2,828,670,820)
Appraisal Capital........................................................................... 95,703,365,584
Contingent Surplus.......................................................................... 1,421,294,485
---------------------
Total Proprietary Capital.................................................................. 125,372,677,745
---------------------
LONG-TERM DEBTS (Net of Current Portion) (Note 21)............................................ 238,824,977,288
---------------------
LEASE OBLIGATION -- BOT (Note 22)............................................................. 406,200,592,454
---------------------
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses....................................................... 27,028,142,497
Retention on Contract Payments.............................................................. 1,215,100,022
Deposits and Trust Funds (Note 21 & Note 23)................................................ 2,831,854,735
Dividends Payable........................................................................... 30,215,838
Lease Payable (Note 22)..................................................................... 22,122,560,635
Notes Payable............................................................................... 1,550,000,000
Interest Payable............................................................................ 4,785,783,838
Current Portion of Long-Term Debts.......................................................... 30,681,544,941
---------------------
Total Current Liabilities.................................................................. 90,245,202,506
---------------------
DEFERRED CREDITS (Note 24).................................................................... 1,453,197,040
---------------------
TOTAL PROPRIETARY CAPITAL and LIABILITIES..................................................... (Peso)862,096,647,033
=====================

2000
---------------------
pesos

ASSETS
UTILITY PLANT at Appraised Values (Notes 2 & 3)............................................... (Peso)459,274,704,521
Less: Accum. Depr'n and Depletion (Notes 2 & 3)............................................. 215,469,607,490
---------------------
Net Utility Plant........................................................................... 243,805,097,031
Construction Work in Progress (Note 4)...................................................... 29,721,356,325
---------------------
Total Utility Plant........................................................................ 273,526,453,356
---------------------
EPS under CAPITAL LEASE (Note 5).............................................................. 360,033,658,714
---------------------
INVESTMENTS and OTHER ASSETS
Investment in Government and Other Corporations (Note 6).................................... 148,482,469
Non-Utility Property -- Net (Note 7)........................................................ 6,697,763,868
Accounts and Other Receivables -- Net (Note 8).............................................. 5,254,143,176
Constr. Work in Progress -- Mat'ls and Supplies (Note 4).................................... 2,337,790,548
Other Assets (Note 9)....................................................................... 39,550,039,561
---------------------
Total Investments and Other Assets......................................................... 53,988,219,622
---------------------
CURRENT ASSETS
Cash and Cash Equivalents (Note 10)......................................................... 2,752,117,067
Accounts Receivables
Power Customers -- Net (Note 11).............................................................. 20,828,032,941
Others -- Net (Note 12)..................................................................... 2,868,450,648
Materials and Supplies for Operation (Note 13).............................................. 13,201,407,320
Advances (Note 14).......................................................................... 578,111,970
Prepayments (Note 15)....................................................................... 830,017,909
Court and Other Deposits.................................................................... 103,171,487
Cash Advances -- Officers and Employees..................................................... 3,398,735
---------------------
Total Current Assets....................................................................... 41,164,708,077
---------------------
DEFERRED CHARGES (Note 16).................................................................... 259,646,293,722
---------------------
CONTINGENT ASSETS (Note 17)................................................................... 1,414,670,644
---------------------
TOTAL ASSETS.................................................................................. 989,774,004,135
=====================
PROPRIETARY CAPITAL and LIABILITIES
PROPRIETARY CAPITAL
Capital Stock (Peso)100 par value
Authorized -- (Peso)50,000,000,000 divided into 500,000,000 shares Issued -- 270,488,708 in
1999 (Note 18)............................................................................. (Peso) 27,048,870,789
Donated Capital (Note 19)................................................................... 3,985,874,212
Retained Earnings (Note 20)................................................................. (17,120,169,294)
Appraisal Capital........................................................................... 95,801,691,348
Contingent Surplus.......................................................................... 1,414,670,644
---------------------
Total Proprietary Capital.................................................................. 111,130,937,699
---------------------
LONG-TERM DEBTS (Net of Current Portion) (Note 21)............................................ 292,000,807,629
---------------------
LEASE OBLIGATION -- BOT (Note 22)............................................................. 485,805,843,742
---------------------
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses....................................................... 35,719,940,417
Retention on Contract Payments.............................................................. 755,480,126
Deposits and Trust Funds (Note 21 & Note 23)................................................ 3,371,462,068
Dividends Payable........................................................................... 30,215,838
Lease Payable (Note 22)..................................................................... 25,827,603,184
Notes Payable............................................................................... --
Interest Payable............................................................................ 5,650,902,433
Current Portion of Long-Term Debts.......................................................... 27,078,596,473
---------------------
Total Current Liabilities.................................................................. 98,434,200,539
---------------------
DEFERRED CREDITS (Note 24).................................................................... 2,402,214,526
---------------------
TOTAL PROPRIETARY CAPITAL and LIABILITIES..................................................... (Peso)989,774,004,135
=====================

See accompanying Notes to Financial Statements.

F-18

NATIONAL POWER CORPORATION

AUDITED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1999 and 2000

1999 2000
--------------------- ---------------------
pesos pesos

CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)............................................................... (Peso) (5,953,359,081) (Peso)(12,963,767,536)
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Depreciation.................................................................. 14,294,511,392 13,586,547,454
Depletion..................................................................... 753,264,000 828,988,000
Amortization of Capacity fee.................................................. 8,946,617,561 15,327,380,562
Amortization of Discount on Debt buy-back..................................... (119,035,527) --
Amortization of Bank Charges on DBB........................................... 9,962,289 --
Amortization of Bond issue cost............................................... 30,652,424 152,842,595
Amortization of Bond Discount................................................. 9,963,499 11,462,239
Amortization of Deferred Forex Differential................................... 7,345,360,954 14,605,367,976
Amortization of SPEED Benefit................................................. 350,000,000 764,870,622
Amortization of Financial Assistance.......................................... 81,937,409 165,700,784
Revaluation of Loan charged to Gain on FOREX Fluctuation...................... 1,146,556,519 928,804,671
Revaluation of KEPCO Trust Deposit charged to Gain on FOREX Fluctuation....... 53,465,355 369,964,579
(Gain)/Loss on Retirement of Assets........................................... (322,887,479) (1,018,956)
Currency Conversion from SDR to $............................................. -- 23,889,996
Condonation of loan charge to Gain on CERA.................................... -- (119,823)
Changes in Operating Assets and Liabilities
Net of Effects from --
Decrease (Increase) in:
Power Customers Receivables.................................................. (1,176,350,447) (7,535,155,800)
Other Current Receivables.................................................... 1,570,712,057 4,682,724
Materials and Supplies for Operation......................................... 844,250,963 (1,128,710,214)
Advances..................................................................... 267,949,820 (61,780,166)
Prepayments.................................................................. (48,373,335) (40,801,164)
Court and Other Deposits..................................................... 34,260,374 55,527,490
Cash Advances to Officer & Employees......................................... (2,484,379) 4,007,336
Invest. In Gov't Bonds and Other Corp........................................ (3,500) --
Accounts and Other No-Current Receivable..................................... (110,290,561) 215,859,341
Other Assets (Note 9)........................................................ 583,652,697 169,360,045
Other Deferred Credits....................................................... (1,793,966,475) (293,771,019)
Increase (Decrease) in:
Accounts Payable and Accrued Exp............................................. 1,934,846,996 8,302,213,094
Retention on Contract Payments............................................... (1,119,686,267) (452,393,281)
Deposits and Trust Funds..................................................... 1,277,626,852 473,682,975
Interest Payable............................................................. 460,333,227 866,052,193
Other Deferred Credits....................................................... 56,962,833 616,658,446
Receipt of Tax Credit Certificates............................................ 69,440,348
Correction of Prior Years Income.............................................. (374,242,385) (877,590,036)
Total Adjustments............................................................... 35,055,007,214 47,082,432,663
--------------------- ---------------------
Net Cash Provided for Operating Activities...................................... (Peso) 29,101,648,133 (Peso) 34,118,665,127
CASH FLOWS FROM INVESTING ACTIVITIES
Construction Expenditures..................................................... (Peso)(10,928,332,771) (Peso) (9,712,223,717)
Additions to:
Utility Plant................................................................ -- --
Non-Utility Property......................................................... -- --
Sale of Power Barges......................................................... 2,111,986,647 --
(Inc)/Dec in Preliminary Surveys and Investigations.......................... 35,998,500 63,582,820
(Inc)/Dec in Investment in MEC............................................... (41,091,828) (17,242,943)
Net Cash Used in Investing Activities........................................... (8,821,439,452) (9,665,883,840)
--------------------- ---------------------

F-19

NATIONAL POWER CORPORATION

AUDITED STATEMENT OF CASH FLOWS -- (Continued)
For the Years Ended December 31, 1999 and 2000

1999 2000
--------------------- ---------------------
pesos pesos

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings..................................................... 38,276,936,798 9,009,629,062
Bond Flotation................................................. 20,156,500,000
Increase/Decrease in Notes Payable............................. (5,400,310,000) (1,550,000,000)
Grants......................................................... 128,470,121 (41,943,495)
Due to Phil. Government........................................ 1,952,950,000
Advances -- National Government................................ 6,759,723,724 332,449,038
Payment of Capacity Fees -- BOT................................ (13,402,372,593) (23,412,699,784)
Payment of Advances Bureau if Treasury......................... (6,422,437,917)
Payment of Loans............................................... (19,930,683,900) (28,016,150,082)
Payment of KEPCO Deposit....................................... (527,296,500) (362,817,000)
Advances to SRMPP Non-Power Components......................... (4,883,096,133) (7,248,322,544)
(Increase)/Decrease in Bond Sinking Fund....................... (11,645,291) (11,645,291)
(Increase)/Decrease in Other Assets -- Cash Restricted Account. (16,696,646,888) 5,956,698,255
Net Cash Provided by Financing Activities........................ (20,156,408,579) (25,188,301,841)
--------------------- ---------------------
Net Increase (Decrease) in Cash and Cash Equivalent.............. 123,800,102 (735,520,554)
Cash and Cash Equivalents at Beginning of Year................... 3,363,837,519 3,487,637,621
--------------------- ---------------------
Cash and Cash Equivalents at End of Year......................... (Peso) 3,487,637,621 (Peso) 2,752,117,067
===================== =====================

F-20

NATIONAL POWER CORPORATION

NOTES TO AUDITED FINANCIAL STATEMENTS

1. Primary Function

The primary function of the Corporation is the total electrification of the
Philippines through the development of power from all sources to meet the needs
of rural electrification, in coordination with/and supported by the agencies of
the government.

2. Significant Accounting Policies

A. Utility Plant and Depreciation

Utility plant is carried in the books at appraised values, except for
additions during the year which are recorded at cost. These assets are revalued
in consonance with NPC's loan covenants with creditor banks and in pursuant to
SFAS No. 12 which permits revaluation of properties, plant and equipment.

B. Appraisal of Utility Plant

C. Capitalization of Interest

Interest incurred on external borrowings which relate to capital projects in
progress and prior to the commencement of operation are capitalized.

D. Allocation of Support Group Expenses

Cost Center services that cannot be clearly classified as well as expenses
identified as having no direct effect to projects are treated as one hundred
percent operating expenses.

E. Investments

Local investments are valued at purchase price while foreign investments are
recorded at the date of the transaction using standard booking rates equivalent
to the Bangko Sentral ng Pilipinas ("BSP") guiding rate on the last working day
of the preceding year. Foreign investment balances are then revalued at the end
of each year using the BSP guiding rates.

Interest earnings on placements follow the accrual method of accounting:
however for short dated placements of less than a month, the interest earnings
are recognized in the books at maturity dates.

F. Receivables

Power and other receivables are stated net of allowance for doubtful
accounts. Allowances are determined through the specific identification of
uncorrectable accounts.

F-21

G. Materials and Supplies for Operation

Materials and supplies for operation can be categorized into fuel (and other
related product) and non-fuel. The Fuel M & S are composed of the fuel oil,
diesel, coal & thermal chemical stocks used by NPC plants for power generation.
These inventories are valued using the last-in-first out ("LIFO") method.

The non-Fuel M & S, on the other hand, are valued using the moving average
method and can be further broken down into the non-Fuel M & S of NPC plants and
areas and those non-Fuel M & S assigned to private IPPs.

H. Deferred Taxes and Duties

By virtue of FIRB# 17-87 of the Department of Finance, the Corporation is
exempt from payment of taxes and duties on local oil purchases. Oil suppliers
bill NPC at gross selling price inclusive of taxes and duties. Fuel deliveries
and consumption are recorded in the books net of taxes and duties. Said taxes
and duties are recognized as Deferred Taxes and Duties representing claims from
the Bureau of Internal Revenue and Bureau of Customs. Upon receipt of Tax
Credit Certificates, the refund is debited to Accounts Receivable-Others and a
corollary entry is made by a debit to Other Expense and a credit to Other
Income.

I. Accounting for Foreign Exchange Fluctuation

On the other hand, foreign exchange difference from restatement of working
capital loans are recorded as gain/loss on foreign exchange ("FOREX")
fluctuation. Payments of loans and interest thereof are recorded at prevailing
exchange rate at date of transaction. Any difference thereof from the booking
rate is likewise treated as gain/loss on Forex fluctuation.

J. Accounting Treatment for BOT Projects

Total capacity fees for the duration of the cooperation period are
recognized outright in the books by a debit to Electric Plant under Capital
Lease account and a corresponding credit to Lease Obligation under the
Long-Term Debts for the unpaid portion of the capital recovery fees. Hopewell
Phgbilao and Sual Coal Fired Thermal Power Plant are amortized over 29 and 25
years, respectively while the rest of BOT assets are amortized over 20 years.

Lease Obligation denominated in foreign currencies are restated at year-end
exchange rate. Foreign exchange differentials on these restatements are debited
to the Deferred FOREX Differential and amortized over the remaining life of the
individual IPP contracts.

K. Income Determination

L. Composition of Rate Base

Plants undergoing major rehabilitation/repair and which are out of operation
for less than one calendar year are included in the computation of Rate Base.

F-22

3. Utility Plant

Total Utility Plant consists of the following:

Historical Cost Appraised Cost
------------------------------------------- -------------------------------------------
Plant Type 2000 1999 2000 1999
- ---------- --------------------- --------------------- --------------------- ---------------------

ELECTRIC PLANTS SERVICE:
DEPRECIABLES:
Steam Production Plant..... (Peso) 2,401,438,789 (Peso) 93,242,558,971 (Peso)161,906,381,366 (Peso)176,817,191,945
Hydraulic Production Plant. 15,456,345,730 15,423,627,526 75,332,683,228 75,274,954,111
Other Production Plant..... 18,072,221,794 33,020,692,977 38,359,962,974 45,549,013,214
Transmission Plant......... 92,427,736,077 88,397,402,919 146,231,837,733 142,143,255,486
Distribution Plant......... 68,832,254 67,523,226 190,668,469 194,092,098
General Plant.............. 7,182,889 23,308,713 10,713,963 21,516,406
LANDS AND LANDHOLDINGS:
Steam Production Plant..... 392,772,193 371,340,745 1,383,191,181 1,662,203,950
Hydraulic Production Plant. 211,565,829 211,553,100 1,371,128,483 1,371,128,483
Other Production Plant..... 12,788,102 12,287,365 114,227,621 140,753,229
Transmission Plant......... 824,985,159 840,435,142 2,422,763,980 2,399,543,365
General Plant.............. 10,394,260 10,394,260 1,462,241,000 1,462,241,000
EPS Land on Lease............ 6,860,182 6,860,182 187,738,000 187,738,000
OTHER UTILITY PLANTS......... 7,844,277,731 7,644,366,430 30,301,166,523 30,099,540,493
--------------------- --------------------- --------------------- ---------------------
(Peso)207,737,400,989 (Peso)239,272,351,556 (Peso)459,274,704,521 (Peso)477,323,171,780
===================== ===================== ===================== =====================
ACCUMULATED DEPRECIATION and
DEPLETION DEPRECIATION 57,231,335,472 51,645,032,660 175,635,075,424 183,287,659,482
Steam Production Plant....... 21,736,093,242 21,864,241,254 62,059,936,184 72,808,728,561
Hydraulic Production Plant... 6,111,537,732 5,765,211,520 39,478,622,052 37,802,977,287
Other Production Plant....... 8,970,854,204 9,390,244,225 20,463,118,405 23,191,527,304
Transmission Plant........... 20,385,801,627 14,603,496,654 53,494,085,665 49,346,265,644
Distribution Plant........... 22,262,428 20,903,942 133,162,789 132,162,511
General Plant................ 4,786,239 9,935,065 6,150,329 5,998,175
DEPLETION.................... 4,926,994,095 4,420,664,555 15,449,926,166 14,582,516,626
OTHER UTILITY PLANTS......... 3,409,049,148 3,140,561,939 24,384,605,900 24,004,894,271
--------------------- --------------------- --------------------- ---------------------
65,567,378,715 59,215,259,154 215,469,607,490 221,875,070,379
--------------------- --------------------- --------------------- ---------------------
NET UTILITY PLANT............ (Peso)142,170,022,274 (Peso)180,057,092,402 (Peso)243,805,097,031 (Peso)255,488,101,401
===================== ===================== ===================== =====================

4. Construction Work in Progress ("CWIP")

Cost of projects under construction is presented as Construction Work in
Progress while stock inventory intended for projects but still in the custody
and within the responsibility of project custodians and stock inventory still
in transit are segregated from the account and classified under Investment and
Other Assets, as follows:

2000 1999
-------------------- --------------------

Construction Work in Progress -- Work Order............ (Peso)29,721,356,325 (Peso)22,159,382,891
Construction Work in Progress -- Materials and Supplies 2,337,790,548 2,662,774,289
-------------------- --------------------
(Peso)32,059,146,873 (Peso)24,822,157,180
==================== ====================

5. Electric Plant Under Capital Lease

This account represents the total computed capacity fees of BOT Projects for
the duration of the cooperation period.

2000 1999
--------------------- ---------------------

Electric Plant under Capital Lease (Peso)408,206,958,161 (Peso)383,706,188,231
Accumulated Amortization.......... (48,173,299,447) (32,845,918,885)
--------------------- ---------------------
(Peso)360,033,658,714 (Peso)350,860,269,346
===================== =====================

F-23

6. Investment in Government and Other Corporations

Investments in governing and other corporations consists substantially of
investments in sinking funds held for the Corporation's long-term bonds payable.

7. Non-Utility Property

Non-utility property account consists of:

Historical Coat Appraised Cost
---------------------------------------- -----------------------------------------
Plant Type 2000 1999 2000 1999
- ---------- -------------------- ------------------- -------------------- --------------------

Non-Utility Lands....... 138,873,244 78,881,838 516,113,713 211,573,354
Non-Utility Plants...... 11,134,305,549 3,268,970,599 38,940,300,204 14,147,013,125
-------------------- ------------------- -------------------- --------------------
(Peso)11,273,178,793 (Peso)3,347,852,437 (Peso)39,456,413,917 (Peso)14,358,586,479
Accumulated Depreciation 8,228,432,138 2,835,195,701 32,758,650,049 11,749,413,136
-------------------- ------------------- -------------------- --------------------
NON-UTILITY PROPERTY Net (Peso) 3,044,746,655 (Peso) 512,656,736 (Peso) 6,697,763,868 (Peso) 2,609,173,343
==================== =================== ==================== ====================

8. Account & Other Receivables

This account consists of:

2000 1999
------------------- -------------------

Non-Current Receivables...... (Peso)5,134,871,870 (Peso)5,230,034,203
Non-Current Power Receivables 691,641,305 737,478,416
Non-Current Lease Receivable. 1,725,811 7,721,205
------------------- -------------------
Total........................ 5,828,238,986 5,975,233,824
Allowance for Bad-Debts...... (574,095,810) (527,803,318)
------------------- -------------------
(Peso)5,254,143,176 (Peso)5,447,430,506
=================== ===================

Non-current receivable includes the (Peso)1.707 Billion Royalty Fees paid to
PNOC-EDC for the unutilized geothermal energy from July 1996 to December 1998
and the receivables from MWSS for their utilization of Angat Dam regarding the
Optimization project of the government from 1992 to 1997 in the amount of
(Peso)3.133 Billion.

9. Other Assets

Other assets substantially consists of:

2000 1999
-------------------- --------------------

Stored Energy -- Leyte A & B............. (Peso) 5,665,717,199 (Peso) 5,837,985,907
Cash-Restricted.......................... 13,885,246,025 19,841,944,280
Investment in Maintenance Eng'g Ctr...... 177,978,802 160,735,859
Advances to San Roque Non-Power Component 19,781,905,736 9,918,437,300
Stock for Disposal....................... 39,191,799 37,216,779
-------------------- --------------------
TOTAL.................................. (Peso)39,550,039,561 (Peso)35,796,320,125
==================== ====================

The Cash Restricted pertains to the funds intended for purposes other than
current operations and therefore not immediately available to management for
any disbursement transactions other than its specified purpose.

Stored energy which is booked under Court and Other Deposit is presented in
the Balance Sheet as Other Assets in the amount of (Peso)2.1 Billion and
(Peso)3.6 Billion for Leyte A & B, respectively. The said amounts represent
advance payments made to PNOC-EDC for the cost of contracted energy for Leyte A
& B.

F-24

The San Roque Multi Purpose Project ("SRMPP") pertains to the construction
of the Non-Power components such as Watershed Management, water quality, flood
control and irrigation of the project. The Memorandum of Agreement ("MOA")
covering this said project provides that NPC shall be reimbursed by Department
of Agriculture/ National Irrigation Administration, Department of Environment
and Natural Resources ("DENR") and Department of Public Works and Highways
("DPWH") in the amount and terms specified in the MOA through the Department of
Finance ("DOF").

10. Cash and Cash Equivalents

This account is composed of:

2000 1999
------------------- -------------------

Cash in Bank (Peso)2,516,489,325 (Peso)3,380,768,734
Cash on Hand 202,638,207 71,054,750
Working Fund 32,989,535 35,814,137
------------------- -------------------
(Peso)2,752,117,067 (Peso)3,487,637,621
=================== ===================

11. Power Customers Receivables

Receivable from power customers consists of:

2000 1999
-------------------- --------------------

Power Receivables............. (Peso)16,207,805,757 (Peso)13,072,702,406
Accrued Utility Revenue....... 6,996,635,855 2,091,859,866
Restructured Power Receivables 32,988,379 44,996,557
-------------------- --------------------
Total......................... 23,237,429,991 15,209,558,829
Allowance for Bad Debts....... (2,409,397,050) (1,962,514,516)
-------------------- --------------------
(Peso)20,828,032,941 (Peso)13,247,044,313
==================== ====================

12. Other Receivables

Other receivables consists of:

2000 1999
------------------- -------------------

Tax Credit Certificates.............. (Peso) 886,417,504 (Peso)1,389,085,479
Receivables from National Government. 524,715,368 461,379,859
Interest............................. 177,165,297 126,698,452
Rent................................. 343,553,477 186,226,527
Receivables from Officers & Employees 10,488,868 9,346,022
Recoverable from Insurance Co........ 296,375 844,764
Receivable -- Others................. 1,362,686,992 1,235,899,209
------------------- -------------------
Total................................ 3,305,323,881 3,409,480,312
Allowance for Bad Debts.............. (436,873,233) (452,097,766)
------------------- -------------------
(Peso)2,868,450,648 (Peso)2,957,382,546
=================== ===================

Receivable -- Others account consists of:

2000 1999
------------------- -------------------

Receivables from Private Co..... (Peso) 884,691,772 (Peso) 807,256,281
Others.......................... 394,766,493 303,964,373
Receivable -- Fuel Oil Suppliers 83,228,727 124,678,555
------------------- -------------------
(Peso)1,362,686,992 (Peso)1,235,899,209
=================== ===================

F-25

13. Materials and Supplies for Operation

The account consists of:

2000 1999
-------------------- --------------------

Materials, Supplies & Equip. Invty....... (Peso) 5,712,420,023 (Peso) 5,694,427,585
Asset in Trust for Prvt. Pwr. Contractors 3,351,277,661 2,320,555,691
MSE in Transit -- Operating Plants....... 1,618,746,906 1,098,507,522
Stock Transfer Clearing Accounts......... 1,087,415,136 1,252,973,045
Diesel................................... 198,941,236 212,680,728
Materials, Supply Temporary Adj.......... 264,425,941 563,334,771
Coal..................................... 294,535,218 518,376,716
Fuel Oil................................. 525,538,218 370,745,697
Aviation Fuel & Other Oil Products....... 106,212,760 80,726,725
Thermal Chemicals........................ 39,023,243 56,422,010
Stock for Transshipment.................. 10,905,625 36,149,808
Fuel Temporary Adjustment Acct........... (10,310,279) (39,045,205)
Gasoline................................. 2,275,282 1,812,494
-------------------- --------------------
Total.................................... (Peso)13,201,407,320 (Peso)12,167,667,587
==================== ====================

14. Advances

Advances consists of:

2000 1999
----------------- -------------------

Advances to contractors.................. (Peso)492,853,074 (Peso)1,010,969,959
Advances to Philippine Geothermal........ 39,647,320 79,963,577
Advances to Gov't Bodies and Institutions 45,611,576 31,693,091
----------------- -------------------
Total.................................... 578,111,970 1,122,626,627
================= ===================

15. Prepayments

Prepayments consist of:

2000 1999
----------------- -----------------

Marginal and Guaranty Deposits (Peso)818,424,350 (Peso)777,284,674
Prepaid Charges/Expenses...... 11,593,559 11,932,070
----------------- -----------------
Total......................... (Peso)830,017,909 (Peso)789,216,744
================= =================

16. Deferred Charges

Deferred charges includes:

2000 1999
--------------------- ---------------------

Deferred FOREX Differential........ (Peso)246,838,525,736 (Peso)139,665,309,290
Other Deferred Debits.............. 6,742,680,023 5,814,685,369
Deferred Taxes & Duties............ 3,444,606,897 3,314,058,192
Preliminary Surveys & Investigation 1,204,262,177 1,267,218,125
Deferred Financial Assistance...... 751,244,247 891,055,649
Discount on NPC Bonds Payable...... 227,969,433 231,723,933
Deferred repairs & Maintenance..... 202,930,073 250,983,825
Others............................. 234,075,136 174,007,909
--------------------- ---------------------
Total.............................. (Peso)259,646,293,722 (Peso)151,609,042,292
===================== =====================

F-26

and duty exemption privileges of the Corporation in its purchase of petroleum
products which are paid by the Corporation at gross. Such taxes and duties
shall become refundable by tax collecting agencies such as BIR and the Bureau
of Customs.

17. Contingent Assets/Surplus

18. Capital Stock

No additional Capital Stock was issued in 2000. The last issuance was made
in 1999 equivalent to 5,918,550 shares representing partial payment of the
stock dividend declared in CY 1994.

19. Donated Capital

These are grants received from foreign governments and lending institutions
which were used to finance the implementation of various projects of NPC.

20. Retained Earnings

Retained Earnings were appropriated for Bond Sinking Fund equivalent to 5%
of Net Operating Income as provided by the NPC Charter.

21. Long-Term Debts

This account consists of:

2000 1999
--------------------- ---------------------

Foreign Loans & Other Long-term Debts... (Peso)231,875,748,698 (Peso)218,304,926,003
NPC Bonds Payable....................... 75,919,480,000 41,591,130,000
Due to Phil. Gov't & its Agencies....... 7,409,330,404 6,123,391,726
KEPCO Security Deposit.................. 3,874,845,000 3,487,074,500
--------------------- ---------------------
319,079,404,102 269,506,522,229
--------------------- ---------------------
Less Current Portion
- -- Foreign Loans & Other Long-term Debts 26,893,420,701 30,532,238,909
- -- Due to Phil. Gov't & its Agencies.... 185,175,772 149,306,032
27,078,596,473 30,681,544,941
--------------------- ---------------------
Total................................... (Peso)292,000,807,629 (Peso)238,824,977,288
===================== =====================

Foreign loans are restated at year-end based on the following BSP guiding
rates on foreign currencies:

BSP Guiding Rates
-----------------
12-31-00 12-31-99
-------- --------

Dollar............. $1 49.9980 40.3130
Yen................ (Yen)1 0.4368 .3938
Austrian Schilling. AS1 3,3788 2.9502
Deutsche Mark...... DM1 23.7715 20.7560
French Franc....... FF1 7.0878 6.1887
Swiss Franc........ SFR1 30.5873 25,2936
Great Britain Pound GBP1 74.7470 65.1055

F-27

22. Lease Obligation -- BOT

This account consists of:

2000 1999
--------------------- ---------------------

Lease Obligation..... 511,633,446,926 428,323,153,089
Less: Current Portion 25,827,603,184 22,122,560,635
--------------------- ---------------------
(Peso)485,805,843,742 (Peso)406,200,592,454
===================== =====================

Total capacity fees for BOT Plants were recorded as Electric Plant under
Capital Lease with a corresponding credit to Lease Obligations. Estimated
capacity fees amounting to (Peso)26 billion payable in 2000 was set-up to
current liabilities under the Current Portion of Lease Obligation account.

23. Deposits and Trust Funds

The account substantially consists of the (Peso)3.176 Billion total payments
made through Escrow agent representing 60% of the service fees required in the
90 day provisional agreement executed with Philippine Geothermal. The original
service contract with PGI expired on September 30, 1996.

24. Deferred Credits

Deferred Credits include advances for other work in progress, advances from
Bureau of Treasury for servicing the indebtedness of NPC.

25. FOREX Recovery

For proper matching of cost and revenue, recovery from FOREX I, which is a
recovery of peso fluctuation on principal repayments, is recorded as other
income while FOREX II is a recovery of foreign denominated other operating
expenses is recorded as part of operating revenue.

Effective August 26, 1994, the corporation included in the customer's power
bills Foreign Exchange Adjustment charges intended to recover the Corporation's
foreign exchange losses arising from the servicing of its principal
indebtedness ("FOREX I") and related foreign operating expenses ("FOREX II").

26. Privatization and Subsidization

Pursuant to Board Resolution No. 96-148 dated June 24, 1996, privatization
related expenses were classified from Operating Expenses to Other Expenses. In
1997, these include the cost of retirement benefits such as gratuity pay,
terminal and accrued leaves and expenses incurred by Privatization and
Restructuring External Office ("PREO"). However, since the imminent
privatization of NPC is clearly unrelated to its ordinary and typical
activities, which is expected to benefit one or more future periods, the
corresponding cost of retirement benefits, such as gratuity pay, terminal and
accrued leaves related to operation was treated as deferred debits to be
amortized over two (2) years starting the succeeding year, while, the cost of
benefit pertaining to Engineering was treated as part of the Construction Work
in Progress.

For CY 2000, the amount certified for obligation in 2001 is (Peso)190
Million and (Peso)1,940 Million for Engineering and Non-Engineering,
respectively.

27. Taxes & Licenses

Pursuant to BIR Ruling #018-2000, Section 32(B)(7)(b) of the Code (supra)
dated January 20, 2000, the income of the National Power Corporation from its
operations as a public utility shall be exempt from corporate income tax.

F-28

The enactment of the local government code has empowered the Local
Government Units to create their own sources of revenue and to levy taxes.
Pursuant to this, effective January, 1992, the payment of realty, franchise tax
and Local Government Unit's share in the national wealth became a contracted
obligation of NPC. Total taxes in 2000 amounted to (Peso)1,128 Million.

28. PNOC-EDC Shortfall Billings

PNOC-EDC has informed the Corporation that it has outstanding receivables on
fuel shortfall from NPC in the amount of (Peso)754.0 Million. The account has
been left under the advisement until the same can be included in the design of
NPC power rates. NPC has not recognized this account.

29. Pending Cases

The Corporation is a defendant in several lawsuits involving a total of
(Peso)7,922 Billion and a claimant in other lawsuits amounting to (Peso)3,376
Million.

F-29

Statement Regarding Unaudited Financial Statements
for the Year ended December 31, 2002.

The following financial statements and other financial data contained
elsewhere in this prospectus for the year ended December 31, 2002 have not been
audited by the Commission on Audit, Republic of the Philippines. Because the
Commission on Audit has not completed its review of these financial statements
it has not expressed any opinion thereon. Therefore, neither the Commission on
Audit nor any other third party has passed on fairness of the presentation of
the financial position of National Power Corporation for the year ended
December 31, 2002 or whether the financial statements for this period are in
accordance with applicable rules and regulations and in conformity with
generally accepted state accounting principles.

F-30

NATIONAL POWER CORPORATION

UNAUDITED INCOME STATEMENT
For the Year Ended December 31, 2002

OPERATING REVENUES
Utility Operating Income................... (Peso) 74,731,461,395
Add: Fuel Cost Adjustment................ 26,637,051,453
Forex Adjustment........................ 3,365,716,941
Other Demand and Energy Adjustment...... 1,879,703,978
Ancillary Service Charge................ 4,874,240,463
Transmission Svcs Operating Income...... 6,971,237,746
---------------------
Total Operating Revenues................. 118,459,413,976
---------------------
Less: Prompt Payment Discount............ 912,285,240
Voltage Discount........................ 474,290,184
Power Factor Adjustment Income.......... 639,380,558
---------------------
NET OPERATING REVENUE...................... 116,433,457,994
---------------------
OPERATING EXPENSES
Generation............................... 71,739,037,863
Depreciation and Depletion............... 14,165,759,000
Amortization of Capacity Fees............ 19,839,181,671
Transmission & Distribution.............. 2,029,381,905
Administration & General................. 2,612,232,289
Other Operating Expenses................. 2,738,042,511
Bad Debts................................ 2,787,262,739
---------------------
Total Operating Expenses................ 115,910,897,978
---------------------
OPERATING INCOME........................... 522,560,016
---------------------
OTHER INCOME
Interest Income (Net).................... 1,373,921,521
Revenue from Lease of Electric Plant..... 0
Forex Recovery........................... 11,320,168,866
Gain/(Loss) on Fuel/Diesel Transactions.. 33,298,781
Gain on Retirement of Asset.............. 24,337
Miscellaneous Income..................... 1,812,045,251
---------------------
Total Other Income...................... 14,539,458,756
---------------------
INTEREST AND OTHER CHARGES
Interest Expense......................... 17,876,424,793
Depreciation-Other Plants/Property....... 1,662,436,706
Finance & Other Bank Charges............. 1,983,909,594
Privatization & Subsidiarization Expense. 610,863,668
Amortization-Deferred Forex Differential. 18,529,507,884
Loss on FOREX Fluctuation................ 6,737,832,216
Miscellaneous Expenses................... 1,396,099,584
---------------------
Total Interest & Other Charges.......... 48,797,064,445
---------------------
NET INCOME/(LOSS).......................... (Peso)(33,735,046,673)
=====================

F-31

NATIONAL POWER CORPORATION

UNAUDITED BALANCE SHEET
December 31, 2002

ASSETS
UTILITY PLANT at Appraised Values............................................................ (Peso) 469,620,817,343
Less: Accum. Depr'n & Depletion............................................................ 237,265,279,507
-----------------------
Net Utility Plant.......................................................................... 232,355,537,836
Construction Work in Progress.............................................................. 36,580,638,690
-----------------------
Total Utility Plant....................................................................... 268,936,176,526
-----------------------
EPS UNDER CAPITAL LEASE.................................................................... 454,721,206,572
-----------------------
INVESTMENT & OTHER ASSETS
Investment in Government & Other Corporation............................................... 133,588,584
Non-Utility Property -- Net................................................................ 5,548,055,894
Accounts and Other Receivables -- Net...................................................... 5,817,273,321
Const. Work in Progress-Mat'ls & Supplies.................................................. 1,179,313,054
Other Assets............................................................................... 65,587,442,324
-----------------------
Total Investments & Other Assets.......................................................... 78,265,673,177
-----------------------
CURRENT ASSETS
Cash & Cash Equivalent..................................................................... 1,993,972,619
Accounts Receivables --
Power Customers -- Net.................................................................... 37,496,189,251
Others -- Net............................................................................. 8,344,876,302
Materials & Supplies for Operation......................................................... 10,668,947,660
Advances................................................................................... 559,149,635
Prepayments................................................................................ 878,808,843
Court & Other Deposits..................................................................... 309,205,260
Cash Advances-Officers & Employees......................................................... 7,310,160
-----------------------
Total Current Assets...................................................................... 60,258,459,730
-----------------------
DEFERRED CHARGES............................................................................. 288,960,148,500
-----------------------
CONTINGENT ASSETS............................................................................ 1,903,179,059
-----------------------
TOTAL ASSETS................................................................................. (Peso)1,153,044,853,564
-----------------------
PROPRIETARY CAPITAL LIABILITIES
PROPRIETARY CAPITAL
Capital Stock (Peso)100 par value
Authorized -- (Peso)50,000,000,000 dividend into 500,000,000 Issued -- 270,488,708 in 1999. (Peso) 27,048,870,789
Donated Capital............................................................................ 4,021,996,948
Retained Earnings.......................................................................... (67,917,158,892)
Appraisal Capital.......................................................................... 95,799,031,296
Contingent Surplus......................................................................... 1,903,179,059
-----------------------
Total Proprietary Capital................................................................. 60,855,919,200
-----------------------
LONG-TERM DEBT (Net of Current Portion)...................................................... 376,315,516,406
-----------------------
LEASE OBLIGATION -- BOT...................................................................... 595,108,491,387
-----------------------
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses...................................................... 49,517,934,342
Retention on Contract Payments............................................................. 978,088,385
Deposits & Trust Funds..................................................................... 5,449,313,207
Dividends Payable.......................................................................... 30,215,838
Lease Payable.............................................................................. 35,249,501,901
Notes Payable.............................................................................. 0
Interest Payable........................................................................... 7,439,706,688
Current Portion of Long-Term Debts......................................................... 19,665,965,434
-----------------------
Total Current Liabilities.................................................................. 118,430,725,777
-----------------------
DEFERRED CREDITS............................................................................. 2,334,200,794
-----------------------
TOTAL PROPRIETARY CAPITAL and LIABILITIES.................................................... (Peso)1,153,044,853,564
=======================

F-32

NATIONAL POWER CORPORATION

UNAUDITED STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2002

2002
------------------------
pesos

CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)................................................................ (33,735,045,673.00)
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Depreciation................................................................... 14,814,769,706.00
Depletion...................................................................... 1,013,426,000.00
Amortization of Capacity fee................................................... 19,839,181,671.00
Amortization of Bond Issue cost................................................ 514,651,172.00
Amortization of Bond Discount.................................................. 264,540,359.00
Amortization of Deferred Forex Differential.................................... 18,529,507,884.00
Amortization of SPEED Benefit.................................................. 466,680,413.00
Amortization of Financial Assistance........................................... 195,802,890.00
Revaluation of Loan changed to (Gain) loss on FOREX Fluctuation................ 10,095,230,263.00
Revaluation of Collateral Deposit & Interest................................... (27,492,097.00)
Revaluation of KEPCO Trust Deposit charged to (Gain) loss on FOREX Fluctuation.
(Gain)/Loss on Retirement/Disposal of Assets...................................
Currency Conversion............................................................
Changes in Operating Assets and Liabilities
Net of Effects from--
Decrease (Increase) in:
Power Customers Receivables................................................... (18,163,186,709.00)/(a/)/
Other Current Receivables..................................................... (1,325,321,097.00)
Materials and Supplies for Operations......................................... 2,786,951,694.00
Advances...................................................................... (246,815,913.00)
Prepayments................................................................... (40,631,975.00)
Court and Other Deposits...................................................... (143,833,781.00)
Cash Advances to Officer & Employees.......................................... (75,041.00)
Accounts and Other Non-Current Receivables.................................... (46,941,990.00)
Other Assets.................................................................. (7,095,554.00)/(c/)/
Other Deferred Charges........................................................ (5,153,565,809.00)/(d/)/
Increase (Decrease) in:
Accounts Payable and Accrued Exp.............................................. 7,892,271,929.00
Retention on Contract Payments................................................ 209,747,474.00
Deposits and Trust Funds...................................................... 1,014,771,554.00
Interest Payable.............................................................. 1,071,245,294.00
Other Deferred Credits........................................................ 67,952,494.00
Correction of Prior Years Income............................................... (1,864,837,695.00)
Total Adjustments................................................................ 51,756,933,136
------------------------
Net Cash Provided for Operating Activities....................................... (Peso) 18,021,887,463
CASH FLOWS FROM INVESTING ACTIVITIES
Construction Expenditures...................................................... (14,873,228,047.00)
Additions to:
(Inc)/Dec in Preliminary Surveys and Investigations........................... (87,662,824.00)/(d/)/
(Inc)/Dec in Investment in MEC................................................ (1,517,180.00)/(c/)/
Net Cash Used in Investing Activities............................................ (14,962,408,051)

F-33

NATIONAL POWER CORPORATION

UNAUDITED STATEMENT OF CASH FLOWS -- (Continued)
For the Year Ended December 31, 2002

2002
------------------------
pesos

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings..................................................... 4,766,314,149.00/(g/)/
Bond Flotation................................................. 69,933,605,541.00
Increase/(Decrease) in Notes Payable........................... (11,874,613,870.00)/(c/)/
Advances -- National Government................................
Payment of Capacity Fees -- BOT................................ (32,640,877,171.00)
Payment of Advances Bureau of Treasury:........................ (1,862,359,830.00)
Payment of Loans............................................... (25,069,822,639.00)/(f/)/
Payment of Bonds............................................... (40,000,000.00)
Payment of KEPCO Deposit....................................... (462,636,000.0)
Advances to SRMPP Non Power Company............................ (1,004,939,357.00)/(d/)/
Reimbursement for the Advances made to SRMPP................... 558,260,000.00
(Increase)/Decrease in Bond Sinking Fund....................... 29,178,891.00/(b/)/
(Increase)/Decrease in Other Assets -- Cash Restricted Account. (5,145,891,034.00)/(c/)/
Net Cash Provided (Used) by Financing Activities................. (2,713,781,320)
Net Increase (Decrease) in Cash and Cash Equivalent.............. 345,698,092
Cash and Cash Equivalent @ Beginning of Year..................... 1,548,274,527
------------------------
Cash and Cash Equivalents @ End of Year.......................... (Peso) 1,993,972,619
========================

- --------
(a/) Includes receivables corresponding to the penalties billed to Meralco for
its utilization of demand and energy below the contracted level. The
penalty amounted to (Peso)14,138,484,475 for CY 2002.
(b/) Decrease in Bond Sinking Fund was accounted as part of financing
activities which consists of principal payment and accrual for interest
income of (Peso)2,117,168 and (Peso)8,703,941 respectively. The payment
made corresponding to Matured Liability on Bonds amounted to
(Peso)40,000,000.
(c/) The Cash Restricted and Advances to SRMPP are presented under financing
activities while investment in MEC is accounted as part of investing
activities.
(d/) Includes (Peso)5,059,613,361 deferred debits pertaining to the payment of
upfront guarantee fee on various bond issuances. Preliminary Survey and
investigation is accounted under investing activities.
(e/) Decrease in Notes Payable represents the net of repayment of loan
amounting to (Peso)12,681,135,356 and availment of (Peso)806,521,486.
(f/) Represents payment of the current portion of Long Term Debt.
(g/) Includes availment from foreign loans amounting to (Peso)4,766,314,149.

F-34

NOTES TO UNAUDITED FINANCIAL STATEMENTS

1. Primary Function

2. Significant Accounting Policies

A. Utility Plant and Depreciation

Regular annual maintenance, repairs and minor replacements are charged to
expenses as they are incurred whereas major maintenance which is done on
periodic three to five-year intervals is deferred, amortized and charged to
operations over the number of years interval. Rehabilitation expenditure which
would result in improvement of a plant's efficiency beyond five years are
capitalized and transferred to plant cost upon completion of work orders.

Depreciation of fixed assets is charged from the date of acquisition of
fixed assets or after the completion of works. Depreciation based on
depreciable values is computed using the Straight Line (SL) method pursuant to
NPC Board Res. No. 94-58 effective 1994.

B. Appraisal of Utility Plant

Electric Plants in Service are recorded are recorded at appraised values in
compliance with ADB's and World Bank's loan covenants and in pursuance to
Statement of Financial Accounting Standard No. 12 which permits the appraisal
of property, plant and equipment.

C. Capitalization of Interest

Interest incurred on external borrowings which relate to capital projects in
programs and prior to the commencement of operation are capitalized.

D. Allocation of Support Group Expenses

Cost Center services that cannot be clearly classified as well as expenses
identified as having no direct effect to projects are treated as one hundred
percent operating expenses.

F-35

E. Investments

Local investments are valued at purchase price while foreign investments are
recorded at the date of the transaction using standard booking rates equivalent
to the Bangko Sentral ng Pilipinas (BSP) guiding rate on the last working day
of the preceding year. Foreign investment balances are then revalued at the end
of each year using the BSP guiding rates.

Interest earnings on placements follow the accrual method of accounting:
however for short dated placements of less than a month, the interest earnings
are recognized in the books at maturity dates.

F. Receivables

Power and other receivables are stated net of allowance for doubtful
accounts. Allowances are determined through the specific identification of
uncorrectable accounts.

G. Materials and Supplies for Operation

Materials and supplies for operation can be categorized into fuel (and its
related products) and non-fuel. The Fuel M & S are composed of the fuel oil,
diesel, coal & thermal chemical stocks used by NPC plants for power generation.
These inventories are valued using the last-in-first out (LIFO) method.

The non-Fuel M & S of NPC plants and areas represented basically the
materials, supplies and equipment received by NPC property custodian for use in
operations.

The non-Fuel M & S assigned to private IPPs includes fuel stock, spares,
materials and supplies transferred to private contractors as stipulated in the
individual contracts.

H. Deferred Taxes and Duties

By virtue of FIRB# 17-87 of the Department of Finance, the Corporation is
exempt from payment of taxes and duties on local oil purchases. Oil suppliers
bill NPC at gross selling price inclusive of taxes and duties. Fuel deliveries
and consumption are recorded in the books net of taxes and duties. Said taxes
and duties are recognized as Deferred Taxes and Duties representing claims from
the Bureau of Internal Revenue and Bureau of Customs. Upon receipt of Tax
Credit Certificates (TCC), the refund is debited to Accounts Receivable-Others
and a corollary entry is made by a debit to Other Expense and a credit to Other
Income.

I. Accounting for Foreign Exchange Fluctuation

F-36

J. Accounting for BOT Projects

Total capacity fees for the duration of the cooperation period are
recognized outright in the books by a debit to Electric Plant under Capital
Lease account and a corresponding credit to Lease Obligation under the
Long-Term Debts. Hopewell Pagbilao and Sual Coal Fired Thermal Power Plant are
amortized over 29 and 25 years respectively, while the rest of BOT assets are
amortized over 20 years.

K. Income Determination

L. Composition of Rate Base

Plants undergoing major rehabilitation/repair and which are out of operation
for less than one calendar year are included in the computation of Rate Base.

The assets under capital lease are not classified under utility plant in
service hence, these are excluded in the computation of the rate base. For
purposes of determining compliance for loan covenants relating to the minimum
rate of return in rate base, the World Bank and Asia Development Bank agreed to
exclude BOT plants from the computation of return on rate base.

F-37

3. Utility Plant

Total Utility Plant consists of the following:

Historical Cost Appraised Cost
------------------------------------------- -------------------------------------------
Plant Type 2002 2001 2002 2001
- ---------- --------------------- --------------------- --------------------- ---------------------

ELECTRIC PLANTS IN SERVICE:
DEPRECIABLES:
Steam Production Plant..... (Peso) 69,591,581,334 (Peso) 74,983,944,816 (Peso)156,212,660,008 (Peso)164,650,140,807
Hydraulic Production Plant. 16,121,960,132 16,016,984,144 94,484,239,498 94,379,263,510
Other Production Plant..... 18,355,416,993 18,153,230,133 38,642,174,319 38,439,987,459
Transmission Plant......... 108,310,004,326 104,214,228,788 162,002,318,210 158,180,182,240
Distribution Plant......... 76,390,477 71,730,213 155,490,473 166,399,209
General Plant.............. 7,182,894 7,182,894 10,713,968 10,713,968
LANDS AND LANDHOLDINGS:
Steam Production Plant..... 611,851,624 632,318,826 1,534,451,774 1,622,737,814
Hydraulic Production Plant. 222,215,928 222,211,238 1,624,926,400 1,624,921,710
Other Production Plant..... 18,819,686 18,694,702 120,259,205 120,134,221
Transmission Plant......... 1,066,039,454 973,028,030 2,594,677,768 2,501,666,344
General Plant.............. 10,394,260 10,394,260 1,462,241,000 1,462,241,000
EPS Land on Lease 1/......... 0 0 0 0
OTHER UTILITY PLANTS......... 7,193,317,181 7,424,187,688 10,776,664,720 10,960,217,087
--------------------- --------------------- --------------------- ---------------------
(Peso)221,585,174,289 (Peso)222,728,135,732 (Peso)469,620,817,343 (Peso)474,118,605,369
===================== ===================== ===================== =====================
ACCUMULATED DEPRECIATION and
DEPLETION DEPRECIATION
Steam Production Plant..... (Peso) 19,375,859,194 (Peso) 23,570,980,991 (Peso) 61,878,292,283 (Peso) 66,476,026,390
Hydraulic Production Plant. 7,413,908,405 6,978,228,405 62,339,454,229 60,257,116,228
Other Production Plant..... 10,673,195,788 9,901,848,788 23,496,047,989 22,043,201,989
Transmission Plant......... 29,282,674,469 25,032,192,192 65,701,267,758 60,088,378,119
Distribution Plant......... 31,577,431 73,128,431 104,324,634 198,277,428
General Plant.............. 5,203,239 56,746,239 6,823,329 70,470,329
DEPLETION.................... 6,314,966,089 5,599,633,089 17,560,070,160 16,483.857,160
OTHER UTILITY PLANTS......... 3,511,238,521 3,199,612,872 6,178,999,125 5,742,786,961
--------------------- --------------------- --------------------- ---------------------
76,608,623,136 74,412,341,007 237,265,279,507 231,359,914,604
--------------------- --------------------- --------------------- ---------------------
NET UTILITY PLANT............ (Peso)144,976,551,153 (Peso)148,315,794,725 (Peso)232,355,537,836 (Peso)242,758,690,765
===================== ===================== ===================== =====================

4. Construction Work in Progress (CWIP)

2002 2001
-------------------- --------------------

Construction Work in Progress -- Work Order............ (Peso)36,580,638,690 (Peso)27,310,991,924
Construction Work in Progress -- Materials and Supplies 1,179,313,054 1,843,961,666
-------------------- --------------------
(Peso)37,759,951,744 (Peso)29,154,953,590
==================== ====================

5. Electric Plant Under Capital Lease

This account represents the total computed capacity fees of BOT Projects for
the duration of the cooperation period.

2002 2001
--------------------- ---------------------

Electric Plant under Capital Lease (Peso)539,765,457,896 (Peso)432,378,241,532
Accumulated Amortization.......... (85,044,251,324) (65,205,069,653)
--------------------- ---------------------
(Peso)454,721,206,572 (Peso)367,173,171,879
===================== =====================

F-38

6. Investment in Government and Other Corporations

Investments in governments and other corporations consists substantially of
investments in sinking funds held for the Corporation's long-term bonds payable.

7. Non-Utility Property

Non-utility property account consists of:

Historical Cost Appraised Cost
----------------------------------------- -----------------------------------------
2002 2001 2002 2001
-------------------- -------------------- -------------------- --------------------

Non-Utility Lands....... 159,074,054 138,873,244 604,133,361 516,113,713
Non-Utility Plants...... 17,484,981,450 11,134,305,549 48,577,903,893 38,940,300,204
-------------------- -------------------- -------------------- --------------------
(Peso)17,644,055,504 (Peso)11,273,178,793 (Peso)49,182,037,254 (Peso)39,456,413,917
-------------------- -------------------- -------------------- --------------------
Accumulated Depreciation 15,005,355,644 8,524,981,138 43,633,981,360 33,495,450,049
-------------------- -------------------- -------------------- --------------------
NON-UTILITY PROPERTY.... (Peso) 2,638,699,860 (Peso) 2,748,197,655 (Peso) 5,548,055,894 (Peso) 5,960,963,868
==================== ==================== ==================== ====================

8. Account & Other Receivables

This account consists of:

2002 2001
------------------- -------------------

Non-Current Receivables...... (Peso)5,133,382,411 (Peso)5,122,080,697
Non-Current Power Receivables 1,357,822,057 952,052,124
Non-Current Lease Receivable. 624,550 2,818,529
------------------- -------------------
Total........................ 6,491,829,018 6,076,951,350
Allowance for Bad-Debts...... (674,555,697) (627,324,066)
------------------- -------------------
Net.......................... (Peso)5,817,273,321 (Peso)5,449,627,284
=================== ===================

Non-current receivable includes the (Peso)1.694 Billion Royalty Fees paid to
PNOC-EDC for the unutilized geothermal energy from July 1996 to December 1998
and the (Peso)3.133 Billion receivables from MWSS for their utilization of
Angat Dam pursuant to the optimization project of the government from 1992 to
1997.

9. Other Assets

Other assets substantially consists of:

2002 2001
-------------------- --------------------

Stored Energy -- Leyte A & B......... (Peso) 5,823,343,303 (Peso) 5,241,828,596
Stored Fuel -- Ilijan................ 10,006,168,202 0
Cash-Restricted...................... 28,265,270,520 23,119,379,487
Investment in Maintenance Eng'g Ctr.. 209,889,674 208,372,493
Adv. to San Roque Non-Power Component 21,227,023,825 19,577,538,268
Stock for Disposal................... 55,746,800 48,651,246
-------------------- --------------------
TOTAL.............................. (Peso)65,587,442,324 (Peso)48,195,770,090
==================== ====================

Stored energy which is booked under Court and Other Deposit is presented in
the Balance Sheet as Other Assets in the amount of (Peso)2.250 Billion and
(Peso)3.573 Billion for Leyte A & B, respectively. The said amounts represent
advance payments made to PNOC-EDC for the cost of contracted energy for Leyte A
& B.

F-39

Meanwhile, the stored fuel, which is also booked under court and other
deposit is likewise presented in the balance sheet as Other Assets in the
amount of (Peso)10.006 Billion. This said amount represents the difference
between the actual gas lifted and that of the contracted fuel with Shell
Philippines Exploration B.V. (SPEX) for the Ilijan Nat Gas Power Plant.

The San Roque Multi Purpose Project (SRMP) pertains in the construction of
the Non-Power components such as Watershed management, water quality, flood
control and irrigation of the project. The Memorandum of Agreement (MOA)
covering this said project provides that NPC shall be reimbursed by Department
of Agriculture/National Irrigation Administration, Department of Environment
and Natural Resources (DENR) and Department of Public Works and Highways (DPWH)
in the amount and terms specified in the MDA, through the Department of Finance
(DOF).

10. Cash and Cash Equivalents

This account is composed of:

2002 2001
------------------- -------------------

Cash in Bank............. (Peso)1,175,918,764 (Peso)1,435,462,752
Cash on Hand............. 139,488,562 174,785,445
Fund w/Bureau of Treasury 651,970,025
Working Fund............. 26,595,268 38,026,330
------------------- -------------------
(Peso)1,993,972,619 (Peso)1,648,274,527
=================== ===================

Pursuant to the provisions of the loan agreements with KFW, a portion of the
interest due on said loans are maintained as special fund. With the instruction
of Department of Finance, the KFW interest Differential Account was transferred
to National Government Special Account.

11. Power Customers Receivables

Receivable from power customers consists of:

2002 2001
-------------------- --------------------

Power Receivables..................... (Peso)31,414,668,685 (Peso)17,113,145,790
Accrued Utility Revenue............... 6,327,440,015 5,309,507,692
Restructured Power Receivables........ 286,231,498 143,347,323
Due from Other Agencies (NPC/TRNS/PSM) 4,743,796,764
-------------------- --------------------
Total................................. 42,772,136,962 22,566,000,805
Allowance for Bad Debts............... (5,275,937,711) (2,912,284,216)
-------------------- --------------------
Net................................... (Peso)37,496,199,251 (Peso)19,653,816,589
==================== ====================

The increase in Power Receivable was mainly due to the inclusion of penalty
to MERALCO for the lower demand & energy than contracted amounting to
(Peso)14.138 Billion. However, a 10% allowance for bad debts was provided for
this penalty.

The account Due from Other Agencies corresponds to the receivables,
particularly of Ancilliary Services Income, from other agencies, (i.e.
Transco). In the Unbundling of Power Tariffs, which took effect in September
26, 2002, the ancilliary services rate has been included in the power bills of
Transco as mandated by the Energy Regulatory Commission.

F-40

12. Other Receivables

Other receivables consists of:

2002 2001
------------------- -------------------

Tax Credit Certificates.............. (Peso) 688,724,227 (Peso) 755,598,162
Receivables from National Government. 1,969,745,369 1,934,240,033
Interest............................. 1,401,852,913 269,193,021
Rent................................. 334,640,915 333,406,326
Receivables from Officers & Employees 11,690,826 10,196,954
Recoverable from Insurance Co........ 725,780 725,680
Receivable -- Others................. 4,489,107,145 2,483,472,825
------------------- -------------------
Total................................ 8,896,487,175 5,786,833,001
Allowance for Bad Debts.............. (551,610,873) (468,885,034)
------------------- -------------------
(Peso)3,344,876,302 (Peso)5,317,947,967
=================== ===================

Receivable -- Others account consists of:

2002 2001
------------------- -------------------

Receivables from Private Co..... (Peso)4,105,694,931 (Peso)2,142,518,270
Others.......................... 332,011,013 261,161,770
Receivable -- Fuel Oil Suppliers 51,401,201 79,792,785
------------------- -------------------
(Peso)4,489,107,145 (Peso)2,483,472,825
=================== ===================

13. Materials and Supplies for Operation

The account consists of:

2002 2001
-------------------- --------------------

Materials, Supplies & Equip. Invty....... (Peso) 5,517,669,312 (Peso) 5,628,561,463
Asset in Trust for Prvt. Pwr. Contractors 2,640,565,167 3,379,023,176
MSE in Transit -- Operating Plants....... 302,619,244 1,527,317,639
Stock Transfer Clearing Accounts......... 1,129,345,457 1,086,359,556
Diesel................................... 89,191,731 99,725,462
Materials, Supply Temporary Adj.......... 130,348,142 71,519,879
Coal..................................... 244,206,059 573,194,759
Fuel Oil................................. 484,609,673 388,198,152
Aviation Fuel & Other Oil Products....... 67,198,329 120,561,981
Thermal Chemicals........................ 41,209,907 54,533,612
Stock for Transshipment.................. 816,167 21,086,371
Fuel Temporary Adjustment Acct........... 17,907,118 100,418,828
Gasoline................................. 2,761,354 2,365,570
-------------------- --------------------
Total.................................... (Peso)10,668,947,660 (Peso)13,052,968,448
==================== ====================

14. Advances

Advances consist of:

2002 2001
----------------- -----------------

Advances to Contractors.................. (Peso)533,477,571 (Peso)195,001,111
Advances to PGI.......................... 5,609,000 39,647,320
Advances to Gov't Bodies and Institutions 20,063,064 35,078,772
----------------- -----------------
Total.................................... (Peso)559,149,635 (Peso)269,727,203
================= =================

F-41

15. Prepayments

Prepayments consist of:

2002 2001
----------------- -----------------

Marginal and Guaranty Deposits* (Peso)864,323,854 (Peso)676,132,599
Prepaid Charges/Expenses....... 14,484,989 14,975,158
----------------- -----------------
Total.......................... (Peso)878,808,843 (Peso)691,107,757
================= =================

- --------
* This consists of transactions requiring deposit to guarantee for the
fulfillment of an obligation.

16. Deferred Charges

Deferred charges includes:

2002 2001
--------------------- ---------------------

Deferred FOREX Differential........ (Peso)271,724,321,894 (Peso)251,763,753,104
Other Deferred Debits.............. 10,660,073,257 6,471,947,205
Deferred Taxes & Duties............ 3,444,592,767 3,442,810,037
Preliminary Surveys & Investigation 1,399,807,653 1,313,273,937
Deferred Financial Assistance...... 823,872,662 1,078,284,083
Discount on NPC Bonds Payable...... 582,000,811 478,492,943
Deferred Repairs & Maintenance..... 105,925,998 150,268,842
Others............................. 219,553,458 213,754,586
--------------------- ---------------------
Total.............................. (Peso)288,960,148,500 (Peso)264,912,584,737
===================== =====================

The Deferred FOREX Differential mainly includes the restatement of the
outstanding balances of foreign currency denominated loans and lease obligation
on BOT plants while the bulk of Other Debits includes expenses set up for the
SPEED benefits of NPC employees for CY 2000 and CY 2001. The amount intended
for separation benefits of NPC employees was not included in this account due
to extended date of separation which is February 28, 2003. The Deferred Taxes
and Duties pertain to the tax and duty exemption privileges of the Corporation
in its purchase of petroleum products which are paid by the Corporation at
gross. Such taxes and duties shall become refundable by tax collecting agencies
such as BIR and the Bureau of Customs.

17. Contingent Assets/Surplus

18. Capital Stock

No additional Capital Stock was issued in 2003. The last issuance was made
in 1999 equivalent to 5,918,550 shares representing partial payment of the
stock dividend declared in CY 1994.

19. Donated Capital

These are grants received from foreign governments and lending institutions
which were used to finance the implementation of various projects of NPC.

20. Retained Earnings

Retained Earnings were appropriated for Bond Sinking Fund equivalent to 5%
of Net Operating Income as provided for by the NPC Charter.

F-42

21. LONG-TERM DEBTS

This account consists of:

2002 2001
--------------------- ---------------------

Foreign Loans & Other Long-term Debts (Peso)210,441,852,149 (Peso)204,702,339,727
NPC Bonds Payable.................... 174,971,292,925 100,042,590,000
Due to Phil. Gov't & its Agencies.... 7,278,480,766 7,427,305,978
KEPCO Security Deposit............... 3,289,856,000 3,521,174,000
--------------------- ---------------------
395,981,481,840 315,693,409,705
--------------------- ---------------------
Less: Current Portion
Foreign Loans & Other Long-term Debts 19,469,315,396 17,301,773,678
NPC Bonds Payable.................... 0 7,710,600,000
Due to Phil. Gov't & its Agencies.... 196,650,038 545,575,088
19,665,965,434 25,557,948,766
--------------------- ---------------------
Net Long term Debts.................. (Peso)376,315,516,406 (Peso)290,135,460,939
===================== =====================

Foreign loans are restated at year-end based on the following BSP guiding
rates on foreign currencies:

BSP Guiding Rates
-----------------
12-31-02 12-31-01
-------- --------

Dollar................. $1 53.0960 51.4040
Yen.................... (Yen)1 .4428 .3904
Swiss Franc............ SFR1 37.8635 30.6177
Great Britain Pound.... GBP1 85.0129 74.7106
European Monetary Union EUR 56.1136
Korea.................. KRW .0442

22. LEASE OBLIGATION -- BOT

This account consists of:

2002 2001
--------------------- ---------------------

Lease Obligation..... (Peso)630,357,993,288 (Peso)535,429,748,488
Less: Current Portion 35,249,501,901 30,392,832,482
--------------------- ---------------------
(Peso)595,108,491,387 (Peso)505,036,916,006
===================== =====================

Total capacity fees for BOT Plants were recorded as Electric Plant under
Capital Lease with a corresponding credit to Lease Obligations. Estimated
capacity fees amounting to (Peso)35 Billion payable in 2002 was set-up to
current liabilities under the Current Portion of Lease Obligation account.

23. DEPOSITS AND TRUST FUNDS

The account substantially consists of the (Peso)5.292 Billion total payments
made through Escrow agent representing 60% of the service fees required in the
provisional agreement executed with Philippine Geothermal, Inc. (PGI). The
original service contract with PGI expired on September 30, 1996.

24. Deferred Credits

Deferred Credits include advances for other work in progress, advances from
Bureau of Treasury for servicing the indebtedness of NPC.

F-43

25. FOREX Recovery

Effective August 26, 1994, the corporation included in the customer's power
bills Foreign Exchange Adjustment charges intended to recover the Corporation's
foreign exchange losses arising from the servicing of its principal
indebtedness ("FOREX I") and related foreign operating expenses ("FOREX II").

26. Privatization and Subsidiarization

Pursuant to Board Resolution No. 96-148 dated June 24, 1996, privatization
related expenses were classified from Operating Expenses to Other Expenses. In
1997, these included the cost of retirement benefits such as gratuity pay,
terminal and accrued leaves and expenses incurred by Privatization and
Restructuring External Office ("PREO"). However, since the imminent
privatization of NPC is clearly unrelated to its ordinary and typical
activities, which is expected to benefit one or more future periods, the
corresponding cost of retirement benefits, such as gratuity pay, terminal and
accrued leaves related to operation was treated as deferred debits to be
amortized over two (2) years starting the succeeding year, while, the cost of
benefit pertaining to Engineering was treated as part of the Construction Work
in Progress.

For CY 2002, the amount certified for obligation is (Peso)217.5 Million and
(Peso)2,128.9 Million for Engineering and Non-Engineering, respectively.

27. Taxes & Licenses

28. PNOC-EDC Shortfall Billings

29. Court and Other Deposits

This account includes the amount deposited with the provincial, municipal or
city courts and with other entities as a guaranty for the fulfillment of
obligation and for other purposes.

F-44

INDEX TO DEBT TABLES OF THE REPUBLIC OF THE PHILIPPINES

Page
----

Guaranteed External Debt of the Republic of the Philippines..... T-2
External Debt of the Republic of the Philippines................ T-8
Domestic Government Securities.................................. T-19
Government Guaranteed Corporate Bonds........................... T-32
Domestic Debt of the Republic (Other Than Securities)........... T-33
Guaranteed Domestic Debt of the Republic (Other Than Securities) T-34

T-1

GUARANTEED EXTERNAL DEBTS OF THE REPUBLIC OF THE PHILIPPINES
AS OF DECEMBER 31, 2002
IN MILLIONS

INTEREST RATE/ ORIGINAL AMOUNT
SPREAD/ CONTRACTED
SERVICE CHARGE YEAR YEAR OF (IN ORIGINAL (IN US
CURRENCY INTEREST RATE BASIS (Per Annum) CONTRACTED MATURITY CURR) DOLLAR)/(2)/
- -------- -------------------------- -------------- ---------- -------- ------------ -----------

GRAND TOTAL 16,064.63
=========
I. NATIONAL GOVERNMENT DIRECT GUARANTEE ON GOCC LOANS 15,641.70
=========
A. LOANS 12,366.46
=========
CANADIAN DOLLARS FIXED RATE 9.2000% 1991 2003 23.54 15.11
-------- ---------
SWISS FRANCS 81.84 58.36
-------- ---------
FIXED RATE 8.8750% 1992 2004 34.31 24.47
SWISS EXPORT BASE RATE 1.3750% 1990 2003 0.23 0.17
SWISS EXPORT BASE RATE 1.3750% 1990 2003 0.15 0.11
SWISS EXPORT BASE RATE 1.3750% 1993 2004 6.50 4.64
SWISS EXPORT BASE RATE 1.3750% 1993 2004 40.65 28.99
DEUTSCHE MARKS 850.93 451.61
-------- ---------
FIXED RATE 7.0000% 1995 2035 30.70 16.29
FIXED RATE 2.0000% 1990 2020 150.00 79.61
FIXED RATE 2.0000% 1988 2018 46.00 24.41
FIXED RATE 9.0000% 1992 2032 60.00 31.84
FIXED RATE 9.0000% 1993 2033 60.00 31.84
FIXED RATE 9.0000% 1993 2023 30.40 16.13
FIXED RATE 2.0000% 1981 2016 15.50 8.23
FIXED RATE 2.0000% 1981 2011 0.60 0.32
FIXED RATE 7.5000% 1995 2035 14.75 7.83
FIXED RATE 2.0000% 1981 2011 4.70 2.49
FIXED RATE 2.0000% 1979 2009 7.00 3.72
FIXED RATE 2.0000% 1979 2015 35.80 19.00
FIXED RATE 7.5000% 1995 2035 50.10 26.59
FIXED RATE 2.0000% 1979 2009 2.80 1.49
FIXED RATE 9.0000% 1993 2033 145.00 76.95
FIXED RATE 9.0000% 1995 2036 12.80 6.79
FIXED RATE 6.5000% 1996 2036 9.30 4.94
GERMAN CAPITAL MARKET RATE 0.0000% 1991 2031 17.25 9.15
GERMAN CAPITAL MARKET RATE 0.0000% 1992 2005 26.00 13.80
GERMAN CAPITAL MARKET RATE 0.0000% 1993 2005 39.60 21.02
GERMAN CAPITAL MARKET RATE 0.0000% 1993 2005 15.00 7.96
LIBOR-6MOS. DEPOSIT 1.0000% 1992 2004 18.70 9.92
LIBOR-6MOS. DEPOSIT 0.0000% 1994 2004 43.93 23.32
EURO 17.16 17.81
-------- ---------
INTEREST FREE 0.0000% 2000 2013 7.81 8.11
FIXED RATE 2001 2040 9.35 9.71
SPANISH PESETAS 1,262.24 7.87
-------- ---------
FIXED RATE 2.5000% 1993 2013 631.12 3.94
ORGANIZATION FOR ECONOMIC
COOPERATION DEVELOPMENT
RATE 0.0000% 1993 2004 631.12 3.94
FRENCH FRANCS 469.61 74.31
-------- ---------
FIXED RATE 6.8500% 1994 2006 9.42 1.49
FIXED RATE 3.0000% 1990 2021 4.86 0.77
FIXED RATE 3.0000% 1990 2021 0.38 0.06
FIXED RATE 3.5000% 1979 2005 80.00 12.66
FIXED RATE 3.0000% 1990 2021 1.68 0.27
FIXED RATE 3.1000% 1994 2014 10.09 1.60
FIXED RATE 3.3000% 1994 2014 4.94 0.78
FIXED RATE 3.0000% 1990 2021 1.45 0.23
FIXED RATE 2.5000% 1991 2022 6.44 1.02
FIXED RATE 3.1000% 1994 2014 9.90 1.57
FIXED RATE 3.0000% 1990 2022 0.76 0.12
FIXED RATE 8.1000% 1994 2005 1.69 0.27
FIXED RATE 3.0000% 1988 2021 45.88 7.26
FIXED RATE 3.0000% 1990 2021 6.26 0.99
FIXED RATE 3.0000% 1990 2021 1.41 0.22
FIXED RATE 3.0000% 1990 2021 1.69 0.27
FIXED RATE 5.4500% 1990 2016 120.00 18.99
FIXED RATE 2.5000% 1991 2022 8.06 1.28
FIXED RATE 3.0000% 1990 2022 1.22 0.19
FIXED RATE 3.0000% 1990 2022 6.12 0.97
FIXED RATE 3.0000% 1990 2021 4.73 0.75
FIXED RATE 3.0000% 1990 2022 0.36 0.06
FIXED RATE 3.0000% 1990 2022 2.25 0.36
FIXED RATE 3.0000% 1988 2021 4.12 0.65
FIXED RATE 8.1000% 1994 2006 5.00 0.79
FIXED RATE 3.1000% 1994 2014 42.62 6.74
FIXED RATE 6.8700% 1996 2017 24.65 3.90
FIXED RATE 1.5000% 1996 2022 8.42 1.33
FIXED RATE 1.5000% 1996 2022 4.46 0.71

OUTSTANDING BALANCE
AS OF
(IN ORIGINAL (IN US
CURRENCY CURR) DOLLAR)/(2)/
- -------- ------------ -----------

GRAND TOTAL 10,757.27
=========
I. NATIONAL GOVERNMENT DIRECT GUARANTEE ON GOCC LOANS 10,459.05
=========
A. LOANS 6,816.13
=========
CANADIAN DOLLARS 1.18 0.76
------ ---------
SWISS FRANCS 17.55 12.51
------ ---------
5.15 3.67
0.01 0.01
0.09 0.06
1.34 0.95
10.96 7.82
DEUTSCHE MARKS 400.71 212.66
------ ---------
26.70 14.17
26.71 14.17
35.65 18.92
70.83 37.59
59.95 31.82
30.40 16.13
6.68 3.55
0.27 0.14
14.75 7.83
2.10 1.11
2.28 1.21
14.98 7.95
44.70 23.72
0.91 0.48
9.20 4.88
6.86 3.64
6.76 3.59
2.61 1.39
4.41 2.34
16.63 8.83
7.94 4.21
2.81 1.49
6.59 3.50
EURO 6.37 6.61
------ ---------
5.67 5.88
0.70 0.73
SPANISH PESETAS 698.38 4.36
------ ---------
549.63 3.43

148.74 0.93
FRENCH FRANCS 319.20 50.51
------ ---------
4.68 0.74
4.62 0.73
0.37 0.06
10.00 1.58
1.60 0.25
9.25 1.46
4.41 0.70
1.27 0.20
6.28 0.99
9.07 1.43
0.76 0.12
0.42 0.07
37.85 5.99
5.79 0.92
1.34 0.21
1.52 0.24
84.00 13.29
7.66 1.21
1.19 0.19
5.96 0.94
4.14 0.66
0.35 0.05
2.02 0.32
3.60 0.57
1.73 0.27
35.66 5.64
13.56 2.15
8.42 1.33
4.46 0.71

T-2

GUARANTEED EXTERNAL DEBTS OF THE REPUBLIC OF THE PHILIPPINES -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS

INTEREST RATE/ ORIGINAL AMOUNT OUTSTANDING BALANCE
SPREAD/ CONTRACTED AS OF
SERVICE CHARGE YEAR YEAR OF (IN ORIGINAL (IN US (IN ORIGINAL (IN US
CURRENCY INTEREST RATE BASIS (PER ANNUM) CONTRACTED MATURITY CURR) DOLLAR)/(2)/ CURR) DOLLAR)/(2)/
- -------- --------------------- -------------- ---------- -------- ------------ ----------- ------------ -----------

FIXED RATE 1.5000% 1996 2022 7.49 1.18 7.49 1.18
FIXED RATE 1.5000% 1996 2022 10.46 1.66 10.46 1.66
FIXED RATE 1.5000% 1996 2026 0.45 0.07 2.99 0.47
FIXED RATE 5.4500% 1991 2018 30.00 4.75 24.15 3.82
FIXED RATE 3.3000% 1994 2014 1.14 0.18 0.98 0.15
FIXED RATE 3.0000% 1990 2022 0.48 0.08 0.45 0.07
FIXED RATE 3.0000% 1990 2022 0.70 0.11 0.70 0.11
KOREAN WON 8,249.00 6.87 13,577.06 11.31
---------- -------- ---------- --------
FIXED RATE 3.5000% 1995 2015 8,249.00 6.87 7,109.12 5.92
FIXED RATE 3.5000% 1995 2015 8,645.00 7.20 6,467.94 5.39
POUNDS STERLING 7.74 12.39 3.87 6.20
---------- -------- ---------- --------
FIXED RATE 5.9500% 1995 2007 7.74 12.39 3.87 6.20
JAPANESE YEN 694,868.21 5,794.51 397,441.45 3,314.26
---------- -------- ---------- --------
FIXED RATE 2.5000% 1992 2022 6,686.00 55.75 6,359.85 53.03
FIXED RATE 6.5000% 1991 2003 13,214.97 110.20 1,319.30 11.00
FIXED RATE 3.0000% 1994 2024 15,000.00 125.09 12,699.81 105.90
FIXED RATE 2.5000% 1989 2006 5,003.68 41.73 3,707.76 30.92
FIXED RATE 2.5000% 1991 2021 30,084.00 250.87 27,148.97 226.40
FIXED RATE 2.7000% 1988 2004 1,936.96 16.15 1,291.30 10.77
FIXED RATE 6.5000% 1991 2011 12,215.94 101.87 7,145.10 59.58
FIXED RATE 3.0000% 1994 2024 22,500.00 187.63 22,500.00 187.63
FIXED RATE 5.5000% 1992 2010 20,550.00 171.37 4,046.94 33.75
FIXED RATE 4.7000% 1993 2009 17,812.50 148.54 6,348.55 52.94
FIXED RATE 5.8000% 1992 2004 27,885.85 232.54 4,769.59 39.77
FIXED RATE 2.5000% 1995 2025 5,283.00 44.05 329.13 2.74
FIXED RATE 2.1000% 1995 2025 848.00 7.07 403.73 3.37
FIXED RATE 2.5000% 1995 2025 1,104.00 9.21 1,021.72 8.52
FIXED RATE 2.1000% 1995 2025 248.00 2.07 328.78 2.74
FIXED RATE 2.7000% 1995 2025 11,394.00 95.01 9,885.69 82.44
FIXED RATE 2.3000% 1995 2025 921.00 7.68 1,232.32 10.28
FIXED RATE 2.7000% 1995 2025 2,224.00 18.55 1,366.30 11.39
FIXED RATE 2.7000% 1996 2026 22,837.00 190.44 11,022.74 91.92
FIXED RATE 2.3000% 1996 2026 1,875.00 15.64 4,301.65 35.87
FIXED RATE 2.7000% 1996 2026 10,184.00 84.92 10,240.00 85.39
FIXED RATE 2.3000% 1996 2026 310.00 2.59 250.04 2.09
FIXED RATE 2.5000% 1996 2026 5,000.00 41.70 4,900.47 40.87
FIXED RATE 2.1000% 1996 2026 158.00 1.32 157.99 1.32
FIXED RATE 2.3000% 1997 2027 8,760.00 73.05 502.89 4.19
FIXED RATE 2.7000% 1997 2027 14,011.00 116.84 1,337.04 11.15
FIXED RATE 2.3000% 1997 2027 449.00 3.74 40.28 0.34
FIXED RATE 2.7000% 1997 2027 7,747.00 64.60 5,734.96 47.82
FIXED RATE 2.3000% 1997 2027 339.00 2.83 284.70 2.37
FIXED RATE 2.7000% 1997 2027 14,638.00 122.07 8,201.74 68.39
FIXED RATE 2.3000% 1997 2027 334.00 2.79 259.24 2.16
FIXED RATE 2.5000% 1997 2027 5,903.00 49.23 262.31 2.19
FIXED RATE 2.1000% 1997 2027 1,325.00 11.05 842.32 7.02
FIXED RATE 2.5000% 1997 2027 386.00 3.22 291.91 2.43
FIXED RATE 2.1000% 1997 2027 648.00 5.40 505.95 4.22
FIXED RATE 2.5000% 1997 2027 1,927.00 16.07 0.00 0.00
FIXED RATE 2.1000% 1997 2027 819.00 6.83 144.39 1.20
FIXED RATE 2.2000% 1998 2028 13,788.00 114.98 1,347.91 11.24
FIXED RATE 0.7500% 1998 2038 767.00 6.40 232.24 1.94
FIXED RATE 2.2000% 1998 2028 19,532.00 162.88 4,179.83 34.86
FIXED RATE 0.7500% 1998 2038 458.00 3.82 298.80 2.49
FIXED RATE 2.2000% 1998 2028 3,064.00 25.55 388.53 3.24
FIXED RATE 1.7000% 1998 2028 2,193.00 18.29 292.16 2.44
FIXED RATE 0.7500% 1998 2038 815.00 6.80 197.26 1.64
FIXED RATE 2.2000% 1999 2028 3,064.00 25.55 12,314.44 102.69
FIXED RATE 1.7000% 1999 2028 2,193.00 18.29 1,872.49 15.61
FIXED RATE 2.2000% 1999 2040 16,450.00 137.18 539.81 4.50
FIXED RATE 0.9500% 2001 2041 39,455.00 329.02 0.00 0.00
FIXED RATE 0.7500% 2001 2041 2,476.00 20.65 0.00 0.00
JAPAN LONG TERM PRIME 1.2500% 1994 2003 26,840.00 223.82 15,698.91 130.91
JAPAN LONG TERM PRIME 1.2500% 1994 2003 31,500.00 262.68 24,779.68 206.64
JAPAN LONG TERM PRIME
LENDING RATE 1.2500% 1994 2005 2,163.65 18.04 509.80 4.25
JAPAN LONG TERM PRIME
LENDING RATE 0.0000% 1994 2014 12,400.00 103.40 4,733.90 39.48
JAPAN LONG TERM PRIME
LENDING RATE 1.2500% 1994 2005 297.84 2.48 59.57 0.50
JAPAN LONG TERM PRIME
LENDING RATE 0.0000% 1992 2014 6,100.00 50.87 4,389.38 36.60
JAPAN LONG TERM PRIME
LENDING RATE 0.0000% 1992 2015 18,600.00 155.11 13,126.45 109.46

T-3

GUARANTEED EXTERNAL DEBTS OF THE REPUBLIC OF THE PHILIPPINES -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS

JAPAN LONG TERM PRIME
LENDING RATE 0.0000% 1999 2019 60,000.00 500.34 55,714.29 464.60
JAPAN LONG TERM PRIME
LENDING RATE 0.0000% 2001 2011 12,500.00 104.24 12,500.00 104.24
JAPAN LONG TERM PRIME
LENDING RATE 0.0000% 2000 2007 5,370.68 44.79 3,836.20 31.99
JAPAN LONG TERM PRIME
LENDING RATE -0.2000% 1999 2014 26,000.00 216.81 19,050.50 158.86
JAPAN SWAP RATE 1.6000% 1999 2009 20,800.00 173.45 20,800.00 173.45
LIBOR 6MOS DEPOSIT 1.6000% 1999 2009 27,200.00 226.82 27,200.00 226.82
LIBOR 6MOS DEPOSIT 0.0000% 1999 2003 8,469.00 70.62 2,117.27 17.66
LIBOR 6MOS DEPOSIT 0.0000% 1999 2004 13,537.00 112.89 4,512.18 37.63
ADB FLOATING RATE 0.0000% 1998 2013 3,057.00 25.49 620.18 5.17
ADB FLOATING RATE 0.5000% 1996 2015 2,166.70 18.07 274.44 2.29
LIBOR BASE RATE 0.0000% 2000 2014 3,676.05 30.65 9.80 0.08
LIBOR BASE RATE 0.0000% 2002 2021 2,166.00 18.06 36.76 0.31
CQB 0.1000% 2001 2011 3,717.00 31.00 37.18 0.31
LIBOR BASE RATE 0.5000% 1996 2016 9,090.39 75.80 2,186.04 18.23
US LIBOR 0.0000% 2001 2020 2,400.00 20.01 2,400.00 20.01
SPECIAL DRAWING RIGHTS 13.50 18.23 11.37 15.35
--------- -------- --------- --------
INTEREST FREE 0.7500% 1992 2032 3.00 4.05 2.33 3.14
LIBOR 6MOS. DEPOSIT 0.8000% 1995 2034 3.50 4.73 3.48 4.70
LIBOR 6MOS. DEPOSIT 0.8000% 1995 2014 7.00 9.45 5.56 7.51
UNITED STATES DOLLARS 5,719.09 5,919.09 3,181.59 3,181.59
--------- -------- --------- --------
ADB FLOATING RATE 0.0000% 1993 2018 43.20 43.20 18.71 18.71
ADB FLOATING RATE 0.0000% 1989 2004 130.00 130.00 85.61 85.61
ADB FLOATING RATE 0.0000% 1991 2009 25.00 25.00 10.50 10.50
ADB FLOATING RATE 0.0000% 1992 2007 2.60 2.60 0.96 0.96
ADB FLOATING RATE 0.0000% 1989 2012 26.40 26.40 19.17 19.17
ADB FLOATING RATE 0.0000% 1988 2012 43.50 43.50 31.27 31.27
ADB FLOATING RATE 0.0000% 1991 2006 100.00 100.00 15.21 15.21
ADB FLOATING RATE 0.0000% 1986 2006 92.00 92.00 37.63 37.63
ADB FLOATING RATE 0.0000% 1995 2020 92.00 92.00 83.15 83.15
ADB FLOATING RATE 0.0000% 1993 2012 138.00 138.00 98.15 98.15
ADB FLOATING RATE 0.0000% 1991 2015 200.00 200.00 164.66 164.66
ADB FLOATING RATE 0.0000% 1988 2008 120.00 120.00 61.25 61.25
ADB FLOATING RATE 0.0000% 1989 2009 160.00 160.00 100.03 100.03
ADB FLOATING RATE 0.0000% 1995 2019 244.00 244.00 151.92 151.92
ADB FLOATING RATE 0.0000% 1992 2012 75.00 75.00 60.80 60.80
ADB FLOATING RATE 0.0000% 1992 2016 31.40 31.40 7.99 7.99
ADB FLOATING RATE 0.0000% 1993 2013 164.00 164.00 96.65 96.65
ADB FLOATING RATE 0.0000% 1998 2021 50.00 50.00 7.67 7.67
ADB FLOATING RATE 0.0000% 1996 2011 5.35 5.35 4.12 4.12
ADB FLOATING RATE 0.0000% 1998 2017 20.22 20.22 31.61 31.61
FIXED RATE 1.5000% 1990 2010 0.17 0.17 0.14 0.14
FIXED RATE 1.5000% 1990 2010 0.03 0.03 0.02 0.02
FIXED RATE 10.5000% 1984 2007 39.30 39.30 12.07 12.07
FIXED RATE 1.5000% 1990 2010 0.08 0.08 0.06 0.06
FIXED RATE 1.5000% 1990 2010 0.05 0.05 0.04 0.04
FIXED RATE 3.0000% 1995 2006 0.50 0.50 0.37 0.37
FIXED RATE 8.1000% 1980 2005 42.80 42.80 6.30 6.30
FIXED RATE 7.6000% 1979 2004 60.70 60.70 9.72 9.72
FIXED RATE 1.5000% 1990 2010 0.41 0.41 0.33 0.33
FIXED RATE 7.7000% 1978 2003 49.00 49.00 4.41 4.41
FIXED RATE 1.5000% 1990 2010 0.04 0.04 0.03 0.03
FIXED RATE 1.5000% 1990 2010 15.67 15.67 12.54 12.54
FIXED RATE 1.5000% 1990 2010 9.34 9.34 7.47 7.47
FIXED RATE 1.5000% 1990 2010 11.56 11.56 9.25 9.25
FIXED RATE 1.5000% 1990 2010 0.09 0.09 0.07 0.07
FIXED RATE 2.0000% 1993 2013 19.30 19.30 19.30 19.30
FIXED RATE 3.5750% 1995 2012 37.90 37.90 36.01 36.01
FIXED RATE 1.5000% 1990 2010 0.03 0.03 0.02 0.02
FIXED RATE 8.3000% 1989 2003 2.24 2.24 0.22 0.22
FIXED RATE 1.5000% 1990 2010 0.10 0.10 0.08 0.08
FIXED RATE 1.5000% 1990 2010 0.20 0.20 0.16 0.16
FIXED RATE 1.5000% 1990 2010 3.38 3.38 2.71 2.71
FIXED RATE 1.5000% 1990 2010 0.17 0.17 0.14 0.14
FIXED RATE 10.1000% 1981 2006 87.50 87.50 19.40 19.40
FIXED RATE 1.5000% 1990 2010 11.21 11.21 8.97 8.97
FIXED RATE 1.5000% 1990 2010 0.15 0.15 0.12 0.12
FIXED RATE 10.2500% 1984 2004 33.00 33.00 5.41 5.41
FIXED RATE 1.5000% 1990 2010 0.04 0.04 0.03 0.03

T-4

GUARANTEED EXTERNAL DEBTS OF THE REPUBLIC OF THE PHILIPPINES -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS

INTEREST RATE/ ORIGINAL AMOUNT OUTSTANDING BALANCE
SPREAD/ CONTRACTED AS OF
SERVICE CHARGE YEAR YEAR OF (IN ORIGINAL (IN US (IN ORIGINAL (IN US
CURRENCY INTEREST RATE BASIS (PER ANNUM) CONTRACTED MATURITY CURR) DOLLAR)/(2)/ CURR) DOLLAR)/(2)/
- -------- ---------------------- -------------- ---------- -------- ------------ ----------- ------------ -----------

FIXED RATE 3.0000% 1995 2006 9.50 9.50 2.91 2.91
FIXED RATE 1.5000% 1990 2010 0.18 0.18 0.14 0.14
FIXED RATE 1.5000% 1990 2010 0.91 0.91 0.73 0.73
FIXED RATE 1.5000% 1990 2010 0.12 0.12 0.10 0.10
FIXED RATE 1.5000% 1990 2010 0.63 0.63 0.51 0.51
FIXED RATE 1.2500% 1993 2025 24.50 24.50 24.50 24.50
FIXED RATE 1.5000% 1990 2010 0.51 0.51 0.41 0.41
FIXED RATE 10.5000% 1984 2007 43.80 43.80 2.75 2.75
FIXED RATE 1.5000% 1990 2010 0.99 0.99 0.79 0.79
FIXED RATE 1.5000% 1990 2010 0.38 0.38 0.30 0.30
FIXED RATE 1.5000% 1990 2010 4.99 4.99 3.99 3.99
FIXED RATE 1.5000% 1990 2010 0.23 0.23 0.19 0.19
FIXED RATE 1.5000% 1990 2010 1.35 1.35 0.89 0.89
FIXED RATE 1.5000% 1990 2010 11.70 11.70 9.36 9.36
FIXED RATE 6.6000% 1995 2008 25.00 25.00 0.61 0.61
FIXED RATE 7.6500% 1996 2009 25.00 25.00 1.85 1.85
FIXED RATE 3.0000% 1994 2007 5.00 5.00 0.52 0.52
FIXED RATE 4.0000% 1995 2018 15.00 15.00 13.44 13.44
FIXED RATE 6.5000% 1997 2010 11.10 11.10 3.09 3.09
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1989 2009 65.50 65.50 35.82 35.82
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1994 2014 113.00 113.00 84.32 84.32
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1993 2012 134.00 134.00 28.90 28.90
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1994 2014 114.00 114.00 46.66 46.66
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1993 2013 110.00 110.00 41.89 41.89
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1989 2009 65.00 65.00 39.42 39.42
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1994 2014 127.35 127.35 108.10 108.10
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1994 2014 19.65 19.65 10.63 10.63
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1995 2002 50.00 50.00 45.95 45.95
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1994 2013 64.00 64.00 43.99 43.99
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1991 2011 175.00 175.00 122.36 122.36
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1994 2014 40.00 40.00 33.05 33.05
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1995 2011 50.00 50.00 40.06 40.06
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1992 2012 91.30 91.30 39.63 39.63
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1988 2008 41.00 41.00 22.06 22.06
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1988 2008 59.00 59.00 27.82 27.82
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1991 2011 150.00 150.00 109.22 109.22
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1990 2010 150.00 150.00 88.85 88.85
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1990 2010 200.00 200.00 127.74 127.74
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1985 2005 100.00 100.00 19.96 19.96
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1991 2011 15.00 15.00 1.05 1.05
IBRD COST OF QUALIFIED
BORROWINGS 0.5000% 1989 2009 40.00 40.00 22.71 22.71
INTEREST FREE 0.0000% 2000 2013 7.50 7.50 3.89 3.89
LIBOR 6 MOS DEPOSITS 0.6250% 1992 2003 19.52 19.52 1.95 1.95
LIBOR 6 MOS DEPOSITS 0.6250% 1992 2003 4.87 4.87 0.22 0.22
LIBOR 6 MOS DEPOSITS 0.6250% 1991 2003 19.52 19.52 0.98 0.98
LIBOR 6 MOS DEPOSITS 0.6250% 1992 2003 6.21 6.21 0.62 0.62
LIBOR 6 MOS DEPOSITS 0.6250% 1992 2003 4.52 4.52 0.23 0.23
LIBOR 6MOS. DEPOSIT 0.0000% 1992 2004 25.50 25.50 5.10 5.10
LIBOR 6MOS. DEPOSIT 0.0000% 1992 2004 17.44 17.44 2.46 2.46
LIBOR 6MOS. DEPOSIT 0.0000% 1992 2004 18.77 18.77 2.48 2.48
LIBOR BASE RATE 0.5000% 1996 2016 100.00 100.00 31.86 31.86
LIBOR BASE RATE 0.5000% 1996 2016 57.00 57.00 6.10 6.10
LIBOR BASE RATE 0.5000% 1996 2016 150.00 150.00 94.03 94.03

T-5

GUARANTEED EXTERNAL DEBTS OF THE REPUBLIC OF THE PHILIPPINES -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS

INTEREST RATE/ ORIGINAL AMOUNT
SPREAD/ CONTRACTED
SERVICE CHARGE YEAR YEAR OF (IN ORIGINAL (IN US
CURRENCY INTEREST RATE BASIS (PER ANNUM) CONTRACTED MATURITY CURR) DOLLAR)/(2)/
- -------- -------------------------- -------------- ---------- -------- ------------ -----------

LIBOR BASE RATE 0.5000% 1995 2015 50.00 50.00
US CONCESSIONARY INTEREST
RELENDING RATE 0.0000% 1993 2004 2.13 2.13
LIBOR BASE RATE 0.5000% 1996 2017 60.00 60.00
LIBOR BASE RATE 0.5000% 1997 2017 54.50 54.50
LIBOR BASE RATE 0.5000% 1998 2018 150.00 150.00
LIBOR BASE RATE 0.5000% 1998 2019 23.30 23.30
LIBOR 6MOS. DEPOSIT 0.0000% 1998 2014 160.00 160.00
LIBOR 6MOS. DEPOSIT 0.0000% 1998 2008 25.00 25.00
US FLOATING RATE 0.9000% 1999 2014 200.00 200.00
US FLOATING RATE 0.3000% 2000 2003 200.00 200.00
B. BONDS 3,275.24
========
UNITED STATES DOLLARS 2,310.00 2,310.00
---------- --------
FIXED RATE 9.7500% 1994 2009 100.00 100.00
FIXED RATE 7.8750% 1996 2006 200.00 200.00
FIXED RATE 8.4000% 1996 2016 160.00 160.00
FIXED RATE 9.6250% 1998 2028 300.00 300.00
FIXED RATE 9.8750% 2000 2010 500.00 500.00
FIXED RATE 9.5750% 2000 2012 250.00 250.00
FIXED RATE 8.4750% 2000 2009 500.00 500.00
FIXED RATE 0.0000% 2002 2010 300.00 300.00
JAPANESE YEN 115,750.00 965.24
---------- --------
FIXED RATE 4.6500% 1995 2015 12,000.00 100.07
FIXED RATE 3.1500% 1997 2003 20,000.00 166.78
FIXED RATE 2.3500% 2000 2010 22,000.00 183.46
FIXED RATE 3.2000% 2002 2020 24,750.00 206.39
FIXED RATE 3.5000% 2002 2022 37,000.00 308.54
EURO 500.00 519.00
---------- --------
FIXED RATE 9.5750% 2001 2006 500.00 519.00
II. GFI GUARANTEE
ASSUMED BY
NATIONAL
GOVERNMENT 422.92
========
BELGIAN FRANCS 1,005.34 25.87
---------- --------
BIBOR 6 MOS. 0.6000% 1992 2007 158.97 4.09
BIBOR 6 MOS. 0.6000% 1992 2007 722.14 18.58
BIBOR 6 MOS. 0.6000% 1992 2007 124.23 3.20
CANADIAN DOLLARS Upon
INTEREST FREE 0.0000% 1986 Demand 0.27 0.17
---------- --------
DEUTSCHE MARKS 3.84 2.04
---------- --------
DM LIBOR 0.8125% 1986 2003 0.33 0.18
DM LIBOR 0.8125% 1986 2003 0.33 0.18
DM LIBOR 0.8125% 1986 2003 0.33 0.18
FIXED RATE 8.6000% 1992 2007 2.84 1.51
SPANISH PESETAS 6,989.98 43.61
---------- --------
FIXED RATE 11.0000% 1991 2007 6,989.98 43.61
FRENCH FRANCS 21.86 3.46
---------- --------
Upon
INTEREST FREE 0.0000% 1986 Demand 3.13 0.50
TAUX DU MARCHE OBLIGATAIRE 0.4000% 1991 2007 4.36 0.69
TAUX DU MARCHE OBLIGATAIRE 0.4000% 1991 2007 0.11 0.02
TAUX DU MARCHE OBLIGATAIRE 0.4000% 1989 2007 13.01 2.06
TAUX DU MARCHE OBLIGATAIRE 0.4000% 1989 2007 1.24 0.20
POUNDS STERLING 1.03 1.65
---------- --------
Upon
0.0000% 1986 Demand 0.00 0.00
GBP LIBOR 0.5000% 1991 2007 1.03 1.65
JAPANESE YEN 26,248.48 218.89
---------- --------
LONG TERM PRIME RATE 0.1000% 1992 2007 4,968.73 41.43
LONG TERM PRIME RATE 0.1000% 1992 2007 16,886.81 140.82
LONG TERM PRIME RATE 0.1000% 1992 2007 216.83 1.81
Upon
INTEREST FREE 0.0000% 1986 Demand 2.74 0.02
LONG TERM PRIME RATE 0.1000% 1992 2007 412.07 3.44
LONG TERM PRIME RATE 0.1000% 1992 2007 701.63 5.85
LONG TERM PRIME RATE 0.1000% 1992 2007 1,194.42 9.96
LONG TERM PRIME RATE 0.1000% 1992 2007 158.65 1.32
LONG TERM PRIME RATE 0.1000% 1992 2007 747.41 6.23

OUTSTANDING BALANCE
AS OF
(IN ORIGINAL (IN US
CURRENCY CURR) DOLLAR)/(2)/
- -------- ------------ -----------

43.34 43.34

0.02 0.02
21.07 21.07
7.63 7.63
65.03 65.03
5.57 5.57
65.56 65.56
18.75 18.75
180.00 180.00
175.00 175.00
B. BONDS 3,642.92
========
UNITED STATES DOLLARS 2,158.68 2,158.68
---------- --------
100.00 100.00
200.00 200.00
160.00 160.00
300.00 300.00
500.00 500.00
250.00 250.00
500.00 500.00
148.68 148.68
JAPANESE YEN 115,750.00 965.24
---------- --------
12,000.00 100.07
20,000.00 166.78
22,000.00 183.46
24,750.00 206.39
37,000.00 308.54
EURO 500.00 519.00
---------- --------
500.00 519.00
II. GFI GUARANTEE
ASSUMED BY
NATIONAL
GOVERNMENT 298.22
========
BELGIAN FRANCS 646.29 16.63
---------- --------
102.19 2.63
464.24 11.95
79.86 2.05
CANADIAN DOLLARS
0.27 0.17
---------- --------
DEUTSCHE MARKS 1.93 1.02
---------- --------
0.03 0.02
0.03 0.02
0.03 0.02
1.83 0.97
SPANISH PESETAS 4,493.56 28.03
---------- --------
4,493.56 28.03
FRENCH FRANCS 15.17 2.40
---------- --------

3.13 0.50
2.80 0.44
0.07 0.01
8.36 1.32
0.80 0.13
POUNDS STERLING 0.66 1.06
---------- --------

0.00 0.00
0.66 1.06
JAPANESE YEN 16,875.01 140.72
---------- --------
3,194.18 26.64
10,855.81 90.53
139.39 1.16

2.74 0.02
264.90 2.21
451.05 3.76
767.84 6.40
101.99 0.85
480.48 4.01

T-6

GUARANTEED EXTERNAL DEBTS OF THE REPUBLIC OF THE PHILIPPINES -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS

INTEREST RATE/ ORIGINAL AMOUNT OUTSTANDING BALANCE
SPREAD/ CONTRACTED AS OF
SERVICE CHARGE YEAR YEAR OF (IN ORIGINAL (IN US (IN ORIGINAL (IN US
CURRENCY INTEREST RATE BASIS (PER ANNUM) CONTRACTED MATURITY CURR) DOLLAR)/(2)/ CURR) DOLLAR)/(2)/
- -------- ----------------------- -------------- ---------- -------- ------------ ----------- ------------ -----------

LONG TERM PRIME RATE 0.1000% 1992 2007 801.78 6.69 515.43 4.30
LONG TERM PRIME RATE 0.1000% 1992 2000 157.43 1.31 101.20 0.84
SAUDI RIAL 27.34 7.29 27.34 7.29
------ ------ ------ ------
Upon
INTEREST FREE 0.0000% 1986 Demand 5.92 1.58 5.92 1.58
Upon
INTEREST FREE 0.0000% 1986 Demand 18.46 4.92 18.46 4.92
Upon
INTEREST FREE 0.0000% 1986 Demand 2.96 0.79 2.96 0.79
UNITED STATES DOLLARS 119.95 119.95 100.89 100.89
------ ------ ------ ------
Upon
INTEREST FREE 0.0000% 1986 Demand 0.97 0.97 0.97 0.97
Upon
INTEREST FREE 0.0000% 1986 Demand 8.33 8.33 8.33 8.33
Upon
INTEREST FREE 0.0000% 1986 Demand 33.09 33.09 33.09 33.09
Upon
INTEREST FREE 0.0000% 1986 Demand 18.60 18.60 18.60 18.60
Upon
INTEREST FREE 0.0000% 1986 Demand 0.72 0.72 0.72 0.72
Upon
INTEREST FREE 0.0000% 1986 Demand 0.51 0.51 0.51 0.51
Upon
INTEREST FREE 0.0000% 1986 Demand 2.18 2.18 2.18 2.18
Upon
INTEREST FREE 0.0000% 1986 Demand 5.22 5.22 5.22 5.22
Upon
INTEREST FREE 0.0000% 1986 Demand 0.51 0.51 0.51 0.51
Upon
INTEREST FREE 0.0000% 1986 Demand 4.40 4.40 4.40 4.40
Upon
INTEREST FREE 0.0000% 1988 Demand 11.55 11.55 7.51 7.51
FIXED RATE 3.4750% 1992 2007 11.25 11.25 7.23 7.23
FIXED RATE 3.4750% 1992 2007 5.28 5.28 3.39 3.39
FIXED RATE 3.4750% 1992 2007 0.80 0.80 0.51 0.51
LIBOR 6 MOS 0.8125% 1986 2003 0.09 0.09 0.01 0.01
LIBOR 6 MOS 0.8125% 1986 2003 0.05 0.05 0.00 0.00
LIBOR 6 MOS 0.8125% 1991 2007 0.32 0.32 0.20 0.20
LIBOR 6 MOS 0.8125% 1986 2003 0.59 0.59 0.06 0.06
LIBOR 6 MOS 0.8125% 1992 2007 0.11 0.11 0.07 0.07
LIBOR 6 MOS 0.8125% 1991 2007 1.22 1.22 0.79 0.79
LIBOR 6 MOS 0.8125% 1986 2003 4.66 4.66 0.47 0.47
LIBOR 6 MOS 0.8125% 1991 2007 0.19 0.19 0.12 0.12
NEW SHORT TERM EXIMBANK
BORROWING 0.5000% 1992 2007 5.61 5.61 3.60 3.60
NEW SHORT TERM EXIMBANK
BORROWING 0.5000% 1992 2007 0.10 0.10 0.06 0.06
NEW SHORT TERM EXIMBANK
BORROWING 0.5000% 1991 2007 3.63 3.63 2.33 2.33

- --------

(1) Includes government guarantee on GOCC (loans and bonds) GFI guarantee
assumed by the government per Proc. 50.

(2) Amount in original currencies were converted to US Dollars using reference
rate on December 27, 2002.

T-7

EXTERNAL DEBT OF THE REPUBLIC OF THE PHILIPPINES/ (1)/
AS OF DECEMBER 31, 2002
IN MILLIONS OF CURRENCY INDICATED

INTEREST RATE/ ORIGINAL OUTSTANDING BALANCE
SPREAD/ AMOUNT CONTRACTED AS OF
SERVICE CHARGE YEAR YEAR OF (IN ORIG. (IN US (IN ORIG. (IN US
CURRENCY INTEREST RATE BASIS (Per Annum) CONTRACTED MATURITY CURR) DOLLAR)/(2)/ CURR) DOLLAR)/(2/)
- -------- ---------------------- -------------- ---------- ---------- --------- ----------- --------- ----------

GRAND TOTAL 40,764.03 25,339.61
--------- ---------
I. DIRECT DEBT OF THE REPUBLIC 26,430.22 13,297.15
--------- ---------
A. AVAILED OF BY GOVERNMENT AGENCIES 22,866.43 11,560.63
--------- ---------
AUSTRIAN SCHILLINGS 102.27 7.71 1,287.43 97.12
-------- --------- -------- ---------
FIXED RATE 4.0000% 31/03/1997 30/06/2014 14.53 1.10 183.21 13.82
FIXED RATE 4.5000% 02/03/2002 30/12/2019 15.06 1.14 207.26 15.63
FIXED RATE 4.5000% 23/07/1999 31/12/2022 72.67 5.48 896.96 67.66
BELGIAN FRANCS 200.00 5.15 25.00 0.64
-------- --------- -------- ---------
INTEREST FREE 0.0000% 06/04/1977 31/12/2006 50.00 1.29 10.00 0.26
INTEREST FREE 0.0000% 11/06/1976 31/12/2005 50.00 1.29 7.50 0.19
FIXED RATE 2.0000% 15/12/1975 31/12/2004 50.00 1.29 5.00 0.13
FIXED RATE 2.0000% 21/08/1974 31/12/2003 50.00 1.29 2.50 0.06
CANADIAN DOLLARS 3.89 2.50 2.14 1.37
-------- --------- -------- ---------
INTEREST FREE 0.0000% 12/11/1974 03/09/2024 3.89 2.50 2.14 1.37
SWISS FRANCS 103.98 74.15 46.27 32.99
-------- --------- -------- ---------
FIXED RATE 0.0125% 01/01/1998 30/04/2005 6.64 4.73 3.32 2.37
FIXED RATE 0.0125% 01/05/1990 31/12/2003 1.71 1.22 0.14 0.10
FIXED RATE 4.6300% 01/01/1998 30/04/2014 37.60 26.81 19.92 14.20
CHF LIBOR 0.0125% 14/09/1998 15/11/2005 1.62 1.15 0.92 0.66
CHF LIBOR 0.0000% 25/09/2001 20/09/2014 22.77 16.24 18.34 13.08
CHF LIBOR 0.0000% 25/09/2001 20/09/2008 22.77 16.24 3.64 2.59
LIBOR 6 MONTHS DEPOSIT 0.0138% 10/03/1989 31/12/2008 10.87 7.75 0.00 0.00
DEUTSCHEMARKS 67.33 35.73 30.99 16.44
-------- --------- -------- ---------
FIXED RATE 2.0000% 03/08/1984 31/12/2014 13.50 7.16 7.91 4.20
FIXED RATE 2.0000% 03/08/1984 31/12/2014 16.50 8.76 9.67 5.13
FIXED RATE 2.0000% 12/10/1990 31/12/2020 6.60 3.50 5.94 3.15
FIXED RATE 2.0000% 12/05/1982 31/12/2012 2.73 1.45 1.34 0.71
FIXED RATE 2.0000% 10/04/1981 30/06/2011 3.00 1.59 1.28 0.68
FIXED RATE 2.0000% 20/06/1974 30/06/2004 10.00 5.31 0.73 0.39
FIXED RATE 2.0000% 23/06/1978 30/06/2008 15.00 7.96 4.13 2.19
DANISH KRONER 80.00 11.18 18.67 2.61
-------- --------- -------- ---------
INTEREST FREE 0.0000% 26/06/1981 01/04/2006 65.00 9.08 12.80 1.79
INTEREST FREE 0.0000% 20/02/1985 01/10/2009 15.00 2.10 5.87 0.82
EURO 154.37 160.23 63.06 65.46
-------- --------- -------- ---------
INTEREST FREE 0.0000% 29/03/2000 21/03/2016 8.48 8.80 8.48 8.80
INTEREST FREE 0.0000% 22/09/2000 15/10/2017 1.84 1.91 1.84 1.91
FIXED RATE 0.4700% 22/01/1998 30/09/2030 0.74 0.77 0.74 0.77
FIXED RATE 0.4700% 22/01/1998 30/09/2030 3.20 3.32 3.24 3.36
FIXED RATE 0.7500% 14/02/2002 30/06/2042 7.39 7.67 0.00 0.00
FIXED RATE 0.7500% 14/02/2002 30/06/2042 10.69 11.09 0.00 0.00
FIXED RATE 1.5000% 17/02/1995 29/11/2014 8.12 8.42 8.08 8.39
FIXED RATE 3.4500% 28/02/2002 31/03/2012 18.17 18.86 3.09 3.21
FIXED RATE 3.6500% 28/02/2002 31/03/2025 36.34 37.72 7.66 7.95
FIXED RATE 4.0000% 16/11/2000 30/06/2023 31.25 32.44 14.15 14.68
FIXED RATE 4.4000% 11/12/2001 31/12/2024 23.99 24.90 12.11 12.57
FIXED RATE 4.9400% 17/08/1999 30/04/2010 3.40 3.53 3.06 3.18
FIXED RATE 4.9400% 17/08/1999 30/04/2010 0.77 0.80 0.61 0.64
FRENCH FRANCS 1,581.90 250.32 824.29 130.44
-------- --------- -------- ---------
FIXED RATE 1.4000% 31/12/1994 31/12/2016 102.36 16.20 96.73 15.31
FIXED RATE 1.4000% 31/12/1994 31/12/2016 17.65 2.79 17.64 2.79
FIXED RATE 1.5000% 18/12/1995 31/12/2018 24.00 3.80 8.56 1.35
FIXED RATE 1.5000% 18/12/1995 31/12/2023 12.60 1.99 12.60 1.99
FIXED RATE 1.5000% 18/12/1995 31/12/2022 3.20 0.51 1.95 0.31
FIXED RATE 1.5000% 18/12/1995 31/12/2022 4.80 0.76 4.88 0.77
FIXED RATE 1.5000% 15/01/1997 30/09/2023 36.06 5.71 36.06 5.71
FIXED RATE 1.5000% 15/01/1997 30/09/2023 98.98 15.66 47.07 7.45
FIXED RATE 2.0000% 20/05/1992 31/12/2024 4.86 0.77 4.78 0.76
FIXED RATE 2.0000% 20/05/1992 01/09/2003 3.24 0.51 0.16 0.03
FIXED RATE 2.0000% 20/05/1992 31/12/2023 18.90 2.99 18.90 2.99
FIXED RATE 2.0000% 17/01/1992 31/12/2024 69.00 10.92 68.35 10.82
FIXED RATE 2.0000% 07/12/1990 31/12/2023 14.22 2.25 14.22 2.25
FIXED RATE 2.0000% 20/05/1992 31/12/2022 4.98 0.79 4.98 0.79
FIXED RATE 2.5000% 09/02/1990 31/12/2022 27.25 4.31 26.91 4.26
FIXED RATE 2.5000% 09/02/1990 31/12/2022 29.07 4.60 28.51 4.51
FIXED RATE 2.5000% 09/02/1990 31/12/2022 17.40 2.75 17.18 2.72
FIXED RATE 2.5000% 22/01/1992 31/12/2023 6.67 1.06 6.58 1.04
FIXED RATE 3.0000% 10/10/1989 31/12/2023 28.50 4.51 25.56 4.04
FIXED RATE 3.0000% 31/07/1989 21/03/2020 9.50 1.50 8.41 1.33
FIXED RATE 3.1000% 08/12/1993 31/12/2014 80.00 12.66 73.51 11.63
FIXED RATE 3.1000% 08/12/1993 31/12/2014 42.40 6.71 38.41 6.08
FIXED RATE 3.1000% 08/12/1993 31/12/2014 8.00 1.27 7.66 1.21
FIXED RATE 3.3000% 05/11/1993 30/06/2013 10.40 1.65 8.83 1.40
FIXED RATE 3.3000% 05/11/1993 30/06/2013 18.40 2.91 15.77 2.49

T-8

EXTERNAL DEBT OF THE REPUBLIC OF THE PHILIPPINES/ (1)/ -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS OF CURRENCY INDICATED

INTEREST RATE/ ORIGINAL OUTSTANDING BALANCE
SPREAD/ AMOUNT CONTRACTED AS OF
SERVICE CHARGE YEAR YEAR OF (IN ORIG. (IN US (IN ORIG. (IN US
CURRENCY INTEREST RATE BASIS (Per Annum) CONTRACTED MATURITY CURR) DOLLAR)/(2)/ CURR) DOLLAR)/(2)/
- -------- ----------------------- -------------- ---------- ---------- ------------ ----------- ---------- -----------

FIXED RATE 3.3000% 04/08/1993 31/12/2013 73.42 11.62 64.10 10.14
FIXED RATE 3.3000% 05/11/1993 30/06/2013 21.60 3.42 0.00 0.00
FIXED RATE 3.5000% 21/12/1992 30/09/2015 21.60 3.42 0.00 0.00
FIXED RATE 3.5000% 21/12/1992 30/09/2015 128.00 20.25 0.00 0.00
FIXED RATE 3.5000% 21/12/1993 30/09/2016 15.00 2.37 0.00 0.00
FIXED RATE 3.5000% 21/12/1994 30/09/2017 55.20 8.73 0.00 0.00
FIXED RATE 3.5000% 21/12/1992 30/09/2015 53.36 8.44 0.00 0.00
FIXED RATE 3.5000% 21/12/1995 30/09/2015 15.00 2.37 11.85 1.87
FIXED RATE 3.5000% 21/12/1995 31/12/2017 5.00 0.79 4.14 0.65
FIXED RATE 3.5000% 21/12/1996 30/09/2018 49.70 7.86 6.31 1.00
FIXED RATE 3.5000% 21/12/1997 30/12/2019 24.00 3.80 23.98 3.80
FIXED RATE 5.6800% 15/01/1997 08/02/2010 39.99 6.33 21.39 3.38
FIXED RATE 5.8200% 08/05/1997 30/12/2010 24.04 3.80 16.25 2.57
FIXED RATE 6.9100% 31/12/1995 30/12/2008 8.40 1.33 4.20 0.66
FIXED RATE 7.3500% 31/12/1995 31/12/2017 21.16 3.35 0.00 0.00
FIXED RATE 7.3500% 31/12/1994 31/12/2016 7.35 1.16 4.41 0.70
FIXED RATE 7.3500% 31/12/1994 31/12/2016 42.64 6.75 25.80 4.08
FIXED RATE 7.3500% 31/12/1995 31/12/2017 8.37 1.32 0.00 0.00
FIXED RATE 7.5000% 31/12/1995 31/12/2017 34.45 5.45 22.03 3.49
FIXED RATE 7.5000% 31/12/1992 30/09/2008 32.00 5.06 0.00 0.00
FIXED RATE 7.5000% 31/12/1992 30/09/2008 13.34 2.11 0.00 0.00
FIXED RATE 7.5000% 31/12/1992 30/09/2008 5.40 0.85 0.00 0.00
FIXED RATE 7.5500% 23/06/1993 05/07/2004 5.40 0.85 0.00 0.00
FIXED RATE 7.5500% 08/12/1993 31/12/2004 20.00 3.16 6.99 1.11
FIXED RATE 7.5500% 08/12/1993 31/12/2004 2.00 0.32 0.80 0.13
FIXED RATE 7.5500% 23/06/1992 05/07/2004 4.60 0.73 1.15 0.18
FIXED RATE 7.5500% 23/06/1992 05/05/2004 2.60 0.41 0.65 0.10
FIXED RATE 7.5500% 08/12/1993 31/12/2004 10.60 1.68 3.70 0.59
FIXED RATE 8.3000% 28/04/1989 31/12/2003 28.50 4.51 0.00 0.00
FIXED RATE 9.2000% 07/12/1990 09/11/2004 9.48 1.50 0.47 0.07
FIXED RATE 9.2000% 17/01/1991 09/06/2004 12.60 1.99 1.26 0.20
FIXED RATE 9.2000% 09/02/1990 01/11/2003 19.73 3.12 0.00 0.00
FIXED RATE 9.2000% 23/06/1992 30/06/2005 18.35 2.90 5.51 0.87
FIXED RATE 9.2000% 22/01/1992 01/12/2003 4.83 0.76 0.71 0.11
FIXED RATE 9.2000% 17/01/1992 19/07/2003 51.77 8.19 4.40 0.70
POUNDS STERLING 186.32 298.31 13.61 21.80
------------ --------- ---------- --------
FIXED RATE 5.9500% 14/07/1995 01/06/2008 69.23 110.85 0.00 0.00
FIXED RATE 6.6000% 05/07/1996 01/08/2007 13.34 21.36 8.26 13.22
FIXED RATE 6.7400% 31/03/2001 28/02/2013 16.25 26.02 2.37 3.79
FIXED RATE 8.1000% 30/07/1992 31/01/2005 11.95 19.14 2.99 4.78
LIBOR 6 MONTHS DEPOSIT 0.0000% 31/12/1997 31/07/2012 75.54 120.95 0.00 0.00
ITALIAN LIRA 10,185.74 5.46 8,717.61 4.67
------------ --------- ---------- --------
LIBOR 6 MONTHS DEPOSIT 1.5000% 30/06/1990 25/05/2011 10,185.74 5.46 8,717.61 4.67
JAPANESE YEN 1,354,861.96 11,298.19 676,786.57 5,643.72
------------ --------- ---------- --------
LONG TERM PRIME LEMDING
RATE -0.0200% 17/02/1999 15/09/2018 43,800.00 365.25 12,080.00 100.74
LONG TERM PRIME LEMDING
RATE -0.0200% 17/02/2000 15/09/2019 43,800.00 365.25 35,553.75 296.48
LONG TERM PRIME LEMDING
RATE 0.5000% 23/06/1997 15/05/2021 20,800.00 173.45 7,183.29 59.90
FIXED RATE 0.7500% 10/03/1999 20/03/2039 36,300.00 302.71 24,200.00 201.80
FIXED RATE 0.7500% 28/12/1999 20/12/2039 813.00 6.78 0.00 0.00
FIXED RATE 0.7500% 28/12/1999 20/12/2039 432.00 3.60 221.31 1.85
FIXED RATE 0.7500% 28/12/1999 20/12/2039 722.00 6.02 142.70 1.19
FIXED RATE 0.7500% 28/12/1999 20/12/2039 2,828.00 23.58 817.69 6.82
FIXED RATE 0.7500% 28/12/1999 20/12/2039 967.00 8.06 282.15 2.35
FIXED RATE 0.7500% 28/12/1999 20/12/2039 844.00 7.04 176.59 1.47
FIXED RATE 0.7500% 28/12/1999 20/12/2039 747.00 6.23 250.29 2.09
FIXED RATE 0.7500% 28/12/1999 20/12/2039 444.00 3.70 185.42 1.55
FIXED RATE 0.7500% 28/12/1999 20/12/2039 1,221.00 10.18 626.35 5.22
FIXED RATE 0.7500% 28/12/1999 20/12/2039 1,022.00 8.52 769.00 6.41
FIXED RATE 0.7500% 07/04/2000 20/04/2040 1,071.00 8.93 451.73 3.77
FIXED RATE 0.7500% 31/08/2000 20/08/2040 14,724.00 122.78 425.86 3.55
FIXED RATE 0.7500% 31/08/2000 20/08/2040 3,549.00 29.60 270.74 2.26
FIXED RATE 0.7500% 10/09/1998 20/09/2038 894.00 7.46 507.14 4.23
FIXED RATE 0.7500% 10/09/1998 20/09/2038 3,077.00 25.66 1,191.28 9.93
FIXED RATE 0.7500% 10/09/1998 20/09/2038 580.00 4.84 290.78 2.42
FIXED RATE 0.7500% 10/09/1998 20/09/2038 1,041.00 8.68 281.29 2.35
FIXED RATE 0.7500% 10/09/1998 20/09/2038 54.00 0.45 26.23 0.22
FIXED RATE 0.7500% 10/09/1998 20/09/2038 404.00 3.37 312.52 2.61
FIXED RATE 0.7500% 10/09/1998 20/09/2038 5,349.00 44.61 711.82 5.94
FIXED RATE 0.7500% 10/09/1998 20/09/2038 2,910.00 24.27 399.59 3.33

T-9

EXTERNAL DEBT OF THE REPUBLIC OF THE PHILIPPINES/ (1)/ -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS OF CURRENCY INDICATED

INTEREST RATE/ ORIGINAL OUTSTANDING BALANCE
SPREAD/ AMOUNT CONTRACTED AS OF
SERVICE CHARGE YEAR YEAR OF (INORIG. (IN US (INORIG. (IN US
CURRENCY INTEREST RATE BASIS (Per Annum) CONTRACTED MATURITY CURR) DOLLAR)/(2)/ CURR) DOLLAR)/(2)/
- -------- ------------------- -------------- ---------- ---------- --------- ----------- --------- -----------

FIXED RATE 0.7500% 10/09/1998 20/09/2038 2,252.00 18.78 841.79 7.02
FIXED RATE 0.7500% 10/09/1998 20/09/2038 393.00 3.28 203.57 1.70
FIXED RATE 0.7500% 20/05/2001 20/05/2041 1,346.00 11.22 326.39 2.72
FIXED RATE 0.7500% 20/05/2001 20/05/2041 856.00 7.14 0.00 0.00
FIXED RATE 0.7500% 20/05/2001 20/05/2041 1,098.00 9.16 0.00 0.00
FIXED RATE 0.7500% 20/05/2001 20/05/2041 1,070.00 8.92 0.00 0.00
FIXED RATE 0.7500% 20/05/2001 20/05/2041 1,080.00 9.01 141.30 1.18
FIXED RATE 0.7500% 20/05/2001 20/05/2041 992.00 8.27 1,028.43 8.58
FIXED RATE 0.7500% 20/05/2001 20/05/2041 233.00 1.94 0.00 0.00
FIXED RATE 0.7500% 20/05/2001 20/05/2041 1,134.00 9.46 382.02 3.19
FIXED RATE 0.7500% 20/05/2001 20/05/2041 2,034.00 16.96 199.59 1.66
FIXED RATE 0.9500% 31/08/2000 20/08/2040 14,724.00 122.78 0.00 0.00
FIXED RATE 0.9500% 31/08/2000 20/08/2040 3,549.00 29.60 0.00 0.00
FIXED RATE 1.0000% 07/04/2000 20/04/2040 7,858.00 65.53 0.00 0.00
FIXED RATE 1.3000% 28/12/1999 20/12/2029 519.00 4.33 46.48 0.39
FIXED RATE 1.3000% 28/12/1999 20/12/2029 255.00 2.13 33.41 0.28
FIXED RATE 1.3000% 28/12/1999 20/12/2029 1,436.00 11.97 531.45 4.43
FIXED RATE 1.3000% 28/12/1999 20/12/2029 7,792.00 64.98 2,460.96 20.52
FIXED RATE 1.3000% 28/12/1999 20/12/2029 145.00 1.21 0.00 0.00
FIXED RATE 1.7000% 10/09/1998 20/09/2028 6,734.00 56.15 193.72 1.62
FIXED RATE 1.7000% 10/09/1998 20/09/2028 291.00 2.43 0.00 0.00
FIXED RATE 1.7000% 10/09/1998 20/09/2028 2,428.00 20.25 619.81 5.17
FIXED RATE 1.7000% 20/05/2001 20/05/2041 2,556.00 21.31 266.70 2.22
FIXED RATE 1.7000% 20/05/2001 20/05/2041 5,175.00 43.15 0.00 0.00
FIXED RATE 1.8000% 28/12/1999 20/12/2029 6,397.00 53.34 166.69 1.39
FIXED RATE 1.8000% 28/12/1999 20/12/2029 5,356.00 44.66 81.95 0.68
FIXED RATE 1.8000% 28/12/1999 20/12/2029 15,299.00 127.58 3,794.81 31.64
FIXED RATE 1.8000% 28/12/1999 20/12/2029 12,556.00 104.70 585.18 4.88
FIXED RATE 1.8000% 28/12/1999 20/12/2029 4,885.00 40.74 0.00 0.00
FIXED RATE 1.8000% 28/12/1999 20/12/2029 6.59 0.05 0.00 0.00
FIXED RATE 1.8000% 28/12/1999 20/12/2029 4,321.00 36.03 233.34 1.95
FIXED RATE 1.8000% 28/12/1999 20/12/2029 4,270.00 35.61 0.00 0.00
FIXED RATE 1.9500% 22/09/2000 14/10/2013 16,600.00 138.43 12,957.70 108.05
FIXED RATE 2.1000% 25/03/1999 15/12/2011 20,308.18 169.35 5,727.58 47.76
FIXED RATE 2.1000% 25/08/1999 15/06/2011 9,697.89 80.87 8,494.47 70.84
FIXED RATE 2.1000% 30/08/1995 20/08/2025 789.00 6.58 638.37 5.32
FIXED RATE 2.1000% 29/03/1996 20/03/2026 1,048.00 8.74 954.78 7.96
FIXED RATE 2.1000% 18/03/1997 20/03/2027 1,192.00 9.94 505.76 4.22
FIXED RATE 2.1000% 18/03/1997 20/03/2027 1,226.00 10.22 640.44 5.34
FIXED RATE 2.2000% 10/09/1998 20/09/2028 4,955.00 41.32 2,368.30 19.75
FIXED RATE 2.2000% 10/09/1998 20/09/2028 10,487.00 87.45 2,153.42 17.96
FIXED RATE 2.2000% 10/09/1998 20/09/2028 5,148.00 42.93 104.11 0.87
FIXED RATE 2.2000% 10/09/1999 20/09/2028 2,387.00 19.91 0.00 0.00
FIXED RATE 2.2000% 10/09/1998 20/09/2028 11,884.00 99.10 2,126.81 17.74
FIXED RATE 2.2000% 20/05/2001 20/05/2041 6,948.00 57.94 0.00 0.00
FIXED RATE 2.2000% 20/05/2001 20/05/2041 4,687.00 39.08 0.00 0.00
FIXED RATE 2.2000% 20/05/2001 20/05/2041 10,645.00 88.77 0.00 0.00
FIXED RATE 2.2000% 20/05/2001 20/05/2041 5,135.00 42.82 0.00 0.00
FIXED RATE 2.2000% 20/05/2001 20/05/2041 4,130.00 34.44 0.00 0.00
FIXED RATE 2.2000% 20/05/2001 20/05/2041 5,523.00 46.06 0.00 0.00
FIXED RATE 2.3000% 30/08/1995 20/08/2025 795.00 6.63 785.96 6.55
FIXED RATE 2.3000% 30/08/1995 20/08/2025 586.00 4.89 479.62 4.00
FIXED RATE 2.3000% 30/08/1995 20/08/2025 1,327.00 11.07 1,493.54 12.45
FIXED RATE 2.3000% 30/08/1995 20/08/2025 597.00 4.98 568.85 4.74
FIXED RATE 2.3000% 30/08/1995 20/08/2025 640.00 5.34 662.32 5.52
FIXED RATE 2.3000% 30/08/1995 20/08/2025 1,792.00 14.94 1,313.38 10.95
FIXED RATE 2.3000% 30/08/1995 20/08/2025 490.00 4.09 455.48 3.80
FIXED RATE 2.3000% 30/08/1995 20/08/2025 1,658.00 13.83 2,292.06 19.11
FIXED RATE 2.3000% 30/08/1995 20/08/2025 569.00 4.74 559.10 4.66
FIXED RATE 2.3000% 29/03/1996 20/03/2026 305.00 2.54 227.20 1.89
FIXED RATE 2.3000% 18/03/1997 20/03/2027 902.00 7.52 593.34 4.95
FIXED RATE 2.3000% 18/03/1997 20/03/2027 985.00 8.21 885.94 7.39
FIXED RATE 2.3000% 18/03/1997 20/03/2027 821.00 6.85 473.93 3.95
FIXED RATE 2.3000% 18/03/1997 20/03/2027 4,019.00 33.51 1,627.17 13.57
FIXED RATE 2.5000% 30/08/1995 20/08/2025 7,523.00 62.73 4,611.39 38.45
FIXED RATE 2.5000% 29/03/1996 20/03/2026 5,863.00 48.89 5,956.00 49.67
FIXED RATE 2.5000% 18/03/1997 20/03/2027 8,219.00 68.54 1,675.99 13.98
FIXED RATE 2.5000% 18/03/1997 20/03/2027 6,753.00 56.31 1,626.60 13.56
FIXED RATE 2.7000% 28/03/1991 20/03/2016 10,575.00 88.18 7,716.87 64.35
FIXED RATE 2.7000% 16/07/1991 20/06/2021 20,020.00 166.95 18,066.77 150.66
FIXED RATE 2.7000% 26/12/1988 20/12/2013 15,000.00 125.09 8,918.91 74.37
FIXED RATE 2.7000% 26/12/1988 20/12/2013 25,000.00 208.48 14,864.85 123.96
FIXED RATE 2.7000% 26/12/1988 20/12/2013 12,500.00 104.24 7,432.41 61.98
FIXED RATE 2.7000% 23/11/1989 20/11/2014 40,000.00 333.56 25,945.94 216.36
FIXED RATE 2.7000% 21/12/1990 20/12/2020 28,200.00 235.16 24,760.94 206.48

T-10

EXTERNAL DEBT OF THE REPUBLIC OF THE PHILIPPINES/ (1)/ -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS OF CURRENCY INDICATED

INTEREST RATE/ ORIGINAL OUTSTANDING BALANCE
SPREAD/ AMOUNT CONTRACTED AS OF
SERVICE CHARGE YEAR YEAR OF (INORIG. (IN US (INORIG. (IN US
CURRENCY INTEREST RATE BASIS (Per Annum) CONTRACTED MATURITY CURR) DOLLAR)/(2)/ CURR) DOLLAR)/(2)/
- -------- ------------------- -------------- ---------- ---------- --------- ----------- --------- -----------

FIXED RATE 2.7000% 28/03/1991 20/03/2016 13,219.00 110.23 9,646.29 80.44
FIXED RATE 2.7000% 16/07/1991 20/06/2016 13,219.00 110.23 9,646.29 80.44
FIXED RATE 2.7000% 26/05/1989 20/05/2019 2,130.40 17.77 1,714.68 14.30
FIXED RATE 2.7000% 09/02/1990 20/02/2020 2,304.00 19.21 1,942.71 16.20
FIXED RATE 2.7000% 09/02/1990 20/02/2020 4,238.00 35.34 3,119.73 26.02
FIXED RATE 2.7000% 09/02/1990 20/02/2020 2,079.00 17.34 1,724.52 14.38
FIXED RATE 2.7000% 09/02/1990 20/02/2020 5,708.00 47.60 4,591.16 38.29
FIXED RATE 2.7000% 09/02/1990 20/02/2020 8,634.00 72.00 6,332.90 52.81
FIXED RATE 2.7000% 09/02/1990 20/02/2020 316.25 2.64 269.96 2.25
FIXED RATE 2.7000% 09/02/1990 20/02/2020 4,986.00 41.58 4,243.61 35.39
FIXED RATE 2.7000% 09/02/1990 20/02/2020 5,080.00 42.36 2,711.00 22.61
FIXED RATE 2.7000% 09/02/1990 20/02/2020 10,560.00 88.06 5,360.88 44.70
FIXED RATE 2.7000% 09/02/1990 20/02/2020 21,752.00 181.39 13,953.80 116.36
FIXED RATE 2.7000% 09/02/1990 20/02/2020 4,867.00 40.59 3,279.99 27.35
FIXED RATE 2.7000% 09/02/1990 20/02/2020 4,301.00 35.87 3,671.15 30.61
FIXED RATE 2.7000% 16/07/1991 20/06/2021 2,065.00 17.22 1,638.29 13.66
FIXED RATE 2.7000% 16/07/1991 20/06/2021 1,663.00 13.87 1,364.49 11.38
FIXED RATE 2.7000% 16/07/1991 20/06/2021 1,795.00 14.97 1,135.46 9.47
FIXED RATE 2.7000% 16/07/1991 20/06/2021 5,266.00 43.91 4,355.90 36.32
FIXED RATE 2.7000% 16/07/1991 20/06/2021 10,790.00 89.98 9,546.07 79.60
FIXED RATE 2.7000% 16/07/1991 20/06/2021 3,516.00 29.32 3,146.41 26.24
FIXED RATE 2.7000% 16/07/1991 20/06/2021 9,427.00 78.61 8,386.16 69.93
FIXED RATE 2.7000% 20/03/1992 20/03/2022 7,655.00 63.84 4,432.35 36.96
FIXED RATE 2.7000% 30/08/1995 20/08/2025 5,356.00 44.66 5,030.11 41.95
FIXED RATE 2.7000% 30/08/1995 20/08/2025 3,454.00 28.80 2,836.65 23.65
FIXED RATE 2.7000% 30/08/1995 20/08/2025 17,064.00 142.30 11,368.72 94.80
FIXED RATE 2.7000% 30/08/1995 20/08/2025 4,982.00 41.54 4,693.66 39.14
FIXED RATE 2.7000% 30/08/1995 20/08/2025 5,746.00 47.92 3,114.35 25.97
FIXED RATE 2.7000% 30/08/1995 20/08/2025 11,103.00 92.59 6,110.79 50.96
FIXED RATE 2.7000% 30/08/1995 20/08/2025 4,275.00 35.65 3,388.18 28.25
FIXED RATE 2.7000% 30/08/1995 20/08/2025 7,893.00 65.82 5,777.11 48.18
FIXED RATE 2.7000% 30/08/1995 20/08/2025 2,303.00 19.20 1,256.70 10.48
FIXED RATE 2.7000% 18/03/1997 20/03/2027 4,844.00 40.39 2,133.19 17.79
FIXED RATE 2.7000% 18/03/1997 20/03/2027 6,698.00 55.85 2,610.98 21.77
FIXED RATE 2.7000% 18/03/1997 20/03/2027 5,772.00 48.13 4,385.39 36.57
FIXED RATE 2.7000% 18/03/1997 20/03/2027 7,103.00 59.23 1,647.01 13.73
FIXED RATE 2.7000% 26/05/1989 20/05/2019 2,063.00 17.20 1,631.65 13.61
FIXED RATE 2.7000% 26/05/1989 20/05/2019 4,776.00 39.83 2,653.00 22.12
FIXED RATE 2.7000% 26/05/1989 20/05/2019 2,500.00 20.85 2,012.18 16.78
FIXED RATE 2.7000% 26/05/1989 20/05/2019 2,633.00 21.96 1,572.85 13.12
FIXED RATE 2.7000% 26/05/1989 20/05/2019 5,500.00 45.86 4,057.35 33.83
FIXED RATE 3.0000% 17/12/1987 20/12/2012 30,000.00 250.17 16,216.20 135.23
FIXED RATE 3.0000% 03/09/1992 20/09/2017 25,380.00 211.64 20,578.35 171.60
FIXED RATE 3.0000% 19/08/1993 20/08/2023 6,872.00 57.31 6,665.85 55.59
FIXED RATE 3.0000% 19/08/1993 20/08/2023 4,633.00 38.63 3,967.75 33.09
FIXED RATE 3.0000% 19/08/1993 20/08/2023 3,803.00 31.71 3,557.21 29.66
FIXED RATE 3.0000% 19/08/1993 20/08/2023 3,055.00 25.48 3,054.99 25.48
FIXED RATE 3.0000% 19/08/1993 20/08/2023 9,294.00 77.50 4,407.96 36.76
FIXED RATE 3.0000% 20/12/1994 20/12/2024 9,620.00 80.22 9,471.92 78.99
FIXED RATE 3.0000% 20/12/1994 20/12/2024 11,754.00 98.02 11,753.90 98.02
FIXED RATE 3.0000% 20/06/1980 20/06/2010 5,400.00 45.03 1,975.59 16.47
FIXED RATE 3.0000% 20/06/1980 20/06/2010 62.28 0.52 22.77 0.19
FIXED RATE 3.0000% 20/06/1980 20/06/2010 577.55 4.82 211.28 1.76
FIXED RATE 3.0000% 20/06/1980 20/06/2010 1,860.00 15.51 680.48 5.67
FIXED RATE 3.0000% 20/06/1980 20/06/2010 85.18 0.71 31.16 0.26
FIXED RATE 3.0000% 20/06/1980 20/06/2010 149.90 1.25 54.83 0.46
FIXED RATE 3.0000% 20/06/1980 20/06/2010 5,410.00 45.11 1,979.27 16.51
FIXED RATE 3.0000% 20/06/1980 20/06/2010 810.07 6.76 296.36 2.47
FIXED RATE 3.0000% 20/06/1980 20/06/2010 979.81 8.17 358.46 2.99
FIXED RATE 3.0000% 16/06/1981 20/06/2011 5,000.00 41.70 1,976.57 16.48
FIXED RATE 3.0000% 16/06/1981 20/06/2011 3,825.52 31.90 1,586.17 13.23
FIXED RATE 3.0000% 16/06/1981 20/06/2011 7,571.84 63.14 3,139.53 26.18
FIXED RATE 3.0000% 31/05/1982 20/05/2012 3,985.19 33.23 1,846.76 15.40
FIXED RATE 3.0000% 31/05/1982 20/05/2012 2,765.83 23.06 1,281.70 10.69
FIXED RATE 3.0000% 31/05/1982 20/05/2012 301.37 2.51 139.63 1.16
FIXED RATE 3.0000% 31/05/1982 20/05/2012 3,420.92 28.53 1,585.28 13.22
FIXED RATE 3.0000% 31/05/1982 10/05/2012 3,773.45 31.47 1,748.67 14.58
FIXED RATE 3.0000% 09/09/1983 20/09/2013 2,943.82 24.55 1,579.60 13.17
FIXED RATE 3.0000% 09/09/1983 20/09/2013 2,123.40 17.71 1,095.42 9.13
FIXED RATE 3.0000% 09/09/1983 20/09/2013 1,140.00 9.51 554.25 4.62
FIXED RATE 3.0000% 09/09/1983 20/09/2013 4,600.00 38.36 2,411.11 20.11
FIXED RATE 3.0000% 27/01/1988 20/01/2018 2,254.00 18.80 119.75 1.00
FIXED RATE 3.0000% 27/01/1988 20/01/2018 4,837.00 40.34 3,362.23 28.04
FIXED RATE 3.0000% 27/01/1988 20/01/2018 10,818.00 90.21 6,815.72 56.84
FIXED RATE 3.0000% 27/01/1988 20/01/2018 2,090.00 17.43 1,547.15 12.90

T-11

EXTERNAL DEBT OF THE REPUBLIC OF THE PHILIPPINES/ (1)/ -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS OF CURRENCY INDICATED

INTEREST RATE/ ORIGINAL OUTSTANDING BALANCE
SPREAD/ AMOUNT CONTRACTED AS OF
SERVICE CHARGE YEAR YEAR OF (IN ORIG. (IN US (IN ORIG. (IN US
CURRENCY INTEREST RATE BASIS (Per Annum) CONTRACTED MATURITY CURR) DOLLAR)/(2)/ CURR) DOLLAR)/(2)/
- -------- ------------------- -------------- ---------- ---------- --------- ----------- --------- -----------

FIXED RATE 3.0000% 27/01/1988 20/01/2018 5,735.00 47.82 4,302.65 35.88
FIXED RATE 3.0000% 27/01/1988 20/01/2018 3,193.00 26.63 2,047.36 17.07
FIXED RATE 3.0000% 27/01/1988 20/01/2018 4,611.00 38.45 3,397.35 28.33
FIXED RATE 3.0000% 27/01/1988 20/01/2018 3,372.00 28.12 2,055.21 17.14
FIXED RATE 3.0000% 27/01/1988 20/01/2018 2,000.00 16.68 1,057.81 8.82
FIXED RATE 3.0000% 27/01/1988 20/01/2018 707.00 5.90 457.06 3.81
FIXED RATE 3.0000% 27/01/1988 20/01/2018 313.93 2.62 237.34 1.98
FIXED RATE 3.0000% 27/01/1988 20/01/2018 300.44 2.51 227.14 1.89
FIXED RATE 3.0000% 31/05/1988 20/05/2018 14,003.00 116.77 10,543.04 87.92
FIXED RATE 3.0000% 20/12/1994 20/12/2024 4,616.00 38.49 4,323.47 36.05
FIXED RATE 3.2500% 14/01/1978 20/01/2003 329.75 2.75 8.91 0.07
FIXED RATE 3.2500% 14/01/1978 20/01/2003 1,773.53 14.79 47.93 0.40
FIXED RATE 3.2500% 14/01/1978 20/01/2003 2,986.50 24.90 80.72 0.67
FIXED RATE 3.2500% 09/11/1978 20/11/2008 4,554.10 37.98 1,332.90 11.12
FIXED RATE 3.2500% 09/11/1978 20/11/2008 1,257.12 10.48 367.93 3.07
FIXED RATE 3.2500% 09/11/1978 20/11/2008 2,913.08 24.29 852.60 7.11
FIXED RATE 3.2500% 09/11/1978 20/11/2008 5,263.39 43.89 1,540.49 12.85
FIXED RATE 3.2500% 09/11/1978 20/05/2008 8,128.00 67.78 2,368.27 19.75
FIXED RATE 3.2500% 09/11/1978 20/11/2008 290.07 2.42 84.89 0.71
FIXED RATE 3.2500% 09/11/1978 20/11/2008 176.78 1.47 51.73 0.43
FIXED RATE 3.2500% 09/11/1978 20/11/2008 155.99 1.30 45.65 0.38
FIXED RATE 3.2500% 09/11/1978 20/11/2008 2,185.29 18.22 639.58 5.33
FIXED RATE 3.5000% 22/12/1994 31/05/2007 48,000.00 400.27 19,399.25 161.77
FIXED RATE 3.5000% 26/11/1986 20/11/2006 32,895.00 274.31 8,489.03 70.79
FIXED RATE 3.5000% 07/05/1984 20/05/2014 2,997.01 24.99 1,681.23 14.02
FIXED RATE 3.5000% 07/05/1984 20/05/2014 1,381.00 11.52 314.64 2.62
FIXED RATE 3.5000% 30/05/1986 20/05/2016 102.06 0.85 67.18 0.56
FIXED RATE 3.5000% 30/05/1986 20/05/2016 457.38 3.81 301.19 2.51
FIXED RATE 3.5000% 30/05/1986 20/05/2016 7,595.00 63.33 4,809.67 40.11
FIXED RATE 3.5000% 30/05/1986 20/05/2016 3,979.50 33.19 2,620.62 21.85
FIXED RATE 3.5000% 30/05/1986 20/05/2016 1,439.00 12.00 634.96 5.29
FIXED RATE 3.5000% 30/05/1986 20/05/2016 1,457.60 12.15 959.88 8.00
FIXED RATE 4.2500% 26/03/1979 20/03/2004 10,855.20 90.52 880.15 7.34
FIXED RATE 5.0000% 01/10/1987 20/06/2003 39,120.00 326.22 3,401.73 28.37
FIXED RATE 6.0000% 11/03/1993 01/02/2013 25,000.00 208.48 14,851.58 123.85
FIXED RATE 6.0000% 27/04/1990 15/06/2009 48,000.00 400.27 17,052.75 142.20
LIBOR 6 MONTHS 2.2500% 22/09/2000 25/04/2015 2,940.00 24.52 2,940.00 24.52
LIBOR 6 MONTHS 2.5000% 13/09/2001 12/12/2006 3,583.80 29.89 3,583.80 29.89
KOREAN WON 24,961.98 20.79 4,223.42 3.52
--------- -------- --------- ------
FIXED RATE 2.5000% 24/02/1998 20/02/2028 21,172.00 17.64 2,075.81 1.73
FIXED RATE 3.5000% 12/03/1991 20/03/2011 3,789.98 3.16 2,147.61 1.79
KUWAIT DINAR 11.05 38.26 2.00 6.91
--------- -------- --------- ------
FIXED RATE 3.5000% 06/05/1998 15/08/2018 6.15 21.29 0.16 0.56
FIXED RATE 4.5000% 26/12/1984 15/02/2008 4.90 16.97 1.84 6.36
NETHERLANDS GUILDER 2.30 1.08 0.00 0.00
--------- -------- --------- ------
FIXED RATE 2.5000% 27/04/1984 31/12/2014 2.30 1.08 0.00 0.00
SWEDISH KRONER 18.31 2.08 18.21 2.07
--------- -------- --------- ------
INTEREST FREE 0.0000% 13/02/1998 30/12/2008 18.31 2.08 18.21 2.07
SPECIAL DRAWING RIGHT 909.36 1,228.00 670.08 904.87
--------- -------- --------- ------
INTEREST FREE 1.0000% 22/11/1990 15/08/2025 16.73 22.59 11.61 15.68
INTEREST FREE 1.0000% 27/12/1988 15/11/2023 5.91 7.98 5.32 7.18
INTEREST FREE 1.0000% 09/11/1990 15/11/2025 35.87 48.45 34.08 46.02
INTEREST FREE 1.0000% 11/07/1991 15/02/2026 50.00 67.52 48.13 64.99
INTEREST FREE 1.0000% 06/03/1992 01/06/2027 26.40 35.65 24.09 32.53
INTEREST FREE 1.0000% 27/12/1988 15/10/2023 18.68 25.22 14.43 19.49
INTEREST FREE 1.0000% 25/01/1991 15/08/2025 24.19 32.67 22.98 31.04
INTEREST FREE 1.0000% 24/06/1992 15/11/2026 27.16 36.68 22.65 30.59
INTEREST FREE 1.0000% 22/11/1990 15/08/2025 69.70 94.12 64.81 87.52
INTEREST FREE 1.0000% 18/12/1989 01/10/2024 25.04 33.82 14.53 19.62
INTEREST FREE 1.0000% 20/01/1995 15/10/2029 11.93 16.10 7.05 9.52
INTEREST FREE 1.0000% 25/10/1990 15/09/2025 18.25 24.64 17.00 22.95
INTEREST FREE 1.0000% 12/09/1988 15/05/2023 53.41 72.12 41.66 56.25
INTEREST FREE 1.0000% 17/02/1989 15/11/2023 14.77 19.95 13.09 17.67
INTEREST FREE 1.0000% 05/11/1993 15/06/2028 18.02 24.34 14.25 19.24
INTEREST FREE 1.0000% 17/02/1989 15/10/2023 25.85 34.91 23.27 31.42
INTEREST FREE 1.0000% 04/07/1988 01/04/2023 43.44 58.66 38.55 52.06
INTEREST FREE 1.0000% 05/10/1989 15/08/2024 39.77 53.70 36.79 49.68
INTEREST FREE 1.0000% 28/11/1991 15/11/2026 35.25 47.59 28.35 38.29
INTEREST FREE 1.0000% 20/01/1995 15/10/2029 36.80 49.69 21.88 29.54
INTEREST FREE 1.0000% 21/04/1988 01/02/2023 11.61 15.68 9.30 12.56
INTEREST FREE 1.0000% 28/11/1991 15/11/2026 22.03 29.75 21.48 29.00

T-12

EXTERNAL DEBT OF THE REPUBLIC OF THE PHILIPPINES/ (1)/ -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS OF CURRENCY INDICATED

INTEREST RATE/ ORIGINAL OUTSTANDING BALANCE
SPREAD/ AMOUNT CONTRACTED AS OF
SERVICE CHARGE YEAR YEAR OF (IN ORIG. (IN US (IN ORIG. (IN US
CURRENCY INTEREST RATE BASIS (Per Annum) CONTRACTED MATURITY CURR) DOLLAR)/(2)/ CURR) DOLLAR)/(2)/
- -------- ---------------------- -------------- ---------- ---------- --------- ----------- --------- -----------

INTEREST FREE 1.0000% 22/11/1993 01/06/2028 50.50 68.20 25.28 34.14
INTEREST FREE 1.0000% 11/01/1996 15/09/2029 15.65 21.13 4.24 5.72
INTEREST FREE 1.0000% 22/11/1990 15/11/2025 14.36 19.39 12.80 17.29
INTEREST FREE 1.0000% 24/12/1992 01/10/2027 34.65 46.79 12.43 16.79
INTEREST FREE 1.0000% 24/04/1986 15/05/2026 43.40 58.60 37.75 50.98
INTEREST FREE 1.0000% 27/11/1995 15/05/2030 9.63 13.00 7.34 9.91
INTEREST FREE 1.0000% 27/11/1995 15/04/2030 17.64 23.82 9.47 12.79
INTEREST FREE 1.0000% 04/06/1996 15/03/2021 12.76 17.23 5.85 7.89
INTEREST FREE 1.0000% 23/07/1997 15/05/2021 13.84 18.69 1.96 2.65
INTEREST FREE 1.0000% 21/01/1998 01/09/2032 11.02 14.88 3.37 4.55
INTEREST FREE 1.0000% 15/04/1998 15/11/2032 6.49 8.76 1.76 2.37
INTEREST FREE 0.0000% 29/11/2000 15/01/2040 4.50 6.08 0.00 0.00
INTEREST FREE 0.0000% 25/09/2000 15/01/2040 6.00 8.10 0.00 0.00
FIXED RATE 0.7500% 06/03/1996 15/03/2030 6.15 8.30 2.73 3.69
FIXED RATE 0.7500% 29/04/1998 15/03/2038 11.00 14.85 3.19 4.31
FIXED RATE 4.0000% 18/05/1992 01/04/2012 11.00 14.85 5.56 7.50
FIXED RATE 4.0000% 16/11/1982 01/08/2002 6.95 9.38 0.18 0.24
FIXED RATE 4.0000% 22/04/1987 01/03/2007 3.02 4.08 0.87 1.17
UNITED STATES DOLLARS 9,427.26 9,427.26 4,625.99 4,625.99
-------- -------- -------- --------
ADB FLOATING RATE 0.0000% 22/11/1990 15/11/2015 9.00 9.00 6.84 6.84
ADB FLOATING RATE 0.0000% 17/02/1989 15/10/2003 65.00 65.00 8.76 8.76
ADB FLOATING RATE 0.0000% 25/10/1990 15/09/2020 33.00 33.00 29.91 29.91
ADB FLOATING RATE 0.0000% 23/12/1986 01/04/2012 82.00 82.00 57.75 57.75
ADB FLOATING RATE 0.0000% 27/11/1995 15/05/2022 15.00 15.00 7.92 7.92
ADB FLOATING RATE 0.0000% 20/01/1995 15/10/2019 41.00 41.00 32.45 32.45
ADB FLOATING RATE 0.0000% 23/12/1986 15/06/2016 18.80 18.80 14.77 14.77
ADB FLOATING RATE 0.0000% 05/10/1989 15/08/2004 30.00 30.00 7.71 7.71
ADB FLOATING RATE 0.0000% 04/07/1988 01/04/2003 60.00 60.00 4.14 4.14
ADB FLOATING RATE 0.0000% 23/12/1986 01/10/2010 24.00 24.00 14.21 14.21
ADB FLOATING RATE 0.0000% 09/11/1990 15/11/2005 50.00 50.00 18.39 18.39
ADB FLOATING RATE 0.0000% 11/01/1996 15/09/2021 9.50 9.50 5.54 5.54
ADB FLOATING RATE 0.0000% 04/02/1991 15/08/2015 150.00 150.00 120.55 120.55
ADB FLOATING RATE 0.0000% 27/11/1995 15/04/2020 30.00 30.00 8.37 8.37
ADB FLOATING RATE 0.0000% 20/01/1995 01/10/2016 23.50 23.50 19.19 19.19
ADB FLOATING RATE 0.0000% 24/12/1992 01/10/2017 50.00 50.00 16.45 16.45
ADB FLOATING RATE 0.0000% 02/05/1996 01/05/2010 150.00 150.00 52.12 52.12
ADB FLOATING RATE 0.0000% 03/06/1997 15/03/2021 18.50 18.50 7.73 7.73
ADB FLOATING RATE 0.0000% 23/06/1997 15/05/2021 167.00 167.00 66.14 66.14
ADB FLOATING RATE 0.0000% 24/04/1986 15/05/2006 50.00 50.00 18.56 18.56
ADB FLOATING RATE 0.0000% 21/12/1998 15/08/2013 300.00 300.00 286.18 286.18
ADB FLOATING RATE 0.0000% 21/12/1998 01/08/2013 200.00 200.00 90.79 90.79
ADB FLOATING RATE 0.0000% 21/01/1998 01/09/2022 93.00 93.00 10.18 10.18
ADB FLOATING RATE 0.0000% 21/01/1998 01/09/2022 20.22 20.22 5.07 5.07
ADB FLOATING RATE 0.0000% 15/04/1998 15/11/2022 15.70 15.70 4.27 4.27
ADB FLOATING RATE 0.0000% 21/01/1998 15/11/2022 22.00 22.00 1.24 1.24
ADB FLOATING RATE 0.0000% 21/12/1998 01/08/2022 71.00 71.00 6.45 6.45
ADB FLOATING RATE 0.0000% 01/03/1999 01/08/2025 53.00 53.00 3.28 3.28
ADB FLOATING RATE 0.0000% 01/03/1999 01/12/2023 24.30 24.30 2.40 2.40
ADB FLOATING RATE 0.0000% 01/03/1999 15/12/2023 93.16 93.16 18.56 18.56
ADB FLOATING RATE 0.0000% 01/03/1999 15/08/2023 60.00 60.00 8.30 8.30
ADB FLOATING RATE 0.0000% 18/07/2000 15/08/2014 100.00 100.00 30.00 30.00
ADB FLOATING RATE 0.0000% 18/07/2000 15/08/2024 75.00 75.00 2.50 2.50
ADB FLOATING RATE 0.0000% 21/07/2000 15/02/2015 100.00 100.00 40.00 40.00
ADB FLOATING RATE 0.0000% 21/07/2000 15/02/2015 75.00 75.00 1.49 1.49
ADB FLOATING RATE 0.0000% 16/11/2000 15/08/2025 25.00 25.00 1.46 1.46
ADB FLOATING RATE 0.0000% 19/11/2001 15/08/2016 75.00 75.00 75.00 75.00
ADB FLOATING RATE 0.0000% 22/10/2001 15/09/2025 75.00 75.00 1.81 1.81
COST QUA. BOR. IBRD 6M 0.5000% 22/12/1989 15/03/2010 200.00 200.00 126.52 126.52
COST QUA. BOR. IBRD 6M 0.5000% 04/06/1984 01/07/2004 90.95 90.95 11.52 11.52
COST QUA. BOR. IBRD 6M 0.5000% 19/01/1990 01/02/2010 40.00 40.00 26.35 26.35
COST QUA. BOR. IBRD 6M 0.5000% 31/05/1989 15/06/2009 300.00 300.00 171.44 171.44
COST QUA. BOR. IBRD 6M 0.5000% 26/09/1984 01/10/2004 150.00 150.00 20.00 20.00
COST QUA. BOR. IBRD 6M 0.5000% 09/11/1989 15/09/2009 70.10 70.10 41.02 41.02
COST QUA. BOR. IBRD 6M 0.5000% 10/08/1984 15/08/2004 35.81 35.81 4.46 4.46
COST QUA. BOR. IBRD 6M 0.5000% 16/03/1990 15/04/2010 40.00 40.00 19.84 19.84
COST QUA. BOR. IBRD 6M 0.5000% 09/06/1993 01/08/2013 28.36 28.36 23.53 23.53
COST QUA. BOR. IBRD 6M 0.5000% 09/06/1993 01/08/2013 22.94 22.94 15.29 15.29
COST QUA. BOR. IBRD 6M 0.5000% 23/12/1992 01/02/2013 200.00 200.00 161.31 161.31
COST QUA. BOR. IBRD 6M 0.5000% 05/02/1992 15/03/2012 90.79 90.79 66.90 66.90
COST QUA. BOR. IBRD 6M 0.5000% 05/02/1992 15/03/2012 59.21 59.21 46.47 46.47
COST QUA. BOR. IBRD 6M 0.5000% 15/07/1993 01/03/2013 37.54 37.54 30.17 30.17
COST QUA. BOR. IBRD 6M 0.5000% 15/07/1993 01/03/2013 25.46 25.46 16.36 16.36
COST QUA. BOR. IBRD 6M 0.5000% 19/06/1986 01/01/2006 82.00 82.00 21.78 21.78
COST QUA. BOR. IBRD 6M 0.5000% 01/09/1988 01/08/2008 200.00 200.00 107.60 107.60
COST QUA. BOR. IBRD 6M 0.5000% 09/07/1990 15/09/2010 200.00 200.00 116.91 116.91

T-13

EXTERNAL DEBT OF THE REPUBLIC OF THE PHILIPPINES/ (1)/ -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS OF CURRENCY INDICATED

ORIGINAL OUTSTANDING BALANCE
INTEREST RATE/ AMOUNT CONTRACTED AS OF
SPREAD/ (IN (IN
SERVICE CHARGE YEAR YEAR OF ORIG. (IN US ORIG. (IN US
CURRENCY INTEREST RATE BASIS (Per Annum) CONTRACTED MATURITY CURR) DOLLAR)/(2)/ CURR) DOLLAR)/(2)/
- -------- ---------------------- -------------- ---------- ---------- ------ ----------- ------ -----------

COST QUA. BOR. IBRD 6M 0.5000% 07/02/1984 01/02/2004 24.97 24.97 2.06 2.06
COST QUA. BOR. IBRD 6M 0.5000% 13/06/1988 15/08/2008 45.00 45.00 12.63 12.63
COST QUA. BOR. IBRD 6M 0.5000% 28/04/1995 01/04/2015 1.30 1.30 1.17 1.17
COST QUA. BOR. IBRD 6M 0.5000% 28/04/1995 01/04/2015 16.70 16.70 8.99 8.99
COST QUA. BOR. IBRD 6M 0.5000% 10/06/1983 01/06/2003 35.92 35.92 1.08 1.08
COST QUA. BOR. IBRD 6M 0.5000% 30/03/1987 01/01/2007 300.00 300.00 90.00 90.00
COST QUA. BOR. IBRD 6M 0.5000% 11/07/1991 15/08/2011 139.44 139.44 100.71 100.71
COST QUA. BOR. IBRD 6M 0.5000% 11/07/1991 15/08/2011 18.56 18.56 3.99 3.99
COST QUA. BOR. IBRD 6M 0.5000% 02/04/1985 01/05/2005 3.95 3.95 0.62 0.62
COST QUA. BOR. IBRD 6M 0.5000% 01/09/1988 15/08/2008 125.26 125.26 67.38 67.38
COST QUA. BOR. IBRD 6M 0.5000% 27/04/1983 15/05/2003 302.25 302.25 10.08 10.08
INTEREST FREE 1.0000% 20/12/1974 01/10/2014 5.77 5.77 2.77 2.77
INTEREST FREE 1.0000% 10/11/1978 01/10/2018 14.00 14.00 8.96 8.96
INTEREST FREE 1.0000% 27/08/1979 01/02/2019 12.34 12.34 8.14 8.14
INTEREST FREE 1.0000% 22/10/1980 15/09/2020 12.20 12.20 8.75 8.75
INTEREST FREE 1.0000% 12/10/1981 01/09/2021 12.11 12.11 9.20 9.20
INTEREST FREE 1.0000% 05/01/1973 01/09/2022 12.70 12.70 7.62 7.62
INTEREST FREE 1.0000% 05/04/1974 15/04/2024 9.50 9.50 6.13 6.13
INTEREST FREE 1.0000% 21/04/1978 15/12/2027 21.52 21.52 16.14 16.14
INTEREST FREE 1.0000% 27/06/1979 01/06/2029 32.22 32.22 25.62 25.62
FIXED RATE 0.3000% 28/05/2002 30/11/2032 4.40 4.40 1.95 1.95
FIXED RATE 0.3000% 28/05/2002 30/11/2032 6.78 6.78 2.12 2.12
FIXED RATE 0.3000% 28/05/2002 30/11/2032 18.56 18.56 5.96 5.96
FIXED RATE 1.0000% 22/09/2000 04/10/2030 7.01 7.01 6.91 6.91
FIXED RATE 1.0000% 03/08/2001 31/12/2031 40.00 40.00 39.73 39.73
FIXED RATE 1.5000% 11/07/1996 17/03/2026 25.18 25.18 25.75 25.75
FIXED RATE 1.7500% 06/08/2000 15/12/2016 10.00 10.00 1.65 1.65
FIXED RATE 2.0000% 24/12/1980 01/10/2021 4.87 4.87 3.52 3.52
FIXED RATE 2.0000% 23/07/1982 15/04/2023 4.15 4.15 4.20 4.20
FIXED RATE 2.0000% 03/04/1984 19/08/2021 0.04 0.04 0.03 0.03
FIXED RATE 2.0000% 24/03/1975 31/05/2017 15.00 15.00 8.81 8.81
FIXED RATE 2.0000% 29/07/1975 16/02/2017 3.47 3.47 2.04 2.04
FIXED RATE 2.0000% 22/12/1975 13/09/2017 4.84 4.84 2.92 2.92
FIXED RATE 2.0000% 11/03/1974 07/12/2016 1.38 1.38 0.79 0.79
FIXED RATE 2.0000% 28/04/1976 25/04/2017 8.90 8.90 5.23 5.23
FIXED RATE 2.0000% 27/06/1977 27/04/2018 2.93 2.93 1.82 1.82
FIXED RATE 2.0000% 13/01/1978 18/05/2019 4.86 4.86 3.08 3.08
FIXED RATE 2.0000% 13/01/1978 09/11/2018 1.46 1.46 0.92 0.92
FIXED RATE 2.0000% 18/08/1978 14/10/2018 0.68 0.68 0.45 0.45
FIXED RATE 2.0000% 23/02/1979 08/04/2020 10.61 10.61 7.22 7.22
FIXED RATE 2.0000% 28/03/1980 05/03/2021 6.36 6.36 4.52 4.52
FIXED RATE 2.0000% 15/02/1979 28/04/2021 4.13 4.13 2.93 2.93
FIXED RATE 2.0000% 15/02/1978 15/05/2021 3.98 3.98 2.83 2.83
FIXED RATE 2.0000% 16/07/1979 15/09/2020 3.63 3.63 2.52 2.52
FIXED RATE 2.0000% 01/08/1979 11/01/2022 0.83 0.83 0.61 0.61
FIXED RATE 2.0000% 01/08/1978 06/01/2024 0.44 0.44 0.35 0.35
FIXED RATE 2.0000% 29/08/1980 13/10/2021 0.39 0.39 0.28 0.28
FIXED RATE 2.0000% 06/11/1981 06/11/2021 9.65 9.65 6.98 6.98
FIXED RATE 2.0000% 28/05/1981 26/08/2022 0.91 0.91 0.68 0.68
FIXED RATE 2.0000% 29/08/1980 01/06/2021 2.09 2.09 1.48 1.48
FIXED RATE 2.0000% 25/09/1981 15/03/2022 3.04 3.04 2.24 2.24
FIXED RATE 2.0000% 30/09/1981 17/08/2021 0.82 0.82 0.61 0.61
FIXED RATE 2.0000% 31/08/1982 14/06/2023 0.81 0.81 0.62 0.62
FIXED RATE 2.0000% 29/09/1982 28/04/2023 0.21 0.21 0.16 0.16
FIXED RATE 2.0000% 23/05/1984 02/06/2023 0.04 0.04 0.03 0.03
FIXED RATE 2.0000% 31/08/1983 16/11/2024 0.18 0.18 0.15 0.15
FIXED RATE 2.0000% 24/08/1979 20/02/2021 1.05 1.05 0.74 0.74
FIXED RATE 2.0000% 28/10/1980 16/12/2023 3.74 3.74 2.92 2.92
FIXED RATE 2.0000% 04/12/1980 28/10/2023 0.49 0.49 0.40 0.40
FIXED RATE 2.0000% 21/07/1982 12/09/2023 0.29 0.29 0.23 0.23
FIXED RATE 2.0000% 30/07/1983 16/04/2025 0.98 0.98 0.81 0.81
FIXED RATE 2.0000% 29/07/1983 01/10/2024 0.06 0.06 0.05 0.05
FIXED RATE 2.0000% 26/03/1984 10/10/2024 0.35 0.35 0.29 0.29
FIXED RATE 2.0000% 15/02/1979 22/11/2022 0.74 0.74 0.55 0.55
FIXED RATE 2.0000% 30/06/1980 14/02/2023 2.30 2.30 1.76 1.76
FIXED RATE 2.0000% 01/06/1994 23/11/2019 14.97 14.97 12.12 12.12
FIXED RATE 2.0000% 20/06/1986 13/10/2016 31.99 31.99 17.22 17.22
FIXED RATE 2.0000% 19/05/1988 03/07/2018 29.99 29.99 18.45 18.45
FIXED RATE 2.0000% 31/07/1990 25/10/2020 21.00 21.00 14.54 14.54
FIXED RATE 2.0000% 02/08/1999 30/12/2019 15.13 15.13 15.13 15.13
FIXED RATE 2.0000% 02/08/1999 11/02/2020 14.87 14.87 14.87 14.87
FIXED RATE 2.0000% 04/05/1972 26/12/2002 9.64 9.64 0.00 0.00
FIXED RATE 2.0000% 08/07/1985 25/10/2015 40.00 40.00 20.00 20.00
FIXED RATE 2.0000% 12/07/2000 19/01/2021 23.35 23.35 23.35 23.35
FIXED RATE 2.0000% 12/07/2000 19/01/2021 16.65 16.65 16.64 16.64
FIXED RATE 2.5000% 30/06/1997 28/04/2014 9.48 9.48 9.01 9.01

T-14

EXTERNAL DEBT OF THE REPUBLIC OF THE PHILIPPINES/ (1)/ -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS OF CURRENCY INDICATED

FIXED RATE 3.0000% 29/06/1973 01/05/2003 6.00 6.00 0.18 0.18
FIXED RATE 3.0000% 04/12/1980 06/04/2022 2.30 2.30 1.67 1.67
FIXED RATE 3.0000% 06/07/1989 06/07/2007 100.00 100.00 42.22 42.22
FIXED RATE 3.0000% 17/05/1991 01/10/2021 15.00 15.00 11.87 11.87
FIXED RATE 3.0000% 30/01/1992 05/04/2022 20.00 20.00 16.67 16.67
FIXED RATE 3.0000% 30/04/1993 26/11/2023 20.00 20.00 17.50 17.50
FIXED RATE 3.0000% 30/10/2001 30/10/2011 35.00 35.00 0.00 0.00
FIXED RATE 3.0000% 19/09/2002 01/12/2016 41.25 41.25 41.25 41.25
FIXED RATE 3.0250% 30/03/1988 15/10/2004 6.50 6.50 1.08 1.08
FIXED RATE 3.2500% 27/09/1990 15/04/2006 4.89 4.89 1.71 1.71
FIXED RATE 3.2500% 22/09/1997 22/03/2014 10.00 10.00 1.69 1.69
FIXED RATE 3.4000% 01/03/1996 15/12/2012 22.95 22.95 22.95 22.95
FIXED RATE 3.4000% 06/06/1997 15/12/2014 36.82 36.82 27.81 27.81
FIXED RATE 3.4000% 01/05/1998 15/05/2014 38.51 38.51 38.51 38.51
FIXED RATE 3.9500% 23/12/1994 28/01/2006 6.13 6.13 0.00 0.00
FIXED RATE 4.0000% 16/07/1998 05/11/2018 10.00 10.00 10.00 10.00
FIXED RATE 4.5500% 28/05/2002 31/01/2009 4.40 4.40 0.00 0.00
FIXED RATE 4.5500% 28/05/2002 30/11/2008 6.78 6.78 0.00 0.00
FIXED RATE 4.5500% 28/05/2002 30/09/2008 18.56 18.56 0.56 0.56
FIXED RATE 5.2000% 05/03/1998 15/10/2010 24.99 24.99 12.72 12.72
FIXED RATE 5.2000% 08/11/1999 15/11/2012 99.45 99.45 86.13 86.13
FIXED RATE 5.9500% 23/12/1994 01/03/2006 34.75 34.75 15.50 15.50
FIXED RATE 7.1800% 22/09/2000 05/04/2008 7.01 7.01 6.32 6.32
FIXED RATE 7.5000% 29/06/1973 01/05/2003 3.59 3.59 0.16 0.16
FIXED RATE 7.5000% 26/11/1973 01/09/2003 4.20 4.20 0.37 0.37
FIXED RATE 7.6000% 07/11/1979 01/09/2009 39.65 39.65 19.63 19.63
FIXED RATE 7.7000% 09/06/1978 15/04/2008 23.50 23.50 9.70 9.70
FIXED RATE 7.7300% 06/04/1990 15/07/2010 40.88 40.88 19.71 19.71
FIXED RATE 7.7300% 06/04/1990 15/07/2010 80.92 80.92 50.64 50.64
FIXED RATE 7.7300% 09/07/1990 15/09/2010 85.00 85.00 29.24 29.24
FIXED RATE 7.7300% 08/11/1990 01/08/2010 18.63 18.63 6.40 6.40
FIXED RATE 7.7300% 08/11/1990 01/08/2010 27.57 27.57 17.09 17.09
FIXED RATE 7.7300% 08/11/1990 01/11/2010 125.00 125.00 72.53 72.53
FIXED RATE 7.7300% 05/02/1992 15/04/2012 61.00 61.00 41.71 41.71
FIXED RATE 7.7300% 31/03/1992 15/06/2012 33.25 33.25 20.97 20.97
FIXED RATE 7.7300% 31/03/1992 15/06/2012 34.75 34.75 25.29 25.29
FIXED RATE 7.7500% 31/05/1989 01/03/2009 60.00 60.00 34.28 34.28
FIXED RATE 8.0000% 23/07/1996 20/10/2006 25.75 25.75 13.63 13.63
FIXED RATE 8.0000% 20/06/1997 30/05/2013 9.48 9.48 5.56 5.56
FIXED RATE 8.0600% 14/09/1994 15/04/2006 20.42 20.42 6.28 6.28
FIXED RATE 8.3000% 06/09/1977 15/04/2007 17.53 17.53 6.21 6.21
FIXED RATE 8.6000% 31/12/1991 30/11/2004 51.95 51.95 0.00 0.00
FIXED RATE 8.7500% 07/07/1975 01/05/2005 12.80 12.80 2.87 2.87
FIXED RATE 8.7500% 18/12/1975 01/11/2005 25.98 25.98 6.73 6.73
FIXED RATE 8.9000% 15/12/1976 15/07/2006 14.60 14.60 4.95 4.95
FIXED RATE 9.0000% 06/11/1980 15/07/2004 30.00 30.00 5.85 5.85
FIXED RATE 9.2000% 07/11/1989 15/10/2003 8.76 8.76 1.34 1.34
FIXED RATE 10.0000% 12/10/1981 01/09/2011 20.79 20.79 13.59 13.59
FIXED RATE 10.1000% 17/11/1981 01/08/2006 20.17 20.17 7.58 7.58
FIXED RATE 10.1000% 04/12/1981 01/09/2006 2.48 2.48 0.92 0.92
FIXED RATE 10.2500% 28/12/1984 15/04/2008 20.63 20.63 9.96 9.96
FIXED RATE 10.5000% 23/12/1983 15/11/2013 38.30 38.30 27.16 27.16
FIXED RATE 10.5000% 23/12/1983 01/10/2003 4.17 4.17 0.53 0.53
FIXED RATE 10.5000% 23/12/1983 15/10/2013 25.15 25.15 17.86 17.86
FIXED RATE 11.0000% 03/11/1982 01/09/2012 18.80 18.80 12.31 12.31
FIXED RATE 11.0000% 01/12/1982 01/05/2006 47.39 47.39 16.20 16.20
FIXED RATE 11.0000% 20/05/1983 01/01/2010 21.77 21.77 13.28 13.28
LIBOR 6 MONTHS DEPOSIT 0.0000% 03/06/1994 01/06/2024 5.00 5.00 5.00 5.00
LIBOR 6 MONTHS DEPOSIT 0.0000% 03/06/1994 01/06/2024 10.00 10.00 19.50 19.50
LIBOR 6 MONTHS DEPOSIT 0.0000% 05/02/1992 01/02/2022 50.00 50.00 10.00 10.00
LIBOR 6 MONTHS DEPOSIT 0.0000% 10/03/1995 10/03/2015 26.50 26.50 14.35 14.35
LIBOR 6 MONTHS DEPOSIT 0.0000% 14/12/1999 15/12/2019 27.50 27.50 5.69 5.69
LIBOR 6 MONTHS DEPOSIT 0.0000% 25/02/2000 04/15/2020 10.00 10.00 63.52 63.52
LIBOR 6 MONTHS DEPOSIT 0.0000% 10/04/2000 15/02/2020 150.00 150.00 37.35 37.35
LIBOR 6 MONTHS DEPOSIT 0.0000% 20/10/2000 09/01/2020 4.79 4.79 1.26 1.26
LIBOR 6 MONTHS DEPOSIT 0.0000% 08/08/2001 01/05/2021 60.00 60.00 3.31 3.31
LIBOR 6 MONTHS DEPOSIT 0.5000% 20/12/1996 15/01/2017 113.40 113.40 30.76 30.76
LIBOR 6 MONTHS DEPOSIT 0.5000% 20/12/1996 15/01/2018 50.00 50.00 46.15 46.15
LIBOR 6 MONTHS DEPOSIT 0.5000% 20/12/1997 15/01/2019 58.00 58.00 26.77 26.77
LIBOR 6 MONTHS DEPOSIT 0.5000% 09/09/1997 15/06/2018 50.00 50.00 12.67 12.67
LIBOR 6 MONTHS DEPOSIT 0.5000% 08/04/1998 15/06/2018 10.00 10.00 9.83 9.83
LIBOR 6 MONTHS DEPOSIT 0.5000% 08/04/1998 15/06/2018 19.00 19.00 8.22 8.22
LIBOR 6 MONTHS DEPOSIT 0.5000% 12/09/2002 15/04/2019 100.00 100.00 1.00 1.00
LIBOR 6 MONTHS DEPOSIT 0.5000% 07/10/2002 15/04/2022 100.00 100.00 0.00 0.00
LIBOR 6 MONTHS DEPOSIT 0.6250% 18/03/1992 15/12/2003 9.39 9.39 1.41 1.41

T-15

EXTERNAL DEBT OF THE REPUBLIC OF THE PHILIPPINES/ (1)/ -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS OF CURRENCY INDICATED

INTEREST RATE/ ORIGINAL OUTSTANDING BALANCE
SPREAD/ AMOUNT CONTRACTED AS OF
SERVICE CHARGE YEAR YEAR OF (IN ORIG. (IN US (IN ORIG. (IN US
CURRENCY INTEREST RATE BASIS (Per Annum) CONTRACTED MATURITY CURR) DOLLAR)/(2)/ CURR) DOLLAR)/(2)/
- -------- ---------------------- -------------- ---------- ---------- ---------- ----------- ---------- -----------

LIBOR 6 MONTHS DEPOSIT 0.6250% 01/04/1992 15/06/2003 4.29 4.29 0.43 0.43
LIBOR 6 MONTHS DEPOSIT 0.6250% 06/08/1992 15/06/2003 0.99 0.99 0.10 0.10
LIBOR 6 MONTHS DEPOSIT 0.7500% 11/12/1998 15/09/2018 300.00 300.00 100.00 100.00
LIBOR 6 MONTHS DEPOSIT 0.7500% 23/03/1999 15/05/2019 100.00 100.00 4.62 4.62
LIBOR 6 MONTHS DEPOSIT 1.1000% 19/10/2000 24/10/2003 100.00 100.00 100.00 100.00
LIBOR 6 MONTHS DEPOSIT 1.6000% 19/10/2000 24/10/2005 300.00 300.00 300.00 300.00
LIBOR 6 MONTHS DEPOSIT 2.9000% 04/07/2001 15/12/2003 100.00 100.00 100.00 100.00
B. RELENT TO GOCC's 3,563.79 1,736.52
-------- --------
BELGIAN FRANCS 1,231.67 31.69 664.71 17.10
---------- -------- ---------- --------
INTEREST FREE 0.0000% 30/10/1992 31/12/2022 150.00 3.86 140.13 3.61
INTEREST FREE 0.0000% 23/12/1983 31/12/2013 100.00 2.57 41.25 1.06
INTEREST FREE 0.0000% 29/11/1982 31/12/2012 100.00 2.57 37.50 0.96
INTEREST FREE 0.0000% 04/11/1981 31/12/2011 300.00 7.72 135.00 3.47
INTEREST FREE 0.0000% 11/08/1980 31/12/2010 450.00 11.58 180.00 4.63
INTEREST FREE 0.0000% 11/03/1996 31/12/2025 131.67 3.39 130.83 3.37
SWISS FRANC 12.07 8.61 0.08 0.05
---------- -------- ---------- --------
FIXED RATE 8.3000% 10/03/1989 31/12/2003 12.07 8.61 0.08 0.05
DEUTSCHEMARK 131.93 70.02 89.42 47.45
---------- -------- ---------- --------
FIXED RATE 2.0000% 10/07/1989 31/12/2019 32.40 17.20 14.93 7.92
FIXED RATE 2.0000% 22/03/1982 30/06/2012 9.70 5.15 4.74 2.52
FIXED RATE 2.0000% 10/07/1989 31/12/2019 14.40 7.64 11.94 6.34
FIXED RATE 2.0000% 10/07/1989 31/12/2019 62.80 33.33 52.30 27.76
FIXED RATE 2.0000% 10/04/1981 31/12/2015 12.63 6.70 5.51 2.92
DANISH KRONER 110.00 15.37 38.76 5.42
---------- -------- ---------- --------
INTEREST FREE 0.0000% 20/02/1985 01/04/2009 95.00 13.28 32.89 4.60
INTEREST FREE 0.0000% 20/02/1985 01/10/2009 15.00 2.10 5.87 0.82
POUNDS STERLING 5.49 8.78 0.33 0.52
---------- -------- ---------- --------
FIXED RATE 2.0000% 12/03/1980 12/03/2005 3.52 5.64 0.00 0.00
FIXED RATE 2.0000% 23/09/1980 23/09/2005 1.97 3.15 0.33 0.52
JAPANESE YEN 378,891.88 3,159.58 183,955.70 1,534.01
---------- -------- ---------- --------
FIXED RATE 0.7500% 07/04/2000 20/04/2040 1,587.00 13.23 510.65 4.26
FIXED RATE 0.7500% 07/04/2000 20/04/2040 821.00 6.85 513.51 4.28
FIXED RATE 0.7500% 10/09/1998 20/09/2038 23,668.00 197.37 1,140.33 9.51
FIXED RATE 1.0000% 07/04/2000 20/04/2040 20,675.00 172.41 435.79 3.63
FIXED RATE 1.0000% 07/04/2000 20/04/2040 7,445.00 62.08 2,074.35 17.30
FIXED RATE 2.0000% 05/09/1973 31/08/2003 4,513.55 37.64 225.68 1.88
FIXED RATE 2.0000% 16/08/1995 31/07/2025 545.40 4.55 541.35 4.51
FIXED RATE 2.7000% 26/05/1989 20/05/2019 6,300.00 52.54 3,998.61 33.34
FIXED RATE 2.7000% 28/06/1990 15/11/2010 5,066.00 42.25 4,224.01 35.22
FIXED RATE 2.7000% 16/07/1991 20/04/2021 2,005.00 16.72 1,673.70 13.96
FIXED RATE 2.7000% 16/07/1991 20/06/2021 5,788.00 48.27 4,960.70 41.37
FIXED RATE 2.7000% 26/05/1992 20/05/2022 1,094.00 9.12 750.13 6.26
FIXED RATE 2.7000% 16/07/1991 20/06/2021 8,283.00 69.07 6,690.67 55.79
FIXED RATE 2.7000% 16/07/1991 20/06/2021 4,028.00 33.59 3,018.68 25.17
FIXED RATE 2.7000% 18/03/1997 20/03/2027 25,665.00 214.02 17,363.11 144.79
FIXED RATE 2.7000% 18/03/1997 20/03/2027 679.00 5.66 0.00 0.00
FIXED RATE 2.7000% 26/05/1989 20/05/2019 5,054.00 42.15 4,053.89 33.81
FIXED RATE 3.0000% 29/01/1993 20/07/2022 3,563.90 29.72 3,155.77 26.32
FIXED RATE 3.0000% 31/03/1993 20/03/2023 6,112.00 50.97 2,987.05 24.91
FIXED RATE 3.0000% 19/08/1993 20/08/2023 18,120.00 151.10 18,014.15 150.22
FIXED RATE 3.0000% 19/08/1993 20/08/2023 1,259.00 10.50 1,195.84 9.97
FIXED RATE 3.0000% 12/08/1994 20/08/2024 11,433.00 95.34 9,739.81 81.22
FIXED RATE 3.0000% 07/12/1994 20/12/2024 7,056.00 58.84 1,369.25 11.42
FIXED RATE 3.0000% 07/12/1994 20/12/2024 6,630.00 55.29 696.63 5.81
FIXED RATE 3.0000% 20/12/1994 20/12/2024 5,513.00 45.97 5,164.02 43.06
FIXED RATE 3.0000% 20/12/1994 20/12/2024 10,756.00 89.69 320.15 2.67
FIXED RATE 3.0000% 20/12/1994 20/12/2024 2,896.00 24.15 1,218.99 10.17
FIXED RATE 3.0000% 20/12/1994 20/12/2024 457.00 3.81 213.91 1.78
FIXED RATE 3.0000% 20/12/1994 20/12/2024 9,795.00 81.68 9,325.00 77.76
FIXED RATE 3.0000% 20/12/1994 20/12/2024 6,212.00 51.80 1,524.35 12.71
FIXED RATE 3.0000% 20/06/1980 20/06/2010 14,832.73 123.69 5,426.60 45.25
FIXED RATE 3.0000% 20/06/1980 20/06/2010 1,529.75 12.76 559.65 4.67
FIXED RATE 3.0000% 16/06/1981 20/06/2011 8,516.35 71.02 3,531.16 29.45
FIXED RATE 3.0000% 16/06/1981 20/06/2011 7,554.76 63.00 3,132.45 26.12
FIXED RATE 3.0000% 16/06/1981 20/06/2011 4,507.27 37.59 1,868.86 15.58
FIXED RATE 3.0000% 16/06/1981 20/06/2011 136.58 1.14 56.61 0.47
FIXED RATE 3.0000% 31/05/1982 20/05/2012 25,489.96 212.56 11,812.40 98.50
FIXED RATE 3.0000% 31/05/1982 20/05/2012 467.92 3.90 216.83 1.81

T-16

EXTERNAL DEBT OF THE REPUBLIC OF THE PHILIPPINES/ (1)/ -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS OF CURRENCY INDICATED

INTEREST RATE/ ORIGINAL
SPREAD/ AMOUNT CONTRACTED
SERVICE CHARGE YEAR YEAR OF (IN ORIG. (IN US
CURRENCY INTEREST RATE BASIS (Per Annum) CONTRACTED MATURITY CURR) DOLLAR)/(2)/
- -------- -------------------------- -------------- ---------- ---------- --------- -----------

FIXED RATE 3.0000% 31/05/1982 20/05/2012 149.16 1.24
FIXED RATE 3.0000% 09/09/1983 20/09/2013 6,510.19 54.29
FIXED RATE 3.0000% 09/09/1983 20/09/2013 4,500.00 37.53
FIXED RATE 3.0000% 09/09/1983 20/09/2013 169.79 1.42
FIXED RATE 3.0000% 27/01/1988 20/01/2018 1,272.00 10.61
FIXED RATE 3.0000% 27/01/1988 20/01/2018 6,015.00 50.16
FIXED RATE 3.0000% 27/01/1988 20/01/2018 2,478.00 20.66
FIXED RATE 3.0000% 27/01/1988 20/01/2018 192.00 1.60
FIXED RATE 3.2500% 14/01/1978 20/01/2003 10,404.52 86.76
FIXED RATE 3.2500% 14/01/1978 20/01/2003 3,957.73 33.00
FIXED RATE 3.2500% 09/11/1978 20/11/2008 4,433.24 36.97
FIXED RATE 3.2500% 02/02/1979 20/02/2009 6,999.93 58.37
FIXED RATE 3.2500% 14/01/1978 20/01/2003 3,013.92 25.13
FIXED RATE 3.5000% 07/05/1984 20/05/2014 2,900.51 24.19
FIXED RATE 3.5000% 30/05/1986 20/05/2016 142.80 1.19
FIXED RATE 4.0000% 09/09/1983 20/09/2013 9,297.91 77.54
FIXED RATE 4.0000% 25/09/1987 20/09/2017 40,400.00 336.90
SPECIAL DRAWING RIGHT 35.17 47.50
--------- ------
INTEREST FREE 0.7500% 08/05/1996 01/01/2036 10.15 13.71
INTEREST FREE 1.0000% 04/06/1991 15/08/2025 11.18 15.10
INTEREST FREE 1.0000% 08/05/1997 01/01/2031 13.84 18.69
UNITED STATES DOLLAR 222.23 222.23
--------- ------
ADB FLOATING RATE 0.0000% 04/06/1991 15/08/2014 6.00 6.00
COST QUA. BOR. IBRD 6M 0.5000% 30/06/1987 01/06/2007 32.00 32.00
COST QUA. BOR. IBRD 6M 0.5000% 10/04/1986 15/11/2006 38.00 38.00
LIBOR 6 MONTHS DEPOSIT 0.5000% 09/09/1997 15/09/2017 2.30 2.30
INTEREST FREE 1.0000% 03/04/1972 01/03/2022 10.02 10.02
INTEREST FREE 1.0000% 27/06/1979 15/02/2029 19.22 19.22
FIXED RATE 2.0000% 24/03/1975 24/03/2016 19.88 19.88
FIXED RATE 2.0000% 06/08/1976 13/04/2017 14.95 14.95
FIXED RATE 2.0000% 09/01/1988 30/06/2014 10.00 10.00
FIXED RATE 2.0000% 06/08/1976 11/04/2017 19.93 19.93
FIXED RATE 2.0000% 21/07/1989 21/07/2014 2.63 2.63
FIXED RATE 3.0000% 07/10/1994 18/04/2011 6.00 6.00
FIXED RATE 7.6000% 07/11/1979 01/10/2003 16.81 16.81
FIXED RATE 10.1000% 04/12/1981 01/09/2006 24.50 24.50
II. NG ASSUMED DEBT (REAL) 2,087.23 317.88
--------- ------
AUSTRIAN SCHILLINGS 21.81 1.65
--------- ------
AUSTRIAN STATUTORY EXPORT
PROMO SCHEME 0.6000% 1992 2007 21.81 1.65
BELGIAN FRANCS 50.00 1.29
--------- ------
FREE 0.0000% 1986 2012 25.00 0.64
FREE 0.0000% 1986 2013 25.00 0.64
DEUTSCHEMARKS 0.29 0.15
--------- ------
FIXED RATE 8.6000% 1992 2007 0.29 0.15
FRENCH FRANCS 2.57 0.41
--------- ------
TAUX DU MARCHE OBLIGATAIRE 0.4000% 1991 2007 2.57 0.41
POUND STERLING 0.17 0.27
--------- ------
LIBOR 6 MONTHS DEPOSIT 0.0000% 1992 2007 0.17 0.27
JAPANESE YEN 1,712.56 14.28
--------- ------
FIXED RATE 6.3000% 1993 2007 1,296.62 10.81
LONG TERM PRIME RATE 0.1000% 1992 2007 415.94 3.47
UNITED STATES DOLLARS 299.83 299.83
--------- ------
FIXED RATE 3.0000% 1992 2007 0.23 0.23
FIXED RATE 3.0000% 1992 2007 0.40 0.40
FIXED RATE 3.0000% 1992 2007 0.25 0.25
FIXED RATE 3.5000% 1992 2007 1.06 1.06
FIXED RATE 3.5000% 1992 2007 0.60 0.60
FIXED RATE 5.0000% 1981 2004 5.49 5.49
FIXED RATE 5.0000% 1981 2006 5.49 5.49
FIXED RATE 5.0000% 1981 2004 5.49 5.49
LIBOR 6 MONTHS DEPOSIT 0.2000% 1992 2007 25.47 25.47
LIBOR 6 MONTHS DEPOSIT 0.2000% 1992 2007 2.63 2.63
LIBOR 6 MONTHS DEPOSIT 0.2000% 1992 2007 0.58 0.58
LIBOR 6 MONTHS DEPOSIT 0.2500% 1990 2007 2.01 2.01

OUTSTANDING BALANCE
AS OF
(IN ORIG. (IN US
CURRENCY CURR) DOLLAR)/(2)/
- -------- --------- -----------

69.10 0.58
3,493.25 29.13
2,412.63 20.12
91.08 0.76
714.71 5.96
4,487.16 37.42
46.41 0.39
127.84 1.07
281.20 2.34
106.97 0.89
1,297.52 10.82
2,219.49 18.51
81.46 0.68
1,627.09 13.57
94.01 0.78
4,989.09 41.60
28,112.07 234.43
SPECIAL DRAWING RIGHT 31.17 42.10
--------- ------
8.39 11.33
9.41 12.71
13.37 18.06
UNITED STATES DOLLAR 89.86 89.86
--------- ------
2.03 2.03
8.96 8.96
8.08 8.08
1.81 1.81
5.86 5.86
15.28 15.28
11.03 11.03
8.79 8.79
3.08 3.08
11.71 11.71
1.68 1.68
1.55 1.55
1.54 1.54
8.47 8.47
II. NG ASSUMED DEBT (REAL) 1,319.15 185.01
--------- ------
AUSTRIAN SCHILLINGS 14.02 1.06
--------- ------

14.02 1.06
BELGIAN FRANCS 28.75 0.74
--------- ------
13.75 0.35
15.00 0.39
DEUTSCHEMARKS 0.19 0.10
--------- ------
0.19 0.10
FRENCH FRANCS 1.65 0.26
--------- ------
1.65 0.26
POUND STERLING 0.11 0.18
--------- ------
0.11 0.18
JAPANESE YEN 1,100.93 9.18
--------- ------
833.54 6.95
267.39 2.23
UNITED STATES DOLLARS 173.50 173.50
--------- ------
0.22 0.22
0.38 0.38
0.24 0.24
1.01 1.01
0.57 0.57
0.92 0.92
1.83 1.83
1.37 1.37
1.69 1.69
16.37 16.37
0.37 0.37
1.29 1.29

T-17

EXTERNAL DEBT OF THE REPUBLIC OF THE PHILIPPINES/ (1)/ -- (Continued)
AS OF DECEMBER 31, 2002
IN MILLIONS OF CURRENCY INDICATED

INTEREST RATE/ ORIGINAL OUTSTANDING BALANCE
SPREAD/ AMOUNT CONTRACTED AS OF
SERVICE CHARGE YEAR YEAR OF (IN ORIG. (IN US (IN ORIG. (IN US
CURRENCY INTEREST RATE BASIS (Per Annum) CONTRACTED MATURITY CURR) DOLLAR)/(2)/ CURR) DOLLAR)/(2)/
- -------- ----------------------- -------------- ---------- -------- --------- ----------- ---------- -----------

LIBOR 6 MONTHS DEPOSIT 0.5000% 1991 2007 3.13 3.13 2.01 2.01
LIBOR 6 MONTHS DEPOSIT 0.5000% 1991 2007 1.24 1.24 0.80 0.80
LIBOR 6 MONTHS DEPOSIT 0.8125% 1986 2003 1.29 1.29 0.13 0.13
LIBOR 6 MONTHS DEPOSIT 0.8125% 1986 2003 2.10 2.10 0.21 0.21
LIBOR 6 MONTHS DEPOSIT 0.8125% 1986 2003 8.73 8.73 1.15 1.15
LIBOR 6 MONTHS DEPOSIT 0.8125% 1986 2003 11.50 11.50 0.09 0.09
NEW SHORT TERM EXIMBANK
BORROWING 0.3750% 1991 2007 0.31 0.31 0.25 0.25
NEW SHORT TERM EXIMBANK
BORROWING 0.3750% 1991 2007 0.30 0.30 0.19 0.19
NEW SHORT TERM EXIMBANK
BORROWING 0.3750% 1991 2007 0.00 0.00 0.00 0.00
NEW SHORT TERM EXIMBANK
BORROWING 0.5000% 1992 2007 151.35 151.35 97.30 97.30
NEW SHORT TERM EXIMBANK
BORROWING 0.5000% 1992 2007 32.99 32.99 21.21 21.21
NEW SHORT TERM EXIMBANK
BORROWING 0.5000% 1992 2007 14.16 14.16 9.10 9.10
NEW SHORT TERM EXIMBANK
BORROWING 0.5000% 1992 2007 23.02 23.02 14.80 14.80
III. NG SECURITIZED LOANS (BRADY BONDS) 14,015.94 11,857.44
--------- ---------
UNITED STATES DOLLARS 11,994.53 11,994.53 9,836.03 9,836.03
OPTION I - IRB 757.38 757.38 250.04 250.04
--------- --------- ---------- ---------
SERIES A STEP UP 4.00% - 7.50% 1992 2007 130.76 130.76 49.15 49.15
SERIES B STEP UP 4.00% - 7.50% 1992 2008 626.62 626.62 200.89 200.89
OPTION II - PCIRB 1,894.09 1,894.09 582.68 582.68
--------- --------- ---------- ---------
SERIES A STEP UP 4.25% - 7.50% 1992 2018 153.49 153.49 127.52 127.52
SERIES B STEP UP 4.25% - 7.50% 1992 2017 1,740.60 1,740.60 455.16 455.16
OPTION III - DEBT CONVERSION BONDS 696.78 696.78 357.03 357.03
--------- --------- ---------- ---------
SERIES A STEP UP 4.00% - 7.50% 1992 2010 5.31 5.31 3.07 3.07
SERIES B STEP UP 4.00% - 7.50% 1992 2009 691.47 691.47 353.96 353.96
FIXED RATE BONDS FIXED 8.7500% 1996 2016 690.00 690.00 690.00 690.00
---------
JAPANESE YEN BONDS (SAMURAI) 86,600.00 1,139.11 136,600.00 1,139.11
--------- --------- ---------- ---------
JAPANESE YEN 86,600.00 1,139.11 136,600.00 1,139.11
--------- --------- ---------- ---------
FIXED 1.8850% 2001 2011 50,000.00 416.95 50,000.00 416.95
FIXED 3.2000% 2000 2005 35,000.00 291.87 35,000.00 291.87
FIXED 4.3000% 2002 2011 21,600.00 180.12 21,600.00 180.12
FIXED 5.0000% 1996 2003 30,000.00 250.17 30,000.00 250.17
GLOBAL BONDS 8,838.59 8,838.59
--------- ---------
UNITED STATES DOLLARS 7,956.29 7,956.29 7,956.29 7,956.29
--------- --------- ---------- ---------
FIXED 7.5000% 2002 2007 300.00 300.00 300.00 300.00
FIXED 8.3750% 2002 2009 1,000.00 1,000.00 1,000.00 1,000.00
FIXED 8.3750% 2002 2009 300.00 300.00 300.00 300.00
FIXED 8.8750% 1998 2008 500.00 500.00 500.00 500.00
FIXED 8.8750% 1998 2008 500.00 500.00 500.00 500.00
FIXED 9.0000% 2002 2013 500.00 500.00 500.00 500.00
FIXED 9.3750% 2002 2017 750.00 750.00 750.00 750.00
FIXED 9.5000% 1999 2024 1,006.29 1,006.29 1,006.29 1,006.29
FIXED 9.8750% 1999 2019 500.00 500.00 500.00 500.00
FIXED 9.8750% 1999 2019 200.00 200.00 200.00 200.00
FIXED 9.8750% 1999 2019 400.00 400.00 400.00 400.00
FIXED 9.8750% 2000 2010 600.00 600.00 600.00 600.00
FIXED 10.6250% 2000 2025 1,000.00 1,000.00 1,000.00 1,000.00
LIBOR 6 MONTHS DEPOSIT 4.2000% 2000 2003 200.00 200.00 200.00 200.00
LIBOR 6 MONTHS DEPOSIT 3.0500% 2001 2004 200.00 200.00 200.00 200.00
EURO 850.00 882.30 850.00 882.30
--------- --------- ---------- ---------
FIXED 8.0000% 1999 2004 350.00 363.30 350.00 363.30
FIXED 9.3750% 2001 2006 500.00 519.00 500.00 519.00

- --------
(1) Excludes external debt guaranteed by the Republic
(2) Amounts in original currencies converted into US Dollar using BSP reference
rate prevailing on December 27, 2002

T-18

DOMESTIC GOVERNMENT SECURITIES /(1)/
As of December 31, 2002
(IN MILLION PESOS)

OUTSTANDING
INTEREST AS OF
RATE YEAR YEAR OF ORIGINAL DECEMBER 31,
INTEREST RATE BASIS (PER ANNUM) CONTRACTED MATURITY AMOUNT 2002
------------------- ------------- ---------- -------- --------- ------------

TOTAL (I + I I) 1,466,145.27
============
I. ACTUAL OBLIGATIONS 1,447,341.91
------------
A. TREASURY BILLS 405,226.40
------------
ADAPS 2002-
Various 2003 74,055.00
TAP 2002-
Various 2003 2,567.00
GOCC Series 2002-
Various 2003 124,539.60
LGUs 2002-
Various 2003 333.30
TEIs 2002-
Various 2003 29,163.20
CB-BOL 2002-
Floating Rate 2003 174,568.30
B. TREASURY NOTES RA 245 2,438.06 2,415.55
--------- ------------
Fixed Rate 3.500% 1984 2005 337.59 334.31
Fixed Rate 3.500% 1984 2005 153.43 153.43
Fixed Rate 3.500% 1984 2005 55.81 55.81
Fixed Rate 3.500% 1985 2005 145.99 145.99
Fixed Rate 3.500% 1985 2005 91.85 91.85
Fixed Rate 3.500% 1985 2005 8.92 8.92
Fixed Rate 3.500% 1985 2005 1.40 1.40
Fixed Rate 3.500% 1985 2005 51.65 42.88
Fixed Rate 3.500% 1985 2005 2.44 2.44
Fixed Rate 3.500% 1985 2006 4.44 4.44
Fixed Rate 3.500% 1985 2006 70.00 70.00
Fixed Rate 3.500% 1985 2006 37.86 37.86
Fixed Rate 3.500% 1985 2006 0.52 0.52
Fixed Rate 3.500% 1985 2006 1.57 1.57
Fixed Rate 3.500% 1985 2006 0.72 0.72
Fixed Rate 3.500% 1985 2006 2.26 2.26
Fixed Rate 3.500% 1985 2006 31.12 31.12
Fixed Rate 3.500% 1986 2006 39.93 39.93
Fixed Rate 3.500% 1986 2006 188.86 188.86
Fixed Rate 3.500% 1986 2006 126.90 126.90
Fixed Rate 3.500% 1986 2006 26.67 26.67
Fixed Rate 3.500% 1986 2006 200.84 200.84
Fixed Rate 3.500% 1986 2006 139.64 139.64
Fixed Rate 3.500% 1986 2006 13.47 3.01
Fixed Rate 3.500% 1986 2006 295.60 295.60
Fixed Rate 3.500% 1986 2006 26.68 26.68
Fixed Rate 3.500% 1986 2007 44.90 44.90
Fixed Rate 3.500% 1986 2007 1.04 1.04
Fixed Rate 3.500% 1986 2007 5.10 5.10
Fixed Rate 3.500% 1986 2007 20.91 20.91
Fixed Rate 3.500% 1986 2007 309.95 309.95
C. BONDS 83,916.86 90,707.71
--------- ------------
Treasury Bonds 8,959.40 5,892.14
--------- ------------
T/Bonds R.A. 245 7,396.74 4,807.10
--------- ------------
Fixed Rate 2.000% 1973 2003 93.00 91.46
Fixed Rate 3.250% 1978 2003 34.83 34.83
Fixed Rate 3.250% 1978 2003 37.32 37.32
Fixed Rate 3.250% 1978 2003 90.97 90.97
Fixed Rate 3.250% 1980 2005 95.00 95.00
Fixed Rate 4.000% 1980 2005 2,100.00 1,099.98

T-19

DOMESTIC GOVERNMENT SECURITIES /(1)/ -- (Continued)
AS OF DECEMBER 31, 2002
(IN MILLION PESOS)

Fixed Rate 4.000% 1981 2006 1,600.00 1,179.53
Fixed Rate 4.000% 1982 2007 2,700.00 1,746.22
Fixed Rate 4.000% 1983 2008 30.00 9.69
Fixed Rate 4.000% 1983 2004 6.89 0.26
Fixed Rate 4.000% 1983 2004 42.03 39.38
Fixed Rate 4.000% 1983 2003 100.00 5.93
Fixed Rate 4.000% 1983 2008 50.00 3.95
Fixed Rate 4.000% 1983 2008 4.87 0.26
Fixed Rate 4.000% 1983 2008 200.00 200.00
Fixed Rate 4.000% 1983 2008 50.00 50.00
Fixed Rate 4.000% 1983 2008 100.00 100.00
Fixed Rate 4.000% 1983 2008 6.83 6.83
Fixed Rate 4.000% 1983 2008 15.00 15.00
Fixed Rate 7.000% 1979 2004 20.00 0.45
Fixed Rate 10.750% 1978 2003 20.00 0.04
T/Bonds PD No. 4 500.26 497.75
---------- ----------
Fixed Rate 2.000% 1973 2003 490.07 487.56
Fixed Rate 2.000% 1973 2003 10.19 10.19
T/Bonds PD No. 195 922.00 447.73
---------- ----------
Fixed Rate 3.750% 1973 2003 307.00 306.85
Fixed Rate 5.000% 1973 2003 100.28 16.51
Fixed Rate 6.000% 1973 2003 514.72 124.37
T/Bonds PD No. 694 140.40 139.56
---------- ----------
Fixed Rate 3.000% 1978 2008 100.00 100.00
Fixed Rate 3.000% 1979 2009 40.40 39.56
30 Yr FXTB 97.05 97.05
---------- ----------
Fixed Rate 12.840% 1996 2025 97.05 97.05
Treasury Bonds (CB-BoL) 50,000.00 50,000.00
---------- ----------
182-Day T-Bill Rate 1993 2018 50,000.00 50,000.00
12 Yr Peso Denominated T/Bonds 24,860.41 24,860.41
---------- ----------
91-Day T-Bill Rate 1995 2007 3,226.41 3,226.41
91-Day T-Bill Rate 1995 2007 21,634.00 21,634.00
---------- ----------
Agrarian Reform Bonds 9,858.12
----------
91-Day T-Bill Rate
D. FIXED RATE T/BONDS 879,276.67 878,276.67
---------- ----------
2 Yr FXTB 176,832.80 176,832.80
---------- ----------
ADAPS 55,375.00 55,375.00
---------- ----------
Fixed Rate 16.000% 2001 2003 3,000.00 3,000.00
Fixed Rate 14.125% 2001 2003 3,000.00 3,000.00
Fixed Rate 13.625% 2001 2003 3,000.00 3,000.00
Fixed Rate 13.250% 2001 2003 4,000.00 4,000.00
Fixed Rate 13.250% 2001 2003 2,000.00 2,000.00
Fixed Rate 13.250% 2001 2003 2,000.00 2,000.00
Fixed Rate 13.250% 2001 2003 2,000.00 2,000.00
Fixed Rate 13.250% 2001 2003 2,000.00 2,000.00
Fixed Rate 13.250% 2001 2003 4,000.00 4,000.00
Fixed Rate 12.750% 2001 2003 3,500.00 3,500.00
Fixed Rate 12.750% 2001 2003 1,270.00 1,270.00
Fixed Rate 9.500% 2002 2004 3,605.00 3,605.00
Fixed Rate 9.500% 2002 2004 4,000.00 4,000.00
Fixed Rate 8.875% 2002 2004 3,000.00 3,000.00

T-20

DOMESTIC GOVERNMENT SECURITIES /(1)/ -- (Continued)
AS OF DECEMBER 31, 2002
(IN MILLION PESOS)

Fixed Rate 8.875% 2002 2004 9,000.00 9,000.00
Fixed Rate 8.875% 2002 2004 6,000.00 6,000.00
TAP 25,448.00 25,448.00
--------- ---------
Fixed Rate 16.000% 2001 2003 4,300.00 4,300.00
Fixed Rate 13.625% 2001 2003 8,088.00 8,088.00
Fixed Rate 13.250% 2001 2003 7,100.00 7,100.00
Fixed Rate 13.250% 2001 2003 3,560.00 3,560.00
Fixed Rate 12.750% 2001 2003 2,000.00 2,000.00
Fixed Rate 8.875% 2002 2004 400.00 400.00
GOCCs 77,024.20 77,024.20
--------- ---------
Fixed Rate 16.000% 2001 2003 6,966.90 6,966.90
Fixed Rate 14.125% 2001 2003 2,020.30 2,020.30
Fixed Rate 13.625% 2001 2003 13,166.10 13,166.10
Fixed Rate 13.250% 2001 2003 1,572.00 1,572.00
Fixed Rate 13.250% 2001 2003 847.70 847.70
Fixed Rate 13.250% 2001 2003 678.90 678.90
Fixed Rate 13.250% 2001 2003 8,714.70 8,714.70
Fixed Rate 12.750% 2001 2003 16,783.10 16,783.10
Fixed Rate 9.500% 2002 2004 10,561.10 10,561.10
Fixed Rate 8.875% 2002 2004 2,278.30 2,278.30
Fixed Rate 8.875% 2002 2004 6,062.00 6,062.00
Fixed Rate 8.875% 2002 2004 7,373.10 7,373.10
TEIs 18,985.60 18,985.60
--------- ---------
Fixed Rate 14.400% 2001 2003 215.10 215.10
Fixed Rate 16.000% 2001 2003 500.00 500.00
Fixed Rate 12.7125% 2001 2003 37.80 37.80
Fixed Rate 14.125% 2001 2003 200.00 200.00
Fixed Rate 13.625% 2001 2003 441.60 441.60
Fixed Rate 12.2625% 2001 2003 1,184.10 1,184.10
Fixed Rate 13.250% 2001 2003 400.00 400.00
Fixed Rate 11.925% 2001 2003 345.60 345.60
Fixed Rate 11.925% 2001 2003 117.40 117.40
Fixed Rate 11.925% 2001 2003 334.50 334.50
Fixed Rate 13.250% 2001 2003 205.90 205.90
Fixed Rate 11.925% 2001 2003 94.80 94.80
Fixed Rate 13.250% 2001 2003 200.00 200.00
Fixed Rate 11.925% 2001 2003 39.70 39.70
Fixed Rate 12.750% 2001 2003 4,293.70 4,293.70
Fixed Rate 11.475% 2001 2003 1,713.50 1,713.50
Fixed Rate 8.550% 2002 2004 771.00 771.00
Fixed Rate 9.500% 2002 2004 1,416.40 1,416.40
Fixed Rate 7.9875% 2002 2004 34.00 34.00
Fixed Rate 8.875% 2002 2004 211.20 211.20
Fixed Rate 8.875% 2002 2004 500.00 500.00
Fixed Rate 7.9875% 2002 2004 465.70 465.70
Fixed Rate 8.875% 2002 2004 4,659.00 4,659.00
Fixed Rate 7.9875% 2002 2004 604.60 604.60
3 Yr FXTB 36,076.50 36,076.50
--------- ---------
ADAPS 12,000.00 12,000.00
--------- ---------
Fixed Rate 10.2500% 2002 2005 6,000.00 6,000.00
Fixed Rate 10.0000% 2002 2005 3,000.00 3,000.00
Fixed Rate 9.1250% 2002 2005 3,000.00 3,000.00

T-21

DOMESTIC GOVERNMENT SECURITIES /(1)/ -- (Continued)
AS OF DECEMBER 31, 2002
(IN MILLION PESOS)

GOCCs 15,884.10 15,884.10
---------- ----------
Fixed Rate 10.2500% 2002 2005 7,235.10 7,235.10
Fixed Rate 10.0000% 2002 2005 8,470.00 8,470.00
Fixed Rate 9.1250% 2002 2005 179.00 179.00
TEIs 8,192.40 8,192.40
---------- ----------
Fixed Rate 10.2500% 2002 2005 5,608.40 5,608.40
Fixed Rate 9.2250% 2002 2005 589.90 589.90
Fixed Rate 10.0000% 2002 2005 400.00 400.00
Fixed Rate 9.0000% 2002 2005 432.70 432.70
Fixed Rate 9.1250% 2002 2005 1,123.70 1,123.70
Fixed Rate 8.2125% 2002 2005 37.70 37.70
4 Yr FXTB 14,706.30 14,706.30
---------- ----------
ADAPS 10,585.00 10,585.00
---------- ----------
Fixed Rate 10.3750% 2002 2006 6,000.00 6,000.00
Fixed Rate 10.3750% 2002 2006 4,585.00 4,585.00
GOCCs 2,464.00 2,464.00
---------- ----------
Fixed Rate 10.3750% 2002 2006 2,086.90 2,086.90
Fixed Rate 10.3750% 2002 2006 377.10 377.10
TEIs 1,657.30 1,657.30
---------- ----------
Fixed Rate 10.3750% 2002 2006 500.00 500.00
Fixed Rate 9.3375% 2002 2006 141.10 141.10
Fixed Rate 10.3750% 2002 2006 1,000.00 1,000.00
Fixed Rate 9.3375% 2002 2006 16.20 16.20
3 Yr Retail T/Bonds 23,259.75 23,259.75
---------- ----------
Fixed Rate 10.750% 2002 2005 23,259.75 23,259.75
4 Yr Retail T/Bonds 37,993.16 37,993.16
---------- ----------
Fixed Rate 14.250% 2001 2005 15,635.38 15,635.38
Fixed Rate 14.250% 2001 2005 22,357.78 22,357.78
5 Yr Retail T/Bonds 39,670.53 39,670.53
---------- ----------
Fixed Rate 12.375% 2002 2007 39,670.53 39,670.53
5 Yr FXTB 210,900.78 210,900.78
---------- ----------
ADAPS 115,012.00 115,012.00
---------- ----------
Fixed Rate 20.000% 1998 2003 2,000.00 2,000.00
Fixed Rate 21.000% 1998 2003 3,000.00 3,000.00
Fixed Rate 20.000% 1998 2003 2,000.00 2,000.00
Fixed Rate 16.125% 1998 2003 3,000.00 3,000.00
Fixed Rate 14.000% 1999 2004 3,000.00 3,000.00
Fixed Rate 13.625% 1999 2004 1,730.00 1,730.00
Fixed Rate 14.250% 1999 2004 890.00 890.00
Fixed Rate 14.250% 1999 2004 2,000.00 2,000.00
Fixed Rate 14.125% 1999 2004 2,000.00 2,000.00
Fixed Rate 13.750% 2000 2005 3,000.00 3,000.00
Fixed Rate 13.500% 2000 2005 3,000.00 3,000.00
Fixed Rate 13.500% 2000 2005 3,000.00 3,000.00
Fixed Rate 12.750% 2000 2005 3,000.00 3,000.00
Fixed Rate 13.250% 2000 2005 1,610.00 1,610.00
Fixed Rate 13.000% 2000 2005 3,000.00 3,000.00
Fixed Rate 13.500% 2000 2005 1,230.00 1,230.00
Fixed Rate 13.875% 2000 2005 765.00 765.00
Fixed Rate 16.750% 2000 2005 1,349.00 1,349.00
Fixed Rate 15.875% 2001 2006 3,000.00 3,000.00

T-22

DOMESTIC GOVERNMENT SECURITIES /(1)/ -- (Continued)
AS OF DECEMBER 31, 2002
(IN MILLION PESOS)

Fixed Rate 15.000% 2001 2006 2,961.00 2,961.00
Fixed Rate 14.500% 2001 2006 3,000.00 3,000.00
Fixed Rate 14.000% 2001 2006 1,000.00 1,000.00
Fixed Rate 15.250% 2001 2006 1,948.00 1,948.00
Fixed Rate 15.250% 2001 2006 2,000.00 2,000.00
Fixed Rate 15.500% 2001 2006 3,500.00 3,500.00
Fixed Rate 16.250% 2001 2006 905.00 905.00
Fixed Rate 14.125% 2001 2004 1,891.00 1,891.00
Fixed Rate 14.125% 2001 2004 2,000.00 2,000.00
Fixed Rate 14.250% 2001 2004 1,260.00 1,260.00
Fixed Rate 14.250% 2001 2004 2,000.00 2,000.00
Fixed Rate 13.750% 2001 2005 2,000.00 2,000.00
Fixed Rate 13.750% 2001 2005 2,000.00 2,000.00
Fixed Rate 13.875% 2001 2005 2,095.00 2,095.00
Fixed Rate 12.750% 2002 2005 4,000.00 4,000.00
Fixed Rate 13.875% 2002 2005 4,000.00 4,000.00
Fixed Rate 12.750% 2002 2005 4,000.00 4,000.00
Fixed Rate 13.500% 2002 2005 4,000.00 4,000.00
Fixed Rate 13.000% 2002 2005 3,000.00 3,000.00
Fixed Rate 13.000% 2002 2007 3,848.00 3,848.00
Fixed Rate 13.000% 2002 2007 1,025.00 1,025.00
Fixed Rate 13.000% 2002 2007 3,000.00 3,000.00
Fixed Rate 10.750% 2002 2007 2,935.00 2,935.00
Fixed Rate 10.750% 2002 2007 3,000.00 3,000.00
Fixed Rate 10.750% 2002 2007 3,000.00 3,000.00
Fixed Rate 11.000% 2002 2007 2,000.00 2,000.00
Fixed Rate 11.000% 2002 2007 1,000.00 1,000.00
Fixed Rate 11.000% 2002 2007 3,000.00 3,000.00
Fixed Rate 14.000% 2002 2006 2,070.00 2,070.00
TAP 23,856.00 23,856.00
--------- ---------
Fixed Rate 20.000% 1998 2003 4,300.00 4,300.00
Fixed Rate 16.125% 1998 2003 2,350.00 2,350.00
Fixed Rate 14.000% 1999 2004 1,050.00 1,050.00
Fixed Rate 14.125% 1999 2004 1,000.00 1,000.00
Fixed Rate 13.875% 2000 2005 3,300.00 3,300.00
Fixed Rate 16.750% 2000 2005 400.00 400.00
Fixed Rate 15.875% 2001 2006 1,000.00 1,000.00
Fixed Rate 15.000% 2001 2006 800.00 800.00
Fixed Rate 14.500% 2001 2006 3,950.00 3,950.00
Fixed Rate 14.000% 2001 2006 1,000.00 1,000.00
Fixed Rate 14.250% 2001 2004 2,706.00 2,706.00
Fixed Rate 14.250% 2001 2004 500.00 500.00
Fixed Rate 13.000% 2002 2005 1,500.00 1,500.00
GOCCs 53,524.98 53,524.98
--------- ---------
Fixed Rate 20.000% 1998 2003 191.00 191.00
Fixed Rate 21.000% 1998 2003 1,949.80 1,949.80
Fixed Rate 20.000% 1998 2003 143.20 143.20
Fixed Rate 16.125% 1998 2003 910.50 910.50
Fixed Rate 14.000% 1999 2004 1,586.60 1,586.60
Fixed Rate 13.625% 1999 2004 45.80 45.80
Fixed Rate 14.250% 1999 2004 1,485.10 1,485.10
Fixed Rate 14.250% 1999 2004 938.70 938.70
Fixed Rate 14.125% 1999 2004 2,975.60 2,975.60

T-23

DOMESTIC GOVERNMENT SECURITIES /(1)/ -- (Continued)
AS OF DECEMBER 31, 2002
(IN MILLION PESOS)

Fixed Rate 13.750% 2000 2005 2,227.40 2,227.40
Fixed Rate 13.500% 2000 2005 1.40 1.40
Fixed Rate 13.500% 2000 2005 1,563.10 1,563.10
Fixed Rate 12.750% 2000 2005 53.00 53.00
Fixed Rate 13.250% 2000 2005 118.40 118.40
Fixed Rate 13.000% 2000 2005 48.20 48.20
Fixed Rate 13.500% 2000 2005 2,998.40 2,998.40
Fixed Rate 13.875% 2000 2005 2,439.00 2,439.00
Fixed Rate 16.750% 2000 2005 1,825.90 1,825.90
Fixed Rate 15.875% 2001 2006 990.50 990.50
Fixed Rate 15.000% 2001 2006 587.20 587.20
Fixed Rate 14.500% 2001 2006 2,181.70 2,181.70
Fixed Rate 14.000% 2001 2006 463.20 463.20
Fixed Rate 15.250% 2001 2006 230.10 230.10
Fixed Rate 15.250% 2001 2006 2,457.90 2,457.90
Fixed Rate 14.125% 2001 2006 1,977.48 1,977.48
Fixed Rate 14.250% 2001 2004 454.30 454.30
Fixed Rate 15.500% 2001 2006 581.60 581.60
Fixed Rate 16.250% 2001 2006 2,269.10 2,269.10
Fixed Rate 13.750% 2001 2005 1,524.80 1,524.80
Fixed Rate 13.875% 2001 2005 2,037.90 2,037.90
Fixed Rate 12.750% 2002 2005 2,540.70 2,540.70
Fixed Rate 13.500% 2002 2005 5,140.10 5,140.10
Fixed Rate 13.000% 2002 2007 155.20 155.20
Fixed Rate 13.000% 2002 2007 4,911.50 4,911.50
Fixed Rate 11.000% 2002 2007 477.90 477.90
Fixed Rate 13.000% 2002 2005 2,146.30 2,146.30
Fixed Rate 14.000% 2002 2006 896.40 896.40
TEIs 18,507.80 18,507.80
--------- ---------
Fixed Rate 18.9000% 1998 2003 500.00 500.00
Fixed Rate 18.0000% 1998 2003 1,018.50 1,018.50
Fixed Rate 20.0000% 1998 2003 200.00 200.00
Fixed Rate 14.5125% 1998 2003 370.20 370.20
Fixed Rate 14.0000% 1999 2004 500.00 500.00
Fixed Rate 12.6000% 1999 2004 211.90 211.90
Fixed Rate 12.8250% 1999 2004 1.00 1.00
Fixed Rate 12.8250% 1999 2004 10.00 10.00
Fixed Rate 13.7500% 2000 2005 100.00 100.00
Fixed Rate 13.5000% 2000 2005 200.00 200.00
Fixed Rate 12.1500% 2000 2005 10.00 10.00
Fixed Rate 12.1500% 2000 2005 30.00 30.00
Fixed Rate 12.7500% 2000 2005 200.00 200.00
Fixed Rate 13.5000% 2000 2005 100.00 100.00
Fixed Rate 12.1500% 2000 2005 30.00 30.00
Fixed Rate 13.8750% 2000 2005 200.00 200.00
Fixed Rate 12.4875% 2000 2005 18.00 18.00
Fixed Rate 15.0750% 2000 2005 223.40 223.40
Fixed Rate 16.7500% 2000 2005 500.00 500.00
Fixed Rate 14.2875% 2001 2006 24.60 24.60
Fixed Rate 15.8750% 2001 2006 200.00 200.00
Fixed Rate 15.0000% 2001 2006 200.00 200.00
Fixed Rate 13.5000% 2001 2006 45.00 45.00
Fixed Rate 14.5000% 2001 2006 600.00 600.00
Fixed Rate 13.0500% 2001 2006 150.70 150.70

T-24

DOMESTIC GOVERNMENT SECURITIES /(1)/ -- (Continued)
AS OF DECEMBER 31, 2002
(IN MILLION PESOS)

Fixed Rate 12.6000% 2001 2006 19.50 19.50
Fixed Rate 15.2500% 2001 2006 800.00 800.00
Fixed Rate 13.7250% 2001 2006 100.40 100.40
Fixed Rate 13.7250% 2001 2006 194.10 194.10
Fixed Rate 15.2500% 2001 2006 200.00 200.00
Fixed Rate 15.5000% 2001 2006 400.00 400.00
Fixed Rate 13.9500% 2001 2006 75.80 75.80
Fixed Rate 16.2500% 2001 2006 500.00 500.00
Fixed Rate 14.6250% 2001 2006 203.60 203.60
Fixed Rate 14.1250% 2001 2004 468.00 468.00
Fixed Rate 12.7125% 2001 2004 19.50 19.50
Fixed Rate 14.2500% 2001 2004 200.00 200.00
Fixed Rate 12.8250% 2001 2004 94.10 94.10
Fixed Rate 14.2500% 2001 2004 200.00 200.00
Fixed Rate 13.7500% 2001 2005 200.00 200.00
Fixed Rate 12.3750% 2001 2005 246.90 246.90
Fixed Rate 12.4875% 2001 2005 41.70 41.70
Fixed Rate 13.8750% 2001 2005 200.00 200.00
Fixed Rate 12.375% 2001 2005 235.50 235.50
Fixed Rate 11.475% 2002 2005 248.00 248.00
Fixed Rate 12.4875% 2002 2005 400.00 400.00
Fixed Rate 12.150% 2002 2005 554.70 554.70
Fixed Rate 13.500% 2002 2005 518.40 518.40
Fixed Rate 11.700% 2002 2007 719.50 719.50
Fixed Rate 13.000% 2002 2007 200.00 200.00
Fixed Rate 11.700% 2002 2007 533.40 533.40
Fixed Rate 11.000% 2002 2007 2,309.20 2,309.20
Fixed Rate 9.900% 2002 2007 108.50 108.50
Fixed Rate 11.700% 2002 2005 318.40 318.40
Fixed Rate 13.000% 2002 2005 1,185.00 1,185.00
Fixed Rate 14.000% 2002 2006 1,370.30 1,370.30
Small Denominated T/Bonds 30,260.24 30,260.24
---------- ----------
Fixed Rate 13.6250% 1999 2004 30,260.24 30,260.24
Progress Bonds 8,000.00 8,000.00
---------- ----------
Fixed Rate 13.875% 2000 2005 8,000.00 8,000.00
7 Yr FXTB 147,447.10 147,447.10
---------- ----------
ADAPS 75,499.00 75,499.00
---------- ----------
Fixed Rate 15.500% 1996 2003 3,000.00 3,000.00
Fixed Rate 15.375% 1996 2003 3,000.00 3,000.00
Fixed Rate 15.375% 1996 2003 3,000.00 3,000.00
Fixed Rate 15.375% 1996 2003 4,000.00 4,000.00
Fixed Rate 15.750% 1996 2003 2,585.00 2,585.00
Fixed Rate 14.875% 1996 2003 2,000.00 2,000.00
Fixed Rate 14.000% 1996 2003 2,000.00 2,000.00
Fixed Rate 13.500% 1997 2004 3,340.00 3,340.00
Fixed Rate 20.875% 1997 2004 1,987.00 1,987.00
Fixed Rate 20.500% 1998 2005 1,887.00 1,887.00
Fixed Rate 20.000% 1998 2005 1,164.00 1,164.00
Fixed Rate 18.375% 1998 2005 2,500.00 2,500.00
Fixed Rate 16.500% 1999 2006 1,805.00 1,805.00
Fixed Rate 14.000% 1999 2006 750.00 750.00
Fixed Rate 14.000% 1999 2006 21.00 21.00

T-25

DOMESTIC GOVERNMENT SECURITIES /(1)/ -- (Continued)
AS OF DECEMBER 31, 2002
(IN MILLION PESOS)

Fixed Rate 15.000% 1999 2006 2,000.00 2,000.00
Fixed Rate 14.750% 1999 2006 2,000.00 2,000.00
Fixed Rate 14.625% 1999 2006 2,000.00 2,000.00
Fixed Rate 14.500% 1999 2006 2,000.00 2,000.00
Fixed Rate 14.500% 2000 2007 2,775.00 2,775.00
Fixed Rate 14.250% 2000 2007 3,000.00 3,000.00
Fixed Rate 14.000% 2000 2007 3,000.00 3,000.00
Fixed Rate 13.375% 2000 2007 3,000.00 3,000.00
Fixed Rate 13.875% 2000 2007 1,250.00 1,250.00
Fixed Rate 13.500% 2000 2007 3,000.00 3,000.00
Fixed Rate 14.000% 2000 2007 1,165.00 1,165.00
Fixed Rate 14.250% 2000 2007 1,640.00 1,640.00
Fixed Rate 14.250% 2000 2007 2,116.00 2,116.00
Fixed Rate 14.500% 2000 2007 1,020.00 1,020.00
Fixed Rate 17.250% 2000 2007 1,039.00 1,039.00
Fixed Rate 16.000% 2001 2008 3,000.00 3,000.00
Fixed Rate 15.625% 2001 2008 3,000.00 3,000.00
Fixed Rate 13.500% 2001 2004 2,000.00 2,000.00
Fixed Rate 13.500% 2001 2004 1,000.00 1,000.00
Fixed Rate 15.000% 2001 2006 2,000.00 2,000.00
Fixed Rate 14.000% 2002 2006 455.00 455.00
TAP 11,680.00 11,680.00
--------- ---------
Fixed Rate 14.000% 1996 2003 1,000.00 1,000.00
Fixed Rate 13.500% 1997 2004 3,180.00 3,180.00
Fixed Rate 20.500% 1998 2005 1,200.00 1,200.00
Fixed Rate 18.375% 1998 2005 2,100.00 2,100.00
Fixed Rate 16.000% 2001 2008 2,200.00 2,200.00
Fixed Rate 15.625% 2001 2008 2,000.00 2,000.00
GOCCs 37,803.70 37,803.70
--------- ---------
Fixed Rate 15.500% 1996 2003 5,513.70 5,513.70
Fixed Rate 15.375% 1996 2003 193.00 193.00
Fixed Rate 15.375% 1996 2003 1,884.10 1,884.10
Fixed Rate 15.750% 1996 2003 98.60 98.60
Fixed Rate 14.175% 1996 2003 1,000.00 1,000.00
Fixed Rate 14.875% 1996 2003 0.80 0.80
Fixed Rate 14.000% 1996 2003 6.40 6.40
Fixed Rate 20.875% 1997 2004 65.00 65.00
Fixed Rate 16.500% 1999 2006 1,446.70 1,446.70
Fixed Rate 15.000% 1999 2006 13.20 13.20
Fixed Rate 14.750% 1999 2006 1.00 1.00
Fixed Rate 14.625% 1999 2006 1,958.80 1,958.80
Fixed Rate 14.500% 1999 2006 867.70 867.70
Fixed Rate 14.500% 2000 2007 3,091.00 3,091.00
Fixed Rate 14.250% 2000 2007 379.40 379.40
Fixed Rate 14.000% 2000 2007 552.70 552.70
Fixed Rate 13.875% 2000 2007 1,047.60 1,047.60
Fixed Rate 13.500% 2000 2007 10.60 10.60
Fixed Rate 14.000% 2000 2007 37.00 37.00
Fixed Rate 14.250% 2000 2007 10.50 10.50
Fixed Rate 14.250% 2000 2007 99.90 99.90
Fixed Rate 14.500% 2000 2007 573.20 573.20
Fixed Rate 17.250% 2000 2007 3,043.70 3,043.70
Fixed Rate 16.000% 2001 2008 2,514.30 2,514.30

T-26

DOMESTIC GOVERNMENT SECURITIES /(1)/ -- (Continued)
AS OF DECEMBER 31, 2002
(IN MILLION PESOS)

Fixed Rate 15.625% 2001 2008 8,319.10 8,319.10
Fixed Rate 16.000% 2001 2008 509.00 509.00
Fixed Rate 13.500% 2001 2004 403.10 403.10
Fixed Rate 15.000% 2001 2006 1,953.40 1,953.40
Fixed Rate 14.000% 2002 2006 2,210.20 2,210.20
TEIs 22,464.40 22,464.40
---------- ----------
Fixed Rate 13.8375% 1996 2003 8,000.00 8,000.00
Fixed Rate 14.175% 1996 2003 1,201.00 1,201.00
Fixed Rate 12.150% 1997 2004 100.00 100.00
Fixed Rate 18.7875% 1997 2004 2,800.00 2,800.00
Fixed Rate 18.000% 1998 2005 200.00 200.00
Fixed Rate 16.5375% 1998 2005 50.00 50.00
Fixed Rate 14.850% 1999 2006 116.10 116.10
Fixed Rate 12.600% 1999 2006 1.20 1.20
Fixed Rate 14.000% 1999 2006 500.00 500.00
Fixed Rate 13.500% 1999 2006 158.00 158.00
Fixed Rate 15.000% 1999 2006 200.00 200.00
Fixed Rate 14.625% 1999 2006 200.00 200.00
Fixed Rate 13.1625% 1999 2006 2.30 2.30
Fixed Rate 13.050% 1999 2006 8.00 8.00
Fixed Rate 14.500% 2000 2007 200.00 200.00
Fixed Rate 13.050% 2000 2007 7.00 7.00
Fixed Rate 14.250% 2000 2007 200.00 200.00
Fixed Rate 12.825% 2000 2007 15.00 15.00
Fixed Rate 14.000% 2000 2007 200.00 200.00
Fixed Rate 13.375% 2000 2007 500.00 500.00
Fixed Rate 13.875% 2000 2007 500.00 500.00
Fixed Rate 13.500% 2000 2007 300.00 300.00
Fixed Rate 14.500% 2000 2007 200.00 200.00
Fixed Rate 17.250% 2000 2007 200.00 200.00
Fixed Rate 15.525% 2000 2007 75.10 75.10
Fixed Rate 14.4000% 2001 2008 435.30 435.30
Fixed Rate 16.000% 2001 2008 1,209.50 1,209.50
Fixed Rate 15.625% 2001 2008 823.10 823.10
Fixed Rate 14.0625% 2001 2008 1,121.60 1,121.60
Fixed Rate 12.150% 2001 2004 142.30 142.30
Fixed Rate 13.500% 2001 2004 900.00 900.00
Fixed Rate 12.150% 2001 2004 137.80 137.80
Fixed Rate 15.000% 2001 2006 200.00 200.00
Fixed Rate 13.500% 2001 2006 911.80 911.80
Fixed Rate 12.600% 2002 2006 149.30 149.30
Fixed Rate 14.000% 2002 2006 500.00 500.00
10 Yr FXTB 118,769.45 117,769.45
---------- ----------
ADAPS 69,407.00 69,407.00
---------- ----------
Fixed Rate 16.000% 1996 2006 2,000.00 2,000.00
Fixed Rate 14.125% 1997 2007 5,000.00 5,000.00
Fixed Rate 13.875% 1997 2007 3,500.00 3,500.00
Fixed Rate 22.875% 1997 2007 1,759.00 1,759.00
Fixed Rate 19.000% 1998 2008 2,000.00 2,000.00
Fixed Rate 20.000% 1998 2008 446.00 446.00
Fixed Rate 18.000% 1998 2008 3,000.00 3,000.00
Fixed Rate 16.500% 1999 2009 3,000.00 3,000.00
Fixed Rate 14.625% 1999 2009 1,550.00 1,550.00

T-27

DOMESTIC GOVERNMENT SECURITIES /(1)/ -- (Continued)
AS OF DECEMBER 31, 2002
(IN MILLION PESOS)

OUTSTANDING
INTEREST AS OF
RATE YEAR YEAR OF ORIGINAL December 31,
INTEREST RATE BASIS (PER ANNUM) CONTRACTED MATURITY AMOUNT 2002
------------------- ----------- ---------- -------- --------- ------------

Fixed Rate 15.000% 1999 2009 1,578.00 1,578.00
Fixed Rate 15.500% 1999 2009 2,000.00 2,000.00
Fixed Rate 15.125% 1999 2009 2,000.00 2,000.00
Fixed Rate 15.000% 1999 2009 2,000.00 2,000.00
Fixed Rate 14.875% 1999 2009 2,000.00 2,000.00
Fixed Rate 14.750% 2000 2010 3,000.00 3,000.00
Fixed Rate 14.625% 2000 2010 3,000.00 3,000.00
Fixed Rate 13.875% 2000 2010 3,000.00 3,000.00
Fixed Rate 13.875% 2000 2010 2,563.00 2,563.00
Fixed Rate 14.250% 2000 2010 1,430.00 1,430.00
Fixed Rate 14.125% 2000 2010 3,000.00 3,000.00
Fixed Rate 14.500% 2000 2010 2,918.00 2,918.00
Fixed Rate 14.625% 2000 2010 1,825.00 1,825.00
Fixed Rate 14.625% 2000 2010 3,000.00 3,000.00
Fixed Rate 17.500% 2000 2010 1,750.00 1,750.00
Fixed Rate 17.500% 2001 2011 2,195.00 2,195.00
Fixed Rate 16.500% 2001 2011 2,893.00 2,893.00
Fixed Rate 13.000% 2002 2012 3,000.00 3,000.00
Fixed Rate 13.000% 2002 2012 2,000.00 2,000.00
Fixed Rate 12.125% 2002 2012 2,000.00 2,000.00
TAP 18,390.00 18,390.00
--------- ---------
Fixed Rate 16.000% 1996 2006 500.00 500.00
Fixed Rate 21.000% 1997 2007 40.00 40.00
Fixed Rate 19.000% 1998 2008 3,800.00 3,800.00
Fixed Rate 17.800% 1998 2008 1,000.00 1,000.00
Fixed Rate 18.000% 1998 2008 1,100.00 1,100.00
Fixed Rate 16.500% 1999 2009 2,150.00 2,150.00
Fixed Rate 14.625% 1999 2009 400.00 400.00
Fixed Rate 15.500% 1999 2009 1,650.00 1,650.00
Fixed Rate 15.000% 1999 2009 600.00 600.00
Fixed Rate 14.750% 2000 2010 500.00 500.00
Fixed Rate 14.625% 2000 2010 1,450.00 1,450.00
Fixed Rate 17.500% 2000 2010 1,200.00 1,200.00
Fixed Rate 17.500% 2001 2011 1,000.00 1,000.00
Fixed Rate 13.000% 2002 2012 3,000.00 3,000.00
GOCCs 17,163.75 17,163.75
--------- ---------
Fixed Rate 16.000% 1996 2006 1,792.64 1,792.64
Fixed Rate 14.400% 1996 2006 1,000.00 1,000.00
Fixed Rate 12.840% 1997 2007 4.71 4.71
Fixed Rate 14.125% 1997 2007 30.20 30.20
Fixed Rate 22.875% 1997 2007 1,784.80 1,784.80
Fixed Rate 20.000% 1998 2008 163.00 163.00
Fixed Rate 18.000% 1998 2008 1,387.50 1,387.50
Fixed Rate 16.500% 1999 2009 183.10 183.10
Fixed Rate 15.500% 1999 2009 189.80 189.80
Fixed Rate 15.125% 1999 2009 3,302.50 3,302.50
Fixed Rate 15.000% 1999 2009 4,909.10 4,909.10
Fixed Rate 14.875% 1999 2009 162.70 162.70
Fixed Rate 14.750% 2000 2010 756.10 756.10
Fixed Rate 14.625% 2000 2010 231.40 231.40
Fixed Rate 13.875% 2000 2010 181.50 181.50
Fixed Rate 13.875% 2000 2010 94.20 94.20
Fixed Rate 14.250% 2000 2010 4.90 4.90

T-28

DOMESTIC GOVERNMENT SECURITIES /(1)/ -- (Continued)
AS OF DECEMBER 31, 2002
(IN MILLION PESOS)

Fixed Rate 14.125% 2000 2010 355.50 355.50
Fixed Rate 14.500% 2000 2010 48.10 48.10
Fixed Rate 14.625% 2000 2010 5.50 5.50
Fixed Rate 14.625% 2000 2010 197.40 197.40
Fixed Rate 17.500% 2000 2010 1.10 1.10
Fixed Rate 17.500% 2001 2011 45.30 45.30
Fixed Rate 16.500% 2001 2011 301.70 301.70
Fixed Rate 13.000% 2002 2012 31.00 31.00
TEIs 13,808.70 12,808.70
--------- ---------
Fixed Rate 14.4000% 1996 2006 5,801.50 4,801.50
Fixed Rate 20.5875% 1997 2007 3,900.00 3,900.00
Fixed Rate 18.0000% 1998 2008 200.00 200.00
Fixed Rate 16.200% 1998 2008 58.50 58.50
Fixed Rate 16.500% 1999 2009 500.00 500.00
Fixed Rate 15.000% 1998 2008 100.00 100.00
Fixed Rate 15.500% 1998 2008 100.00 100.00
Fixed Rate 15.000% 1998 2008 200.00 200.00
Fixed Rate 14.625% 2000 2010 200.00 200.00
Fixed Rate 14.250% 2000 2010 200.00 200.00
Fixed Rate 14.125% 2000 2010 200.00 200.00
Fixed Rate 14.625% 2000 2010 200.00 200.00
Fixed Rate 17.500% 2000 2010 200.00 200.00
Fixed Rate 17.500% 2001 2011 744.70 744.70
Fixed Rate 15.750% 2001 2011 4.50 4.50
Fixed Rate 16.500% 2001 2011 700.00 700.00
Fixed Rate 14.800% 2001 2011 300.40 300.40
Fixed Rate 11.700% 2002 2012 181.70 181.70
Fixed Rate 11.700% 2002 2012 17.40 17.40
20 Yrs XTB 18,000.36 18,000.36
--------- ---------
ADAPS 7,000.00 7,000.00
--------- ---------
Fixed Rate 14.375% 1997 2017 2,000.00 2,000.00
Fixed Rate 15.000% 2002 2022 4,000.00 4,000.00
Fixed Rate 12.750% 2002 2022 1,000.00 1,000.00
TAP 3,804.90 3,804.90
--------- ---------
Fixed Rate 14.375% 1997 2017 3,804.90 3,804.90
GOCCs 7,160.46 7,160.46
--------- ---------
Fixed Rate 14.375% 1997 2017 4,020.10 4,020.10
Fixed Rate 12.840% 1998 2018 9.97 9.97
Fixed Rate 12.840% 1998 2018 0.48 0.48
Fixed Rate 12.840% 1999 2019 4.97 4.97
Fixed Rate 12.840% 1999 2019 0.48 0.48
Fixed Rate 12.840% 1999 2019 0.05 0.05
Fixed Rate 12.840% 1999 2019 1.02 1.02
Fixed Rate 12.840% 2000 2020 2.20 2.20
Fixed Rate 12.840% 2001 2021 2.42 2.42
Fixed Rate 12.840% 2002 2022 2.67 2.67
Fixed Rate 15.000% 2002 2022 3,116.10 3,116.10
TEI 35.00 35.00
--------- ---------
Fixed Rate 13.500% 2002 2022 35.00 35.00
25 Yr FXTB 8,202.10 8,202.10
--------- ---------
ADAPS 5,286.00 5,286.00
--------- ---------
Fixed Rate 18.250% 2000 2025 5,286.00 5,286.00

T-29

DOMESTIC GOVERNMENT SECURITIES /(1)/ -- (Continued)
AS OF DECEMBER 31, 2002
(IN MILLION PESOS)

TAP 2,320.00 2,320.00
--------- ---------
Fixed Rate 18.250% 2000 2025 2,320.00 2,320.00
GOCCs 96.10 96.10
--------- ---------
Fixed Rate 18.250% 2000 2025 96.10 96.10
TEIs 500.00 500.00
--------- ---------
Fixed Rate 18.250% 2000 2025 500.00 500.00
10 Yr Special Purpose T/Bonds for CARP 9,157.62 9,157.62
--------- ---------
ADAPS 5,988.00 5,988.00
--------- ---------
Fixed Rate 15.500% 2001 2011 3,173.00 3,173.00
Fixed Rate 14.000% 2002 2012 2,815.00 2,815.00
TAP
Fixed Rate 15.500% 2001 2011 2,769.62 2,769.62
TEIs
Fixed Rate 15.500% 2001 2011 400.00 400.00
E. ZERO COUPON PEACE BOND 35,000.00 35,000.00
--------- ---------
2001 2011 35,000.00 35,000.00
F. FIXED RATE PESO NOTES (CURR SWAP) 11,810.00 11,810.00
--------- ---------
3 Yr 6,330.00 6,330.00
--------- ---------
Fixed Rate
5 Yr 14.000% 2001 2004 6,330.00 6,330.00
--------- ---------
Fixed Rate 5,480.00 5,480.00
--------- ---------
14.250% 2001 2006 5,480.00 5,480.00
G. US DOLLAR Linked PHp. Peso Notes (DLPNs) /(2)/ 12,000.00 12,080.50
--------- ---------
2 Yr 3,500.00 3,571.63
--------- ---------
Fixed Rate 8.5625% 2001 2003 3,500.00 3,571.63
3 Yr 8,500.00 8,508.86
--------- ---------
Fixed Rate 10.4375% 2001 2004 3,500.00 3,567.17
Fixed Rate 7.5625% 2002 2005 5,000.00 4,941.69
--------- ---------
H. FIXED RATE PROMISSORY NOTES 11,520.00 11,520.00
--------- ---------
3 Yr
Fixed Rate 8.125% 2002 2005 6,230.00 6,230.00
5 Yr
Fixed Rate 9.625% 2002 2007 5,290.00 5,290.00
I. FIXED TERM DEPOSIT Various 2002 2003 305.08 305.08
II. CONTINGENT OBLIGATIONS 18,140.70 18,803.37
--------- ---------
A. NPC Bonds 140.70 140.70
--------- ---------
Fixed Rate 8.500% 1978 2003 20.00 20.00
Fixed Rate 8.500% 1978 2003 20.00 20.00
Fixed Rate 8.500% 1978 2003 20.00 20.00
Fixed Rate 8.500% 1978 2003 20.00 20.00
Fixed Rate 8.500% 1978 2003 20.00 20.00
Fixed Rate 8.500% 1978 2003 20.00 20.00
Fixed Rate 8.500% 1978 2003 10.00 10.00
Fixed Rate 8.500% 1978 2003 10.70 10.70
B. Land Bank Bonds 662.67
---------
Fixed Rate 6.000% 662.67

T-30

DOMESTIC GOVERNMENT SECURITIES /(1)/ -- (Continued)
AS OF DECEMBER 31, 2002
(IN MILLION PESOS)

C. NDC Agri-Agra (ERAP Bonds) 7,000.00 7,000.00
-------- --------
Fixed Rate 7.875% 1999 2004 5,000.00 5,000.00
Fixed Rate 6.875% 2002 2009 2,000.00 2,000.00
D. PAG-IBIG Housing Bonds Bond 4,000.00 4,000.00
Fixed Rate 8.250% 2000 2005 4,000.00 4,000.00
E. HGC ZERO COUPON BOND 7,000.00 7,000.00
-------- --------
ADAPs 2002 2007 5,000.00 5,000.00
TAP 2002 2007 2,000.00 2,000.00

- --------
(1) Excludes external securities of the Republic

(2) Based on reference rate of (Peso)/$ of (Peso)53.05 as of December 27, 2002

T-31

GOVERNMENT GUARANTEED CORPORATE BONDS
As of December 31, 2001
(IN MILLIONS)

Outstanding Balance
as of
Interest Rate/Spread Year Year of Original Amount December 31, 2001
Interest Rate Basis (Per annum) Contracted Maturity (In Pesos) (In Pesos)
------------------- -------------------- ---------- -------- --------------- -------------------

National Power Corporation
Bonds
Fixed Rate 8.500% 1978 2003 20.00 20.00
Fixed Rate 8.500% 1978 2003 20.00 20.00
Fixed Rate 8.500% 1978 2003 20.00 20.00
Fixed Rate 8.500% 1978 2003 20.00 20.00
Fixed Rate 8.500% 1978 2003 20.00 20.00
Fixed Rate 8.500% 1978 2003 20.00 20.00
Fixed Rate 8.500% 1978 2003 10.00 10.00
Fixed Rate 8.500% 1978 2003 10.70 10.70
--------- ---------
Total NPC Bonds 140.70 140.70
--------- ---------
MWSS Angat Bonds
91-Day Treasury Bill Rate 0.000%* 1992 2002 230.00 17.71
--------- ---------
Total MWSS Angat
Bonds 230.00 17.71
--------- ---------
NDC Agri-Agra (Erap Bonds)
Fixed Rate 7.875% 1999 2004 5,000.00 5,000.00
--------- ---------
Total Erap Bonds 5,000.00 5,000.00
--------- ---------
HDMF Bonds (PAG-IBIG)
Fixed Rate 8.250% 2000 2005 4,000.00 4,000.00
--------- ---------
Total HDMF Bonds 4,000.00 4,000.00
--------- ---------
Land Bank Bonds
Fixed Rate 6.000% 807.75
--------- ---------
Total LBP Bonds 807.75
--------- ---------
NPC Negotiated T/Bills
Fixed Rate 13.062% 2001 2002 11,000.00 11,000.00
--------- ---------
Total NP Negotiated
T/Bills 11,000.00 11,000.00
--------- ---------
Grand Total Contingent
Obligations 20,370.70 20,966.16
========= =========

- --------
Source: Bureau of the Treasury, Department of Finance.

T-32

DOMESTIC DEBT OF THE REPUBLIC (OTHER THAN SECURITIES) /(1)/
AS OF DECEMBER 31, 2002
IN MILLIONS

ORIGINAL AMOUNT OUTSTANDING BALANCE
CONTRACTED AS OF December 31, 2002
------------------- -----------------------
INTEREST IN IN IN IN
RATE YEAR YEAR OF ORIGINAL PHILIPPINE ORIGINAL PHILIPPINE
INTEREST RATE BASIS SPREAD CONTRACTED MATURITY CURR CURR PESO /(2)/ CURR PESO /(2)/
-------------------- -------- ---------- ----------- ---- -------- ---------- -------- ----------

TOTAL 62,061 23,860
------ ------
DIRECT LOANS 216 15,609
------ ------
AGENCIES 216 15,609
------ ------
UNITED STATES DOLLARS 4
------
LIBOR 6 MOS. 0.8125% 1986 2003 USD 4 216 0 4
PHILIPPINE PESOS 0 15,605 15,605
INTEREST FREE 0.0000% 1953 PHP 79 79
INTEREST FREE 0.0000% 1953 PHP 48 48
INTEREST FREE 0.0000% 1953 PHP 29 29
INTEREST FREE 0.0000% 1953 PHP 6,821 6,821
INTEREST FREE 0.0000% 1945 PHP 6,599 6,599
INTEREST FREE 0.0000% 1945 PHP 1,686 1,686
INTEREST FREE 0.0000% 1945 PHP 21 21
INTEREST FREE 0.0000% 1960 PHP 217 217
INTEREST FREE 0.0000% 1985 PHP 64 64
INTEREST FREE 0.0000% 1993 PHP 28 28
INTEREST FREE 0.0000% 1989 PHP 14 14
ASSUMED LOANS (REAL) 61,845 8,251
------ ------
PHILIPPINE PESOS 2,297 2,297 2,297 2,297
----- ------ ------ ------
INTEREST FREE 0.00% 1986 Upon Demand PHP 63 63 63 63
INTEREST FREE 0.00% 1986 Upon Demand PHP 134 134 134 134
INTEREST FREE 0.00% 1986 Upon Demand PHP 120 120 120 120
INTEREST FREE 0.00% 1986 Upon Demand PHP 72 72 72 72
INTEREST FREE 0.00% 1986 Upon Demand PHP 50 50 50 50
INTEREST FREE 0.00% 1986 Upon Demand PHP 200 200 200 200
INTEREST FREE 0.00% 1986 Upon Demand PHP 1 1 1 1
INTEREST FREE 0.00% 1986 Upon Demand PHP 66 66 66 66
INTEREST FREE 0.00% 1986 Upon Demand PHP 3 3 3 3
INTEREST FREE 0.00% 1986 Upon Demand PHP 3 3 3 3
INTEREST FREE 0.00% 1986 Upon Demand PHP 4 4 4 4
INTEREST FREE 0.00% 1986 Upon Demand PHP 8 8 8 8
INTEREST FREE 0.00% 1986 Upon Demand PHP 1 1 1 1
INTEREST FREE 0.00% 1986 Upon Demand PHP 1 1 1 1
INTEREST FREE 0.00% 1986 Upon Demand PHP 9 9 9 9
INTEREST FREE 0.00% 1986 Upon Demand PHP 84 84 84 84
INTEREST FREE 0.00% 1986 Upon Demand PHP 3 3 3 3
INTEREST FREE 0.00% 1986 Upon Demand PHP 6 6 6 6
INTEREST FREE 0.00% 1986 Upon Demand PHP 1 1 1 1
INTEREST FREE 0.00% 1986 Upon Demand PHP 261 261 261 261
INTEREST FREE 0.00% 1986 Upon Demand PHP 913 913 913 913
INTEREST FREE 0.00% 1986 Upon Demand PHP 6 6 6 6
INTEREST FREE 0.00% 1986 Upon Demand PHP 54 54 54 54
INTEREST FREE 0.00% 1986 Upon Demand PHP 229 229 229 229

T-33

GUARANTEED DOMESTIC DEBT OF THE REPUBLIC (OTHER THAN SECURITIES) /(1)/
AS OF DECEMBER 31, 2002
IN MILLIONS

ORIGINAL AMOUNT OUTSTANDING BALANCE
CONTRACTED AS OF 31 DECEMBER 2002
------------------- ----------------------
INTEREST IN IN IN IN
INTEREST RATE RATE YEAR YEAR OF ORIGINAL PHILIPPINE ORIGINAL PHILIPPINE
BASIS SPREAD CONTRACTED MATURITY CURR PESO /(2)/ CURR PESO /(2)/
-------------- -------- ---------- ----------- -------- ---------- -------- ----------

T O T AL 2,358 2,261
----- -----
A. NATIONAL GOVERNMENT DIRECT GUARANTEE 2,078 39 2,078
----- -----
US DOLLARS LIBOR 6 MOS. 0.8125% 1986 2007 39 2,078 39 2,078
B. GFI GUARANTEE ASSUMED BY THE GOVERNMENT PER PROC. 50. 280 280 183 183
----- --- -----
PHILIPPINE PESOS
INTEREST FREE 0.0000% 1986 Upon Demand 7 7 7 7
INTEREST FREE 0.0000% 1986 Upon Demand 30 30 30 30
91 DAY T/BILL 0.0000% 1986 2007 12 12 12 12
92 DAY T/BILL 0.0000% 1986 2007 17 17 17 17
93 DAY T/BILL 0.0000% 1986 2007 35 35 15 15
94 DAY T/BILL 0.0000% 1986 2007 7 7 7 7
95 DAY T/BILL 0.0000% 1986 2007 6 6 6 6
96 DAY T/BILL 0.0000% 1986 2007 5 5 5 5
97 DAY T/BILL 0.0000% 1986 2007 3 3 3 3
98 DAY T/BILL 0.0000% 1986 2007 1 1 1 1
99 DAY T/BILL 0.0000% 1986 2007 18 18 5 5
100 DAY T/BILL 0.0000% 1986 2007 19 19 19 19
101 DAY T/BILL 0.0000% 1986 2007 32 32 1 1
102 DAY T/BILL 0.0000% 1986 2007 32 32 5 5
103 DAY T/BILL 0.0000% 1986 2007 8 8 3 3
104 DAY T/BILL 0.0000% 1986 2007 42 42 42 42
105 DAY T/BILL 0.0000% 1986 2007 4 4 4 4

- --------
(1) Excludes securities issued by GOCCs
(2) FX rate used: BSP reference rate prevailing on December 27, 2002

T-34

PRINCIPAL OFFICE OF NATIONAL POWER CORPORATION

National Power Corporation
Quezon Avenue corner, BIR Road
Diliman, Quezon City
Republic of the Philippines

GUARANTOR PRINCIPAL OFFICE OF POWER
SECTOR ASSETS AND
LIABILITIES MANAGEMENT
CORPORATION

Republic of the Power Sector Assets and
Philippines Liabilities
Department of Finance Management Corporation
Office of the Secretary 2nd Floor, SGV II Building
Department of Finance
Building Ayala Avenue, Makati City
Bangko Sentral Complex Metro Manila
Manila Republic of the
Philippines
Republic of the
Philippines

FISCAL AGENT, PRINCIPAL LUXEMBOURG PAYING AND
PAYING AGENT,
TRANSFER AGENT AND TRANSFER AGENT
REGISTRAR

Citibank, N.A. Citibank International
plc (Luxembourg Branch)
5 Carmelite Street 58, Boulevard
London EC4Y OPA Grande-Duchesse Charlotte
United Kingdom L-1330 Luxembourg

LEGAL ADVISORS TO LEGAL ADVISORS TO
THE ISSUER AND THE UNDERWRITERS
GUARANTOR

as to Philippine law as to Philippine law
Department of Justice Romulo, Mabanta,
Buenaventura, Sayoc
Padre Faura Street & de Los Angeles
Malate 30th Floor, Citibank Tower
Manila 8741 Paseo de Roxas
Republic of the
Philippines Makati City
Republic of the
Philippines

as to U.S. law as to U.S. law
Allen & Overy Davis Polk & Wardwell
9th Floor, Three Exchange 18th Floor, The Hong Kong
Square Club Building
Central 3A Chater Road
Hong Kong SAR Central
Hong Kong SAR

================================================================================

$500,000,000

National Power Corporation

% Guaranteed Bonds due

irrevocably and unconditionally guaranteed as to payment of

principal, interest and additional amounts, if any, by the

Republic of the Philippines

[LOGO] [LOGO] PSALM [LOGO] REPUBLIC OF THE
POWER SECTOR PHILIPPINES
ASSETS & LIABILITIES
MANAGEMENT CORPORATION

----------

PROSPECTUS

June , 2003

----------

Citigroup

================================================================================

PART II

(As required by Items (11), (13) and (14) of Schedule B of the Securities Act
of 1933.)

Item 11. Estimated Expenses

It is estimated that the expenses in connection with the offer hereunder,
exclusive of compensation payable to underwriters and agents, will be as
follows:

SEC Registration Fee.......... $ 40,450
NASD Filing Fee............... $ 30,500
Printing Costs................ $ 45,000
Legal Fees and Expenses....... $300,000
Fiscal Agent Fees and Expenses $ 26,000
Miscellaneous................. $ 75,000
---------
Total........................ $516,950

UNDERTAKINGS

The undersigned Registrants hereby undertake:

(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");

(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereto) which, individually or in the
aggregate, represent a fundamental change in the information set out
in this Registration Statement; and

(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;

(2) that, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and

(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.

(4) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrants pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

II-1

CONTENTS OF REGISTRATION STATEMENT

This Registration Statement consists of:

(1) Facing sheet.

(2) Part I consisting of the Prospectus.

(3) Part II consisting of pages numbered II-1 through II-8.

(4) The following exhibits:

A. Form of Fiscal Agency Agreement relating to the Bonds*

B. Form of the Bonds (attached to the form of Fiscal Agency Agreement
under Exhibit A above)*

C. Form of Underwriting Agreement*

D. Opinion of the General Counsel of National Power Corporation as to
the legality of the Bonds*

E. Opinion of the General Counsel of Power Sector Assets and Liabilities
Management Corporation as to the legality of the Bonds*

F. Opinion of the Secretary of the Department of Justice of the Republic
of the Philippines as to the legality of the Guarantee*

G. Opinion of Allen & Overy, U.S. counsel to National Power Corporation,
Power Sector Assets and Liabilities Management Corporation and the
Republic of the Philippines as to the legality of the Bonds

H. Consent of the General Counsel of National Power Corporation
(included in Exhibit D)*

I. Consent of the General Counsel of Power Sector Assets and Liabilities
Management Corporation (included in Exhibit E)*

J. Consent of the Secretary of the Department of Justice, the Republic
of the Philippines (included in Exhibit F)*

K. Deed of Transfer from National Power Corporation to Power Sector
Assets and Liabilities Management Corporation**

L. Deed of Transfer from National Power Corporation to National
Transmission Corporation**

* To be filed by amendment.
** Incorporated by reference to Registration Statement No. 333-101021.

II-2

SIGNATURE OF NATIONAL POWER CORPORATION

Pursuant to the requirements of the Securities Act of 1933, as amended,
National Power Corporation has duly caused this Registration Statement or
amendment thereto to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Manila, Republic of the Philippines on the 13th day
of June, 2003.

NATIONAL POWER CORPORATION

By: /s/ ROGELIO M. MURGA
-----------------------------
Name: Rogelio M. Murga*
Title: President and CEO, NPC

* Consent is hereby given to use of his name in connection with the
information specified in this Registration Statement or amendment thereto to
have been supplied by him and stated on his authority.

II-3

SIGNATURE OF POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION

Pursuant to the requirements of the Securities Act of 1933, as amended,
Power Sector Assets and Liabilities Management Corporation has duly caused this
Registration Statement or amendment thereto to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Manila, Republic of the
Philippines on the 13th day of June, 2003.

POWER SECTOR ASSETS AND
LIABILITIESMANAGEMENT CORPORATION

By: /s/ EDGARDO M. DEL FONSO
-----------------------------
Name: Edgardo M. del Fonso*
Title: President and CEO,
Power Sector Assets
and Liabilities
Management Corporation

* Consent is hereby given to use of his name in connection with the
information specified in this Registration Statement or amendment thereto to
have been supplied by him and stated on his authority.

II-4

SIGNATURE OF REPUBLIC OF THE PHILIPPINES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Republic of the Philippines has duly caused this Registration Statement or
amendment thereto to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Manila, Republic of the Philippines on the 13th day
of June, 2003.

REPUBLIC OF THE PHILIPPINES

By: /s/ JOSE ISIDRO N. CAMACHO
-----------------------------
Name: Jose Isidro N. Camacho*
Title: Secretary, Department
of Finance

* Consent is hereby given to use of his name in connection with the
information specified in this Registration Statement or amendment thereto to
have been supplied by him and stated on his authority.

II-5

SIGNATURE OF AUTHORIZED REPRESENTATIVE OF NATIONAL POWER CORPORATION,
POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION
AND REPUBLIC OF THE PHILIPPINES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
undersigned, a duly authorized representative in the United States for each of
National Power Corporation, Power Sector Assets and Liabilities Management
Corporation and the Republic of the Philippines has signed this Registration
Statement or amendment thereto in the City of New York, New York on the 13th
day of June, 2003.

By: /s/ LINGLINGAY LACANLALE
-----------------------------
Name: Linglingay Lacanlale
Title: Consul General

II-6

AUDITOR'S CONSENT

I hereby consent to the reference to our Commission in this Registration
Statement of the National Power Corporation for the offering the Guaranteed
Bonds described herein.

COMMISSION ON AUDIT

By: /s/ NORBERTO D. CABIBIHAN
-----------------------------
Name: Norberto D. Cabibihan
Title: State Auditor V
Corporate Auditor

II-7

EXHIBITS

Exhibit Sequentially
Number Exhibits Numbered Page
- ------ ---------------------------------------------------------------------------------- -------------

A. Form of Fiscal Agency Agreement relating to the Bonds*

B. Form of the Bonds (attached to the form of Fiscal Agency Agreement under
Exhibit A above)*

C. Form of Underwriting Agreement*

D. Opinion of the General Counsel of National Power Corporation as to the legality of
the Bonds*

E. Opinion of the General Counsel of Power Sector Assets and Liabilities Management
Corporation as to the legality of the Bonds*

F. Opinion of the Secretary of the Department of Justice of the Republic of the
Philippines as to the legality of the Guarantee*

G. Opinion of Allen & Overy, U.S. counsel to National Power Corporation, Power
Sector Assets and Liabilities Management Corporation and the Republic of the
Philippines as to the legality of the Bonds

H. Consent of the General Counsel of National Power Corporation (included in
Exhibit D)*

I. Consent of the General Counsel of Power Sector Assets and Liabilities Management
Corporation (included in Exhibit E)*

J. Consent of the Secretary of the Department of Justice, the Republic of the
Philippines (included in Exhibit F)*

K. Deed of Transfer from National Power Corporation to Power Sector Assets and
Liabilities Management Corporation**

L. Deed of Transfer from National Power Corporation to National Transmission
Corporation**

* To be filed by amendment.
** Incorporated by reference to Registration Statement No. 333-101021.

II-8