On the economic front, however, official data released on August 30 was unambiguously positive. GDP expanded by 7.5 per cent year-on-year in the second quarter, the government said, and this was the fastest rate of growth in two decades and well ahead of the best forecasts by Philippine economy watchers.

In its Asian Development Outlook for 2007, the Asian Development Bank had predicted the Philippines was likely to maintain 'modest economic growth', with GDP rising 5.4 per cent this year, and 5.7 per cent in 2008.

'Growth momentum has accelerated in the last three quarters, however, raising the possibility that Philippines growth has shifted up a gear,' says UBS economist Edward Teather.

UBS responded to the news by revising its quarterly growth forecasts in Q3 and Q4 upwards to an average 1.3 per cent quarter-on-quarter and now projected 7.1 per cent real growth in 2007 and 6.5 per cent in 2008. This was above the government's growth target of 6.1 per cent to 6.7 per cent for 2007 'but in the realms of possibility according to officials', says Mr Teather.

Another positive note is that, for the moment at least, this rapid rate of growth has not triggered a rise in inflation, and official data released this month indicated that inflation as measured by the Consumer Price Index fell to 2.4 per cent in August from 2.6 per cent in July.

The core measure of inflation, which excludes selected food and energy items, fell to 2.9 per cent from 3.0 per cent.

Given these numbers, the Philippine Central Bank, the Bangko Sentral ng Pilipinas (BSP) - which has a targeted range for inflation of 2.3 to 3.2 per cent - is unlikely to raise interest rates, say analysts.

BSP Governor Amando Tetangco said on August30 that the expanding economy and 'manageable' inflation allowed the central bank to maintain a neutral policy stance. The BSP left policy rates unchanged at 6per cent at its August meeting and in its accompanying statement said the inflation outlook was benign and the balance of risks to future inflation had remained essentially unchanged.

But these comments came ahead of the growing consensus among analysts that the US Federal Reserve could begin to cut rates quite aggressively starting as early as this month - a move that could see a depreciation of the US dollar versus regional currencies, including the Philippine peso. That could deliver exchange rate gains for peso investors, but it could also trigger an uptick in imported inflation.

Investors in Philippine notes and bonds, meanwhile, have signalled concerns about taking an exposure to the peso. On August28, offers attracted by a 364-day T-bill auction by the Philippine Bureau of Treasury fell short of the 3.5 billion pesos worth of notes on sale, and the average rate was up more than 50 basis points from the last auction just two weeks earlier, at 5.988 per cent versus 5.438 per cent on August 13. The treasury rejected the bids rather than raise the money.

On September4, at its first auction of 20-year treasury bonds since December 5, 2006, the treasury reduced its targeted raising of 7billion pesos to 5.925 billion as investors again demanded a premium it believed was too rich. The average rate on the issue was 8.599 per cent - up almost one percentage point from the 7.774 per cent at which the last issue in December 2006 was placed. Bids totalled 13.347billion pesos.

On the Philippine Stock Exchange, meanwhile, share prices suffered heavily in the volatile trading conditions that were triggered by news of defaults in the US subprime mortgage market, with the main market index falling just shy of 1,000-points, or 24.5 per cent, from a year-to-date intra-day high of 3,820.55 on July 13 to 2,884.34 on August 17.

The market subsequently clawed back around half of these losses with the benchmark Philippine Stock Exchange index back at levels of about 3,330 early this month. But UBS equity strategist Sakthi Siva pointed out this remained within 5 per cent of previous market troughs over the past three years.

With the Philippine market on a historic price earnings multiple at present of about 14.5 times versus the rich valuations of Chinese and Indian shares - trading at 27 times in the case of H shares listed on the Hong Kong market, and around 20 times for Indian stocks, that ought to make Philippine shares oversold and worth a punt. Buoyant sentiment in the first half of the year before the credit-jitters struck the market saw an active capital-raising programme by local companies, including a US$370million stock rights offering of the Alliance Global Group, and the IPOs of National Reinsurance and Pacific Online Systems, raising US$52.3million and US$7.6million respectively.

'This positive sentiment is also mirrored in higher foreign portfolio investments of US$1,673 million for the first five months of 2007, which was 152 per cent higher than the same period in 2006,' notes PricewaterhouseCoopers (PwC) in its mid-year report on mergers and acquisitions in the region, Asia-Pacific M&A Bulletin - Private Equity Goes Shopping.

In the Philippines, says PwC, the value of announced deals was up by 42 per cent to US$2.3billion for the first half of the year, with deal volume increasing to 88 compared to the 59 for the first half of last year. 'The increase in deal volume, specifically in inbound investments, can be attributed to increased optimism with respect to the economic and political environment of the country,' it notes.

The question posed by the August sell-off on the market and the caution shown by bond investors, is whether the optimism shown in the first half of the year remains intact and that the 'sick man of Asia' remains on the mend.

On the up and up?

Value of announced deals in US$ in the Philippines, up by 42 per cent for the first half of the year, with deal volume increasing to 88 compared to 59 for the first half of last year, according to PricewaterhouseCoopers: 2.3b