This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 MANILA 003045 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/PMBS, EAP/EP, EB/IFD, EB/TPP/BTA/ANA 
STATE PASS USTR FOR BWEISEL, DKATZ AND JMURPHY 
STATE PASS USAID AND OPIC 
USDA FOR TERPSTRA, SHEIKH 
TREASURY FOR OASIA FOR AJEWELL 
USDOJ FOR MCRAWFORD 
USDOC FOR 4430/ITA/MAC/DBISBEE 
TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV RP
SUBJECT: LITTLE ECONOMIC IMPACT SO FAR FROM ARROYO'S WOES 
 
REFS: A) Manila 2993 
 
      B) Manila 2970 
      C) Manila 2670 
      D) Manila 2475 
      E) Manila 2167 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION 
 
¶1.  (SBU) Summary.  The Peso broke the PhP56/$1 mark on 
June 29, but has marginally recovered.  The stock market 
continued to slide lower on concerns about the President's 
future, but most local analysts said that the situation 
remains manageable.  The Philippine business community 
appears to be sticking with its support of President 
Arroyo, but remains cautious about the future due to 
lingering concerns about corruption and its impact on 
business.  Agriculture Secretary Yap announced his 
resignation on June 30 in the wake of tax evasion charges 
filed against him.  His departure should have no serious 
political or economic ramifications, as would potentially 
the departure of economic stars in the Cabinet such as 
Finance Secretary Purisma, who remains a cheerleader for 
the Administration.  End Summary. 
 
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Markets Nervous, But Holding 
---------------------------- 
 
¶2. (U) Despite GRP efforts to assure the business sector 
that the Arroyo Administration remains committed to 
economic reforms, the financial markets remained jittery 
after the President's announcement at a business forum on 
June 29 that her husband would leave the country (ref a). 
Amid the political drama, the local currency hit an intra- 
day low (and closing level) of PhP56.05/$1 on June 29, the 
weakest recorded since January 12.  At that rate, the peso 
had depreciated by 0.8% (PhP0.54) in two days, from June 
27's closing rate of PhP55.51/$1.  The peso fell further to 
a low of PhP56.26/$1 in morning inter-bank trades on June 
30 (not too far off the Php56.45/$1 historical low recorded 
before the May 2004 elections) before recovering to 
PhP56.00/$1 by day's end, reportedly because of Central Bank 
intervention.  On July 1, the peso opened trading at 
PhP56.05/$1, but recovered to end the day's trading at 
PhP55.87/$1. 
 
¶3.  (U)  As for other indicators, the Philippine Stock 
Price Index (Phisix) closed July 1 at 1,895.25, down 3.48% 
from June 27.  On the downtrend for several months, 
domestic interest rates also have come under pressure these 
past three weeks.  Despite excess financial market 
liquidity and perceptions of improved fiscal prospects, 
securities dealers jacked up bid rates for the Government's 
treasury bills, particularly for the longer-term papers, 
prompting the Government to reject most of the bids 
offered. 
 
¶4.  (SBU) Foreign exchange and securities traders and 
analysts commented that the markets are understandably 
nervous but described the situation as "still manageable." 
While more investors may opt to stay on the sidelines until 
the political dust settles, some observers noted that the 
markets were not yet seeing a massive sell-off of peso 
assets, probably due to improved economic fundamentals and 
especially efforts to address the public sector's chronic 
budget deficit.  The business community remains concerned 
about the lingering effect of corruption on the economic 
climate, according to observers. 
 
¶5.  (SBU) However, analysts warned that the economic 
situation could worsen should protracted political 
controversies seriously put to question the 
Administration's ability to pursue bold reforms and move 
the economy forward.  Already, the opposition and militant 
cause-oriented groups have again begun to lambast as "anti- 
poor" the amended Value Added Tax law (ref e), which took 
effect on July 1, further to fuel furor against the Arroyo 
presidency and urge her to resign.  Several opposition 
members of Congress have petitioned the Supreme Court to 
halt the implementation of the new VAT law, claiming that 
it amounts to an unconstitutional delegation of taxing 
authority to the Executive.  Although Finance Secretary 
Cesar Purisima has stressed repeatedly that the President 
will indeed use the standby authority granted by the law to 
increase the VAT rate by two percentage points to 12% in 
2006 to secure fiscal stability, observers have expressed 
doubt as to whether the President will be able to do so as 
her popularity weakens. 
 
--------------------------- 
Purisima Remains Optimistic 
--------------------------- 
 
¶6.  (SBU) At the Business Leaders Forum on July 29, 
Secretary Purisima focused on the positive developments in 
 
SIPDIS 
the Philippine economy and reiterated support for the 
President and her commitment to economic reforms.  Urging 
that the Philippines must "get out of the cycle of deficit 
it has been in," he stated that the country could balance 
its budget earlier than its target date of 2010 through a 
series of "front-loaded deficit reductions." 
 
¶7.  (U)  Purisima also emphasized the importance of recent 
efforts to prosecute tax evaders, which, if sustained, will 
"show people that it is no longer business as usual." 
Purisima also emphasized that the Department of Finance 
would begin to take "a closer look" at the country's 
government-owned and controlled corporations (GOCCs), 
specifically the National Food Authority; the GOCCs 
contributed significantly to the public sector deficit, he 
stressed.  Purisima also stated that an ambitious 
privatization scheme would leave the Government "more 
freedom to invest in infrastructure," paving the way for a 
brighter future for the country. 
 
--------------------------------------------- - 
New Central Bank Governor Promises Consistency 
--------------------------------------------- - 
 
¶8.  (SBU) Central Bank Governor Amando Tetangco, who 
officially assumed his post as the new governor of the 
Philippine Central Bank on July 1 but has been acting 
governor for several weeks, also delivered a positive 
message about prospects for the Philippine economy at the 
July 29 event, stressing that his bank's policy direction 
would emphasize "continuity and consistency."  While noting 
that inflation in the Philippines had continued to rise 
over the last several months (due mainly to increasing 
world oil prices and the increasing transportation and 
energy prices that follow suit), Tetangco stated that the 
Central Bank's policy rates had remained steady since April 
2005 (at 7% for borrowing and 9.25% for lending).  The 
Central Bank forecasts that inflation rates will average 
7.9% for 2005 and 7.5% for 2006.  Tetangco said the Bank's 
international reserve levels have recently risen to 
historical highs and the balance of payments yielded a 
surplus of $1.6 billion during January-May 2005.  He 
downplayed the negative implications of high Philippine 
debt levels for the future of the country's economy, 
emphasizing that 90% of the country's foreign debt is made 
up of medium to long-term loans, nearly half to bilateral 
and multilateral lenders and carrying concessional interest 
rates. 
 
---------------------------- 
Santos Projects Trade Growth 
---------------------------- 
 
¶9.  (SBU) According to Secretary of Trade and Industry Juan 
Santos, recent trends reflected a "return of confidence" in 
the Philippine economy.  Philippine exports grew by 9.3% 
last year; Santos is aiming for a 10% increase this year. 
(Note: January-May 2005 exports were up 4.8% year-on-year. 
End note)  Santos acknowledged that electronics dominate 
the RP's exports (accounting for some 70% of total 
exports), but stated that the country is attempting to 
shift its manufacturing focus toward highervalue-added 
goods.  Santos emphasized the importance of investments in 
the call center industry but noted that other forms of 
business process outsourcing such as automotive design and 
computer graphics could also attract new investors to the 
country. 
 
----------------------------- 
Agriculture Secretary Resigns 
----------------------------- 
 
¶10.  (U) Agriculture Secretary Arthur Yap resigned on June 
30, saying that tax evasion charges recently filed against 
him and his father left him no choice.  Yap, while 
maintaining his innocence, admitted that staying on while 
the case is heard would create a "no-win" situation for 
both him and President Arroyo because, even if cleared of 
the charges, the opposition would claim it is only a GRP 
"whitewash."  He insisted that his resignation was not in 
response to mounting pressure on President Arroyo to step 
down.  According to media reports, Arroyo is also 
contemplating additional cabinet changes.  Yap announced 
that he will remain in his job until Malacanang names a 
successor. 
 
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Comment 
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¶11.  (SBU) Economic fundamentals have not changed 
significantly in the wake of the President's recent 
difficulties, and the business community appears to remain 
mostly supportive of her, likely because there are no 
alternative economic plans from other potential leaders 
that would better address business concerns.  Business 
leaders place their confidence less in Arroyo than in 
Purisima and the other members of her economic team, but 
doubt is growing about the GRP's ability to implement its 
economic reform package because of the President's 
political baggage.  Departure of any of these key economic 
players would probably foretell a death knell for the 
Arroyo Administration, at least from the standpoint of the 
influential business community.  Yap and the others rumored 
to be part of the potential cabinet reshuffle are not/not 
seen are among those key players; his (and potentially 
their) departure should not affect the business and 
economic environment. 
 
Mussomeli