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

C O N F I D E N T I A L SECTION 01 OF 05 MANILA 000001 
 
SIPDIS 
 
DEPT FOR EAP, EAP/MTS, EAP/MLS, INR/EAP, EB, G/TIP 
DEPT PLEASE PASS TO USAID ANE/TS - L. SAULS 
 
E.O. 12958: DECL: 01/03/2016 
TAGS: PGOV PREL ECON ETRD EAID MARR MOPS PHUM RP
SUBJECT: MOVING FORWARD ON USG PRIORITIES IN THE 
PHILIPPINES IN 2006 
 
Classified By: Charge d'Affaires, a.i., Paul W. Jones for reasons 
1.4 (b) and (d). 
 
¶1.  (C) Summary:  While still facing serious political 
obstacles, President Arroyo has recovered some of her 
equilibrium after surviving impeachment charges and severe 
domestic turbulence in 2005.  The relative pause in the 
political wars provides an opening for the USG to move 
forward with key bilateral priorities in 2006.  In the 
security arena, the USG needs to keep up the pressure for the 
passage of anti-terrorism legislation, which is wending its 
way through Congress.  Maintaining strong domestic support 
for the U.S. Special Operations forces deployed in Mindanao 
will remain key to giving the GRP the tools and encouragement 
to capture or kill terrorists.  Increasing intelligence 
cooperation is critical to this effort.  Philippine Defense 
Reform, which enjoys strong support from President Arroyo and 
Defense Secretary Cruz, will enable Philippine forces to 
operate more effectively against terrorists, insurgents, and 
Communists, reducing the need for U.S. forces over the medium 
term.  President Arroyo's continued desire for U.S. political 
approval and natural inclination to support U.S. positions 
provide opportunities for stronger Philippine support in 
international fora, as we saw in her outspoken support at the 
US/ASEAN-7 meeting in Pusan for bringing heightened 
international scrutiny on Burma, including at the UN Security 
Council. 
 
¶2.  (C) On the economic and development side, the USG will 
need to continue to encourage greater privatization and trade 
liberalization and work closely with the GRP in developing 
its Millennium Challenge Account Threshold Country Plan.  Our 
law enforcement agenda, including increased convictions in 
human trafficking cases and intellectual property rights 
violations, will depend much on a successful launch of 
Philippine National Police reform, which will also strengthen 
the police's counterterrorism capabilities.  Overall, real 
progress in 2006 in U.S.-GRP ties seems possible as long as 
the GRP's focus is on substantive matters and it does not 
become distracted by domestic infighting.  High-level visits 
by Executive Branch principals and Members of Congress in the 
coming year cold help focus attention to making real progress 
on key issues and would be very much welcomed by the GRP. 
End Summary. 
 
--------------------------------- 
Arroyo:  Recovering some Momentum 
--------------------------------- 
 
¶3.  (C) President Gloria Macapagal Arroyo's 2005 was largely 
a battle for survival.  Opposition attacks on her reached a 
crescendo in June when she was accused of cheating in the May 
2004 election and her family was accused of profiting from 
illegal gambling.  Many observers believe that she came close 
to resigning in July after a series of resignations by 
members of her Cabinet and defections to Opposition ranks by 
key political supporters.  With President Arroyo living to 
fight another day when the influential Catholic Church 
declined to call for her resignation, her supporters in the 
House handily defeated the Opposition's impeachment effort in 
September. 
 
¶4.  (C) Since that time, the political situation has grown 
more calm (in part because of our constant efforts to urge 
parties to act responsibly) and President Arroyo appears to 
have recovered some of her political equilibrium.  In 
November, the Supreme Court cleared the way for the 
implementation of her Expanded Value Added Tax (E-VAT) 
program, which did not -- contrary to some predictions -- 
spark street protests.  (The E-VAT is scheduled to increase 
tax revenue further in early 2006 and there is some concern 
that this could spark some new protests.)  Remittances from 
Overseas Foreign Workers are up and financial market 
confidence received a boost with the implementation of the 
E-VAT, helping the peso perform as one of the strongest 
currencies in Asia.  President Arroyo continues to have the 
luck of facing a divided, fragmented Opposition that has no 
center of gravity.  She also benefits from a Constitutional 
requirement that states that impeachment motions can only be 
brought once a year, which means she is in the clear on that 
score until at least mid-year 2006. 
 
--------------------- 
Fear the Distractions 
--------------------- 
 
¶5.  (C) President Arroyo's poll numbers remain extremely low 
and she continues to fight for her political viability.  She 
is prone to panicking and making things worse.  There is 
little doubt, given the volatile nature of Philippine 
politics, that new distractions will appear on the radar 
screen in 2006.  One serious distraction could involve 
proposed Constitutional changes, which potentially could 
transform the Philippines into a parliamentary system, with 
or without a President, within one to two years, and possibly 
create a truly federal state.  Much legislative and political 
capital and attention will focus on this process over the 
months ahead. 
 
¶6.  (C) Another distraction could be over the case of the 
U.S. Marines who are being investigated for an alleged rape. 
The matter has not sparked much public attention, but twists 
and turns in the case could potentially embolden the left and 
perhaps panic President Arroyo and potentially jeopardize the 
Visiting Forces Agreement and our extensive military exercise 
program.  Finally, although it is quieter on this front of 
late, the Arroyo administration at times in 2005 threatened 
to impose "emergency rule," most notably against the New 
People's Army (NPA), a Foreign Terrorist Organization (FTO), 
and an alleged network of supporters, including Opposition 
political leaders.  Such a move could spark large-scale 
demonstrations and call into question the Philippines' 
international reputation; the USG has consistently (and so 
far successfully) urged the GRP not to make such a move. 
 
--------------------------- 
Let's Get to the Substance: 
Security Issues 
--------------------------- 
 
¶7.  (C) President Arroyo should be in a better political 
position at this point than she was several months ago, so 
her administration will be better able to focus on key 
substantive issues.  This relative pause in the political 
wars provides an opening for USG efforts to move forward 
successfully with key bilateral priorities with the 
Philippines in 2006.  In the security arena, key issues that 
the USG should focus on include: 
 
-- proposed anti-terrorism legislation:  Although the House 
is poised to pass an anti-terrorism bill (under strong 
pressure from President Arroyo) in early January, draft 
legislation remains bogged down in the Senate.  Opposition 
members have indicated that they fear President Arroyo might 
use the broad language in the anti-terrorism legislation 
against them.  Quiet meetings with pro-Opposition Senate 
President Drilon by our DOJ Attache and poloffs have helped 
address some concerns, and we will continue to advocate rapid 
passage at all levels of government; 
 
-- counterterrorism cooperation with GRP:  USG-GRP 
counterterrorism cooperation yielded  important successes in 
¶2005.  Philippine authorities apprehended several key terror 
suspects including the leader of the Rajah Sulaiman Movement, 
Ahmed Santos; these arrests appear effectively to have 
dismantled the RSM as an active terrorist force.  In 
addition, a court in Manila convicted three men in October 
2005 for involvement in the "Valentine's Day" bombings in 
February 2005.  The new year should see expanded U.S.-RP 
counterterrorism cooperation.  Secretary of National Defense 
Avelino Cruz's proposed Security Engagement Board to deal 
with counterterrorism issues in a structure similar to the 
existing Mutual Defense Board should provide a sounder 
Philippine legal framework for our efforts to improve Armed 
Forces of the Philippines (AFP) capabilities.  Joint Special 
Operations Task Force-Philippines' expanded program of 
civil-military operations with the AFP in Jolo in the Sulu 
Archipelago offers the potential, in coordination with 
existing USAID activities, to expand zones of peace and to 
reward communities that have made the choice against 
terrorism.  An in-country Anti-Terrorism Assistance Program, 
targeted to start in January 2006, will help improve the 
capabilities of GRP law enforcement agencies to deal with the 
terrorist threat; 
 
-- Philippine Defense Reform (PDR):  PDR continues to broaden 
and deepen its impact on the AFP as the presence of U.S. 
experts begins to have an effect on logistics, maintenance, 
personnel management, training, and other areas.  A major 
U.S. focus in 2006 is helping Secretary Cruz get his National 
Training Center initiative off the ground, an effort to train 
and re-equip 12 Philippine Army and two Philippine Marine 
Corps battalions each year over the space of six years.  In 
addition to PDR, the U.S. will maintain in 2006 robust 
ongoing mil-to-mil relations with the Philippines, including 
various bilateral exercises and an expanded security 
assistance effort; 
 
-- Philippine National Police (PNP) reform:  Mission has 
requested funding for a series of proposals arising from the 
2005 GRP-U.S. Joint Law Enforcement Assessment that will help 
the PNP address long-standing deficiencies as it undertakes 
its own comprehensive transformation effort.  February 2006 
is the target date for a S/CT-funded seminar aimed at 
improving management and operations of PNP and other GRP 
corrections institutions.  However, further targeted 
assistance in such areas as internal affairs, strategic 
planning, and resource analysis is needed to help the PNP 
institutionalize its transformation program.  The presence of 
a U.S. Law Enforcement Advisor could serve an important role 
in keeping the PNP effort focused and on track; 
 
-- Mindanao peace process:  Both the Moro Islamic Liberation 
Front (MILF) and the GRP voice optimism about prospects in 
2006 for a negotiated settlement to the Mindanao conflict. 
We need to encourage both sides to move forward on an 
agreement and be ready with quick-disbursing assistance to 
help cement a deal once it is signed.  Within weeks of a 
peace agreement, USAID could initiate development activities 
on the ground using existing funds, but significant 
additional Economic Support Funds (ESF) would be needed to 
sustain these efforts.  In our engagement with the MILF, 
Mission continues to stress the critical importance that all 
elements of the MILF must cut all ties with terrorist 
organizations; 
 
-- Communist insurgency:  GRP relations with the NPA 
plummeted further in 2005 as attacks on security forces 
increased and leftist agitators pressed for President 
Arroyo's resignation.  The NPA continues to insist as a 
pre-condition to resuming negotiations that the GRP intercede 
with the U.S. and European Union to lift its foreign 
terrorist organization designation.  Its actions, however, 
demonstrate that it remains committed to employing violent 
means to obtain its objective of achieving power.  The new 
year is unlikely to see any break in the deadlock surrounding 
negotiations.  The USG needs to continue to monitor the 
situation carefully, because a further deterioration in the 
situation could have a negative impact on overall USG 
activities in the Philippines. 
 
------------------------------------------- 
International Organization, Regional Issues 
------------------------------------------- 
 
¶8.  (C) The USG should seek to capitalize on the GRP's recent 
support of the effort to bring Burma's atrocious human rights 
record before the UN Security Council.  The Philippines broke 
ranks with ASEAN to back the U.S. proposal, indicating that 
it is willing to take a tougher stand regarding the Burmese 
regime and buck the ASEAN "consensus" when pressed to do so 
for a good cause.  At the UN, we should continue to urge the 
GRP to make sure that it is never more than one vote away 
from any given USG position.  While the Philippine term on 
the UN Security Council ended in December 2005, it continues 
to play an influential role in the ASEAN Regional Forum (ARF) 
and it chairs the Asia-Pacific Economic Cooperation (APEC) 
Counterterrorism Task Force, two venues where it can help 
advance U.S. objectives.  We will need to intensify 
cooperation with the GRP on ASEAN issues as the Philippines 
takes over the ASEAN Chairmanship from Malaysia in July. 
 
¶9.  (C) The GRP's relationship with China is an enduring one, 
based upon proximity and trade ties.  Nonetheless, despite 
Beijing's recent economic overtures, deep suspicions remain 
among some of Manila's elite regarding China's intentions 
towards the region.  Our engagement with the AFP on defense 
reform and in other areas should prevent China from winning 
any significant inroads within the Philippine military. 
 
-------------------- 
Economic/Development 
-------------------- 
 
¶10.  (U)  The Philippine economy slowed slightly in 2005 due 
to high oil prices and poor agricultural output, but 
maintained a respectable GDP growth rate of about 5 percent. 
The political turbulence of the summer did not have a 
significant impact on economic factors.  The 20 percent 
growth in remittance inflows and the GRP's implementation of 
the E-VAT helped to strengthen the peso.  Portfolio capital 
increased by over $2 billion over the last year while new 
foreign direct investment remained anemic at about $400 
million.  Poor infrastructure, an inconsistent and 
non-transparent regulatory environment, weak intellectual 
property rights enforcement, relatively high wages and 
electricity costs, and corruption remain major concerns of 
domestic and foreign investors, as well as companies selling 
goods to the Philippines. 
 
¶11.  (SBU) The massive remittance flows of the last year have 
helped to fuel mainly consumption and to augment incomes of 
the poorest 30 percent of the population.  These funds may be 
partly responsible for maintaining social stability and 
precluding major anti-government protests or "EDSA"-like 
challenges to the GRP.  Remittances have also helped to boost 
real estate investment and could become a more important 
factor in promoting growth if they were funneled toward new 
domestic enterprises that would stimulate employment and 
growth. 
 
¶12.  (SBU) The USG will need to work closely with the GRP as 
it develops its Millennium Challenge Account Threshold 
Country Plan (TCP).  The GRP, in the coming months, must 
submit this TCP to the Millennium Challenge Corporation for 
review for MCA funding, aimed especially at anti-corruption 
and revenue enhancement efforts.  President Arroyo has 
charted a course through 2009 to reduce the fiscal deficit to 
zero, an achievement possible only with substantial progress 
in stopping the revenue leakages attributable to corrupt 
officials.  She will also need to fight corruption in 
government infrastructure programs, which independent studies 
have estimated consume about one-third of infrastructure 
budgets. 
 
¶13.  (SBU) In recognition of some progress on intellectual 
property right protection, the Mission recommended taking the 
Philippines off the Special 301 Priority Watch List in early 
2006, while preparing to make clear to the GRP that we would 
re-list it if there is backsliding on this front in the 
months ahead.  In addition, Mission will continue to use our 
Trade and Investment Council meetings, conducted through our 
Trade and Investment Framework Agreement (TIFA), to advocate 
for the U.S. private sector. 
 
----------------- 
Human Trafficking 
----------------- 
 
¶14.  (SBU) The USG listed the Philippines as a Tier Two Watch 
List country in its TIP Report in 2004 and 2005.  The 
Philippines remains a source, transit, and destination 
country for men, women, and children trafficked for the 
purposes of sexual exploitation and forced labor.  One area 
of particular concern has been the limited number of 
prosecutions and convictions under the 2003 Anti-Trafficking 
Act.  The GRP made some progress in this area in December 
2005, with the first convictions and sentencings of 
traffickers.  Additional convictions will be necessary in 
2006 to demonstrate that the GRP is making significant 
efforts to address this shortcoming.  The USG needs to 
continue to underscore the importance of making progress in 
combating TIP to top GRP officials, noting the tremendous 
scope of the problem and the serious ramifications of 
potential demotion to the Tier Three list. 
 
------- 
Comment 
------- 
 
¶15.  (C) Overall, real progress in 2006 in U.S.-GRP ties 
seems possible as long as the GRP focuses on substantive 
matters and does not allow itself to be distracted too much 
by domestic infighting.  Progress, of course, will remain 
contingent on ongoing Philippine realities, which include 
lack of resources and capacity, weak rule of law, rampant 
poverty, and corruption.  Through USG programs, especially 
those of USAID, we are helping the GRP address some of these 
long-standing problems, which are serious impediments to 
effective government action in many areas.  The burden of 
helping the Philippines overcome serious weaknesses falls 
heavily on the U.S., given our unique history here as well as 
our access and resources.  As the Mission works to move the 
relationship forward, we believe that additional USG 
high-level visits -- including from Cabinet and senior USG 
officials and the Congress -- in 2006 can help make real 
progress by focusing GRP attention on key issues and would be 
very much welcomed by the GRP. 
 
Visit Embassy Manila's Classified website: 
http://www.state.sgov.gov/p/eap/manila/index. cfm 
 
Jones