VZCZCXRO7321
PP RUEHCHI RUEHDT RUEHHM
DE RUEHML #3064/01 2020944
ZNR UUUUU ZZH
P 210944Z JUL 06
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC PRIORITY 2115
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RHHMUNA/CDRUSPACOM HONOLULU HI

UNCLAS SECTION 01 OF 04 MANILA 003064 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/EX AND EAP/MTS 
 
E.O. 12958: N/A 
TAGS: PREL MARR ECON PGOV ETRD ECIN EAID RP
SUBJECT: SCENESETTER FOR ASSISTANT SECRETARY HILL'S VISIT 
TO THE PHILIPPINES 
 
 
¶1.  (SBU) SUMMARY:  Chris, the entire US Mission welcomes you 
back to the Philippines!  We have been busy emphasizing our 
partnership in this historic year; upcoming Codels will be a 
next stage as will President Arroyo's September trip to 
Hawaii.  Your visit focuses on outreach in two key areas -- 
to the military and to the economic sector, as well a meeting 
with President Arroyo.  She is in a stronger political 
position than at any time over the past year, although 
scandals continue to circle and concerns grow about the 
credibility of the May 2007 elections.  Our military 
relations remain strong.  Philippine Defense Reform moves 
forward, as does the new Security Engagement Board.  Police 
reform is also underway.  Our assistance program is making a 
real difference in reducing poverty and promoting sustainable 
development, especially in Mindanao and the Sulu Archipelago. 
 The U.S. remains the Philippines' most important economic 
partner.  While the economy continues to grow by a 
respectable 5%, increased foreign investment coupled with 
continued economic reforms are needed to achieve stronger 
economic growth rates and ultimately reduce poverty.  The 
recently approved $21 million Millennium Challenge Account 
Threshold Program will help contribute to this goal.  End 
Summary. 
 
POLITICS 
-------- 
 
¶2.  (SBU) President Arroyo survived last fall's impeachment 
effort and the abortive coup attempt in February that led to 
the week-long State of National Emergency.  She now faces 
another impeachment effort in Congress, but few expect 
success.  The President's July 24 State of the Nation address 
will lay out her priorities for the coming year, likely 
concentrating on her plan for creation of four 
"supra-regions" as an apparent first step to a kind of 
federalism, key legislation to pass (including the 
counterterrorism bill and legislation to restore tax 
incentives at Clark) and aspects of her economic reform plan. 
 She may revive Constitutional change proposals. 
 
¶3.  (SBU) Extrajudicial killings -- of leftists, journalists, 
judges, lawyers, and suspected drug dealers -- continue at 
perhaps record levels.  Creation of a new "Task Force Usig" 
within the Philippine National Police has done little to stem 
this trend or to reassure the public that the GRP is serious 
about bringing these culprits to justice. 
 
¶4.  (SBU)  President Arroyo continues to press ahead with key 
priorities of her substantive agenda, which include: 
--  combating corruption and plugging revenue leaks (programs 
that the Millennium Challenge Threshold Country program to be 
signed July 24 will assist); 
--  pursuing peace talks with the Moro Islamic Liberation 
Front (MILF); 
--  maintaining progress on Philippine Defense Reform (PDR); 
--  instituting a transformational program for the Philippine 
National Police (which we will assist with the deployment of 
a Senior Law Enforcement Adviser in August provided by ICITAP 
and funded by INL); 
--  pursuing poverty reduction, which we assist with our 
multi-faceted and robust USAID program, primarily in Muslim 
Mindanao and the Sulu Archipelago; 
--  continuing to make Mindanao and Sulu inhospitable for the 
Jemaah Islamayah and Abu Sayyaf Group, and working on 
civil/humanitarian programs (often in conjunction with 
JSOTF-P) to reward communities that have made the choice away 
from terrorism; 
--  making a renewed push to "eliminate" the New People's 
Army with a combination of new military and legal offensives, 
as well as a newly funded "hearts and minds" program; 
--  pursuing economic and fiscal reform initiatives that will 
continue to reduce the budget deficit and improve tax 
collection; 
--  electoral reform (it is not clear how sincere the 
electoral reform effort is over the long term, but it is 
essential to greater stability). 
 
MILITARY ISSUES 
--------------- 
 
¶5.  (SBU) The GRP deposited $17.53 million into a Foreign 
Military Sales holding account in 2004 for Philippine Defense 
Reform (PDR).  There are now 11 US Subject Matter Experts on 
the ground, and the Filipinos intend to add two more in the 
near future to help reform the inspector general's office and 
develop strategic planning.  In addition to long term 
institutional changes, the multi-year Capability Upgrade 
Program will upgrade and modernize 72 Philippine Army and 12 
 
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Philippine Marine Corps battalions over the next six years. 
The Battalion of Excellence concept focuses on personnel and 
logistics programs while also introducing new personnel 
policies, new equipment, and better training capabilities as 
part of Philippine Defense Reform. 
 
¶6.  (SBU) The Armed Forces of the Philippines is beginning to 
see the positive effects of the Maintenance Mobility Program. 
 Three C-130's are now operational and a fourth is awaiting 
depot maintenance.  Several efforts are coming together that 
will eventually bring a total of 46 UH-1H helicopters to the 
Philippines.  The AFP purchased 20 reconditioned Hueys from 
Singapore, all of which have now been delivered.  An 
additional six Excess Defense Article UH-1Hs purchased with 
national funds are undergoing refurbishment at the DynCorp 
facility in Panama City, Florida, and are expected to arrive 
this August 2006.  The first 10 of 20 UH-1Hs promised by 
President Bush during President Arroyo's May 2003 State Visit 
to Washington are also undergoing refurbishment at the same 
facility. 
 
¶7.  (SBU) The bilateral Security Engagement Board (SEB) held 
its inaugural meeting on April 21 and for the first time put 
US-RP joint counterterrorism efforts within a formal 
structure.  Modeled after the existing Mutual Defense Board, 
the SEB is designed specifically to deal with non-traditional 
security issues, notably counterterrorism, maritime security, 
disaster relief, and counter-narcotics.  This watershed 
agreement sets the framework for the GRP-proposed "Kapit 
Bisig" (Shoulder-to-Shoulder) counterterrorism activities 
focused on civil affairs, capability upgrades, operations, 
and specific scenarios for cooperation. 
 
¶8.  (SBU)  The outgoing Armed Forces of the Philippines Chief 
of Staff has just approved initial stages of courts martial 
against about 40 officers and 100 enlisted men allegedly 
involved in the February coup attempt. 
 
MARINE CASE 
----------- 
 
¶9.  (SBU) The case of four US Marines accused of the November 
2005 rape of a Filipina continues to move its way through the 
Philippine court system.  The GRP has recognized the US right 
to custody of the four servicemen, who remain under the 
supervision of JUSMAG and III Marine Expeditionary Force 
representatives on the grounds of the US Embassy.  The 
prosecution has now almost finished its case, with the 
defense due to make its arguments next.  We do not expect a 
verdict before sentence.  We remain committed to ensuring the 
safety and morale of our Marines and continue to raise the 
importance of a fair and speedy trial with President Arroyo 
and her Cabinet. 
 
ECONOMY 
------- 
 
¶10.  (SBU) We are the Philippines' largest grant aid donor, 
with about $70 million in bilateral economic assistance in 
¶2006.  With the Millennium Challenge Corporation's (MCC) 
recent June approval of financing for $21 million over a 
two-year period for a Threshold Program, this relationship is 
growing even stronger.  The formal agreement will be signed 
on July 26 and aims to improve revenue administration and 
anti-corruption efforts in key GRP agencies including the 
Bureau of Internal Revenue, the Bureau of Customs, and the 
Department of Finance.  If the Philippines can demonstrate 
the political will to strengthen the rule-of-law and 
successfully fight corruption, we could see more domestic and 
foreign investment as well as more jobs and growth. 
 
¶11.  (SBU)  The U.S. also remains the Philippines' largest 
overall trading partner (including both goods and services 
combined), with over $16 billion in two-way merchandise 
trade.  Japan falls slightly behind us.  Trade with China, 
though only about $6 billion in 2005, grew by about 60% over 
the last year.  Major U.S. exports are electronics, 
machinery, and agriculture.  We are also the largest foreign 
investor with over $6 billion in assets in a broad range of 
manufacturing and service industries, including banking, 
insurance, consumer goods, electronics, autos, and 
agriculture. 
 
¶12.  (SBU)  Over the last year, the Philippines has made 
substantial progress in advancing its economic reform agenda. 
 It reduced its budget deficit from about 4% of GDP to about 
2%.  Improvements in intellectual property rights protection 
led USTR to move the Philippines from the Special 301 
 
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Priority Watch List to the Watch List.  The mining industry 
is being opened to foreign investment and lapses in certain 
tax incentives for foreign investors are being addressed. 
 
¶13.  (SBU)  In comparison to other countries in the region, 
the Philippine public and private sector investment levels 
remain low.  This condition inhibits the economy's ability to 
sustain growth rates at a level necessary to begin reducing 
poverty.  The current GDP growth of about 5% is respectable, 
but, with a population growth rate of 2.3%, the impact on per 
capita income remains elusive. 
 
DEVELOPMENT ASSISTANCE 
---------------------- 
 
¶14.  (SBU)  USAID/Philippines manages a $900 million 
assistance portfolio with an average operating annual budget 
of between $65 and $85 million.  Nearly 60% of this 
assistance goes to conflict-affected areas of Mindanao. 
USAID programs focus on transparency and anti-corruption, 
public health, improved management of natural resources, 
education, and strengthening the peace process in Mindanao by 
reintegrating former combatants into the economy, improving 
basic infrastructure, promoting economic growth, and 
strengthening local government unit service delivery.  USAID 
is preparing for an increased assistance package to Mindanao 
in the event that the GRP and the Moro Islamic Front reach a 
comprehensive peace agreement.  USAID is also supporting 
Philippine electoral reform initiatives and Avian Influenza 
and disaster preparedness. 
 
¶15.  (SBU)  Our Peace Corps program is the second oldest and 
the current large program remains close to the heart of 
Filipinos.  Our agricultural assistance has played a key role 
in developing agricultural research, improving farm to market 
capabilities and enhancing trade capacity. 
 
 
SUGGESTED THEMES 
---------------- 
 
¶16.  (SBU) In your meetings with President Arroyo, Secretary 
Teves, and Secretary Favila, and in your public messages, I 
suggest you stress the following: 
 
OVERALL 
--  The U.S.-Philippine partnership is strong and growing as 
we celebrate 60 years of friendship as well as the 100th year 
of Philippine emigration to the U.S. 
--  Likely U.S. Congressional visitors in August will 
reinforce these important ties, as will President Arroyo's 
expected participation in a September commemorative event in 
Hawaii; 
--  Our shared history is not as important as our shared 
future, based on common values, goals, and interests; 
--  We look forward to working with you on the US-ASEAN 
Enhanced Partnership initiative as you chair ASEAN over the 
next year; 
 
PEACE AND PROSPERITY 
--  Your reform programs for security forces are making great 
progress, including in reinforcing the respect for civilian 
leadership; 
--  Our assistance programs will continue to be robust and to 
focus on Mindanao and the Sulu Archipelago, and we are 
prepared to seek additional funding in the event of an 
MILF/GRP peace accord; 
--  The new Millennium Challenge Threshold Country program is 
an excellent opportunity for the Philippines to make real 
headway on corruption and revenue enhancement; 
--  Your economic reform programs are important steps to 
improving the investment climate and encouraging general 
economic development; 
 
WITH FAVILA AND TEVES 
--  Appreciate the progress on intellectual property rights 
but we must continue to work on this issue, especially 
regarding pharmaceuticals and the entertainment industry 
--  Delighted to see so many US investors here.  Important to 
work together to solve individual trade problems so that 
investors continue to look favorably on the Philippines; 
 
GOVERNANCE 
--  Welcome your support for electoral reform to strengthen 
people's confidence in the institutions of democracy; 
--  Extrajudicial killings undermine confidence in your 
Government's commitment to justice and ability to provide 
security to its citizens, as well as damage investor 
 
MANILA 00003064  004 OF 004 
 
 
confidence in the RP as a safe place to do business. 
Creation of a new task force is a good first step, but it is 
essential to bring the culprits to justice. 
 
Visit Embassy Manila's Classified website: 
http://www.state.sgov.gov/p/eap/manila/index. cfm 
Kenney