VZCZCXRO5448
OO RUEHCHI RUEHDT RUEHHM
DE RUEHML #2677/01 2210554
ZNR UUUUU ZZH
O 090554Z AUG 07
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7771
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUCPDOC/USDOC WASHDC IMMEDIATE
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS IMMEDIATE
RHHMUNA/CDR USPACOM HONOLULU HI//FPA//

UNCLAS SECTION 01 OF 03 MANILA 002677 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EAP/MTS, EAP/EP, EEB/IFD/OMA 
STATE PASS EXIM, OPIC, AND USTR 
STATE PASS USAID FOR AA/ANE, AA/EGAT, DAA/ANE 
TREASURY FOR OASIA 
USDOC FOR 4430/ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV RP
SUBJECT: GRP Committed to Market-Determined Foreign Exchange Rate 
Policy 
 
Refs:  A) 06 Manila 5050 
       B) Manila 1859 
 
SENSITIVE BUT UNCLASSIFIED 
 
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Summary 
------- 
 
¶1.  (U) In a variety of public fora, Philippine Central Bank 
Governor Amando Tetangco has said the GRP remains committed to a 
flexible, market-driven foreign exchange rate policy.  Although the 
GRP has undertaken measures to assist affected sectors, he rejected 
capital controls and calls from exporters for more aggressive 
intervention in the foreign exchange trading market to arrest the 
peso's rise.  GRP officials believe that the peso's appreciation 
since 2005 has generated net benefits for the economy by helping 
temper inflationary pressures; allowing the Central Bank to build up 
international reserves; providing public and private sectors an 
opportunity to retire foreign debt obligations; and reducing peso 
requirements for foreign debt service payments.  Officials appear 
more concerned about potential vulnerabilities and disruptions from 
swift reversals in investor sentiment that generally characterize 
portfolio capital investments.  End Summary. 
 
------------------------------- 
Peso Surges, Exporters Complain 
------------------------------- 
 
¶2.  (U) The peso, currently trading at a seven-year high of around 
PHP 45.5 per USD, has appreciated more than 7% year-to-date and has 
surged ahead of other Southeast Asian currencies since the beginning 
of the year.  Complaining of waning competitiveness and mounting 
losses, export groups have called on the central bank to intervene 
more aggressively to stabilize the exchange rate at around 50 to the 
USD.  They warned that the strong peso adversely affects recipients 
of remittances from Overseas Filipino Workers (OFW), dampens 
tourism, and subjects domestic producers of import substitutes to 
stiff competition from cheap imports. 
 
---------------------------------------- 
Market-Driven Exchange Rate Policy Stays 
---------------------------------------- 
 
¶3.  (U) Central Bank Governor Amando Tetangco has reiterated in 
various fora that the Philippine Government remains committed to a 
market-driven foreign exchange rate policy.  In a recent briefing 
with the American Chamber of Commerce of the Philippines, he 
stressed that the Central Bank does not target a specific exchange 
rate.  The agency focuses its intervention in the inter-bank trading 
market to smooth excessive volatility and temper speculative 
pressures.  The Governor also ruled out controls on portfolio 
capital flows, which have contributed significantly over the past 
several months to the peso's strength.  As of mid-July, net inflows 
of foreign portfolio capital had more than tripled to nearly USD 3 
billion over the preceding 12 months, with most of these funds going 
into the local stock market. 
 
------------------------------------- 
Pesos Still Within Equilibrium Range? 
------------------------------------- 
 
¶4.  (U) Governor Tetangco commented that the peso's appreciation 
since 2005 has not necessarily translated into a significant 
reduction in export price competitiveness.  Compared with a 
trade-weighted, inflation-adjusted basket of competitor currencies, 
he estimated that the peso's appreciation since 2005 has merely 
offset the local currency's significant 2002-2004 decline, triggered 
by domestic fiscal worries and political uncertainties. 
 
¶5.  (SBU) The Governor warned of inherent difficulties in 
determining "equilibrium" exchange rate levels, but estimated the 
current range at somewhere between 42 and 49 to the USD.  Although 
the peso has been rising since 2005, Tetangco observed that the rate 
of growth of exports has accelerated over this period (15% in 2006 
and 8% thus far in 2007).  Other Central Bank officials commented in 
separate occasions that a stronger peso translates to cheaper peso 
expenditures for inputs of the import-dependent electronics sector, 
partially offsetting lower peso proceeds from export sales.  Tourist 
arrivals and receipts continue to grow, and imports have not surged 
as feared.  OFW remittances expanded by nearly 20% during 2006 to 
USD 12.8 billion and were up more than 20% year-on-year as of 
 
MANILA 00002677  002 OF 003 
 
 
mid-2007. 
 
¶6.  (U) The Central Bank Governor cited studies indicating that 
export competitiveness does not hinge on exchange rate policy alone. 
 Achieving and sustaining long-term export competitiveness depends 
just as heavily on sound and stable macroeconomic, investment, and 
trade regimes.  Critical factors for a resilient and vibrant export 
sector include a productive and skilled labor force, access to 
affordable credit, efficient infrastructure, technological 
investments, and aggressive marketing efforts. 
 
----------------------- 
Benefits of Strong Peso 
----------------------- 
 
¶7.  (U) Assessing the currency appreciation's overall economic 
impact thus far, Governor Tetangco said the peso's strength has 
brought benefits to the economy that offset the disadvantages to 
certain sectors.  The stronger currency dampened inflationary 
pressures from increases in international prices of imported 
commodities, including oil and petroleum products.  The Governor 
estimated that the cumulative appreciation of the exchange rate over 
the past 2 1/2 years from 56 pesos/USD to 45 pesos lowered inflation 
by 2.5 percentage points, benefiting both consumers (including OFW 
beneficiaries) and producers. 
¶8.  (U) The stronger peso has allowed the Central Bank to build its 
international reserve buffer to a more comfortable level.  Gross 
international reserves hit a record $26.4 billion in June, 
equivalent to 4.8 months import cover and to 2.5 times the foreign 
debt maturing over the next twelve months.  While Central Bank 
foreign exchange purchases help to temper the peso's rise, the Bank 
generally attempts to sterilize reserve inflows to prevent excess 
liquidity from threatening inflation targets. 
 
¶9.  (U) The local currency's appreciation has also provided both the 
public and private sectors the opportunity to pre-pay foreign debt 
obligations -- $4.4 billion during 2006 and $1.4 billion so far in 
2007 -- helping to reduce the Philippines' foreign debt ratio from 
55% to 45% of Gross Domestic Product (GDP) between the end of 2005 
and 2006, respectively.  Pre-paid debt included the Government's 
remaining $220 million obligation with the International Monetary 
Fund (IMF), ending 4 1/2 decades of IMF supervision. 
 
¶10.  (U) Two years of peso appreciation has dropped the Philippines' 
foreign debt-to-GDP ratio below the IMF's 60% vulnerability 
threshold, a development welcomed by credit rating agencies and 
rewarded by foreign capital markets through narrower risk premiums 
for Philippine debt.  Tetangco believes that the strong local 
currency will encourage more debt retirement and noted room for 
further improvement vis--vis debt ratios of similarly-rated, 
emerging-market economies. 
 
--------------------------------------------- -------- 
Currency Appreciation "Net Positive" for GRP Finances 
--------------------------------------------- -------- 
 
¶11.  (U) Department of Finance (DOF) officials described the overall 
impact of a strong local currency as "net positive" for National 
Government finances.  Lower peso requirements for servicing foreign 
loan obligations more than offset reduced peso receipts from Customs 
collections.  The DOF estimated the net benefit from a stronger than 
expected exchange rate at about 2 billion pesos in 2005 and 12 
billion pesos in 2006. 
 
--------------------------------------------- - 
But GRP Not Unsympathetic to Exporters Plight 
--------------------------------------------- - 
 
¶12.  (U) Although it remains committed to a market-driven exchange 
rate, the Philippine Government recognizes the adverse impact of the 
currency's appreciation on small exporters that depend mainly on 
domestic inputs.  The GRP has taken a number of other measures to 
assist exporters.  Citing increasing demand for foreign exchange 
because of globalization, the Central Bank relaxed foreign exchange 
regulations in March 2007 by doubling allowable over-the-counter 
foreign exchange purchases from banks for non-trade and non-debt 
purchases to USD 10,000, and for outward investments by residents to 
USD 12,000. 
 
¶13.  (U) To enhance exporters' access to credit, the Central Bank 
established a USD 500 million Exporters Dollar and Yen Rediscount 
Facility.  The government-owned Development Bank of the Philippines 
 
MANILA 00002677  003 OF 003 
 
 
recently opened a USD 1 billion foreign exchange hedging facility 
for exporters. 
 
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Comment 
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¶14.  (SBU) The Philippine Government generally considers the peso's 
appreciation as a "pleasant challenge" and a reflection of very 
liquid global financial markets seeking to invest in emerging 
economies with improving macroeconomic situations (Ref A). 
Pro-Administration politicians have bandied the strong peso as a 
vote of confidence for the Arroyo administration.  Central Bank 
officials privately fear that a false sense of complacency may begin 
to set in and stressed the urgency of undertaking and sustaining 
reforms to boost foreign direct investment levels, promote long-term 
export growth, and harness non-debt sources of foreign exchange by 
addressing slipping competitiveness rankings (septel).  They 
emphasized the need to address persistent revenue collection 
problems (Ref B) that could seriously undermine the current cautious 
optimism here. 
 
Jones