VZCZCXRO6082
OO RUEHCHI RUEHDT RUEHHM
DE RUEHML #3102/01 2560604
ZNR UUUUU ZZH
O 130604Z SEP 07 ZDK
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8239
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 02 MANILA 003102 
 
SIPDIS 
 
SIPDIS 
 
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: ECON EFIN PGOV RP
SUBJECT: Philippine GDP Growing Rapidly, But Challenges Remain 
 
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Summary 
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¶1.  Philippine Gross Domestic Product grew 7.5% year-on-year during 
the second quarter, a twenty-year high.  Government spending helped 
spur the expansion.  Economists now expect full-year economic growth 
at the upper end of the government's 6.1%-6.7% target range. 
Sustaining higher growth will require higher levels of private 
sector investment, which are dependent on implementation of reforms 
to make the economy more open and competitive and the investment 
regime more welcoming.  End Summary. 
 
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GDP Growth Exceeds Expectations 
------------------------------- 
 
¶2.  According to the Philippine National Statistical Coordination 
Board, second-quarter Gross Domestic Product grew 7.5% year-on-year. 
 That expansion represented a twenty-year high, beat the 6.5% 
consensus forecast, and outpaced the growth registered by most Asian 
neighbors (with the exception of Singapore and China).  (Like most 
developing countries, the Philippines reports year-on-year rather 
than seasonally-adjusted annualized growth rates.  GRP statisticians 
estimate the seasonally-adjusted annualized growth rate at between 
6.8%-7.1%.)  With growth estimated at 7.1% during the first quarter, 
cumulative first half growth was 7.3% year-on-year.  First half 
Gross National Product (which includes the remittances of overseas 
Filipino workers) increased by 8% in real terms from the first 
semester of 2006. 
 
--------------------------------------------- -------- 
Expenditure Accounts: Striking Growth in GRP Spending 
--------------------------------------------- -------- 
 
¶3.  On the demand side, personal consumption grew 6.0%, government 
consumption grew 11.8%, and capital formation grew 9.3%; all above 
first half 2006 growth of 5.4%, 5.3%, and 0.9%, respectively.  These 
more than offset a deceleration in the growth of exports from 17.2% 
to 16.8%. 
 
¶4.  While personal consumption continued to fuel the economy's 
expansion on the demand side (helped by workers remittances), the 
acceleration in government consumption and construction expenditures 
during the first six months of the year was striking.  This 
reflected a deliberate effort to boost non-debt spending after the 
passage of new tax measures, with election-related spending for the 
May 2007 congressional and local polls providing additional impetus 
during the period. 
 
¶5.  Government construction spending grew nearly 34% during the 
first half of 2007; a second consecutive year of growth after 
declines that saw government construction spending drop by over 60% 
between 2000 and 2005.  The combination of expansion of public 
sector consumption and infrastructure expenditures produced nearly 
20% of the total year-on-year growth in aggregate demand during the 
first half of 2007, up from just 7.6% in 2006. 
 
¶6.  Private construction investments grew 8.5%, boosted in part by 
migrant workers' investments in real estate, the demand for office 
space from the business process outsourcing industry, and lower 
interest rates.  Investments in durable equipment rose a modest 2% 
year-on-year during the first half of 2007. 
 
--------------------------------------------- --- 
Production Accounts:  Services and Industry Lead 
--------------------------------------------- --- 
 
¶7.  Services output grew 8.6% and industry grew 7.2%, both rates 
higher than in the first half of 2006 (6.2% and 4.9%, respectively). 
 These sectors more than made up for the slower expansion of 
agricultural output (which was hit by unfavorable weather 
conditions). 
 
¶8.  Transportation/communications increased 10.1%, (fueled in part 
by promotional activities and the robust expansion of cellular, 
fixed line, and broadband services) and spurred most of the 
acceleration in service sector growth. 
 
¶9.  The faster expansion of industrial sector output mainly 
reflected more construction activity (up 20.6% year-on-year). 
Mining/quarrying grew 24.3%, up from barely 3% the previous year. 
 
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MANILA 00003102  002 OF 002 
 
 
Comment 
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¶10.  Macroeconomic stability, the result of important and 
politically difficult fiscal reforms undertaken in 2005, have 
provided a foundation for growth, while the resulting revenues have 
been used to spur growth via increased infrastructure investments. 
As important as those investments are, they will not be sufficient 
to keep Philippine growth rates up with those of their neighbors in 
the long term.  To bring about sustained growth at levels which 
would bring down poverty, the government will need to implement 
economic and political reforms, including privatization, 
liberalization of investment and trade regimes and a more effective 
judicial system.  Readers may wish to refer to the listing of 
Embassy economic objectives in these areas on the Philippines 
Economic Priorities page of the Intellipedia on the classified 
network at www.intelink.sgov/wiki/Philippines_Economic_P riorities. 
 
Kenney