VZCZCXYZ0001
OO RUEHWEB

DE RUEHML #0010/01 0020920
ZNR UUUUU ZZH
O 020920Z JAN 08
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9283
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUCPDOC/USDOC WASHDC IMMEDIATE
RHHMUNA/CDR USPACOM HONOLULU HI//FPA//

UNCLAS MANILA 000010 
 
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 
STATE PASS ASIAN PACIFIC ECONOMIC COOPERATION 
TREASURY FOR OASIA 
USDOC FOR 4430/ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV PGOV ENRG SENV TPHY RP
SUBJECT: 2007 a Good Year for Philippine Economy, and for USG 
Economic Efforts in the Philippines 
 
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Summary 
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¶1.  (SBU) Embassy Manila's long-term efforts to promote economic 
reforms and improved governance are one factor behind the increased 
performance and resilience of the Philippine economy.  Although 
statistics for the entire year are not yet available the economy is 
on track to grow at around seven percent for the entire year, 
unemployment and inflation are down, government revenues up.  This 
has also been a significant year in our promotion of economic 
reforms, and in civil aviation safety, intellectual property rights, 
and marine science efforts.  End Summary. 
 
----------------------------------- 
Excellent Overall Macro Performance 
----------------------------------- 
 
¶2.  (U) U.S. economic policy towards the Philippines has clearly and 
consistently emphasized domestic Philippine economic growth with 
equity as the best way of advancing larger U.S. interests in the 
region.  Over the past several years, the Philippine economy has 
demonstrated a newfound strength and resilience, and foreign 
investors have demonstrated increased confidence in the country's 
future.  January-September Gross Domestic Product (GDP) expanded by 
7.1% year-on-year, and is on track to exceed the high end (6.7%) of 
the Government's targeted growth range. 
 
¶3.  (U) Full-year growth of near 7% will be the economy's strongest 
expansion in three decades, capping nine consecutive quarters of 
growth at greater than 5%.  Personal consumption continued to fuel 
the economy's growth on the demand side -- helped by robust 
remittances from overseas Filipino workers.  Government construction 
expenditures (up 30% in real terms) also contributed, reflecting a 
deliberate policy enacted after the passage of enhanced tax 
measures.  Private construction investments (up 10%) broke from two 
consecutive years of negative growth, boosted in part by overseas 
workers' investments in real estate, the demand for office space 
from the booming business process outsourcing industry, and lower 
interest rates. 
 
¶4.  (U) The balance of payments surplus was $7.8 billion through 
October and is poised to end 2007 at an all-time high on the back of 
remittances and higher net inflows of foreign portfolio and direct 
investments.  Remittances from overseas workers are expected to 
exceed $14 billion by yearend.  Net foreign portfolio investment 
increased to an estimated $3.7 billion through November, up 76% 
year-on-year.  The Central Bank estimated net foreign direct 
investment at $1.9 billion through September, up 22.3% from 2006's 
comparable nine-month level.  The Central Bank's gross international 
reserves reached a new high of $32.5 billion as of end-November, 
equal to about six months of goods and service imports. 
 
¶5.  (U) The Philippine Government is on track towards staying within 
the 1%-of-GDP fiscal deficit ceiling programmed for 2007.  For a 
second consecutive year, the deficit-reduction program and improved 
financial performance of other public sector entities have yielded 
surpluses for the consolidated public sector.  Although still high, 
the debt of the consolidated public sector has declined to under 80% 
of GDP, from 2003's peak 118%-of-GDP ratio.  Improved public sector 
finances and lower inflation have helped bring down domestic 
interest rates to a record low and consumer price inflation will 
average below 3% during 2007. 
 
¶6.  (U) From January through mid-December 2007, the peso 
strengthened by 18% versus the US dollar, the most among regional 
currencies.  The Government pre-paid foreign denominated 
obligations, relaxed ceilings for foreign exchange purchases, and 
built-up international reserves, partly to stem the peso's rapid 
appreciation.  As of mid-December, the Philippine Stock Exchange 
index was up nearly 22% for the year.  As of September 2007, the 
share of non-performing loans and foreclosed assets to total 
commercial banking system assets had declined to 5.3% (from 6.3% at 
the end of 2006 and May 2002's 15.1% Asian crisis peak). 
 
--------------------------------------------- --- 
Economy demonstrated Ability to Withstand Shocks 
--------------------------------------------- --- 
 
¶7.  (SBU) These positive macro economic developments have occurred 
in spite of factors that in the past might have shaken business 
 
confidence or dampened performance, including rising fuel prices, 
repeated corruption allegations against the Arroyo Administration, 
coup plots, terrorist bombings, an unruly legislature, and an 
irresponsible press.  The Government will beat its deficit target 
this year despite under-performing tax collections if only because 
of strong privatization receipts and lower-than-projected debt 
payments. 
 
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Trade Healthy 
------------- 
 
¶8.  (U) The United States continued to be the Philippines' largest 
trading partner in 2007, accounting for 16.9% of Philippine exports, 
and 14.6% of its imports on a value basis.  Two way merchandise 
trade between the United States and the Philippines amounted to 
$12.6 billion over the first nine months of 2007.  The Philippines 
is the fifth largest beneficiary of the General System of 
Preferences, with $928 million in Philippine goods entering the 
United States under the program through September, or 13.4% of all 
Philippine exports to the United States. 
 
-------------------------- 
USG Reform Accomplishments 
-------------------------- 
 
¶9.  (SBU) Progress was made on many of our priority areas for 
economic reform this year.  Among the most important of the 
successes we shared with our Philippine allies were: 
 
--  Energy Privatization:  2007 was a banner year for Philippine 
power privatization.  Thirty-nine percent of the government's 
electric generation capacity has now been privatized, up from 11% at 
the start of the year.  The 25-year concession for the National 
Transmission Company, TransCo, was sold for $3.95 billion.  This is 
a record amount for a government asset sold in the Philippines and 
will be helpful in retiring the debt. We will continue to press for 
the government to meet its statutory obligation to sell off 70% of 
capacity and liberalize the sector. 
 
--  Civil Aviation Liberalization:  Though President Arroyo did not 
sign a decree re-liberalizing service to the former Clark airbase, 
as many had hoped, she instead instructed her negotiators to agree 
to a significantly liberalized civil aviation agreement with South 
Korea, one of the most important sources of tourists to the 
Philippines.  The fight over liberalization of this sector will 
continue in 2008. 
 
--  Fiscal Reform and the Fight Against Corruption:  The Millennium 
Challenge Corporation Threshold Program for the Philippines, focused 
on increasing transparency and effectiveness in revenue collection 
and improving the work of the anti-corruption institution made 
significant progress.  The project is on track to meet most key 
indicators.  USAID assistance programs also made a significant and 
quantifiable contribution to revenue collection. 
 
--  Infrastructure and Education spending:  As a result of the 
improved fiscal situation and at the urging of the Embassy and many 
of our partners in policy advocacy, the government has significantly 
increased funding for both primary education and infrastructure, 
both of which have been starved for funds in recent years. 
 
--------------------------------------------- -- 
Philippine Civil Aviation Safety Regulation Hit 
--------------------------------------------- -- 
 
¶10.  (SBU) The year ended with the FAA on the verge of announcing a 
downgrade to Category 2 under its International Aviation Safety 
Assessment program.  Post has worked with the government and 
industry since the initial FAA assessment visit in July to build 
understanding of the situation and a commitment to reform.  The FAA 
team that announced the decision to Philippine officials in November 
noted that the Filipinos had been exceptionally well-prepared for 
the downgrade news by Post and had given serious thought to how the 
problems could be remedied.  Even before the FAA team delivered its 
assessment, the Philippine House of Representatives passed 
legislation to create a new Philippine Civil Aviation Authority 
based on international recommendations.  In 2008 we will be 
monitoring the Philippine plans to regain Category 1 status and 
working closely with Philippine officials, industry and the FAA to 
help them achieve that goal. 
 
 
--------------------------- 
More Nuanced Picture on IPR 
--------------------------- 
 
¶11.  (U) Intellectual property rights protection remained a 
significant concern in 2007.  While the Philippine government 
promoted IPR protection, and seized some IPR infringing materials 
including clothing, software, and optical discs, the lack of 
prosecutions and convictions continues to be a major problem.  We 
maintain our aggressive outreach in engaging industry, the 
administration and congress on the "Cheaper Medicines Bill" to 
minimize impact on U.S. industry and ensure that any legislation 
passed is consistent with Philippine international commitments and 
U.S. policy.  We played a key role in quashing a Department of 
Justice decision which would have allowed Philippine pirates to 
re-broadcast with impunity U.S. television content without 
authorization.  During 2007, several dozen Philippine government 
officials involved in intellectual property rights protection 
participated in U.S. training programs and officials from the Office 
of the United States Trade Representative emphasized IPR during two 
visits to Manila, as did the regional attach of the U.S. Patent and 
Trademark Office. 
 
--------------------------------------- 
Major Accomplishments in Marine Science 
--------------------------------------- 
 
¶12.  (U) We played a key role in assisting marine scientific 
research projects in Philippine waters in 2007.  The scientific 
research highlight was the successful deep sea exploration of the 
Inner Space Speciation Project conducted by scientists from Woods 
Hole Oceanographic Institution and National Geographic.  The project 
received extensive local and international press coverage and will 
be on National Geographic Television and in the December 2008 issue 
of National Geographic Magazine. 
 
¶13.  (U) We coordinated officials from the United States Department 
of Agriculture, Federal Communication Commission, and the Economic 
Bureau's Office International Information and Communications Policy 
who conducted training and consultations on delivering high-speed 
internet in rural areas.  Post convened intergovernmental and 
non-governmental stakeholders to formulate an oil spill plan.  We 
hosted Science Fellows from the U.S. Environmental Protection Agency 
to acquaint the Department of Science and Technology with U.S. 
technology transfer laws and to assist Ateneo University, the Manila 
Observatory, non-governmental organizations interested in coastal 
conservation, and the Philippine Tropical Forest Conservation 
Foundation in pinpointing environmental problems in the Philippines 
via satellite mapping. 
 
------------------------------------ 
Progress in Combating Terror Finance 
------------------------------------ 
 
¶14.  (U) Post assisted in training almost 1,000 Philippine students 
in Anti-Money Laundering and Countering Terrorism Financing in 2007. 
 The Human Security Act which passed congress in June gives 
Philippine officials valuable new law enforcement tools for 
collecting information on possible sources of financing for 
terrorism.  In November, Philippine officials expressed a new 
determination to independently nominate several Philippine nationals 
involved in terror finance to the United Nations 1267 Committee. 
 
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Comment 
------- 
 
¶15.  (U) Although the general macroeconomic outlook has improved 
significantly, the Philippines continues to face important 
challenges and must sustain the reform momentum to catch up with its 
regional neighbors and translate current optimism into the long-term 
confidence needed for higher investment levels, sustained high 
growth, employment generation, and poverty alleviation.  Sustaining 
longer-term fiscal stability that allows for higher spending on 
infrastructure and social services will require more aggressive 
efforts to strengthen tax collection and administration as 
privatization receipts are not a sustainable revenue source.  The 
Philippines continues to struggle with slipping competitiveness and 
anti-corruption rankings because other countries are moving more 
aggressively to address problems in these areas. 
 
 
Embassy Manila's detailed economic reform agenda can be accessed on 
the classified Intellipedia at 
www.intelink.sgov.gov/wiki/Philippines_Econom ic_Prior ities. 
 
Kenney