VZCZCXYZ0021
OO RUEHWEB

DE RUEHML #0367/01 0432242
ZNR UUUUU ZZH
O 122242Z FEB 08
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9718
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUCPDOC/USDOC WASHDC IMMEDIATE
RHHMUNA/CDR USPACOM HONOLULU HI//FPA//

UNCLAS MANILA 000367 
 
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: ECON EFIN ETRD EINV PGOV RP
SUBJECT:  Can the Philippine Economy Keep it Up? 
 
Ref:  Manila 10, Manila 209 
 
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Summary 
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¶1.  (SBU) As we reported ref A, 2007 was a very good year for the 
Philippine economy which, according to final numbers, grew at 7.3%. 
While concern is widespread over the impact on exports of slowing 
global demand and the strong peso, the rapid growth in services, 
remittances, transport, construction, and mining will likely 
continue and keep GDP growth at around 6%.  End Summary. 
 
-------------------------- 
Overall Macro Performance 
-------------------------- 
 
¶2.  (U) The Philippine economy grew at its fastest pace in three 
decades in 2007, with real GDP growth estimated at 7.3%, lower 
unemployment and inflation, and improved government revenues. 
Higher government spending contributed to this higher growth rate, 
but a resilient and growing service sector and large remittances 
from the millions of Filipinos working abroad play an increasingly 
important role in the economy. 
 
¶3.  (U) In 2007, personal consumption fueled the economy's growth on 
the demand side, aided by over $14 billion in remittances from 
overseas Filipino workers, equal to about 11% of GDP.  Increased 
government construction expenditures (up 30% in real terms), made 
possible by tax increases in recent years, was another factor in the 
growth.  Private construction investment grew about 10%, 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. 
 
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Service Boom Likely to Continue 
------------------------------- 
 
¶4.  (U) The services sector grew at 8.7% in 2007 and services now 
account for about 55% of Philippine GDP.  Business process 
outsourcing, information technology services, medical and legal 
transcription services, animation services, design, architectural 
and engineering services are all part of the offshore and 
outsourcing industry.  Outsourcing has been the fastest segment of 
the Philippine economy, with growth in the past two years of 40% and 
predicted to grow another 40% over the next two years.  The head of 
the Business Processing Association of the Philippines told us that 
there is a huge, still largely untapped global market for these 
services. 
 
¶5.  (U) Current Business Processing Association plans call for the 
Philippines to capture about 10% of the global outsourcing market, 
employ one million persons, produce about 8.5% of the country's GDP, 
and rival overseas remittances in economic importance by 2010. 
Already, the rapid growth of this industry is fueling shortages in 
prime office space in several major Philippine cities (in response, 
the construction industry grew by almost 20% in 2007).  There has 
also been a significant positive impact on communications, data 
storage, and other information technology sectors that support 
outsourcing businesses.  The Association believes that an economic 
slowdown in the United States could be good for the outsourcing 
industry, since U.S. companies would accelerate cost-cutting 
measures such as outsourcing. 
 
¶6.  (U) Tourism and mining are also emerging as key industries. 
2007 was a record year for tourism with over 3 million arrivals from 
overseas spending more than $5 billion and fueling air 
transportation growth of 15%.  Mining and quarrying grew by 25%. 
Philex Mining Corporation, the country's largest in terms of market 
value, reported a 62% increase in net income to $120 million on the 
back of higher metal prices and volumes sold. 
 
-------------------- 
Effects of High Peso 
-------------------- 
 
¶7.  (U) From January 2007 through January 2008, the peso 
strengthened by more than other regional currencies; about 19% 
versus the US dollar.  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.  Local and foreign business people, including 
 
outsourcing centers, have told us that the appreciation in the peso 
over the past year was making some business operations in the 
Philippines unprofitable because of the increased cost of local 
inputs. 
 
¶8.  (SBU) American executives in Cebu told us that a number of local 
furniture companies have been forced out of business because the 
strong peso made it impossible for them to compete with other 
regional manufacturers.  Business people in northern Mindanao told 
us that exporters of dried banana chips are unable to make money on 
contracts priced in dollars, and have stopped purchasing bananas 
from local farmers.  An official at the Korean Chamber of Commerce 
told us that the value of the peso was "killing" the manufacturing 
sector here.  To the extent that the peso continues to appreciate 
more rapidly than currencies in neighboring countries, there will be 
a negative effect on the competitiveness of Philippine exports and 
the attractiveness of the Philippines as an investment destination. 
 
----------------------------- 
Slowing Investment and Growth 
----------------------------- 
 
¶8.  (SBU) Investment is expected to slow this year from levels (as a 
percent of GDP) already lower than in neighboring countries. 
Economists expect Philippine GDP growth to slow from 7.3% last year, 
but to still achieve decent growth of 5-6% in 2008.  Overseas 
Filipino worker remittances are expected to be a stabilizing factor 
against a possible slowing of U.S. economic growth given the 
dispersion of Filipino workers (about 500,000 Filipinos work in the 
Middle East).  Some economists speculate that remittances may 
increase to partially compensate for the more expensive peso. 
 
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Comment 
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¶9.  (U) The rate of investment in the Philippines must be increased 
to achieve sustained growth in a stable macroeconomic environment. 
The possibility of slowing global economic growth, a strong peso, 
and uncertainty in international financial markets present 
formidable new challenges to sustained rapid economic growth. 
Export industries which rely on consumers in developed countries may 
be hard hit.  However, the Philippines has a relatively robust 
domestic economy compared to neighboring countries, with domestic 
demand fueled by remittances, an expanding service sector, and newly 
middle class tourists from nearby countries.  The trends of economic 
globalization play to the strengths of the Philippines such as 
relatively high levels of English and technical skills, and 
technologies that allow services to be performed at a distance. 
 
Kenney