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OO RUEHCHI RUEHCN RUEHDT RUEHHM
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O 250454Z JUL 08
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1402
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
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UNCLAS SECTION 01 OF 03 MANILA 001775 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/MTS 
STATE PASS USAID FOR AA/ANE, AA/EGAT, DAA/ANE 
TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAGR EPET ENRG RP
SUBJECT:  GRP RESPONSE TO RISING FOOD AND FUEL PRICES 
 
REF:  A) Manila 1050, B) Manila 1031, C) Manila 0838 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1.  (SBU) Summary:  Rising food and fuel prices in the Philippines 
have pushed up consumer price inflation to a fourteen-year high. 
The Philippine government continues to provide cheap rice for the 
poor and has scrapped duties on fuel, granted tax relief to personal 
income taxpayers, and postponed its balanced-budget goal in order to 
boost pro-poor spending.  The government has been resisting calls to 
scrap the value added tax on fuel and electricity, impose price 
controls on basic commodities, and repeal the law that deregulated 
the downstream oil industry.  Although President Gloria Arroyo's 
popularity rating is low, anti-government rallies thus far have been 
sporadic, contained, and led mainly by the political opposition and 
fringe groups.  End Summary. 
 
Food and Fuel Push Up Consumer Prices 
------------------------------------- 
 
¶2.  (U) Accelerating since September 2007, year-on-year consumer 
price inflation climbed further to 11.4% in June, a 14-year high. 
The food index (47% of the consumer basket of a typical Filipino 
household) increased 17.4% year-on-year; rice prices soared by 43%. 
Rapidly rising international oil prices also are working their way 
into general price levels through increasing retail fuel prices, 
higher rates for electricity and public utilities, increased 
transportation costs and rising production and operating expenses. 
Domestic prices of diesel and unleaded gasoline are, for example, 
now about 64% and 48% higher than they were a year ago (currently 
about $5.15 per gallon for unleaded gas and about $4.88 per gallon 
for diesel). 
 
Central Bank Shifts to Monetary Tightening Mode 
--------------------------------------------- -- 
 
¶3.  (SBU) Year-on-year inflation averaged 7.6% during the first half 
of 2008.  The Philippine Central Bank now forecasts that average 
inflation for the full-year will range from 9%-11%, up sharply from 
the original 3%-5% targeted range.  For the first time in nearly 
three years, the monetary authority raised policy rates by 25 basis 
points in June and by another 50 basis points in July and has hinted 
of further monetary tightening to manage inflation expectations. 
 
Food, Fuel and Poverty 
---------------------- 
 
¶4.  (U) Rising food and fuel prices will aggravate poverty in a 
country where a third of the population already live below 
government-estimated poverty thresholds and more than 40% below the 
$2/day international poverty benchmark (Ref A).  Asian Development 
Bank economists recently estimated that every 10% hike in food 
prices pushes 2 million more Filipinos into poverty. 
 
Government Rice Subsidies Continue 
---------------------------------- 
 
¶5.  (U) Currently the world's largest rice importer, the Philippine 
government continues to sell rice at 18.25 pesos per kilogram (about 
$0.41 at current exchange rates) -- less than half of average 
commercial prices -- to impoverished families (Ref B).  The National 
Food Authority (NFA), the state's grains trading firm -- already 
struggling with a negative $1.2 billion net worth and $1.7 billion 
in outstanding liabilities as of end-2007 -- expects its deficit to 
balloon to between 35-40 billion pesos (roughly $770-880 million) 
during 2008.  NFA's debts represent contingent obligations on the 
part of the National Government. 
 
Zero Tariffs on Oil and Personal Income Tax Relief 
--------------------------------------------- ----- 
 
¶6.  (U) In January 2008, President Gloria Macapagal-Arroyo issued an 
executive order directing modifications on the 3% duty on imported 
petroleum products based on international oil price triggers.  The 
tariff fell to 0% starting June 1.  Department of Finance (DOF) 
officials estimate the measure could cost the government about 18 
billion pesos ($400 million) in foregone revenues, but expects 37 
billion pesos ($820 million) in "windfall" collections from the 
value-added tax on a higher-than projected oil and fuel import bill. 
 
 
¶7.  (U) In mid-June 2007, President Arroyo also signed a law 
(Republic Act 9504) providing relief to personal income tax payers 
 
MANILA 00001775  002 OF 003 
 
 
by increasing allowable deductions and exempting minimum wage 
earners from income tax.  DOF officials expect 7 billion pesos ($155 
million) in foregone revenues during 2008 from the income tax 
relief.  They hope that accompanying provisions in the legislation 
to plug income tax leakages for the self-employed and corporate 
sectors will result in a revenue neutral legislation. 
 
Heightened Monitoring but No to Price Controls... 
--------------------------------------------- ---- 
 
¶8.  (U) The Government has resisted calls by some groups to impose 
price controls on basic commodities, but holds frequent dialogues 
with major manufacturers and oil firms to delay and/or temper price 
adjustments.  In a recent initiative, the Department of Trade and 
Industry has been working with manufacturers to publish suggested 
retail prices and announced they would consider deviations beyond 
10% from suggested prices in retail outlets as a red flag for 
profiteering. 
 
...And to Repeal of Oil Deregulation Law 
----------------------------------------- 
 
¶9.  (SBU) The Philippine government also has resisted calls 
(including bills in the Philippine Congress) to repeal the 1998 
Downstream Oil Industry Deregulation Act, as well as clamors from 
left-of-center groups to nationalize the Philippine oil industry. 
Convinced that such a response would only restrict supply and jar 
investor confidence, the government has depended mainly on moral 
suasion for oil companies to stagger price increases to appease 
public sentiment.  Department of Engergy officials noted that 
vehicular traffic has eased in Metro Manila while metro-railway 
usage has risen by 20% to 500,000 passengers per day, suggesting 
that market-based fuel prices encourage conservation.  The 
government plans to purchase more than 70 new light rail coaches in 
¶2009. 
 
¶10.  (SBU) Warning of further, staggered adjustments, oil firms here 
note that domestic price increases are lagging international oil 
price trends.  Results of a study commissioned by the Department of 
Energy, which looked at price trends and financial data from 2006 to 
early 2008, echoed this observation and cleared oil companies of 
abusive pricing behavior.  Energy and Chevron officials told 
econoffs that oil companies have been partially cross-subsidizing 
more socially sensitive petroleum products (such as diesel and 
kerosene) with gasoline prices.  Chevron officials claim that oil 
companies have had under-recoveries for diesel and kerosene since 
February. 
 
Keeping VAT on Fuel and Electricity 
----------------------------------- 
 
¶11.  (SBU) The political opposition, emerging presidential 
candidates for the 2010 elections, and some members of the Catholic 
clergy have joined the clamor by fringe consumer, transport, and 
student groups to scrap the 12% value added tax on fuel and 
electricity.  Legislation to this effect has already been filed in 
the Philippine Congress.  Scrapping the VAT would reduce current 
diesel and gasoline prices by between 6 to 7 pesos ($0.13-0.16) per 
liter (equivalent to $0.50-0.60 per gallon).  President Arroyo and 
her economic team have countered that such a move would mainly 
benefit the better-off segments of Philippine society (who consume 
more than 80% of fuel and power); derail fiscal stabilization 
efforts; rattle financial and credit markets; and deprive the 
government of nearly 100 billion pesos ($2.2 billion) in revenues to 
fund critical infrastructure and social spending programs during a 
globally challenging time. 
 
¶12.  (U) After offsetting estimated revenue losses from the 
scrapping of import duties on oil/fuel, the Philippine government 
expects about 19 billion pesos ($420 million) in net "windfall" 
gains during 2008 from the value-added tax on oil products.  The 
Philippine government reported that the 8 billion pesos ($178 
million) in excess value-added tax collections during the first half 
of the year have funded cash transfers to small electricity 
consumers; loans and scholarships for poor but deserving college 
students; the conversion of engines used by public transport 
vehicles to alternative-fuel use; the conversion from incandescent 
to fluorescent bulbs in government offices and public places; 
livelihood programs for families of public transportation drivers; 
upgrading of provincial hospitals; and disaster relief and 
rehabilitation. 
 
Balanced-Budget Goal Deferred to 2010 
 
MANILA 00001775  003 OF 003 
 
 
------------------------------------- 
 
¶13.  (U) The Philippine government has officially pushed back its 
2008 balanced-budget goal to 2010, but still hopes for fiscal 
deficits for 2008 and 2009 below 1% of Gross Domestic Product.  For 
2008, the government has announced it is prepared to hike the 
current budget by up to 75 billion pesos ($1.7 billion) to support, 
among others, agricultural productivity and food security goals and 
expand social safety nets for vulnerable sectors. 
 
Silver Lining:  An Opportunity for Reforms? 
------------------------------------------- 
 
¶14.  (SBU) The food and fuel-price issue is spurring action on 
long-stalled reforms such as passage of a renewable energy bill. 
Food security concerns have highlighted the role of biotechnology 
for boosting rice and food crops productivity.  Linking 
over-population to poverty and food security, a number of 
legislators have vowed to push for more aggressive family planning 
and reproductive health bills, although this remains a contentious 
issue even among Cabinet officials.  Government officials told 
econoffs that the President is seriously considering airing her 
support for natural family planning during the July 28 State of the 
Nation Address to improve strained relations with the influential 
Catholic Church. 
 
¶15.  (SBU) As part of ongoing negotiations between the government 
and World Bank for a food security loan, policy commitments may 
include rice policy reforms that would liberalize rice trade; allow 
private sector participation in rice importation; reduce the tariff 
(currently 50%) for rice; lift quantitative restrictions on rice 
over the medium-term; and limit the role of the financially-strapped 
National Food Authority to buffer stocking (Ref C).  These measures 
adopt reforms recommended a few months ago by a team of 
rice/agricultural experts funded by joint World Bank-USAID technical 
assistance. 
 
Comment 
------- 
 
¶16.  (SBU) The country's leading social survey institution reported 
recently that President Arroyo's popularity rating has sunk to the 
lowest level recorded by a Philippine president since 1986. 
Nevertheless, more pragmatic businesspeople and economists, as well 
as international credit rating and multilateral donor agencies, 
credit President Arroyo for resisting populist proposals that could 
spell fiscal disaster and spook investors.  Political rallies thus 
far -- led mainly by the political opposition and left-of-center 
groups -- have been sporadic and relatively contained, although 
anti-Arroyo forces may converge during the President's July 28 State 
of the Nation Address.  As household budgets tighten, effective and 
transparent implementation of pro-poor strategies will gain in 
importance. 
 
Kenney