VZCZCXRO5739
OO RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHML #2340/01 2882349
ZNR UUUUU ZZH
O 142349Z OCT 08
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2085
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS IMMEDIATE
RHHMUNA/USPACOM HONOLULU HI//FPA//

UNCLAS SECTION 01 OF 02 MANILA 002340 
 
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 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON RP
SUBJECT:  UPDATE: PHILIPPINES AND GLOBAL FINANCIAL CRISIS 
 
REFS:  A) State 107872, B) Manila 2174 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION 
 
¶1.  (SBU) Summary:  During October 6-10, the Philippine stock market 
index dropped by more than 18% to its weakest level in more than 27 
months and the peso hit seventeen-month lows, yet banks maintained 
adequate foreign exchange and peso liquidity.  The stock index then 
rose by 8.4% on October 13-14.  President Arroyo has called for an 
ASEAN+3 summit to coordinate regional responses to the crisis 
(septel).  The Ambassador and Mission members conveyed Ref A points 
on USG actions at public and private meetings. Potential Philippine 
exposure to distressed financial institutions remains at less than 
2% of Philippine banking resources.  The Philippine government does 
not allow insurance companies to invest in structured products.  The 
Philippines does not have a sovereign wealth fund and international 
reserves remain adequate and conservatively invested.  The economy 
is in a stronger position to weather the global financial storm due 
to fiscal and banking reforms and debt management initiatives, and 
the financial crisis may be providing greater urgency to pursue 
unfinished reforms.  End Summary. 
 
EXPOSURE TO TROUBLED INSTITUTIONS LIMITED 
 
¶2.  (U) In a meeting with econoffs on October 10, senior Central 
Bank officials reiterated that Philippine banks have limited direct 
exposure to troubled U.S. and European financial institutions.  They 
estimated total potential exposure at about 1.8% of banking system 
assets ($1.8 billion), including about $800 million of exposures to 
institutions that are being bailed out by their respective 
governments or which have been sold to new private owners.  The 
affected Philippine banks are well-capitalized; do not have solvency 
issues; and are not experiencing heavy withdrawals.  Central Bank 
officials noted that interbank lending has slowed in recent weeks as 
banks defensively conserve liquidity.  However, liquidity remains 
adequate and banks have not required emergency assistance to-date. 
 
 
SOME TIGHTNESS, BUT NO SCARCITY OF FOREIGN EXCHANGE 
 
¶3.  (SBU) There is no scarcity of foreign exchange, according to the 
Central Bank officials.  They shared that a number of local banks 
have begun withdrawing overseas placements/investments to bring back 
into the country due to global uncertainties.  There is some 
tightness in the interbank foreign exchange market because of 
individual banks? desire to hold on to, or build-up, foreign 
exchange holdings due to the current global jitters.  The Central 
Bank has injected foreign exchange liquidity in the market as needed 
and is set to launch a $-denominated repurchase facility (on 
$-denominated Republic of the Philippines bonds) as a temporary 
contingency measure.  Pre-Christmas Overseas Filipino Worker (OFW) 
remittances are expected to keep international reserves stable and 
to help temper pressure on the peso.  OFW remittances are up 18% 
over 2007 and on track to exceed $16 billion by yearend. 
 
INTERNATIONAL RESERVES SECURE 
 
¶4.  (U) Central Bank officials estimated gross international 
reserves at $36.7 billion as of end-September -- little changed from 
the $36.9 billion record high posted in July, adequate for close to 
six months worth of merchandise and service imports, and equivalent 
to 2.6 times foreign debt obligations falling due in the next twelve 
months.  An estimated 87% of the reserves are held in ?foreign 
investments? and about 11% in gold.  The ?foreign investments? are 
held in investment-grade (mostly Triple A) sovereign bonds and 
securities issued by multilateral agencies (i.e., the World Bank and 
Asian Development Bank).  The Philippines does not have a Sovereign 
Wealth Fund. 
 
ROOM FOR MONETARY EASING? 
 
¶5.  (SBU) After raising rates by a cumulative 100 basis points from 
June to August, the Philippine Monetary Board (the Central Bank?s 
highest policymaking body) kept repurchase and reverse repurchase 
rates steady at 8% and 6%, respectively, during its October 6 
meeting.  Some Central Bank officials have hinted that the recent, 
concerted action by foreign central banks to cut rates, as well as 
easing pressures on food and oil prices, may give the Monetary Board 
some flexibility to consider monetary easing during its next regular 
meeting in November.  The Monetary Board does not plan to hold an 
off-cycle review prior to its regular meeting next month. 
 
INSURANCE SECTOR, STATE PENSION FUNDS HOLDING UP 
 
 
MANILA 00002340  002 OF 002 
 
 
¶6.  (U) AIG has officially announced that Philamlife -- its local 
subsidiary and the largest player in the Philippine insurance market 
-- is for sale.  The Philamlife Group (which also has interests in a 
savings bank, in the pre-need business, and in financial asset 
management) has an estimated $3.8 billion in total assets and $1 
billion net worth.  Over ten potential bidders have reportedly 
expressed interest to acquire the company, which is considered as 
one of the Philippines? most profitable and venerable institutions. 
It has been business as usual for Philamlife pending the company?s 
sale. 
 
¶7.  (U) Senior officials from the Philippine Insurance Commission 
recently noted that the insurance sector?s investments are closely 
regulated.  No insurance company is exposed to the troubled 
institutions in the United States and Europe.  Less than 10% of the 
industry?s funds are invested in foreign-denominated assets, over 
90% of which are in Philippine sovereign bonds.  The Commission does 
not allow investments in structured products. 
 
¶8.  (U) Officials from the Social Security System (SSS, the 
mandatory pension fund for private sector employees) reiterated 
during a recent hearing in the Philippine Senate that it has no 
overseas investments.  Officials from the Government Service 
Insurance System (the mandatory pension fund for public sector 
personnel) stated in separate media interviews that investments are 
safe.  Legislators are pressing for more detailed disclosure of 
GSIS?s $1 billion Global Investment Fund (equivalent to about 12% of 
the pension fund?s loan and investment portfolio). 
 
EMBASSY OUTREACH 
 
¶9.  (SBU) The Ambassador used a speech to an economic roundtable 
October 10 and a radio interview October 12 to convey messages on 
USG actions (Ref A).  Mission members have kept the focus on the 
serious USG response and international coordination, despite some 
early carping from European counterparts and some Philippine 
pundits. 
 
CHALLENGING TIMES AHEAD 
 
¶10.  (SBU) While direct exposure to problematic investments and 
financial institutions is limited, the impact of the global 
financial crisis on economic growth, poverty alleviation, local and 
overseas employment, remittances, credit availability, and overall 
investment prospects is a concern.  In a statement on September 30, 
the Philippine government vowed to accelerate infrastructure and 
agricultural spending, fast-track financial sector reform reforms, 
improve revenue generation through improved tax administration and 
legislative measures, and reduce regulatory and administrative 
bottlenecks to boost competitiveness. 
 
COMMENT 
 
¶11.  (SBU) The financial crisis appears to be providing a greater 
sense of urgency to pursue unfinished reforms -- several supported 
by USG grants and technical assistance -- with greater vigor. 
Recent initiatives in the Philippine Congress include a proposed 
review of foreign ownership limitations in the Philippine 
Constitution, which members of the government?s economic team vowed 
to support.  President Arroyo?s call for an ASEAN+3 summit shows 
commendable regional initiative in confronting a global problem. 
End Comment. 
 
Kenney