VZCZCXRO7019
OO RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHML #2532/01 3150551
ZNR UUUUU ZZH
O 100551Z NOV 08
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2366
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS IMMEDIATE
RHHMUNA/USPACOM HONOLULU HI//FPA//

UNCLAS SECTION 01 OF 03 MANILA 002532 
 
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:  PAIN NOW, WORSE PAIN LATER FOR THE PHILIPPINE ECONOMY 
 
REFS:  A) Manila 2340, B) Manila 2174, C) Manila 1050 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1.  (SBU) Summary:  The impact of the U.S. slowdown and global 
financial problems on the Philippines has so far been felt mostly 
through the fall of the stock market and of the value of the peso. 
Real economic pain, though, is coming.  Contacts in business and 
government tell us they are bracing for serious setbacks.  While 
there is no expectation of a banking or financial crisis, effects 
will likely include scaling down of production and layoffs in the 
electronics and semiconductor sectors, a significant slowdown in 
construction, and slower growth in remittances from Filipinos 
overseas.  Revenue challenges and increasing costs of borrowing will 
constrain fiscal policy.  Slower GDP growth will constrict 
employment opportunities and poverty will likely increase for the 
Philippines's rapidly growing population.  End Summary. 
 
Direct Exposure to Problematic Investments Limited... 
--------------------------------------------- -------- 
 
¶2.  (U) During the initial months of financial turbulence, the 
Philippines has been shielded from the most direct effects of 
financial troubles in the United States (Refs A and B).  Its 
relatively inward-looking banking and insurance industries have 
relatively little exposure to foreign financial instruments, 
generally placing over 90% of their loans and domestic investments. 
Reinforcing domestic financial stability were remittances from 
overseas Filipino workers, which have been growing by more than 17% 
year-on-year thus far and are expected to contribute more than $16 
billion to the Philippine economy during 2008. 
 
Stocks/Peso Suffer Most Obvious Setbacks... 
------------------------------------------- 
 
¶3.  (U) The more immediate and significant effects of the external 
financial shock have thus far been on the Philippine stock and 
currency markets.  For the first time since December 2006, the 
Philippine peso fell back to 49 pesos to U.S. dollar territory 
during the last week of October, after peaking at around 40 to the 
U.S. dollar this past February, prompting the Central Bank to dip 
into its $37 billion stock of reserves.  On November 7, the peso 
closed at 48.81, 3.9% weaker than at the end of September 2008 and 
18.2% weaker from the end of 2007. 
 
¶4.  (U) The local stock market has been volatile since 
mid-September.  On Monday, October 27, the Philippine Stock Exchange 
composite index experienced a 12.3% one-day decline to 1713.83, 
slipping to its lowest level in more than four years.  Stock 
Exchange officials imposed a mandatory 15-minute halt to trading in 
order to stop a wave of panic selling (a "circuit breaker" strategy 
agreed upon by stock exchange members should the index fall by 10% 
or more from its previous day's close).  The main index of the 
Exchange slipped by another 0.5% to 1704.41 on October 28, before 
rising in subsequent days in response to the Federal Reserve's 
announcement of an interest rate cut.  At the close of trading on 
November 7, the index stood at 1921.34, compared to 3621.60 at the 
end of 2007 (a 46.9% drop year-to-date).  The stock index has 
declined by more than 26% over the past six trading weeks alone. 
 
¶5.  (SBU) Though systemic risk seems manageable at this point, there 
may be specific companies or financial institutions where risk is 
concentrated.  One example may be the Lopez group of companies, 
owners of the electricity distribution company for Manila, which has 
high dollar-denominated debts.  Between devaluation of the peso and 
the decline of equity prices, the Lopez group has seen the value of 
the collateral for its loans fall to 10% of outstanding loans. 
 
...But Adverse Impact on Real Economy Emerging 
--------------------------------------------- - 
 
¶6.  (SBU) Though government statements about the impact of global 
developments on the Philippines have been predictably sanguine, 
businesspeople are nervous and pulling back.  Jaime Zobel de Ayala, 
one of the most respected businessmen in the country, told 
Ambassador that his companies are pulling back assets and minimizing 
risk.  Ernie Santiago, President of the industry association 
representing the semiconductor and electronics industries of the 
country (the largest concentration of U.S. investment) told Econoff 
that association members will be cutting back production in coming 
months.  They have scheduled a meeting of their members to discuss 
how to deal publicly with the significant layoffs participants in 
the industry will have to announce soon. 
 
 
MANILA 00002532  002 OF 003 
 
 
¶7.  (U) Contacts in the construction and tourism industries have 
also expressed to us their concern about their sectors. 
Construction, in particular, expects to be hit by cutbacks in the 
private sector and in government investment spending, as well. 
 
¶8.  (SBU) One of the President's most trusted economic advisors, 
Joey Salceda, told us that he expects the impact on the Philippines 
to be very significant.  He expects 2008 growth to fall by at least 
half it's 2007 three-decade high of 7.2 percent.  He predicts 
overseas worker remittances, which have seen growth approaching 20 
percent per year recently, will slow to single-digit growth over the 
coming year.  Increasing tax revenue will be challenging.  The 
"flight to quality" by investors has already begun to exert upward 
pressure on domestic and foreign interest rates and may tighten the 
Government of the Philippines's access to financing.  At a time when 
he would like to advise President Arroyo to spend and stimulate the 
economy, most likely there would be not choice but to cut spending 
on infrastructure. 
 
¶9.  (SBU) In a separate meeting, Finance Secretary Gary Teves agreed 
with Salceda's conclusions, stating that he is facing an 
increasingly tough budget cycle, with a number of factors 
exacerbating revenue pressures in an already challenging 
environment.  The corporate income tax rate (raised from 32% to 35% 
under the reformed value added tax law as a form of "burden 
sharing") falls to 30% in 2009.  A tax relief measure signed into 
law in response to high food and fuel inflation took effect in July 
2008, exempting minimum wage earners from income tax and increasing 
personal deductions. 
 
Impact on Poverty 
----------------- 
 
¶10.  (SBU) While lower prices for energy and food (the price of rice 
is now half what it was at its peak earlier this year) will provide 
some relief, poverty will certainly increase with the slowing of the 
economy.  Salceda predicted 310,000 job losses, including 50,000 for 
overseas Filipino workers, - about 1% of total employment in the 
Philippines.  Combined with more than 1 million new entrants in the 
Philippine job market annually, the unemployment rate could inch up 
to between 9%-10% over the coming year, from 7.6% currently. 
Measurements of poverty and hunger are both likely to increase as a 
result. 
 
Recent GRP Responses 
-------------------- 
 
¶11.  (U) On October 23, the Central Bank issued Circular 627, 
launching a dollar-denominated repurchase facility to help ease the 
"uneven distribution" of foreign exchange among banks and temper 
pressure on the peso.  On October 23 and 31, the monetary authority 
also issued Circulars 626 and 628, respectively, providing 
guidelines for financial institutions to reclassify certain 
financial assets from categories recorded at fair market value to 
categories recorded at amortized cost.  Allowing the 
reclassification of non-derivative financial assets conforms with 
revisions issued in October 2008 by the International Accounting 
Standards Board -- purposely to help promote confidence in financial 
markets by tempering potentially sharp deteriorations in balance 
sheets and incomes from the current global financial turbulence.  As 
additional regulatory relief, the Philippine monetary authority also 
allowed the reclassification, until mid-November 2008, of credit 
link notes and similar products underpinned by Republic of the 
Philippines bonds.  In response to emerging tightness in the 
interbank credit market, the Philippine Central Bank announced on 
November 7 a two percentage point cut in required reserve 
requirements effective November 14, and doubled resources under its 
rediscounting facility to 40 billion pesos (about $816 million). 
 
¶12.  (U) Salceda told us that, given limits to government spending, 
the government would attempt to prioritize strictly its budget for 
¶2009.  In particular, he saw increases focusing on agriculture, 
including more purchases of rice from farmers (buying high and 
selling low in order to subsidize both producers and consumers), 
education (scholarships) and healthcare.  He said that President 
Arroyo continues to support the Doha Round.  For his part, he said, 
"A new WTO deal would do more than all the bailouts in helping the 
real economy, as it would optimize the positive impacts of stimulus 
packages." 
 
Comment: Combating Poverty Still on the To Do List 
--------------------------------------------- ----- 
 
¶13.  (U) The Philippines is likely to weather the downturn 
 
MANILA 00002532  003 OF 003 
 
 
reasonably well, mostly thanks to the stabilization of the 
macroeconomic situation -- the most important accomplishment of the 
Arroyo government.  Nonetheless, the desperate poverty which 
afflicts about 45% of the population of this country (measured 
against the $2/day international poverty line) will worsen (Ref C). 
The need for selected reforms and for further opening of the economy 
to combat poverty will continue to grow. 
 
Kenney