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DE RUEHML #0145/01 0220934
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O 220934Z JAN 09
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2954
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCPDOC/USDOC WASHDC IMMEDIATE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION IMMEDIATE
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UNCLAS SECTION 01 OF 03 MANILA 000145 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EAP/MTS, EAP/EP, AND EEB/TPP 
STATE PASS USTR FOR BWEISEL AND KEHLERS 
STATE ALSO PASS USAID, OPIC 
TREASURY FOR OASIA 
USDOC FOR 4430/ITA/MAC 
 
E.O. 12958: N/A 
TAGS: ETRD EINV ECON PGOV PREL RP
SUBJECT:  Clark and Subic Freeports Sound but Slowing 
 
REF: a) Manila 85; b) Manila 86; c) 08 Manila 2740; d) Manila 108; 
e) Manila 103 
 
¶1. (SBU) Summary:  The former American bases at Clark and Subic Bay 
have become successful "special economic zones," a designation for 
areas with relatively attractive investment regulations.  They 
benefit from their excellent transportation facilities and the 
country's English-speaking, educated work force.  Shipyards and 
related services are the most important industries at Subic, while 
Clark hosts business process outsourcing, semiconductors, and 
tourism.  Clark and Subic are examples of the successes and 
challenges of the special economic zones.  Nationwide, the zones 
account for 80% of Philippine exports.  Their friendliness to 
capital has attracted billions of dollars of investment.  However, 
the integration of the zones into the global economy, the key to 
their success, also renders them far more vulnerable to the impact 
of the global economic slowdown than the rest of the Philippine 
economy.  They will see significant layoffs over the coming year. 
Further, there is some question whether they truly benefit the 
country in the long run.  End summary. 
 
From Ghost Towns to Export Centers 
---------------------------------- 
 
¶2. (U) When the United States closed the Clark Air Force and Subic 
Naval bases in 1991, many observers predicted that the two would 
become ghost towns.  Instead, the GRP enacted the Bases Conversion 
Development Act in 1992, turning the former bases into special 
economic zones with their own more attractive legal and more 
effective governance structures.  Clark, Subic, and other special 
economic zones now produce 80% of Philippine exports, and are the 
most important areas of Philippine integration into the global 
economy.  The most dynamic sectors of the country's economy dominate 
the zones, including business process outsourcing, tourism, 
shipbuilding and maintenance, garments, and electronics.  The zones 
remain sound and strong.  Foreign investors are overwhelmingly happy 
with how their businesses have been performing, and report that the 
zone authorities play a highly constructive role.  The industries in 
the zones draw on the Philippines' most significant advantages, 
including its English-speaking, educated labor force and the 
country's proximity to global manufacturing supply Fchains. 
 
¶3. (SBU) The praise of the special economic zones contrasts sharply 
with foreign investor criticism of investment possibilities in the 
rest of the Philippine economy.  The domestic economy in the 
Philippines is heavily protected, controlled by a handful of 
dominant and politically-connected families, and generally 
inefficient, marked in particular by low rates of both foreign and 
domestic investment.  There are serious legal and governance 
deficiencies (ref A and B). 
 
¶4. (SBU) Relative isolation from the global economy has sheltered 
most of the Philippine domestic economy from the global slowdown 
(ref C and D).  Domestic businesses will be affected by the slowing 
of growth in remittances as overseas Filipino workers lose their 
jobs, and by the reduction in consumption resulting from layoffs in 
the zones (see below) but otherwise, the domestic economy appears to 
be rather insulated from international economic trends. 
 
¶5. (SBU) Export zones like Clark and Subic, on the other hand, are 
extremely vulnerable to the current global recession.  In 
particular, manufacturing at Clark and Subic is pro-cyclical; i.e., 
it thrived in the economic boom of the first two-thirds of this 
decade and has been among the first to suffer from the falloff in 
worldwide demand.  While investors maintain that they are committed 
to the zones for the long term, they also expect the next year or 
two to be difficult, with projects delayed or canceled, and with 
many workers losing their jobs. 
 
Subic's Shipping Focus Endures 
----------------------------- 
 
¶6. (U) Subic Bay was not only the home of the U.S. Seventh Fleet, 
but also the location of the yards that carried out repairs to U.S. 
Navy vessels in the Pacific.  This legacy has led to the emergence 
of a number of businesses servicing world shipping.  Most notably, 
the Korean firm Hanjin Shipping, has built a major shipyard in Subic 
that employs 20,000. 
 
¶7. (SBU) Hanjin is Subic's largest employer, but has suffered from 
the impact of the downturn in shipping.  Lease rates for cargo ships 
have fallen to a fraction of what they were a year ago, causing 
 
MANILA 00000145  002 OF 003 
 
 
shipping lines to cancel orders for new ships.  A Hanjin engineer 
told EconOff that contracts to build seven ships have been canceled 
since September, and workers have been told to slow the pace of 
their work on four other vessels.  Over twenty undelivered ships 
without buyers now sit idle in Subic Bay.  The owner of a 
neighboring business told us that other Subic companies expect 
Hanjin to lay off up to half its workforce during 2009.  Many dry 
dock businesses have also sprouted around Subic, drawing on a 
workforce with experience in repairing U.S. Navy ships.  These 
businesses have been somewhat more resilient during the crisis, 
since ships that continue to sail must be serviced at least once 
every two years, but still have suffered as the volume of global 
shipping slides. 
 
Clark Airstrip:  Manila's New International Airport? 
--------------------------------------------- ------- 
 
¶8. (U) The former Clark runway is now the Diosdado Macapagal 
International Airport.  Given its relative closeness to Manila 
(about 50 miles) and room for expansion and the addition of new 
runways, the GRP intends to make Clark the new international airport 
for Manila within the next decade (ref E).  For the moment, Asian 
budget carriers dominate flights into Clark, but the director of the 
airport told us that a new passenger terminal and a high-speed light 
rail connection between Clark and Manila within five years will make 
it possible for Manila travelers to reach the airport in under an 
hour.  While the airport initially served businesses located in the 
Clark zone, such as the Asian hub of United Parcel Service (now 
slated to move to China), most of the airport's traffic now serves 
passengers from parts of Central Luzon outside the zone. 
 
Texas Instruments 
----------------- 
 
¶9. (SBU) In 2007, Texas Instruments announced a $1 billion 
investment in a new factory in Clark, its second large facility in 
the Philippines.  The construction has been proceeding on schedule, 
but it neared completion just as the world electronics market began 
to slow.  We understand that the company remains committed to its 
Clark factory, but in light of the slowdown, and the recent layoff 
of several hundred employees in Baguio, the opening of the Clark 
facility will be delayed. 
 
Korean Investors and Tourists Have a Central Role 
--------------------------------------------- ---- 
 
¶10. (SBU) Within the past two months daily flights have been 
introduced to Korean airports. In addition to Hanjin, several 
tourism projects, retirement properties, luxury hotels, nightclubs, 
English study programs, and golf courses in the zones cater to 
Korean visitors, especially during the winter months of November to 
February.  A manager at the Mimosa Country Club at Clark told us 
that the golf course has been practically empty this winter, as the 
depreciation of the Korean won by about one-third has kept most 
Korean visitors away.  The zone's Holiday Inn, a majority of whose 
clientele is Korean, has also suffered a spike in its vacancy rate. 
 
Export Zones Have Attracted Smugglers 
------------------------------------- 
 
¶11. (SBU) The smuggling into the Philippines via the tariff-free 
Subic Freeport was an important political issue during 2008. 
Petroleum and used automobiles were the most profile smuggled goods. 
 Zone officials told us that smuggling has declined sharply over the 
past few months as oil prices have fallen and an executive order 
banning the importation of used vehicles has been more rigorously 
enforced. 
 
A Single Clark/Subic Zone? 
-------------------------- 
 
¶12. (U) A new 58-mile expressway linking Subic, Clark, and the city 
of Tarlac opened in April 2008, cutting the travel time by road 
between the two economic zones from three hours to around 45 
minutes.  With that, there are initiatives to market the zones as a 
single magnet for business, with the intention of eventually 
unifying the zones.  The leadership of the zones has already created 
a joint "Clark Subic Marketing Agency" to promote the zones to 
investors, and they are investigating the idea of incorporating the 
land along the new expressway into the zones, and perhaps combining 
them. 
 
 
MANILA 00000145  003 OF 003 
 
 
Clark and Subic Feel the Recession 
---------------------------------- 
 
¶13. (SBU) Despite the prospects for growth, this year is likely to 
be difficult for Clark and Subic.  Businesses at both zones are 
feeling the effects of contracting demand, in the form of lost 
business and cancellation of existing contracts, particularly at the 
Hanshin shipyard in Subic.  According to the head of the Labor 
Department at the Subic Bay Metropolitan Authority, there were 800 
layoffs in Subic between October and December, and as of January, 
another 1,500 workers are on mandatory annual leave.  Other 
businesses have resorted to various measures to reduce labor costs 
while avoiding layoffs, such as suspending operations for up to two 
months this winter, or reducing workers to 30-hour weeks.  Operators 
of several American-owned businesses in the zones told us that their 
workforces embodied investments of time and training.  One manager 
explained that a majority of his workforce had been with his company 
since it opened in the Philippines in 1998, and that if he had to 
lay people off, it would take years to rebuild and retrain his 
workforce once the economy improved. 
 
Special Economic Zones: an Economic Model? 
------------------------------------------- 
 
¶14. (SBU) Clark and Subic illustrate both the success and the 
vulnerability of Philippine economic zones.  The firms that have 
invested there view their experiences as successes, and they intend 
to stay for the long term, as demonstrated by their desire to hold 
on to their skilled work forces despite the present slowdown.  The 
Clark and Subic zones remain fundamentally sound, and are examples 
of what the Philippine economy would be capable off if it were less 
closed and protected.  Clark and Subic have been hit by a downturn 
that was not of their own making.  While the next year to 18 months 
will be difficult, they look set to be successful over the long 
term. 
 
¶15. (U) As a 2008 World Bank Study (Rising Growth, Declining 
Investment: The Puzzle of the Philippines) noted, the 44 special 
economic zones were "conceived as a substitute for a good investment 
climate."  As such, they have been successful.  However, their 
impact on the Philippine economy has been, perhaps, less than 
originally expected.  The direct benefit to the Philippines as a 
whole seems to be mostly the consumption generated by the salaries 
paid in the zones, making these jobs somewhat analogous to those of 
overseas Filipino workers.  In effect, the zones may serve as yet 
another escape valve of the political economy of the Philippines 
(ref C), allowing the low investment, oligopolistic domestic economy 
to delay or avoid reform -- making a good investment climate for the 
country as a whole less necessary and less likely. 
 
Kenney