VZCZCXRO7636
OO RUEHCHI RUEHCN RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHPB
DE RUEHML #0378/01 0510834
ZNR UUUUU ZZH
O 200834Z FEB 09
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3269
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS IMMEDIATE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RHHMUNA/USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 03 MANILA 000378 
 
SENSITIVE 
 
SIPDIS 
 
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 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ECIN RP CN XE XD
SUBJECT:  Philippines: Holding Up But Pain Increasing 
 
REFS:  A) 08 Manila 2532, B) 08 Manila 2725, C) 08 Manila 2740, D) 
Manila 0108 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1.  (SBU) Summary:  The Philippines is unlikely to slip into 
recession in 2009 (Refs A and B).  However, the global financial 
crisis is inhibiting capital formation, depressing trade, dampening 
tourism, and eliminating jobs in some sectors.  The Philippine 
Central Bank cut interest rates again in January and the 
government's budget deficit will increase.  The Philippines will 
weather the crisis better than many of its neighbors, but further 
reforms are needed to stage and sustain the strong post-crisis 
recovery required to generate jobs, boost investments, and alleviate 
poverty (Ref C) -- which remains the focus of U.S. development 
assistance and policy advocacy here (Ref D).  End Summary. 
 
GDP Musters 4.5% Fourth-Quarter 2008 Growth 
------------------------------------------- 
 
¶2.  (U) Philippine GDP growth slowed to 4.6% in 2008 (a six-year 
low) from 7.2% in 2007 (a three-decade high).  The economy's 4.5% 
year-on-year expansion during the fourth quarter surpassed most 
expectations.  Personal and government consumption grew 4.5% and 
4.7% in real terms, respectively.  Construction spending grew at 
11.6%.  However, weak investments and exports were a drag on 
economic growth.  Fourth-quarter investments in capital equipment 
and inventories declined by 7.4% and 84.5%, respectively; and 
combined merchandise and service exports contracted by 7.5% in real 
terms. 
 
¶3.  (SBU) The International Monetary Fund recently reduced its 
Philippine growth forecast to 2.25% as have a number of 
credit-rating agencies in line with more pessimistic global economic 
growth projections.  Philippine economic planning officials 
privately admit that the government may need to review its current 
3.7%-4.7% growth target for 2009 in view of increasingly gloomy 
global economic prospects, but they still expect growth to be higher 
than the IMF forecast. 
 
Banks' NPL Ratio Lowest Since Asian Crisis 
------------------------------------------ 
 
¶4.  (U) The Central Bank reported recently that the commercial 
banking system (which makes up more than 90% of aggregate banking 
sector resources) recorded a 3.8% non-performing loan ratio as of 
end-November 2008, the lowest since the ratio peaked at 18.8% in 
October 1981. 
 
Overseas Deployment Holding, But Prospects Cloudy 
--------------------------------------------- ---- 
 
¶5.  (U) The Philippine Overseas Employment Agency (POEA) reports 
that overseas deployment of Philippine workers grew nearly 28% to 
more than 1.3 million during 2008.  Fourth-quarter deployment 
expanded 9.7% year-on-year despite the troubled external 
environment, supporting the steady flow of remittances that helped 
prevent a sharper slowdown in domestic demand and overall economic 
growth.  Deployment in January 2009 increased 18% year-on-year. 
Encouraged by this relative resilience and the nearly 480,000 active 
job vacancies as of mid-February (more than a quarter for 
professional, technical and managerial workers), the Agency remains 
hopeful about reaching its one million annual deployment target in 
¶2009.  The officials estimated crisis-related overseas job losses at 
less than 5,500 thus far out of the more than four million Filipino 
contract workers abroad, with nearly 80% of the lost jobs 
representing retrenchments by electronics and export manufacturing 
firms in Taiwan.  There are reports that some overseas workers are 
settling for lower pay/benefits to avoid lay-offs.  Although 
full-year 2008 overseas workers' remittances expanded by 13.7% to a 
new record high $16.4 billion (10% of GDP), fourth quarter inflows 
slowed to 4.6% growth year-on-year and to only 1% growth in 
December.  There are down-side risks to the government's current 
6%-9% remittance growth projection for 2009, depending on evolving 
global developments, but officials currently see flat growth as the 
worst case scenario and remain confident that workers' remittances 
will muster some expansion this year due to the deployment of 
higher-skilled Filipinos. 
 
Hefty Drop In Exports and Imports 
--------------------------------- 
 
¶6.  (U) In December, total export revenue plunged a record 40.4% 
 
MANILA 00000378  002 OF 003 
 
 
year-on-year, led by a 47.6% year-on-year drop in receipts from 
electronics shipments (which contribute nearly two-thirds of annual 
Philippine exports).  Full-year 2008 exports declined 2.9% from 
2007, pulled down by a weak fourth quarter performance that saw 
October-December 2008 export receipts drop 22.5% and electronics 
exports decline by 27.7% from the third quarter of 2007.  Low 
local-value-added (estimated at 30%) of electronics manufacturing 
here means that even this dramatic fall in exports has a less dire 
impact on the domestic economy. 
 
¶7.  (U) Cumulative January-November import payments increased 5.6% 
year-on-year, although the import bill dropped significantly 
year-on-year in October (11.1%) and plunged by 31.5% in November 
(the sharpest decline in over two decades - December figures are not 
yet available).  Although weakening imports will temper balance of 
payments pressures from sputtering exports and investment flows, 
they signal weakening economic activity.  Excluding oil/fuel (where 
price effects drove down imports), November 2008 import payments 
still fell by a steep 29% from November 2007, suggesting escalating 
uncertainties on business sentiment and local and external demand 
expectations.  Imports of raw materials and intermediate inputs 
(down 32.8%) led the decline, with inputs for the electronics sector 
dropping by more than 50% year-on-year.  November imports of capital 
equipment and consumer goods also declined by 29.3% and 6.7% 
year-on-year, respectively. 
 
Emerging Pain for Tourism Industry 
---------------------------------- 
 
¶8.  (U) Foreign tourist arrivals -- up 8.7% in 2007 - managed 1.5% 
growth to 3.1 million in 2008 despite the twin shocks of high oil 
prices and the global financial crisis.  While January-July 2008 
foreign visitor arrivals increased by more than 6% from 2007's 
comparable period, foreign visitors declined by low single-digits 
during the months of August, September and October; and, as the 
global financial crisis escalated, contracted by 12.3% in November 
and 6.5% in December (for a combined November-to-December decline of 
nearly 9% year-on-year).  The Philippine national income accounts 
show that foreign demand for tourism-related services tumbled some 
35% year-on-year in real terms during the second half of 2008 -- 
swamping the 7% real growth rate recorded during the first semester. 
 Tourism services' share of full-year GDP declined from 3.4% in 2007 
to 2.8% in 2008.  Business people report that vacancy rates have 
doubled to around 40% in major hotels in Manila as businesses seek 
to save on travel expenses and conserve capital. 
 
Softening Labor Market 
---------------------- 
 
¶9.  (U) Pressures on the labor market have begun to emerge. 
According to Philippine Labor Department officials, businesses 
operating here have laid off some 40,000 workers since October 2008, 
while putting another 33,000 on shorter work hours.  On January 30, 
the Labor Department issued guidelines on the adoption of flexible 
working arrangements (i.e., compressed workweeks, temporary 
reduction in workdays, rotation of workers, flexible holiday 
schedules, etc.) as a response to the global economic downturn.  A 
number of bright spots remain, led by still promising employment 
prospects in the business process outsourcing industry, which 
expects to generate at least 100,000 new jobs this year.  Citing 
findings from a recent international survey, an official from the 
Philippine office of a multinational recruitment company also told 
the press recently that many companies operating in the country 
currently still plan to hire at the managerial/professional levels 
and that firing rates are still relatively low -- better than the 
survey results in, among others, Singapore, China and India. 
Although net job creation may decline from the half million 
positions created in 2008 and exert upward pressure on employment 
and underemployment rates, many here still expect positive net job 
generation this year. 
 
Further Policy Rates Cut and Deficit Spending 
--------------------------------------------- 
 
¶10.  (U) For a second consecutive month, the Philippine Monetary 
Board (the Central Bank's policy-making body) cut interest rates by 
50 basis points during its January 29 meeting -- a total reduction 
of 100 basis points since December.  Officials hinted that 
decelerating inflation (7.1% in January 2009, a ten-month low) will 
provide room for further monetary easing.  The Monetary Board -- 
which doubled resources for the Central Bank's rediscounting 
facility to 40 billion pesos ($850 million) last November -- further 
increased the rediscounting budget to 60 billion pesos ($1.3 
 
MANILA 00000378  003 OF 003 
 
 
billion) in mid-February. 
 
¶11.  (U) Department of Finance Secretary Margarito Teves also has 
hinted in a number of recent forums that the government may raise 
its programmed deficit ceiling even further from 1.2% of GDP -- to 
as much as 2% of GDP -- to prevent downward pressure on revenues 
from compressing the planned 14% year-on-year expansion in the 2009 
budget. 
 
¶12.  (SBU) In January, the Economic Planning Department unveiled a 
330 billion pesos (roughly $7 billion) "national resiliency program" 
stimulus package.  Only some 40% of that amount actually represents 
new crisis-response commitments, and we assess that most of those 
commitments are smoke and mirrors rather than actual new outlays. 
Key presidential economic advisor Joey Salceda told EconCouns that 
he advised the President to "look like you are spending, but do not 
spend."  In his view, the downturn is going to continue beyond 2009 
and the GRP does not have the resources to have a noticeable impact 
on the downturn via fiscal policy, so it is better not to expend the 
resources on such an effort. 
 
Comment 
------- 
 
¶13.  (SBU) Although the Philippines may be less affected than its 
more globally-integrated neighbors in the short-term, we remain 
concerned about the country's ability to post the strong post-crisis 
recovery needed to create jobs, attract investments, and ease 
poverty.  Although we continue to monitor the unfolding impact of 
the global financial crisis closely, Post assistance efforts remain 
focused on helping the Philippines overcome longer-term challenges 
to achieving high, sustainable, and inclusive growth by, among 
others, improving competitiveness and reducing barriers to trade and 
investment; improving revenue collection efficiency and public 
expenditure management; strengthening public sector institutions; 
and promoting transparency and good governance. 
 
Kenney