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DE RUEHML #2281/01 3042308
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O 312308Z OCT 09
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5600
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS IMMEDIATE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION IMMEDIATE
RHHMUNA/USPACOM HONOLULU HI//FPA//

UNCLAS SECTION 01 OF 03 MANILA 002281 
 
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:  Philippine Economic Update 
 
REFS: A) Manila 1192, B) Manila 1351 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1.  (SBU) Summary:  The government's economic team reports that the 
Philippine economy continues to grow. The balance of payments is in 
surplus; international reserves are at a record high; foreign direct 
investment is increasing; the banking system remains sound; and the 
stock market is rebounding.  The business sector, donor agencies, 
and other observers have expressed concern over longer-term 
constraints to growth and development.  The past year's food, oil 
and global financial shocks, as well as natural disasters, have 
likely pushed more Filipinos into poverty.  Shrinking fiscal 
resources will complicate efforts to boost growth and alleviate 
poverty, particularly for the new administration that assumes office 
after the May 2010 elections.  End Summary. 
 
 
Philippine Economy Holding Up 
----------------------------- 
 
¶2.  (U) On October 15, Cabinet secretaries from the government's 
economic team reviewed recent statistics, stressing that the country 
remains resilient and has reacted positively to signs of an emerging 
global recovery. 
The Philippine's Gross Domestic Product (GDP) grew 1% in the first 
half of 2009, which is within the government's current 0.8%-1.8% 
target growth range for the full year. 
Personal consumption and government spending spurred growth, making 
up for sluggish business investment.  Consumer spending, the 
Philippine economy's main demand driver, grew at a faster rate 
during the second quarter than in the first, aided by improved 
consumer confidence, slowing inflation, and the continued resilience 
of overseas worker remittances.  After an unimpressive first 
quarter, government spending accelerated markedly, with combined 
second-quarter government consumption and capital spending expanding 
26% in real terms over last year's levels. 
 
¶3.  (U) The service sector, which accounts for more than half of 
Philippine economic output, accelerated to 3% growth in the second 
quarter, spurred by improved performances in private services, 
notably business process outsourcing (BPO), finance, real estate, 
and government services.  Industrial output, down 2.5% year-on-year 
during the first quarter, declined by a smaller 0.3% in the second 
quarter as improved growth for the mining/quarrying, construction, 
and public utilities sub-sectors partially offset continued 
contraction (7%) in manufacturing output. 
 
 
Remittances Continue to Grow 
---------------------------- 
 
¶4.  (U) Overseas remittances have slowed from the double-digit 
growth rates of past years but have held up better than expected, 
supporting economic growth and the balance of payments. 
January-August remittances of $11.3 billion increased 4% over 2008's 
comparable period.  Though modest in U.S. dollar terms, when 
converted to pesos, it translates to 16% growth because of a fall in 
the exchange rate, and, subtracting out inflation, to 12% growth in 
real peso terms over 2008. 
 
¶5.  (U) Cumulative January-August 2009 merchandise exports were off 
30% from 2008's level, and electronics exports (which contribute 60% 
of annual export revenues) down by 32%.  However, the merchandise 
export drop has been slowing since April, with August's total 
exports down 21% year-on-year, the slowest decline posted since 
December 2008.  Officials of the Semiconductor and Electronics 
Industry Association of the Philippines (SEIPI) said they expect 
modest growth in their industry's exports during the fourth quarter 
due to improved demand and depleting global stocks. 
 
¶6.  (U) The Philippines merchandise import bill also contracted (31% 
as of August) which, combined with higher overseas worker 
remittances and income from the growing BPO sector, has kept 
pressure off the current account.  A smaller oil import bill (a 
combination of lower imported volumes and international prices) was 
a significant factor, as were lower imports of raw material for the 
electronics manufacturing industry. 
 
Investment Flowed out Last Year, Flowing in in 2009 
--------------------------------------------- ------ 
 
¶7.  (U) Foreign direct investments began improving during the second 
 
MANILA 00002281  002 OF 003 
 
 
quarter, pulling up cumulative January-July 2009 net inflows to $1.2 
billion, up nearly 34% from January-July 2008.  Central 
Bank-registered foreign portfolio capital (required for investors 
who seek to purchase foreign exchange from the banking system to 
remit profits) mustered $230 million in net inflows during the first 
nine months of 2009 - a significant turnaround from the $855 million 
in net foreign portfolio capital withdrawals posted during the first 
nine months of 2008. 
 
¶8.  (U) The balance of payments remains in surplus ($2.8 billion 
from January-August, exceeding the government's $1 billion full-year 
forecast).  The Central Bank's gross international reserves have 
risen to a record-high $42 billion as of September -- equivalent to 
eight months of merchandise and service imports and 3.6 times 
private and public sector debt payments due over the next twelve 
months.  The Philippines external debt remains manageable by 
international standards, with the combined outstanding obligations 
of the public and private sectors at 33% of GDP as of June 2009, 
compared to 34% of GDP as of mid-2008. 
 
 
Capitl Available, Bond Market Thriving 
-------------------------------------- 
 
¶9.  (U) Commercial banking loans expanded 6%, which is a slower pace 
than the double-digit growth rates of the past several years. 
Central Bank and banking sector officials stressed there is no 
liquidity/credit crunch and that reduced growth in bank loans is 
consistent with the economy's more tempered expansion.  They noted 
that a number of the country's major corporations also opted to take 
advantage of alternative sources of financing, particularly the bond 
market.  Corporate bonds floated from January-August totaled nearly 
200 billion pesos (roughly $48 billion), more than double the 
corporate bonds issued during the first eight months of 2008. 
 
¶10.  (U) The banking system's asset quality indicators remain stable 
at pre-global financial crisis rates of between 4%-5%.  According to 
latest estimates, aerage non-performing loan and no-performing 
asset ratios stood at 4.2% and 4.9%, respectively, as of end-August 
¶2009. 
 
 
Stock Market Rebounds 57 Percent 
-------------------------------- 
 
¶11.  (U) The Philippine Stock Exchange index -- which closed down 
48% in 2008 from 2007 -- has been on an upward trajectory since 
April 2009, reacting positively to improvements in the Philippine 
and global economies.  As of October 15, the index was up 57% from 
the start of the year. 
 
 
Climate Change: Dark Clouds Hovering 
------------------------------------ 
 
¶12.  (U) President Gloria Macapagal-Arroyo noted that flooding, 
destruction, and displacement caused by two consecutive typhoons 
(Ketsana and Parma) just weeks before the economic briefing -- as 
well as by 2008's Typhoon Frank from which the country had yet to 
fully recover -- required coordinated rehabilitation efforts.  She 
announced the creation of a multi-sector National Reconstruction 
Commission, which she tasked with coordinating an international 
pledging session.  Arroyo requested donor grants (over concessional 
loans and commercial borrowing) to avoid adding to the fiscal 
deficit and debt and debt-service ratios, noting that "the 
Philippines is a victim of climate change, not a culprit" and 
contributes "less than one percent to global warming." 
 
¶13.  (U) President Arroyo also signed the "Climate Change Act of 
2009" into law (on October 23), authorizing the creation of a 
Climate Change Commission under the Presidency.  The law's objective 
is to factor climate change into policy formulation, development 
planning, and poverty reduction programs.  She thanked Congress for 
supporting a 12 billion peso (roughly $255 million) supplemental 
budget for 2009 and called for passage of a pending "Disaster Risk 
Reduction and Management" bill. 
 
 
Fiscal Sector: A Brewing Crisis? 
-------------------------------- 
 
¶14.  (SBU) Consecutive external shocks (the food, oil and global 
financial crises) forced the national government to postpone its 
 
MANILA 00002281  003 OF 003 
 
 
goal of balancing the budget from 2008 to 2013(Ref B).  Senior 
officials from the Philippine Bureau of Treasury told econoffs they 
expect the fiscal deficit to exceed the 250 billion peso (3.2% of 
GDP) programmed ceiling for the year -- with the actual deficit 
hovering at about 300 billion pesos (3.5% of GDP) by year's end -- 
reflecting revenue collection shortfalls and added pressures from 
disaster relief and rehabilitation 
 
¶15.  (SBU) The tax-to-GDP ratio has stagnated at about 14% in recent 
years and is running at 13.5% thus far in 2009, because of recent 
revenue-eroding tax measures (tax relief for minimum wage and 
individual income earners and a five percentage point reduction to 
30% of the corporate income tax rate), lower-than-expected tariff 
collections from a sharper-than-expected import slump, and 
persistent revenue collection problems.  Economists warn that weak 
revenues and ballooning deficits caused by stimulus spending could 
limit future access to low-cost financing, constrain economic 
growth, and undermine macroeconomic stability in the medium to long 
term.  Revenue-raising measures being pushed by the Department of 
Finance include excise tax reforms for liquor and tobacco and fiscal 
incentives rationalization.  However, these face increasing 
resistance in the Philippine Congress this close to an election 
year. 
 
Businesses, Donors Call for Longer-Term Growth Focus 
--------------------------------------------- ------- 
 
¶16.  (U) During the annual Philippine Business Conference organized 
by the Philippine Chamber of Commerce and Industry, investors and 
international donors acknowledged the economy's ability to weather 
the impact of external shocks in the short-term but expressed 
concern over the economy's long-term prospects.  They noted the 
country's efforts to improve the business/investment climate had 
lagged that of its neighbors and called for aggressive efforts to 
improve Philippine competitiveness.  The Philippines dropped from 
71st place to 87th of 133 countries in the World Economic Forum's 
2009-2010 Global Competitiveness Report; from 141st to 144th among 
183 countries in the World Bank-International Finance Corporation's 
2009 Doing Business Report; and from 40th to 43rd among 57 countries 
in the International Institute for Management Development's 2009 
World Competitiveness Yearbook.  The country's 15% investment-to-GDP 
ratio lags the 20%-40% ratios of most Southeast Asian neighbors. 
 
Comment 
------- 
 
¶17.  (SBU) There is still broad agreement that the government's 
0.8%-1.8% targeted growth rate for 2009 remains achievable despite 
the recent typhoons.  Growth continues to be stimulated by overseas 
remittances, and disaster relief and rehabilitation spending will 
also help boost the economy.  Concern has turned to longer-term 
growth and employment prospects for a country where a third of the 
population is subsisting below poverty thresholds.  Economists 
estimate that the economy should achieve and sustain 7% to 8% annual 
growth to make significant inroads against poverty, given the 
Philippines' rapidly growing population.  Expanding the economy with 
limited fiscal resources and climate change-related threats will be 
a major challenge for the new administration that assumes office in 
¶2010. 
 
Kenney