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UNCLAS SECTION 01 OF 04 MANILA 000038 
 
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 ETRD ECIN RP CN XE XD
SUBJECT:  Philippines 2009 Economic Wrap-up and 2010 Way Ahead 
 
REFS: A) 09 Manila 2281 B) 09 Manila 1737 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1.  (SBU) Summary:  The Philippine economy is poised for moderate 
growth in 2010 after avoiding most of the effects of the world 
recession in 2009.  Although buffeted by two extremely damaging 
storms in the final trimester, the Gross Domestic Product (GDP) 
expanded overall in 2009, while neighboring economies in the region 
contracted.  The Philippine stock market's main index grew over 60 
percent, foreign reserves are at a record high; foreign direct 
investment is rebounding, the local business community continues to 
build and invest, and remittances are increasing.  The banking 
sector is sound, and the government's fiscal deficit is manageable. 
Spending on the May 2010 presidential elections is also set to boost 
the economy and create jobs.  However, inefficiency, corruption, 
misdirected government and private spending, high population growth, 
and other impediments will continue to constrain growth and 
prosperity, and will inhibit efforts to reduce poverty for the 
foreseeable future.  End Summary. 
 
 
Economy Growing Despite Natural Disasters 
----------------------------------------- 
 
 
¶2.  (SBU) The Philippine Gross Domestic Product (GDP) grew 
approximately 1.4 percent in 2009, and will more than double that 
rate in 2010, according to World Bank and Asian Development Bank 
(ADB) estimates.  The Philippines avoided most of the effects of the 
global financial crisis because it is less dependent on 
international trade than other economies in the region, and did not 
suffer unduly when demand from the United States and other trade 
partners contracted in 2009.  These growth figures take into 
consideration the damage caused by two large storms in September and 
October, which resulted in USD four billion in losses and reduced 
2009 GDP by nearly half a percentage point.  Poverty, which already 
afflicts one-third of the Philippines' 90 million people, increased 
by one half of one percent due to the damage caused by the storms. 
However, the energetic response to these disasters by individual 
Filipinos, as well as domestic and international charities, donor 
nations and multilateral development banks resulted in a large 
injection of cash into the economy that helped cushion the economic 
downturn and promote reconstruction of houses, farms and businesses. 
 The World Bank estimates that growth in 2010 could actually exceed 
its pre-disaster estimates, largely due to spending on 
disaster-related recovery and reconstruction. 
 
Budget Deficit Growing But Manageable 
------------------------------------- 
 
¶3. (SBU) Another result of the natural disasters is a 
larger-than-anticipated 2009 budget deficit.  A fall in imports 
reduced collections by the customs bureau, and revenue-eroding 
measures passed by Congress, such as tax breaks for minimum-wage 
earners and businesses affected by the storms, further cut 
government income.  Special tax exemptions for favored sectors or 
projects added to the government's revenue woes, and unexpected 
spending on rescue and relief efforts pushed the government further 
into the red.  However, the overall deficit, when fully tabulated, 
is unlikely to exceed four percent of GDP in 2009, which is 
considered manageable by most macroeconomists and is substantially 
less than the fiscal deficits of the United States and Japan, which 
were approximately 10 percent of GDP in 2009. 
 
Good Financial Management 
------------------------- 
 
¶4. (SBU) The Philippine government (GRP) has financed its deficit by 
taking advantage of low-interest borrowing from world capital 
markets flush with cash.  It has a debt portfolio balanced between 
short-, medium- and long-term obligations, which has helped it avoid 
liquidity crises by spreading out repayments.  Its debt offerings 
have been oversubscribed on a regular basis, which allows it to pay 
lower interest rates to the many investors bidding for its bonds. 
The government, expecting interest rates to rise in 2010, has likely 
saved millions by pre-financing much of 2010's anticipated budget 
shortfall with this low-cost domestic and foreign capital.  Finance 
Secretary Teves, who the Financial Times Group named best finance 
minister in Asia in 2008, has also obtained concessional loans from 
 
MANILA 00000038  002 OF 004 
 
 
the Asian Development Bank to finance infrastructure projects, and 
was the first to take advantage of the ADB's counter-cyclical or 
stimulus spending loan offering in 2009.  The Philippine Central 
Bank is conservatively managed and well regarded, and although it 
suffered currency exchange losses from its moderate interventions in 
the market, it increased its investment profits and reduced expenses 
in 2009.  It is expected to maintain relatively low interest rates 
through most of 2010, which will further stimulate the economy by 
reducing startup costs to new entrepreneurs and allowing lower-cost 
expansion of existing businesses. 
 
Campaigning and Other Growth Engines 
------------------------------------ 
 
¶5.  (U) Spending on the May 2010 presidential and congressional 
campaigns has already begun, and will provide an estimated half 
point boost to the GDP by increasing consumption and providing jobs. 
 The three major presidential candidates are seen as relatively 
pragmatic in terms of economic policy, which has helped business 
sector and investor confidence.  Several economic sectors are 
booming, such as business process outsourcing (BPO), which grew over 
20 percent and employs hundreds of thousands of mostly young 
Philippinos in call centers.  Banking and financial institutions 
have increased profits, and growth in construction and real estate 
is driven in part by remittances from overseas Philippine workers, 
which grew by about four percent in 2009 and are expected to show 
even stronger growth in 2010.  A new law allowing the establishment 
of Real Estate Investment Trusts (REITs) will attract additional 
investors into the housing market, and offers incentives to spur 
construction of low-cost housing. 
 
Trade Down, But Showing Signs of Recovery 
----------------------------------------- 
 
¶6.  (U) The value of exports and imports of goods dropped between 20 
and 30 percent in 2009.  Part of the reduction in imports was caused 
by lower world oil prices, but the main drag on trade was weak 
global demand for the Philippines' primary exports of semiconductors 
and electronics.  However, industry associations reported moderate 
growth in this sector by the end of the year due to renewed demand, 
and some analysts see growth up to 10 percent in 2010.  Texas 
Instrument's plant in Baguio is ramping up chip production and may 
increase sales enough to fill the gap in export value created by the 
mid-year closure of an Intel chip plant.  Its neighbor in Baguio, 
U.S. company Moog Systems, is expecting to hire more workers as 
demand for its aviation hydraulic/electrical components increases 
with the rollout of the Boeing 787. 
 
Stock Market Rebounds; Investment Climate Improves 
--------------------------------------------- ----- 
 
¶7.  (SBU) The Philippine Stock Exchange index -- which closed down 
48% in 2008 -- gained 63% in 2009.  Foreign portfolio capital flows 
reversed from a severe outflow in 2008 to a moderate inflow in 2009 
- a turnaround that may top one billion dollars.  Many investors, 
both foreign and domestic, seeking higher yields than in U.S. or 
European markets, earned substantial profits in Philippine stocks 
and bonds.  Although investment is still hampered by constitutional 
limitations on foreign ownership of businesses, and judicial 
processes are torturously slow and subjective, the overall 
investment regime has improved.  Congress passed a modern renewable 
energy law that offers investment incentives; protection of 
intellectual property rights improved incrementally; and the Central 
Bank eased procedures for businesses remitting profits out of the 
country.  The government has also responded to Embassy efforts to 
mediate several investment disputes involving U.S. companies, and 
quickly resolved a major case in the power generation sector late in 
the year.  Foreign direct investment, although down for the year, 
continues to flow into dynamic sectors, such as power generation, 
transmission and distribution, BPOs, real estate and consumer goods. 
 
 
ASEAN FTAs Enter Into Force 
--------------------------- 
 
¶8. (U) The Philippines is one of six members of the Association of 
Southeast Asian Nations (ASEAN) that moved towards free trade by 
eliminating duties on more than 99 percent of products on January 1, 
¶2010.  On the same date, the ASEAN-China Free Trade Agreement, and 
the ASEAN-Australia-New Zealand Free Trade Agreement entered into 
 
MANILA 00000038  003 OF 004 
 
 
full force.  The new free trade area will rival the European Union 
and the North American Free Trade Area in terms of value and surpass 
those markets in terms of population.  The effects of these 
agreements will not likely be apparent for months or even years, but 
they will certainly increase trade, lower prices to consumers, and 
increase business opportunities throughout the region.  However, 
Philippine manufacturers will have to compete with low-cost 
producers in China and elsewhere in the region, and are already 
discussing the use of anti-dumping rules and other trade remedies to 
reduce expected competition.  These agreements may also reduce the 
competitiveness of U.S. agricultural products in the Philippines and 
the region (reftel B). 
 
Not All News from 2009 Was Good 
------------------------------- 
 
¶9.  (SBU) The long-term trend is for manufacturing to move out of 
the Philippines towards lower-cost countries such as Vietnam, 
Indonesia and China, but this is a gradual movement that will occur 
over decades.  However, the global financial crisis/world recession 
accelerated this process in 2009.  Intel closed its semiconductor 
plant after 35 years in-country, and Goodyear also shut its tire 
plant after 53 years of manufacturing in the Philippines.  The ADB 
estimates that, besides the half percent overall poverty rate 
increase in 2009 caused by natural disasters, the country's slow 
long-term rate of poverty reduction has brought about a net increase 
in the absolute number of poor people since 1990. The Philippines 
also declined in several competitiveness indexes, with respondents 
complaining about deficient infrastructure and corruption.  In 
addition, new barriers have cropped up in agricultural trade, 
affecting U.S. exports.  The sudden emergence of price controls on 
fuel and food reminded entrepreneurs that the government does 
intervene in markets in ways that affect profits and undercut 
investor confidence.  And finally, companies continue to become 
entangled in investment disputes.  The resultant judicial processes 
are costly and slow-moving, with officials often susceptible to 
political or economic influence. 
 
 
Prospects for 2010 
------------------ 
 
¶10. (SBU) For the short term, the key players in the Arroyo 
Administration's economic team, such as the secretaries of Finance, 
Agriculture and Trade, have told us they will stay in office until 
the May elections.  This may help restrain government spending 
intended to influence voters during the elections, and will likely 
mean sensible management of the economy for the first trimester. 
The Central Bank, which is apolitical, will remain under the same 
management and will continue its cautious approach of containing 
inflation and intermittently intervening in the market to prevent 
wild fluctuations in exchange rates.   Portfolio capital will 
continue to buoy the stock and bond markets, although yields will 
not match those of 2009.  Exchange rates are likely to remain 
stable, especially if the U.S. dollar remains weak, and remittances 
will continue to offer a steady flow of foreign exchange and boost 
consumption.  The Millennium Challenge Corporation reselected the 
Philippines as eligible for a compact in 2010, which could boost 
confidence and result in an inflow of several hundred million 
dollars dedicated to infrastructure and revenue management if an 
accord is reached.  The possibility of reaching a peace accord with 
rebels in the resource-rich island of Mindanao would also create 
business opportunities and further improve investor confidence. 
Local business tycoons indicate they will continue investing in 
their own country, and significant development aid from multilateral 
development banks, non-governmental organizations and donor nations 
will continue to flow.  And finally, meteorologists say the El Nino 
weather phenomenon may result in fewer and weaker typhoons affecting 
the Philippines in 2010. 
 
Comment 
------- 
 
¶11. (SBU) Although there is a strong element of uncertainty to any 
economic forecast, there are enough indicators and trends to suggest 
that 2010 will be a relatively good year for the Philippine economy. 
 However, there remain many pitfalls that will continue to constrain 
growth.  Investor confidence, always precarious, could vanish 
quickly if political instability were to become widespread.  The 
volatile art of politics is closely entwined with economics in the 
 
MANILA 00000038  004 OF 004 
 
 
Philippines, so any growth in 2010 will be influenced greatly by the 
conduct and results of the elections, as well as the natural 
disasters that regularly afflict this archipelago.  End comment. 
 
 
Kenney