LITTLE ECONOMIC IMPACT SO FAR FROM ARROYO'S WOES

UNCLAS SECTION 01 OF 03 MANILA 003045 SIPDIS SENSITIVE STATE FOR EAP/PMBS, EAP/EP, EB/IFD, EB/TPP/BTA/ANA STATE PASS USTR FOR BWEISEL, DKATZ AND JMURPHY STATE PASS USAID AND OPIC USDA FOR TERPSTRA, SHEIKH TREASURY FOR OASIA FOR AJEWELL USDOJ FOR MCRAWFORD USDOC FOR 4430/ITA/MAC/DBISBEE TREASURY FOR OASIA E.O. 12958: N/A TAGS: ECON EFIN EINV PGOV RP SUBJECT: LITTLE ECONOMIC IMPACT SO FAR FROM ARROYO'S WOES REFS: A) Manila 2993 B) Manila 2970 C) Manila 2670 D) Manila 2475 E) Manila 2167 SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION ¶1. (SBU) Summary. The Peso broke the PhP56/$1 mark on June 29, but has marginally recovered. The stock market continued to slide lower on concerns about the President's future, but most local analysts said that the situation remains manageable. The Philippine business community appears to be sticking with its support of President Arroyo, but remains cautious about the future due to lingering concerns about corruption and its impact on business. Agriculture Secretary Yap announced his resignation on June 30 in the wake of tax evasion charges filed against him. His departure should have no serious political or economic ramifications, as would potentially the departure of economic stars in the Cabinet such as Finance Secretary Purisma, who remains a cheerleader for the Administration. End Summary. -------------- Markets Nervous, But Holding -------------- ¶2. (U) Despite GRP efforts to assure the business sector that the Arroyo Administration remains committed to economic reforms, the financial markets remained jittery after the President's announcement at a business forum on June 29 that her husband would leave the country (ref a). Amid the political drama, the local currency hit an intra- day low (and closing level) of PhP56.05/$1 on June 29, the weakest recorded since January 12. At that rate, the peso had depreciated by 0.8% (PhP0.54) in two days, from June 27's closing rate of PhP55.51/$1. The peso fell further to a low of PhP56.26/$1 in morning inter-bank trades on June 30 (not too far off the Php56.45/$1 historical low recorded before the May 2004 elections) before recovering to PhP56.00/$1 by day's end, reportedly because of Central Bank intervention. On July 1, the peso opened trading at PhP56.05/$1, but recovered to end the day's trading at PhP55.87/$1. ¶3. (U) As for other indicators, the Philippine Stock Price Index (Phisix) closed July 1 at 1,895.25, down 3.48% from June 27. On the downtrend for several months, domestic interest rates also have come under pressure these past three weeks. Despite excess financial market liquidity and perceptions of improved fiscal prospects, securities dealers jacked up bid rates for the Government's treasury bills, particularly for the longer-term papers, prompting the Government to reject most of the bids offered. ¶4. (SBU) Foreign exchange and securities traders and analysts commented that the markets are understandably nervous but described the situation as "still manageable." While more investors may opt to stay on the sidelines until the political dust settles, some observers noted that the markets were not yet seeing a massive sell-off of peso assets, probably due to improved economic fundamentals and especially efforts to address the public sector's chronic budget deficit. The business community remains concerned about the lingering effect of corruption on the economic climate, according to observers. ¶5. (SBU) However, analysts warned that the economic situation could worsen should protracted political controversies seriously put to question the Administration's ability to pursue bold reforms and move the economy forward. Already, the opposition and militant cause-oriented groups have again begun to lambast as "anti- poor" the amended Value Added Tax law (ref e),which took effect on July 1, further to fuel furor against the Arroyo presidency and urge her to resign. Several opposition members of Congress have petitioned the Supreme Court to halt the implementation of the new VAT law, claiming that it amounts to an unconstitutional delegation of taxing authority to the Executive. Although Finance Secretary Cesar Purisima has stressed repeatedly that the President will indeed use the standby authority granted by the law to increase the VAT rate by two percentage points to 12% in 2006 to secure fiscal stability, observers have expressed doubt as to whether the President will be able to do so as her popularity weakens. -------------- Purisima Remains Optimistic -------------- ¶6. (SBU) At the Business Leaders Forum on July 29, Secretary Purisima focused on the positive developments in SIPDIS the Philippine economy and reiterated support for the President and her commitment to economic reforms. Urging that the Philippines must "get out of the cycle of deficit it has been in," he stated that the country could balance its budget earlier than its target date of 2010 through a series of "front-loaded deficit reductions." ¶7. (U) Purisima also emphasized the importance of recent efforts to prosecute tax evaders, which, if sustained, will "show people that it is no longer business as usual." Purisima also emphasized that the Department of Finance would begin to take "a closer look" at the country's government-owned and controlled corporations (GOCCs), specifically the National Food Authority; the GOCCs contributed significantly to the public sector deficit, he stressed. Purisima also stated that an ambitious privatization scheme would leave the Government "more freedom to invest in infrastructure," paving the way for a brighter future for the country. -------------- - New Central Bank Governor Promises Consistency -------------- - ¶8. (SBU) Central Bank Governor Amando Tetangco, who officially assumed his post as the new governor of the Philippine Central Bank on July 1 but has been acting governor for several weeks, also delivered a positive message about prospects for the Philippine economy at the July 29 event, stressing that his bank's policy direction would emphasize "continuity and consistency." While noting that inflation in the Philippines had continued to rise over the last several months (due mainly to increasing world oil prices and the increasing transportation and energy prices that follow suit),Tetangco stated that the Central Bank's policy rates had remained steady since April 2005 (at 7% for borrowing and 9.25% for lending). The Central Bank forecasts that inflation rates will average 7.9% for 2005 and 7.5% for 2006. Tetangco said the Bank's international reserve levels have recently risen to historical highs and the balance of payments yielded a surplus of $1.6 billion during January-May 2005. He downplayed the negative implications of high Philippine debt levels for the future of the country's economy, emphasizing that 90% of the country's foreign debt is made up of medium to long-term loans, nearly half to bilateral and multilateral lenders and carrying concessional interest rates. -------------- Santos Projects Trade Growth -------------- ¶9. (SBU) According to Secretary of Trade and Industry Juan Santos, recent trends reflected a "return of confidence" in the Philippine economy. Philippine exports grew by 9.3% last year; Santos is aiming for a 10% increase this year. (Note: January-May 2005 exports were up 4.8% year-on-year. End note) Santos acknowledged that electronics dominate the RP's exports (accounting for some 70% of total exports),but stated that the country is attempting to shift its manufacturing focus toward highervalue-added goods. Santos emphasized the importance of investments in the call center industry but noted that other forms of business process outsourcing such as automotive design and computer graphics could also attract new investors to the country. -------------- Agriculture Secretary Resigns -------------- ¶10. (U) Agriculture Secretary Arthur Yap resigned on June 30, saying that tax evasion charges recently filed against him and his father left him no choice. Yap, while maintaining his innocence, admitted that staying on while the case is heard would create a "no-win" situation for both him and President Arroyo because, even if cleared of the charges, the opposition would claim it is only a GRP "whitewash." He insisted that his resignation was not in response to mounting pressure on President Arroyo to step down. According to media reports, Arroyo is also contemplating additional cabinet changes. Yap announced that he will remain in his job until Malacanang names a successor. -------------- Comment -------------- ¶11. (SBU) Economic fundamentals have not changed significantly in the wake of the President's recent difficulties, and the business community appears to remain mostly supportive of her, likely because there are no alternative economic plans from other potential leaders that would better address business concerns. Business leaders place their confidence less in Arroyo than in Purisima and the other members of her economic team, but doubt is growing about the GRP's ability to implement its economic reform package because of the President's political baggage. Departure of any of these key economic players would probably foretell a death knell for the Arroyo Administration, at least from the standpoint of the influential business community. Yap and the others rumored to be part of the potential cabinet reshuffle are not/not seen are among those key players; his (and potentially their) departure should not affect the business and economic environment. Mussomeli