ARROYO CELEBRATES JULY 4TH, BUT SUPREME COURT

S E C R E T SECTION 01 OF 05 MANILA 003061

SIPDIS

DEPT FOR EAP, EAP/PMBS, INR/EAP, EB, EAP/PD, EAP/EP,
EB/TPP/BTA/ANA, EB/IFD
DEPT PASS USTR FOR BWEISEL, DKATZ
DEPT PASS USAID AND OPIC
TREASURY FOR OASIA FOR AJEWELL
USDOJ FOR MCRAWFORD
USDOC FOR 4430/ITA/MAC/DBISBEE

E.O. 12958: DECL: 07/05/2015
TAGS: PGOV PINS PREL ECON PINR KPAO RP
SUBJECT: ARROYO CELEBRATES JULY 4TH, BUT SUPREME COURT
DECISION SPARKS MORE TURMOIL

REF: A. MANILA 3046


B. MANILA 2993

C. MANILA 2887

D. MANILA 2840

E. MANILA 2167

Classified By: Political Officer Andrew McClearn for
reasons 1.4 (b) and (d).


1. (C) Summary: President Arroyo attended Mission's July 4
celebration and also hosted an anti-trafficking event at
Malacanang attended by Charge on July 2. At the July 4
event, Charge publicly hailed close U.S.-Philippine ties and
underscored the importance of strengthening democratic
institutions. Amid Arroyo's attempts to show that she is
focused on governing despite continued political tensions,
the Supreme Court's surprise July 1 decision to place a
Temporary Restraining Order (TRO) on the Expanded VAT law has
taken a serious toll on the peso, the stock market, and
investor confidence. Contacts believe that the President
worked in backchannel fashion to secure the TRO, despite
Malacanang claims that it opposed the decision. The
opposition plans to ramp up its efforts to pressure Arroyo to
quit or face impeachment, and the left is planning more
rallies. The signs are that political turmoil will continue,
with the Supreme Court's TRO handing economic reform efforts
a serious setback. End Summary.

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Celebrating July 4; Wrapping Herself in "Old Glory"
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2. (U) In a first since she came to power in 2001, President
Arroyo attended Mission's July 4 celebration. Vice President
Noli de Castro and a host of other dignitaries, including top
cabinet and military officials also attended the event, which
was held at the Chancery. In his toast, Charge stated, in
part: "Sometimes we as a people decide, through the
democratic process, to fix what we perceive is wrong with our
country. Other times we discern that what is best for our
country is to accept imperfection and mistakes as inevitable
and tolerable. Always keeping in mind that what is most
important is strengthening the democratic institutions that
are our only true safeguard against both tyranny and
anarchy." (Para 15 contains additional portions of Charge's
remarks, which are also on the Embassy's website.)


3. (C) In response, Foreign Affairs Secretary Albert Romulo
offered a brief toast on behalf of the GRP. Arroyo made no
formal remarks. Her appearance received significant press
coverage in both broadcast and print media. A smiling Arroyo
was apparently somewhat caught off guard by Charge's brief
comment regarding the "snap" election of 1986 (see Para 15),
and subsequently instructed Admiral Ernesto De Leon, the
Chief of the Philippine Navy, to inquire as to whether there
was any significance to the reference. (DATT dismissed the
suggestion out of hand, and reiterated that Mission supports
transparency, accountability, and the rule of law.) Palace
Spokesman Ignacio Bunye earlier on July 4 had reiterated the
Palace's view that the President would continue in office,
stating: "Our President believes there is no basis for her
resignation because she has not committed any illegal act."



4. (U) President Arroyo also used a July 2 anti-trafficking
in persons event at Malacanang to reaffirm her willingness to
cooperate with the U.S. on a wide range of human rights and
economic initiatives. A feisty Arroyo also publicly rebutted
her critics, brushing off charges that she cheated in the
2004 elections and lambasting the opposition, stating: "If my
opponents feel that the best thing for the nation is to tear
it down, so be it on their part." Arroyo said she would
"turn the other cheek" to her opponents and would not be
deterred from carrying out "the people's business." Charge
delivered remarks that urged the GRP to follow through on its
efforts to secure convictions under the Philippines' 2003
Anti-Trafficking Law.


5. (U) In other Malacanang-related news, First Gentleman
Jose Miguel "Mike" Arroyo had his lawyers object to a
subpoena issued last week meant to force his testimony at the
high profile corruption trial against former president Joseph
Estrada. On July 4, Mike Arroyo's lawyers appeared before
the Sandiganbayan court, which gave them ten days to file a
motion to dismiss the June 30 subpoena. According to media
reports, Mike Arroyo was scheduled to depart Manila July 5
for the U.S. together with son Congressman Juan Miguel
"Mikey" Arroyo.

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Surprise Supreme Court Decision
--------------


6. (U) Amid Arroyo's attempts to show that she is focused on
governing despite continued political tensions, the Supreme
Court's unexpected July 1 decision to place a TRO on the
Expanded Value Added Tax (E-VAT) law has taken a serious toll
on the peso, the stock market, and investor confidence. The
Court voted 13-2 in favor of the TRO. Chief Justice Davide
and Justice Puno were the only dissenting votes. The Supreme
Court scheduled a hearing on July 26 on the substance of the
case.


7. (U) The E-VAT law is the centerpiece of a hard-fought
package of fiscal reform legislation recently won by Arroyo
and her allies in Congress. The provisions that went into
effect lifted the exemptions enjoyed by the petroleum and
electric sectors, among others, and were expected to increase
government revenues by PHP4-PHP5 billion (USD 70-90 million)
per month. The law also would allow the President to
increase the VAT rate from 10 to 12 percent in January 2006
if the budget deficit and VAT collections exceed 1.5 percent
and 2.8 percent, respectively (ref E).


8. (U) Two groups had filed motions requesting the TRO only
on June 30; one group was led by the Association of
Philippine Petroleum Dealers and the other group consisted of
opposition lawmakers. (Note: Two other groups of educators
and opposition lawmakers had filed a petition before the
Supreme Court to invalidate the law shortly after it was
signed in May 2004, but the Court declined those petitions.)
Opponents of the E-VAT argued that the portion of the law
removing the "no pass through" provision for the petroleum
and electricity sectors was invalid because the provision was
inserted in the bicameral conference committee by deleting a
provision present in both the Senate and House versions
without proper authority. They also challenged the law on
the grounds that giving the President the discretion to
increase the VAT rate next year unconstitutionally delegates
taxing authority from the Congress to the Executive. The
petroleum dealers also specifically opposed a provision in
the amended E-VAT law that limits the quarterly input VAT
credits to 70 percent of output VAT credits.


9. (S) Finance Secretary Cesar Purisima told Acting Econ/C
he was caught off-guard by the Court's move. He said he was
convinced that the TRO was "arranged" by Malacanang because
Arroyo feared that its implementation would lead to street
protests. Other sources, including Arroyo ally Congressman
Jesli Lapus, Chair of the House Ways and Means Committee,
separately told A/DCM and other emboffs that Arroyo was
behind the TRO. He said Malacanang had asked for
Congressional help two weeks ago to delay implementation, but
Lapus and others said it could not be done. Supreme Court
Program Management Director Evelyn Dum Dum also confirmed to
poloff July 2 that the Palace had pressured Justices to agree
to the TRO. Purisima described the decision as
"devastating," saying that delays in the E-VAT's
implementation would derail if not endanger the country's
efforts to put its fiscal house in order.

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Peso, Market Hit the Skids
--------------


10. (SBU) The TRO added to the uncertainties in financial
markets already made jittery by the ongoing political
tensions. The local currency closed at PhP 56.09 on July 4,
the peso's weakest closing rate since January 11. The
Philippine Stock Price Index (Phisix) declined by 4.2 percent
on July 4 to 1,815.67, posting one of the steepest one-day
losses since the 1997 Asian financial crisis and edging down
to its weakest closing level since late December 2004. In
morning trading on July 5, the Peso opened weaker at PhP
56.15/$1 and ranged from PhP 56.06 to PhP 56.19 during
morning interbank trades. The Phisix closed July 5 up
slightly (1817.02) on bargain hunting for blue-chip stocks.
Securities dealers demanded significantly higher yields
during the GRP's July 4 primary-market Treasury bill auction
as a result of resurgent concerns over fiscal stability,
combined with higher political risk premiums, prompting the
GRP to reject all tenders. Foreign investors also reportedly
sold off Philippine sovereign bonds at somewhat higher yields
than in previous days.


11. (SBU) Credit rating agencies expressed concern over the
TRO but have adopted a wait-and-see attitude for now, noting
that external liquidity and international reserve levels
remain comfortable. They warned, however, that substantial
delays in implementing the amended E-VAT law or its
abandonment would see credit rating outlooks slide from
"stable" to "negative" or, even worse, could trigger
downgrades in the ratings themselves. GRP foreign bond
issues are already rated two to three levels below investment
grade, and a further deterioration would exacerbate the
already substantial spreads the GRP is paying on its
foreign-denominated bond issues. Although the latest
estimates on net foreign portfolio investments from January
to the third week of June showed USD 1.9 billion in net
inflows -- nearly four times 2004's full-year surplus --
traders and analysts noted that the continued combination of
both political and economic setbacks is increasingly eroding
investor confidence.

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Opposition Plans to Ramp Up Pressure
--------------


12. (C) The opposition plans to ramp up its own efforts to
pressure Arroyo to quit or face impeachment. Opposition
Senator Panfilo "Ping" Lacson told Acting Pol/C on July 1
that he planned to urge that the hearings currently underway
in the House and Senate continue "until the whole truth is
known." Renato de Villa, an opposition figure and former
defense secretary under Fidel Ramos, told emboffs in a July 1
meeting that "among the average Filipino, it's already
indisputable that Arroyo is guilty, that she won a rigged
election." De Villa and opposition member Louie Sison
(political adviser for Brother Eddie Villanueva) also told
emboffs that there are opposition plans to release "damaging
material" against Arroyo in coming days, although neither
provided additional information. In a blow to Arroyo, the
Brothers of De La Salle, a Roman Catholic order who teach and
manage De La Salle University and other schools, issued a
statement on July 2 calling on Arroyo "to voluntarily
relinquish power so that the constitutional process of
succession may proceed." The University of the Philippines
Law School, and several schools affiliated with Ateneo
University, made similar public pronouncements.


13. (C) Representative Teodoro "Teddy" Casino of the Bayan
Muna party told emboffs on July 4 that Bayan Muna and other
leftist groups were planning additional public protest
rallies against Arroyo. Casino said the anti-Arroyo effort
was "beginning to take a life of its own" among some civil
society groups that had previously supported Arroyo. Casino
praised the Supreme Court for issuing the TRO on July 1,
arguing that it was "good news" for the poor, who would have
been hurt by the higher prices. The National Democratic
Front (NDF) -- an umbrella group with close links to the
Communist Party of the Philippines and the New People's Army
(CPP/NPA) -- issued a statement on July 4 demanding Arroyo's
immediate removal from office as a precondition for
resumption of the stalled GRP-NDF peace talks. From the
Netherlands, Jose Maria Sison, the exiled leader of the
CPP/NPA, was quoted as stating: "So long as it stays in
power, the Arroyo regime will continue to prevent the
resumption of the formal talks."

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Comment
--------------

14. (S) The signs are that political turmoil will continue,
with fallout now appearing on the economic front as well.
The Supreme Court TRO has given a black eye to economic
reform efforts. Arroyo worked extremely hard to push through
the E-VAT law, and its passage had been a significant victory
for her efforts to narrow the Philippines' budget deficit --
or so it was thought. The reports that Arroyo actually
supported the TRO -- which dealt a solid blow to her own
reform efforts -- indicate strongly that her mindset is a
defensive, reactive one, and it displays a worrisome but
successful effort to interfere with the supposedly
independent judiciary at the highest levels. It is clear the
President decided against the advice of her chief economic
advisers to sacrifice the E-VAT law -- at least until the
end of July -- in the interest of trying to buy political
peace, especially from leftist elements. If that is the
case, there is little sign that it is working: the
opposition -- including the left -- gives every indication of
wanting to up the ante, and, by doing so, increase the
pressure on her to step down. End Comment.


15. (U) A slightly abridged version of Charge's July 4
remarks follows:

"Over the past century, and even this past year, the
relationship between our two countries has had its ups and
downs. But like all genuine and mature friendships, as we
work through our disagreements, we find ourselves stronger
allies. Sometimes in conflict, sometimes in anger, but most
times with understanding and mutual admiration, we have grown
together. I hope that after my departure (or maybe because
of it?) the relationship between our two countries will
continue to deepen.

Independence Day is a special day for all Americans, but
especially for those of us serving overseas. As Americans in
the Philippines we can celebrate in a country that also
cherishes the democratic values upon which our own nation was
founded.

In the Declaration of Independence, Jefferson speaks of
mankind's inalienable rights as "life, liberty, and the
pursuit of happiness." I always liked it that only the
pursuit of happiness is guaranteed, not happiness itself. It
is ultimately our choices as a people that decide, that
determine our fate. And, of course, wherever people are
involved so is imperfection. This puts a heavy burden on all
of us to weigh carefully what is and is not the best course
for our countries. Sometimes we as a people decide, through
the democratic process, to fix what we perceive is wrong with
our country. Other times we discern that what is best for
our country is to accept imperfection and mistakes as
inevitable and tolerable. Always keeping in mind that what
is most important is strengthening the democratic
institutions that are our only true safeguard against both
tyranny and anarchy.

I will end with a story that unfortunately some of you have
already heard before and will now be bored having to hear
again. This story was told to me right after the "snap"
election of 1986, but before Marcos was actually overthrown.
It is a story that strikes a chord with me even now after 19
years. Sometime in mid-February 1986, I met with a close
Filipino friend of mine for coffee, but when I sat down it
was clear he was very upset. I asked him what was wrong, and
he angrily explained that one of his own best friends had
decided to leave the Philippines to visit the United States.
My friend had asked him, "how can you leave your country now,
when we are fighting against Marcos? We must all stay here
and fight for freedom and against corruption." His friend
replied, laughingly, "Oh come on, you take this all too
seriously. I,ll be back after things quiet down here.
Right now I just want to relax and go visit the Land of the
Free and the Home of the Brave.," Infuriated, my friend
answered: &You may be going to visit the Land of the
Free,, but you are leaving the Home of the Brave.,8 And
that is the way I always think of the Filipino people, even
after 19 years -- as the bravest of people. So, let's
acknowledge this remarkable people.

Family and friends, please join me in toasting the health and
happiness of the President of the Republic, Her Excellency
Gloria Macapagal-Arroyo, and to the brave Filipino people:
May the preservation of democracy and your passion for
justice continue to be the cornerstone and safeguard of your
pursuit of happiness. Mabuhay!"

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MUSSOMELI