FINANCE SECRETARY NONCOMMITAL ON DOHA ROUND;

UNCLAS SECTION 01 OF 03 MANILA 005505

SIPDIS

SENSITIVE

STATE FOR EB/IFD/OIA, EB/ESC;
STATE PASS EXIM, OPIC AND USTR
STATE PASS USAID FOR AA/ANE AND AA/G
STATE PASS USTR FOR BWEISEL AND DKATZ
DOE FOR TOM CUTLER
TREASURY FOR OASIA
USDOC FOR 4430/ITA/MC/ASIA & PAC/KOREA & SE ASIA/ASEAN

E.O. 12958: N/A
TAGS: ECON EFIN ENRG PREL EINV RP
SUBJECT: FINANCE SECRETARY NONCOMMITAL ON DOHA ROUND;
FOCUSED ON FISCAL IMPROVEMENTS


Sensitive but Unclassified -- Not for Internet -- Protect
Accordingly

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Summary
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1. (SBU) Finance Secretary Teves acknowledged to Charge that
the GRP needs to do more to address public skepticism over
the benefits of lower tariffs and progress in the WTO Doha
Round. Teves was grateful for U.S. assistance and advice on
improving the efficiency of revenue collection, a key area
for fiscal reform. Teves said that the recent strengthening
of the peso would be useful for debt as well as deficit
reduction. With implementation of the new VAT, Teves said he
would focus efforts on revenue collection. Teves expressed
his commitment to improving the business climate as a way to
promote investment and expand the tax base. He noted his
interest in working with commercial banks to channel more
overseas remittances into investment, not just consumption.
Total 2005 remittance inflows through formal banking channels
will exceed $10 billion, with an additional estimated $3
billion through informal channels, according to Teves. The
DOF expects GDP growth to increase to about 6 percent in 2006
with increased investment in IT-enabled services and mining.
DOF also expects a global pick up in the electronics sector
and increased domestic agricultural production as the "El
Nino" effect diminishes.


2. (U) USG Participants: Charge Paul W. Jones; USAID
Director Jon Lindborg; and Econ Counselor Robert Ludan. GRP:
Finance Secretary Margarito "Gary" Teves; Undersecretary for
Domestic Finance Gil Beltran.

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Doha Round
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3. (SBU) The Charge, in a November 16 meeting, urged Teves to
play a more active role in the Doha Round, including with the
EU. He said that the Philippines would benefit from lower
subsidies and tariffs on agricultural goods. Teves replied
that although the Department of Trade and Industry has the
lead on this issue, he had consistently advocated trade
liberalization as long as it was reciprocal. The Charge
noted that the U.S. has advanced bold proposals after
consultations with Congress and that the U.S. has pressed the
EU to follow that lead; the Philippines, he said, as a G20
and Cairns Group member, could voice its views more actively.
Teves said that the GRP needs to address public skepticism
with respect to the benefits of lower tariff rates. In
addition, the GRP needs to convince important vested
interests, such as the sugar industry, that liberalization is
in its long term interest.

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Economic and Fiscal Reforms
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4. (SBU) Teves was grateful for U.S. assistance and advice
on improving the efficiency of revenue collection, a key area
for further reform in the Philippines. He mentioned ongoing
discussions with the World Bank and IMF to determine the best
approach, including possibly working with the U.S. Internal
Revenue Service on technologies and methods to fight tax
evasion. Teves said that DOF had filed tax delinquency cases
with the GRP Justice Department, but remained concerned about
public support and confidence in the program. With the
implementation of the new VAT, the DOF message to the
Congress and public now is that the focus should be on
efficiency of revenue collection and not on additional new
taxes. Teves agreed that consistent information to the
public and transparency of government operations were vital.
He was pleased that the Millennium Challenge Threshold
Program would promote these improvements in the revenue
system. The Charge underscored that the USG wanted to be as
helpful as possible with respect to fiscal reforms.


5. (SBU) Teves explained that finding ways to work under the
current Constitution was preferable to amending it. Steps to
promote liberalization, including the entry of U.S. and other
foreign firms, is a key economic goal. Teves noted that
economic liberalization and improvements in governance in the
1980s had promoted growth and job creation during the 1990s.
Teves agreed with the Charge that improvements in the
business climate would also improve the fiscal situation.
Teves underscored that it was important for the DOF to
provide better explanations to the public on budget
expenditures. To improve taxpayer compliance, the DOF needed
to be more accessible, open, and accountable about how funds
are spent, he admitted


6. (SBU) Teves said that the recent strengthening of the
peso against the U.S. dollar would be useful for debt
reduction and not only for reducing the deficit. An
increasing amount of VAT revenues would also be directed to
fund social services and infrastructure. Teves expressed the
hope that these investments will improve GDP growth along
with a sustained decline in both the deficit and the debt.
Continuity and certainty would be important elements in
financial policies. At present, interest and principal
payments on the consolidated national debt consume about 86
percent of national government revenues. Teves stated that a
deficit should be below 3% of GDP. The 180 billion peso
deficit ($3.3 billion) at the end of 2005 would be 3.4
percent of GDP but that a deficit of 2.0-2.1 percent is
achievable in 2007, according to Teves. He insisted that the
DOF would focus on revenue collection and not sacrifice
social spending to achieve that goal.

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Remittances from Overseas Foreign Workers (OFWs)
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7. (SBU) As the former head of the Land Bank of the
Philippines, a government financial institution with 350
branches charged with rural development, Teves said that it
was important to identify OFW investment opportunities and
wider use of bank deposits by OFWs. Banks could be more
active and improve the efficiency OFW funds transfers and
investments. He said that the DOF expected about $3
billion in remittance inflows through informal channels in
2005 in addition to the $10 billion through formal banking
channels. He credited the 20-30 percent year-on-year
increase in remittances in 2005 to the increased number of
overseas workers, now over 8 million.

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Investment Incentives
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8. (SBU) Teves pointed out that business-oriented senators
like Ralph Recto are working to ensure regulatory consistency
and stronger investment incentives, but he noted that many
economic policies were driven by Supreme Court decisions. He
observed that, in contrast to the Philippines, China moved
quickly to transform its economy once it embraced capitalism.
Teves explained that in the Philippines, officials are
reluctant to interfere in sensitive Supreme Court
deliberations, and he had been hesitant to approach the Court
on the new VAT law when the temporary retraining order was in
place while the Court determined constitutionality. Finally,
he said, the Court approached him and asked if the VAT was
indeed important to the economy, to which Teves responded
affirmatively. The Court lifted the restraining order but
cautioned Teves to communicate accurately the rationale for
the VAT to the public and to ensure that the implementing
rules were clear.

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Banking Regulations
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9. (SBU) The Charge noted that the controversy over back
taxes owed by foreign currency deposit units (FCDUs) of
foreign and domestic banks remains unresolved. Teves said
that Congress needed to amend the banking law, and that an
earlier proposal to clarify the intent of the 1998 law might
be insufficient. (Note: This tax issue involves FCDU tax
exemptions that were explicit in the Philippine banking law
until 1998, when Congress passed an updated law. The Bureau
of Internal Revenue interpreted the exemptions in the new law
as implicitly present, based on continued GRP interest in
making the Philippines a center for international banking.
After five years of tax exemptions during 1998-2003, a
further update of the law in 2003 made the tax exemptions
explicit again. At that time, the Bureau of Internal Revenue
suddenly announced that the implicit tax exemption in the
1998 law had been misinterpreted and insisted that banks pay
back taxes on FCDU profits for 1998-2003, which BIR estimated
to be about $700 million for all banks. End note.)

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Higher GDP Growth in 2006
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10. (SBU) Undersecretary Beltran explained that the DOF
expects faster growth in the coming months as investment in
IT-enabled services such as call centers increases sharply
along with more investment in the mining sector. Electronics
exporters had sensed a general recovery taking place in the
second half of 2005, but those forecasts of annual growth at
more than 10 percent have been pushed back to 2006. As the
El Nino effect subsides, agricultural production should
return to the normal 3-4 percent annual growth rate. For
2006, the current outlook is for 5.7-6.3 percent GDP growth.
Beltran's optimism extended to the inflation forecast. He
said he expected prices to fall slightly, perhaps by 0.6 -
0.8 percentage points, even with the expanded VAT, as oil
prices decline. He said that 2006 will be a better year for
the economy and that DOF views are consistent with those of
the World Bank and IMF. Although credit demand remains very
weak, he expected increased investment in mining and
manufacturing, the latter long overdue for new investment as
private sector capacity utilization reaches its limits.
Beltran said that with infrastructure spending at 2.0 - 2.7
percent of GDP in 2006, demand for construction materials and
related industries would also contribute to GDP growth.

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Comment
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11. (SBU) With increased revenues from the new VAT along
with savings due to peso appreciation, interest rate
declines, and a declining budget deficit, the GRP appears to
be poised to apply some of its "savings" towards reduction of
its debt stock. Teves's remarks and recent public statements
by Central Bank Governor Tetangco reflect that possibility.
President Arroyo has also publicly remarked on possible
pre-payment of portions of the national debt as the GRP
outperformed its deficit reduction forecasts by 40 billion
pesos ($730 million). The GRP, however, has not outlined a
clear commitment or plan. So far this year, debt service
payments appear to have declined by about 4 billion pesos
($73 million) because of a combination of lower interest
rates and stronger peso. That amount, however, still
remains a very small portion of the GRP's consolidated public
sector debt of over $80 billion. The GRP deficit is 3.4
percent of GDP, and, though the deficit is declining, the
government will require about $4-5 billion in new borrowing
in 2006. Pre-payment of government debt may also involve
legal hurdles because holders of those instruments would
probably have to be involved in a decision.











Jones