MOVING FORWARD ON USG PRIORITIES IN THE

C O N F I D E N T I A L SECTION 01 OF 05 MANILA 000001 SIPDIS DEPT FOR EAP, EAP/MTS, EAP/MLS, INR/EAP, EB, G/TIP DEPT PLEASE PASS TO USAID ANE/TS - L. SAULS E.O. 12958: DECL: 01/03/2016 TAGS: PGOV PREL ECON ETRD EAID MARR MOPS PHUM RP SUBJECT: MOVING FORWARD ON USG PRIORITIES IN THE PHILIPPINES IN 2006 Classified By: Charge d'Affaires, a.i., Paul W. Jones for reasons 1.4 (b) and (d). ¶1. (C) Summary: While still facing serious political obstacles, President Arroyo has recovered some of her equilibrium after surviving impeachment charges and severe domestic turbulence in 2005. The relative pause in the political wars provides an opening for the USG to move forward with key bilateral priorities in 2006. In the security arena, the USG needs to keep up the pressure for the passage of anti-terrorism legislation, which is wending its way through Congress. Maintaining strong domestic support for the U.S. Special Operations forces deployed in Mindanao will remain key to giving the GRP the tools and encouragement to capture or kill terrorists. Increasing intelligence cooperation is critical to this effort. Philippine Defense Reform, which enjoys strong support from President Arroyo and Defense Secretary Cruz, will enable Philippine forces to operate more effectively against terrorists, insurgents, and Communists, reducing the need for U.S. forces over the medium term. President Arroyo's continued desire for U.S. political approval and natural inclination to support U.S. positions provide opportunities for stronger Philippine support in international fora, as we saw in her outspoken support at the US/ASEAN-7 meeting in Pusan for bringing heightened international scrutiny on Burma, including at the UN Security Council. ¶2. (C) On the economic and development side, the USG will need to continue to encourage greater privatization and trade liberalization and work closely with the GRP in developing its Millennium Challenge Account Threshold Country Plan. Our law enforcement agenda, including increased convictions in human trafficking cases and intellectual property rights violations, will depend much on a successful launch of Philippine National Police reform, which will also strengthen the police's counterterrorism capabilities. Overall, real progress in 2006 in U.S.-GRP ties seems possible as long as the GRP's focus is on substantive matters and it does not become distracted by domestic infighting. High-level visits by Executive Branch principals and Members of Congress in the coming year cold help focus attention to making real progress on key issues and would be very much welcomed by the GRP. End Summary. -------------- Arroyo: Recovering some Momentum -------------- ¶3. (C) President Gloria Macapagal Arroyo's 2005 was largely a battle for survival. Opposition attacks on her reached a crescendo in June when she was accused of cheating in the May 2004 election and her family was accused of profiting from illegal gambling. Many observers believe that she came close to resigning in July after a series of resignations by members of her Cabinet and defections to Opposition ranks by key political supporters. With President Arroyo living to fight another day when the influential Catholic Church declined to call for her resignation, her supporters in the House handily defeated the Opposition's impeachment effort in September. ¶4. (C) Since that time, the political situation has grown more calm (in part because of our constant efforts to urge parties to act responsibly) and President Arroyo appears to have recovered some of her political equilibrium. In November, the Supreme Court cleared the way for the implementation of her Expanded Value Added Tax (E-VAT) program, which did not -- contrary to some predictions -- spark street protests. (The E-VAT is scheduled to increase tax revenue further in early 2006 and there is some concern that this could spark some new protests.) Remittances from Overseas Foreign Workers are up and financial market confidence received a boost with the implementation of the E-VAT, helping the peso perform as one of the strongest currencies in Asia. President Arroyo continues to have the luck of facing a divided, fragmented Opposition that has no center of gravity. She also benefits from a Constitutional requirement that states that impeachment motions can only be brought once a year, which means she is in the clear on that score until at least mid-year 2006. -------------- Fear the Distractions -------------- ¶5. (C) President Arroyo's poll numbers remain extremely low and she continues to fight for her political viability. She is prone to panicking and making things worse. There is little doubt, given the volatile nature of Philippine politics, that new distractions will appear on the radar screen in 2006. One serious distraction could involve proposed Constitutional changes, which potentially could transform the Philippines into a parliamentary system, with or without a President, within one to two years, and possibly create a truly federal state. Much legislative and political capital and attention will focus on this process over the months ahead. ¶6. (C) Another distraction could be over the case of the U.S. Marines who are being investigated for an alleged rape. The matter has not sparked much public attention, but twists and turns in the case could potentially embolden the left and perhaps panic President Arroyo and potentially jeopardize the Visiting Forces Agreement and our extensive military exercise program. Finally, although it is quieter on this front of late, the Arroyo administration at times in 2005 threatened to impose "emergency rule," most notably against the New People's Army (NPA),a Foreign Terrorist Organization (FTO), and an alleged network of supporters, including Opposition political leaders. Such a move could spark large-scale demonstrations and call into question the Philippines' international reputation; the USG has consistently (and so far successfully) urged the GRP not to make such a move. -------------- Let's Get to the Substance: Security Issues -------------- ¶7. (C) President Arroyo should be in a better political position at this point than she was several months ago, so her administration will be better able to focus on key substantive issues. This relative pause in the political wars provides an opening for USG efforts to move forward successfully with key bilateral priorities with the Philippines in 2006. In the security arena, key issues that the USG should focus on include: -- proposed anti-terrorism legislation: Although the House is poised to pass an anti-terrorism bill (under strong pressure from President Arroyo) in early January, draft legislation remains bogged down in the Senate. Opposition members have indicated that they fear President Arroyo might use the broad language in the anti-terrorism legislation against them. Quiet meetings with pro-Opposition Senate President Drilon by our DOJ Attache and poloffs have helped address some concerns, and we will continue to advocate rapid passage at all levels of government; -- counterterrorism cooperation with GRP: USG-GRP counterterrorism cooperation yielded important successes in ¶2005. Philippine authorities apprehended several key terror suspects including the leader of the Rajah Sulaiman Movement, Ahmed Santos; these arrests appear effectively to have dismantled the RSM as an active terrorist force. In addition, a court in Manila convicted three men in October 2005 for involvement in the "Valentine's Day" bombings in February 2005. The new year should see expanded U.S.-RP counterterrorism cooperation. Secretary of National Defense Avelino Cruz's proposed Security Engagement Board to deal with counterterrorism issues in a structure similar to the existing Mutual Defense Board should provide a sounder Philippine legal framework for our efforts to improve Armed Forces of the Philippines (AFP) capabilities. Joint Special Operations Task Force-Philippines' expanded program of civil-military operations with the AFP in Jolo in the Sulu Archipelago offers the potential, in coordination with existing USAID activities, to expand zones of peace and to reward communities that have made the choice against terrorism. An in-country Anti-Terrorism Assistance Program, targeted to start in January 2006, will help improve the capabilities of GRP law enforcement agencies to deal with the terrorist threat; -- Philippine Defense Reform (PDR): PDR continues to broaden and deepen its impact on the AFP as the presence of U.S. experts begins to have an effect on logistics, maintenance, personnel management, training, and other areas. A major U.S. focus in 2006 is helping Secretary Cruz get his National Training Center initiative off the ground, an effort to train and re-equip 12 Philippine Army and two Philippine Marine Corps battalions each year over the space of six years. In addition to PDR, the U.S. will maintain in 2006 robust ongoing mil-to-mil relations with the Philippines, including various bilateral exercises and an expanded security assistance effort; -- Philippine National Police (PNP) reform: Mission has requested funding for a series of proposals arising from the 2005 GRP-U.S. Joint Law Enforcement Assessment that will help the PNP address long-standing deficiencies as it undertakes its own comprehensive transformation effort. February 2006 is the target date for a S/CT-funded seminar aimed at improving management and operations of PNP and other GRP corrections institutions. However, further targeted assistance in such areas as internal affairs, strategic planning, and resource analysis is needed to help the PNP institutionalize its transformation program. The presence of a U.S. Law Enforcement Advisor could serve an important role in keeping the PNP effort focused and on track; -- Mindanao peace process: Both the Moro Islamic Liberation Front (MILF) and the GRP voice optimism about prospects in 2006 for a negotiated settlement to the Mindanao conflict. We need to encourage both sides to move forward on an agreement and be ready with quick-disbursing assistance to help cement a deal once it is signed. Within weeks of a peace agreement, USAID could initiate development activities on the ground using existing funds, but significant additional Economic Support Funds (ESF) would be needed to sustain these efforts. In our engagement with the MILF, Mission continues to stress the critical importance that all elements of the MILF must cut all ties with terrorist organizations; -- Communist insurgency: GRP relations with the NPA plummeted further in 2005 as attacks on security forces increased and leftist agitators pressed for President Arroyo's resignation. The NPA continues to insist as a pre-condition to resuming negotiations that the GRP intercede with the U.S. and European Union to lift its foreign terrorist organization designation. Its actions, however, demonstrate that it remains committed to employing violent means to obtain its objective of achieving power. The new year is unlikely to see any break in the deadlock surrounding negotiations. The USG needs to continue to monitor the situation carefully, because a further deterioration in the situation could have a negative impact on overall USG activities in the Philippines. -------------- International Organization, Regional Issues -------------- ¶8. (C) The USG should seek to capitalize on the GRP's recent support of the effort to bring Burma's atrocious human rights record before the UN Security Council. The Philippines broke ranks with ASEAN to back the U.S. proposal, indicating that it is willing to take a tougher stand regarding the Burmese regime and buck the ASEAN "consensus" when pressed to do so for a good cause. At the UN, we should continue to urge the GRP to make sure that it is never more than one vote away from any given USG position. While the Philippine term on the UN Security Council ended in December 2005, it continues to play an influential role in the ASEAN Regional Forum (ARF) and it chairs the Asia-Pacific Economic Cooperation (APEC) Counterterrorism Task Force, two venues where it can help advance U.S. objectives. We will need to intensify cooperation with the GRP on ASEAN issues as the Philippines takes over the ASEAN Chairmanship from Malaysia in July. ¶9. (C) The GRP's relationship with China is an enduring one, based upon proximity and trade ties. Nonetheless, despite Beijing's recent economic overtures, deep suspicions remain among some of Manila's elite regarding China's intentions towards the region. Our engagement with the AFP on defense reform and in other areas should prevent China from winning any significant inroads within the Philippine military. -------------- Economic/Development -------------- ¶10. (U) The Philippine economy slowed slightly in 2005 due to high oil prices and poor agricultural output, but maintained a respectable GDP growth rate of about 5 percent. The political turbulence of the summer did not have a significant impact on economic factors. The 20 percent growth in remittance inflows and the GRP's implementation of the E-VAT helped to strengthen the peso. Portfolio capital increased by over $2 billion over the last year while new foreign direct investment remained anemic at about $400 million. Poor infrastructure, an inconsistent and non-transparent regulatory environment, weak intellectual property rights enforcement, relatively high wages and electricity costs, and corruption remain major concerns of domestic and foreign investors, as well as companies selling goods to the Philippines. ¶11. (SBU) The massive remittance flows of the last year have helped to fuel mainly consumption and to augment incomes of the poorest 30 percent of the population. These funds may be partly responsible for maintaining social stability and precluding major anti-government protests or "EDSA"-like challenges to the GRP. Remittances have also helped to boost real estate investment and could become a more important factor in promoting growth if they were funneled toward new domestic enterprises that would stimulate employment and growth. ¶12. (SBU) The USG will need to work closely with the GRP as it develops its Millennium Challenge Account Threshold Country Plan (TCP). The GRP, in the coming months, must submit this TCP to the Millennium Challenge Corporation for review for MCA funding, aimed especially at anti-corruption and revenue enhancement efforts. President Arroyo has charted a course through 2009 to reduce the fiscal deficit to zero, an achievement possible only with substantial progress in stopping the revenue leakages attributable to corrupt officials. She will also need to fight corruption in government infrastructure programs, which independent studies have estimated consume about one-third of infrastructure budgets. ¶13. (SBU) In recognition of some progress on intellectual property right protection, the Mission recommended taking the Philippines off the Special 301 Priority Watch List in early 2006, while preparing to make clear to the GRP that we would re-list it if there is backsliding on this front in the months ahead. In addition, Mission will continue to use our Trade and Investment Council meetings, conducted through our Trade and Investment Framework Agreement (TIFA),to advocate for the U.S. private sector. -------------- Human Trafficking -------------- ¶14. (SBU) The USG listed the Philippines as a Tier Two Watch List country in its TIP Report in 2004 and 2005. The Philippines remains a source, transit, and destination country for men, women, and children trafficked for the purposes of sexual exploitation and forced labor. One area of particular concern has been the limited number of prosecutions and convictions under the 2003 Anti-Trafficking Act. The GRP made some progress in this area in December 2005, with the first convictions and sentencings of traffickers. Additional convictions will be necessary in 2006 to demonstrate that the GRP is making significant efforts to address this shortcoming. The USG needs to continue to underscore the importance of making progress in combating TIP to top GRP officials, noting the tremendous scope of the problem and the serious ramifications of potential demotion to the Tier Three list. -------------- Comment -------------- ¶15. (C) Overall, real progress in 2006 in U.S.-GRP ties seems possible as long as the GRP focuses on substantive matters and does not allow itself to be distracted too much by domestic infighting. Progress, of course, will remain contingent on ongoing Philippine realities, which include lack of resources and capacity, weak rule of law, rampant poverty, and corruption. Through USG programs, especially those of USAID, we are helping the GRP address some of these long-standing problems, which are serious impediments to effective government action in many areas. The burden of helping the Philippines overcome serious weaknesses falls heavily on the U.S., given our unique history here as well as our access and resources. As the Mission works to move the relationship forward, we believe that additional USG high-level visits -- including from Cabinet and senior USG officials and the Congress -- in 2006 can help make real progress by focusing GRP attention on key issues and would be very much welcomed by the GRP. Visit Embassy Manila's Classified website: http://www.state.sgov.gov/p/eap/manila/index. cfm Jones