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.

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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.

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Fear the Distractions
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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
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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.

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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.

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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.

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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.

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Comment
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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