SCENESETTER FOR ASSISTANT SECRETARY HILL'S VISIT

UNCLAS SECTION 01 OF 04 MANILA 003064 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/EX AND EAP/MTS E.O. 12958: N/A TAGS: PREL MARR ECON PGOV ETRD ECIN EAID RP SUBJECT: SCENESETTER FOR ASSISTANT SECRETARY HILL'S VISIT TO THE PHILIPPINES ¶1. (SBU) SUMMARY: Chris, the entire US Mission welcomes you back to the Philippines! We have been busy emphasizing our partnership in this historic year; upcoming Codels will be a next stage as will President Arroyo's September trip to Hawaii. Your visit focuses on outreach in two key areas -- to the military and to the economic sector, as well a meeting with President Arroyo. She is in a stronger political position than at any time over the past year, although scandals continue to circle and concerns grow about the credibility of the May 2007 elections. Our military relations remain strong. Philippine Defense Reform moves forward, as does the new Security Engagement Board. Police reform is also underway. Our assistance program is making a real difference in reducing poverty and promoting sustainable development, especially in Mindanao and the Sulu Archipelago. The U.S. remains the Philippines' most important economic partner. While the economy continues to grow by a respectable 5%, increased foreign investment coupled with continued economic reforms are needed to achieve stronger economic growth rates and ultimately reduce poverty. The recently approved $21 million Millennium Challenge Account Threshold Program will help contribute to this goal. End Summary. POLITICS -------------- ¶2. (SBU) President Arroyo survived last fall's impeachment effort and the abortive coup attempt in February that led to the week-long State of National Emergency. She now faces another impeachment effort in Congress, but few expect success. The President's July 24 State of the Nation address will lay out her priorities for the coming year, likely concentrating on her plan for creation of four "supra-regions" as an apparent first step to a kind of federalism, key legislation to pass (including the counterterrorism bill and legislation to restore tax incentives at Clark) and aspects of her economic reform plan. She may revive Constitutional change proposals. ¶3. (SBU) Extrajudicial killings -- of leftists, journalists, judges, lawyers, and suspected drug dealers -- continue at perhaps record levels. Creation of a new "Task Force Usig" within the Philippine National Police has done little to stem this trend or to reassure the public that the GRP is serious about bringing these culprits to justice. ¶4. (SBU) President Arroyo continues to press ahead with key priorities of her substantive agenda, which include: -- combating corruption and plugging revenue leaks (programs that the Millennium Challenge Threshold Country program to be signed July 24 will assist); -- pursuing peace talks with the Moro Islamic Liberation Front (MILF); -- maintaining progress on Philippine Defense Reform (PDR); -- instituting a transformational program for the Philippine National Police (which we will assist with the deployment of a Senior Law Enforcement Adviser in August provided by ICITAP and funded by INL); -- pursuing poverty reduction, which we assist with our multi-faceted and robust USAID program, primarily in Muslim Mindanao and the Sulu Archipelago; -- continuing to make Mindanao and Sulu inhospitable for the Jemaah Islamayah and Abu Sayyaf Group, and working on civil/humanitarian programs (often in conjunction with JSOTF-P) to reward communities that have made the choice away from terrorism; -- making a renewed push to "eliminate" the New People's Army with a combination of new military and legal offensives, as well as a newly funded "hearts and minds" program; -- pursuing economic and fiscal reform initiatives that will continue to reduce the budget deficit and improve tax collection; -- electoral reform (it is not clear how sincere the electoral reform effort is over the long term, but it is essential to greater stability). MILITARY ISSUES -------------- ¶5. (SBU) The GRP deposited $17.53 million into a Foreign Military Sales holding account in 2004 for Philippine Defense Reform (PDR). There are now 11 US Subject Matter Experts on the ground, and the Filipinos intend to add two more in the near future to help reform the inspector general's office and develop strategic planning. In addition to long term institutional changes, the multi-year Capability Upgrade Program will upgrade and modernize 72 Philippine Army and 12 MANILA 00003064 002 OF 004 Philippine Marine Corps battalions over the next six years. The Battalion of Excellence concept focuses on personnel and logistics programs while also introducing new personnel policies, new equipment, and better training capabilities as part of Philippine Defense Reform. ¶6. (SBU) The Armed Forces of the Philippines is beginning to see the positive effects of the Maintenance Mobility Program. Three C-130's are now operational and a fourth is awaiting depot maintenance. Several efforts are coming together that will eventually bring a total of 46 UH-1H helicopters to the Philippines. The AFP purchased 20 reconditioned Hueys from Singapore, all of which have now been delivered. An additional six Excess Defense Article UH-1Hs purchased with national funds are undergoing refurbishment at the DynCorp facility in Panama City, Florida, and are expected to arrive this August 2006. The first 10 of 20 UH-1Hs promised by President Bush during President Arroyo's May 2003 State Visit to Washington are also undergoing refurbishment at the same facility. ¶7. (SBU) The bilateral Security Engagement Board (SEB) held its inaugural meeting on April 21 and for the first time put US-RP joint counterterrorism efforts within a formal structure. Modeled after the existing Mutual Defense Board, the SEB is designed specifically to deal with non-traditional security issues, notably counterterrorism, maritime security, disaster relief, and counter-narcotics. This watershed agreement sets the framework for the GRP-proposed "Kapit Bisig" (Shoulder-to-Shoulder) counterterrorism activities focused on civil affairs, capability upgrades, operations, and specific scenarios for cooperation. ¶8. (SBU) The outgoing Armed Forces of the Philippines Chief of Staff has just approved initial stages of courts martial against about 40 officers and 100 enlisted men allegedly involved in the February coup attempt. MARINE CASE -------------- ¶9. (SBU) The case of four US Marines accused of the November 2005 rape of a Filipina continues to move its way through the Philippine court system. The GRP has recognized the US right to custody of the four servicemen, who remain under the supervision of JUSMAG and III Marine Expeditionary Force representatives on the grounds of the US Embassy. The prosecution has now almost finished its case, with the defense due to make its arguments next. We do not expect a verdict before sentence. We remain committed to ensuring the safety and morale of our Marines and continue to raise the importance of a fair and speedy trial with President Arroyo and her Cabinet. ECONOMY -------------- ¶10. (SBU) We are the Philippines' largest grant aid donor, with about $70 million in bilateral economic assistance in ¶2006. With the Millennium Challenge Corporation's (MCC) recent June approval of financing for $21 million over a two-year period for a Threshold Program, this relationship is growing even stronger. The formal agreement will be signed on July 26 and aims to improve revenue administration and anti-corruption efforts in key GRP agencies including the Bureau of Internal Revenue, the Bureau of Customs, and the Department of Finance. If the Philippines can demonstrate the political will to strengthen the rule-of-law and successfully fight corruption, we could see more domestic and foreign investment as well as more jobs and growth. ¶11. (SBU) The U.S. also remains the Philippines' largest overall trading partner (including both goods and services combined),with over $16 billion in two-way merchandise trade. Japan falls slightly behind us. Trade with China, though only about $6 billion in 2005, grew by about 60% over the last year. Major U.S. exports are electronics, machinery, and agriculture. We are also the largest foreign investor with over $6 billion in assets in a broad range of manufacturing and service industries, including banking, insurance, consumer goods, electronics, autos, and agriculture. ¶12. (SBU) Over the last year, the Philippines has made substantial progress in advancing its economic reform agenda. It reduced its budget deficit from about 4% of GDP to about 2%. Improvements in intellectual property rights protection led USTR to move the Philippines from the Special 301 MANILA 00003064 003 OF 004 Priority Watch List to the Watch List. The mining industry is being opened to foreign investment and lapses in certain tax incentives for foreign investors are being addressed. ¶13. (SBU) In comparison to other countries in the region, the Philippine public and private sector investment levels remain low. This condition inhibits the economy's ability to sustain growth rates at a level necessary to begin reducing poverty. The current GDP growth of about 5% is respectable, but, with a population growth rate of 2.3%, the impact on per capita income remains elusive. DEVELOPMENT ASSISTANCE -------------- ¶14. (SBU) USAID/Philippines manages a $900 million assistance portfolio with an average operating annual budget of between $65 and $85 million. Nearly 60% of this assistance goes to conflict-affected areas of Mindanao. USAID programs focus on transparency and anti-corruption, public health, improved management of natural resources, education, and strengthening the peace process in Mindanao by reintegrating former combatants into the economy, improving basic infrastructure, promoting economic growth, and strengthening local government unit service delivery. USAID is preparing for an increased assistance package to Mindanao in the event that the GRP and the Moro Islamic Front reach a comprehensive peace agreement. USAID is also supporting Philippine electoral reform initiatives and Avian Influenza and disaster preparedness. ¶15. (SBU) Our Peace Corps program is the second oldest and the current large program remains close to the heart of Filipinos. Our agricultural assistance has played a key role in developing agricultural research, improving farm to market capabilities and enhancing trade capacity. SUGGESTED THEMES -------------- ¶16. (SBU) In your meetings with President Arroyo, Secretary Teves, and Secretary Favila, and in your public messages, I suggest you stress the following: OVERALL -- The U.S.-Philippine partnership is strong and growing as we celebrate 60 years of friendship as well as the 100th year of Philippine emigration to the U.S. -- Likely U.S. Congressional visitors in August will reinforce these important ties, as will President Arroyo's expected participation in a September commemorative event in Hawaii; -- Our shared history is not as important as our shared future, based on common values, goals, and interests; -- We look forward to working with you on the US-ASEAN Enhanced Partnership initiative as you chair ASEAN over the next year; PEACE AND PROSPERITY -- Your reform programs for security forces are making great progress, including in reinforcing the respect for civilian leadership; -- Our assistance programs will continue to be robust and to focus on Mindanao and the Sulu Archipelago, and we are prepared to seek additional funding in the event of an MILF/GRP peace accord; -- The new Millennium Challenge Threshold Country program is an excellent opportunity for the Philippines to make real headway on corruption and revenue enhancement; -- Your economic reform programs are important steps to improving the investment climate and encouraging general economic development; WITH FAVILA AND TEVES -- Appreciate the progress on intellectual property rights but we must continue to work on this issue, especially regarding pharmaceuticals and the entertainment industry -- Delighted to see so many US investors here. Important to work together to solve individual trade problems so that investors continue to look favorably on the Philippines; GOVERNANCE -- Welcome your support for electoral reform to strengthen people's confidence in the institutions of democracy; -- Extrajudicial killings undermine confidence in your Government's commitment to justice and ability to provide security to its citizens, as well as damage investor MANILA 00003064 004 OF 004 confidence in the RP as a safe place to do business. Creation of a new task force is a good first step, but it is essential to bring the culprits to justice. Visit Embassy Manila's Classified website: http://www.state.sgov.gov/p/eap/manila/index. cfm Kenney