A/S HILL'S MEETING WITH TRADE AND INDUSTRY SECRETARY

UNCLAS SECTION 01 OF 02 MANILA 003226

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E.O. 12958: N/A
TAGS: ETRD EAGR ETTC EINV KIPR RP
SUBJECT: A/S HILL'S MEETING WITH TRADE AND INDUSTRY SECRETARY
FAVILA AND FINANCE SECRETARY TEVES

REF: MANILA 03098

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ACCORDINGLY

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SUMMARY
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1. (SBU) In a breakfast meeting July 31 with Assistant Secretary
Hill and the Ambassador, Philippines Finance Secretary Gary Teves
and Trade and Industry Secretary Peter Favila expressed confidence
in the Philippines' strong economic growth, improving fiscal
situation, and solid cooperation between their two departments on
key economic programs. Fiscal reform measures are on track, but
increased spending on much-needed infrastructure and social services
will likely challenge balanced budget goals. Favila expected the
country could achieve 10% annual growth in investments and exports,
even as the government seeks to rationalize its investment
incentives. Hill and Favila discussed the possibility of a US-RP
Free Trade Agreement and agreed that a good first step would be to
pursue sectoral trade agreements. End Summary.


2. (U) Assistant Secretary Hill and the Ambassador met with Trade
and Industry Secretary Peter Favila and Finance Secretary Gary Teves
over breakfast on July 31. Also joining from the GRP were DTI
Undersecretary Elmer Hernandez and Finance Undersecretary Roberto
Tan. Both secretaries were optimistic about the Philippines'
economic situation. Favila said the exceptionally strong
collaboration between both the Finance and Trade departments in
addressing key economic issues and concerns is helping move the
economy forward.

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FISCAL SITUATION
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3. (SBU) Teves said fiscal measures are on track for the year and
he expects to achieve the President's budget deficit target of 2.1%
of GDP (down from 2.7% of GDP for 2005). Favila said the
President's original target for a balanced budget by 2010 has now
been pushed forward to 2008. To achieve this goal, Teves said the
government must maintain fiscal discipline while stepping up
spending on social services and infrastructure.


4. (SBU) Favila said infrastructure spending needs to increase to
at least 5% of GDP to finance the major new infrastructure
initiatives outlined by President Arroyo in her State of the Union
Address (reftel). Teves said this increase would necessarily
reduce other spending or require a continuing budget deficit. Hill
said the GRP must increase infrastructure spending to compete for
investment with other countries in the region.


5. (SBU) Teves said he was pleasantly surprised at the level of
public interest in the Millennium Challenge Program, signed July 26.
He added "we need to make sure we do well." Hill commented that
President Arroyo's prompt decision to match the $20 million grant
demonstrated the GRP's commitment to a successful program.

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INVESTMENT CLIMATE
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6. (U) Favila said he is confident the Philippines can achieve 10%
annual growth in both investments and exports. Teves and Favila
jointly conducted a series of "economic roadshows" over the last 10
months meeting with potential investors to attract additional
investment. During their first roadshow to New York and London in
October, Teves said investors were skeptical, but subsequent
roadshows found investors more enthusiastic due to increasingly
positive economic and fiscal indicators. Favila said he also wants
to place trade offices overseas in target countries but needs
funding. Favila added the U.S. is "always our number one partner,"
but we need to branch out and attract more investment from other
countries.


7. (U) Favila said current investors are happy about people, but
not about contracts. Investors are attracted to the Philippines'
low-cost, high-quality labor, but the GRP is concerned about the
country's long-term ability to supply an adequate labor pool,
particularly given concerns about declining English language
proficiency. The most frequent complaint, he said, is the lack of
contract integrity and the need to fight lengthy court battles with
often undesired results. Finance Undersecretary Tan said his office

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is receiving positive feedback from bankers who are happy about the
improving fiscal situation, aided by the recently improved outlook
of the Philippines' credit rating from negative to stable.

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RATIONALIZATION OF INVESTMENT INCENTIVES
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8. (SBU) Favila said the GRP needs to focus on improving
macroeconomic fundamentals, which will ultimately strengthen the
economy and the investment climate. One measure is to rationalize
the current package of investment incentives offered to investors,
which President Arroyo alluded to in her State of the Nation
Address. Favila said the current incentives package, based on
decades of various laws, needs to be reviewed.


9. (SBU) Undersecretary Hernandez said the GRP basically looked at
two options: continue to offer the current incentive program at the
cost of needed revenues or judicially manage the incentives program
in order to build a stronger economy in the long-term. Investors
ultimately want the stronger economy, Hernandez said. When Favila
met with the American Chamber of Commerce, members expressed
concern, but most understood the GRP's rationale.


10. (SBU) Both Favila and Teves emphasized that their departments
are jointly working on the incentives rationalization plan and are
coordinating closely with Senator Ralph Recto on the legislation.
They are also consulting with the World Bank. Teves said they want
a reasonable but competitive package that considers the fiscal
situation. Favila said the GRP will improve non-fiscal incentives
such as ease of doing business and cutting through government
bureaucracy. DTI is working to set up a pilot program with the city
of Davao on the island of Mindanao.

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INTELLECTUAL PROPERTY RIGHTS
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11. (SBU) Favila expressed appreciation to Embassy Manila and to
the U.S. Patent and Trademark Office for arranging an individualized
training program on intellectual property rights (IPR) for
Intellectual Property Office Director General Adrian Cristobal.
Favila said the GRP has much to learn. In particular, it needs to
convict more IPR violators, which Favila said is a big challenge.
In a meeting with the Chief Justice of the Supreme Court, Favila
said it was clear the regular courts are not conversant on IPR
issues.

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US - RP Free Trade Agreement
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12. (SBU) Favila asked Hill about the possibility of a US-RP Free
Trade Agreement (FTA) in the near future. He said the GRP is about
ready to sign an FTA with Japan (the Japan-Philippines Economic
Partnership Agreement) and that the first question the Philippine
Congress will ask when it goes through is "what about the U.S.?"
Hill said we should work to maximize bilateral trade opportunities
but suggested sectoral trade agreements may be more realistic in the
near-term. Favila agreed.


13. (U) A/S Hill did not have an opportunity to clear this message
before departing post.

KENNEY