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

UNCLAS SECTION 01 OF 02 MANILA 003226 SIPDIS SENSITIVE SIPDIS DEPT FOR EAP/EX AND EAP/MTS STATE PASS TO USTR FOR BWEISEL AND DKATZ USDOC FOR 4430/ITA/MAC/ SBERLINGUETTE USDOC PASS TO USPTO FOR PETER FOWLER 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 SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION - PROTECT ACCORDINGLY -------------- SUMMARY -------------- ¶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. -------------- FISCAL SITUATION -------------- ¶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. -------------- INVESTMENT CLIMATE -------------- ¶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 MANILA 00003226 002 OF 002 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. -------------- RATIONALIZATION OF INVESTMENT INCENTIVES -------------- ¶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. -------------- INTELLECTUAL PROPERTY RIGHTS -------------- ¶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. -------------- US - RP Free Trade Agreement -------------- ¶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