THE PHILIPPINES: YEAR IN REVIEW 2006

C O N F I D E N T I A L SECTION 01 OF 04 MANILA 000004 SIPDIS SIPDIS STATE FOR EAP, PM, AND EAP/MTS USPACOM ALSO FOR FPA HUSO AND J5 SECDEF/OSD/ISA/AP (TOOLAN/BAILEY) JOINT STAFF/J5 (WILKES/ROBINSON/CLEMMONS) E.O. 12958: DECL: 10/26/2016 TAGS: PGOV PREL PTER ECON EAID MOPS PHUM RP SUBJECT: THE PHILIPPINES: YEAR IN REVIEW 2006 REF: A. 06 MANILA 5109 ¶B. 06 MANILA 5050 ¶C. 06 MANILA 4809 Classified By: (U) Ambassador Kristie A. Kenney for reasons 1.4(b) and (d). ¶1. (C) SUMMARY. President Arroyo has emerged in a stronger position at the end of 2006, but faces challenges ahead in preserving control of the House in the May 2007 bi-elections. Arroyo has been helped by a buoyant economy in 2006, but the country will have to deal with power privatization and crumbling infrastructure and health and education systems to sustain growth over the longer term. Counterterrorism is one of the real bright spots in 2006 as Philippine troops have demonstrated that, with U.S. help, they are capable of taking on the Abu Sayyaf and Jemaah Islamiyah threat. The peace process with the Moro Islamic Liberation Front remains on track, but difficult issues will have to be resolved in 2007 to secure a deal. Defense and police reform appear fully entrenched, and to have the buy-in of the rank-and-file. Continued U.S. support and engagement are key to achieving further gains in counterterrorism and economic, defense, and police reform, and could help address the serious problem of alleged extra-judicial killings. END SUMMARY. A STRONGER PRESIDENT FACING A DIVIDED OPPOSITION -------------- --- ¶2. (C) Bruised, battered, but unbowed, President Gloria Macapagal Arroyo emerged at the end of 2006 in perhaps her strongest position since assuming office after the deposition of former President Estrada in 2001. Despite consistently low popularity figures, President Arroyo faces no real threat from a divided opposition that has consistently failed to reignite the popular fervor that led to EDSA I and EDSA II. She faced down a coup attempt in February by elements of the Scout Rangers and Philippine Marine Corps, and turned back a feeble impeachment attempt in August. Proven loyalists General Hermogenes Esperon and distant relative Director General Oscar Calderon respectively command the Armed Forces and Philippine National Police. High-ranking coup plotters, including the former commanders of the Scout Rangers and Philippine Marine Corps, await trial by courts-martial. ¶3. (C) President Arroyo faces challenges ahead in 2007, however. The upcoming bi-elections in May could upset the Administration's control over the Philippine House and add to the number of Opposition members in the Senate, making it more difficult to quash the inevitable effort to resuscitate an impeachment complaint. President Arroyo, who has shown herself adept at using the levers of power to dish out favors and curry support, will use all her political wiles to ensure she retains a majority. HELPED BY A GROWING ECONOMY -------------- ¶4. (SBU) President Arroyo has been helped by the Philippine economy, which performed well in 2006 (ref b). Growth hit an estimated 5.5 percent, while inflation slowed to only 4.7 percent. Both the stock market and the peso ended the year at record highs. The economy was bolstered by a 15 percent increase in remittances by overseas workers, a recovery in exports, and sensible fiscal policies, which have brought the budget deficit under control. In recognition of the Philippine government's progress in reducing public sector debt, the World Bank announced December 22 that it had approved a new $250 million development loan to support further fiscal reform. The Philippine government also announced December 29 that it intends to pay off early the outstanding balance of its debt to the International Monetary Fund, which will enable it to exit its post-program monitoring arrangement with the Fund. Unfortunately, the long-term prognosis is less rosy. Privatization of the power sector has moved forward very slowly. Infrastructure and the education and health systems have been allowed to crumble, and corruption and inconsistent policies on the part of administrations stretching back decades have kept investment far below its potential. ¶5. (SBU) Our focus in 2007 will be on policy advocacy on the key long-term issues facing the Philippine economy. We will lobby for consistent policy, including resolution of the MANILA 00000004 002 OF 004 current debate over investment incentives and consistent and effective protection of intellectual property rights. We will also lobby for greater education and health spending, targeting of infrastructure spending on key projects, and rekindling the effort to privatize the power sector. The Millennium Challenge Corporation's Threshold Program is an opportunity to combat corruption while improving the fiscal situation. We will need to find other ways of combating corruption, as well. CHARTER CHANGE WILL REMAIN AN ISSUE IN 2007 -------------- ¶6. (C) The effort to amend the Philippine Constitution, despite the spectacular failure of the "people's initiative" and constituent assembly gambits, is likely to re-emerge in 2007, should President Arroyo and her ally, House Speaker Jose de Venecia, succeed in maintaining control of the House. De Venecia, who openly aspires to be prime minister, is unlikely to give up his goal of moving the Philippines to a uni-cameral parliamentary system through charter change. COUNTERTERRORISM BRIGHT SPOT -------------- ¶7. (C) Counterterrorism represents a real bright spots for the Philippines in 2006. The House passed an anti-terrorism bill and the Senate has made progress with its version, which Senate President Villar has said he will make priority legislation in 2007. Armed Forces of the Philippines (AFP) troops on the island of Jolo have shown remarkable tenacity in pursuing Abu Sayyaf Group (ASG) and Jemaah Islamiyah (JI) leaders. Working extremely closely with U.S. Joint Special Operations Task Force (JSOTF) counterparts, who are providing support down to the battalion level, the AFP has forced the ASG and JI out of their entrenched base camps and kept them on the run. U.S.-trained light infantry battalion and Light Reaction Company forces have been at the cutting-edge of the effort, and U.S. intelligence, surveillance, and reconnaissance support is fully integrated into AFP operations. Civil-military operations, with JSOTF assistance, have helped shape the battlefield and isolate the terrorists from the population. These efforts complement USAID's development assistance in infrastructure, education, health, and renewable energy in building communities that have a stake in a peaceful Mindanao. 2007 should see further improvements, as the AFP continues to internalize and put into practice U.S. doctrine and advice, and a sustained effort could turn the corner in the counterterrorism fight on Jolo. ¶8. (SBU) Post's in-country Anti-Terrorism Assistance Program has helped professionalize the inter-agency Anti-Terrorism Task Force (ATTF),which in 2006 arrested, captured, or killed 88 suspected terrorists, and seized over 900 kilograms of explosive materials. The ATTF will become institutionalized once the House and Senate pass the pending anti-terrorism legislation. PEACE PROCESS STILL ON TRACK -------------- ¶9. (C) Although momentarily stalled over the difficult issue of ancestral domain, peace negotiations between the Philippine government and Moro Islamic Liberation Front (MILF) remained on track at the end of 2006, with informal talks set to resume in 2007. The GRP's generous self-determination offer appears to have helped bridge the gap between the two sides, but the devil remains in the details, which may include a plebiscite to ratify any deal. We will continue to encourage both the Philippine government and MILF to stick with the peace process, and continue our assistance to consolidate and expand peace and prosperity in Mindanao whether or not peace talks succeed in 2007. FURTHER ENTRENCHMENT OF DEFENSE AND POLICE REFORM -------------- -------------- ¶10. (C) Former Secretary Cruz's tenure at the Department of National Defense (DND) saw the further entrenchment of Philippine Defense Reform (PDR),with the drafting of a National Defense Act now under consideration by the legislature, and the approval of ten major plans of action and milestones. Thirteen U.S. Subject Matter Experts are on MANILA 00000004 003 OF 004 the ground and integrated into the DND and AFP Joint Staff. Cruz's premature departure in November 2006 over an internal cabinet squabble about charter change is unlikely to derail the reform program, which has been firmly embraced by Chief of Staff General Esperon and the senior leadership of the AFP. 2007 should see further advances, with implementation of the Battalion Retraining Program and Combat Lifesaver Training, which will translate PDR concepts into practical benefits for the troops. Both House and Senate leaders have said that they intend to make the National Defense Act priority legislation in the New Year. ¶11. (C) The Philippine National Police has encouragingly sought to emulate the AFP's example in pursuing its own transformation effort. A resident Embassy Senior Law Enforcement Advisor will assist in moving this reform initiative forward in 2007, with a program aimed at developing model police stations. UPHOLDING THE VISITING FORCES AGREEMENT -------------- ¶12. (C) The creative legal strategy employed by the Philippine Government in late December to justify returning custody of Lance Corporal Smith to the U.S. Embassy (ref a) despite a clear ruling from the Court of Appeals reflected the Government's commitment to the VFA and the priority it places on our military/military relations. There will undoubtedly be considerable political and public blowback, but the Arroyo Administration is prepared to withstand this criticism and legal scrutiny. Smith's appeal of the guilty verdict will be decided separately by the higher courts and will take even longer. We will remain closely engaged throughout the judicial process to ensure that his rights under the VFA are respected. EJKS - A CALL FOR ACTION -------------- ¶13. (C) The question of arbitrary, unlawful, or extra-judicial killings (EJKs) has been a prominent issue throughout 2006. Responding to public demand for action, the Department of Interior and Local Government in May directed the Philippine National Police to form a special task force, Task Force Usig, to investigate the killings. Usig has so far filed 67 cases against the individuals allegedly involved, including some members of the police and the military, and is trying to determine how many of the killings are politically motivated. In August, President Arroyo went a step further to create a high-profile, independent commission headed by former Supreme Court Justice Jose A. Melo to investigate the alleged killings and to make policy and legislative recommendations to help stop them. The Melo Commission completed its work in December and is due to present a report to President Arroyo sometime early 2007. With politically motivated violence an ever-present component of Filipino politics, President Arroyo is certain to face pressure to take measures to stem the killings in the run-up to the May 2007 elections. We hope, with Department support, to implement in 2007 targeted training (ref c) to improve police and prosecutor cooperation investigating and prosecuting these killings. ASEAN CHAIRMANSHIP -------------- ¶14. (C) The Philippines' chair of the Association of Southeast Asian Nations (ASEAN) got off to a rocky start in December when it was forced to cancel the December Cebu Summits due to fears of a typhoon and potential terrorist threats. Nonetheless, Department of Foreign Affairs counterparts tell us they intend to pursue an ambitious agenda at the rescheduled ASEAN-related Summits in January and the ASEAN Regional Forum meetings later in the year, focused in part on fostering productive cooperation on Burma and North Korea. COMMENT -------------- ¶15. (C) The often-chaotic political environment in the Philippines can seem daunting, and we face numerous MANILA 00000004 004 OF 004 challenges ahead in 2007. Nonetheless, as we have seen in 2006, concerted, sustained engagement with our Philippine counterparts can make a difference in counterterrorism and economic, defense, and police reform. Some of issues we will be monitoring in 2007 include the possible capture of Dulmatin, Umar Patek, or other senior terrorist leaders; major government successes in the campaign against the Communist Party of the Philippines/New People's Army; potential significant U.S. investment in the energy sector; potential violence and fraud in the May 2007 elections; and, inevitable pressure to renegotiate the VFA before a final verdict in the Smith case. Visit Embassy Manila's Classified website: http://www.state.sgov.gov/p/eap/manila/index. cfm KENNEY