Congressman Salceda on Politics and Economic Policy

UNCLAS SECTION 01 OF 02 MANILA 000473 SIPDIS STATE FOR EAP/EP, EB/TPP/TPA STATE PASS USTR FOR DKATZ STATE PASS USAID TREASURY FOR OASIA SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ETRD KIPR RP SUBJECT: Congressman Salceda on Politics and Economic Policy Sensitive but unclassified. Please handle accordingly. ¶1. (U) Summary: Over dinner on February 5, Representative Joey Salceda, a close advisor to President Arroyo, predicted the passage of the Roxas bill on pharmaceuticals and the eventual presidency of its sponsor, Senator Manuel Roxas. Salceda argued that the GRP has done what was necessary to stabilize the economy, and will now benefit from several years of high growth rates, but that the fundamental structural weakness of the economy will eventually re-assert itself. He expressed his support for a FTA with the U.S., but said the Philippines will not be able to make the constitutional changes which would be necessary to reach such an agreement. Salceda let slip that he expected to take over as Chief of Staff for President Arroyo, which was publicly confirmed by the president two days after the meeting. End summary. ¶2. (U) Economic Counselor and Philip Ingeneri, EAP/MTS desk officer for Philippine economic issues, dined with Salceda and three of his staffers. Salceda is a three-term congressman who will be stepping down at the end of his term in July, since term limits prevent him from seeking reelection. Salceda is one of the most informed economic thinkers in Philippine politics. His background includes periods spent in Europe as a financial fund manager for SBGC Warburg and Barings Securities, and he is one of the leading economic advisers to President Arroyo. FTA Needed, but Unlikely -------------- ¶3. (U) The discussion was wide-ranging, covering numerous economic and political themes. Questioned about the prospects for continued economic liberalization, Salceda argued vigorously for a greater opening of the economy, but expressed disappointment with what had been accomplished so far. He said he had had much higher hopes for the Arroyo administration, but its poor relationship with the Senate had limited its effectiveness. He expressed the hope that the GRP and USG would be able to negotiate a bilateral free trade agreement before the end of Arroyo's term in 2010. When we noted that negotiations for an FTA would require liberalization of constitutional provisions that limit foreign investment in large parts of the economy, Salceda replied that such changes would be 
politically impossible. The Roxas Bill -------------- ¶4. (SBU) Salceda confirmed that Senator Manuel "Mar" Roxas' bill restricting the rights of pharmaceutical patent holders was headed for passage, but noted that only an inability to obtain a quorum could stop the bill. (Note: This is precisely what transpired on February 8 and 9, originally the last days of the congressional session. On February 9, however, President Arroyo called a special two-day session for February 19 and 20 to bring several pieces of pending legislation, including the Roxas bill, to final votes. End note.) Even in that event, Salceda thought it likely the bill would pass in the lame duck session the first week of June. Salceda noted the bad blood between Senator Roxas and the pharmaceutical companies dating back some years. He said the companies had made a serious mistake tangling with the likely next president of the Philippines. He put at 60% the likelihood that Roxas would be elected to the presidency in the 2010 elections. Economic Growth to Increase, but Only Temporarily -------------- -------------- ¶5. (U) Salceda said that he expects economic growth to spike over the next two years as a result of fiscal reforms and the increased ability of the government to spend. Stronger pubic sector finances have brought down interest rates and improved confidence, with several banks now competing to provide fixed-rate 10%-11% twenty-five year loans. New revenue measures, a re-enacted 2006 budget that resulted in restrained spending, and significant savings from a stronger peso and lower-than-expected interest rates have created substantial fiscal space to expand spending on infrastructure and basic social services such as education over the rest of Arroyo's term. The 2007 budget, recently ratified by both houses of Congress, envisions expanding education spending from 119 billion pesos to 135 billion pesos (13.5%) and doubling infrastructure investments from 75 billion pesos to 157 billion pesos. ¶6. However, according to Salceda, after a short burst of growth the country would return to its usual "muddling through." The MANILA 00000473 002 OF 002 structural problems of the Philippine economy had not been dealt with and would continue to constrain growth. Salceda noted that recent research has shown that in other Southeast Asian countries 90% of poverty reduction has resulted from GDP growth and only 10% from state intervention. But Corruption Remains a Problem -------------- ¶7. (U) The growth of revenues and resulting expanded spending will increase opportunities for corruption, Salceda cautioned. He estimated that 80% of corruption in the fiscal sector translates into reduced revenues while the 20% represents diverted expenditure. Increased spending, though, would increase corruption on the expenditure side. Monitoring and oversight will be critical to ensuring that taxpayer funds deliver infrastructure, growth, and jobs. Salceda's Future Becomes Clearer -------------- ¶8. (SBU) After three terms in office, term limits do not allow Salceda another. He said he resisted entreaties to run for the Senate in this year's elections, and would instead join the administration. He confirmed that he has been one of Arroyo's closest economic advisers, and has a strong personal relationship with the president. He claimed to be among the few who can get on the President?s good side and "make her laugh" - usually with his biting cynical wit. Salceda said he would limit his stint in the administration to 18 months and then go to Wall Street "where the money is." One of his staffers confirmed later that Salceda had accepted President Arroyo's offer of the position of Chief of Staff being vacated by Michael Defensor, who is running for the Senate. The President's office publicly announced Salceda's appointment on February 9. Kenney