Congressman Salceda on Politics and Economic Policy

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SIPDIS

STATE FOR EAP/EP, EB/TPP/TPA
STATE PASS USTR FOR DKATZ
STATE PASS USAID
TREASURY FOR OASIA

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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
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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
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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

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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