2007 a Good Year for Philippine Economy, and for USG

UNCLAS MANILA 000010

SIPDIS

SIPDIS

SENSITIVE

STATE FOR EAP/MTS, EAP/EP, EEB/IFD/OMA
STATE PASS EXIM, OPIC, AND USTR
STATE PASS USAID FOR AA/ANE, AA/EGAT, DAA/ANE
STATE PASS ASIAN PACIFIC ECONOMIC COOPERATION
TREASURY FOR OASIA
USDOC FOR 4430/ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV PGOV ENRG SENV TPHY RP
SUBJECT: 2007 a Good Year for Philippine Economy, and for USG
Economic Efforts in the Philippines

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Summary
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1. (SBU) Embassy Manila's long-term efforts to promote economic
reforms and improved governance are one factor behind the increased
performance and resilience of the Philippine economy. Although
statistics for the entire year are not yet available the economy is
on track to grow at around seven percent for the entire year,
unemployment and inflation are down, government revenues up. This
has also been a significant year in our promotion of economic
reforms, and in civil aviation safety, intellectual property rights,
and marine science efforts. End Summary.

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Excellent Overall Macro Performance
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2. (U) U.S. economic policy towards the Philippines has clearly and
consistently emphasized domestic Philippine economic growth with
equity as the best way of advancing larger U.S. interests in the
region. Over the past several years, the Philippine economy has
demonstrated a newfound strength and resilience, and foreign
investors have demonstrated increased confidence in the country's
future. January-September Gross Domestic Product (GDP) expanded by
7.1% year-on-year, and is on track to exceed the high end (6.7%) of
the Government's targeted growth range.


3. (U) Full-year growth of near 7% will be the economy's strongest
expansion in three decades, capping nine consecutive quarters of
growth at greater than 5%. Personal consumption continued to fuel
the economy's growth on the demand side -- helped by robust
remittances from overseas Filipino workers. Government construction
expenditures (up 30% in real terms) also contributed, reflecting a
deliberate policy enacted after the passage of enhanced tax
measures. Private construction investments (up 10%) broke from two
consecutive years of negative growth, boosted in part by overseas
workers' investments in real estate, the demand for office space
from the booming business process outsourcing industry, and lower
interest rates.


4. (U) The balance of payments surplus was $7.8 billion through
October and is poised to end 2007 at an all-time high on the back of
remittances and higher net inflows of foreign portfolio and direct
investments. Remittances from overseas workers are expected to
exceed $14 billion by yearend. Net foreign portfolio investment
increased to an estimated $3.7 billion through November, up 76%
year-on-year. The Central Bank estimated net foreign direct
investment at $1.9 billion through September, up 22.3% from 2006's
comparable nine-month level. The Central Bank's gross international
reserves reached a new high of $32.5 billion as of end-November,
equal to about six months of goods and service imports.


5. (U) The Philippine Government is on track towards staying within
the 1%-of-GDP fiscal deficit ceiling programmed for 2007. For a
second consecutive year, the deficit-reduction program and improved
financial performance of other public sector entities have yielded
surpluses for the consolidated public sector. Although still high,
the debt of the consolidated public sector has declined to under 80%
of GDP, from 2003's peak 118%-of-GDP ratio. Improved public sector
finances and lower inflation have helped bring down domestic
interest rates to a record low and consumer price inflation will
average below 3% during 2007.


6. (U) From January through mid-December 2007, the peso
strengthened by 18% versus the US dollar, the most among regional
currencies. The Government pre-paid foreign denominated
obligations, relaxed ceilings for foreign exchange purchases, and
built-up international reserves, partly to stem the peso's rapid
appreciation. As of mid-December, the Philippine Stock Exchange
index was up nearly 22% for the year. As of September 2007, the
share of non-performing loans and foreclosed assets to total
commercial banking system assets had declined to 5.3% (from 6.3% at
the end of 2006 and May 2002's 15.1% Asian crisis peak).

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Economy demonstrated Ability to Withstand Shocks
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7. (SBU) These positive macro economic developments have occurred
in spite of factors that in the past might have shaken business

confidence or dampened performance, including rising fuel prices,
repeated corruption allegations against the Arroyo Administration,
coup plots, terrorist bombings, an unruly legislature, and an
irresponsible press. The Government will beat its deficit target
this year despite under-performing tax collections if only because
of strong privatization receipts and lower-than-projected debt
payments.

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Trade Healthy
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8. (U) The United States continued to be the Philippines' largest
trading partner in 2007, accounting for 16.9% of Philippine exports,
and 14.6% of its imports on a value basis. Two way merchandise
trade between the United States and the Philippines amounted to
$12.6 billion over the first nine months of 2007. The Philippines
is the fifth largest beneficiary of the General System of
Preferences, with $928 million in Philippine goods entering the
United States under the program through September, or 13.4% of all
Philippine exports to the United States.

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USG Reform Accomplishments
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9. (SBU) Progress was made on many of our priority areas for
economic reform this year. Among the most important of the
successes we shared with our Philippine allies were:

-- Energy Privatization: 2007 was a banner year for Philippine
power privatization. Thirty-nine percent of the government's
electric generation capacity has now been privatized, up from 11% at
the start of the year. The 25-year concession for the National
Transmission Company, TransCo, was sold for $3.95 billion. This is
a record amount for a government asset sold in the Philippines and
will be helpful in retiring the debt. We will continue to press for
the government to meet its statutory obligation to sell off 70% of
capacity and liberalize the sector.

-- Civil Aviation Liberalization: Though President Arroyo did not
sign a decree re-liberalizing service to the former Clark airbase,
as many had hoped, she instead instructed her negotiators to agree
to a significantly liberalized civil aviation agreement with South
Korea, one of the most important sources of tourists to the
Philippines. The fight over liberalization of this sector will
continue in 2008.

-- Fiscal Reform and the Fight Against Corruption: The Millennium
Challenge Corporation Threshold Program for the Philippines, focused
on increasing transparency and effectiveness in revenue collection
and improving the work of the anti-corruption institution made
significant progress. The project is on track to meet most key
indicators. USAID assistance programs also made a significant and
quantifiable contribution to revenue collection.

-- Infrastructure and Education spending: As a result of the
improved fiscal situation and at the urging of the Embassy and many
of our partners in policy advocacy, the government has significantly
increased funding for both primary education and infrastructure,
both of which have been starved for funds in recent years.

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Philippine Civil Aviation Safety Regulation Hit
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10. (SBU) The year ended with the FAA on the verge of announcing a
downgrade to Category 2 under its International Aviation Safety
Assessment program. Post has worked with the government and
industry since the initial FAA assessment visit in July to build
understanding of the situation and a commitment to reform. The FAA
team that announced the decision to Philippine officials in November
noted that the Filipinos had been exceptionally well-prepared for
the downgrade news by Post and had given serious thought to how the
problems could be remedied. Even before the FAA team delivered its
assessment, the Philippine House of Representatives passed
legislation to create a new Philippine Civil Aviation Authority
based on international recommendations. In 2008 we will be
monitoring the Philippine plans to regain Category 1 status and
working closely with Philippine officials, industry and the FAA to
help them achieve that goal.


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More Nuanced Picture on IPR
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11. (U) Intellectual property rights protection remained a
significant concern in 2007. While the Philippine government
promoted IPR protection, and seized some IPR infringing materials
including clothing, software, and optical discs, the lack of
prosecutions and convictions continues to be a major problem. We
maintain our aggressive outreach in engaging industry, the
administration and congress on the "Cheaper Medicines Bill" to
minimize impact on U.S. industry and ensure that any legislation
passed is consistent with Philippine international commitments and
U.S. policy. We played a key role in quashing a Department of
Justice decision which would have allowed Philippine pirates to
re-broadcast with impunity U.S. television content without
authorization. During 2007, several dozen Philippine government
officials involved in intellectual property rights protection
participated in U.S. training programs and officials from the Office
of the United States Trade Representative emphasized IPR during two
visits to Manila, as did the regional attach of the U.S. Patent and
Trademark Office.

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Major Accomplishments in Marine Science
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12. (U) We played a key role in assisting marine scientific
research projects in Philippine waters in 2007. The scientific
research highlight was the successful deep sea exploration of the
Inner Space Speciation Project conducted by scientists from Woods
Hole Oceanographic Institution and National Geographic. The project
received extensive local and international press coverage and will
be on National Geographic Television and in the December 2008 issue
of National Geographic Magazine.


13. (U) We coordinated officials from the United States Department
of Agriculture, Federal Communication Commission, and the Economic
Bureau's Office International Information and Communications Policy
who conducted training and consultations on delivering high-speed
internet in rural areas. Post convened intergovernmental and
non-governmental stakeholders to formulate an oil spill plan. We
hosted Science Fellows from the U.S. Environmental Protection Agency
to acquaint the Department of Science and Technology with U.S.
technology transfer laws and to assist Ateneo University, the Manila
Observatory, non-governmental organizations interested in coastal
conservation, and the Philippine Tropical Forest Conservation
Foundation in pinpointing environmental problems in the Philippines
via satellite mapping.

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Progress in Combating Terror Finance
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14. (U) Post assisted in training almost 1,000 Philippine students
in Anti-Money Laundering and Countering Terrorism Financing in 2007.
The Human Security Act which passed congress in June gives
Philippine officials valuable new law enforcement tools for
collecting information on possible sources of financing for
terrorism. In November, Philippine officials expressed a new
determination to independently nominate several Philippine nationals
involved in terror finance to the United Nations 1267 Committee.

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Comment
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15. (U) Although the general macroeconomic outlook has improved
significantly, the Philippines continues to face important
challenges and must sustain the reform momentum to catch up with its
regional neighbors and translate current optimism into the long-term
confidence needed for higher investment levels, sustained high
growth, employment generation, and poverty alleviation. Sustaining
longer-term fiscal stability that allows for higher spending on
infrastructure and social services will require more aggressive
efforts to strengthen tax collection and administration as
privatization receipts are not a sustainable revenue source. The
Philippines continues to struggle with slipping competitiveness and
anti-corruption rankings because other countries are moving more
aggressively to address problems in these areas.


Embassy Manila's detailed economic reform agenda can be accessed on
the classified Intellipedia at
www.intelink.sgov.gov/wiki/Philippines_Econom ic_Prior ities.

Kenney