Philippine Growth Target Cut, Fiscal Deficit Up

UNCLAS SECTION 01 OF 03 MANILA 001351 SENSITIVE SIPDIS 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 TREASURY FOR OASIA PACOM FOR FPA E.O. 12958: N/A TAGS: EFIN ECON ECIN RP CN XE XD SUBJECT: Philippine Growth Target Cut, Fiscal Deficit Up REFS: A) Manila 1192, B) Manila 0680, C) 08 Manila 2740 SENSITIVE BUT UNCLASSIFIED ¶1. (SBU) Summary: The Philippine government further cut economic growth targets and increased its budget deficit ceiling after disappointing first-quarter economic growth data (Ref A). The official unemployment rate has tapered, but more Filipinos are working fewer hours. While some groups push for "buy Filipino" government procurement, the government reaffirmed its commitment to ASEAN tariff reductions. Although most forecasts still see the economy mustering some expansion in 2009, the IMF and World Bank now predict negative GDP growth. Fiscal sustainability will be a serious challenge. End Summary. Government Slashes Growth Target... -------------- ¶2. (U) Following disappointing first-quarter economic growth numbers, the Philippine government announced that it had slashed its targeted 2009 GDP growth range to 0.8%-1.8%. Barely two months ago, the government expected 2009 GDP to expand between 3.1%-4.1%. The International Monetary Fund and the World Bank now predict 2009 GDP will contract by 1% and 0.5%, respectively. Most other forecasts see growth around the lower end of the government's new 0.8%-1.8% range. And Hikes Fiscal Deficit Ceiling -------------- ¶3. (U) The lower growth forecast spurred the government to raise its programmed 2009 deficit to 3.2% of GDP (about pesos 250 billion),up from 2.5% of GDP (pesos 199 billion) programmed in April. The larger deficit reflects a desire to preserve the 2009 "stimulus" budget (Ref B) despite weaker revenues. According to senior Department of Finance officials, credit rating agencies and debt markets appreciate the importance of fiscal pump-priming and have expressed "tolerance" for a deficit-to-GDP ratio of up to 3.5%. Medium-Term Fiscal Scenario Precarious -------------- ¶4. (SBU) Food, oil and global financial shocks interrupted the downward trend in the government's deficit-to-GDP and debt ratios in 2008 and 2009 and frustrated hopes of balancing the budget last year. In a meeting with econoffs, Department of Finance senior officials lamented recent laws (including a five percentage point reduction in corporate income tax rate and tax relief for individual income tax payers) that could cost the government 65 billion pesos (about 0.7% of GDP) in annual revenues. The officials said the government hopes to resume fiscal consolidation in 2010, but they do not expect to balance the budget without new revenue measures or severe belt-tightening. The Department of Finance has appealed to congressional leaders for action on pending proposals to increase excise taxes for tobacco and liquor and other revenue enhancement measures, and for a moratorium on revenue-losing bills. ¶5. (SBU) In meetings with econoffs, credit-rating agencies (including Fitch and Standard & Poor's) expressed more concern over medium-term revenue and fiscal prospects than over the Philippines' ability to weather the current economic storm. They fear that reduced revenue collections and higher debt ratios will threaten the government's credit rating (already below investment-grade). This could limit access to low-cost financing, constrain economic growth, and undermine macroeconomic stability. Remittances Grow, Exports Fall, Reserves Stable -------------- -- ¶6. (U) Overseas remittances have slowed from the double-digit growth rates of the past several years but continue to expand. Cumulative January-April remittances of $5.5 billion increased 2.6% from 2008's comparable period, according to recent data. This translates to 19.3% year-on-year growth in nominal peso terms (because of a weaker local currency) and, net of inflation, 12.3% growth in real peso terms from 2008. January-April exports declined 36.4% from 2008's comparable four-month level and electronics exports (which contribute over 60% of annual export revenues) declined by 40.2%. Preliminary indications from the local electronics industry association are that orders have improved month-on-month since April, raising hopes the export slump has begun MANILA 00001351 002 OF 003 to bottom out. ¶7. (U) The Philippines's merchandise import bill (down 35% year-on-year as of April) has also contracted because of the heavy dependence on imported inputs of the country's major exports. Net foreign direct investments sputtered to barely $45 million during the first quarter of 2009. The balance of payments remains in surplus ($2 billion as of May 2009) and the Central Bank's gross international reserves are stable at $39.3 billion (equivalent to more than six months of merchandise and service imports and three months of private and public sector debt payments falling due over the next twelve months). Unexpected Drop in Unemployment -------------- ¶8. (U) The unemployment rate declined from 8.0% to 7.5% between April 2008 and April 2009 according to the government's latest quarterly labor force survey. The total employed expanded 4.4% year-on-year, equivalent to more than 1.4 million more jobs. However, underlying statistics indicate a soft job market and a deteriorating quality of employment. Those working less than the regular 40-hour workweek increased from 35.6% (April 2008) to 41% (April 2009) of the total employed. Wage and salary workers declined from 52.9% to 51.9% over the same period, while self-employed and unpaid family workers (a rough proxy for employment in the Philippines's informal sector) increased from 47% to 48% and accounted for more than 70% of net job creation between April 2008 and April 2009. Scope for Monetary Easing; Deposit Insurance Doubled -------------- -------------- ¶9. (U) Philippine Central Bank officials hint of further interest rate cuts to the cumulative 175 basis-points reduction since December 2008. On May 27, President Arroyo signed into law a doubling of deposit insurance coverage to 500,000 pesos (roughly $10,500). Government officials cited the law as a "pre-emptive" measure to maintain confidence in the banking system in the midst of global financial uncertainties. Philippines to Honor AFTA-CEPT Commitments -------------- ¶10. (SBU) Under pressure from groups opposing trade liberalization, Philippine Trade Secretary Peter Favila publicly floated the idea of delaying tariff cuts set for January 1, 2010 under the ASEAN Free Trade Area-Common Effective Preferential Tariff (AFTA-CEPT) agreement. However, President Gloria Macapagal-Arroyo announced soon afterwards that the Philippines would implement its AFTA-CEPT commitments as scheduled. An executive order on the scheduled tariff cuts is pending her signature. Trade items affected by the tariff cuts include wheat, chicken/poultry, pork, dairy products, and fruits and vegetables, as well as the automobile and electronics sectors. Agricultural interests generally oppose the liberalization while the auto and electronics industries here favor the ASEAN-wide tariff reductions. There could be a significant negative impact on U.S. agricultural exports to the Philippines (septel). "Buy Filipino" for Government Procurement? -------------- ¶11. (SBU) Citing the U.S. "Buy America" procurement policy, two business chambers known for protectionist leanings continue to urge the government to purchase Philippine-made products. Current government regulations specify preference for majority Filipino-owned suppliers, but there are no guidelines requiring preference for locally-made (over imported) products. The Philippines is not a signatory to the WTO government procurement agreement. Officials from the Government Procurement Policy Board told econoffs that revised procurement guidelines are targeted for release in September, but details are still being worked-out. Comment -------------- ¶12. (SBU) Mildly negative or mildly positive growth will make little difference for a predominantly low-income population growing at more than 2% per year, more of who are expected to fall into poverty. Economists, investors, creditors and other Philippine observers are most concerned about addressing long-standing constraints to growth, competitiveness, and poverty alleviation (Ref MANILA 00001351 003 OF 003 C). The fiscal sector and remittances bear close watching. Kenney