UNCLAS SECTION 01 OF 03 MANILA 000378

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

E.O. 12958: N/A
TAGS: EFIN ECON ECIN RP CN XE XD
SUBJECT: Philippines: Holding Up But Pain Increasing

REFS: A) 08 Manila 2532, B) 08 Manila 2725, C) 08 Manila 2740, D)
Manila 0108

SENSITIVE BUT UNCLASSIFIED


1. (SBU) Summary: The Philippines is unlikely to slip into
recession in 2009 (Refs A and B). However, the global financial
crisis is inhibiting capital formation, depressing trade, dampening
tourism, and eliminating jobs in some sectors. The Philippine
Central Bank cut interest rates again in January and the
government's budget deficit will increase. The Philippines will
weather the crisis better than many of its neighbors, but further
reforms are needed to stage and sustain the strong post-crisis
recovery required to generate jobs, boost investments, and alleviate
poverty (Ref C) -- which remains the focus of U.S. development
assistance and policy advocacy here (Ref D). End Summary.

GDP Musters 4.5% Fourth-Quarter 2008 Growth
--------------


2. (U) Philippine GDP growth slowed to 4.6% in 2008 (a six-year
low) from 7.2% in 2007 (a three-decade high). The economy's 4.5%
year-on-year expansion during the fourth quarter surpassed most
expectations. Personal and government consumption grew 4.5% and
4.7% in real terms, respectively. Construction spending grew at
11.6%. However, weak investments and exports were a drag on
economic growth. Fourth-quarter investments in capital equipment
and inventories declined by 7.4% and 84.5%, respectively; and
combined merchandise and service exports contracted by 7.5% in real
terms.


3. (SBU) The International Monetary Fund recently reduced its
Philippine growth forecast to 2.25% as have a number of
credit-rating agencies in line with more pessimistic global economic
growth projections. Philippine economic planning officials
privately admit that the government may need to review its current
3.7%-4.7% growth target for 2009 in view of increasingly gloomy
global economic prospects, but they still expect growth to be higher
than the IMF forecast.

Banks' NPL Ratio Lowest Since Asian Crisis
--------------


4. (U) The Central Bank reported recently that the commercial
banking system (which makes up more than 90% of aggregate banking
sector resources) recorded a 3.8% non-performing loan ratio as of
end-November 2008, the lowest since the ratio peaked at 18.8% in
October 1981.

Overseas Deployment Holding, But Prospects Cloudy
-------------- --------------


5. (U) The Philippine Overseas Employment Agency (POEA) reports
that overseas deployment of Philippine workers grew nearly 28% to
more than 1.3 million during 2008. Fourth-quarter deployment
expanded 9.7% year-on-year despite the troubled external
environment, supporting the steady flow of remittances that helped
prevent a sharper slowdown in domestic demand and overall economic
growth. Deployment in January 2009 increased 18% year-on-year.
Encouraged by this relative resilience and the nearly 480,000 active
job vacancies as of mid-February (more than a quarter for
professional, technical and managerial workers), the Agency remains
hopeful about reaching its one million annual deployment target in

2009. The officials estimated crisis-related overseas job losses at
less than 5,500 thus far out of the more than four million Filipino
contract workers abroad, with nearly 80% of the lost jobs
representing retrenchments by electronics and export manufacturing
firms in Taiwan. There are reports that some overseas workers are
settling for lower pay/benefits to avoid lay-offs. Although
full-year 2008 overseas workers' remittances expanded by 13.7% to a
new record high $16.4 billion (10% of GDP), fourth quarter inflows
slowed to 4.6% growth year-on-year and to only 1% growth in
December. There are down-side risks to the government's current
6%-9% remittance growth projection for 2009, depending on evolving
global developments, but officials currently see flat growth as the
worst case scenario and remain confident that workers' remittances
will muster some expansion this year due to the deployment of
higher-skilled Filipinos.

Hefty Drop In Exports and Imports
--------------


6. (U) In December, total export revenue plunged a record 40.4%

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year-on-year, led by a 47.6% year-on-year drop in receipts from
electronics shipments (which contribute nearly two-thirds of annual
Philippine exports). Full-year 2008 exports declined 2.9% from
2007, pulled down by a weak fourth quarter performance that saw
October-December 2008 export receipts drop 22.5% and electronics
exports decline by 27.7% from the third quarter of 2007. Low
local-value-added (estimated at 30%) of electronics manufacturing
here means that even this dramatic fall in exports has a less dire
impact on the domestic economy.


7. (U) Cumulative January-November import payments increased 5.6%
year-on-year, although the import bill dropped significantly
year-on-year in October (11.1%) and plunged by 31.5% in November
(the sharpest decline in over two decades - December figures are not
yet available). Although weakening imports will temper balance of
payments pressures from sputtering exports and investment flows,
they signal weakening economic activity. Excluding oil/fuel (where
price effects drove down imports), November 2008 import payments
still fell by a steep 29% from November 2007, suggesting escalating
uncertainties on business sentiment and local and external demand
expectations. Imports of raw materials and intermediate inputs
(down 32.8%) led the decline, with inputs for the electronics sector
dropping by more than 50% year-on-year. November imports of capital
equipment and consumer goods also declined by 29.3% and 6.7%
year-on-year, respectively.

Emerging Pain for Tourism Industry
--------------


8. (U) Foreign tourist arrivals -- up 8.7% in 2007 - managed 1.5%
growth to 3.1 million in 2008 despite the twin shocks of high oil
prices and the global financial crisis. While January-July 2008
foreign visitor arrivals increased by more than 6% from 2007's
comparable period, foreign visitors declined by low single-digits
during the months of August, September and October; and, as the
global financial crisis escalated, contracted by 12.3% in November
and 6.5% in December (for a combined November-to-December decline of
nearly 9% year-on-year). The Philippine national income accounts
show that foreign demand for tourism-related services tumbled some
35% year-on-year in real terms during the second half of 2008 --
swamping the 7% real growth rate recorded during the first semester.
Tourism services' share of full-year GDP declined from 3.4% in 2007
to 2.8% in 2008. Business people report that vacancy rates have
doubled to around 40% in major hotels in Manila as businesses seek
to save on travel expenses and conserve capital.

Softening Labor Market
--------------


9. (U) Pressures on the labor market have begun to emerge.
According to Philippine Labor Department officials, businesses
operating here have laid off some 40,000 workers since October 2008,
while putting another 33,000 on shorter work hours. On January 30,
the Labor Department issued guidelines on the adoption of flexible
working arrangements (i.e., compressed workweeks, temporary
reduction in workdays, rotation of workers, flexible holiday
schedules, etc.) as a response to the global economic downturn. A
number of bright spots remain, led by still promising employment
prospects in the business process outsourcing industry, which
expects to generate at least 100,000 new jobs this year. Citing
findings from a recent international survey, an official from the
Philippine office of a multinational recruitment company also told
the press recently that many companies operating in the country
currently still plan to hire at the managerial/professional levels
and that firing rates are still relatively low -- better than the
survey results in, among others, Singapore, China and India.
Although net job creation may decline from the half million
positions created in 2008 and exert upward pressure on employment
and underemployment rates, many here still expect positive net job
generation this year.

Further Policy Rates Cut and Deficit Spending
--------------


10. (U) For a second consecutive month, the Philippine Monetary
Board (the Central Bank's policy-making body) cut interest rates by
50 basis points during its January 29 meeting -- a total reduction
of 100 basis points since December. Officials hinted that
decelerating inflation (7.1% in January 2009, a ten-month low) will
provide room for further monetary easing. The Monetary Board --
which doubled resources for the Central Bank's rediscounting
facility to 40 billion pesos ($850 million) last November -- further
increased the rediscounting budget to 60 billion pesos ($1.3

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billion) in mid-February.


11. (U) Department of Finance Secretary Margarito Teves also has
hinted in a number of recent forums that the government may raise
its programmed deficit ceiling even further from 1.2% of GDP -- to
as much as 2% of GDP -- to prevent downward pressure on revenues
from compressing the planned 14% year-on-year expansion in the 2009
budget.


12. (SBU) In January, the Economic Planning Department unveiled a
330 billion pesos (roughly $7 billion) "national resiliency program"
stimulus package. Only some 40% of that amount actually represents
new crisis-response commitments, and we assess that most of those
commitments are smoke and mirrors rather than actual new outlays.
Key presidential economic advisor Joey Salceda told EconCouns that
he advised the President to "look like you are spending, but do not
spend." In his view, the downturn is going to continue beyond 2009
and the GRP does not have the resources to have a noticeable impact
on the downturn via fiscal policy, so it is better not to expend the
resources on such an effort.

Comment
--------------


13. (SBU) Although the Philippines may be less affected than its
more globally-integrated neighbors in the short-term, we remain
concerned about the country's ability to post the strong post-crisis
recovery needed to create jobs, attract investments, and ease
poverty. Although we continue to monitor the unfolding impact of
the global financial crisis closely, Post assistance efforts remain
focused on helping the Philippines overcome longer-term challenges
to achieving high, sustainable, and inclusive growth by, among
others, improving competitiveness and reducing barriers to trade and
investment; improving revenue collection efficiency and public
expenditure management; strengthening public sector institutions;
and promoting transparency and good governance.

Kenney