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Cablegate: Update: Philippines and Global Financial Crisis

VZCZCXRO5739
OO RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHML #2340/01 2882349
ZNR UUUUU ZZH
O 142349Z OCT 08
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2085
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS IMMEDIATE
RHHMUNA/USPACOM HONOLULU HI//FPA//

UNCLAS SECTION 01 OF 02 MANILA 002340

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

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON RP
SUBJECT: UPDATE: PHILIPPINES AND GLOBAL FINANCIAL CRISIS

REFS: A) State 107872, B) Manila 2174

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION

1. (SBU) Summary: During October 6-10, the Philippine stock market
index dropped by more than 18% to its weakest level in more than 27
months and the peso hit seventeen-month lows, yet banks maintained
adequate foreign exchange and peso liquidity. The stock index then
rose by 8.4% on October 13-14. President Arroyo has called for an
ASEAN+3 summit to coordinate regional responses to the crisis
(septel). The Ambassador and Mission members conveyed Ref A points
on USG actions at public and private meetings. Potential Philippine
exposure to distressed financial institutions remains at less than
2% of Philippine banking resources. The Philippine government does
not allow insurance companies to invest in structured products. The
Philippines does not have a sovereign wealth fund and international
reserves remain adequate and conservatively invested. The economy
is in a stronger position to weather the global financial storm due
to fiscal and banking reforms and debt management initiatives, and
the financial crisis may be providing greater urgency to pursue
unfinished reforms. End Summary.

EXPOSURE TO TROUBLED INSTITUTIONS LIMITED

2. (U) In a meeting with econoffs on October 10, senior Central
Bank officials reiterated that Philippine banks have limited direct
exposure to troubled U.S. and European financial institutions. They
estimated total potential exposure at about 1.8% of banking system
assets ($1.8 billion), including about $800 million of exposures to
institutions that are being bailed out by their respective
governments or which have been sold to new private owners. The
affected Philippine banks are well-capitalized; do not have solvency
issues; and are not experiencing heavy withdrawals. Central Bank
officials noted that interbank lending has slowed in recent weeks as
banks defensively conserve liquidity. However, liquidity remains
adequate and banks have not required emergency assistance to-date.


SOME TIGHTNESS, BUT NO SCARCITY OF FOREIGN EXCHANGE

3. (SBU) There is no scarcity of foreign exchange, according to the
Central Bank officials. They shared that a number of local banks
have begun withdrawing overseas placements/investments to bring back
into the country due to global uncertainties. There is some
tightness in the interbank foreign exchange market because of
individual banks? desire to hold on to, or build-up, foreign
exchange holdings due to the current global jitters. The Central
Bank has injected foreign exchange liquidity in the market as needed
and is set to launch a $-denominated repurchase facility (on
$-denominated Republic of the Philippines bonds) as a temporary
contingency measure. Pre-Christmas Overseas Filipino Worker (OFW)
remittances are expected to keep international reserves stable and
to help temper pressure on the peso. OFW remittances are up 18%
over 2007 and on track to exceed $16 billion by yearend.

INTERNATIONAL RESERVES SECURE

4. (U) Central Bank officials estimated gross international
reserves at $36.7 billion as of end-September -- little changed from
the $36.9 billion record high posted in July, adequate for close to
six months worth of merchandise and service imports, and equivalent
to 2.6 times foreign debt obligations falling due in the next twelve
months. An estimated 87% of the reserves are held in ?foreign
investments? and about 11% in gold. The ?foreign investments? are
held in investment-grade (mostly Triple A) sovereign bonds and
securities issued by multilateral agencies (i.e., the World Bank and
Asian Development Bank). The Philippines does not have a Sovereign
Wealth Fund.

ROOM FOR MONETARY EASING?

5. (SBU) After raising rates by a cumulative 100 basis points from
June to August, the Philippine Monetary Board (the Central Bank?s
highest policymaking body) kept repurchase and reverse repurchase
rates steady at 8% and 6%, respectively, during its October 6
meeting. Some Central Bank officials have hinted that the recent,
concerted action by foreign central banks to cut rates, as well as
easing pressures on food and oil prices, may give the Monetary Board
some flexibility to consider monetary easing during its next regular
meeting in November. The Monetary Board does not plan to hold an
off-cycle review prior to its regular meeting next month.

INSURANCE SECTOR, STATE PENSION FUNDS HOLDING UP


MANILA 00002340 002 OF 002


6. (U) AIG has officially announced that Philamlife -- its local
subsidiary and the largest player in the Philippine insurance market
-- is for sale. The Philamlife Group (which also has interests in a
savings bank, in the pre-need business, and in financial asset
management) has an estimated $3.8 billion in total assets and $1
billion net worth. Over ten potential bidders have reportedly
expressed interest to acquire the company, which is considered as
one of the Philippines? most profitable and venerable institutions.
It has been business as usual for Philamlife pending the company?s
sale.

7. (U) Senior officials from the Philippine Insurance Commission
recently noted that the insurance sector?s investments are closely
regulated. No insurance company is exposed to the troubled
institutions in the United States and Europe. Less than 10% of the
industry?s funds are invested in foreign-denominated assets, over
90% of which are in Philippine sovereign bonds. The Commission does
not allow investments in structured products.

8. (U) Officials from the Social Security System (SSS, the
mandatory pension fund for private sector employees) reiterated
during a recent hearing in the Philippine Senate that it has no
overseas investments. Officials from the Government Service
Insurance System (the mandatory pension fund for public sector
personnel) stated in separate media interviews that investments are
safe. Legislators are pressing for more detailed disclosure of
GSIS?s $1 billion Global Investment Fund (equivalent to about 12% of
the pension fund?s loan and investment portfolio).

EMBASSY OUTREACH

9. (SBU) The Ambassador used a speech to an economic roundtable
October 10 and a radio interview October 12 to convey messages on
USG actions (Ref A). Mission members have kept the focus on the
serious USG response and international coordination, despite some
early carping from European counterparts and some Philippine
pundits.

CHALLENGING TIMES AHEAD

10. (SBU) While direct exposure to problematic investments and
financial institutions is limited, the impact of the global
financial crisis on economic growth, poverty alleviation, local and
overseas employment, remittances, credit availability, and overall
investment prospects is a concern. In a statement on September 30,
the Philippine government vowed to accelerate infrastructure and
agricultural spending, fast-track financial sector reform reforms,
improve revenue generation through improved tax administration and
legislative measures, and reduce regulatory and administrative
bottlenecks to boost competitiveness.

COMMENT

11. (SBU) The financial crisis appears to be providing a greater
sense of urgency to pursue unfinished reforms -- several supported
by USG grants and technical assistance -- with greater vigor.
Recent initiatives in the Philippine Congress include a proposed
review of foreign ownership limitations in the Philippine
Constitution, which members of the government?s economic team vowed
to support. President Arroyo?s call for an ASEAN+3 summit shows
commendable regional initiative in confronting a global problem.
End Comment.

Kenney

© Scoop Media

 
 
 
 
 
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