Cablegate: Financial Crisis Impact On the Philippines

DE RUEHML #2725/01 3500904
O 150904Z DEC 08





E.O. 12958: N/A
SUBJECT: Financial Crisis Impact on the Philippines

REFS: A) Manila 2532, B) Manila 2174, C) Manila 2340,
D) Manila 1050


1. (SBU) Summary: Philippine GDP growth will slow, some jobs will
disappear, and poverty will increase, but the global financial
crisis will not create an economic or balance of payments crisis
here (Ref A) in 2009. The business process outsourcing industry
will continue its spectacular growth, while export industries will
suffer. The global crisis has intensified calls to enhance the
investment and business climate and the government has decided to
increase its spending. End Summary.

Economic Growth Slowing

2. (U) Philippine Gross Domestic Product (GDP) growth has slowed
this year from 2007's 7.2% three-decade high, but grew 4.6%
year-on-year through the third quarter. The Philippines is not
among Asia's highly open or export-oriented economies, and this lack
of integration into the global economy has blunted the overall
growth impact of a sputtering export sector dominated by the low
(30%) local value-added electronics industry. Personal consumption
has slowed due to high inflation (which hit a high of 12.4% in
August) but continued strong remittances from Overseas Filipino
Workers have helped cushion what could have been a sharper growth
slowdown. Acceleration in third-quarter public sector and
construction expenditures also helped prop up the economy. The
government has officially abandoned its balanced budget goal for
2008, opting for higher deficits this year and in 2009 equivalent to
roughly 0.9% and 1.2% of GDP, respectively, to help support economic
growth and employment. Private sector investments in durable
equipment were up 6.5% year-on-year in real terms during the first
six months, but posted flat year-on-year growth during the third

Room for Monetary Easing?

3. (SBU) The current consensus is that the Philippines will avoid a
recession but growth will slow to under 3.5% next year. With
year-on-year inflation down to 9.9% in November, Central Bank
officials may reduce policy rates at their December 18 meeting from
6% (reverse repurchase) and 8% (repurchase) currently. Although the
Philippines has limited direct exposure to investment products
issued by troubled foreign financial institutions (Refs B and C),
Philippine Central Bank Deputy Governor Nestor Espenilla, in a
meeting on December 5, predicted bank profit margins will drop and
non-performing loan ratios will increase. The latest data on credit
card debt showed a 20% quarter-on-quarter nominal expansion in
non-performing loans between March and June, from 10.4% to 11.6% of
credit card receivables. However, Espenilla noted that credit card
loans make up barely 5% of total loan portfolios and he does not see
overall NPL ratios rising beyond 7% next year, nowhere near the
18%-19% Asian crisis peaks.

4. (SBU) According to Espenilla, banks have become more cautious in
their lending during the fourth quarter, but there is no credit
squeeze and banks are competing aggressively for credit-worthy
borrowers (automotive and real estate industry contacts confirmed
this in separate conversations with econoffs). The Deputy Governor
noted that capital adequacy ratios (currently averaging 14%) remain
comfortably above international (8%) and Central Bank-mandated (10%)
benchmarks. He added that the Central Bank has not heard thus far
of any major retrenchment plans, commenting that Citibank and HSBC,
for example, were even expanding their business process outsourcing
operations here. Although eight rural banks recently declared bank
holidays, their financial problems appear mainly to have been a
consequence of mismanagement (i.e., most of the closed banks
reportedly share the same owners). The rural banking segment
comprises barely 3% of total banking system resources and the recent
bank closures do not pose systemic risk.

Balance of Payments Surplus; Foreign Investments Down
--------------------------------------------- --------

5. (U) The Philippines ended 2007 with a balance of payments
surplus at a historic high of $8.7 billion, but this had narrowed to
under $350 million as of October 2008 due to lower foreign direct
investment, outflows of foreign portfolio capital, weak exports, and
high import costs for fuel and rice. The latest statistics show a
46% year-on-year decline to $1.4 billion of net foreign direct
investment through September, and $1.5 billion in net withdrawals of

MANILA 00002725 002 OF 003

portfolio capital through November. Exports rose by 1.9% during the
first ten months of the year, but recorded a sharp 15% decline in
October (the worst performance in seven years). International
reserves stood at $36.2 billion as of November, up 7.1% from
end-2007 and equivalent to 5.7 months worth of merchandise and
service imports and 2.5 times foreign obligations falling due over
the next twelve months. Central Bank contacts noted that fuel and
food prices are softening, and a fall in import components will
partially offset the fall in electronics exports.

Whereto Remittances?

6. (U) Philippine observers express deep concern about the
potential impact of a "synchronized recession" around the globe on
worker remittances which, at 11% of GDP, are an important
stabilizing factor in the Philippine economy. Remittances were over
17.2% higher year-on-year as of September and should exceed $16
billion by yearend. Officials from the three largest commercial
banks have indicated that fourth quarter remittances remain brisk.

7. (SBU) In a meeting on December 11, Deputy Administrator Viveca
Catalig of the Philippine Overseas Employment Administration
estimated that about 500,000 overseas workers, primarily seafarers,
domestic helpers, tourism and hospitality workers, export-oriented
factory workers, and low-skilled service employees, are vulnerable
to the global crisis. Of this number, the administration estimates
that 50,000 to 100,000 (1% to 2% of Filipino workers overseas) may
be unable to find alternative employment abroad.

8. (SBU) Others here fear that downward pressure on oil prices
could eventually affect construction and other jobs in the Middle
East, which account for about half of overseas employment. For now,
according to Catalig, some 450,000 jobs are waiting to be filled by
Filipinos next year (including more than 100,000 in the Middle East)
and more are under negotiation, many for higher-paid professionals
and skilled workers. Current expectations are for a slowdown to
single-digit growth, rather than contraction, in 2009 remittances.

Electronics Sector: Gloomy Prospects

9. (SBU) Electronics exports, which account for nearly a third of
Philippine export revenues, dropped by a sharp 18.9% in October.
Ernesto Santiago, the president of the electronics industry
association here, told econoffs in a meeting on December 4 that the
situation had turned from "challenging" to "terrible" with sharp
declines expected during the fourth quarter and "grim" prospects for
2009. Tight credit overseas is an increasingly serious concern.
According to Santiago, some semiconductor companies report that
about 15% of their customers, mainly small- and medium-sized firms,
were unable to obtain financing for normal operations. Santiago
does not expect electronics exports in 2009 to drop as sharply as in
2001, when export revenues shrank by 22% and 18,000 workers lost
their jobs, but noted that several hundred workers have already been
laid off in recent months from the industry's 450,000-strong direct
labor force and that many companies plan shorter work weeks and
fewer work shifts.

Business Process Outsourcing: Prospects Remain Bright
--------------------------------------------- --------

10. (U) In a meeting with econoffs on December 9, the Business
Processing Association of the Philippines' Director for Information
and Research Gigi Virata said that the industry remains on track to
hit its 40% revenue growth target for 2008, to $6.8 billion. The
industry's employee base has increased by more than 36% year-on-year
to more than 400,000. The Association expects to generate more than
100,000 new jobs in the sector. Virata cited U.S. firms Accenture,
Convergys, and Teletech as among companies planning to expand
operations next year. Citigroup, HSBC, and JP Morgan Chase also
plan to expand back office operations here. Shell will move all of
its back office operations to the Philippines in 2009. The
Philippines has already captured 8% to 9% of the global business
process outsourcing market, according to Virata, and is well on its
way to achieving the 10% global market share targeted by 2010. Some
observers believe that the terrorist incidents in Mumbai, India will
hasten the migration of higher-end services to the Philippines from
India, a trend they were already seeing.

Soft Labor Market and Poverty

MANILA 00002725 003 OF 003

11. (SBU) Although the Philippines does not face a meltdown, the
economic slowdown and aversion to risk during uncertainty will
threaten domestic job opportunities for the one million or so annual
new entrants to the Philippine labor force. Officials from the
Employers Confederation of the Philippines fear that only 500,000
new jobs will be created next year while between 200,000 to 250,000
workers risk displacement. This will push more Filipinos into the
informal economy and worsen already high poverty rates.

12. (U) The latest Philippines poverty survey, conducted in 2006,
showed poverty has increased to engulf about a third of the
population (Ref D). Poverty is likely to have increased even more
after this year's spike in food prices. According to a recent World
Bank impact analysis, every 10% rise in food prices increases the
Philippine poverty rate by two percentage points. Using the World
Bank's formula, Philippine poverty may have increased further by
about 3.3 percentage points (to roughly 36.2%) in 2008 -- equivalent
to another five million more poor Filipinos. This number seems
likely to increase further next year.

Hazy Prospects Demand Reform

13. (SBU) Global financial problems provided fresh impetus to
stalled financial market reforms. In August, President Gloria
Macapagal-Arroyo signed the Personal Equity and Retirement Account
Act into law, establishing a regulatory framework and tax incentives
for retirement plans to attract savings. The President also
recently signed the Credit Information Systems Act to facilitate
access to affordable capital by providing financial institutions
access to information on borrowers' credit histories. Foreign
business chambers are pushing for measures to address floundering
competitiveness rankings, curb corruption, reduce bureaucratic red
tape, and boost public sector spending to blunt the impact of the
global crisis on the economy. They note the estimated 40% to 50% of
taxes that still escape collection as another area for improvement.

14. (SBU) Comment: The relatively inward-looking Philippine
economy is more insulated from the global financial crisis than
neighboring export-oriented economies. However, less globalization
it is also a key reason for the long-term inability of the
Philippines to control its rising poverty rate. As we reported ref
D, it is spectacular, startling, and discouraging that Philippine
poverty increased from 2003 to 2006, which were good years for the
Philippine economy. Without further reform and a greater opening to
the world, it is likely that the Philippines will fall further
behind its neighbors when they begin to come out of the current
economic difficulties.


© Scoop Media

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