Cablegate: Philippine Economic Update

DE RUEHML #2281/01 3042308
O 312308Z OCT 09





E.O. 12958: N/A
SUBJECT: Philippine Economic Update

REFS: A) Manila 1192, B) Manila 1351


1. (SBU) Summary: The government's economic team reports that the
Philippine economy continues to grow. The balance of payments is in
surplus; international reserves are at a record high; foreign direct
investment is increasing; the banking system remains sound; and the
stock market is rebounding. The business sector, donor agencies,
and other observers have expressed concern over longer-term
constraints to growth and development. The past year's food, oil
and global financial shocks, as well as natural disasters, have
likely pushed more Filipinos into poverty. Shrinking fiscal
resources will complicate efforts to boost growth and alleviate
poverty, particularly for the new administration that assumes office
after the May 2010 elections. End Summary.

Philippine Economy Holding Up

2. (U) On October 15, Cabinet secretaries from the government's
economic team reviewed recent statistics, stressing that the country
remains resilient and has reacted positively to signs of an emerging
global recovery.
The Philippine's Gross Domestic Product (GDP) grew 1% in the first
half of 2009, which is within the government's current 0.8%-1.8%
target growth range for the full year.
Personal consumption and government spending spurred growth, making
up for sluggish business investment. Consumer spending, the
Philippine economy's main demand driver, grew at a faster rate
during the second quarter than in the first, aided by improved
consumer confidence, slowing inflation, and the continued resilience
of overseas worker remittances. After an unimpressive first
quarter, government spending accelerated markedly, with combined
second-quarter government consumption and capital spending expanding
26% in real terms over last year's levels.

3. (U) The service sector, which accounts for more than half of
Philippine economic output, accelerated to 3% growth in the second
quarter, spurred by improved performances in private services,
notably business process outsourcing (BPO), finance, real estate,
and government services. Industrial output, down 2.5% year-on-year
during the first quarter, declined by a smaller 0.3% in the second
quarter as improved growth for the mining/quarrying, construction,
and public utilities sub-sectors partially offset continued
contraction (7%) in manufacturing output.

Remittances Continue to Grow

4. (U) Overseas remittances have slowed from the double-digit
growth rates of past years but have held up better than expected,
supporting economic growth and the balance of payments.
January-August remittances of $11.3 billion increased 4% over 2008's
comparable period. Though modest in U.S. dollar terms, when
converted to pesos, it translates to 16% growth because of a fall in
the exchange rate, and, subtracting out inflation, to 12% growth in
real peso terms over 2008.

5. (U) Cumulative January-August 2009 merchandise exports were off
30% from 2008's level, and electronics exports (which contribute 60%
of annual export revenues) down by 32%. However, the merchandise
export drop has been slowing since April, with August's total
exports down 21% year-on-year, the slowest decline posted since
December 2008. Officials of the Semiconductor and Electronics
Industry Association of the Philippines (SEIPI) said they expect
modest growth in their industry's exports during the fourth quarter
due to improved demand and depleting global stocks.

6. (U) The Philippines merchandise import bill also contracted (31%
as of August) which, combined with higher overseas worker
remittances and income from the growing BPO sector, has kept
pressure off the current account. A smaller oil import bill (a
combination of lower imported volumes and international prices) was
a significant factor, as were lower imports of raw material for the
electronics manufacturing industry.

Investment Flowed out Last Year, Flowing in in 2009
--------------------------------------------- ------

7. (U) Foreign direct investments began improving during the second

MANILA 00002281 002 OF 003

quarter, pulling up cumulative January-July 2009 net inflows to $1.2
billion, up nearly 34% from January-July 2008. Central
Bank-registered foreign portfolio capital (required for investors
who seek to purchase foreign exchange from the banking system to
remit profits) mustered $230 million in net inflows during the first
nine months of 2009 - a significant turnaround from the $855 million
in net foreign portfolio capital withdrawals posted during the first
nine months of 2008.

8. (U) The balance of payments remains in surplus ($2.8 billion
from January-August, exceeding the government's $1 billion full-year
forecast). The Central Bank's gross international reserves have
risen to a record-high $42 billion as of September -- equivalent to
eight months of merchandise and service imports and 3.6 times
private and public sector debt payments due over the next twelve
months. The Philippines external debt remains manageable by
international standards, with the combined outstanding obligations
of the public and private sectors at 33% of GDP as of June 2009,
compared to 34% of GDP as of mid-2008.

Capitl Available, Bond Market Thriving

9. (U) Commercial banking loans expanded 6%, which is a slower pace
than the double-digit growth rates of the past several years.
Central Bank and banking sector officials stressed there is no
liquidity/credit crunch and that reduced growth in bank loans is
consistent with the economy's more tempered expansion. They noted
that a number of the country's major corporations also opted to take
advantage of alternative sources of financing, particularly the bond
market. Corporate bonds floated from January-August totaled nearly
200 billion pesos (roughly $48 billion), more than double the
corporate bonds issued during the first eight months of 2008.

10. (U) The banking system's asset quality indicators remain stable
at pre-global financial crisis rates of between 4%-5%. According to
latest estimates, aerage non-performing loan and no-performing
asset ratios stood at 4.2% and 4.9%, respectively, as of end-August

Stock Market Rebounds 57 Percent

11. (U) The Philippine Stock Exchange index -- which closed down
48% in 2008 from 2007 -- has been on an upward trajectory since
April 2009, reacting positively to improvements in the Philippine
and global economies. As of October 15, the index was up 57% from
the start of the year.

Climate Change: Dark Clouds Hovering

12. (U) President Gloria Macapagal-Arroyo noted that flooding,
destruction, and displacement caused by two consecutive typhoons
(Ketsana and Parma) just weeks before the economic briefing -- as
well as by 2008's Typhoon Frank from which the country had yet to
fully recover -- required coordinated rehabilitation efforts. She
announced the creation of a multi-sector National Reconstruction
Commission, which she tasked with coordinating an international
pledging session. Arroyo requested donor grants (over concessional
loans and commercial borrowing) to avoid adding to the fiscal
deficit and debt and debt-service ratios, noting that "the
Philippines is a victim of climate change, not a culprit" and
contributes "less than one percent to global warming."

13. (U) President Arroyo also signed the "Climate Change Act of
2009" into law (on October 23), authorizing the creation of a
Climate Change Commission under the Presidency. The law's objective
is to factor climate change into policy formulation, development
planning, and poverty reduction programs. She thanked Congress for
supporting a 12 billion peso (roughly $255 million) supplemental
budget for 2009 and called for passage of a pending "Disaster Risk
Reduction and Management" bill.

Fiscal Sector: A Brewing Crisis?

14. (SBU) Consecutive external shocks (the food, oil and global
financial crises) forced the national government to postpone its

MANILA 00002281 003 OF 003

goal of balancing the budget from 2008 to 2013(Ref B). Senior
officials from the Philippine Bureau of Treasury told econoffs they
expect the fiscal deficit to exceed the 250 billion peso (3.2% of
GDP) programmed ceiling for the year -- with the actual deficit
hovering at about 300 billion pesos (3.5% of GDP) by year's end --
reflecting revenue collection shortfalls and added pressures from
disaster relief and rehabilitation

15. (SBU) The tax-to-GDP ratio has stagnated at about 14% in recent
years and is running at 13.5% thus far in 2009, because of recent
revenue-eroding tax measures (tax relief for minimum wage and
individual income earners and a five percentage point reduction to
30% of the corporate income tax rate), lower-than-expected tariff
collections from a sharper-than-expected import slump, and
persistent revenue collection problems. Economists warn that weak
revenues and ballooning deficits caused by stimulus spending could
limit future access to low-cost financing, constrain economic
growth, and undermine macroeconomic stability in the medium to long
term. Revenue-raising measures being pushed by the Department of
Finance include excise tax reforms for liquor and tobacco and fiscal
incentives rationalization. However, these face increasing
resistance in the Philippine Congress this close to an election

Businesses, Donors Call for Longer-Term Growth Focus
--------------------------------------------- -------

16. (U) During the annual Philippine Business Conference organized
by the Philippine Chamber of Commerce and Industry, investors and
international donors acknowledged the economy's ability to weather
the impact of external shocks in the short-term but expressed
concern over the economy's long-term prospects. They noted the
country's efforts to improve the business/investment climate had
lagged that of its neighbors and called for aggressive efforts to
improve Philippine competitiveness. The Philippines dropped from
71st place to 87th of 133 countries in the World Economic Forum's
2009-2010 Global Competitiveness Report; from 141st to 144th among
183 countries in the World Bank-International Finance Corporation's
2009 Doing Business Report; and from 40th to 43rd among 57 countries
in the International Institute for Management Development's 2009
World Competitiveness Yearbook. The country's 15% investment-to-GDP
ratio lags the 20%-40% ratios of most Southeast Asian neighbors.


17. (SBU) There is still broad agreement that the government's
0.8%-1.8% targeted growth rate for 2009 remains achievable despite
the recent typhoons. Growth continues to be stimulated by overseas
remittances, and disaster relief and rehabilitation spending will
also help boost the economy. Concern has turned to longer-term
growth and employment prospects for a country where a third of the
population is subsisting below poverty thresholds. Economists
estimate that the economy should achieve and sustain 7% to 8% annual
growth to make significant inroads against poverty, given the
Philippines' rapidly growing population. Expanding the economy with
limited fiscal resources and climate change-related threats will be
a major challenge for the new administration that assumes office in


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