Sep 192014
 

http://wikileaks.org/cable/2009/03/09MANILA680.html#
Reference ID Created Released Classification Origin
09MANILA680
2009-03-27 08:15
2011-08-30 01:44
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Manila

VZCZCXRO1859
OO RUEHCHI RUEHCN RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHPB
DE RUEHML #0680/01 0860815
ZNR UUUUU ZZH
O 270815Z MAR 09
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3663
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS IMMEDIATE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RHHMUNA/USPACOM HONOLULU HI//FPA//
UNCLAS SECTION 01 OF 03 MANILA 000680

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: Economic Crisis/Fiscal Crunch in the Philippines

REF: Manila 0378

SENSITIVE BUT UNCLASSIFIED

¶1. (SBU) Summary: The Government abandoned its 2008
balanced-budget goal and plans a higher deficit of 2.2% of Gross
Domestic Product for 2009 — a modest stimulus relative to the
deficit spending being pursued by regional neighbors in response to
the global financial crisis. We assess that the GRP policy response
has been appropriate given the circumstances, but remain concerned
about tax collections and, ultimately, fiscal sustainability. End
Summary.

Philippines Abandons Balanced Budget Goal…
——————————————–

¶2. (U) Faced with food and oil price shocks, the global financial
crisis, and slowing economic growth, the Philippine Government
abandoned its plan for a balanced budget in 2008 and revised its
fiscal program to a 75 billion peso (exchange rate is about 48 pesos
to the dollar) deficit, equivalent to 1% of Gross Domestic Product
(GDP). The revised program, which marked a reversal from declining
deficit-to-GDP ratios (from a peak 5.6% in 2003 to 0.2% by 2007)
reflected a 15.5 billion peso downward adjustment in the original
tax collection target; a 4.4 billion peso upward adjustment in the
non-tax revenue goal; and 64 billion pesos in additional
expenditures, partly to accommodate higher rice imports and social
spending.

——————————————— ———
Selected Fiscal Indicators
(As % of GDP)
——————————————— ———

2001 2002 2003 2004 2005 2006 2007 2008
—- —- —- —- —- —- —- —-

Revenues 15.5 14.6 14.8 14.5 15.0 16.2 17.1 16.0
Tax 13.6 12.8 12.8 12.4 13.0 14.3 14.0 14.0
Non-Tax 2.0 1.8 2.1 2.1 2.0 2.0 3.1 2.1

Expend. 19.7 19.9 19.5 18.3 17.7 17.3 17.3 17.0
Debt Serv. 4.8 4.7 5.2 5.4 5.5 5.1 4.0 3.6
Non-Debt 14.9 15.2 14.3 12.9 12.2 12.2 13.3 13.4

Deficit -4.0 -5.3 -4.6 -3.8 -2.7 -1.1 -0.2 -0.9

Outstanding
Debt 65.7 72.5 77.7 78.2 71.5 63.8 55.8 56.3
——————————————— ———
Source: Philippine Dept. of Budget and Management

¶3. (U) The Government reduced its revenue goal partly because the
Philippine Congress passed a tax relief measure for minimum wage
earners and individual taxpayers and President Arroyo issued an
Executive Order reducing or scrapping tariffs on imported crude oil
and refined petroleum when international prices hit certain
“triggers.” These tax relief measures cost the Government an
estimated 28.5 billion pesos in potential revenues in 2008,
equivalent to more than 0.3% of GDP.

¶4. (U) The Government reported recently that it closed 2008 with a
fiscal deficit of 68.1 billion pesos, 0.9% of GDP. Underlying that
performance was a 44 billion peso slippage in tax collections
vis-`-vis an already reduced goal. About 22 billion pesos in
higher-than-targeted non-tax revenues and 29 billion pesos in
lower-than-programmed spending (reflecting project implementation
and absorptive capacity constraints) more than offset
lower-than-targeted tax collections.

…Programs Larger Deficit in 2009
———————————-

¶5. (U) President Arroyo signed the 2009 budget into law on March
13, 2009. The fiscal plan allows for a higher deficit (177.2
billion pesos) equivalent to 2.2% of GDP. It accommodates a 17.1%
nominal expansion in non-debt expenditures (equivalent to about
13.5% growth after inflation) to allow larger capital outlays and
pro-poor spending. As a ratio to GDP, the Government projects a
rise in non-debt spending from 13.4% of GDP in 2008 to 14.5% in
¶2009.

¶6. (U) This year’s budget increases infrastructure outlays by more

MANILA 00000680 002 OF 003

than 35% to 2.1% of GDP in 2009. The Government hopes to frontload
60% of infrastructure spending and other vital social services
during the first half of the year to help spur economic growth.
Philippine Budget Department officials noted that the focus will be
smaller, quick-disbursing infrastructure projects with allotments
lapsing monthly (“use or lose”) to spur agencies to closely monitor
project/program implementation.

——————————————— ———
2009 Budget, Selected Agencies
——————————————— ———

Levels Growth Rate (%)
(Billion Pesos) 2008- Average
2008 2009 2009 1998-2008

—- —- —– ———

Economic/Infrastructure
———————-
Dept of Public Works 102.4 137.5 34.3 10.1
Dept of Transport/
Communications 22.8 26.1 14.7 10.5
Dept. of Agriculture 25.4 42.6 67.3 3.6

Social Services
—————
Dept. of Education 149.3 171.5 15.0 6.2
Dept. of Health 20.3 28.5 40.4 6.2
Dept. of Social Welfare 4.9 10.7 118.2 10.6
——————————————— ———
Source: Philippine Dept. of Budget and Management

¶7. (SBU) Respected economists here have noted that the 2009 budget
would be more accurately described as a “measured fiscal expansion”
rather than “stimulus” vis-`-vis the significantly more aggressive
deficit-to-GDP ratios programmed elsewhere in the region (averaging
about 4.5% in ASEAN) in response to the global financial turmoil.
Although it has come down, the Government’s debt-to-GDP ratio (more
than 56% in 2008) remains high relative to those of regional and
emerging economies and constrains more aggressive deficit spending.
Policymakers remain wary of rekindling concerns about the GRP’s
commitment to fiscal discipline and of potentially spooking credit
markets.

Challenges
———-

¶8. (SBU) The government is hoping for a 10% (104 billion peso)
year-on-year expansion in tax collections during 2009 to finance the
budget and contain the fiscal deficit within 2.2% of GDP. However,
the budget’s assumption of economic growth of 3.7% is now regarded
as very optimistic. The target is even more ambitious than it seems
given expected erosion to collections of some 45 billion pesos, or
0.5% of GDP, resulting from previously scheduled tax reductions and
tax breaks passed in 2008. Revenues face further pressures after
2011, when there will be no further biennial increases in excise
taxes on liquor and cigarettes. While the Department of Finance has
a long wish list of revenue-enhancing legislation sitting in
Congress — principally rationalizing fiscal incentives, reforming
the excise tax system for cigarettes and liquor, and controlling
excessive business deductions through the introduction of a
simplified net income taxations system for professionals and the
self-employed — it is unclear whether that agenda can garner even
united executive branch support in the run-up to national
elections.

Weak Tax Administration and Corruption
————————————–

¶9. (SBU) The Arroyo Administration deserves credit for averting a
fiscal crisis through tax measures implemented several years ago,
which has allowed it to implement modest expansionary policy during
the current economic downturn. That said, policymakers are making
the best of the current situation via limited and responsible
expansion while providing themselves with political cover by
“talking big” about their “stimulus package.”

¶10. (U) However, weak tax administration continues to undermine
revenue potential and remains a serious challenge. Tax effort
declined consecutively from 1997’s 17.0% peak to 12.4% in 2004. Tax
increases in 2005 and 2006 brought tax effort back up to 14%, but
despite frequently and loudly proclaimed efforts to increase

MANILA 00000680 003 OF 003

compliance the numbers have been stagnant since then. A recent
paper by a respected economic think tank concluded that improvements
in collections were due largely to changes in tax policy, which are
counterbalanced by tax leakages averaging some 0.5 percentage points
annually.

¶11. (SBU) Corruption is also a serious problem for tax collection.
A respected polling organization found in a 2008 survey of
enterprises that 46% were asked by government officials for a bribe
in relation to the assessment and payment of income taxes. Nearly a
third reported having been asked for a bribe in relation to
compliance with import regulations and the payment of import duties.

Comment
——-

¶12. (SBU) The impact of the global economic downturn, though
significant, has not been severe in the Philippines, as yet
(reftel). Given the constraints under which GRP fiscal policy
operates, we believe policy to date has been appropriate. While
markets for GRP debt have so far been accepting of further debt
financing, they might be less so were the fiscal situation to begin
to unravel. While we do not expect that to happen this year, the
risk is not insignificant.

Kenney

   

 

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