Sep 192014
Reference ID Created Released Classification Origin
2009-01-16 05:21
2011-08-30 01:44
Embassy Manila

DE RUEHML #0108/01 0160521
O 160521Z JAN 09




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

REFS: A) State 134905, B) Manila 2740, C) Manila 2725,
D) Manila 2532

¶1. (SBU) Summary: The global financial crisis has caused asset
values to decline and unemployment to increase and will slow
Philippine GDP growth; but record high foreign reserves, less
reliance on international trade, banking sector reforms, and the
government’s improved fiscal position leave the country in a much
better position to weather the crisis than many of its neighbors, as
we reported in detail in refs B and C. In the paragraphs below we
respond to the questions posed in ref A regarding the impact of the
crisis. End Summary.

Are Key Sectors Slowing?

¶2. (U) Philippine Gross Domestic Product (GDP) growth has slowed
this year from 2007’s 7.2% three-decade high, but still reported
4.6% growth year-on-year through the third quarter. Electronics
exports, which account for nearly two-thirds of Philippine
merchandise export revenues, dropped by a sharp 18.9% in October and
by 17% in November and face grim prospects for 2009. The automobile
industry here mustered 5.6% growth (measured in number of units
sold) during 2008 but that performance was down from the 14%
year-on-year expansion posted during the first eight months of the
year, indicating slowing growth since September. Automobile sales
in December expanded only 1%. The Philippine government’s target to
create an important mining sector by 2010 is at risk and domestic
mineral production is actually declining, in part due to lower
prices. Aside from electronics and mining, real estate is beginning
to be affected. The index of listed property firms of the
Philippine Stock Exchange is down more than 50% from its highs of
just a year ago.

¶3. (U) On the other hand, some sectors of the Philippine economy
are still doing quite well. Business process outsourcing remains on
track to hit its 40% revenue growth target for 2008. The industry’s
employee base increased in 2008 by more than 36% to more than
400,000. The impact of the global financial crisis on agriculture
will likely be indirect and minimal. In the rural areas and for the
microenterprise sector in particular, there has been no reported
drop in sales activity. In fact, many microfinance borrowers have
reported an increase in business and some have remarked that
business has never been better.

Social Impact and Government Reaction

¶4. (U) The global financial problems come at a time when the
Philippines has been making progress on important 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. President Arroyo 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 now
pushing even harder 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.
During the first week of January, Government officials announced a
$6 billion “economic resiliency plan” which includes $2 billion for
infrastructure in partnership with government financial institutions
and private banks, as well as assistance for returning overseas
workers, export sector assistance, and expanding social safety nets
— but provided little detail.

¶5. (U) According to the government’s labor force survey the
unemployment rate rose to 6.8% from 6.3% in October. Manufacturing
employment was especially hard-hit, with an estimated 163,000 jobs
lost year-on-year. Uncertain prospects for 2009 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 if conditions worsen,
only 500,000 new jobs will be created 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.
The government plans to assist overseas Filipino workers who
repatriate after losing their jobs, but it does not anticipate
social unrest.

MANILA 00000108 002 OF 003

Impact on Trade, Remittances, and Investment

¶6. (U) As noted above, slowed global demand will have a significant
impact on Philippine electronics industry exports and employment in
that sector. However, job losses in merchandise export industries
will likely be exceeded by new hiring in the business process
outsourcing industry. Remittances from overseas Filipinos equal
about 11% of Philippine GDP and are the Philippines’ largest source
of net foreign exchange earnings and by far the largest net
contributor to the balance of payments surplus. These remittances
continued to grow rapidly in 2008 (15.1% through November) and are
projected to show modest growth through 2009 (around 7% according to
current government projections) despite the global economic
downturn. Some Filipinos working in factories in Singapore and
Taiwan have lost their jobs, but many overseas Filipino workers are
in industries (health care and other services) less affected by the
crisis. Shipping companies that employ large numbers of Filipino
seamen report that, despite sharply declining business worldwide,
they are reluctant to lay-off their Filipino crews. According to the
Philippine Overseas Employment Administration, 450,000 active job
orders are waiting to be filled by Filipinos and more are under

¶7. (U) Net foreign direct investment flows in the ten months to
October 2008 totaled $1.4 billion, down 46.2% from the same period
in 2007 as investment decisions were stalled by foreign investors’
concerns over the developments in financial markets, particularly in
the weeks following the unfolding of the global financial crisis in
late September. For example, one major equity sale of a Philippine
transportation company to a foreign buyer was reduced from 100% to
49% due to tightened finances. A $2 billion Korean shipbuilding
investment in Mindanao is on hold, in part due to the decline in
orders for new ships. Investments in semiconductor and mining will
likely also fall in response to falling demand in those sectors.
Portfolio capital investments posted a net outflow of about $1.4
billion in 2008, with an estimated 85% of that total net outflow
occurring during the last four months of the year.

Impact on Credit and Banking

¶8. (U) Outstanding commercial banking system loans continued to
grow robustly year-on-year in October (21.9%) and November (21.3%).
Loans and deposits at rural banks reportedly have continued to
increase without tighter credit conditions. Recently, however,
senior Central Bank officials said that commercial banks have noted
slowing demand for credit as well as greater caution and more
intense due diligence in extending loans due to strong global
recession fears. Banks have expressed greater caution about lending
to exporters, high-end real estate developers, and investors. The
Central Bank foresees banks’ “guardedness” contributing to slower
loan growth in 2009 but not a credit crunch. In spite of the
increased caution, selectiveness in issuing loans, and tighter
lending requirements, automobile and real estate industry executives
report that financial institutions continue to compete aggressively
for the most credit-worthy borrowers.

¶9. (U) Commercial banks’ non-performing loan ratio as of October
was under 4%, little changed from the ratio before September.
Nonetheless, there are concerns that non-performing loan ratios
could rise to 6% or 7% (nowhere near the 18%-19% Asian crisis peak
in 1997-98). Recent closures of a number of small, rural banks have
made the headlines lately, but these banks make up a very small
share of total banking system resources, and their closure was not
related to the global financial crisis. Nevertheless, the Central
Bank supports legislative initiatives to increase the level of
deposit insurance as a mechanism to shore up confidence. Estimated
maximum exposure to assets of troubled or bankrupt foreign financial
institutions is less than 2% of total assets, far less than in some
other Southeast Asian countries. Banking sector reforms, including
increasing banks’ capital requirements and the adoption of
international capital adequacy and financial reporting standards
also have improved the Philippine banking industry’s resilience to
external shocks.

Impact on Public Spending

¶10. (U) Expecting weaker economic growth, the Philippines abandoned
its balanced budget goal and opted for deficit targets equivalent to
1% of GDP in 2008 and 1.2% of GDP in 2009, and plans to frontload
spending during the first half of 2009 to spur the economy.

MANILA 00000108 003 OF 003

Accordingly, Finance Department officials concede that 2009 will be
a challenging year revenue-wise as the government seeks higher
collections while facing revenue losses from a scheduled reduction
in the corporate income tax rate from 35% to 30% and from a tax
relief package for minimum wage and salaried workers that went into
effect in July 2008 in response to high food and consumer price
inflation. The 2004 passage of a controversial value added tax law
improved government finances and helped the country avert a fiscal
crisis, but weak tax collection, currently at only 14.5% of GDP,
remains a challenge and lags most of the Philippines’ Asian
neighbors. There are also continuing challenges and weaknesses in
infrastructure project implementation and public expenditure

¶11. (U) The government successfully raised $1.5 billion from the
international bond market on January 7 – achieving its full-year
foreign commercial borrowing target at a coupon rate of 8.5%,
roughly 30-40 basis points more than what comparable Philippine
bonds due in 2019 yielded ahead of this issue. The government seeks
another $1 billion from multilateral and bilateral donors, according
to Philippine Finance Department and Treasury Bureau officials.

Actions of Other Organizations

¶12. (U) The Philippines has not requested an International Monetary
Fund program. The Asian Development Bank expects higher
requirements for budget support than agreed under its Country
Operations Business Plan 2009-2010 and will hold discussions in the
first quarter of 2009. The Philippines requested assistance from
the World Bank to counter the impact of the crisis during the annual
meetings last October 2008. The World Bank agreed in December 2008
to a $200 million Development Policy Operation to support the
Philippine Government’s efforts to address the challenges of high
food prices in the short and long term. These funds will support
conditional cash transfers and other social safety nets for
vulnerable households. The Philippines has asked assistance from
the World Bank and USAID to help determine the risks and potential
impacts of the global financial crisis and economic downturn on the

Impact on Assistance Programs

¶13. (U) According to the International Monetary Fund, the widening
interest rate spreads between Philippines and U.S.-based debt yields
could negatively affect bank profitability in the Philippines. The
World Bank’s new Country Assistance Strategy notes increased
vulnerability to external shocks, changes in investor sentiment, and
the possible adverse impact on overseas worker remittances, exports,
and foreign direct investments. The European Community delegation
in the Philippines is still responding to concerns from the food
price crisis of early 2008 rather than the current financial crisis.
Australian and Japanese assistance programs are monitoring the
situation closely, but have not reported any operational changes due
to the global financial crisis.

¶14. (U) Comment: As we reported in refs A and B, the impact of the
global financial crisis in the Philippines will probably be
significantly less than what is felt in many neighboring economies,
and though key sectors may suffer substantial losses, overall the
Philippines is still expected to avoid an outright financial crisis
or broad, severe economic downturn of its own. Of course, the
Philippines would suffer significantly if large numbers of overseas
workers lose jobs and remittances decline, or if food prices spike
again this year. These possibilities are not likely, but in such a
scenario an appropriate shift in the focus of assistance efforts may
be warranted. For now, however, we are maintaining our current
programs as planned and continue to monitor the situation closely.




Sorry, the comment form is closed at this time.