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Viewing cable 08MANILA2725, Financial Crisis Impact on the Philippines

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Reference ID Created Released Classification Origin
08MANILA2725 2008-12-15 09:04 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Manila
VZCZCXRO6101
OO RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHML #2725/01 3500904
ZNR UUUUU ZZH
O 150904Z DEC 08
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2688
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS IMMEDIATE
RHHMUNA/USPACOM HONOLULU HI//FPA//
UNCLAS SECTION 01 OF 03 MANILA 002725 
 
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: Financial Crisis Impact on the Philippines 
 
REFS:  A) Manila 2532, B) Manila 2174, C) Manila 2340, 
D) Manila 1050 
 
SENSITIVE BUT UNCLASSIFIED 
 
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 
quarter. 
 
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. 
 
Kenney