VZCZCXRO5448
OO RUEHCHI RUEHDT RUEHHM
DE RUEHML #2677/01 2210554
ZNR UUUUU ZZH
O 090554Z AUG 07
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7771
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUCPDOC/USDOC WASHDC IMMEDIATE
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS IMMEDIATE
RHHMUNA/CDR USPACOM HONOLULU HI//FPA//
UNCLAS SECTION 01 OF 03 MANILA 002677
SIPDIS
SIPDIS
SENSITIVE
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
USDOC FOR 4430/ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN
E.O. 12958: N/A
TAGS: EFIN ECON PGOV RP
SUBJECT: GRP Committed to Market-Determined Foreign Exchange Rate
Policy
Refs: A) 06 Manila 5050
B) Manila 1859
SENSITIVE BUT UNCLASSIFIED
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Summary
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1. (U) In a variety of public fora, Philippine Central Bank
Governor Amando Tetangco has said the GRP remains committed to a
flexible, market-driven foreign exchange rate policy. Although the
GRP has undertaken measures to assist affected sectors, he rejected
capital controls and calls from exporters for more aggressive
intervention in the foreign exchange trading market to arrest the
peso's rise. GRP officials believe that the peso's appreciation
since 2005 has generated net benefits for the economy by helping
temper inflationary pressures; allowing the Central Bank to build up
international reserves; providing public and private sectors an
opportunity to retire foreign debt obligations; and reducing peso
requirements for foreign debt service payments. Officials appear
more concerned about potential vulnerabilities and disruptions from
swift reversals in investor sentiment that generally characterize
portfolio capital investments. End Summary.
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Peso Surges, Exporters Complain
-------------------------------
2. (U) The peso, currently trading at a seven-year high of around
PHP 45.5 per USD, has appreciated more than 7% year-to-date and has
surged ahead of other Southeast Asian currencies since the beginning
of the year. Complaining of waning competitiveness and mounting
losses, export groups have called on the central bank to intervene
more aggressively to stabilize the exchange rate at around 50 to the
USD. They warned that the strong peso adversely affects recipients
of remittances from Overseas Filipino Workers (OFW), dampens
tourism, and subjects domestic producers of import substitutes to
stiff competition from cheap imports.
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Market-Driven Exchange Rate Policy Stays
----------------------------------------
3. (U) Central Bank Governor Amando Tetangco has reiterated in
various fora that the Philippine Government remains committed to a
market-driven foreign exchange rate policy. In a recent briefing
with the American Chamber of Commerce of the Philippines, he
stressed that the Central Bank does not target a specific exchange
rate. The agency focuses its intervention in the inter-bank trading
market to smooth excessive volatility and temper speculative
pressures. The Governor also ruled out controls on portfolio
capital flows, which have contributed significantly over the past
several months to the peso's strength. As of mid-July, net inflows
of foreign portfolio capital had more than tripled to nearly USD 3
billion over the preceding 12 months, with most of these funds going
into the local stock market.
-------------------------------------
Pesos Still Within Equilibrium Range?
-------------------------------------
4. (U) Governor Tetangco commented that the peso's appreciation
since 2005 has not necessarily translated into a significant
reduction in export price competitiveness. Compared with a
trade-weighted, inflation-adjusted basket of competitor currencies,
he estimated that the peso's appreciation since 2005 has merely
offset the local currency's significant 2002-2004 decline, triggered
by domestic fiscal worries and political uncertainties.
5. (SBU) The Governor warned of inherent difficulties in
determining "equilibrium" exchange rate levels, but estimated the
current range at somewhere between 42 and 49 to the USD. Although
the peso has been rising since 2005, Tetangco observed that the rate
of growth of exports has accelerated over this period (15% in 2006
and 8% thus far in 2007). Other Central Bank officials commented in
separate occasions that a stronger peso translates to cheaper peso
expenditures for inputs of the import-dependent electronics sector,
partially offsetting lower peso proceeds from export sales. Tourist
arrivals and receipts continue to grow, and imports have not surged
as feared. OFW remittances expanded by nearly 20% during 2006 to
USD 12.8 billion and were up more than 20% year-on-year as of
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mid-2007.
6. (U) The Central Bank Governor cited studies indicating that
export competitiveness does not hinge on exchange rate policy alone.
Achieving and sustaining long-term export competitiveness depends
just as heavily on sound and stable macroeconomic, investment, and
trade regimes. Critical factors for a resilient and vibrant export
sector include a productive and skilled labor force, access to
affordable credit, efficient infrastructure, technological
investments, and aggressive marketing efforts.
-----------------------
Benefits of Strong Peso
-----------------------
7. (U) Assessing the currency appreciation's overall economic
impact thus far, Governor Tetangco said the peso's strength has
brought benefits to the economy that offset the disadvantages to
certain sectors. The stronger currency dampened inflationary
pressures from increases in international prices of imported
commodities, including oil and petroleum products. The Governor
estimated that the cumulative appreciation of the exchange rate over
the past 2 1/2 years from 56 pesos/USD to 45 pesos lowered inflation
by 2.5 percentage points, benefiting both consumers (including OFW
beneficiaries) and producers.
8. (U) The stronger peso has allowed the Central Bank to build its
international reserve buffer to a more comfortable level. Gross
international reserves hit a record $26.4 billion in June,
equivalent to 4.8 months import cover and to 2.5 times the foreign
debt maturing over the next twelve months. While Central Bank
foreign exchange purchases help to temper the peso's rise, the Bank
generally attempts to sterilize reserve inflows to prevent excess
liquidity from threatening inflation targets.
9. (U) The local currency's appreciation has also provided both the
public and private sectors the opportunity to pre-pay foreign debt
obligations -- $4.4 billion during 2006 and $1.4 billion so far in
2007 -- helping to reduce the Philippines' foreign debt ratio from
55% to 45% of Gross Domestic Product (GDP) between the end of 2005
and 2006, respectively. Pre-paid debt included the Government's
remaining $220 million obligation with the International Monetary
Fund (IMF), ending 4 1/2 decades of IMF supervision.
10. (U) Two years of peso appreciation has dropped the Philippines'
foreign debt-to-GDP ratio below the IMF's 60% vulnerability
threshold, a development welcomed by credit rating agencies and
rewarded by foreign capital markets through narrower risk premiums
for Philippine debt. Tetangco believes that the strong local
currency will encourage more debt retirement and noted room for
further improvement vis--vis debt ratios of similarly-rated,
emerging-market economies.
--------------------------------------------- --------
Currency Appreciation "Net Positive" for GRP Finances
--------------------------------------------- --------
11. (U) Department of Finance (DOF) officials described the overall
impact of a strong local currency as "net positive" for National
Government finances. Lower peso requirements for servicing foreign
loan obligations more than offset reduced peso receipts from Customs
collections. The DOF estimated the net benefit from a stronger than
expected exchange rate at about 2 billion pesos in 2005 and 12
billion pesos in 2006.
--------------------------------------------- -
But GRP Not Unsympathetic to Exporters Plight
--------------------------------------------- -
12. (U) Although it remains committed to a market-driven exchange
rate, the Philippine Government recognizes the adverse impact of the
currency's appreciation on small exporters that depend mainly on
domestic inputs. The GRP has taken a number of other measures to
assist exporters. Citing increasing demand for foreign exchange
because of globalization, the Central Bank relaxed foreign exchange
regulations in March 2007 by doubling allowable over-the-counter
foreign exchange purchases from banks for non-trade and non-debt
purchases to USD 10,000, and for outward investments by residents to
USD 12,000.
13. (U) To enhance exporters' access to credit, the Central Bank
established a USD 500 million Exporters Dollar and Yen Rediscount
Facility. The government-owned Development Bank of the Philippines
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recently opened a USD 1 billion foreign exchange hedging facility
for exporters.
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Comment
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14. (SBU) The Philippine Government generally considers the peso's
appreciation as a "pleasant challenge" and a reflection of very
liquid global financial markets seeking to invest in emerging
economies with improving macroeconomic situations (Ref A).
Pro-Administration politicians have bandied the strong peso as a
vote of confidence for the Arroyo administration. Central Bank
officials privately fear that a false sense of complacency may begin
to set in and stressed the urgency of undertaking and sustaining
reforms to boost foreign direct investment levels, promote long-term
export growth, and harness non-debt sources of foreign exchange by
addressing slipping competitiveness rankings (septel). They
emphasized the need to address persistent revenue collection
problems (Ref B) that could seriously undermine the current cautious
optimism here.
Jones