US State Dept Backgrounds Notes: Philippines

Wed, 04 Nov 2009
Background Note: Philippines

October 2009
Bureau of East Asian and Pacific Affairs

PROFILE
OFFICIAL NAME:

Republic of the Philippines
Geography
Area: 300,000 sq. km. (117,187 sq. mi.).
Major cities (2007 estimate): Capital--Manila (pop. 11.55 million in metropolitan area); other cities--Davao City (1.36 million); Cebu City (0.80 million).
Terrain: Islands, 65% mountainous, with narrow coastal lowlands.
Climate: Tropical, astride typhoon belt.

People
Nationality: Noun--Filipino(s). Adjective--Philippine.
Population (2009 estimate): 92.2 million.
Annual growth rate (2007 estimate): 2.04%.
Ethnic groups: Malay, Chinese.
Religions (based on 2000 census): Roman Catholic 80.9%, Muslim 5%, Evangelical 2.8%, Iglesia ni Kristo 2.3%, Aglipayan 2%, other Christian 4.5%, other 1.8%, unspecified 0.6%, none 0.1%.
Languages: Filipino (based on Tagalog), official national language; English, language of government and instruction in education.
Education: Years compulsory--6 (note: 6 years of primary education free and compulsory; 4 years of secondary education free but not compulsory). Attendance (2008)--85% in elementary grades, 62% in secondary grades. Literacy (2003)--93.4%.
Health: Infant mortality rate (2006)--24 per 1,000. Life expectancy (2005)--67.80 yrs. for males; 72.50 yrs. for females.
Work force (2008): 36.81 million. Services (including commerce and government)--51%; agriculture--34%; industry--15%.

Government
Type: Republic.
Independence: 1946.
Constitution: February 11, 1987.
Branches: Executive--president and vice president. Legislative--bicameral legislature. Judicial--independent.
Administrative subdivisions: 16 regions and Metro Manila (National Capital Region), 80 provinces, 120 cities.
Political parties: Lakas-Christian Muslim Democrats/KAMPI, Nationalist People's Coalition, Laban ng Demokratikong Pilipino, Liberal Party, Aksiyon Demokratiko, Partido Demokratikong Pilipino-Lakas ng Bayan, and other small parties.
Suffrage: Universal, but not compulsory, at age 18.

Economy
GDP (2008): $166.9 billion.
Annual GDP growth rate (2008): 3.8% at constant prices.
GDP per capita (2008): $1,841.
Natural resources: Copper, nickel, iron, cobalt, silver, gold.
Agriculture: Products--rice, coconut products, sugar, corn, pork, bananas, pineapple products, aquaculture, mangoes, eggs.
Industry: Types--textiles and garments, pharmaceuticals, chemicals, wood products, food processing, electronics and semiconductor assembly, petroleum refining, fishing, business process outsourcing services.
Trade (2008): Exports--$49.0 billion. Imports--$56.6 billion.

PEOPLE
The majority of Philippine people are descendants of Indonesians and Malays who migrated to the islands in successive waves over many centuries and largely displaced the aboriginal inhabitants. The largest ethnic minority now is the mainland Asians (called Chinese), who have played an important role in commerce for many centuries since they first came to the islands to trade. Arabs and Indians also traveled and traded in the Philippines in the first and early second millennium. As a result of intermarriage, many Filipinos have some Asian mainland, Spanish, American, Arab, or Indian ancestry. After the mainland Asians, Americans and Spaniards constitute the next largest minorities in the country.

More than 90% of the people are Christian as a result of the nearly 400 years of Spanish and American rule. The major non-Hispanicized groups are the Muslim population, concentrated in the Sulu Archipelago and in central and western Mindanao, and the mountain aboriginal groups of northern Luzon. Small forest tribes still live in the more remote areas of Mindanao.

About 87 languages and dialects are spoken, most belonging to the Malay-Polynesian linguistic family. Of these, eight are the first languages of more than 85% of the population. The four principal indigenous languages are Cebuano, spoken in the Visayas; Tagalog, predominant in the area around Manila; Ilocano, spoken in northern Luzon, and Maranao and related languages spoken in Mindanao. Since 1939, in an effort to develop national unity, the government has promoted the use of the national language, Pilipino, which is based on Tagalog. Pilipino is taught in all schools and is widely used across the archipelago. Many use English as a second language. Nearly all professionals, academics, and government workers are conversant or fluent in English. In January 2003, President Gloria Macapagal-Arroyo ordered the Department of Education to restore English as the medium of instruction in all schools and universities. Only a few Filipino families use Spanish or Mandarin as second languages.

The Philippines has one of the highest literacy rates in the developing world. About 93% of the population 10 years of age and older are literate.

HISTORY
The history of the Philippines can be divided into four distinct phases: the pre-Spanish period (before 1521); the Spanish period (1521-1898); the American period (1898-1946); and the post-independence period (1946-present).

Pre-Spanish Period
The first people in the Philippines, the Negritos, are believed to have come to the islands 30,000 years ago from Borneo and Sumatra, making their way across then-existing land bridges. Subsequently, Malays came from the south in successive waves, the earliest by land bridges and later in boats by sea. The Malays settled in scattered communities, named barangays after the large outrigger boats in which they arrived, and ruled by chieftains known as datus. Chinese merchants and traders arrived and settled in the ninth century, sometimes traveling on the ships of Arab traders, introducing Islam in the south and extending some influence even into Luzon. The Malays, however, remained the dominant group until the Spanish arrived in the 16th century.

Spanish Period
Portuguese explorer Ferdinand Magellan reached the Philippines and claimed the archipelago for Spain in 1521, but was killed shortly afterwards when he intervened in a dispute between rival tribes. Christianity was established in the Philippines only after the arrival of the succeeding Spanish expeditionary forces (the first led by Legazpi in the early 16th century) and the Spanish Jesuits, and in the 17th and 18th centuries by the conquistadores.

Until Mexico proclaimed independence from Spain in 1810, the islands were under the administrative control of Spanish North America, and there was significant migration between North America and the Philippines. This period was the era of conversion to Roman Catholicism. A Spanish colonial social system was developed with a local government centered in Manila and with considerable clerical influence. Spanish influence was strongest in Luzon and the central Philippines but less so in Mindanao, save for certain coastal cities.

The long period of Spanish rule was marked by numerous uprisings. Towards the latter half of the 19th century, European-educated Filipinos or ilustrados (such as the Chinese Filipino national hero Jose Rizal) began to criticize the excesses of Spanish rule and instilled a new sense of national identity. This movement gave inspiration to the final revolt against Spain that began in 1896 under the leadership of Emilio Aguinaldo (another Chinese Filipino) and continued until the Americans defeated the Spanish fleet in Manila Bay on May 1, 1898, during the Spanish-American War. Aguinaldo declared independence from Spain on June 12, 1898.

American Period
Following Admiral George Dewey's defeat of the Spanish fleet in Manila Bay, the U.S. occupied the Philippines. Spain ceded the islands to the United States under the terms of the Treaty of Paris (December 10, 1898) that ended the war.

A war of resistance against U.S. rule, led by revolutionary General Aguinaldo, broke out in 1899. During this conflict fighting and disease claimed the lives of tens of thousands of Filipinos and thousands of Americans. Filipinos and an increasing number of American historians refer to these hostilities as the Philippine-American War (1899-1902), and in 1999, the U.S. Library of Congress reclassified its references to use this term. In 1901, Aguinaldo was captured and swore allegiance to the United States, and resistance gradually died out until the conflict ended with a Peace Proclamation on July 4, 1902. However, armed resistance continued sporadically until 1913, especially among the Muslims in Mindanao and Sulu.

U.S. administration of the Philippines was always declared to be temporary and aimed to develop institutions that would permit and encourage the eventual establishment of a free and democratic government. Therefore, U.S. officials concentrated on the creation of such practical supports for democratic government as public education, public infrastructure, and a sound legal system.

The first legislative assembly was elected in 1907, and a bicameral legislature, largely under Filipino control, was established. A civil service was formed and was gradually taken over by the Filipinos, who had effectively gained control by the end of World War I. The Catholic Church was disestablished, and a considerable amount of church land was purchased and redistributed.

In 1935, under the terms of the Tydings-McDuffie Act, the Philippines became a self-governing commonwealth. Manuel Quezon was elected president of the new government, which was designed to prepare the country for independence after a 10-year transition period. Japan attacked, however, and in May 1942, Corregidor, the last American/Filipino stronghold, fell. U.S. forces in the Philippines surrendered to the Japanese, placing the islands under Japanese control. During the occupation, thousands of Filipinos fought a running guerilla campaign against Japanese forces.

The full-scale war to regain the Philippines began when General Douglas MacArthur landed on Leyte on October 20, 1944. Filipinos and Americans fought together until the Japanese surrendered in September 1945 Much of Manila was destroyed during the final months of the fighting. In total, an estimated one million Filipinos lost their lives in the war.

Due to the Japanese occupation, the guerrilla warfare that followed, and the battles leading to liberation, the country suffered great damage and a complete organizational breakdown. Despite the shaken state of the country, the United States and the Philippines decided to move forward with plans for independence. On July 4, 1946, the Philippine Islands became the independent Republic of the Philippines, in accordance with the terms of the Tydings-McDuffie Act. In 1962, the official Philippine Independence Day was changed from July 4 to June 12, commemorating the date independence from Spain was declared by Emilio Aguinaldo in 1898.

Post-Independence Period
The early years of independence were dominated by U.S.-assisted postwar reconstruction. The communist-inspired Huk Rebellion (1945-53) complicated recovery efforts before its successful suppression under the leadership of President Ramon Magsaysay. The succeeding administrations of Presidents Carlos P. Garcia (1957-61) and Diosdado Macapagal (1961-65) sought to expand Philippine ties to its Asian neighbors, implement domestic reform programs, and develop and diversify the economy.

In 1972, President Ferdinand E. Marcos (1965-86) declared martial law, citing growing lawlessness and open rebellion by the communist rebels as his justification. Marcos governed from 1973 until mid-1981 in accordance with the transitory provisions of a new constitution that replaced the commonwealth constitution of 1935. He suppressed democratic institutions and restricted civil liberties during the martial law period, ruling largely by decree and popular referenda. The government began a process of political normalization during 1978-81, culminating in the reelection of President Marcos to a six-year term that would have ended in 1987. The Marcos government's respect for human rights remained low despite the end of martial law on January 17, 1981. His government retained its wide arrest and detention powers, and corruption and cronyism contributed to a serious decline in economic growth and development.

The assassination of opposition leader Benigno (Ninoy) Aquino upon his return to the Philippines in 1983 after a long period of exile coalesced popular dissatisfaction with Marcos and set in motion a succession of events that culminated in a snap presidential election in February 1986. The opposition united under Aquino's widow, Corazon Aquino, and Salvador Laurel, head of the United Nationalist Democratic Organization (UNIDO). The election was marred by widespread electoral fraud on the part of Marcos and his supporters. International observers, including a U.S. delegation led by Senator Richard Lugar (R-Indiana), denounced the official results. Marcos was forced to flee the Philippines in the face of a peaceful civilian-military uprising that ousted him and installed Corazon Aquino as president on February 25, 1986.

Under Aquino's presidency, progress was made in revitalizing democratic institutions and civil liberties. However, the administration was also viewed by many as weak and fractious, and a return to full political stability and economic development was hampered by several attempted coups staged by disaffected members of the Philippine military.

Fidel Ramos was elected president in 1992. Early in his administration, Ramos declared "national reconciliation" his highest priority. He legalized the Communist Party and created the National Unification Commission (NUC) to lay the groundwork for talks with communist insurgents, Muslim separatists, and military rebels. In June 1994, President Ramos signed into law a general conditional amnesty covering all rebel groups, as well as Philippine military and police personnel accused of crimes committed while fighting the insurgents. In October 1995, the government signed an agreement bringing the military insurgency to an end. A peace agreement with one major Muslim insurgent group, the Moro National Liberation Front (MNLF), was signed in 1996, using the existing Autonomous Region in Muslim Mindanao (ARMM) as a vehicle for self-government.

Popular movie actor Joseph Ejercito Estrada's election as president in May 1998 marked the Philippines' third democratic succession since the ouster of Marcos. Estrada was elected with overwhelming mass support on a platform promising poverty alleviation and an anti-crime crackdown During his first two years in office, President Estrada was plagued with allegations of corruption, resulting in impeachment proceedings. Estrada vacated his office in 2001. In 2007, an anti-graft court convicted Estrada of plunder charges. He received a presidential pardon soon after the conviction.

Gloria Macapagal-Arroyo, elected vice president in 1998, assumed the presidency in January 2001 after widespread demonstrations that followed the breakdown of Estrada's impeachment trial. The Philippine Supreme Court subsequently endorsed unanimously the constitutionality of the transfer of power. National and local elections took place in May 2004. Under the constitution, Arroyo was eligible for another six-year term as president, and she won a hard-fought campaign against her primary challenger, movie actor Fernando Poe, Jr., in elections held May 10, 2004. Noli De Castro was elected vice president.

Impeachment charges were brought against Arroyo in June 2005 for allegedly tampering with the results of the elections after purported tapes of her speaking with an electoral official during the vote count surfaced, but Congress rejected the charges in September 2005. Similar charges were discussed and dismissed by Congress in 2006, 2007, and 2008.

GOVERNMENT AND POLITICAL CONDITIONS
The Philippines has a representative democracy modeled on the U.S. system. The 1987 constitution, adopted during the Aquino administration, reestablished a presidential system of government with a bicameral legislature and an independent judiciary. The president is limited to one six-year term. Provision also was made in the constitution for autonomous regions in Muslim areas of Mindanao and in the Cordillera region of northern Luzon, where many aboriginal tribes still live.

The 24-member Philippine Senate is elected at large, and all senators serve six-year terms. Half are elected every three years. There are currently 239 members in the House of Representatives, 217 of whom represent single-member districts. The remaining 22 House seats are occupied by sectoral party representatives elected at large, called party list representatives. The Supreme Court approved the introduction of 32 additional party list seats in April 2009, in time for May 2010 national elections. All representatives serve three-year terms, with a maximum of three consecutive terms. On May 14, 2007, legislative and local elections were held. President Arroyo's coalition won the majority of the seats in the House of Representatives, gubernatorial seats, and city mayoral seats. However, the President's coalition won only three out of 12 vacant seats in the Philippine Senate. Although the election was marred by some violence and irregularities, civil society monitoring groups played a welcome and active role in ensuring a relatively fair and democratic process. The next presidential and congressional elections are scheduled for May 2010.

The government continues to face threats from terrorist groups, including four terrorist groups on the U.S. Government's Foreign Terrorist Organization list. The terrorist Abu Sayyaf Group (ASG), which gained international notoriety with its kidnappings of foreign tourists in the southern islands, remains a major problem for the government, along with members of the Indonesian-based Jemaah Islamiyah (JI). Efforts to track down and interdict ASG and JI members have met with some success, especially in Basilan and Jolo, where U.S. troops provide counterterrorism assistance and training to Philippine soldiers, along with conducting humanitarian activities. In August 2006, the Armed Forces of the Philippines began a major offensive against ASG and JI on the island of Jolo. This offensive was successful and resulted in the deaths of Abu Sayyaf leader Khadafy Janjalani and his deputy, Abu Solaiman. The U.S. Government provided rewards to Philippine citizens whose information led to these deaths in the military operations, as well as to many other operations against terrorist leaders. The broad-based efforts to weaken terrorist organizations resulted in the death or capture of over 200 terrorists in 2007 and 2008.

An international monitoring team continues to watch over a cease-fire agreement between the government and the separatist Moro Islamic Liberation Front (MILF). In June 2003, the MILF issued a formal renunciation of terrorism. In August 2008, during peace talks mediated by the Government of Malaysia, the Philippine Government and the MILF reached agreement in principle on a territorial agreement. However, intervention by the Philippine Supreme Court, and its subsequent October 14, 2008 ruling that the draft agreement was unconstitutional, forced both parties to seek new ways to reach a peace agreement. Fighting flared up after the agreement was struck down in court and continued sporadically in central Mindanao, until both sides agreed to a cease-fire on July 29, 2009 and resumed the peace talks.

Principal Government Officials
President--Gloria Macapagal-Arroyo
Vice President--Noli De Castro
Foreign Secretary--Alberto Romulo
Ambassador to the United States--Willie Gaa
Permanent Representative to the UN--Hilario G. Davide

The Republic of the Philippines maintains an embassy in the United States at 1600 Massachusetts Avenue NW, Washington, DC 20036 (tel. 202-467-9300). Consulates general are in New York, Chicago, San Francisco, Los Angeles, Honolulu, and Agana (Guam).

ECONOMY
Since the end of World War II, the Philippine economy has been on an unfortunate trajectory, going from one of the richest countries in Asia (following Japan) to one of the poorest. Growth immediately after the war was rapid, but slowed over time. Years of economic mismanagement and political volatility during the Marcos regime contributed to economic stagnation and resulted in macroeconomic instability. A severe recession from 1984 through 1985 saw the economy shrink by more than 10%, and perceptions of political instability during the Aquino administration further dampened economic activity.

During the 1990s, the Philippine Government introduced a broad range of economic reforms designed to spur business growth and foreign investment. As a result, the Philippines saw a period of higher growth, although the Asian financial crisis in 1997 slowed Philippine economic development once again.

Despite occasional challenges to her presidency and resistance to pro-liberalization reforms by vested interests, President Arroyo made considerable progress in restoring macroeconomic stability with the help of a well-regarded economic team. Nonetheless, long-term economic growth remains threatened by crumbling infrastructure and education systems, and trade and investment barriers. International competitiveness rankings have slipped.

The service sector contributes more than half of overall Philippine economic output, followed by industry (about a third), and agriculture (less than 20%). Important industries include food processing; textiles and garments; electronics and automobile parts; and business process outsourcing. Most industries are concentrated in the urban areas around metropolitan Manila. Mining also has great potential in the Philippines, which possesses significant reserves of chromate, nickel, and copper. Significant natural gas finds off the islands of Palawan have added to the country's substantial geothermal, hydro, and coal energy reserves.

Today's Economy
The Philippine economy seems comparatively well-equipped to weather the global financial crisis in the short term, partly as a result of the efforts over the past few years to control the fiscal deficit, bring down debt ratios, and adopt internationally-accepted banking sector capital adequacy standards. The Philippine banking sector--which comprises 80% of total financial system resources--has limited direct exposure to distressed financial institutions overseas (i.e., $2 billion, less than 2% of aggregate banking system assets). Conservative regulatory policies, including the prohibition of investments in structured products, shielded the insurance sector from exposure to distressed financial firms. While direct financial exposure to problematic investments and financial institutions is limited, the impact of external shocks to economic growth, poverty alleviation, employment, remittances, credit availability, and overall investment prospects is a concern.

GDP grew by 7.3% in 2007, the fastest annual pace of growth in over three decades--fueled by increased government and private construction expenditures; a robust information communications technology industry; improved post-drought agricultural harvests; and strong private consumption, spurred in part by $14.4 billion in remittances from overseas workers (equivalent to about 10% of GDP). However, real year-on-year GDP growth slowed to 3.8% during 2008, reflecting the impact of high food and fuel prices and global financial uncertainties on the domestic economy. Overseas workers’ remittances--which increased 13.7% year-on-year in 2008 to a new $16.4 billion record--helped cushion the impact of external shocks on economic growth, but began to slow during 2008’s fourth quarter. Remittances are expected to grow 3%-4% in 2009 despite the global financial crisis, helping the economy avoid recession and supporting the balance of payments and international reserves. Most independent forecasts also currently see Philippine GDP growing within the government’s 0.8%-1.8% targeted range for 2009. It will take a higher, sustained economic growth path to make more appreciable progress in poverty alleviation given the Philippines' annual population growth rate of 2.04%, one of the highest in Asia. The portion of the population living below the national poverty line increased from 30% to 33% between 2003 and 2006, equivalent to an additional 3.8 million poor Filipinos. Slower economic growth here and abroad, a soft domestic labor market, and uncertainties over overseas employment opportunities threaten to push more Filipinos into poverty.

Business process outsourcing (BPO) has been the fastest-growing segment of the Philippine economy and has been relatively resilient amid the global financial turmoil, totaling an estimated 10% of the global outsourcing market and generating more than $6 billion in revenues in 2008 (up 26% and equivalent to about 3.6% of Philippine GDP). Although revenue growth has slowed from 40% during 2006 and 2007, industry officials expect the BPO sector to post double-digit revenue growth of between 20%-30%, and to generate about 100,000 new jobs, during 2009. The balance of payments surplus--which hit a record $8.6 billion in 2007 from higher overseas worker remittances, tourism receipts, BPO-related revenues, portfolio investments, and official development assistance funds--narrowed to $18 million during 2008. Merchandise exports--which rely heavily on electronics shipments for about two-thirds of sales--declined by nearly 3% year-on-year during 2008, pulled down by a 23% year-on-year decline in fourth-quarter revenues. Although there has been some improvement over the years, the local value added of electronics exports remains relatively low at about 30%. Net foreign direct investment (FDI) inflows dropped by 48% from 2007, to $1.5 billion; and net foreign portfolio capital reversed from a $3.8 billion net inflow in 2007 to a $3.6 billion net outflow in 2008. Import growth slowed but nevertheless increased by more than 2%, mainly because of spikes in international prices of fuel, rice, and petroleum-based agricultural inputs. Foreign tourist arrivals sputtered to 1.5% growth and tourism-related revenues weakened. The United States remains the Philippines' largest trading partner with $17 billion in two-way trade during 2008, and is among the largest investors with $6 billion in total direct investments. Although showing signs of bottoming out, merchandise exports slumped further in 2009 (with January-August 2009 exports down 30.3% year-on-year). However, the merchandise import bill has also declined (31.2% as of August 2009), combining with the continued expansion in overseas remittances and BPO revenues, and improving net foreign direct and portfolio investment flows to produce a wider balance of payments surplus (estimated at $2.8 billion as of August 2009).

The Philippine stock market index--which closed 2008 down more than 48% year-on-year--closed mid-October 2009 more than 57% higher from end-2008. The Philippine peso, which closed 2008 15% weaker from end-2007, has appreciated by 2.5% since the beginning of the year. Gross international reserves ($37.6 billion as of end-2008) have risen further to a new record high of nearly $42.3 billion as of end-September 2009, adequate for close to 8 months of goods and services imports and equivalent to 3.6 times foreign debts maturing over the next 12 months.

Efforts in recent years to reduce the fiscal deficit by raising new taxes have helped reduce high debt ratios, create additional fiscal space to increase spending on vital social services and infrastructure after years of tight budgets, and improve confidence. December 2004 legislation provided for biennial adjustments to the excise tax rates for tobacco and liquor products until 2011; the government began implementing an amended value added tax (VAT) law in November 2005 that expanded VAT coverage and increased the VAT rate from 10% to 12%; and a law signed in January 2005 seeks to institute a performance-based rewards system in the government's revenue collection agencies. Although still high by regional and emerging country standards, the debt of the national government has declined to about 56% of GDP; and that of the consolidated public sector to about 64% of GDP. Major credit rating agencies raised their rating outlook from “negative” to “stable” in recognition of fiscal progress and more manageable debt ratios.

The national government worked to reduce its fiscal deficits for five consecutive years to 0.2% of GDP in 2007 and had hoped to balance the budget in 2008. The Arroyo administration no longer targets leaving office in 2010 with a balanced budget, opting instead for measured deficit spending to help stimulate the economy and temper the adverse impact of global external shocks on the already high number of Filipinos struggling with poverty. The national government ended 2008 with a deficit equivalent to 0.9% of GDP and has programmed a higher deficit for 2009 equivalent to 3.2% of GDP. Looking forward, further reforms are needed to ease fiscal pressures from large losses being sustained by a number of government-owned firms and to control and manage contingent liabilities. Despite recent improvements, challenges remain to the long-term viability of state-run pension funds. The national government's tax-to-GDP ratio increased from 13% in 2005 to 14.3% in 2006 after new tax measures went into effect; however, it declined and stagnated at 14% in 2007 and 2008, has declined further in 2009 (to 13.5% during the first semester), and remains low relative to historical performance (i.e., 1997’s 17% peak ratio) and vis-à-vis regional standards. The government has intermittently relied on heftier privatization receipts to make up for the shortfall in targeted tax collections but this is not a sustainable revenue source. Legislation passed in 2008 providing tax relief for minimum wage earners and individual taxpayers, a cut in the corporate income tax rate from 35% to 30% starting 2009, and no further adjustments to liquor and tobacco excise taxes after 2011 will erode government revenues further.

The Philippine Congress enacted an anti-money laundering law in September 2001 and followed through with amendments in March 2003 to address legal concerns posed by the Organization for Economic Cooperation and Development (OECD) Financial Action Task Force (FATF). The FATF removed the Philippines from its list of Non-Cooperating Countries and Territories in February 2005, noting the significant progress made to remedy concerns and deficiencies identified by the FATF to improve implementation. The Egmont Group, the international network of financial intelligence units, admitted the Philippines to its membership in June 2005. The FATF Asia Pacific Group conducted a comprehensive peer review of the Philippines in September 2008. Some of the more important concerns include the exclusion of casinos from the list of covered institutions and 2008 court rulings that inhibit and complicate investigations of fraud and corruption by prohibiting ex-parte inquiries regarding suspicious accounts. The Philippines’ financial intelligence unit is pushing for amendments to the anti-money laundering law to address these concerns.

Eight years after the Arroyo administration enacted legislation to rationalize the electric power sector and privatize the government's debt-saddled National Power Corporation (NPC), significant progress was made only in 2007, with the privatization of the state-owned transmission company (Transco) and sales of 68% of total generating assets in Luzon and the Visayas. The Arroyo government is confident it will complete its privatization targets in 2009.

The U.S. Trade Representative removed the Philippines from its Special 301 Priority Watch List in 2006, reflecting improvement in its enforcement of intellectual property rights (IPR) protection. It has maintained the Philippines on the Special 301 Watch List through 2009. However, sustained effort and continuing progress on key IPR issues will be essential to maintain this status.

Despite a number of policy reforms, the Philippines continues to face important challenges and must sustain the reform momentum to achieve and sustain the strong post-crisis recovery needed to spur investments, achieve higher growth, generate employment, and alleviate poverty for a rapidly expanding population. Absent new revenue measures, sustained fiscal stability will require more aggressive tax collection efficiency to address the severe under-spending in infrastructure and social services after years of tight budgets. Continuing efforts to fast-track power sector privatization remain critical to the long-term stability of public sector finances, ensuring reliable electricity supply, and bringing down the cost of power. Climate change is an emerging threat to agriculture and overall growth, and also could further complicate fiscal consolidation efforts.

Potential foreign investors, as well as tourists, remain concerned about law and order, inadequate infrastructure, policy and regulatory instability, and governance issues. While trade liberalization presents significant opportunities, intensifying global competition and the emergence of low-wage export economies also pose challenges. Competition from other Southeast Asian countries and from China for investment underlines the need for sustained progress on structural reforms to remove bottlenecks to growth, to lower costs of doing business, and to promote good public and private sector governance. The government has been working to reinvigorate its anti-corruption drive, and the Office of the Ombudsman has reported improved conviction rates. Nevertheless, the Philippines’ efforts are lagging and more needs to be done to improve international perception of its anti-corruption campaign--an effort that will require strong political will and significantly greater financial and human resources.

Agriculture and Forestry
Arable farmland comprises more than 40% of the total land area. Although the Philippines is rich in agricultural potential, inadequate infrastructure, lack of financing, and government policies have limited productivity gains. Philippine farms produce food crops for domestic consumption and cash crops for export. The agricultural sector employs more than one-third of the work force but provides less than a fifth of GDP.

Decades of uncontrolled logging and slash-and-burn agriculture in marginal upland areas have stripped forests, with critical implications for the ecological balance. Although the government has instituted conservation programs, deforestation remains a severe problem.

With its 7,107 islands, the Philippines has a very diverse range of fishing areas. Notwithstanding good prospects for marine fisheries, the industry continues to face a difficult future due to destructive fishing methods, a lack of funds, and inadequate government support.

Agriculture generally suffers from low productivity, low economies of scale, and inadequate infrastructure support. Despite the adverse effects of successive strong typhoons in the last four months of 2006, the overall agricultural output expanded by 3.8% during that year. In 2007, the sector grew by 4.7%, led by gains in the fisheries subsector. The sector registered slower growth in 2008 at 3.9%, due mainly to negative growth in the livestock sector and lesser output in the crops and fisheries subsector, and growth is expected to slow further to under 2% in 2009 due to adverse weather conditions.

Industry
Industrial production is centered on the processing and assembly operations of the following: food, beverages, tobacco, rubber products, textiles, clothing and footwear, pharmaceuticals, paints, wood and wood products, paper and paper products, printing and publishing, furniture and fixtures, small appliances, and electronics. Heavier industries are dominated by the production of cement, glass, industrial chemicals, fertilizers, iron and steel, mineral products, and refined petroleum products. Newer industries, particularly production of semiconductors and other intermediate goods for incorporation into consumer electronics are important components of Philippine exports and are located in special export processing zones.

The industrial sector is concentrated in urban areas, especially in the metropolitan Manila region, and has only weak linkages to the rural economy. Inadequate infrastructure, transportation, and communication have so far inhibited faster industrial growth, although significant strides have been made in addressing the last of these elements.

Mining
The Philippines is one of the world's most highly mineralized countries, with untapped mineral wealth estimated at more than $840 billion. Philippine copper, gold, and chromate deposits are among the largest in the world. Other important minerals include nickel, silver, coal, gypsum, and sulfur. The Philippines also has significant deposits of clay, limestone, marble, silica, and phosphate. The discovery of natural gas reserves off Palawan has been brought on-line to generate electricity.

Despite its rich mineral deposits, the Philippine mining industry is just a fraction of what it was in the 1970s and 1980s when the country ranked among the ten leading gold and copper producers worldwide. Low metal prices, high production costs, and lack of investment in infrastructure have contributed to the industry's overall decline. A December 2004 Supreme Court decision upheld the constitutionality of the 1995 Mining Act, thereby allowing up to 100% foreign-owned companies to invest in large-scale exploration, development, and utilization of minerals, oil, and gas.

FOREIGN RELATIONS
In its foreign policy, the Philippines cultivates constructive relations with its Asian neighbors, with whom it is linked through membership in the Association of Southeast Asian Nations (ASEAN), the ASEAN Regional Forum (ARF), and the Asia-Pacific Economic Cooperation (APEC) forum. The Philippines chaired ASEAN from 2006 to 2007, hosting the ASEAN Heads of State Summit and the ASEAN Regional Forum. The Philippines is a member of the UN and some of its specialized agencies, and served a two-year term as a member of the UN Security Council from January 2004-2006, acting as UNSC President in September 2005. Since 1992, the Philippines has been a member of the Non-Aligned Movement. The government is seeking observer status in the Organization of the Islamic Conference (OIC). The Philippines has played a key role in ASEAN in recent years, ratifying the ASEAN Charter in October 2008. The Philippines also values its relations with the countries of the Middle East, in no small part because hundreds of thousands of Filipinos are employed in that region. The welfare of the some four to five million overseas Filipino contract workers is considered to be a pillar of Philippine foreign policy.

The fundamental Philippine attachment to democracy and human rights is also reflected in its foreign policy. Philippine soldiers and police have participated in a number of multilateral civilian police and peacekeeping operations, and a Philippine Army general served as the first commander of the UN Peacekeeping Operation in East Timor. The Philippines presently has peacekeepers deployed in eight UN Peacekeeping Operations worldwide. The Philippines also participated in Operation Iraqi Freedom, deploying some 50 troops to Iraq in 2003. (These troops were subsequently withdrawn in 2004 after the kidnapping of a Filipino overseas worker.) The Philippine Government also has been active in efforts to reduce tensions among rival claimants to the territories and waters of the resource-rich South China Sea.

U.S.-PHILIPPINE RELATIONS
U.S.-Philippine relations are based on shared history and commitment to democratic principles, as well as on economic ties. The historical and cultural links between the Philippines and the United States remain strong. The Philippines modeled its governmental institutions on those of the United States and continues to share a commitment to democracy and human rights. At the most fundamental level of bilateral relations, human links continue to form a strong bridge between the two countries. There are an estimated four million Americans of Philippine ancestry in the United States, and more than 250,000 American citizens in the Philippines.

Until November 1992, pursuant to the 1947 Military Bases Agreement, the United States maintained and operated major facilities at Clark Air Base, Subic Bay Naval Complex, and several small subsidiary installations in the Philippines. In August 1991, negotiators from the two countries reached agreement on a draft treaty providing for use of Subic Bay Naval Base by U.S. forces for 10 years. The draft treaty did not include use of Clark Air Base, which had been so heavily damaged by the 1991 eruption of Mount Pinatubo that the United States decided to abandon it.

In September 1991, the Philippine Senate rejected the bases treaty, and despite further efforts to salvage the situation, the two sides could not reach an agreement. As a result, the Philippine Government informed the United States on December 6, 1991, that it would have one year to complete withdrawal. That withdrawal went smoothly and was completed ahead of schedule, with the last U.S. forces departing on November 24, 1992. On departure, the U.S. Government turned over assets worth more than $1.3 billion to the Philippines, including an airport and ship-repair facility. Agencies formed by the Philippine Government have converted the former military bases for civilian commercial use, with Subic Bay serving as a flagship for that effort.

The post-U.S. bases era has seen U.S.-Philippine relations improved and broadened, with a prominent focus on economic and commercial ties while maintaining the importance of the security dimension. U.S. investment continues to play an important role in the Philippine economy, while a strong security relationship rests on the 1952 U.S.-Philippines Mutual Defense Treaty (MDT). In February 1998, U.S. and Philippine negotiators concluded the Visiting Forces Agreement (VFA), paving the way for increased military cooperation under the MDT. The agreement was approved by the Philippine Senate in May 1999 and entered into force on June 1, 1999. Under the VFA, the United States has conducted ship visits to Philippine ports and resumed large combined military exercises with Philippine forces.

Key events in the bilateral relationship include the July 4, 1996 declaration by President Ramos of Philippine-American Friendship Day in commemoration of the 50th anniversary of Philippine independence. Ramos visited the United States in April 1998, and then-President Estrada visited in July 2000. President Arroyo met with President George W. Bush in an official working visit in November 2001, made a state visit in Washington on May 19, 2003, and returned for additional working visits on June 24, 2008 and July 30, 2009. President Bush made a state visit to the Philippines on October 18, 2003, during which he addressed a joint session of the Philippine Congress--the first American President to do so since Dwight D. Eisenhower. There are regular U.S. cabinet-level, congressional, and military visits to the Philippines as well.

President Arroyo has repeatedly stressed the close friendship between the Philippines and the United States and her desire to expand bilateral ties further. Both governments seek to revitalize and strengthen their partnership by working toward greater security, prosperity, and service to Filipinos and Americans alike. President Arroyo has lent strong support to counterterrorism efforts. In October 2003, the United States designated the Philippines as a Major Non-NATO Ally. That same month, the Philippines joined the select group of countries to have ratified all 12 UN counterterrorism conventions.

Annual bilateral military exercises contribute directly to the Philippine armed forces' efforts to combat insurgents, defeat Abu Sayyaf and Jemaah Islamiyah terrorists, and bring development to formerly terrorist-plagued areas, most notably in the southern Philippines. They include not only combined military training but also civil-military affairs and humanitarian projects. The International Military Education and Training (IMET) program is the largest in the Pacific and the third-largest in the world, and a Mutual Logistics Support Agreement (MLSA) was signed in November 2002. Similarly, law enforcement cooperation has reached new levels: U.S. and Philippine agencies have cooperated to bring charges against numerous terrorists, to implement the countries' extradition treaty, and to train thousands of Filipino law enforcement officers. There is a Senior Law Enforcement Advisor helping the Philippine National Police with its Transformation Program.

In FY 2009, the U.S. Government--working closely with the Philippine Government, civil society, the private sector, and other donors--provided $138 million in grant funds to support a more peaceful and prosperous Philippines. About 55% of economic assistance resources are targeted for Mindanao, for programs that promote economic growth, mitigate conflict, and promote peace and security. The United States supports programs that promote good governance at the national and local levels, improve electoral systems, promote rule of law and human rights, help address constraints to trade and investment, improve revenue collection/administration and fiscal transparency, and enhance the ability of military and civilian law enforcement agencies to maintain peace and security. Many programs across other sectors--including health, education, agricultural productivity, micro-enterprise development, and natural resource management--also support improved governance, human capital development, poverty alleviation, and/or sustainable growth. Health-related assistance programs include reproductive health, maternal and child care, tuberculosis and HIV/AIDS control, and avian flu preparedness. The United States also provides humanitarian assistance to internally-displaced persons in conflict-affected areas and to victims of natural disasters (including $5 million in reconstruction assistance for the typhoon-battered Bicol region in FY 2007 and, thus far, $6 million for disaster relief and early recovery following typhoons Ketsana and Parma in FY 2009 and FY 2010). In 2006, the Millennium Challenge Corporation (MCC) granted $21 million to the Philippines for a two-year Threshold Program targeted at addressing corruption in revenue administration and improving the capabilities of the Office of the Ombudsman. Performance under this Threshold Program contributed to the MCC awarding the Philippines Compact eligibility status in March 2008, and retention of such status in December 2008.

Nearly 400,000 Americans visit the Philippines each year. Providing government services to U.S. and other citizens, therefore, constitutes an important aspect of the bilateral relationship. Those services include veterans' affairs, social security, and consular operations. Benefits to Filipinos and U.S. citizens resident in the Philippines from the U.S. Department of Veterans Affairs and the Social Security Administration totaled approximately $330 million in 2007. Many people-to-people programs exist between the United States and the Philippines, including Fulbright, International Visitors, and Aquino Fellowship exchange programs, as well as the U.S. Peace Corps.

Trade and Investment
Two-way U.S. merchandise trade with the Philippines amounted to $17 billion in 2008 (U.S. Department of Commerce data). According to Philippine Government data, 12.7% of the Philippines' imports in 2008 came from the United States, and about 16.7% of its exports were bound for America. The Philippines ranks as our 31st-largest export market and our 37th-largest supplier. Key exports to the United States are semiconductor devices and computer peripherals, automobile parts, electric machinery, textiles and garments, wheat and animal feeds, and coconut oil. In addition to other goods, the Philippines imports raw and semi-processed materials for the manufacture of semiconductors, electronics and electrical machinery, transport equipment, and cereals and cereal preparations.

The United States traditionally has been the Philippines' largest foreign investor, with close to $6 billion in total foreign direct investment as of end-2008.

Since the late 1980s, the Philippines has committed itself to reforms that encourage foreign investment as a basis for economic development, subject to certain guidelines and restrictions in specified areas. Under President Ramos, the Philippines expanded reforms, opening the power generation and telecommunications sectors to foreign investment, as well as securing ratification of the Uruguay Round agreement and membership in the World Trade Organization. As noted earlier, President Arroyo's administration has generally continued such reforms despite opposition from vested interests and "nationalist" blocs. A major obstacle has been and will continue to be constitutional restrictions on, among others, foreign ownership of land and public utilities, which limits maximum ownership to 40%.

Although more reforms are needed, the relatively closed Philippine economy has been opened significantly over the last two decades by foreign exchange deregulation, foreign investment and banking liberalization, tariff and market barrier reduction, and foreign entry into the retail trade sector. The Electric Power Industry Reform Act of 2001 opened opportunities for U.S. firms to participate in the power industry in the Philippines. Information and communications technologies, backroom operations such as call centers, regional facilities or shared-service centers, tourism, and mining are likewise leading investment opportunities.

Principal U.S. Embassy Officials
Ambassador--Kristie A. Kenney
Deputy Chief of Mission--Leslie Bassett
Political Counselor--Thomas B. Gibbons
Economic Counselor--Brian P. Doherty
Public Affairs Counselor--Richard Nelson
Consul General--Karen L. Christensen
Management Counselor (acting)--Vivian Lesh
Commercial Counselor--Patrick Wall
USAID Mission Director (acting)--Elzadia Washington
Agricultural Counselor--Emiko Purdy
Transportation and Safety Administration--Scottie R. Laird
Department of Homeland Security--Frank J. Cabaddu
Department of Justice Attaché--Robert E. Courtney III
Defense Attaché Office--Colonel Anthony Senci
Joint U.S. Military Assistance Group--Colonel Kevin D. Clark
Regional Security Officer--Jacob M. Wohlman
Legal Attaché--James D. Nixon
U.S. Drug Enforcement Administration--Robert M. Cash
Veterans Affairs--Jonathan Skelly
Social Security Administration--Darrin Morgan
American Battle Monuments Commission--Larry A. Adkison
U.S. Peace Corps--Sonia Derenoncourt

ENDS

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