US embassy cable - 05MANILA3061

S E C R E T SECTION 01 OF 05 MANILA 003061 
 
SIPDIS 
 
DEPT FOR EAP, EAP/PMBS, INR/EAP, EB, EAP/PD, EAP/EP, 
EB/TPP/BTA/ANA, EB/IFD 
DEPT PASS USTR FOR BWEISEL, DKATZ 
DEPT PASS USAID AND OPIC 
TREASURY FOR OASIA FOR AJEWELL 
USDOJ FOR MCRAWFORD 
USDOC FOR 4430/ITA/MAC/DBISBEE 
 
E.O. 12958: DECL: 07/05/2015 
TAGS: PGOV, PINS, PREL, ECON, PINR, KPAO, RP 
SUBJECT: ARROYO CELEBRATES JULY 4TH, BUT SUPREME COURT 
DECISION SPARKS MORE TURMOIL 
 
REF: A. MANILA 3046 
 
     B. MANILA 2993 
     C. MANILA 2887 
     D. MANILA 2840 
     E. MANILA 2167 
 
Classified By: Political Officer Andrew McClearn for 
reasons 1.4 (b) and (d). 
 
1.  (C) Summary:  President Arroyo attended Mission's July 4 
celebration and also hosted an anti-trafficking event at 
Malacanang attended by Charge on July 2.  At the July 4 
event, Charge publicly hailed close U.S.-Philippine ties and 
underscored the importance of strengthening democratic 
institutions.  Amid Arroyo's attempts to show that she is 
focused on governing despite continued political tensions, 
the Supreme Court's surprise July 1 decision to place a 
Temporary Restraining Order (TRO) on the Expanded VAT law has 
taken a serious toll on the peso, the stock market, and 
investor confidence.  Contacts believe that the President 
worked in backchannel fashion to secure the TRO, despite 
Malacanang claims that it opposed the decision.  The 
opposition plans to ramp up its efforts to pressure Arroyo to 
quit or face impeachment, and the left is planning more 
rallies.  The signs are that political turmoil will continue, 
with the Supreme Court's TRO handing economic reform efforts 
a serious setback.  End Summary. 
 
------------------------- ------------------------- 
Celebrating July 4; Wrapping Herself in "Old Glory" 
------------------------- ------------------------- 
 
2.  (U) In a first since she came to power in 2001, President 
Arroyo attended Mission's July 4 celebration.  Vice President 
Noli de Castro and a host of other dignitaries, including top 
cabinet and military officials also attended the event, which 
was held at the Chancery.  In his toast, Charge stated, in 
part:  "Sometimes we as a people decide, through the 
democratic process, to fix what we perceive is wrong with our 
country.  Other times we discern that what is best for our 
country is to accept imperfection and mistakes as inevitable 
and tolerable.  Always keeping in mind that what is most 
important is strengthening the democratic institutions that 
are our only true safeguard against both tyranny and 
anarchy."  (Para 15 contains additional portions of Charge's 
remarks, which are also on the Embassy's website.) 
 
3.  (C) In response, Foreign Affairs Secretary Albert Romulo 
offered a brief toast on behalf of the GRP.  Arroyo made no 
formal remarks.  Her appearance received significant press 
coverage in both broadcast and print media.  A smiling Arroyo 
was apparently somewhat caught off guard by Charge's brief 
comment regarding the "snap" election of 1986 (see Para 15), 
and subsequently instructed Admiral Ernesto De Leon, the 
Chief of the Philippine Navy, to inquire as to whether there 
was any significance to the reference.  (DATT dismissed the 
suggestion out of hand, and reiterated that Mission supports 
transparency, accountability, and the rule of law.)  Palace 
Spokesman Ignacio Bunye earlier on July 4 had reiterated the 
Palace's view that the President would continue in office, 
stating: "Our President believes there is no basis for her 
resignation because she has not committed any illegal act." 
 
 
4.  (U) President Arroyo also used a July 2 anti-trafficking 
in persons event at Malacanang to reaffirm her willingness to 
cooperate with the U.S. on a wide range of human rights and 
economic initiatives.  A feisty Arroyo also publicly rebutted 
her critics, brushing off charges that she cheated in the 
2004 elections and lambasting the opposition, stating: "If my 
opponents feel that the best thing for the nation is to tear 
it down, so be it on their part."  Arroyo said she would 
"turn the other cheek" to her opponents and would not be 
deterred from carrying out "the people's business."  Charge 
delivered remarks that urged the GRP to follow through on its 
efforts to secure convictions under the Philippines' 2003 
Anti-Trafficking Law. 
 
5.  (U) In other Malacanang-related news, First Gentleman 
Jose Miguel "Mike" Arroyo had his lawyers object to a 
subpoena issued last week meant to force his testimony at the 
high profile corruption trial against former president Joseph 
Estrada.  On July 4, Mike Arroyo's lawyers appeared before 
the Sandiganbayan court, which gave them ten days to file a 
motion to dismiss the June 30 subpoena.  According to media 
reports, Mike Arroyo was scheduled to depart Manila July 5 
for the U.S. together with son Congressman Juan Miguel 
"Mikey" Arroyo. 
 
------------------------------- 
Surprise Supreme Court Decision 
------------------------------- 
 
6.  (U) Amid Arroyo's attempts to show that she is focused on 
governing despite continued political tensions, the Supreme 
Court's unexpected July 1 decision to place a TRO on the 
Expanded Value Added Tax (E-VAT) law has taken a serious toll 
on the peso, the stock market, and investor confidence.  The 
Court voted 13-2 in favor of the TRO.  Chief Justice Davide 
and Justice Puno were the only dissenting votes.  The Supreme 
Court scheduled a hearing on July 26 on the substance of  the 
case. 
 
7.  (U) The E-VAT law is the centerpiece of a hard-fought 
package of fiscal reform legislation recently won by Arroyo 
and her allies in Congress.  The provisions that went into 
effect lifted the exemptions enjoyed by the petroleum and 
electric sectors, among others, and were expected to increase 
government revenues by PHP4-PHP5 billion (USD 70-90 million) 
per month.  The law also would allow the President to 
increase the VAT rate from 10 to 12 percent in January 2006 
if the budget deficit and VAT collections exceed 1.5 percent 
and 2.8 percent, respectively (ref E). 
 
8.  (U) Two groups had filed motions requesting the TRO only 
on June 30; one group was led by the Association of 
Philippine Petroleum Dealers and the other group consisted of 
 opposition lawmakers.  (Note: Two other groups of educators 
and opposition lawmakers had filed a petition before the 
Supreme Court to invalidate the law shortly after it was 
signed in May 2004, but the Court declined those petitions.) 
Opponents of the E-VAT argued that the portion of the law 
removing the "no pass through" provision for the petroleum 
and electricity sectors was invalid because the provision was 
inserted in the bicameral conference committee by deleting a 
provision present in both the Senate and House versions 
without proper authority.  They also challenged the law on 
the grounds that giving the President the discretion to 
increase the VAT rate next year unconstitutionally delegates 
taxing authority from the Congress to the Executive.  The 
petroleum dealers also specifically opposed a provision in 
the amended E-VAT law that limits the quarterly input VAT 
credits to 70 percent of output VAT credits. 
 
9.  (S) Finance Secretary Cesar Purisima told Acting Econ/C 
he was caught off-guard by the Court's move.  He said he was 
convinced that the TRO was "arranged" by Malacanang because 
Arroyo feared that its implementation would lead to street 
protests.  Other sources, including Arroyo ally Congressman 
Jesli Lapus, Chair of the House Ways and Means Committee, 
separately told A/DCM and other emboffs that Arroyo was 
behind the TRO.  He said Malacanang had asked for 
Congressional help two weeks ago to delay implementation, but 
Lapus and others said it could not be done.  Supreme Court 
Program Management Director Evelyn Dum Dum also confirmed to 
poloff July 2 that the Palace had pressured Justices to agree 
to the TRO.  Purisima described the decision as 
"devastating," saying that delays in the E-VAT's 
implementation would derail if not endanger the country's 
efforts to put its fiscal house in order. 
 
-------------------------- 
Peso, Market Hit the Skids 
-------------------------- 
 
10.  (SBU) The TRO added to the uncertainties in financial 
markets already made jittery by the ongoing political 
tensions.  The local currency closed at PhP 56.09 on July 4, 
the peso's weakest closing rate since January 11.  The 
Philippine Stock Price Index (Phisix) declined by 4.2 percent 
on July 4 to 1,815.67, posting one of the steepest one-day 
losses since the 1997 Asian financial crisis and edging down 
to its weakest closing level since late December 2004.  In 
morning trading on July 5, the Peso opened weaker at PhP 
56.15/$1 and ranged from PhP 56.06 to PhP 56.19 during 
morning interbank trades.  The Phisix closed July 5 up 
slightly (1817.02) on bargain hunting for blue-chip stocks. 
Securities dealers demanded significantly higher yields 
during the GRP's July 4 primary-market Treasury bill auction 
as a result of resurgent concerns over fiscal stability, 
combined with higher political risk premiums, prompting the 
GRP to reject all tenders.  Foreign investors also reportedly 
sold off Philippine sovereign bonds at somewhat higher yields 
than in previous days. 
 
11.  (SBU) Credit rating agencies expressed concern over the 
TRO but have adopted a wait-and-see attitude for now, noting 
that external liquidity and international reserve levels 
remain comfortable.  They warned, however, that substantial 
delays in implementing the amended E-VAT law or its 
abandonment would see credit rating outlooks slide from 
"stable" to "negative" or, even worse, could trigger 
downgrades in the ratings themselves.  GRP foreign bond 
issues are already rated two to three levels below investment 
grade, and a further deterioration would exacerbate the 
already substantial spreads the GRP is paying on its 
foreign-denominated bond issues.  Although the latest 
estimates on net foreign portfolio investments from January 
to the third week of June showed USD 1.9 billion in net 
inflows -- nearly four times 2004's full-year surplus -- 
traders and analysts noted that the continued combination of 
both political and economic setbacks is increasingly eroding 
investor confidence. 
 
------------------------------------ 
Opposition Plans to Ramp Up Pressure 
------------------------------------ 
 
12.  (C) The opposition plans to ramp up its own efforts to 
pressure Arroyo to quit or face impeachment.  Opposition 
Senator Panfilo "Ping" Lacson told Acting Pol/C on July 1 
that he planned to urge that the hearings currently underway 
in the House and Senate continue "until the whole truth is 
known."  Renato de Villa, an opposition figure and former 
defense secretary under Fidel Ramos, told emboffs in a July 1 
meeting that "among the average Filipino, it's already 
indisputable that Arroyo is guilty, that she won a rigged 
election."  De Villa and opposition member Louie Sison 
(political adviser for Brother Eddie Villanueva) also told 
emboffs that there are opposition plans to release "damaging 
material" against Arroyo in coming days, although neither 
provided additional information.  In a blow to Arroyo, the 
Brothers of De La Salle, a Roman Catholic order who teach and 
manage De La Salle University and other schools, issued a 
statement on July 2 calling on Arroyo "to voluntarily 
relinquish power so that the constitutional process of 
succession may proceed."  The University of the Philippines 
Law School, and several schools affiliated with Ateneo 
University, made similar public pronouncements. 
 
13.  (C) Representative Teodoro "Teddy" Casino of the Bayan 
Muna party told emboffs on July 4 that Bayan Muna and other 
leftist groups were planning additional public protest 
rallies against Arroyo.  Casino said the anti-Arroyo effort 
was  "beginning to take a life of its own" among some civil 
society groups that had previously supported Arroyo.  Casino 
praised the Supreme Court for issuing the TRO on July 1, 
arguing that it was "good news" for the poor, who would have 
been hurt by the higher prices.  The National Democratic 
Front (NDF) -- an umbrella group with close links to the 
Communist Party of the Philippines and the New People's Army 
(CPP/NPA) -- issued a statement on July 4 demanding Arroyo's 
immediate removal from office as a precondition for 
resumption of the stalled GRP-NDF peace talks.  From the 
Netherlands, Jose Maria Sison, the exiled leader of the 
CPP/NPA, was quoted as stating:  "So long as it stays in 
power, the Arroyo regime will continue to prevent the 
resumption of the formal talks." 
 
------- 
Comment 
------- 
14.  (S) The signs are that political turmoil will continue, 
with fallout now appearing on the economic front as well. 
The Supreme Court TRO has given a black eye to economic 
reform efforts.  Arroyo worked extremely hard to push through 
the E-VAT law, and its passage had been a significant victory 
for her efforts to narrow the Philippines' budget deficit -- 
or so it was thought.  The reports that Arroyo actually 
supported the TRO -- which dealt a solid blow to her own 
reform efforts -- indicate strongly that her mindset is a 
defensive, reactive one, and it displays a worrisome but 
successful effort to interfere with the supposedly 
independent judiciary at the highest levels.  It is clear the 
President decided against the advice of her chief economic 
advisers to sacrifice the E-VAT law  -- at least until the 
end of July -- in the interest of trying to buy political 
peace, especially from leftist elements.  If that is the 
case, there is little sign that it is working:  the 
opposition -- including the left -- gives every indication of 
wanting to up the ante, and, by doing so, increase the 
pressure on her to step down.  End Comment. 
 
15.  (U) A slightly abridged version of Charge's July 4 
remarks follows: 
 
"Over the past century, and even this past year, the 
relationship between our two countries has had its ups and 
downs.  But like all genuine and mature friendships, as we 
work through our disagreements, we find ourselves stronger 
allies.  Sometimes in conflict, sometimes in anger, but most 
times with understanding and mutual admiration, we have grown 
together.  I hope that after my departure (or maybe because 
of it?) the relationship between our two countries will 
continue to deepen. 
 
Independence Day is a special day for all Americans, but 
especially for those of us serving overseas.  As Americans in 
the Philippines we can celebrate in a country that also 
cherishes the democratic values upon which our own nation was 
founded. 
 
In the Declaration of Independence, Jefferson speaks of 
mankind's inalienable rights as "life, liberty, and the 
pursuit of happiness."  I always liked it that only the 
pursuit of happiness is guaranteed, not happiness itself.  It 
is ultimately our choices as a people that decide, that 
determine our fate.  And, of course, wherever people are 
involved so is imperfection.  This puts a heavy burden on all 
of us to weigh carefully what is and is not the best course 
for our countries.  Sometimes we as a people decide, through 
the democratic process, to fix what we perceive is wrong with 
our country.  Other times we discern that what is best for 
our country is to accept imperfection and mistakes as 
inevitable and tolerable.  Always keeping in mind that what 
is most important is strengthening the democratic 
institutions that are our only true safeguard against both 
tyranny and anarchy. 
 
I will end with a story that unfortunately some of you have 
already heard before and will now be bored having to hear 
again.  This story was told to me right after the "snap" 
election of 1986, but before Marcos was actually overthrown. 
It is a story that strikes a chord with me even now after 19 
years.  Sometime in mid-February 1986, I met with a close 
Filipino friend of mine for coffee, but when I sat down it 
was clear he was very upset.  I asked him what was wrong, and 
he angrily explained that one of his own best friends had 
decided to leave the Philippines to visit the United States. 
My friend had asked him, "how can you leave your country now, 
when we are fighting against Marcos?  We must all stay here 
and fight for freedom and against corruption."  His friend 
replied, laughingly, "Oh come on, you take this all too 
seriously.  I,ll be back after things quiet down here. 
Right now I just want to relax and go visit the  Land of the 
Free and the Home of the Brave.,"  Infuriated, my friend 
answered: &You may be going to visit the  Land of the 
Free,, but you are leaving the  Home of the Brave.,8  And 
that is the way I always think of the Filipino people, even 
after 19 years -- as the bravest of people.  So, let's 
acknowledge this remarkable people. 
 
Family and friends, please join me in toasting the health and 
happiness of the President of the Republic, Her Excellency 
Gloria Macapagal-Arroyo, and to the brave Filipino people: 
May the preservation of democracy and your passion for 
justice continue to be the cornerstone and safeguard of your 
pursuit of happiness.  Mabuhay!" 
 
Visit Embassy Manila's Classified SIPRNET website: 
http://www.state.sgov.gov/p/eap/manila/index. cfm 
 
You can also access this site through the State Department's 
Classified SIPRNET website: 
http://www.state.sgov.gov/ 
 
MUSSOMELI