About the CBI

September 2005
Background Note: Philippines

Flag of Philippines is two equal horizontal bands of blue (top) and red with
a white equilateral triangle based on the hoist side; in the center of the
triangle is a yellow sun with eight primary rays (each containing three
individual rays) and in each corner of the triangle is a small yellow
five-pointed star.

PROFILE

OFFICIAL NAME:
Republic of the Philippines

Geography
Area: 300,000 sq. km. (117,187 sq. mi.).
Major cities (2000 census): Capital--Manila (pop. 9.9 million in metropolitan
area); other cities--Davao City (1.2 million); Cebu City (0.7 million).
Terrain: Islands, 65% mountainous, with narrow coastal lowlands.
Climate: Tropical, astride typhoon belt.

People
Nationality: Noun--Filipino(s). Adjective--Philippine.
Population (2000 census): 76.5 million; estimate for 2004: 83.9 million.
Annual growth rate: 2.36%.
Ethnic groups: Malay, Chinese.
Religions: Catholic 85%, Protestant 9%, Muslim 5%, Buddhist and other 1%.
Languages: Pilipino (based on Tagalog), 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--94% in elementary grades, 64% in secondary grades.
Literacy--93.4%.
Health: Infant mortality rate (2003)--29 per 1,000. Life expectancy (2003)
--67.8 yrs. for males; 73.1 yrs. for females.
Work force (2004): 35.8 million. Services (including commerce and government,
2004)--47%; agriculture--20%; industry--33%.

Government
Type: Republic.
Independence: 1946.
Constitution: February 11, 1987.
Branches: Executive--president and vice president. Legislative--bicameral
legislature. Judicial--independent.
Administrative subdivisions: 15 regions and Metro Manila (National Capital
Region), 79 provinces, 115 cities.
Political parties: Lakas-Christian Muslim Democrats, 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 (2004): $84.2 billion.
Annual GDP growth rate (2004): 6.1%.
GDP per capita (2004): $976.
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 assembly, petroleum refining, fishing.
Trade (2004): Exports--$39.6 billion. Imports--$40.3 billion.

PEOPLE
The majority of Philippine people are of Malay stock, descendants of
Indonesians and Malays who migrated to the islands long before the Christian
era. The most significant ethnic minority group is the Chinese, who have
played an important role in commerce since the ninth century, when they first
came to the islands to trade. As a result of intermarriage, many Filipinos
have some Chinese and Spanish ancestry. Americans and Spaniards constitute
the next largest alien minorities in the country.

More than 90% of the people are Christian; most were converted and became
Westernized to varying degrees during 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 groups of northern Luzon. Small forest tribes still live in the
more remote areas of Mindanao.

About 87 native languages and dialects are spoken, all belonging to the
Malay-Polynesian linguistic family. Of these, eight are the first languages
of more than 85% of the population. The three principal indigenous languages
are Cebuano, spoken in the Visayas; Tagalog, predominant in the area around
Manila; and Ilocano, spoken in northern Luzon. 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 gaining acceptance, particularly as a second language. Many
use English, the most important nonnative language, as a second language,
including nearly all professionals, academics, and government workers. 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 as a first language.

The Philippines has one of the highest literacy rates in the East Asian and
Pacific area. About 92% 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 years since independence (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, people of Malay stock came
from the south in successive waves, the earliest by land bridges and later in
boats called barangays. The Malays settled in scattered communities, which
became known as barangays, and which were ruled by chieftains known as datus.
Chinese merchants and traders arrived and settled in the ninth century A.D.
In the 14th century, Arabs arrived, 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
Ferdinand Magellan reached the Philippines and claimed it for Spain in 1521,
and for the next 377 years, the islands were under Spanish rule. This period
was the era of conversion to Roman Catholicism. A Spanish colonial social
system was developed with a government centered on Manila and with
considerable clerical influence. Spanish influence was strongest in Luzon and
the Central Philippines. It was less strong 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, western-educated
Filipinos or "ilustrados" such as 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 which began
in 1896 under the leadership of Emilio Aguinaldo 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 Dewey's defeat of the Spanish fleet in Manila Bay, the
United States 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 President
Aguinaldo, broke out in 1899. This conflict claimed the lives of tens of
thousands of Filipinos and thousands of Americans. Although Americans have
historically used the term "the Philippine Insurrection," 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.
The conflict ended with a Peace Proclamation on July 4, 1902. However, armed
resistance continued sporadically, with heavy casualties on both sides, until
1913, especially 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 and a sound legal system.

The first legislative assembly was elected in 1907. A bicameral legislature,
largely under Philippine 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. World War II intervened, 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 Gen. Douglas
MacArthur landed on Leyte on October 20, 1944. Filipinos and Americans fought
together until the Japanese surrender 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.

As a result of 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 Independence Day was changed from
July 4 to June 12, commemorating the date independence from Spain was
declared by General 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 6-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. Corruption and favoritism contributed to a serious decline
in economic growth and development under Marcos.

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 Sen. 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 respect for 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.

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 on corruption charges. 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, Macapagal-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 Macapagal-Arroyo in June of 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. The
Congress rejected the charges in September 2005.

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
6-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 indigenous tribes still live.

The 24-member Philippine Senate is elected at large. There are currently 23
senators, however. The May 2004 national election produced 12 new senators,
although, because current Senator Noli De Castro was elected Vice President,
he will leave his seat empty until the next Senate elections in 2007. Of a
maximum 250 members of the House of Representatives, 212 are elected from
single-member districts. The remainder of the House seats are designated for
sectoral party representatives elected at large, called party list
representatives; currently there are 24 such representatives in the House.

When Macapagal-Arroyo assumed the Presidency, her "People Power Coalition,"
led by the Lakas-CMD party, became the dominant group in Congress. The
75-member Lakas party leads the "Sunshine Coalition," which also includes the
61-member Nationalist People's Coalition, the 22-member Liberal Party, and
several other major and minor parties. The LDP party leads the 20-member
opposition bloc. In the Senate, the pro-administration coalition controls 12
of the 22 seats. Members of the Philippine Congress tend to have weak party
loyalties and change party affiliation easily.

The government continues to face threats from both Muslim separatist groups
and communist insurgents, and rising crime and concerns about the security
situation have had a negative impact on tourism and foreign investment. The
terrorist Abu Sayyaf Group (ASG), which recently gained international
notoriety with its kidnappings of foreign tourists in the southern islands,
is a major problem for the government. In May 2001, the ASG kidnapped several
Americans, beheading one of them in June 2001. In a June 2002 rescue attempt,
another American hostage was killed. Efforts to track down and destroy the
ASG have met with some success, especially on Basilan, where U.S. troops
advised, assisted and trained Philippine soldiers in counterterrorism. ASG
elements remain active on Jolo Island and elsewhere in the southwestern
Philippines. Philippine security forces captured an Indonesian terrorist with
links to Jemaah Islamiyah in 2002; he escaped from custody in July 2003, but
police pursued and killed him in October.

In August 2001, the government reached a cease-fire agreement with the
separatist Moro Islamic Liberation Front (MILF); negotiations on a final
peace agreement continued at a very slow pace amid sporadic fighting. At
President Arroyo's May 2003 State Visit to Washington, President Bush pledged
diplomatic and financial support for the peace process, a move that both
sides embraced. In June 2003, the MILF issued a formal renunciation of
terrorism. An ensuing cessation of hostilities has held into mid-2005, and
talks between the two sides continue, with the Government of Malaysia acting
as principal mediator. The United States Institute of Peace has also made
proposals for assisting the peace process, in cooperation with the Philippine
Government and the MILF. The Department of State in August 2002 added the
Communist Party of the Philippines/New People's Army (CPP/NPA) to the U.S.
Foreign Terrorist Organization list. Negotiations between the government and
the CPP's political arm, the National Democratic Front, were suspended in
2001 after the NPA assassinated two members of Congress, although
"back-channel" and exploratory talks have continued since then.

Principal Government Officials
President--Gloria Macapagal-Arroyo
Vice President--Noli de Castro
Foreign Secretary---Alberto Romulo
Ambassador to the United States--Albert F. del Rosario
Permanent Representative to the UN--Lauro Baja

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 the Second World War, the Philippine economy has had a mixed
history of growth and development. Over the years, the Philippines has gone
from being one of the richest countries in Asia (following Japan) to being
one of the poorest. Growth immediately after the war was rapid, but slowed
over time. A severe recession in 1984-85 saw the economy shrink by more than
10%, and perceptions of political instability during the Aquino
administration further dampened economic activity. During his administration,
President Ramos introduced a broad range of economic reforms and initiatives
designed to spur business growth and foreign investment. As a result, the
Philippines saw a period of higher growth, but the Asian financial crisis
triggered in 1997 slowed economic development in the Philippines once again.
President Estrada managed to continue some of the reforms begun by the Ramos
administration. Important laws to strengthen regulation and supervision of
the banking system (General Banking Act) and securities markets (Securities
Regulation Code), to liberalize foreign participation in the retail trade
sector, and to promote and regulate electronic commerce were enacted during
his abbreviated term. Despite occasional challenges to her presidency and
resistance to pro-liberalization reforms by vested interests, President
Gloria Macapagal-Arroyo has made considerable progress in restoring
macroeconomic stability with the help of a well-regarded economic team.
However, despite recent progress, fiscal problems remain one of the economy's
weakest points and its biggest vulnerability.

Important sectors of the Philippine economy include agriculture and industry,
particularly food processing, textiles and garments, and electronics and
automobile parts. Most industries are concentrated in the urban areas around
metropolitan Manila. Mining also has great potential in the Philippines,
which possesses significant reserves of chromite, 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 Philippines was less severely affected by the Asian financial crisis than
its neighbors, aided in part by annual remittances from overseas Filipino
workers that are expected to hit the $10 billion mark in 2005. Except for
1998--when drought and weather-related disturbances pulled down agricultural
harvests, combining with the contraction in industrial sector
production--real Gross Domestic Product (GDP) has recorded positive growth
year-on-year. From a 0.6% decline in 1998, GDP expansion picked up in 1999
(3.4%) and 2000 (4.4%) but slowed to under 2% in 2001 in the context of a
global economic slowdown, export slump, and domestic as well as global
political and security concerns. Year-on-year GDP growth accelerated to 4.5%
in 2002, reflecting the continued resilience of the service sector, gains in
industrial sector output, and recovering exports. The economy exhibited
resilience during 2003 with 4.5% GDP growth, notwithstanding serious external
and domestic shocks. (including the Iraq War, SARS, uncertainties over global
economic prospects, sovereign credit-rating downgrades, and resurgent
law-and-order worries). GDP increased by 6% in 2004, a fifteen-year high, but
is expected to expand by under 5% in 2005 on weaker export growth,
drought-affected agricultural harvests, and high oil prices. Historically,
the Philippines has had difficulty sustaining growth at over 5%. It will take
a higher, sustained economic-growth path to make more appreciable progress in
poverty alleviation given the Philippines' high annual population growth rate
of 2.36%--one of the highest in Asia.

Agriculture generally suffers from low productivity, low economies-of-scale,
and inadequate infrastructure support. Agricultural output fell in 1997 and
1998 due to an El Niño-related drought but increased by 6.0% in 1999 (over
1998's low base). Growth reverted to more normal rates in 2000 (4.0%) and
2001 (3.7%). Agricultural output (affected by another, albeit milder, dry
spell) expanded by 3.9% year-on-year in 2002 and 3.2% in 2003. Agricultural
output increased by 4.9% in real terms during 2004 but stagnated during the
first semester of 2005 due to drought and intermittent weather disturbances.

The Philippines relies heavily on electronics shipments for about two-thirds
of export revenues. Although there has been some improvement, over the years,
local value added of electronics exports remains relatively low at about 30%.
Overall export receipts expanded by 9.6% in 2004, led by an 11.2% increase in
foreign exchange receipts from electronics shipments. Year-on-year export
growth slowed to 3.6% during the first half of 2005, with receipts from
electronics shipments up by a lethargic 1.2%.

Although less severely affected than its neighbors, the Philippines' banking
sector was not spared from high interest rates and non-performing asset (NPA)
levels during the Asian financial crisis and its aftermath. Increases in
minimum capitalization requirements, increasing loan-loss provisions, and
generally healthy capital-adequacy ratios have helped temper systemic risk.
The Special Purpose Vehicle (SPV) Act of January 2003, which provides
time-bound fiscal and regulatory incentives to encourage the sale to private
asset management companies, has helped to reduce banks' portfolios of
non-performing assets (NPAs). As of July 2005, the ratio of the commercial
banking system's NPAs to total assets had declined to under 9.5% (from 12.3%
as of July 2004). Banks had until April 2005 to conclude notarized agreements
to sell their NPAs to qualify for incentives under the law. A bill supported
by the Philippine Central Bank and the banking sector seeks to extend the
deadline towards further reducing the NPA ratio to pre-crisis levels of under
5%. Circumstances surrounding bank closures continue to highlight remaining
impediments to more effective bank supervision and timely
intervention--including stringent bank secrecy laws, obstacles preventing
bank regulators from examining banks at will, and inadequate legal protection
for Central Bank officials and examiners. The government faces another
important challenge in addressing threats to the long-term viability of
state-run pension funds. The monetary authority's adoption since January 2002
of an inflation-targeting framework has enhanced transparency in the conduct
of monetary policy. The government--which has targeted lower fiscal deficits
since 2003 toward balancing the budget before the end of President
Macapagal-Arroyo's term--contained the full-year 2004 budget deficit to 3.9%
of GDP (down from 2002's 5.3% record high) and is on track thus far to
containing the 2005 deficit to 3.4% of GDP in 2005, reflecting spending
restrain and more vigorous efforts by tax collection agencies to improve
administration, enforcement, and governance. However, the current 13%
tax-to-GDP ratio remains well below the 17% peak ratio achieved in 1997.

The Aquino and Ramos administrations opened up the relatively closed
Philippine economy and provided a firmer base for sustainable economic
growth. After a slow start, President Estrada and his cabinet continued with,
and expanded, liberalization and market-based policies and reforms. Efforts
to reform the constitution to encourage foreign investment, particularly
foreign ownership of land, were abandoned amidst nationalist opposition.
Initial optimism about prospects for economic reform also had dimmed amid
concerns of governmental corruption. Scandals involving the Philippine Stock
Exchange, and the President's close ties to certain businessmen, shook
confidence of investors and the business community and ultimately led to
successful efforts to impeach and remove President Estrada.

The Macapagal-Arroyo Administration enacted an anti-money laundering law in
September 2001 and followed through with amendments in March 2003 to address
remaining legal concerns posed by the OECD Financial Action Task Force
(FATF). The Financial Action Task Force (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 Macapagal-Arroyo government
is pushing for congressional approval of an anti-terrorism law to strengthen
its campaign against terrorism and terrorist financing.

Although encountering implementation hitches, the Macapagal-Arroyo
administration also enacted legislation in 2001 to rationalize the electric
power sector and privatize the government's debt-saddled National Power
Corporation (NPC). The government has achieved some success in establishing
an independent regulatory system for electricity pricing which will benefit
NPC finances. In addition to the Special Purpose Vehicle law, President
Macapagal-Arroyo also signed into law in 2003 a priority initiative to reform
the government procurement system (the Government Procurement Reform Act).
During the first quarter of 2004, she signed into law legislation to
rationalize and plug leakages in the Philippines' convoluted documentary
stamp tax system and encourage secondary trading of financial instruments, as
well as legislation (the Securitization Act) towards establishing the
necessary infrastructure and market environment for a wide range of
asset-backed securities. She also signed legislation to institutionalize
Alternative Dispute Resolution for civil cases to help address the problem of
overburdened court dockets.

Notwithstanding a number of favorable policy developments, the Philippine
economy continues to juggle extremely limited financial resources while
attempting to meet the needs of a rapidly expanding population and address
intensifying demands for the current administration to deliver on its
anti-poverty promises. Over 80% of the government budget is gobbled up by
non-discretionary expenses (i.e., debt service, government salaries and
benefits, and legally-mandated revenue transfers to local government units).
The current high level of government debt, the substantial share of foreign
obligations, the emerging risks posed by contingent liabilities (particularly
those of the government's debt-saddled NPC), and the worrisome deterioration
in the tax collection performance from the 1997 peak (still low by regional
standards) have increased the country's vulnerability to severe external and
domestic shocks. More recent reforms include laws increasing excise taxes on
tobacco and liquor products and establishing a system of rewards and
penalties in revenue collection agencies. An amended Value Added Tax law
(which would reduce VAT exemptions and increase the VAT rate from 10% to 12%
in 2006 represents the most significant measure thus far in the
Macapagal-Arroyo Administration's efforts to raise revenues from legislative
measures to balance the budget two years ahead of schedule (2008 vs. 2010)
while expanding investments in infrastructure and improving the delivery of
essential social services. As of end-September 2005, the amended VAT
law--originally scheduled for implementation in July 2005 but challenged by
opposition lawmakers and other groups before the Supreme Court--was on hold
pending a final ruling by the Court.

Reflecting weaknesses in intellectual property rights protection, the country
remains on the U.S. Trade Representative's Special 301 Priority Watchlist.
Potential foreign investors, as well as tourists, continue to be concerned
about law and order, inadequate infrastructure, 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, lower costs of doing business, and
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 will need to do more 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 nearly 40% of the work force but
provides less than one-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. The government has instituted conservation programs, but
deforestation remains a severe problem.

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

Industry
Industrial production is centered on processing and assembly operations of
the following: food, beverages, tobacco, rubber products, textiles, clothing
and footwear, pharmaceuticals, paints, plywood and veneer, paper and paper
products, small appliances, and electronics. Heavier industries are dominated
by the production of cement, glass, industrial chemicals, fertilizers, iron
and steel, and refined petroleum products.

The industrial sector is concentrated in the 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 chromite 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 Island 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 ASEAN, the
ASEAN Regional Forum (ARF), and the Asia-Pacific Economic Cooperation (APEC)
forum. The Philippines is a member of the UN and some of its specialized
agencies, and began a 2-year term as a member of the UN Security Council in
January 2004, serving 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 Islamic Conference (OIC). The
Philippines has played a key role in ASEAN in recent years and 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
fundamental Philippine attachment to democracy and human rights is 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 also participated in Operation Iraqi
Freedom, deploying some 50 troops to Iraq in 2003. (These troops were
subsequently withdrawn in 2004 after a Filipino overseas worker was
kidnapped.) 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. The welfare of the some seven million overseas
Filipino workers is considered to be a pillar of Philippine foreign policy.
Through foreign exchange remittances, these workers account for approximately
10% of the gross domestic product.

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 U.S. remain strong. The
Philippines modeled its governmental institutions on those of the U.S., 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 2 million
Americans of Philippine ancestry in the United States and more than 130,000
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 Mt. Pinatubo that
the U.S. 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 agreement. As a result, the Philippine Government informed the U.S. 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
U.S. has conducted ship visits to Philippine ports and has 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
Macapagal-Arroyo (PGMA) met with President Bush in an official working visit
in November 2001 and made a state visit in Washington on May 19, 2003.
Numerous U.S. Cabinet-level visits to the Philippines punctuated this period,
culminating in a visit by Secretary of State Colin Powell in August 2002.
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.

President Macapagal-Arroyo has repeatedly stressed the close friendship
between the Philippines and the United States and her desire to strengthen
bilateral ties further. Our governments seek to revitalize and strengthen our
partnership by working toward greater security, prosperity, and service to
Filipinos and Americans alike. Inaugurated into office on the same day as
President Bush, President Macapagal-Arroyo lent strong support to the global
war on terrorism and the coalition against Saddam Hussein.

Balikatan (Shoulder-to-Shoulder) 02-1 in 2002 contributed directly to the
Philippines armed forces efforts to root out Abu Sayyaf terrorists and bring
development to one formerly terrorist-plagued island. The U.S. and the
Philippines have intensified their annual cycle of combined military training
around the country as well as the military's civil affairs and humanitarian
projects, funded by $70 million in U.S. Foreign Military Financing projected
between 2004-06. Moreover, the International Military Education and Training
(IMET) program, $2.7 million in FY 2004, is the largest in Asia and the
second largest in the world. At $148 million the Philippines is the number
one recipient in Asia of Excess Defense Articles. The Mutual Logistics
Support Agreement (MLSA) was signed in November 2002 after a year-long
negotiation process. Similarly, law enforcement cooperation has reached new
levels. U.S. and Philippines agencies have cooperated to bring charges
against 15 Abu Sayyaf terrorists, implement our extradition treaty, and train
some 700 Filipino law enforcement officers in 2002. In October 2003, the
United States designated the Philippines as a Major Non-NATO Ally. The same
month, the Philippines joined the select group of countries to have ratified
all 12 UN Counterterrorism Conventions.

The United States is also working closely with the Philippines to reduce
poverty and increase prosperity. The U.S. fully supports President
Macapagal-Arroyo's "Strong Republic" reform agenda for rooting out
corruption, opening economic opportunity, and investing in health and
education. USAID programs, worth $16 million in FY 2005, support the Arroyo
Administration's war on poverty as well as the GRP reform agenda in critical
areas, including anti-money laundering, rule of law, tax collection, and
trade and investment. Other USAID programs worth $23.2 million bolstered the
government's efforts to heal divisions in Philippine society through a focus
on conflict resolution, livelihood enhancement for former combatants, and
economic development in Mindanao and the Autonomous Region in Muslim
Mindanao, among the poorest areas in the country. Meanwhile, important
programs continue in modern family planning, infectious disease control,
environmental protection, rural electrification, and provision of basic
services--as well as PL 480 food aid programs, which together totaled $70
million in FY 2005. In November 2004, the Philippines became eligible for the
Millennium Challenge Account (MCA) Threshold Program. In August 2005, the
country's concept proposal for the threshold program, addressing corruption
in revenue administration, was approved for the development of a Threshold
Country Plan for $20 million. Nearly 400,000 Americans visit the Philippines
each year. Filipinos living in the United States remitted about $4.1 billion
to the Philippines in 2003. Providing government services to U.S. and other
party's citizens, therefore, constitutes an important aspect of the bilateral
relationship. Those services include veterans affairs, social security, and
consular operations. Benefits to Filipinos from the U.S Veterans Affairs and
Social Security administrations totaled, $143.9 million and $246.7 million,
respectively. Many people-to-people programs exist between the U.S. 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 $16.2 billion
in 2004 (U.S. Department of Commerce data). According to Philippine
Government data, some 16% of the Philippines' imports in 2004 came from the
U.S., and about 18% of its exports were bound for America. The Philippines
ranks as our 21st largest export market and our 28th largest supplier. Key
exports to the U.S. 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 about $6.3 billion in estimated investment as of end-2004
according to official U.S. statistics (U.S. Department of Commerce data).
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 Macapagal-Arroyo 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%.

Over the last two decades, the relatively closed Philippine economy has been
opened significantly 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, and regional facilities or shared-service
centers are likewise leading investment opportunities.

Principal U.S. Embassy Officials
Ambassador--vacant
Charge d'Affaires, ad interim--Darryl Johnson
Deputy Chief of Mission--Paul W. Jones
Political Counselor--Scott R. Bellard
Economic Counselor--Robert Ludan
Consul General--Richard D. Haynes
Management Counselor--Sharon E. Ludan
Commercial Counselor--David Fulton
USAID Mission Director--Jon Lindborg
Agricultural Counselor--David Miller
Transportation and Safety Administration--Bert Williams
Defense Attaché Office--Colonel Terry P. Cook.
Joint U.S. Military Assistance Group--Colonel Mathias R. Velasco
Regional Security Officer--William H. Lamb
Legal Attaché--Stephen P. Cutler
U.S. Drug Enforcement Administration--Timothy C. Teal
Veterans Affairs--Barry M. Barker
Social Security Administration--Thomas Ashley
American Battle Monuments Communication--Daniel L. Neese
U.S. Peace Corps--William J. Benjamin

The U.S. Embassy is located at 1201 Roxas Boulevard, Manila; tel. (63)(2)
528-6300; fax 522-4361. Website: http://manila.usembassy.gov/. The American
Business Center is located at 25/F, Ayala Life - FGU Center, 6811 Ayala
Avenue, Makati City. It houses the Foreign Commercial Service: tel (63)(2)
888-4088; fax 888-6606; website: http://manila.usembassy.gov/wwwh3012.html;
and the Foreign Agricultural Service: tel (63)(2)887-1137; fax 887-1268;
website: http://manila.usembassy.gov/wwwh3011.html.