Following a hotly-contested election campaign and aftermath in the Philippines, incumbent President Gloria Macapagal Arroyo was sworn in June 30 for a new six-year term. She immediately announced plans for strict austerity and frugality both in public and private life in order to cope with the country’s mounting debt burden, budget deficit, credit rating and unemployment.

In interviews and her inaugural speech, the economist sought to impress the public, business community and international investors with her commitment to healing the country’s economy. She announced new taxes on tobacco and beer and other measures attempting to cope with difficulties she had largely been unable to address during her three years as President after the ouster of her predecessor Joseph Estrada by a public outcry against his alleged corruption.

In her inaugural speech in June, the 57-year old daughter of a former President, pledged to create six million new jobs or as many as 10 million during her tenure, balance the budget, improve tax collection, provide for cheap medicine for the poor, loans for three million entrepreneurs, create a million agriculture-based businesses, provide electricity and clean water in every village and an education for every child.

She also promised to unite a country which she said had not yet completed the transition to stability since the unseating of its long-time dictator Ferdinand Marcos nearly 20 years earlier. She also said she would tackle congestion in Manila and the widespread corruption in public life.

Financial circles, however, warned that the country could face a reduction in its credit rating if her government did not raise taxes and cope with the debts of public enterprises such as the national power company. Just a few days earlier the power company had sent shock waves through the entire country by announcing that electricity rates would be raised by 20% in an attempt to lower its debts. And economic analyses, including from the Asian Development Bank, added to warnings about the country’s poverty and exploding population.

Populations statistics for the sprawling island country are variously given at between 79 million to 84 million, with a per capita income of some $1030. On August 16, the Government presented the framework of an ambitious plan to halve poverty in six years by attracting more foreign investment and improving links between Manila and depressed regions. The detailed programme was planned for completion for October.

Meanwhile, backers of the losing Presidential candidate Fernando Poe Jr., continued to claim election fraud and promised to maintain the public agitation, which had nevertheless seemed to have declined following the immediate aftermath of the stormy election and counting. Scuffling broke out during her inauguration follow-up speech in Cebu, her political base, and the opposition said it would not concede defeat and would maintain public displays of the type which had toppled former President Estrada.

Both Estrada and Poe were populist show-business personalities who appealed to and received support from many of the poor among the country’s 84 million population.

Arroyo took several weeks to complete assignments to the Cabinet. During that time she was confronted with a major decision to withdraw the country’s small troop presence in Iraq as a condition for the liberation of a captured Filippino worker in the country. The government also faced continuing difficulties in coping with terrorist activities in its island territories.

Another indication of a broadening of Manila’s foreign policy was the decision by the President to schedule her first foreign trip of her term in September to China. Trade between the Philippines and China doubled in 2003 to some $9.4 billion, with the Philippines becoming China’s largest provider of fresh fruit and enjoying a trade surplus. In counterpart the Philippines have imported hybrid rice technology and hope to obtain similar improvements for corn and have also been assisted in transport infrastructure projects.

The decision to repatriate the 51 soldiers a month earlier than forecast was a complex one seen as required by domestic public opinion but also important in foreign policy terms. There are reported to be some seven to eight million Filipino expatriate workers scattered throughout the world, some one million said to be in the Gulf States, where their security would be regarded as at risk if the Filipino contingent were not withdrawn from Iraq. The decision to dispatch troops to Iraq as a gesture of solidarity to the US had also been a controversial one at home. This gesture was believed to have not been reciprocated by the US award of additional contracts or aid to the Philippines. The support for the Bush Administration policy was also believed to have linked Manila too closely to the increasingly challenged President. Nevertheless, the government’s actions also faced disquiet at home when dozens of job candidates protested at the decision not to allow Filipino nationals to take jobs in Iraq.

Ironically, the Filipino troops were being withdrawn at roughly the same time as American troops were being deployed to the Philippines as part of joint 'Balikatan' exercises against Muslim extremists in the south, whose ties to the al-Qaeda and Jemaah Islamiyah networks have become increasingly pronounced.

In August a Philippine court handed down death sentences to 17 Abu Sayyaf members for several cases of abduction and murder of Filipino and American civilians, including American pastors Martin and Gracia Burnham. The decision led the US to declare that it had renewed confidence in the Philippines’ resolve to combat international terrorism, despite the strains resulting from the withdrawal from Iraq and the US reaction of removing the Philippines from the coalition.

In addition, the Government also indicated in August it was prepared to resume contacts in Malaysia with representatives of the Moro Islamic Liberation Front whose estimated 12,000 members have been fighting for a separate Islamic state in the Philippines since 1978. The MILF, however, was said to have been helpful in the recent killing or capture of a gang of kidnappers in the region who had abducted an Italian priest two years earlier. It was the first time that the MILF had allowed the national armed forces to operate in Maguindanao which it considers its territory. This and other “confidence-building measures,” led one Government emissary in August to forecast that an accord could be found with the MILF by year’s end.

But on another front, long-running talks with Communist rebels due to take place in Oslo were called off by the Communist National Democratic Front in August. The Communists maintain a New People’s Army militia of up to 20,000 in Central and Northern Luzon, collecting levies, using landmines and abducting youths to press into their fighting ranks. The US and European Union had both recently declared the Communists a terrorist organisation in an effort to dry up its sources of international funding but leading the NDF to cancel the next round of talks.

The EU Commission and the Philippine Ministry of Foreign Affairs on August 10 signed memorandum of agreement covering some €63 million in aid until 2006 for various trade, economic and anti-terrorism activities, which also included governance, anti-corruption and poverty reduction projects amounting to € 5.4 million over three years. A major element would be aid for a health reform programme and reconstruction in the southern Philippines and assisting the peace process in Mindanao. Some €5 million would be devoted to security and anti-terrorism activities. The governance and anti-corruption projects would stress access to justice for the poor, especially women and children, in some 30 villages in 100 poor municipalities and involve courts, police and civil society organisations. The anti-corruption programme would work to improve the capacity of the Office of Ombudsman, train to 1200 officials in anti-corruption actions and 800 civil society representatives in procurement, auditing and democracy.

Just a weeks earlier in July, a similar accord was signed covering some €5 million in EU financial aid for savings and loan and rural development activities. And the EU also has been involved in a major multiyear rural infrastructure and development assistance programme with hundreds of individual projects.

The EU has been a major aid and trade partner for the Philippines, especially since the restoration of democracy in 1986. In the 1990s, the EU and member countries provided some €1.3 billion in assistance, loans and grants to be the fourth largest donor for the country. And in recent years, the EU was the second major destination for Philippine exports, covering electronic products and food exports.