(Adds link to graphic)
By Manuel Mogato
MANILA, Aug 6 (Reuters) - An historic peace settlement in the southern Philippines is at risk of breaking down as Muslim rebels accuse the government of going back on its word over a proposed law to create self-rule for the war-torn region.
The two sides, who signed the deal in March to end nearly five decades of conflict, are holding urgent talks this week to try to iron out the unexpected obstacles to what had been seen as one of President Benigno Aquino's landmark successes.
A breakdown would risk a return to violence and a blow to hopes for an economic revival for resource-rich Mindanao island as potential investors in sectors such as agriculture and mining wait on the sidelines for the peace deal to be implemented.
Large companies such as food processor Del Monte Pacific Limited, which has a pineapple plantation in Mindanao, had said they were considering expanding operations after the deal. But most major foreign companies have held back pending evidence of a lasting settlement.
Under the pact the main rebel group - the Moro Islamic Liberation Front (MILF) - agreed to disband its guerrilla force and rebuild communities in exchange for wider powers to control the region's economy and society. A joint government-MILF panel agreed details of the region's powers and relations with the central government this year, submitting a draft law for approval by Congress.
But the hitherto smooth progress has stalled after Aquino's legal team made surprise, sweeping changes to the draft law which the MILF says contravene the earlier agreement and would place unacceptable limits on their autonomy.
"We cannot accept this proposed law as it is," Mohagher Iqbal, the MILF's chief negotiator, told Reuters.
"We will lose face if we agree to this. Their version clearly departed from the letter and spirit of the peace agreement, which was the basis in crafting the proposed law."
Iqbal's comments to Reuters are the first public indication that the agreement is close to collapse.
Iqbal said about 70 percent of the nearly 100-page draft "Bangsamoro" law was either deleted or revised by Aquino's lawyers, who reviewed the document for two months after it was submitted in late April for vetting. A copy of the revised legislation seen by Reuters showed entire sections of articles on territory, resources, and government structure had been deleted or revised.
AQUINO'S CAPITAL FADES
The peace deal - including provisions on revenue-sharing between the new region and the national government - was the product of more than 17 years of negotiations, brokered by Malaysia since 2001.
Analysts say the law appears to have fallen victim to recent legal and political setbacks suffered by Aquino, whose approval ratings have dropped after his flagship economic stimulus fund was declared illegal by the Supreme Court last month. He faces three impeachment complaints in Congress.
That has made Aquino, whose presidency has two years to run, wary of a new battle with the top court that could arise if the self-rule law contravenes the constitution.
"The president could have easily persuaded Congress to approve the Bangsamoro law if he still enjoyed a high popular rating. But he is facing a serious credibility problem because of his economic stimulus package," said Julkipli Wadi, a professor at the University of the Philippines.
The government's chief negotiator, Miriam Coronel Ferrer, denied the government had reneged on key pledges but said the proposed law had to be in line with the constitution.
"Let's not point fingers at each other," she said. "There were difficulties in the drafting of the law but the president is not afraid to gamble his political capital for this issue."
The revisions by Aquino's team seek to bring crucial elements such as resource sharing and taxation in line with the constitution, making the proposed new autonomous region more dependent on the central government for economic policy and law making. A higher degree of autonomy for the region could require Aquino to push for amendments to the constitution, which he is unwilling to do despite having large enough majorities in Congress.
Aquino has promised the autonomous region would be in place by January 2015. Following that, a referendum on whether to accept the new law will be held in Muslim Mindanao.
"The president should agree to amend the constitution and grant full fiscal autonomy, otherwise the rebels will reject this arrangement," said an independent lawyer who is involved in discussions to resolve the problem.
"The talks are getting harder. I am afraid the rebels will go back to war if this process fails."
BIG INVESTMENTS ON HOLD
There have been no clashes between the MILF and the army since 2011, but tension remains high in a region that is rife with poverty, guns and extremist Muslim splinter groups that have resisted joining the peace settlement.
"Challenges on the ground are very real," Rommel Banlaoi, director at the Centre for Intelligence and National Security Studies, told Reuters, saying some MILF commanders are getting impatient and unhappy with the delay.
More than 120,000 people have been killed and two million displaced by the conflict in western Mindanao, a Muslim majority area in the mostly Roman Catholic Asian nation.
Renewed violence would wipe out the goodwill and increased business confidence since the March peace deal, said Ishak Mastura, head of the regional board of investments.
About 2.5 billion pesos ($57 million) in investments were registered in Muslim Mindanao in the first half of 2014, the highest in its history, Mastura said. Investments rose to nearly 1.5 billion pesos in 2013 from 569 million pesos in 2012.
Mindanao's mineral reserves include gold, copper, nickel, iron, chromite and manganese and account for about two-fifths of total reserves in the country. The Sulu Sea and Cotabato Basin, both within the conflict zone, have combined reserves of 411 million barrels of crude oil, equivalent to more than three times the country's annual consumption, and 2.3 billion cubic feet of gas.
"As long as there's no shooting on both sides we're still OK but if fighting resumes that's an entirely new ball game," Mastura said.
(Editing by Stuart Grudgings and Robert Birsel)