More than four decades ago the administration of the late President Ferdinand Marcos borrowed money from western lenders to build the 620-megawatt Bataan Nuclear Power Plant. Built at a cost of $2.3 billion, the BNPP was set for commercial operations in 1985. On April 30, 1986, the late President Corazon Aquino ordered the project mothballed. Since 1986, the Philippine government had spent a total of P64.7 billion—P43.5 billion for principal amortization and P21.2 billion in interest—for the unused nuclear plant. Filipino taxpayers managed to fully pay the BNPP loans 12 years ago (although the government is still spending P27 million a year for the nuclear plant’s upkeep).
Fast-forward to 2019: The Duterte administration borrowed money from China to build the Chico River Pump Irrigation, the first flagship infrastructure project under the “Build, Build, Build” program. The project will help some 4,000 farming families by irrigating around 8,700 hectares of agricultural land in Kalinga and Cagayan.
Before the project could be completed, a senatorial candidate raised the alarm over the alleged “onerous” project, warning that the Philippines could fall into China’s debt trap. He was worried because the project cost is P4.37 billion, while the loan agreement only covers P3.69 billion, citing that the loan has an interest rate of 2 percent. The senatorial candidate said the China loan comes with dangerous provisions that the Philippines’s sovereignty will not be recognized and that China may take control of the country’s patrimonial assets in case of default.
A senior associate justice at the Supreme Court added fuel to the fire when he called for greater public scrutiny of bilateral deals with China. He warned that Beijing could end up with assets from the gas-rich Reed Bank in the disputed South China Sea if the government failed to meet its loan obligation on the Chico River irrigation project. The High Court Justice said: “In case of default by the Philippines in repayment of the loan, China can seize, to satisfy any arbitral award in favor of China, ‘patrimonial assets and assets dedicated to commercial use’ of the Philippine government.”
Pundits who rode on the China debt trap scare bandwagon said the Philippines could become another Sri Lanka, which availed itself of Chinese loans to have its ports upgraded. When Sri Lanka couldn’t pay back the loans, China turned them into equity, which gave the Asian giant ownership and control of Sri Lanka’s two major ports.
Jay Batongbacal, director of the University of the Philippines’s Institute for Maritime Affairs and Law of the Sea, said there are a couple of things that make China’s Sri Lanka strategy very unlikely in the case of the Philippines. He said the Philippines is better in managing foreign loans than Sri Lanka. Then, there’s the size of the Philippine economy, which is roughly four times that of Sri Lanka and still growing fast.
Should Filipinos be worried about the China debt trap warnings? A debt trap occurs when debt obligations reach an unsustainable threshold of the country’s gross domestic product, which creates a high debt-to-GDP ratio. However, the Philippines has strong economic fundamentals that mitigate against the danger of excessive indebtedness.
Finance Assistant Secretary Antonio Lambino assured the public that the irrigation project went through a rigorous process, hurdling tests from the Department of Justice, the Department of Finance, and the Bangko Sentral ng Pilipinas. Explaining that the interest rates from the Chinese loan were still cheap, despite Japan offering much lower figures, he said the Philippines has 20 years to pay for the loan and inclusive of a seven-year grace period. He also explained that the country’s debt-to-GDP ratio, or the ratio between loan obligations to the size of the economy, stood at 41.9 percent in 2018 when the programed ratio was 42.1 percent, which means the government performed better than expected. In other words, the Philippines can pay the loan for a project that can contribute to economic growth.