No parting from debt: PHL to carry weight of borrowing post-Duterte

HERE comes the sun, thanks to Olympic gold medalist Hidilyn Diaz.

As Diaz lifted a combined 224 kilograms it felt a weight, albeit temporarily, was lifted from the shoulders of a country hunched with the heavy load of debt.

Indeed, as the rains at Monday’s dusk drowned the droning-on of President Duterte during his last State-of-the-Nation Address (Sona), the republic faced the danger of debilitating debt.


Finance officials have said that the Philippines could see the ratio of debt to gross domestic product (GDP) to tip the scale at around 58.7 percent.

The borrowings were spurred by the inability of government to raise funds as the economy went into a recession. The latter is pinned on the government economic team’s decision to stop the economy’s gear from running to stem the spread of Covid. Indeed, 70 percent of all economic activity ceased after strict lockdown measures were imposed in March last year.

The quarantine restrictions continue and a déjà vu of 2020 is imminent given the threat of the Delta variant and continued increase in Covid-19 cases. This is akin to an ouroboros: lockdowns cause a decline in revenues but easing restrictions sparks infection and restricting mobility a logical option.

And, like Diaz before the Tokyo games, government had to seek financial support.

In the latter’s case, the easiest is borrowing.

Key lenders

MULTILATERAL development banks have been part of the country’s growth and development story for many decades. These organizations have provided much of the infrastructure that we see today through Official Development Assistance (ODA) grants and loans.

As of June 2020, National Economic and Development Authority (Neda) data showed that the country has a total of $26.21-billion ODA grants and loans. The bulk of these ODA, $24.6 billion, are loans from various bilateral and multilateral organizations.

The Asian Development Bank (ADB), World Bank and the Asian Infrastructure Investment Bank (AIIB) are the three top multilateral development banks the country relied on for its ODA loans and grants.

Preliminary data from NEDA showed that as of June last year, the country received $6.96 billion from the ADB, $4.9 billion from the World Bank and $957.6 million from the AIIB. Tokyo is the top ODA source of the country during the period, with commitments amounting to $10.03 billion.

Last Tuesday, the Philippines secured another loan from the ADB, this time to support efforts to plug youth unemployment and underemployment.

The ADB Board has approved a $400 million policy-based loan to finance the “Facilitating Youth School-to-Work Transition” program, “Subprogram 3.”

Up to $9.19B

THE program builds on nearly a decade of the ADB’s support to the government in shortening the time at-risk young Filipinos spend to find work after leaving school.

The amount, to note, is on top of the existing loans the country has secured from the ADB. Based on the 2019 ODA Portfolio Review, the Philippines already owed $5.6 billion to the Manila-based multilateral development bank. The amount covered active loans as of December 2019.

However, not all these loans were signed by the Duterte administration. Of the amount of active loans as of the end of 2019, the Duterte administration signed $4.3 billion.

Several loans were also granted by the ADB to the Philippines in the years 2020 and 2021. Approved loans last year—discounting regional technical assistance projects where the country received funding and grants—amounted to $4.49 billion (about P226.05 billion at current exchange rates).

The largest loans obtained were for the “Covid-19 Active Response and Expenditure Support” program. The ADB provided four loans for the project consisting of two $250-million worth loans and two loans worth $500 million each.

With all these loans, the Philippines owed the ADB a total of $9.19 billion (around P462.67 billion). This comprises loans obtained by the Duterte administration since it assumed office in 2016 until the loan approved by the ADB last Tuesday.

Most disadvantaged

MEANWHILE, the Philippines had a total of $4.25 billion worth of loans from the World Bank based on the 2019 “ODA Portfolio Review.” However, of these loans, those signed under the Duterte administration amounted to $1.59 billion.

Since the end of December 2019, the World Bank had approved another $5.04-billion worth of loans for the Philippines. This is based only on commitment-amounts of the Washington-based lender on various projects.

Of these loans, the largest had a $600-million worth price tag. There are three loans with this amount: the “Promoting Competitiveness and Enhancing Resilience to Natural Disasters Sub-program 2 Development Policy Loan,” or DPL; the “Beneficiary First Social Protection” project; and, the “Philippines Covid-19 Emergency Response” project.

The World Bank said the DPL aims to help the Philippines “recover from the pandemic by adopting digital technologies, promoting greater competition and reducing the costs of doing business” to revive more economic activities and jobs in the country.

The project aims to help small and medium enterprises bounce back from the pandemic, help citizens cope with social distancing measures and other health protocols and improve delivery of social assistance to the most disadvantaged groups in society.

Innovative, responsive

THE “Beneficiary FIRST Social Protection” project sought to mitigate the impact of Covid-19 on the welfare of low-income households and strengthen the social protection (SP) delivery system of the Department of Social Welfare and Development (DSWD) to be “adaptive and efficient.”

It was intended to provide continuing support to the DSWD to implement the “Pantawid Pamilyang Pilipino” program (4Ps) and pursue “fast, innovative and responsive service transformation,” or “First,” for beneficiaries.

For the “Philippines’s Covid-19 Emergency Response” project, the World Bank said the funds were intended to help the national government purchase and distribute Covid-19 vaccines.

It also aims to strengthen the country’s health systems and overcome the impact of the pandemic, especially on the poor and the most vulnerable.

Given all these loans approved and signed during the current administration, the Philippines owed the World Bank $6.63 billion.

Loans from AIIB

AS for the AIIB, the Philippines only has three loans, for which it owes the AIIB a total of $1.26 billion for three projects.

The first loan, approved in 2017, is for the “Metro Manila Flood Management” project worth $207.6 million. The loan will be used for the project that will focus on 56 potentially-critical drainage areas with an approximate land area of 11,100 hectares or over 17 percent of Metro Manila’s total area.

It also aims to modernize drainage areas, minimize solid waste dumped in waterways and help in land acquisition and site development for housing resettlement.

The AIIB said the project will benefit some 3.5 million while the direct project beneficiaries, i.e., those adversely affected by regular flooding, are estimated at 1.7 million.

The second loan from the AIIB is the “Covid-19 Active Response and Expenditure Support,” or “Cares,” program worth $750 million. The project, approved in 2020, is being cofinanced with the ADB.

The primary objective of the project is to mitigate the adverse impacts of Covid-19 on the health and economic opportunities of the population of the Philippines by providing budgetary support to the government’s pandemic-response activities.

The Cares program is financed by a policy-based loan under its “Countercyclical Support Facility Covid-19 Pandemic Response Option,” or CPRO.” The program will provide critically needed support to help the Government of the Philippines mitigate the severe health, social and economic impact caused by the pandemic.

ODA concessions

THE third and latest AIIB loan is the $300-million second “Health System Enhancement to Address and Limit Covid-19 under the Asia Pacific Vaccine Access Facility” project, referred to as “Heal 2.” The AIID approved the loan this year.

The fund is also being cofinanced with the ADD under its “Asia Pacific Vaccine Access Facility,” or “Apvax,” program. The project will provide critically needed vaccines to assist the Philippine government in mitigating adverse health, social and economic impacts caused by the Covid-19 pandemic.

The loan will be cofinanced with the ADB as the lead co-financier. The project’s environmental and social (ES) risks and impacts have been assessed in accordance with ADB’s Safeguard Policy Statement (SPS), according to the lender.

All these loans are just a fraction of what the government owes. There are other development partners who have extended significant amounts in loans to the country to undertake projects and programs between 2016 and 2022 and even beyond.

Part of the reason for the attraction of obtaining ODA loans is the concessional nature of these loans. This feature is crucial for countries like the Philippines to be able to have the ability and flexibility to repay these loans.

Securing loans

ODA partners provide low-interest rates and longer repayment periods with grace periods to boot.

Some of the Philippines’s bilateral partners, like the Japanese government, charge interest rates of below 1 percent and have repayment periods of 15 to as long as 40 years. This arrangement is sometimes on top of grace periods—or years when the country does not need to pay for the loan—of five years to as much as 10 years, relative to the loan.

For the ADB, the Philippines, like the Cook Islands, Georgia, India and Indonesia, is classified as a C1 country. These countries are composed of small island developing states (SIDS) and lower middle-income countries (LMIC). To date, the Philippines is classified as an LMIC.

The concessional loans received by these countries are from the ADB’s Ordinary Capital Resources (OCR). As such, the C1 countries “need the least ‘concessionality’ when they secure ODA loans.

The average loan maturity of ADB loans is anywhere from 24 years to 40 years with a grace period of 5 years to 10 years, depending on the loan. In terms of interest rates, these average anywhere from 1 percent to 2 percent during the grace period while during amortization, the rate is an average of 1.5 percent to 2 percent.

Not fazed

THE World Bank, meanwhile, charges interest rates for loans obtained by the Philippines. These rates are contingent on maturity and the currency commitment.

Some loans have a variable spread that are charged with a base interest rate, usually at Libor (London Interbank Offered Rate) plus 0.46 percent to 0.96 percent.

Loans with a fixed spread are charged with a base interest rate, usually the Libor, plus 0.70 percent to 1.5 percent.

World Bank loans have a maximum final maturity of 30 years while the maximum average repayment maturity is pegged at 18 years.

Based on the 2019 loan terms of the AIIB with the Philippines from the NEDA, the bank charges a base lending rate (Libor) plus additional 0.75 percent to 1.40 percent, contingent on maturity.

The AIIB also charges a one-time front-end fee at 0.25 percent on the committed loan amount. The Commitment fee is 0.25 percent charged on the undisbursed loan balances. The commitment fee can increase if projects get delayed.

DOF unfazed

The Department of Finance (DOF) is, however, unfazed by the debts.

Finance Secretary Carlos G. Dominguez has said the country’s debts remain manageable. This is especially the case since majority of the country’s debts were obtained from local sources.

This will prevent foreign exchange losses from being a factor in the country’s debt management efforts.

“Our financial and banking system did not buckle under the pressure of the pandemic. Our currency remained relatively strong,” Dominguez said in a recent forum. “We have the reserves to support our imports. Our deficit and debt figures remained manageable.”

Administrations past

THIS is not the first time the Philippines finds itself lifting a pile of debt.

Back in the 1980s, the country experienced a debt crisis after the Marcos administration left billions in foreign borrowings in its wake. As a result, the country was forced to pay these decades after the ink dried on these loan agreements.

However, Ibon Foundation Inc. Executive Director Jose Enrique A. Africa said the 60 percent debt-to-GDP ratio in 2022 is comparable to the Marcos administration’s debt. However, he said it was “smaller than peaks” reached during the administrations of President Fidel V. Ramos and President Gloria Arroyo.

Africa said the nature of the Duterte administration’s debts is different from the Marcos-era borrowings. Those debts in the 1970s were “unpayable” since these were mostly foreign debts and had severe foreign exchange constraints.

“Debt today is not just more heavily domestic but there is also much more available foreign exchange for servicing the foreign debt especially from overseas remittances,” Africa said.

Taking consideration

HOWEVER, De La Salle University economist Maria Ella C. Oplas said the level of debt incurred by the current administration may even be more than the Marcos administration’s debt—even without taking into consideration the value of the peso.

Oplas estimated that it may be “more or less equivalent to combined debt of several administrations.”

However, she said the circumstances of obtaining these debts “were certainly different.”

This is the first time the country experienced a pandemic—something that has not happened in a generation. This makes it impossible to compare the country’s debts to those that were obtained before.

“It ballooned because of the pandemic. So there is a huge disparity between the debt incurred by each president not just by number alone. More importantly we have to consider the situation. None of those presidents were in a pandemic before,” Oplas said.

Nonetheless, economists and civil society groups still sounded alarm bells given the mounting debts, particularly during the pandemic.

Adding to list

FORMER Dean of the University of the Philippines School of Labor and Industrial Relations and current Freedom from Debt Coalition (FDC) President Rene E. Ofreneo said that in 2019, the debt-to-GDP ratio was down to 39 percent “after years of being prudent in our borrowings.”

Ofreneo said after only 1.5 years into the pandemic, the country’s debt to GDP ratio is nearly at 60 percent with over P2 trillion worth of new debts added to the country’s long list of borrowings.

FDC estimated that by the end of 2020, the country had a “debt bomb” worth P9.8 trillion, a P2.1-trillion or 27-percent increase from P7.73 trillion at the end of 2019. The FDC estimated that after the first quarter of 2021, debt-to-GDP ratio stood at 60.4 percent, a 16-year high.

“[Senator Franklin] Drilon was partly correct when he said he’s wondering why there are so many presidential aspirants when the big task facing the next administration is how to manage the debt and economic situation,” Ofreneo said.

“The bigger issue, of course, is how sustainable the debt situation given an economy that is flattened. The debt service—principal and interest—is now over P1 trillion a year,” he added.

Yearning for reason

AFRICA said one worrisome impact of the country’s debt is the possibility of increasing debt service. This will mean less revenues for pandemic response, health and education services and social protection that are considered urgent at this time. He said “undeclared austerity is a real danger.”

He added that the growing debt and debt servicing also raises the risk of further tax increases to raise revenues in order to pay its debts. This could, in turn, burden ordinary Filipinos.

This is why managing the debt is important, according to former Socioeconomic Planning Secretary Dante B. Canlas. He said the “fattened” public debt, due to its sheer size, could crowd out much-needed funds for other economic and social services.

“Debt servicing has gotten bigger. It is automatically appropriated in the GAA. Hence, debt service will crowd out economic and social spending like infrastructure, education, health and housing and/or shelter,” Canlas told the BusinessMirror.

Opting for moratorium

WITH the sheer amount of loans incurred by the Philippines, some economists believe declaring a debt moratorium could be an option to give the government the fiscal space it needs to respond to the financial challenges it will face in the coming years.

The “M” word was the weapon of choice back in the 1980s. The Marcos administration declared bankruptcy and imposed a 90-day debt moratorium on principal payments in 1983.

Africa said a debt moratorium is always an option for countries. However, when it comes to the Duterte administration, it has already missed the opportunity to call for a moratorium, which should have been made as early as last year.

However, he believed the government can “rectify this by drawing up a respectable Covid-19 response and stimulus package and make the case that these are urgent for the people and will hasten economic recovery and revenue generation and then unilaterally declare debt moratoriums as needed.”

But, he said “these can be broad-based or selective but, in general, cannot be negotiated as every creditor will tend to resist.”

The question is how and how long the Philippines could keep them at bay.

Nine quarters

THE Marcos administration’s actions back in the 1980s, unfortunately, caused the economy to tank. The country’s economic growth contracted 3.2 percent in the fourth quarter of 1983—around the time when Marcos declared bankruptcy and a 90-day debt moratorium.

That quarter 38 years ago was the first of nine consecutive quarters when the economy would record contractions. The economy hit rock bottom in the third quarter of 1984 when GDP growth plunged 10.7 percent and again at a contraction of 10.5 percent in the first quarter of 1985.

The impact on the economy is one of the dangers of declaring a debt moratorium. A debt moratorium can provide relief; but its effect can only be a temporary one.

Oplas said while the Philippines can be granted a debt moratorium given its current credit standing, but it would only delay the country’s agony.

“I think we are in a position to be granted with moratorium when asked. We have good credit rating and the situation calls for it. We can go for it but, it will just delay the agony,” she said.

GDP, debt

OPLAS said efforts to address the debts sustainably means attracting foreign direct investors and capitalize on what the “Build, Build, Build” program was originally aimed for.

This, she said, is under the assumption that the economy will open.

“Next year will be election year and that will spur economic activity. We need that to jumpstart the economy.”

Unionbank Chief Economist Ruben Carlo O. Asuncion told the BusinessMirror that one of the ways the country can safely address its indebtedness is to outgrow it.

However, it will mean implementing unpopular measures and for Filipinos to swallow the bitter pill of the country’s spendthrift ways.

Ofreneo said he believes this is the main strategy of the government in addressing the mounting debts. But doing so means allowing the economy to grow so that the Philippines could meet its obligations.

“At this point, we are at 60 percent of GDP in terms of our total debt-to-GDP ratio and the IMF classifies emerging/developing economies at total debt-to-GDP ratio of 70 percent of GDP to be at high risk of debt crisis…default. Thus, there is still space but a very limited one,” Asuncion said.

According to Asuncion, if the government’s cards are played right, “growing ourselves out of debt is still possible in the medium term.”

“Remember that the previous administrations have done it before. There will be unpopular policies that have to be implemented though,” he told the BusinessMirror. “Next leaders should be ready to bite the bullet of unpopularity for the greater good.”

A greater rate

CANLAS said while the “debt moratorium is not being discussed yet, but if the public debt worsens, it may be invoked.”

But, generally, he said the Philippines is hoping to grow out of its debt by growing at a rate greater than the interest rate.

This explains why the Bangko Sentral ng Pilipinas’s (BSP) actions are also focused on low interest rates. This is part of the government policy strategy as a consequence to managing the country’s indebtedness, he explained.

However, Ofreneo said, outgrowing debt is an “old normal” strategy and may no longer be applicable. That is why proactive solutions are important at this point, he emphasized.

Ofreneo said the government should rebalance its economic policies, particularly when it comes to debts, stimulus spending and trade, among others.

“If we do not employ re-balancing and re-strategizing in the economy, our debts will balloon like in the 1980s and we shall be dependent once more on external creditors—with China’s AIIB joining them—and the say-so of narrow-minded economic technocrats. The decade of the 2020s will be another lost decade. Last year, we lagged behind Vietnam, whose GDP per capita in the 1980s was a fraction of ours,” Ofreneo warned.

Yielding wealth

AFRICA said the most sustainable way out of these debts is to adopt “a genuinely progressive tax system” where the country’s richest families will play a crucial role.

Ibon and FDC are advocating for the passage of a wealth tax. In its recent “State of the People’s Address,” the FDC said a 1-percent wealth tax could help the government generate P316.55 billion. That amount is based on 2019 data, which put the total wealth at P31.66 trillion.

A 2-percent tax per annum will generate P633.1 billion while a 3-percent tax will create additional government revenues worth P949.7 billion, according to the organizations.

FDC believes that if the wealth tax targets those with stock and bank accounts, who have P29.58 trillion in stocks and transferable securities as well as time and savings deposits, the government could generate wealth tax revenues thus: P295.77 billion at 1 percent; P591.54 billion at 2 percent; and, P887.3 billion at 3 percent.

The FDC said that in 2019, some P30.66 trillion in financial wealth circulated in the Philippines. However, only about 30 percent of the population had access to 96 percent of this wealth.

Over time

OF the 96 percent of wealth, the FDC said, 13 percent is owned by only 40 families.

Further, a total of P3 trillion of this 13 percent is owned only by 300 individuals. Those without bank accounts—the marginalized, laborers, etc., who make up 70 percent of the population—have to share P1.4 trillion in cash.

“The country’s richest families accumulate wealth and the largest corporations earn profits from the labors of their workers. Much of these are idle, unproductive and just used to generate more financial wealth,” Africa said. “Direct taxes such as a wealth tax and higher CIT [corporate income tax] on large firms can be used to mobilize and spend these for social and economic development.”

But ultimately, Oplas said the best way to address the country’s debts is for Filipinos to vote wisely in the coming elections.

The next administration will have to clean up the “mess” when it assumes office next year. The next President, Oplas imagines, may not be able to rest for the next six years.

“[There will be] no rest trying to solve this pandemic; no rest trying to pay for this huge debt,” Oplas said.

New hope

LIKE Diaz, Oplas wants the sun to shine after the rain.

“But at least this new president will not start from scratch,” she told the BusinessMirror.

Oplas said it is important to remember that the government has initiated the “Build Build, Build” program despite the pandemic.

“So in a way the new president has infrastructure and policies that can encourage new investors to the country,” she said.

Oplas’s words, like Diaz’s gold medal, offer hope and comfort to some; palliative solutions to others. Nonetheless, she emphasized there should be a solution to the debt burden.

But this solution will not come easy, as economists have pointed out.

In the end, there is no Diaz, a weightlifting champion, to carry the burden for all Filipinos when it comes to the country’s debt obligations. Each must carry her own weight; a long time.

Image courtesy of BM Graphics: Job Ruzgal
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