THE President’s budget secretary expressed confidence on Monday that the Philippines’s public debt remains at acceptable levels amid alarm bells raised by US Vice President Mike Pence that Chinese loans could lead countries into a debt trap.
In the Pandesal Forum in Quezon City on Monday, Budget Secretary Benjamin E. Diokno told reporters the country’s debt-to-GDP ratio was currently at 40 percent and is expected to fall to around 38.5 to 38.6 percent by 2020. He said having a debt to GDP ratio of 60 percent or lower was still considered “healthy.”
The statement was a reaction to the statement made by US Vice President Pence at the 2018 Apec CEO Summit that Chinese loans, particularly those financing infrastructure projects, “come with strings attached and lead to staggering debt.”
“Our debt-to-GDP ratio is very low. Under Mrs. [Corazon] Aquino, it was 100 percent; our debt was equivalent to the size of our economy. Under Erap [Joseph Estrada], since we were coming out of the Asian Financial Crisis, it was still very high. We had about 70, 80 percent but President Duterte’s debt-to- GDP ratio is 40 percent and declining,” Diokno, who served as budget secretary for all three presidents, said.
“What’s the significance of this debt-to-GDP ratio? The rule of thumb is a country whose debt, public debt divided by the GDP is 60 percent or better is in pretty good shape. So we are much lower than 60 percent at 40 percent. Other countries like Japan, for example, have a debt-to-GDP ratio of 250 percent. Their debt is 2.5 times bigger than the size of their GDP. The US has a debt-to-GDP ratio of more than 100 percent, [for] many European countries, more than 100 percent. So we’re in pretty good shape. There is no fear whatsoever that we will fall into what is called a debt trap,” Diokno explained.
Diokno added that the Philippines implements safeguard mechanisms that prevent the country from incurring more debt than it can afford. One such mechanism is the rigorous approval process implemented by the National Economic and Development Authority (Neda).
He said when evaluating projects, the Neda looks at projects based on their economic internal rate of return (EIRR). This helps determine if a project is economically, financially and socially viable for the country. In order to be approved, projects must pass the 10-percent hurdle rate.
“The rule is if the economic rate of return exceeds the cost of borrowing, it’s a go, it makes sense. If it is lower, the economic rate of return is lower than the cost of borrowing, it should be a no-go,” Diokno said.
“We will not borrow if the return on invest is lower than 10 percent. If you can borrow a loan at 3 percent [interest] and you will get 10 percent [benefits] in return, that’s a no brainer, that is feasible,” he also said.
Diokno further said the stern warning of Pence must be taken with a grain of salt given the trade tensions between China and the US. He said that if the US does not want the world to end up indebted to China, they should also put up their own offensive in terms of offering funds to countries.
He said the Philippine government is open to considering these kinds of assistance. Diokno said, however, that no such offer has been made on the part of the US in terms of financing the country’s massive infrastructure requirements in the medium and long term.
But as far as Chinese funds are concerned, Diokno said the visit of China’s President Xi Jinping today (November 20) will be capped by the signing of an agreement concerning around 20 infrastructure projects.
The largest of these, he said, is the Philippine National Railways (PNR) South Long-haul from Manila to Bicol, a 639-kilometer railway to be funded by a Chinese loan. The project is worth P175.318 billion and is expected to be completed by 2022, the end of the President’s term.
The project will traverse Manila; Los Baños, Laguna; Lucena, Quezon; Gumaca, Quezon; Naga, Camarines Sur; Legazpi, Albay; Sorsogon City, Sorsogon; Matnog, Sorsogon; and Batangas City, Batangas.
“If they [US] can adopt a package, why not? Like I said we have an independent foreign policy. I do not see any offer from them. If they can offer something like that, we’ll take it,” Diokno said.
In August, former Socioeconomic Planning Secretary Cielito Habito said veering away from private-sector financing in funding infrastructure projects poses risks such as a new debt crisis.
However, Habito said the country is still nowhere near debt crisis, thanks in part to the prudence exercised by previous administrations benefited the country’s finances.
The country’s external debt-to-GDP ratio remains healthy at 23 percent, significantly lower than its Asean neighbors.
Habito said the external debt-to-GDP ratio of Asean countries like Singapore is 49.4 percent; Malaysia, 69.1 percent; Indonesia, 34.8 percent; and Thailand, 32.1 percent. Nonetheless, the threat remains.
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