PH Debt: All’s well that swells

Lenders have offered to defer debt payments for
those severely affected by the lockdown. The World Bank has encouraged the
Group of 20 nations to postpone repayment of official bilateral credit, although
has not yet considered suspending debt payments owed it. The International
Monetary Fund has approved debt relief to its 25 poorest member countries. Commercial
banks have offered a 60-day grace period for loans, including for household
debts borrowed through credit cards. Even informal moneylenders in the
Philippines’ urban poor communities have reportedly stopped collecting loan
installments for a while.

These are not necessarily all done out of
sheer goodwill. In many cases they seek to stop debtors from succumbing to
severe debt-driven crisis due to the pandemic which would stop them from paying
anything at all in the future. In short, they are also favorable to the
creditors.

The Duterte government, with its much-brandished
good credit standing, could have moved for debt relief too but instead, at the
height of the COVID-19 pandemic, it started borrowing more. The finance
department underscores the need for government to borrow from foreign sources
to fund its economic recovery plan. Multilateral and country creditors have unsurprisingly
exploited the situation and recycled funds to lend.

Do we really need to borrow for COVID
response? People have asked. How are we going to pay for all of these debts?

Accumulating debt

The Duterte administration’s Philippine
Program for Recovery with Equity and Solidarity (PH-PROGRESO) is worth Php1.7
trillion, Php561 billion (US$11 billion) of which is targeted by the Department
of Finance (DOF) to come from bilateral and multilateral loans and global
bonds. There is another Php404 million (US$8 million) in foreign grants.

From March 14 to June 4 this year, based on
IBON monitoring, the Duterte government has already obtained foreign
commitments of US$3.95 billion in loans, US$17.3 million in grants, and US$5
million in technical assistance (TA) – all for addressing the COVID-19
pandemic. The Philippine-headquartered Asian Development Bank (ADB) accounts
for US$2.1 billion of the loans plus all of the TA and much of the grants. The
World Bank accounts for US$1.1 billion, and the China-led Asian Infrastructure
Investment Bank (AIIB) for US$750 million. There are US$9.3 million in grants
from USAID. In sum, there are 7 project loans, 2 grants, and 1 regional TA so
far.

Loans amounting to US$3.95 billion are, at the
current exchange rate of Php50.05 to a US dollar, equivalent to Php197.7
billion. This increased the outstanding national government debt which has already
risen from Php7.7 trillion by the end of 2019 to an astounding Php8.6 trillion
by April 2020. The Php869-billion increment in the last four months far
surpasses the full-year increments of the last three years.

Government securities increased by Php436
billion, while the Bangko Sentral ng Pilipinas used its repurchase facility to lend
Php300 billion to the national government for COVID response. Meanwhile, external
debt increased by Php133.1 billion from December 2019 to April 2020. In April
2020, the Duterte government’s foreign debt grew 16.5% year-to-date and 16.4% year-on-year,
or the biggest increase in the last four years.

The Duterte government has already reached 66%
(or Php919.5 billion) of its Php1.4 trillion projected gross borrowings for the
year. If the planned foreign financing for PH-PROGRESO alone is realized, the government
would already go over its borrowing projection. This does not yet include the uncontrollable
increase in domestic debt due to the continuous issuance of government
securities. Domestic debt comprises 68% of the outstanding national government
debt.

For whose sake, really?

The loan commitments are specified for
strengthening healthcare, augmenting funds for socioeconomic relief, and providing
economic stimulus for agriculture and micro, small and medium enterprises
(MSMEs). There are also wage subsidies for small enterprises and support for
repatriated overseas Filipino workers (OFWs).

These are urgent things to attend to during the
pandemic that the Duterte government has not competently addressed. Instead, we
have only witnessed how government’s policy of health privatization, neglect of
essential economic sectors, and myopic understanding of the poor have made it ill-prepared
for an emergency such as COVID.

COVID-19 is unplanned thus the need to apply
for a loan – that has been the official line. Are the loans meant to help us
cope with the coronavirus, while government opts to keep spending for its
neoliberal policies and to protect business? 
Actually, these urgent loan-financed items are part of a larger package
which includes even bigger support for businesses who get financial relief in
the form of tax deferrals, low-interest loans, and credit guarantee schemes.

The country’s creditors are more straightforward.
They will provide budgetary support so that the country’s economic managers can
continue spending on the administration’s Build,
Build, Build
(BBB) infrastructure projects, foreign investment attractions,
tourism and other boosters of the otherwise slowing, and now contracting,
economy.

The ADB has pledged US$1.5 billion from its COVID-19
Active Response and Expenditure Support (CARES) program for fiscal management,
among others. The AIIB’s US$750 million loan is co-financed with CARES. The
AIIB only has loan facilities for infrastructure investment and does not have a
‘development financing’ orientation. It recently launched a COVID recovery
facility but even this is oriented towards addressing liquidity problems, providing
fiscal and budgetary support in partnership with multilateral banks, and building
health infrastructure – all so that governments can focus on COVID impacts and
leave infrastructure funds alone.

The more recent Php400 million loan commitment
of the ADB to strengthen domestic capital markets and investments is more explicit.
This is to enable the Duterte government to fund infrastructure at lower costs and
to enable the private sector to raise infrastructure funds from capital markets.

COVID-19 is unplanned, while the Duterte
administration’s focus is unchanged. The government is still fixated on burnishing
the economy’s image to attract foreign investors, and will only address the emergency
by as much as it can borrow. This reinforces the country’s vicious spiral of
debt and shallow economic growth. Creditors are complicit in this neoliberal
COVID response.

Protecting profits

But what really demolishes the argument that
government needs to take out a loan for COVID-19 is that there are viable
sources of money that government chooses to forego in behalf of big business. Case
in point is the DOF-backed Corporate
Recovery and Tax Incentives for Enterprises (CREATE) bill, the renamed second
package of the unpopular Tax Reform for Acceleration and Inclusion (TRAIN) Law.
The first package taxes consumption goods by the poor and relieves the rich of
paying income taxes. CREATE in turn reduces corporate income tax from 30% to
25%  from July 2020 until 2022 and
thereafter 1% yearly cut until 20% by 2027. This gives corporations up to Php667
billion worth of tax breaks over the next five years, which is the largest in
the country’s history.

CREATE is at the
core of the administration’s recovery plan, PH-PROGRESO. It also proposes Php133.7
billion in loans and guarantees, Php142.8 billion in other tax cuts and
foregone revenue, and Php233.3 billion in additional liquidity. PH-PROGRESO declares
prioritizing the resumption of BBB. To do so, it incentivizes big business with
tax cuts and liquidity and equity infusion through government intervention and
borrowing in the guise of helping them recover from the pandemic recession. The
creation of jobs and recovery of incomes of the poor and vulnerable are an
afterthought.

Indeed, government has to revive the economy
from the unnecessary lockdown, but this has to start with what is truly
essential. The COVID crisis is an extraordinary opportunity for government to strengthen
national production in agriculture and industry – a surefire way to stimulate
employment and consumption. But agriculture and the MSMEs that make up the
majority of the country’s enterprises are extremely marginalized.

In the House-approved Php1.3 trillion Accelerated
Recovery and Investments Stimulus for the Economy (ARISE) bill, agriculture
gets a paltry Php66 billion and MSMEs are allocated only Php125 billion in
loans and guarantees. The COVID crisis is also a golden chance to bridge the chasm
between rich and poor, which has become stark especially during COVID. But quite
to the contrary the Duterte government has relieved the rich and increased
borrowing to sustain such economic order – an addition to the mounting burden
of the poor.

Unpayable future

The DOF reiterates that the debt is payable
and that the country is in no way headed to a debt crisis. It says that the
debt-to-gross domestic product (GDP) ratio is only around 39.6% at the end of
2019 and 43.3% as of March 2020. The ratio indicates manageable levels, says the
government, and is much less than in 2000-2010 when the debt-to-GDP ratio hovered
around an annual average of 60% until it started going down in 2011 at the start
of the country’s high growth episode.

But those days are gone. Fast economic growth
peaked in 2012-2016 then steadily declined since the start of the Duterte
presidency. Before COVID, the administration tried to but could not cover up
the slowing economy. The GDP growth slowed from 6.9% in 2016, 6.7% in 2017,
6.2% in 2018, and to just 6.0% in 2019, the slowest in eight years. The economy
shrank in the first quarter of 2020 by 0.2%, and the economic managers are seeing
a severe decline in full-year real GDP growth to -0.6% to 4.3 percent.

All the sources of economic growth that government
has relied on – OFW remittances and foreign direct investment in BPOs and export
manufacturing – have slowed down since the beginning of the Duterte
administration. And these are definitely headed into a tailspin as the global
economy sinks deeper into crisis.

The Duterte government has never considered the
erosion of agriculture and manufacturing to arrest the economic slowdown. Instead,
it has artificially boosted economic growth with pump-priming – increasing
government spending to its highest level as percent of GDP. Infrastructure
spending comprised 4.7% of the GDP in 2019 and is targeted to reach 7.0% of the
GDP by 2022. It shall be the highest among all the administrations.

BBB projects are the Duterte administration’s preferred
drug for resuscitating the ailing economy before it slips away. However, it has
been borrowing heavily for this. Of the Php4.3 trillion needed for the 100 flagship
infrastructure projects of the administration, 83% is expected to come from
official development assistance (ODA), mostly in the form of loans. The Duterte
government’s borrowing binge is unprecedented – on a monthly average, it is
borrowing Php45.6 billion, almost three times as much as Aquino (Php19.0
billion) and over twice as much as Arroyo (Php21.2 billion).

The fiscal deficit is thus a growing problem,
with the Php660.2 billion deficit in 2019 equivalent to 3.5% of GDP. The fiscal
deficit is already at Php348 billion as of April 2020.

Here is why the debt is eventually unpayable
and such a huge burden. First of all, ODA loans may be at concessional rates but
are tied to the conditionality of using the technology, materials and expertise
of the creditor country. In the case of China, this includes even the use of
Chinese labor. Secondly, absorptive capacity in a program as grand as BBB is a
major issue. The Philippine government lacks the bureaucratic and technical
capacity to implement all the grand infrastructure projects. This capacity has
been eroded by decades of privatization and deregulation. The private sector,
on the other hand, is not that deep because of the economy’s backward fundamentals.
Third, BBB’s main focus is mobility for the benefit of the service and trading
oriented economy, and not in building Philippine agriculture and industry. Thus
the infusion of infrastructure capital or even the construction of the facility
will not be useful in the long run for national development.

Lastly and most ironically, we are being obliged
to fully pay for this mounting debt. This early, the government is already
thinking of taxing and raising government fees on the very coping mechanisms of
the dislocated working people. For instance, the economic managers want to tax online
selling even as people are losing their sources of livelihood, or want to
collect bike registration fees as workers seek alternatives to the poor public mass
transport, among others. The government already failed to meet its revenue
target in 2019, short by Php12.2 billion, and is anticipating even bigger
spending and bigger debt in 2020.

Our future is being mortgaged. It doesn’t help
to cure apprehensions when government says that the debt is manageable. Government
has to end its anti-people neoliberal economic policies, and only then shall we
be well.

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