Till debt do us part
Published Feb 24, 2022 12:05 am
OF SUBSTANCE AND SPIRIT
Diwa C. Guinigundo
Of the many weaknesses of the Philippine economy during the Marcos dictatorship, its heavy reliance on foreign borrowing to finance domestic investment was most debilitating. The idea then was to use borrowed funds to accelerate the growth of the Philippine economy even with weak domestic savings. Marcos’ technocrats argued that net positive transfer would be achieved to finance investment and growth.
Such a strategy produced some growth in the 1970s but mostly failed in the 1980s. We sowed the seeds of the debt crisis.
Apart from encouraging private investment, taxes and tariffs should have helped mitigate the saving-investment gap but the Marcos government granted enormous tax incentives and exemptions. Tax collection was minuscule. Widespread tax evasion and corruption in the revenue office also magnified the resource constraint. Not all borrowed funds were invested. Some funded unconscionable consumption, some were simply salted in banks abroad.
Some positive net transfer ensued in the 1970s. Since loans were to be repaid with interest, more loans had to be incurred until the creditors found themselves short of funds because of Mexico’s near-default in August 1982, and short of confidence in the Philippines because of the August 1983 assassination of Senator Ninoy Aquino and the worst balance of payments crisis in history.
Fair weather friends, these creditor banks. Former Prime Minister and Finance Minister Cesar Virata reported that they reduced our credit lines towards the end of 1982 and pulled out some $709 million by early 1983.
Even as the investment rate between 1974-80 was second highest among Indonesia, Malaysia, Thailand and Korea, our growth was the lowest during the same period. We were at the bottom in economic efficiency. With borrowed funds, policy makers tended to be more myopic, thinking of the now rather than the day after, with an extremely soft commitment to patriotic vision and strategy.
Parenthetically, Cheryl Payer (The Debt Trap: The International Monetary Fund and the Third World, 1974) argued that as early as the 1970s, the Marcos government had already run into “crippling debt obligations.” James Boyce (The Political Economy of External Indebtedness, 1990) quoted the editors of Pick’s Currency Yearbook commenting that foreign loans surged after the declaration of martial law in 1972: “Despite the excellent chance of these debts possibly never being repaid, certain banks or bankers considered dictator Marcos an excellent credit risk.”
When Marcos captured Malacañang in 1965, external debt stood at about $600 million. After he was deposed in EDSA, the Philippines had to pay $26.7 billion. Some residuals continue to be serviced until today.
This must be the context of JP Morgan raising the issue of the twin fiscal deficit and current account deficit as posing the key concerns for the next president of the Republic. Fiscal deficit is bound to accumulate with higher public spending on sustained pandemic mitigation and economic recovery. The current account deficit could worsen as the economy gains more traction with higher demand for imports.
After the last two years of unprecedented public deficit and borrowings, how do we fare in public finance?
Fiscal deficit climbed to ₱1.371 trillion or 7.6 percent of GDP in 2020 and at end-September 2021, at ₱1.323 trillion or 8.3 percent of GDP. In the past, we had cold feet every time we saw the ratio inching beyond 3-4 percent of GDP.
With little revenues to finance the shortfall, the option is to borrow some more. By the end of 2021, the government borrowed a total of ₱11.73 trillion or around 60.5 percent of GDP, broken down into domestic, 42.1 percent and external, 18.4 percent of GDP. This breach is not serious yet but as in the past, as long as we can cover debt servicing with positive growth, we are quite safe. Borrowed funds should be invested not consumed, not pocketed by unscrupulous politicians in commissions and kickbacks. Our vulnerability derives from higher interest rates following a possible tightening of the US Fed and peso depreciation.
At some point, we also need to wean ourselves away from loan-fueled growth. The announcement of Finance Secretary Sonny Dominguez about the preparation of a fiscal consolidation plan is an excellent idea. He quoted an amount of $22.55 billion representing the country’s COVID response as of early this year. Raising taxes to pay for our COVID response makes sense rather than borrow more to pay them back. Relatively untaxed sectors are good candidates including properties.
We should resist the plan of some members of Congress to reduce fuel tax in order to help bring down oil prices. The solution is not to suspend the tax, but to release focused and time-bound direct subsidies to public transport drivers and operators down to tricycles.
With respect to our overall external debt, the level stood at $105.9 billion or about 27.3 percent of GDP at end-September 2021. Clearly, this level of external indebtedness is nowhere close to the 72.7 percent debt to output ratio in 1983 when we had to declare a series of 90-day moratorium on debt payments because we ran out of foreign exchange. It was only in December 1984 that our foreign creditors signed up on debt restructuring supported by the IMF with a very strict adjustment program. We were back to the so-called voluntary capital markets only after more than ten years in the early 1990s.
With our unsustainable debt keeping us away from the market for many years, we busied ourselves gaining more resilience from policy and structural reforms for over 30 years, building economic and social institutions. Until the pandemic hit us in 2020, and mismanaged it, our staying power was demonstrated by 21 years or 84 quarters of uninterrupted positive economic growth, low and stable inflation, stronger public finance and a very liquid external payments position.
It is not enough that we have a good economic strategy and debt management. We must protect the economy with a strong firewall against plunder, money laundering and extravagant use of public funds. Who wants more debt in the next six years?
Diwa C. Guinigundo
Of the many weaknesses of the Philippine economy during the Marcos dictatorship, its heavy reliance on foreign borrowing to finance domestic investment was most debilitating. The idea then was to use borrowed funds to accelerate the growth of the Philippine economy even with weak domestic savings. Marcos’ technocrats argued that net positive transfer would be achieved to finance investment and growth.
Such a strategy produced some growth in the 1970s but mostly failed in the 1980s. We sowed the seeds of the debt crisis.
Apart from encouraging private investment, taxes and tariffs should have helped mitigate the saving-investment gap but the Marcos government granted enormous tax incentives and exemptions. Tax collection was minuscule. Widespread tax evasion and corruption in the revenue office also magnified the resource constraint. Not all borrowed funds were invested. Some funded unconscionable consumption, some were simply salted in banks abroad.
Some positive net transfer ensued in the 1970s. Since loans were to be repaid with interest, more loans had to be incurred until the creditors found themselves short of funds because of Mexico’s near-default in August 1982, and short of confidence in the Philippines because of the August 1983 assassination of Senator Ninoy Aquino and the worst balance of payments crisis in history.
Fair weather friends, these creditor banks. Former Prime Minister and Finance Minister Cesar Virata reported that they reduced our credit lines towards the end of 1982 and pulled out some $709 million by early 1983.
Even as the investment rate between 1974-80 was second highest among Indonesia, Malaysia, Thailand and Korea, our growth was the lowest during the same period. We were at the bottom in economic efficiency. With borrowed funds, policy makers tended to be more myopic, thinking of the now rather than the day after, with an extremely soft commitment to patriotic vision and strategy.
Parenthetically, Cheryl Payer (The Debt Trap: The International Monetary Fund and the Third World, 1974) argued that as early as the 1970s, the Marcos government had already run into “crippling debt obligations.” James Boyce (The Political Economy of External Indebtedness, 1990) quoted the editors of Pick’s Currency Yearbook commenting that foreign loans surged after the declaration of martial law in 1972: “Despite the excellent chance of these debts possibly never being repaid, certain banks or bankers considered dictator Marcos an excellent credit risk.”
When Marcos captured Malacañang in 1965, external debt stood at about $600 million. After he was deposed in EDSA, the Philippines had to pay $26.7 billion. Some residuals continue to be serviced until today.
This must be the context of JP Morgan raising the issue of the twin fiscal deficit and current account deficit as posing the key concerns for the next president of the Republic. Fiscal deficit is bound to accumulate with higher public spending on sustained pandemic mitigation and economic recovery. The current account deficit could worsen as the economy gains more traction with higher demand for imports.
After the last two years of unprecedented public deficit and borrowings, how do we fare in public finance?
Fiscal deficit climbed to ₱1.371 trillion or 7.6 percent of GDP in 2020 and at end-September 2021, at ₱1.323 trillion or 8.3 percent of GDP. In the past, we had cold feet every time we saw the ratio inching beyond 3-4 percent of GDP.
With little revenues to finance the shortfall, the option is to borrow some more. By the end of 2021, the government borrowed a total of ₱11.73 trillion or around 60.5 percent of GDP, broken down into domestic, 42.1 percent and external, 18.4 percent of GDP. This breach is not serious yet but as in the past, as long as we can cover debt servicing with positive growth, we are quite safe. Borrowed funds should be invested not consumed, not pocketed by unscrupulous politicians in commissions and kickbacks. Our vulnerability derives from higher interest rates following a possible tightening of the US Fed and peso depreciation.
At some point, we also need to wean ourselves away from loan-fueled growth. The announcement of Finance Secretary Sonny Dominguez about the preparation of a fiscal consolidation plan is an excellent idea. He quoted an amount of $22.55 billion representing the country’s COVID response as of early this year. Raising taxes to pay for our COVID response makes sense rather than borrow more to pay them back. Relatively untaxed sectors are good candidates including properties.
We should resist the plan of some members of Congress to reduce fuel tax in order to help bring down oil prices. The solution is not to suspend the tax, but to release focused and time-bound direct subsidies to public transport drivers and operators down to tricycles.
With respect to our overall external debt, the level stood at $105.9 billion or about 27.3 percent of GDP at end-September 2021. Clearly, this level of external indebtedness is nowhere close to the 72.7 percent debt to output ratio in 1983 when we had to declare a series of 90-day moratorium on debt payments because we ran out of foreign exchange. It was only in December 1984 that our foreign creditors signed up on debt restructuring supported by the IMF with a very strict adjustment program. We were back to the so-called voluntary capital markets only after more than ten years in the early 1990s.
With our unsustainable debt keeping us away from the market for many years, we busied ourselves gaining more resilience from policy and structural reforms for over 30 years, building economic and social institutions. Until the pandemic hit us in 2020, and mismanaged it, our staying power was demonstrated by 21 years or 84 quarters of uninterrupted positive economic growth, low and stable inflation, stronger public finance and a very liquid external payments position.
It is not enough that we have a good economic strategy and debt management. We must protect the economy with a strong firewall against plunder, money laundering and extravagant use of public funds. Who wants more debt in the next six years?