August - September 2008
Till debt do us part?

Gloria’s inglorious record: Biggest debtor, least popular

GLORIA MACAPAGAL-Arroyo will go down in Philippine history as the president with an inglorious track record, at least, on two counts.

First, her popularity rating has hit the pits of negative 38 percent, the worst scored by a president since the late dictator Ferdinand Marcos.

Second, in just six years in office or until 2007, Arroyo has incurred a record P3.54 trillion in domestic and foreign debt, more than twice the combined total borrowings of the three presidents before her. This is the aggregate amount of debts Arroyo incurred based on official foreign exchange rates, according to the Freedom from Debt Coalition (FDC), a nongovernment anti-debt advocacy group.

When Marcos assumed the presidency in 1965, the Philippines had foreign debt of less than $1 billion. He fell from power in 1986 and left a total debt stock of $28 billion, or at the exchange rate of P20.38 at the time, just P570.6 billion.

In a span of 14 years, the Aquino, Ramos, and Estrada administrations contracted a total of P1.51 trillion in debts, P2.03 trillion less than what Arroyo has borrowed in her first six years in office.

Under Arroyo, the FDC estimates that based on 2007 interest and principal payments, taxpayers carry a debt servicing burden of P1.2 million every minute. Today, the FDC adds, every Filipino man, woman, and child owes creditors P42,819.42.

But when Arroyo delivered her eighth state of the nation address before the joint session of the 14th Congress last July 28, she made much of the fact that the current global economic slowdown triggering runaway surges in oil and food prices “did not catch us helpless and unprepared.”

BIGGEST DEBTOR. Gloria Macapagal-Arroyo has borrowed a record P3.54 trillion in debts from 2001 to 2007, making her the single biggest borrower among the post-Edsa presidents. [photo by Jaileen F. Jimeno]

Arroyo harped about the strongest economic growth the Philippines posted in the last 30 years anchored on the 7.3-percent gross domestic product (GDP) growth rate in 2007 characterized by low inflation, a strong peso, and creation of a million new jobs. These, she said, were the results of the tough choices she made, and which she now claims are shielding the country from the worst effects of the global crisis.

The economic growth, Arroyo said, had almost made the dream of a balanced budget within reach. But more importantly, she emphasized, it enabled the government to “retir(e) debts in great amounts, reducing the drag on our country’s development.”

Prepaying debts

On the strength of such macroeconomic fundamentals, the Arroyo government has been resorting to prepaying some of the country’s foreign debts, including at least US$220 million of debts claimed by the International Monetary Fund (IMF) and US$72 million owed to the Asian Development Bank (ADB).

During the 12-month period ending March 2008, prepayments as recorded by the Bangko Sentral ng Pilipinas (BSP) totaled US$1.2 billion. Nearly the entire amount, or US$1.16 billion, were for obligations maturing beyond 2008.

As a consequence, the BSP noted in June the continued improvement of the country’s major external debt ratio in the first quarter of this year, indicating an improving capacity of the Philippines to service its maturing foreign obligations.

Total outstanding debt as a percentage of aggregate output (GNP), the BSP reported, declined to 32.4 percent, from 35 percent in 2007 and 40.8 percent in March 2007.

In terms of GDP, the external debt ratio also improved to 35.5 percent — from 38.1 percent in 2007 and 44.2 percent in March 2007.

By the end of March 2008, the Philippines’s outstanding external debt (as approved and/or registered by the BSP) stood at US$54.6 billion. The figure is slightly lower than the end-2007 level of US$54.9 billion, but is actually higher than the US$54 billion recorded a year ago as of end-March 2007.

What has caused the debt stock to decline by only US$327 million, the BSP explained, are the foreign exchange revaluation adjustments as a result of the continued weakening of the U.S. dollar against the Japanese yen and the euro.

CHART shows how the post-Marcos governments have addressed the country’s debt burden.

By the close of the first quarter of 2008, the adjustments amounted to US$2.4 billion, almost negating the impact of large net principal payments of US$2.8 billion. During this period, prepayments totaled US$322 million, US$298 million of which pertained to maturing debts in 2009 and beyond.

Year-on-year though, the foreign exchange revaluation adjustments reached US$3.4 billion to surpass net principal payments of US$2.8 billion, causing the debt stock to rise by US$565 million.

Notwithstanding the higher debt stock, the BSP said that no immediate impact on the country’s external debt payments is expected since most of the affected accounts are Japanese yen-denominated with very long repayment terms ranging from 20 to 40 years.

A ‘Ponzi’ game?

Such improvements in the debt situation, however, do not hide the fact that since 2001 when Arroyo came to power, the country’s outstanding external debt has actually risen by US$3.7 billion, even reaching a high of US$57.4 billion in 2003.

While it declined to US$53.4 billion in 2006, attributed to the weakening of the U.S. dollar and Arroyo’s prepayment strategy, the external debt again increased by US$1.5 billion last year.

Table 1: National Government Outstanding Debt (in billion pesos)

* as of April 2008

Source: Bureau of the Treasury

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*
TOTAL 1,775.3 2,166.7 2,384.9 2,815.4 3,355.1 3,811.9 3,888.2 3,851.5 3,712.4 3,871.7
Foreign 796.9 1,098.5 1,137.2 1,344.3 1,651.3 1,810.7 1,723.9 1,697.4 1,511.3 1,570.3
Domestic 978.4 1,068.2 1,247.7 1,471.2 1,703.8 2,001.2 2,164.3 2,154.1 2,201.2 2,301.4
GROWTH RATE 18.7% 22.0% 10.1% 18.1% 19.2% 13.6% 2.0% -0.9% -3.6% 4.1%

The Arroyo government has justified its practice of prepaying maturing debts, saying this saves the country several millions of dollars in interest payments. Yet, whatever slight decrease in the debt stock had been registered has just easily been offset by government’s continued heavy borrowings.

Economists have even likened Arroyo’s aggressive borrowing to repay maturing principals of old debts to a Ponzi game (commonly known as pyramiding) that can only be sustained as long as interest rates for new loans are lower than the previous ones.

No less than the ADB has pointed out the unsustainability of this core debt management strategy in a study in 2006.

What is worse, the FDC says, is that Arroyo’s borrowings have always exceeded the budget deficits.

Table 2: National Government Debt Service Payments (in billion pesos)

* as proposed in 2008 GAA

Source: Bureau of the Treasury; DBM

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*
TOTAL 205.4 227.8 274.4 358.0 470.0 601.7 678.9 854.4 614.1 598.1
INTEREST 106.3 140.9 174.8 185.9 226.4 260.9 299.8 310.1 267.8 269.8
PRINCIPAL 99.1 86.9 99.6 172.1 243.6 340.8 379.1 544.3 346.3 328.3

In the FDC’s view, Arroyo has achieved two major fiscal records: Of four Philippine presidents since the 1986 EDSA people power revolt, she is the most aggressive borrower, and also the largest payer, of debts. From 2001 to 2007, the FDC reports that the Arroyo government had paid out P3.8 trillion to foreign and domestic lenders. This is more than double the combined debt service payments of P1.8 trillion of her three predecessors from 1986 to 2000.

And contrary to what her government would want the public to believe, the FDC warns that the debt problem is not yet over.

The P42,819.42 debt burden on every Filipino citizen does not include the national government’s contingent liabilities that by end-2007 has amounted to P484 billion, according to the FDC.

These are potential debts as a consequence of government’s expressed or implied commitments to directly assume the liability of other entities should these fail to honor their obligations. Much of these contingent liabilities are foreign-currency denominated amounting to P419 billion.

Abuse of power?

Economists like Dr. Benjamin Diokno have been questioning the legal basis for prepaying some national debts which are not yet due and demandable. The practice, says the former budget secretary under the Aquino and Estrada administration, undermines the power of the purse of Congress.

SCRAP ILLEGITIMATE DEBTS. Anti-debt activists have found an ally in Congress, which passed the 2008 General Appropriations Act with a provision prohibitng payments to loans deemed “illegitimate.” Arroyo, however, vetoed the provision. [photo courtesy of FDC]

“The executive department has probably abused the automaticity of debt service payment by prepaying public debt without congressional imprimatur, and creating indebtedness — which translates into money to be paid out of the Treasury in the future — without prior approval of Congress,” says Diokno.

“Under certain conditions, it is also poor economics,” he argues. “For example, the government incurred huge losses when it prepaid foreign loans when the peso exchange rate was P50 to the U.S. dollar say two years ago, when we could pay now at P41 to the U.S. dollar.”

Debt servicing has remained a top priority of the Arroyo government; it has consistently and fiercely upheld automatic appropriation for debt service — money that critics say should have been spent on the urgent needs of the people instead of the government resorting to giving meager doleouts.

Freed funds from the debt service, according to FDC, should be enough to cover whatever revenue shortfalls would result from the reformed value-added tax (R-VAT) on oil and electricity.

In defense of VAT?

In her eighth SONA, Arroyo defended the continued imposition of VAT on petroleum products and power. Lifting this, she said, would turn back the fiscal reforms in place and would be tantamount to “strip(ping) our people of the means to ride out the world food and energy crisis.”

But Lidy Nacpil, FDC vice president, dismisses Arroyo’s claim as “deceptive.”

“It deflects from one of the fundamental reasons why we are so vulnerable to the economic crisis, which is the country’s enduring debt burden,” she says, adding that the amount of debt service eclipses all other expenditures, including all the subsidy programs of the government.

“A moratorium alone on interest payments is more than enough to cover for the expected revenues for ‘General Sales Tax, Turnover, or VAT,’ pegged at P204.9 billion,” points out Nacpil.

This year, payments allotted for the principal amortization of debts actually total P328.3 billion, and for interest payments, P269.8 billion.

In the first four months of 2008, P306.7 billion — P119 billion in interest payments and P187.7 billion in principal payments — have already been spent to service maturing debts.

There would have been less expenditure on debt service had Arroyo not vetoed the special provision in the P1.227-trillion General Appropriations Act of 2008 prohibiting interest payments amounting to P25.9 billion (out of the total P269.8 billion) for what Congress considered to be “tainted, fraudulent and useless loans” pending their renegotiation or condonation.

It was the first time in a decade, and under Arroyo, that Congress had passed such special provision.

In her veto message after signing the three-months delayed 2008 budget in March, Arroyo evidently deemed the country’s credit rating in the global community more paramount, noting “with grave concern” the proposed congressional prohibition on interest payments.

“While Congress may have been impelled by the best of intentions this restriction is a clear encroachment of the constitutional guarantee on non-impairment of contracts,” she stressed.

Controversial deals

Not enrolled in the Congress list are the recent concessional loans from the Export-Import Bank of China for projects deemed illegitimate as these were contracted under allegedly unfair and onerous provisions, and attended by bribery and overpricing.

These consisted of the North Luzon Railways Project (NLRP), South Luzon Railways Project (SLRP), the already scrapped National Broadband Network (NBN) Project, and Cyber Education Project. Including the US$329-million NBN project, the Chinese loans amount to US$2.2 billion (or P91.1 billion).

Table 3: Loans Challenged as Fraudulent, Tainted and/or Useless in the 2008 Budget

*Computed using an exchange rate of US$1 to P41

Source: 2008 GAA; FDC

Austria Medical Waste Project US$19.1 million P503.65 million Bank Austria AG
Small Coconut Farms Development Project (SCFDP) US$121.80 million P4.99 billion International Bank for Reconstruction and Development (IBRD)
Second Social Expenditure Management Program (SEMP2) US$100 million P5.21 billion IBRD
Secondary Education Development and Improvement Project (SEDIP) US$116.71 million P4.56 billion Japan Bank for International Cooperation (JBIC) and Asian Development Bank (ADB)
Philippine Merchant Marine Academy (PMMA) Modernization Project US$20.93 million P858 million Kreditanstalt fur Wiederaufbau (KfW) of Germany
Telepono sa Barangay Project US$24.99 million + CHF44.24 million (Swiss Franc) P999.60 million + P1.21 billion Export Development Corporation (EDC) of Canada and Credit Comm’l de France
Power Sector Restructuring Program US$300 million + US$300 million P12.3 billion + P12.3 billion ADB and JBIC
Power Sector Development Program US$450 million + US$300 million P18.5 billion + P12.3 billion ADB and JBIC
Angat Water Supply Optimization Project US$80 million P3.28 billion JBIC
Procurement of Search and Rescue Vessel from Tenix Defense Pty Ltd. Aus$109.90 million P3.08 billion Export Finance and Insurance Corporation (EFIC) of Australia
Pampanga Delta Development Project ¥7.54 billion P1.98 billion JBIC
Plus remaining unsecuritized loans incurred during the term of former President Ferdinand Marcos

Arroyo has maintained that the constitutionality of treating debt service as automatically appropriated is both established and unequivocal. “Servicing of public debt, whether foreign or domestic is automatically appropriated to ensure that the required amounts are available when they become due,” she said.

But while legislators expected the veto considering the continuing effectivity of automatic appropriation for debt service, Albay Rep. Edcel Lagman, chair of the House of Representatives committee on appropriations, laments how the Executive forefeited the “strong political endorsement from Congress for the renegotiation or condonation of odious and wasteful loans.”

Justifying the provision, Lagman says these loans are “in the improvident league of the Bataan Nuclear Power Plant (BNPP) indebtedness which the government has fully paid despite the mothballing of the nuclear facility which was errantly supplied and installed from a tainted loan.”

The mothballed nuclear plant cost the country a total of P64.8 billion — P43.5 billion as principal amortization and P21.2 billion in interest payments — from 1986 up to last year.

‘Spending compression’

With the huge amounts flowing out of the country in debt-service payments, it is therefore no surprise that in the last seven years there has been what Diokno calls a spending compression — the underfunding of education, health, and public infrastructure.

Education, which should receive the highest budgetary allocation as mandated by the Constitution, only got more than a fourth (P164.1 billion) of what the Arroyo government automatically appropriated for debt service (P612.8 billion) in 2007. Spending on health was even more atrocious — at P18.4 billion, this corresponded to a measly three percent of what the government spent on debt payments.

For this year, the education budget was even lower at P138.2 billion, while health got only a meager increase at P19.8 billion.

Many are wont to blame Arroyo, an economist, for the problems besetting the economy, but Dr. Walden Bello, FDC president, would rather put things in perspective. Arroyo, she says, is “not the problem, but part of a bigger problem that extends far into the recent past.”

A noted critic of the current economic globalization model, Bello assigns collective responsibility on the last five administrations for the Philippines’s economic malfunctioning, noting the stark difference between the country’s economic growth record from 1990 to 2005 and the rest of Southeast Asia.

Within that period, the country’s GDP per capita growth averaged 1.6 per cent per annum, according to the latest Human Development Report of the United Nations Development Program (UNDP).

“(It’s) the worst in the region,” says Bello, pointing out how even all the so-called lower-tier ASEAN [Asssociation of Southeast Asian Nations] countries have significantly outstripped the Philippines — Vietnam (5.9 percent), Laos (3.8 percent), Cambodia (5.5 percent), and Myanmar (6.6 percent).

Bello rejects overpopulation, corruption, strong protectionist policies, and the issue of higher, non-competitive labor wages as explanations advanced by some analysts for the country’s continuing underdevelopment. Instead, he says the real culprit is the crisis of investment that begun in the mid-1980s, out of which the economy has never really recovered.

The ratio of investment to GDP plunged to 17 percent during that period, from nearly 30 percent in the early 1980s, and stayed at 20-22 percent in the early part of 2000. The impact of the World Bank and International Monetary Fund-imposed structural adjustment programs in the 1980s and 1990s — decades of international recession — marked by radical tariff liberalization coupled with monetary and fiscal tightening measures further led to the downward spiral of private investment.

But instead of picking up the investment slack, the fledgling government of then President Corazon Aquino succumbed to pressure from international creditors to a “model debtor strategy” in order for the country to continuously enjoy access to the global capital markets.

By virtue of Executive Order No. 292, Aquino affirmed “automatic appropriation” for foreign-debt service from the government budget every year as laid out in a Marcos decree, Presidential Decree 1177.

Aquino’s executive order institutionalized the said policy in the Revised Administrative Code of 1987, in particular, Section 26 (B) Book 6, allowing payments for both principal and interest on public debt to be automatically appropriated sans any comprehensive review to determine if these debts were legitimate.

Bello could only describe the huge financial resources — amounting to US$30 billion (eight to 10 percent of GDP) between 1986 and 1993 — that flowed out in debt service payments as a “catastrophic failure.” This, Bello says, made the country a “net exporter of capital to the North.”

From seven percent in 1980, interest payments as a percentage of total government expenditures rose to 28 percent in 1994. Under Arroyo, the share of interest payments has hardly changed, averaging 27 percent and registering highs of 31.1 percent in 2005 and 29.7 percent in 2006.

Table 4: Annual Interest Payments vs Government Expenditures (in billion pesos)

* as of April 2008

Source: Bureau of the Treasury

2001 2002 2003 2004 2005 2006 2007 2008*
NATIONAL GOVERNMENT EXPENDITURES 714.5 789.1 839.6 893.8 962.9 1,044.4 1,149.0 401.3
INTEREST PAYMENTS 174.8 185.9 226.4 260.9 299.8 310.1 267.8 119.0
AS % OF GOVERNMENT EXPENDITURES 24.5% 23.6% 27.0% 29.2% 31.1% 29.7% 23.3% 29.6%

If payments for principal amortization, which are off-budget items, are included, debt-service payments actually have taken up almost 60 percent of national government expenditures in the last seven years.

Why paying off principal amortization of our debts does not form part of expenditures boggles the minds of anti-debt advocates. In Arroyo’s “perverted logic,” the FDC says, what she is telling the public is that the government has to refinance its old debts through more borrowings.

To the detriment of social spending, post-Marcos governments from Aquino to Arroyo have made debt servicing the topmost national economic priority, but which has taken a more vicious turn under the present dispensation.

Argentina’s ‘political courage’

Given such priority Arroyo has accorded to repaying the foreign debt amid an economy in crisis, Bello could only look to Argentina with marvel and envy for President Nestor Kirchner’s “courageous act of essentially defaulting on most of that country’s foreign debt and channeling the money saved to domestic investment.”

In his first year in office in 2003, Kirchner declared that Argentina was defaulting on its external debt (about $93 billion), regarded as the largest sovereign debt default in history. The government’s firm stance consigned the country to a pariah in the global financial markets but eventually paid off as it allowed the restructuring of 76 percent of the defaulted principal, offering approximately 30 cents per dollar face value of old debt to its creditors, said to be the largest sovereign restructuring in history.

In 2005, the Argentine president announced the cancellation of the country’s debt owed to the IMF by issuing a one-time payment of US$9.8 billion — an act that was meant to gain independence from the structural reform impositions of the lending institution.

As a result of these tough measures, Argentina was able to reduce its external debt burden to US$118 billion by September 2007. Moreover, the Latin American country of 41 million people has been enjoying a remarkable surge in real GDP growth — 8.8 percent in 2003, 9.0 percent in 2004, 9.2 percent in 2005, 8.5 percent in 2006, and 8.7 percent in 2007 — after the crippling recession years of the late 1990s up to 2002.

Of the Philippines’s policy of automatic debt appropriation coupled with weak revenue generation (particularly in customs collections) as a result of its adherence to trade liberalization measures as radical tariff reductions, Bello says: “It requires no special intelligence to realize that the massive amounts of money that have gone to paying our creditors to service our constantly mounting external debt was money that could not go to development.”

As such, anti-debt advocates like FDC have been clamoring for nothing less than the repeal of the automatic appropriation law. FDC has also been pushing for the creation of a congressional commission on debt audit that would investigate all public-sector debts and contingent liabilities, as well as review all government policies regarding borrowings and payments of debts.

The proposals have the support of legislators like Rep. Lagman, who led Congress in reducing the debt service several times and allocating the reduced amount to social development during the Aquino administration. The Bicolano congressman has also been filing bills to repeal or amend the automatic debt servicing provision as far back as the time of the Ramos administration.

As it had done on many occasions past, Congress failed to assert its power of the purse more forcefully with respect to the debt problem.

Confronted with a presidential veto the last time, anti-debt legislators have been consigned to hoping that the Executive will conduct a thorough audit of loans challenged as fraudulent, tainted, and useless before effecting payments for principal amortizations and interest payments.

Hence, with this “suffocating policy framework” in place, Bello can only concede: “As long as it remains this country’s basic paradigm, it is difficult to see the Philippines emerging from its long night of stagnation.”