China or US debt trap?

This column is appalled at the desperate propaganda floated by the Liberal Party and their acolytes fearing that the country is about to be entrapped in debt with China. These lackeys should better analyze the disinformation given them by their handlers that inject the usual prognostication that the country is about to sink deeper in debt consequent to President Duterte’s move to improve the country’s economic, trade and political relations with China.

The oligarchs, the usual beneficiary of the US financial largess, the shameless but tax-evading Church, the hypocritical mainstream media, and the senile leadership in the communist party and their front organizations failed to logically connect that the US, which is the source of their moronic disinformation, is the world’s number-one debtor having a $21.48-trillion debt many fear is likely to incur a default payment.

These pathetic cynics sidetrack the truth that the country has an external debt of $73.097 billion. They fail to take note that 61.5 percent of this is dollar-denominated, 13.5 percent in yen, 14.5 percent in multi-currency borrowed from the World Bank and ADB, and 10.5 percent in obligations to 17 other countries. According to Foreign Affairs Secretary Cayetano, only 1 percent of our external loans come from China. From there, we could deduce that our loan with China would be somewhere between $700 million to $800 million.

These anti-Chinese wrigglers make their doomsday prediction of the $25 billion in economic assistance in the form of grants, loans and investment. Logic will tell us that one can never put interest on something it has yet to receive. Chinese ambassador to the Philippines Zhao Jianhua explained that the two bridges that will cross Pasig River from Binondo to Intramuros would come in the form of grant or to be exact, given to us for free.

Setting aside development projects being sponsored by China, let us just point out how illogical the opposition can be. First, the US is ranked as the one debtor in the world, and the Philippines ranks number 56 out of the 194 states listed. This figure alone should have put them on guard that in the event the US incurs a default payment of its external debt, this country be doubly hard hit more than the US. Nonetheless, to avoid this, the US devised a trick of just revaluing its currency or by injecting more money into the market known as “quantitative easing.”

This now allows the US to postpone its day of reckoning, but in the meantime our peso continues to tumble. Because these hypocrites pretend not to know why the peso keeps on sinking, they would rather attribute the increase in the prices of goods to inflation to blame Duterte, and not on the volatility of the dollar where 61.5 per cent of our external debt is with the US.

Second, there is no way the country could avoid the financial tremors that may occur in the US because our currency is in chained to the dollar but not on its value. We now have a P54-to-a dollar rate and whatever tremors the US will experience will be absorbed by us because we allowed to be put in place all the devices to make sure we lose in all our contracts. The currency exchange rate adjustment (CERA) is one good example.

If we borrow, say $100 million from the US through their controlled financial institutions, and there occurs a financial crisis, that would readily affect the peso. From the current P54 to a dollar, the rate could easily jump to P60. The principal to our loan obligation will thus automatically increase. This does not include the interest although they have been bragging that their interest rate is low compared to others.

Third, when the US decided to detach the dollar from the gold standard, the first casualty was the system of interest rate. It effectively abrogated the anti-usury law such that nobody goes to jail for usury. This was followed by the abrogation in 1999 of the landmark Glass-Steagall Law which separated banking from investment. From thereon, banks competed with investors and traders. Adding burden was the relaxation on foreign the investment and remittance of profit.

This was followed by the liberalization of the banking industry. The miserable Noynoy Aquino government signed RA 10641, an act allowing the full entry of foreign banks in the local banking industry. The new law amended RA 7721 promulgated in 1994 under the Ramos administration.

Otherwise known as the Foreign Bank Liberalization Act, RA 7721 was instrumental in the entry of foreign banks through either of the three modes: acquisition of up to 60 percent of an existing domestic banks voting stock; establishment of branches with full banking authority; or investing up to 60 percent of the voting stock of a new banking subsidiary incorporated under Philippine laws. Since July 2014, foreigners have been allowed to own 100 percent of Philippine domestic banks.

Fourth, because of the volatility of the dollar in relation to their external debt obligations, often denominated in US dollars, countries like the Philippines adopted the debt-to-GDP-ratio in servicing our external debt upon the advice of US bankers. This has become mandatory to countries falling within the sphere of US financial jurisdiction that sought loans for their developmental projects, as filler to their huge trade deficit or shortfall in revenue collection. In our case, the Bangko Sentral ng Pilipinas has set the ratio to what its GDP can produce. It reached its peak in 2001 at 68.2 percent. The ratio has significantly fallen to 27.3-percent ratio at the end of 2014.

For instance, for every P100 worth of goods and services the country produces, it must use around P42 to P55 for debt repayment. Thus, if one has to combine the debt-to-GDP ratio and the CERA that would point to a bleak chance for debtors-states to escape from the debt trap to which the Amboy hecklers attribute to China.

It is worth noting that loans extended by China to countries needing financial assistance seldom experience the burden of paying their debt obligation on the basis of debt-to-GDP ratio or are under pressure to observe the CERA formula. One can honestly say this because the renminbi is stable. The Chinese government seldom revalue or devalue their currency just to overcome the financial exigencies of using them as weapon to exert favorable business deal.

To simplify, if we have a P1.6-trillion budget say for this year, and the debt-to-GDP ratio is pegged at 30 percent, that automatically means we will be deducting P450 billion from that appropriated budget just to service our debt obligation. This does not include the increases in the value of the dollar which would hit us twice because that would correspondingly decrease the value of the peso. If one adds, say the three to four percent interest, then we could rightly predict that there is no way the country could escape from the manacle that has chained us into absolute penury.

What is more, the debt-to-GDP ratio and the CERA are financial formula that will always favor the creditors and never to debtors. Thus, the creation of the Asian International Infrastructure Bank (AIIB) has created troubling crisis for the Western financial institutions like the ADB, World Bank and IMF. Should developing countries shift to the AIIB for credit, that will be their end because that will expose their true nature as surviving usury.

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Topics: Liberal Party , China , United States , Allan Peter Cayetano , Bangko Sentral ng Pilipinas
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