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BSP: PH won’t fall into ‘debt trap’

BSP: PH won’t fall into ‘debt trap’"The economy continues to grow."

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As he has done much work on economic theory and practice since his student days at the University of the Philippines in the mid-1970s and later at the London School of Economics, Diwa Guinigundo, now the most senior of the three deputy governors of the Bangko Sentral ng Pilipinas (BSP) after rising from the ranks, can speak with authority on what direction the Philippine economy should go at this point.

In the latest edition of our Saturday Forum@Annabel’s with the theme, “Philippines-China Economic Cooperation: How Will It Benefit the Country?”, Guinigundo gave local and foreign media interesting insights on our current economic situation. We share with our readers highlights of his presentation.

The Philippine economy has been growing for the past three decades, since the first quarter of 1990. Much of this we owe to sustained policy and structural reforms that translated to higher potential output for the economy. Five to 10 years ago, the potential output of the economy stood at four-and-a-half percent. In the last five years, our potential output has grown to between six-and-a-half to 7 percent. If in the past we were subjected to a cycle of boom and bust, or a situation where we grow today and tomorrow we contract, that’s no longer the case now.

What the government wants to do is to sustain the growth. For middle-income countries, the challenge is to avoid the so-called “middle-income gap.” When an economy reaches a $10,000 or $11,000 per capita income, it begins to experience flat economic growth. There are two reasons for this. One is aging infrastructure or the lack of sufficient infrastructure. Second is an aging population, which is not a problem at all. We have 107 million people today, and most of them are young, with the median age at 24 years old.

It is our aging infrastructure that we want to address. We must fill the infrastructure gap.

This is where China’s Belt and Road Initiative or BRI comes in. Our trade and investment regime has been multilateral, we deal with the World Bank, International Monetary Fund, or the World Trade Organization anchored on the underlying principle of cooperation or collaboration and based on mutual interest and international conventions. But we must now look for other sources of funding.

What can we get from BRI? It is an initiative that not only seeks to establish inter-connectivity and inter-linkages across national borders. So even if the Philippines is not connected to the Asian mainland, we are considered part of the nautical or maritime dimension of BRI.

China is of increasing importance to us because of merchandise trade. In 2018, of our total merchandise exports, 13 percent went to China; to ASEAN, about 15 percent. So ASEAN accounts for a bigger share of our merchandise exports right now. What about imports? Our intra-ASEAN trade is about 25 percent. With China, it is nearly 20 percent. But 10 to 15 years ago, both exports and imports from China stood at minimal levels.

What about investments? China’s share in foreign portfolio investments is small, accounting for only 1 percent of the total. China’s share in total foreign direct investments (FDIs) in our country is likewise small. In 2018, it was only about $2.7 billion, or 7 percent of total FDIs. But with China’s aggressive push globally, we can expect this amount to increase in the years ahead.

One issue being raised now involves our external debt. Some are saying that we are falling into China’s debt trap. But what are the numbers?

Last year, our external debt stood at $79 billion. We owe China less than $1 billion as of the end of 2018, $980 million, to be exact. It’s distributed among short-term, medium-term, and long-term. The short-term, basically related to trade, or revolving trade credits, accounts for $520 million. The medium to long-term loans or those that cover more than five years account for $420 million. While we have seen the increased participation of China in our infrastructure program, if we factor in all the investment and loan commitments and indications of interest, that would amount to only 4 or 5 percent of FDIs by the end of 2022.

We have an existing law, the Foreign Borrowings Act, which prescribes an elaborate system of processing foreign loans. Every proposed project must meet economic and social viability criteria and pass through the inter-agency Investment Coordinating Council (ICC) of NEDA. Then it goes to the BSP for approval in principle, which involves looking at the terms and conditions and its effect on our balance of payments. The DOJ will also examine the legality and constitutionality of the loan proposal.

We have standard provisions in the terms and conditions. First, there are no collaterals on any of the loans signed by the Philippine government contrary to the statements of those who are saying that we would have to give away our patrimonial assets if we default in repayments. And second, we have a waiver of immunity, which allows the creditor to take us to court if there is a problem. This is standard in loan contracts between sovereigns. If there are issues raised, it would be voluntary on the part of either side to go to arbitration. And arbitral rulings will have to conform to our Constitution and our judicial system.

In the case of loans from China for the Kaliwa Dam and Chico River Irrigation Pump Projects, the interest rates are 2 percent. In Japan’s loan for the North-South Commuter Rail, the interest rate is 2.7 percent. The French loan for Cebu’s Bus Rapid Transit or BRT carries an interest rate of 3.69 percent.

In other words, the Central Bank wants to ensure that our external debt to GDP ratio is manageable. In 2005, our debt-to-GDP ratio stood at 60 percent. If you translate that into simple terms, 60 percent of our GDP comes from loans. Today, as of end-2018, that has gone down to 23.9 percent. Why? We have been able to get more capital inflows and to pay back most of our debt obligations to both public and private creditors. In 2017 alone, we paid more than $4 billion of our debt obligations. Last year, until the third quarter, we paid $2.7 billion. That’s because the economy continues to grow.


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