External debt management was rationalized in 1971
"The two decrees brought many important changes to the operations of the Central Bank and the banking system."
Last month, for the first time during the present pandemic, the governor of the BSP (Bangko Sentral ng Pilipinas) talked about the manageability of this country’s external debt. As reported by one newspaper, Governor Benjamin Diokno stated that this country’s external debt remains manageable and is likely to stay that way.
This is what the governor said in his May 20 only briefing: “Although (its) foreign borrowings grew by $14.9 billion in 2020, the economy countries to have the capacity to service its maturing foreign obligations in view of the country’s manageable debt profile: relatively low external-debt-to-GDP (gross domestic product) ratio and low debt service ratio.”
The Philippines’ external debt - the total foreign-currency obligations of Philippine borrowers foreign credentials - stood at $88.6 billion at end-December 2019; the $14.9 billion of foreign borrowings incurred by Philippine borrowers in 2020 brought this total up to $98.5 billion on December 31,2020.
Mr. Diokno went on to say this: “The BSP remains steadfast and committed in supporting the government and the Philippine economy on its way to recovery through prudent debt management, among other (means).”
Governor Diokno speaks of “prudent debt management” having been undertaken by the BSP during the present pandemic, i.e., since March 2020, when the Philippine economy’s most important part, NCR (National Capital Region) was first placed under ECQ (Enhanced Community Quarantine). The truth of the matter, however, is that Mr. Diokno and his Monetary Board colleagues have not had to do any prudent debt-managing. The monetary reform program of 1970-1971, which was embodied in Presidential Decree (PD) No. had taken care of that task.
At the height of what until then had been its most serious financial crisis, the administration of President Ferdinand Marcos requested the IMF (International Monetary Fund) for a standby loan to replenish its virtually empty foreign exchange offers. The IMF granted the request, but, along with its approval, it recommended the taking of steps toward reform of this country’s financial system. The most important of those steps was the establishment of a Joint International Monetary Fund-Central Bank Survey Commission. The Commission would be a five-member body, with the Governor of the Central Bank (then Gregorio Licaros) as chairman: The two Philippine members, both from the private sector, were Jose B. Fernandez Jr. and Armad V. Fabella. The Commission was to conduct a thorough review not only of the operations of the banking system but also - very significant - of the operations of the Central Bank.
In due course, the Commission completed its report and submitted a copy to President Marcos and a copy to the hanging Director of the IMF. President Marcos, who was then governing by decree, issued a pair of PDs: PD 71 covering Central Bank operations and PD 72 covering the operations of the Philippine banking system.
The two PDs brought many important changes to the operations of the Central Bank and the banking system. PD 71 installed economic rationale and financial discipline in the operations of the nation’s monetary authority. Mandatory ratios were put in place: external debt to GDP (gross domestic product) ratio, total debt service payments to GDP ratio, short-term external debt to total external debt ratio and ratio of fixed-interest debt to total external debt. And, in what was perhaps the most significant reform of all, Monetary Board approval now had to be sought beforehand for all foreign borrowings and guarantee extensions of the national government and all government instrumentalities (including corporations).
The efficacy and value of PD 71’s reforms are to be seen in Governor Diokno’s May 20 briefing: “End-2020 external debt represent(ing) 27.2 percent of the GDP,” “the maturity profile of the country’s external debt also remain(ing) predominantly medium-term and long-term in nature, with share to total of 85.6 percent” and “60 percent of the medium-term and long-term borrowings have fixed interest rates (that minimize) risks from possible interest rate increases.”
Where should credit go, then, for the continuing manageability of this country’s external debt? The answer is obvious.