Lenders have offered to defer debt payments for those severely affected by the lockdown. The World Bank has encouraged the Group of 20 nations to postpone repayment of official bilateral credit, although has not yet considered suspending debt payments owed it. The International Monetary Fund has approved debt relief to its 25 poorest member countries. Commercial banks have offered a 60-day grace period for loans, including for household debts borrowed through credit cards. Even informal moneylenders in the Philippines’ urban poor communities have reportedly stopped collecting loan installments for a while.
These are not necessarily all done out of sheer goodwill. In many cases they seek to stop debtors from succumbing to severe debt-driven crisis due to the pandemic which would stop them from paying anything at all in the future. In short, they are also favorable to the creditors.
The Duterte government, with its much-brandished good credit standing, could have moved for debt relief too but instead, at the height of the COVID-19 pandemic, it started borrowing more. The finance department underscores the need for government to borrow from foreign sources to fund its economic recovery plan. Multilateral and country creditors have unsurprisingly exploited the situation and recycled funds to lend.
Do we really need to borrow for COVID response? People have asked. How are we going to pay for all of these debts?
The Duterte administration’s Philippine Program for Recovery with Equity and Solidarity (PH-PROGRESO) is worth Php1.7 trillion, Php561 billion (US$11 billion) of which is targeted by the Department of Finance (DOF) to come from bilateral and multilateral loans and global bonds. There is another Php404 million (US$8 million) in foreign grants.
From March 14 to June 4 this year, based on IBON monitoring, the Duterte government has already obtained foreign commitments of US$3.95 billion in loans, US$17.3 million in grants, and US$5 million in technical assistance (TA) – all for addressing the COVID-19 pandemic. The Philippine-headquartered Asian Development Bank (ADB) accounts for US$2.1 billion of the loans plus all of the TA and much of the grants. The World Bank accounts for US$1.1 billion, and the China-led Asian Infrastructure Investment Bank (AIIB) for US$750 million. There are US$9.3 million in grants from USAID. In sum, there are 7 project loans, 2 grants, and 1 regional TA so far.
Loans amounting to US$3.95 billion are, at the current exchange rate of Php50.05 to a US dollar, equivalent to Php197.7 billion. This increased the outstanding national government debt which has already risen from Php7.7 trillion by the end of 2019 to an astounding Php8.6 trillion by April 2020. The Php869-billion increment in the last four months far surpasses the full-year increments of the last three years.
Government securities increased by Php436 billion, while the Bangko Sentral ng Pilipinas used its repurchase facility to lend Php300 billion to the national government for COVID response. Meanwhile, external debt increased by Php133.1 billion from December 2019 to April 2020. In April 2020, the Duterte government’s foreign debt grew 16.5% year-to-date and 16.4% year-on-year, or the biggest increase in the last four years.
The Duterte government has already reached 66% (or Php919.5 billion) of its Php1.4 trillion projected gross borrowings for the year. If the planned foreign financing for PH-PROGRESO alone is realized, the government would already go over its borrowing projection. This does not yet include the uncontrollable increase in domestic debt due to the continuous issuance of government securities. Domestic debt comprises 68% of the outstanding national government debt.
For whose sake, really?
The loan commitments are specified for strengthening healthcare, augmenting funds for socioeconomic relief, and providing economic stimulus for agriculture and micro, small and medium enterprises (MSMEs). There are also wage subsidies for small enterprises and support for repatriated overseas Filipino workers (OFWs).
These are urgent things to attend to during the pandemic that the Duterte government has not competently addressed. Instead, we have only witnessed how government’s policy of health privatization, neglect of essential economic sectors, and myopic understanding of the poor have made it ill-prepared for an emergency such as COVID.
COVID-19 is unplanned thus the need to apply for a loan – that has been the official line. Are the loans meant to help us cope with the coronavirus, while government opts to keep spending for its neoliberal policies and to protect business? Actually, these urgent loan-financed items are part of a larger package which includes even bigger support for businesses who get financial relief in the form of tax deferrals, low-interest loans, and credit guarantee schemes.
The country’s creditors are more straightforward. They will provide budgetary support so that the country’s economic managers can continue spending on the administration’s Build, Build, Build (BBB) infrastructure projects, foreign investment attractions, tourism and other boosters of the otherwise slowing, and now contracting, economy.
The ADB has pledged US$1.5 billion from its COVID-19 Active Response and Expenditure Support (CARES) program for fiscal management, among others. The AIIB’s US$750 million loan is co-financed with CARES. The AIIB only has loan facilities for infrastructure investment and does not have a ‘development financing’ orientation. It recently launched a COVID recovery facility but even this is oriented towards addressing liquidity problems, providing fiscal and budgetary support in partnership with multilateral banks, and building health infrastructure – all so that governments can focus on COVID impacts and leave infrastructure funds alone.
The more recent Php400 million loan commitment of the ADB to strengthen domestic capital markets and investments is more explicit. This is to enable the Duterte government to fund infrastructure at lower costs and to enable the private sector to raise infrastructure funds from capital markets.
COVID-19 is unplanned, while the Duterte administration’s focus is unchanged. The government is still fixated on burnishing the economy’s image to attract foreign investors, and will only address the emergency by as much as it can borrow. This reinforces the country’s vicious spiral of debt and shallow economic growth. Creditors are complicit in this neoliberal COVID response.
But what really demolishes the argument that government needs to take out a loan for COVID-19 is that there are viable sources of money that government chooses to forego in behalf of big business. Case in point is the DOF-backed Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill, the renamed second package of the unpopular Tax Reform for Acceleration and Inclusion (TRAIN) Law. The first package taxes consumption goods by the poor and relieves the rich of paying income taxes. CREATE in turn reduces corporate income tax from 30% to 25% from July 2020 until 2022 and thereafter 1% yearly cut until 20% by 2027. This gives corporations up to Php667 billion worth of tax breaks over the next five years, which is the largest in the country’s history.
CREATE is at the core of the administration’s recovery plan, PH-PROGRESO. It also proposes Php133.7 billion in loans and guarantees, Php142.8 billion in other tax cuts and foregone revenue, and Php233.3 billion in additional liquidity. PH-PROGRESO declares prioritizing the resumption of BBB. To do so, it incentivizes big business with tax cuts and liquidity and equity infusion through government intervention and borrowing in the guise of helping them recover from the pandemic recession. The creation of jobs and recovery of incomes of the poor and vulnerable are an afterthought.
Indeed, government has to revive the economy from the unnecessary lockdown, but this has to start with what is truly essential. The COVID crisis is an extraordinary opportunity for government to strengthen national production in agriculture and industry – a surefire way to stimulate employment and consumption. But agriculture and the MSMEs that make up the majority of the country’s enterprises are extremely marginalized.
In the House-approved Php1.3 trillion Accelerated Recovery and Investments Stimulus for the Economy (ARISE) bill, agriculture gets a paltry Php66 billion and MSMEs are allocated only Php125 billion in loans and guarantees. The COVID crisis is also a golden chance to bridge the chasm between rich and poor, which has become stark especially during COVID. But quite to the contrary the Duterte government has relieved the rich and increased borrowing to sustain such economic order – an addition to the mounting burden of the poor.
The DOF reiterates that the debt is payable and that the country is in no way headed to a debt crisis. It says that the debt-to-gross domestic product (GDP) ratio is only around 39.6% at the end of 2019 and 43.3% as of March 2020. The ratio indicates manageable levels, says the government, and is much less than in 2000-2010 when the debt-to-GDP ratio hovered around an annual average of 60% until it started going down in 2011 at the start of the country’s high growth episode.
But those days are gone. Fast economic growth peaked in 2012-2016 then steadily declined since the start of the Duterte presidency. Before COVID, the administration tried to but could not cover up the slowing economy. The GDP growth slowed from 6.9% in 2016, 6.7% in 2017, 6.2% in 2018, and to just 6.0% in 2019, the slowest in eight years. The economy shrank in the first quarter of 2020 by 0.2%, and the economic managers are seeing a severe decline in full-year real GDP growth to -0.6% to 4.3 percent.
All the sources of economic growth that government has relied on – OFW remittances and foreign direct investment in BPOs and export manufacturing – have slowed down since the beginning of the Duterte administration. And these are definitely headed into a tailspin as the global economy sinks deeper into crisis.
The Duterte government has never considered the erosion of agriculture and manufacturing to arrest the economic slowdown. Instead, it has artificially boosted economic growth with pump-priming – increasing government spending to its highest level as percent of GDP. Infrastructure spending comprised 4.7% of the GDP in 2019 and is targeted to reach 7.0% of the GDP by 2022. It shall be the highest among all the administrations.
BBB projects are the Duterte administration’s preferred drug for resuscitating the ailing economy before it slips away. However, it has been borrowing heavily for this. Of the Php4.3 trillion needed for the 100 flagship infrastructure projects of the administration, 83% is expected to come from official development assistance (ODA), mostly in the form of loans. The Duterte government’s borrowing binge is unprecedented – on a monthly average, it is borrowing Php45.6 billion, almost three times as much as Aquino (Php19.0 billion) and over twice as much as Arroyo (Php21.2 billion).
The fiscal deficit is thus a growing problem, with the Php660.2 billion deficit in 2019 equivalent to 3.5% of GDP. The fiscal deficit is already at Php348 billion as of April 2020.
Here is why the debt is eventually unpayable and such a huge burden. First of all, ODA loans may be at concessional rates but are tied to the conditionality of using the technology, materials and expertise of the creditor country. In the case of China, this includes even the use of Chinese labor. Secondly, absorptive capacity in a program as grand as BBB is a major issue. The Philippine government lacks the bureaucratic and technical capacity to implement all the grand infrastructure projects. This capacity has been eroded by decades of privatization and deregulation. The private sector, on the other hand, is not that deep because of the economy’s backward fundamentals. Third, BBB’s main focus is mobility for the benefit of the service and trading oriented economy, and not in building Philippine agriculture and industry. Thus the infusion of infrastructure capital or even the construction of the facility will not be useful in the long run for national development.
Lastly and most ironically, we are being obliged to fully pay for this mounting debt. This early, the government is already thinking of taxing and raising government fees on the very coping mechanisms of the dislocated working people. For instance, the economic managers want to tax online selling even as people are losing their sources of livelihood, or want to collect bike registration fees as workers seek alternatives to the poor public mass transport, among others. The government already failed to meet its revenue target in 2019, short by Php12.2 billion, and is anticipating even bigger spending and bigger debt in 2020.
Our future is being mortgaged. It doesn’t help to cure apprehensions when government says that the debt is manageable. Government has to end its anti-people neoliberal economic policies, and only then shall we be well. #
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Kodao publishes IBON articles as part of a content-sharing agreement.