Public debt

Candidates have been promising dreamy projects. But can we afford them?

Those politicians don’t even know how many zeroes there are in a trillion. That’s the magnitude of our budget deficit now… in the trillions of pesos.

The Duterte administration caused a 2021 full year budget deficit of P1.7 trillion. Duterte spent about P5 trillion, but collected revenues of only about P3.3 trillion. Our national treasury borrowed to fill in the gap.

Sure, the pandemic made it necessary to borrow heavily. But we also lost billions in borrowed funds to corrupt pandemic supply deals that taxpayers must now pay for. Doubtful anyone will go to jail for plunder. They are too well connected.

Our present debt-to-GDP ratio is at 60.5 percent, higher than the 54.6 percent a year earlier and slightly above the 60 percent threshold considered as manageable by multilateral lenders for developing economies. It is also the highest debt-to-GDP ratio since the 65.7 percent seen in 2005.

Fitch Ratings has affirmed the Philippines’ long-term foreign-currency issuer default rating (IDR) at “BBB” with a negative outlook.

Finance Secretary Sonny Dominguez has been insisting our debt level is manageable, provided we spend our budget this year on the right things.

Unfortunately, most of our P5 trillion budget will cover salaries, maintenance and operating expenses. That means, we are borrowing not to build for the future, but mostly to pay salaries for an obviously oversized bureaucracy. Those are the same useless bureaucrats who overprice contracts and harass taxpayers with red tape.

My friend, former investment banker Manny Gonzalez explains our situation simply:

“Back in the 1970s, I was one of the very first bankers to nearly get fired over disagreements on how to gauge country creditworthiness.

“My superiors wanted to lend to Country X; I tried to veto the syndicated loan on the grounds that Country X had only one viable export (i.e., source of repayment for the loan). Guess who won.

“But I was wrong. Now the country has three big hitters in its export economy, and it runs a current account surplus (meaning in principle it has the means to pay down its debt).

“Our 2022 deficit is roughly P 1.7 trillion (P5 trillion expenses, P 3.3 trillion income). This equals about $30 billion in round numbers vs. current external debt of $110 billion. The deficit will have to be funded with borrowings or the government must print money.

“Assuming we don’t just print money, the borrowings will have to be mainly foreign, because borrowing all of that locally (equal to $15,000 per living Filipino) would soak up liquidity and fiscally depress growth prospects.

“Right now, borrowing $30 billion will not be a problem. Not because of anything about the Philippines, but because world interest rates are so low that institutions with money are chasing any investment that yields more than a US government note.

“But this might not always be the case. The history of sovereign lending is that the money keeps flowing. Until one day, it doesn’t. Then there is a massive devaluation and economic hardship.

“Many countries you wouldn’t suspect have large external debts – Japan and Switzerland, for example. The difference with the Philippines is that Switzerland has a balanced budget and a current account surplus so lenders feel secure. Japan has a huge budget deficit, but a current account surplus…

“The Philippines, though, has both a current account deficit and a national government budget deficit. One or both of these need to be fixed or one day, at the drop of a hat and with very little prior warning, lenders will stop funding our deficits, and not only that will want all their previous lending repaid.

“This finally brings me back to the question no one in this country is asking: How are we spending that P5 trillion (the national government’s planned expenditures for 2022).

“To recall my Country X, it spent its foreign borrowings more or less wisely, developing two viable export sectors from nothing. (Good thing, too, because its original export has withered due to world market conditions.)

“How is our P5 trillion being spent? 1/5 (equal to almost 70 percent of the budget deficit) is spent on NCR, where it costs (apparently) THREE TIMES MORE to give residents basic services, than any other part of the country…

“We are even apparently spending $200 million to ‘improve the earthquake resistance of government buildings in NCR.’ Can you think of any government building in Manila in the past 100 years that suffered even $10 million damage? The remedy is 100 times more costly than what it supposedly avoids…

“As for the rest of the P5 trillion, I couldn’t identify anything in it that has a clear chance of increasing tax collections or generating export earnings. They’re all just general hopes and wishes that if we Build Build Build (bahala na what we build), somehow GDP and exports will rise, and further down yet, someone will pay more taxes.

“Not bloody likely. MOST OF THE PROPOSED BUILD BUILD BUILD PROJECTS HAVE A NEGATIVE ECONOMIC RATE OF RETURN, ON TOP OF A NEGATIVE FINANCIAL RATE OF RETURN. That means they will weigh directly on both the government budget and the international current account balance.

“The Metro Manila subway is a SURE LOSER in every respect. No country in the world has succeeded in operating a subway system at a profit. Making a commute more comfortable or prestigious is not an economic ‘benefit’. Linking already-congested areas to each other is not ‘economic development.’ A subway system is CONSUMPTION, not INVESTMENT…

“What is most tragic is that not a single one of our leaders, technocrats, or presidential or even vice-presidential candidates, seem to have any opinion on the budget except to mouth that, sure, Build is Good.

“We are walking off a cliff, and no one seems to understand that we are.”

Manny is right. We have been here before, but it is as if we didn’t learn our history lessons from 1983. After borrowing heavily and spending frivolously, international lending dried up, bankers demanded payment and we couldn’t pay.

Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco