Weak peso may limit government financing options

MANILA, Philippines — The financing options of the Marcos administration may be limited to local lenders, as the weakening of the peso against the dollar  may discourage the government from acquiring dollar-denominated loans, including from the newly created $600 billion infrastructure fund of the Group of Seven (G7).

Experts from the country’s leading universities yesterday said the government should think twice about borrowing abroad to finance its infrastructure projects amid the weakening of the peso against the dollar.

De La Salle University economics professor Maria Ella Oplas warned that the government may struggle to pay its offshore debts if it continues to obtain new loans following the continued weakening of the peso against the dollar.

“Outsourced debt is discouraged, especially now that the peso exchange rate to dollar has lowered the value of our peso. Repayment of fluctuating dollars is risky,” Oplas told The STAR.

The local currency declined to 54.985 to $1 on Friday – the weakest in 17 years – before recovering to 54.78 on Monday to end an eight-day decline.

Despite the correction, the peso has depreciated by 7.4 percent since the start of 2022, making it the worst performing currency in Southeast Asia.

Oplas said the incoming administration of president-elect Ferdinand Marcos Jr. should focus on bringing down the debt ratio to within the manageable level of 60 percent of gross domestic product (GDP).

“The new administration should be prudent, too, in accumulating more debt given that we have surpassed the 60 percent threshold,” Oplas said.

The national debt, measured against the GDP, has risen to a 17-year high of 63.5 percent as of March, exceeding the international standard of 60 percent.

On Sunday, US President Joe Biden announced that the G7 would mobilize $600 billion in the next five years for the completion of global infrastructure mostly in developing economies.

The G7 is made up of developed nations Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

The G7 financing will serve as an alternative to China’s Belt and Road Initiative worth $1 trillion.

Biden said the G7’s international infrastructure plan would offer borrowers another option that they can explore to pay for projects, especially on clean energy, health systems, gender equality and information technology.

Leonardo Lanzona, economics professor at the Ateneo de Manila University, said the Marcos administration may consider the costs and benefits of accepting the G7’s offer for infrastructure financing.

“This will help ease the cash constraints that we are currently experiencing. The issue, however, is that this is not doleout and, instead, it is a loan. If we ever avail of this window, we still need to know if the returns are greater than the interest rates,” Lanzona told The STAR.

Lanzona agreed with Oplas that the peso’s depreciation will raise the cost of dollar-denominated loans, but said the viability of projects to be pursued should be the foremost consideration.

“The loans will be more expensive, especially the dollar-denominated loans, but a weak peso is not necessarily bad. It has positive effects, which can be greater than the costs. It should not be counted as a problem. The issue remains as to the proper allocation of these loans to the more viable projects,” Lanzona said.

On the other hand, Oplas said the Marcos administration should stick with the plan to bring back public-private partnerships (PPP) as a financing mode for infrastructure projects. She proposed that the government allow the private sector to increase its role in economic development in the next six years.

Incoming finance secretary Benjamin Diokno told The STAR that the Marcos administration would rely on PPPs to keep infrastructure spending above five percent of GDP until 2028.