Will building spree hock Philippines to China?

POSTSCRIPT - Federico D. Pascual Jr. - The Philippine Star

AN ANALYSIS in Forbes.com warns that the projected Philippine debt of $167 billion to help finance the ambitious “Build! Build! Build!” program of the administration could balloon to $452 billion in 10 years and lead to debt bondage to China.

The article, contributed by political risk analyst Anders Corr, cautions about possible pitfalls in massive borrowing from China which has been offering concessional loans for President Rodrigo Duterte’s signature infrastructure projects.

Last April 18, the administration’s economic managers presented at the “Dutertenomics” forum in Pasay City an infrastructure program needing P3.6 trillion from 2018 to 2020 to usher in what is touted as a “golden age of infrastructure.”

The big-ticket projects cover transportation, water resources, sewerage and sanitation, flooding, solid waste, maritime, social infrastructure, energy, information communications technology, and other areas.

In Phnom Penh last Thursday, President Duterte told investors attending the World Economic Forum on ASEAN that the Dutertenomics programs will need some $160 billion aside from the budget funding of “Private-Public Partnership” projects.

“The Philippine people must be forewarned about the dangerous China deal,” said Corr, who holds a PhD in Government from Harvard University, and a BA and MA in International Relations from Yale University (summa cum laude). He assumed that all the loans are likely to come from China.

Corr said: “Duterte and his political allies are seeking billions in loans at unknown interest rates from China, whose companies stand to benefit by offloading idle Chinese industrial capacity to build costly infrastructure for which no proper cost-benefit analysis has been done.

“(Duterte et al.) could gain hundreds of millions of dollars each in finders’ fees from such loans that the taxpayer will have to pay. This should be considered odious debt if the terms are not transparent to the public in advance, if public cost-benefit analyses are not done for each deal, and if each deal is not approved by Congress.”

• $167-B debt may balloon to $452-B?

DUTERTE apologists could dismiss Corr’s comments as just one man’s opinion based on wobbly assumptions, but listen to what he said further:

“According to the South China Morning Post on May 12, Secretary of Budget and Management Benjamin Diokno estimated some $167 billion would be spent on infrastructure during Duterte’s six-year term, under the slogan ‘Build! Build! Build!’.

“That could increase current Philippine national government debt of approximately $123 billion, to $290 billion. But that does not include interest. High rates of interest that China, the most likely lender, could impose on the new debt could balloon it to over a trillion US dollars in 10 years.

“More likely at 10% interest the new debt could go to $452 billion, bringing Philippines’ debt-to-GDP ratio to 197%, second-to-worst in the world. That understates the burden to the Philippines, as existing national government debt would also accrue interest over that time, and such interest was not included in the analysis.

“Dutertenomics, fueled by expensive loans from China, will put the Philippines into virtual debt bondage if allowed to proceed.

“Duterte and his influential friends and business associates could each benefit in finders’ fees, of 2-7%, for such deals.

“Debt imposed on the public through corruption, fast-tracking or under martial law should be considered odious debt, and not repayable. The only way to stop such unjust debt is for the terms to be entirely transparent to the public in advance, for full cost-benefit analyses to be done by an independent authority on each deal, and for the Congress to vote on whether each deal proceeds.”

(Re Congress’ role, the Constitution says in Section 20, Article VII: “The President may contract or guarantee foreign loans on behalf of the Republic of the Philippines with the prior concurrence of the Monetary Board, and subject to such limitations as may be provided by law. The Monetary Board shall, within 30 days from the end of every quarter of the calendar year, submit to the Congress a complete report of its decision on applications for loans to be contracted or guaranteed by the Government or government-owned and -controlled corporations which would have the effect of increasing the foreign debt….”)

Corr continues: “Even at 5%, which is nearest the lending rate of interest published by the IMF and World Bank for the Philippines, the effect of such a large sum would be an increase in debt (in addition to existing debt) of $275 billion after 10 years. That would bring the Philippines’ debt-to-GDP ratio to approximately 136%.”

(He had a chart showing how $167 billion of new debt will affect the economy over 10 years, at different possible interest rates. It uses monthly compounding of interest and is based on a standard compound interest formula. The actual scenario, however, may depart from his calculations depending on the still undisclosed loan terms.)

“The interest rate that China will offer the Philippines on such a large sum relative to GDP is likely higher than the World Bank rate, but likely lower than say 15%. Without much-needed transparency from the Duterte government and China on the rate, conditionality, and repayment terms of $167 billion of new debt, the public should assume, to forestall a worst-case scenario, that the rate would be somewhere between 10% and 15%. Over 10 years, that could balloon Philippines’ debt-to-GDP ratio as high as 296%, the highest in the world.

“At any likely interest rate, the Philippines will have trouble repaying $167 billion in debt, plus interest, to China. The Philippines will have to give political and economic concessions to China to repay annual interest, or renegotiate such a large quantity of debt. That could include political concessions, for example giving up territory or oil rights in the South China Sea or Benham Rise, or it could include economic concessions, for example selling China its national companies, or agreeing to below-market rates on exports to China.”

(Corr’s full article is at: http://tinyurl.com/m3o5puz)

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ADVISORY: Postscript archives can be accessed at www.manilamail.com. Follow us on Twitteras @FDPascual. Email feedback to [email protected]

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