Freeman Cebu Business

Economist: Phl falling into China’s debt trap

Carlo S. Lorenciana - The Freeman

CEBU, Philippines — The Philippines might be at risk of falling into China’s debt trap.

As the country seeks more loans from China to fast track its P8-trillion infrastructure buildup in the next four years, it could likely be a victim of the Asian superpower's debt trap diplomacy.

Cebuano economist Fernando Fajardo told The FREEMAN yesterday the Philippines is very vulnerable to debt trap considering its borrowing from China, which has higher interest rates compared to Japan.

Chinese loans come with an interest rate of 2-3 percent. But loans available from Japan have interest rates between 0.25 and 0.75 percent, up to 12 times cheaper than those from China.

"Yes and that's the whole Chinese idea," Fajardo asserted when asked if the country is likely to fall into the debt trap. "To make us subservient to them."

The Philippine government had insisted it is seeking China's funding aid as it weighs up the need for "diplomatic friends."

"It is the height of fiscal irresponsibility to borrow for project at high interest rates when alternatives are available," explained Fajardo, who is economics professor at the University of San Carlos.

"If they are good projects, funding is not a problem at low rates," he said.

The Philippines has fought with China for years over territorial disputes in the South China Sea but relations between the two nations have improved under Duterte's watch.

China is reportedly to have a pattern of funding infrastructure projects in poorer countries in exchange for better relations and regional access, a trend called the debt-trap diplomacy.

One of the biggest culprits cited has been China's Belt and Road Initiative (BRI), a trillion-dollar project to link 70 countries in Asia, Oceania, Africa, and Europe with railway lines and shipping lanes.

To fund the infrastructure projects, believed to be attractive to poorer and developing countries that struggle to secure traditional financing, China offers their own loans.

In the Philippines, some Chinese projects in past administrations have become controversial because of corruption, lack of transparency and accountability.

In fact, some Chinese contractors of Philippine projects had been blacklisted by the World Bank.

Chinese loans are reportedly to have exorbitant interest rates or natural resources are used as collateral that China can control if a country defaults on its payments.

Since the start of his term, Duterte has sought closer economic and diplomatic ties with China.

In a Forbes opinion piece, Corr Analytics founder Anders Corr had warned the Philippines might fall into "debt bondage" if its infrastructure push will be fueled by high-interest rate loans from China, the most likely lender.

Corr noted given China’s prevailing interest rates, the current Philippine national government debt of approximately $123 billion could rise to over a trillion US dollars in 10 years. (FREEMAN)


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