Sovereign debts are generational

The interesting issue that came up last week which was an offshoot of the Metro Manila water crisis, are the terms and conditions of the government loan from China to build the Chico River Dam. It was revealed that the loan had been collateralized by patrimonial assets that included the Reed Bank oil and gas deposits in the Philippine territorial waters. The other conditions such as the interest rates, the shorter maturity, the governing Chinese laws, and the composition/location of the arbitration panel were all in favor of China. Considering the experiences of other countries like Kenya, Sri Lanka, and Venezuela that have had their natural resources/patrimonial assets taken over by China, concern and alarm are raised over the Philippines loans from China.

As a commercial/investment banker and a businessman, I have been a lender, borrower, and even a third party in loan negotiations. Once it has been established that the party is an eligible borrower, everything is actually negotiable, but one side usually has a better negotiating position than the other. I was in the Philippine side in a two-day finalization of a large loan for a Philippine company from a Wall Street Bank with three people who flew in from New York, and even if we knew they were eager to wrap up the deal, we really did not get much concessions as we had to get that loan that was tied up to an equipment purchase. This was in the 1970s and the Philippines didn’t have a good sovereign credit rating then.

Sovereign loans, whether from country financial institution or from multi-laterals like the Asian Development Bank, World Bank, or International Monetary Fund, are usually long-term developmental 30- to 40-year loans. That is why the formal name of the World Bank is the International Bank for Reconstruction and Development (IBRD). The rates are concessionally low at less than 1% and may be tied or untied to the purchases of equipment from the lending country. On the other hand, multilateral loans are untied and the equipment supplies are bid out. The long-term nature of the projects are considered in determining the cash flow and payment terms of the loan, so the approval and/or concurrence of the legislature of the borrowing country is required, as the servicing/maturity of the loans may span many changes in the people in the borrowing government. Lifespan of governments are from four years to eight years, unless there are constitutional changes that prolong the tenure of governments. Sovereign loans may span more than one generation. In fact, the 25- to 35-year home mortgage loans have been designed taking into consideration the average life span of people and the productive years of their lives. Corporations and countries, which are juridical personalities, are given longer maturities but board resolutions or legislative imprimaturs are required to make the loan covenants binding to the successors.

It can be argued that the Chinese loans are really commercial loans and not concessional loans, as the rates are higher at 2% and the term is 20 years. The Chinese are also not forcing us to borrow from them if we have alternative sources. The terms on the governing laws, the arbitration commission, and the patrimonial assets guaranty are conditions we may reject. The Chinese are just better negotiators and businessmen, if they were able to convince our government to get the loan. The saving grace is that our Department of Finance posted on their website the terms and conditions of these Chinese loans for all to see, which makes me believe they were aware of the onerous conditions but had good reasons to still proceed with the loan.