Manageable

Governments need to borrow all the time, mainly to maintain enough fiscal space to do its work and, at times, to stimulate the economy.

Like any large company, government needs to maintain proactive treasury operations. It has a fixed payroll, public projects to fund and capital expenditures to make. In the event of a calamity, it must have enough resources in its vaults to avert a humanitarian disaster.

The public revenue cycle does not perfectly fit the public expenditure cycle. Adept treasury operations fill the gap.

Then there are the projects that are of long gestation, where the economic rewards come further down the road even as costs are front-ended. Development financing comes into play here. Official development assistance and development financing institutions extend loan packages. Prudential management of the borrowing rests on ensuring the economic benefits down the road are larger than the financing costs.  

When loans are used wisely, the economy can actually outgrow the debt. Since the debt crisis we experienced in the early eighties, our economic managers have become adept at working down the debt service. Our debt service load has become more than manageable and it will be a crime not to accept cheap financing offers for projects that will modernize our infrastructure. As a rule of thumb, if interest rates are lower than our inflation rate, the financing offer is a good one.

After Sri Lanka last year failed to pay for loans incurred in building the oversized Hambantota Port, the South Asian country agreed to hand over the facility to China on a 99-year lease. Alarms were raised here about the possibility we could over-borrow from China and end up surrendering our resources to the region’s economic superpower.

Those alarms eventually died down after the difference in the fiscal situations of Sri Lanka and the Philippines were pointed out. Unlike Sri Lanka, we are in no danger of over-borrowing and perfectly capable of managing our debts.

The Philippine economy has grown for 77 successive quarters. In the last eight quarters, our growth was consistently above 6.5 percent. In the first quarter of this year, our economy grew by 6.8 percent. Were it not for the elevated inflation rate during this quarter, the economy could have easily breached seven percent growth.

We are likely to see upgrades in our sovereign credit ratings. This means we can borrow at even cheaper rates. When the country floated (yuan denominated) Panda Bonds earlier this year, the financial instrument was given AAA rating.

Still, alarmists are saying Chinese lending at three percent interest rate is expensive, pointing to the zero percent interest rate on yen loans. But there are variable risks between yuan and yen loans. The foreign exchange risk of yen loans is higher, meaning the possibility of the yen revaluing against the peso is higher compared to China’s currency. In an interest rate swap, the borrowing costs end up even.

Our ability to access debt on friendly terms from China and Japan to support our aggressive infrastructure build-up is the result of the Duterte administration’s pivot to the East. No dollar- or euro-denominated lending could match the attractiveness of borrowing in yuan and yen.

See how the dollar appreciated against the peso over the past year. If we borrowed in dollars, we would have been penalized by the foreign exchange risks.

On the other hand, by borrowing in yuan and yen, we are able to invest so much in future growth. Let’s look at the numbers again after we have posted our 100th consecutive quarters of growth and liberated millions from poverty.

Indebted

Sovereign borrowing is one thing; personal borrowing is another.

Last week (Drowned, May 8), I discussed in this space the frightening volume of debt (nearing a billion) incurred by our schoolteachers. I suggested the DepEd review its policies regarding the Automatic Payment Deduction System (APDS) to avert the possibility our teachers drown in debt. Some tough love might be in order to diminish the propensity to borrow.

Some of my banker-friends have raised some sound counter-arguments against applying tough love on this matter.

Taking out a salary-deductible loan is part of the economic freedom teachers enjoy. It is a personal decision, one that should be guided by their own calculation of financing needs. True, the private lenders do not coerce them to borrow.

Most teachers use the money prudentially, for home improvement, the education of their children and to cover medical emergencies. Without the facility of borrowing from private lending institutions, they would have fallen prey to usurious informal lending channels. They would be worse off because of that.

Furthermore, my banker-friends assure, the private lending institutions do meticulous due diligence on the borrowers. Their account officers look into the borrower’s capacity to pay. I presume there are enough mechanisms to avert over-borrowing similar to what happened to retired soldiers and policemen enticed to borrow by the numerous savings and loan associations with access to automatic pension deduction schemes.

Let me say, though, that I do not blame the private lending institutions for the large volume of teacher borrowing. Of course they are more accessible and friendlier to potential borrowers. Of course automatic salary deduction lessens their lending risk. Of course they offer more attractive terms and rates resulting from lower lending risks. This is the nature of the business.

Still, I sense there is a moral hazard in this arrangement. But I will leave it to the good professional sense of the lending institutions, perhaps by better application of the know-your-customer rule, to mitigate that hazard.