It’s a race between the economy and the debt


JThe Philippine economy must go beyond the debt! The opposite scenario is unthinkable: it will send the Philippine economy towards Sri Lanka. The Philippine economy grew by 8.3% in the first quarter of 2022, but this was helped by a weak base in the first quarter of 2021 and a rebound in household spending. Revenge spending will quickly decrease and the low base catapult will be gone for Q2 2022 and onwards. We will be lucky to make 6% for the rest of the year. The Philippine Treasury has a negative balance with a debt of 63% (about 12 trillion pesos) of GDP and a budget deficit of more than 8% of GDP.

Dr Vaughn Montes revealed at the FEF press conference on July 8 that only 18% of the debt burden is in foreign currency, which is good news as the government can get more lenient treatment from local creditors. It is also encouraging to see that our position in terms of foreign exchange reserves is still very comfortable (more than eight months of imports), although, of course, it is on a slight downward trend. However, foreign currency-denominated debt continues to grow, although G2G borrowing and borrowing from multilateral institutions offers greater potential for renewal and refinancing.

I can’t say how fast the debt will grow because turbulence in the global economy is hard to predict: the Russian-Ukrainian war is dragging on and Russian oil withdrawal will continue; a determined response to rising non-Russian oil production will clearly mitigate and shorten the oil price crisis. The thing is, we’re in a guessing game right now. Nevertheless, economic growth of 6-7% should be enough to cover any new surprises on the debt front.

Inflation has already reached 6% and the exchange rate has crossed the 56 peso/$ mark. We were in this situation in 2004-2005 with the political unrest of Garci and the resignation of the Hyatt 10. The Bangko Sentral ng Pilipinas (BSP) is about to raise interest rates again, which would interrupt the economic recovery , as the newly seen exuberance on the demand side of the market will again be tempered. This is why the BSP is reluctant to follow the US Fed’s lead in more aggressive interest rate hikes. Given that rapid economic growth is our goal, BSP’s reluctance makes sense. Moreover, inflationary spikes caused by supply shortages are never directly corrected by a higher interest rate which only serves to shrink the economy.

Unlike in 2016, when the government had money flowing from its ears, the IfScalar resources to support the expanded Build, Build, Build (BBB) ​​program have dried up and as a result, the government’s infrastructure program will naturally experience a pause. Higher taxes on a regime that has already knownffA sharp decline in income will also dampen market demand, in addition to inflicting real suffering and possibly causing social unrest. There is also a growing demand for safety net spending due to absolute deprivation resulting from job loss and rising food prices. This clamor cannot be ignored since social disorders can start from such destitution.

When rapid economic growth is essential, the question of how to accelerate investment becomes paramount. It is the iron law of economic growth that without rapid investment the old will go pfftt. For decades, the Philippines has traditionally lagged its more dynamic neighbors in investment rates – 20% of GDP compared to 35-40% of GDP. Even in the last 12 years of the terms of the last two presidents, we have barely exceeded the target of 25% of GDP. Public spending on infrastructure has improved from around 2.5% of GDP from 1980 to 2015 to 5-6% of GDP. This despite the properly ambitious BBB. Now BBB will take a break.

How can we keep infrastructure spending high while being deprived of Ifscalar resources?

1.) For arterial infrastructure, it is essential to intensify the use of public-private partnership (PPP) projects. PPP has already delivered gems in arterial infrastructure (Skyway 3, TPLEX, CALAX and the Cebu and Clark air terminals, to name a few). But the appetite for PPP projects has waned among private actors due to a few actions of the previous administration: the refusal to honor the Singapore Arbitral Tribunal’s decision on compensation for water service concessionaires of Metro Manila coupled with the threat of expropriation, signaling that the government cannot be trusted to honor the contracts it has signed. It is one thing to open up new markets to foreign players (the new APC does this), it is quite another that the contracts concluded in these markets are honored by the authorities and the courts; without enforcement, even the letter of the law is empty.

1.a) The new Marcos administration would do well to signal an ironclad commitment to the rule of law: to honor the contracts it has signed;

1.b) Similarly, the new administration should revamp the pending implementation rules and regulations of the new PPP law to include a MAGA (significant adverse government action) provision as a signal of this commitment; and,

1.c) Initiate the process of honoring Singapore’s arbitration award on water concessionaires. One source of new investment is the foreign direct investment community. The Duterte government has shown little respect for the rule of law by increasing the effective corporate income tax for existing PEZA (Philippine Economic Zone Authority) locators by 17% (the equivalent of the gross income from 5% as calculated by the Ministry of Finance) to 25% without adequate compensation. PEZA’s investment commitments have steadily declined since.

2.) Perhaps for potential PEZA locators, a corporate income tax offer of 17% for 10 years (which is the Vietnamese offer) would be soothing.

3.) Lift investment squeeze by opening up mining and forestry areas. Let’s move the $6 billion Tampakan Gold and Copper Mining to Bukidnon.

4.) Borrow from local governments: Renew the obligation to local government by postponing the implementation of the Mandanas ruling for five years with appropriate interest; this will require Supreme Court approval. This will postpone for better times the cost of the tax grab (by 3% of GDP growth according to the calculation of the DoF);

5.) Attract private capital to the agricultural sector by facilitating (by law if necessary) the consolidation of farms to increase productivity through returns to scale.

6.) Articulate a clear pro-tradable ecology: for example, exempting the electricity tariff for manufacturers and agribusiness from universal and stranded assets and stranded debt taxes.

7.) For low-rise, fast investment and job creation, incentivize via a conditional tax on unused rooftops – conditional since it expires the moment 20% of the roof is used for solar PV installation. Good news: the Gokongwei group has solarized the roofs of all its shopping centers and sites. Glory.

Raul V. Fabella is a retired professor of the UP School of Economics, Fellow of the National Academy of Science and Technology, and Honorary Professor of the Asian Institute of Management. He gets his dopamine fix by riding his bike and tending to flowers with his wife Teena.

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