Philippine Debt Management

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Philippine Debt Management
Fiscal Management in Education EDM 231
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Theory of Public Debt
What is Public Debt?
money or credit owed by any level of government
indirect debt of taxpayers
INTERNAL DEBT
EXTERNAL DEBT
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Theory of Public Debt
What are the origins of Public Borrowing?
European economists between 1500 and 1750 are
considered mercantilists.
Mercantilist Period
Era of merchant capital, dependent on connections
between social and productive systems
One of the greatest critics of mercantilism. He
was strong in emphasizing the disadvantages of
borrowing and expostulated on the advantages of
the balanced budget during the years of
capitalism.
Adam Smith
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Theory of Public Debt
What are the origins of Public Borrowing?
Keynesian Theory of Deficit Financing
It was during the time of John Maynard Keynes
that the idea of public borrowing was introduced
during the Great Depression, mainly as a
compensatory tool in times of economic stability.
In order to keep people fully employed,
governments have to run deficits when the economy
is slowing.
Borrowing for capital generation purposes is
necessary like setting up public enterprises
which will contribute to a productive output.
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Theory of Public Debt
What are the origins of Public Borrowing?
Keynesian Theory of Deficit Financing
WHY IT CANNOT WORK IN LDCS
1) Instabilities of LDCs are of external origin
like oil crisis, inflation, and recession in the
industrialized countries. 2) Keynes theories are
based on the assumption of fully developed
economies undergoing cyclical difficulties. In
LDCs productive capacity is not yet fully
developed. 3) An example cited by fiscal
administrators in the 60s was the Emergency
Employment Administration during the Macapagal
era where deficit financing was resorted to.
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Theory of Public Debt
What are the origins of Public Borrowing?
Development Finance
Predicated on Foreign Borrowing.
The expenditure demands of development are
expensive and urgent. The only immediate option
recommended by experts is borrowing, specifically
foreign borrowing.
Musgrave and Musgrave point out that in
development finance, foreign borrowing is
preferable. Public investment which is
financed by (local) borrowing does not add to
capital formation if it merely diverts funds
otherwise available for private investment. If
borrowing is from abroad, additional resources
become available as borrowing is accompanied by
increased imports.
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Theory of Public Debt
What are the origins of Public Borrowing?
Development Finance
Why Foreign Borrowing is preferred

• results in inflow of additional resources
• covers up foreign exchange deficiencies due to
  development spending
• facilitates the inflow of technical and
  managerial expertise

Significant events during the development decades

• the sharp rise in borrowing activities of the
  LDCs
• the emergence of the World Bank and International
  Monetary Fund as the dominant figures in
  development

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Theory of Public Debt
What are the origins of Public Borrowing?
Development Finance
International Monetary Fund
An international organization of 184 member
countries. It was established to promote
international monetary cooperation, exchange
stability, and orderly exchange arrangements to
foster economic growth and high levels of
employment and to provide temporary financial
assistance to countries to help ease balance of
payments adjustment.
Surveillance
1)Abolition or liberalization of foreign exchange
and import controls 2)Devaluation of the exchange
rate 3)Domestic anti-inflationary
programmes 4)Greater hospitality to foreign
investment
Financing
Technical Assistance
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Theory of Public Debt
What are the origins of Public Borrowing?
Development Finance
The World Bank
By 1949, the bank shifted from reconstruction to
development lending, with focus on LDCs.
Originated from IBRD (International Bank of
Reconstruction and Development)
During the 1950s, loans to LDCs were
infrastructure related. Later on, it widened its
scope to include mining, agriculture, water,
education, etc.
the goal was to assist in the recovery and
reconstruction of countries devastated by WWII.
By the end of 1980, total loans and credits to
LDCs amounted to 80 billion.
By the end of the 90s, total loans and credits
to LDCs amounted to 2 trillion.
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Theory of Public Debt
What are the origins of Public Borrowing?
The International Structuralist Models
Dependency Theory/ Neo-Marxist
Theory of Imperialism/ Neo-colonialism
Dos Santos defines dependence as a conditioning
situation where the economies of one group of
countries are conditioned by the development and
expansion of others
Views the relationships among LDCs, advanced
countries, and the WB-IMF as that of an
imperialism.

• Conditions of dependencycommon historical
  background initial dependence on imports for
  manufacturing requirements heavy dependence on
  imports of foreign technology deep penetration
  by foreign capital in the guise of transnational
  corporations condition of cultural,
  psychological, social, and political
  independence.

The colonial relationship is evident through
political and economic dominance, or what is
called neo-colonial.
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Theory of Public Debt
What are the origins of Public Borrowing?
The International Structuralist Models
Cheryl Payer, writer of the Debt Trap, cited
that the World Bank has used its financial power
to promote the interests of private,
international capital in its expansion to every
corner of the underdeveloped world.
The Philippines in the early 80s was one of the
top seven debtor countries and had a Balance of
Payment (BOP) deficit of 1.135 billion, a trade
deficit of 2.805 billion, and a cash deficit of
P14.4 billion. Negotiations with IMF were
formidable, such as, reduction of cash deficit to
P9 billion, further restructuring of tariff rates
and further devaluation of the peso.
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Theory of Public Debt
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Theory of Public Debt
What are the origins of Public Borrowing?
Overcoming the Debt Crisis by Herbert Wilkens

• Close cooperation between banks, the debtor
  countries, and the creditor nations
• Adequate financial means for the multilateral
  institutions, above all the IMF
• Readiness on the part of the debtor countries to
  restrict their rate of development and their
  consumption
• Readiness of the creditor banks and creditor
  states to help the debtors overcome the temporary
  lack of liquidity.

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Theory of Public Debt
What are the origins of Public Borrowing?
Overcoming the Debt Crisis by Herbert Wilkens
The REAL ISSUE Borrowing as practiced!
For what are we borrowing?
For whom are we borrowing?
Under what conditions are we borrowing?
Who benefit from the borrowing?
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Structure of Philippine Public Debt
The total external debt of a country- the sum of
its liabilities to non-residents payable in
foreign currency, goods or services. It could
be compiled functionally, according to maturity,
types of creditors and types of debtors. The
structure of the Philippine public debt can be
analyzed in various ways, some of which are
through cross-section and time-series.
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Structure of Philippine Public Debt
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Structure of Philippine Public Debt
CROSS-SECTION ANALYSIS
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Structure of Philippine Public Debt
CROSS-SECTION ANALYSIS
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Structure of Philippine Public Debt
CROSS-SECTION ANALYSIS
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Structure of Philippine Public Debt
TIME-SERIES ANALYSIS
external debt accumulation in the Philippines is
characterized by an accelerating trend.
Growth Trend
Philippine external debt in a timeline 1972-
2.7 billion 1982- 24.82 billion (period of the
policy of development financing) 1983- massive
capital flight took place leading to the
financial and economic crisis. Philippines
declared a series of moratoria on debt
service. 1985- 26.25 billion 1986- 28.25
billion July 1991- 28.8 billion
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Structure of Philippine Public Debt
TIME-SERIES ANALYSIS
public sector which includes mainly the National
Government, GOCCs, and the Central Bank and the
private sector.
Debtor trend
1983- public sector debt was 67.4 of total
external debt (16.7 billion) 1985- public sector
debt was 72.8 of total external debt (19.12
billion) 1986- public sector debt was 77.2 of
total external debt (21.83 billion) In the
succeeding years, a sharp rise in NG (National
Government) external debt was evident as the NG
have assumed the liabilities of the Philippine
National Bank (PNB), Development Bank of the
Philippines (DBP), and the Philippine Nuclear
Power Plant (PNPP). July 1991- public sector debt
was 80.2 of total external debt ( 23.07 billion)
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Structure of Philippine Public Debt
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Structure of Philippine Public Debt
TIME-SERIES ANALYSIS
Philippine major creditors-private commercial
banks, financial institutions, and the official
creditors consisting of multilateral and
bilateral agencies.
Creditor trend
1983- debts to private commercial banks and
financial institutions totaled 74.72 of the
Philippine external debt. Official creditors had
a combined share of 24.71 1988- private
creditors trimmed down exposure to Phil external
debt to 55.01. July 1991- debt from official
creditors was 52, or 14.965 billion, where as
for private creditors, 38.6 or 11.109 billion.
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Structure of Philippine Public Debt
TIME-SERIES ANALYSIS
Debt-service trend
interest payments alone on debts had continually
risen.
Average annual interest payments 1970-1975- 104
million 1976-1980- 313 million 1981-1985- 1.773
billion Principal repayments 1970- 262
million 1980- 681 million 1982- 1.042
billion 1983-1985- average of 855 million Debt
service (interest plus principal) from 1980 to
1985 was 2.5 billion. Interest payments rose
because of higher interest rates. The countrys
productive capacity cannot keep pace with a heavy
debt service burden.
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Structure of Philippine Public Debt
TIME-SERIES ANALYSIS
Net Resource Transfer
measures the net flow of resources in a
debtor-creditor relationship.
From 1986 to 1990, net resource transfer amounted
to 1.506 billion. The Philippines paid more in
debt servicing than in what it received in loan
availments.
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Structure of Philippine Public Debt
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Structure of Philippine Public Debt
National Government Outstanding Debt (In million
pesos)
Sourcewww.freedomfromdebtcoalition.org
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Structure of Philippine Public Debt
TIME-SERIES ANALYSIS
Global Finance Structure

• Shift to Official Development Assistance (ODAs)
  from commercial bank lending
• Increasing debt stocks
• The need for more loans to finance development in
  the Third World
• Debt service and elimination of arrears
• The socio-economic impact of debt, debt service,
  and debt-induced adjustment programs
• The changing facet of commercial bank and private
  lending
• Voluntary debt reduction schemes
• The impact of ODA on Balance of Payments

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System for Public Debt Management
Background on Public Debt

• This desire to borrow in order to spend more is
  usually justified by the following
• development finance
• cheap credit
• financing current expenditure

Fiscal deficits (the gap between government
revenues and total expenditures) are
prerequisites to accumulating debt. The gap
represents the difference between government
revenue generation and the desired level of
spending of government . The absence of money
to fully finance its desired spending prompts a
government to borrow.

• Ways on financing expenditure gaps
• raising taxes
• tapping domestic savings
• monetary expansion
• foreign borrowing

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System for Public Debt Management
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System for Public Debt Management
Four Stages of Public Debt (Angel Yoingco)
1
Borrowing the Funds
2
Spending the Funds
3
Raising revenue for repayments
4
Actual debt repayment
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System for Public Debt Management
What is Public Debt Management and Why is it
Important?
It is the process of establishing and executing a
strategy for managing the government's debt in
order to -raise the required amount of
funding -achieve its risk and cost
objectives -meet any other sovereign debt
management goals the government may have set
Governments should ensure that both the level and
rate of growth in their public debt is
fundamentally sustainable, and can be serviced
under a wide range of circumstances while meeting
cost and risk objectives.
Poorly structured debt in terms of maturity,
currency, or interest rate composition and large
and unfunded contingent liabilities have been
important factors in inducing or propagating
economic crises in many countries throughout
history.
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System for Public Debt Management
What is Public Debt Management and Why is it
Important?
Several debt market crises have highlighted the
importance of sound debt management practices and
the need for an efficient and sound capital
market.
Sound debt structures help governments reduce
their exposure to interest rate, currency and
other risks.
Risky debt structures are often the consequence
of inappropriate economic policies--fiscal,
monetary and exchange rate--but the feedback
effects undoubtedly go in both directions.
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EXTERNAL DEBT MANAGEMENTIN THE PHILIPPINES
DEBT MANAGEMENT FROM A MACRO PERSPECTIVE

• Identification of priority areas for foreign
  financing
• Determination of project viability andborrowers
  capacity to pay
• Assessment of countrys debt servicing capability

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EXTERNAL DEBT MANAGEMENTIN THE PHILIPPINES
INSTITUTIONAL ARRANGEMENTS FOR DEBT MANAGEMENT

• Bangko Sentral ng Pilipinas
• Department of Finance
• Investment Coordination Committee
• Inter-agency Committee for Review of Foreign Loan
  Documents
• National Economic Development Authority
• Development Budget Coordination Committee
• Board of Investments

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EXTERNAL DEBT MANAGEMENTIN THE PHILIPPINES
LEGAL BASES

• The Philippine Constitution 15 October 1986
• Letter of Instructions No. 158 21 January 1974
• Foreign Borrowings Act (Republic Act 4860) 8
  September 1966
• New Central Bank Act (Republic Act 7653) 10
  June 1993

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EXTERNAL DEBT MANAGEMENTIN THE PHILIPPINES
BSP DEBT MANAGEMENT RESPONSIBILITIES

• Monitoring the level of external debt
• Keeping outstanding debt and debt burdenat
  manageable levels
• Obtaining the best available terms and conditions
  for foreign financing and avoid bunching of
  maturities

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EXTERNAL DEBT MANAGEMENTIN THE PHILIPPINES
BSP DEBT MANAGEMENT TOOLS

• Regulatory issuances (policies and procedures)
• Administrative mechanisms (approval and
  registration process reporting system)
• Observance of ceilings on new commercial MLT
  loans and outstanding ST public sector debt
• Debt Strategies

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EXTERNAL DEBT MANAGEMENTIN THE PHILIPPINES
DEBT MONITORING SYSTEM

• The Philippine external debt monitoring system
  covers all data categories such as
• by borrower (public, private, bank and
  non-bank)
• by original and residual maturity (short-term,
  medium- and long-term)
• by creditor type
• by currency and
• by country

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EXTERNAL DEBT MANAGEMENTIN THE PHILIPPINES
DEBT MONITORING SYSTEM

• The Philippine external debt monitoring system
  covers all data categories such as
• by borrower (public, private, bank and
  non-bank)
• by original and residual maturity (short-term,
  medium- and long-term)
• by creditor type
• by currency and
• by country

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System for Public Debt Management
Philippine Debt Crisis

• The present situation indicates that the foreign
  debt has become unmanageable and has reached
  crisis proportions.

• The country during the Marcos regime underwent a
  severe debt crisis that it had to declare a
  moratorium. In the Aquino administration, much of
  the policies on debt during the Marcos time were
  retained.

The moral issues have not been addressed by the
government such as fraudulent bank loans,
including the Bataan Nuclear Power Plant
Decisions on debt strategy and management were
made primarily by the President, without the
legislature.
The public was totally ignored in debt
deliberations.
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System for Public Debt Management
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System for Public Debt Management

• According to the Commission on Audit, for a poor
  country like the Philippines, spending Php170.1
  billion on principal and interest payments for
  one year alone is quite onerous. This amount
  could have been used to
• feed some 200,000 refugees of Mt. Pinatubo for
  more than 23 years at Php100 per person a day,
• finance the 14-year Modernization Program of the
  entire Armed Forces of the Philippines with an
  estimated cost of Php170 billion, or
• fund the budgetary requirements to implement all
  the programs, projects, and services of the
  government for one fiscal year, including
  agriculture, environment and natural resources,
  trade and industry, public works, transportation
  and communications, energy, irrigation,
  education, health, defense program, and the
  general public services.

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System for Public Debt Management
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Issues and Problems
Transnationalization of capital and finance led
to transnationalization of fraud on a massive
scale.

• The shift in priorities of global finance from
  Third World debt to budding democracies in Russia
  and Europe signals sharply reduced lending to
  other debtor economies. This will have serious
  impact on the economic development of debtor
  countries.
• New and innovative approaches to the debt problem
  have to be formulated. The debt crisis, as far as
  the debtor countries are concerned, remain as
  real and burdensome as ever. The search for
  lasting solutions is imperative.
• Any campaign to strengthen the position of poor
  indebted countries like the Philippines vis-à-vis
  the colossal powers of the international
  financial institutions should include the
  mobilization of United Nations bodies. United
  Nations bodies like UNESCO, UNICEF, UNCTAD, and
  UNCHR have consistently criticized the solutions
  inflicted by international financial institutions
  upon hapless indebted countries. These solutions
  have solved the problems of global finance but
  not of the indebted countries themselves.

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Issues and Problems
IMFs Executive Summary- The Debt Crisis Saga
President Arroyo has won a new term. The
President has announced various initiatives to
foster job creation and reduce poverty, while
committing to balancing the budget. The new
mandate provides an opportunity to move boldly
with regard to fiscal and structural
reforms. Monetary policy should remain vigilant.
Inflation has picked up in 2004 due to adverse
supply shocks. The 2005 inflation forecast should
be reassessed once markets have reacted to the
new fiscal package. There was debate about the
size of the initial fiscal adjustment. The
authorities are formulating a significant package
of tax measures, and staff argued that the bulk
of the additional revenues should be saved. The
nature and quality of revenue measures being
contemplated is critical. The proposed gross
income tax (GIT) is a particular concern, since
the tax may introduce significant distortions and
will have an uncertain impact on revenue. Debt
sustainability analysis. The sustainability of
the Philippines nonfinancial public sector
(NFPS) debt depends largely on the strength of
future reforms. Fiscal and governance reforms.
Improve operations of the Bureau of Internal
Revenue rationalize fiscal incentives reform
financial sector taxation improve expenditure
management restructure electric power sector-
Electric Power Industry Reform Act of 2001
(EPIRA) reduce average tariffs to about nine
percent and strengthen Securities and Exchange
Commission policies and procedures for debt
restructuring.
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Issues and Problems
Freedom from Debt Coalition -Ramon-Carlo E.
Galicia

• The Freedom from Debt Coalition calls on the
  government to immediately undertake the
  following
• Repeal of the Automatic Appropriations Provision
  for Debt Service
• Investigation and audit of all outstanding debt
  to determine which are fraudulent, behest, and
  onerous and consequently repudiate such
• Ceiling on allocations for interest payments
• Establishment of effective mechanisms to ensure
  that resources freed from debt service will go to
  the delivery of basic services badly needed by
  the people, especially the poor and marginalized
  sectors
• Tighter regulation of government borrowings and
  the awarding of sovereign guarantees and
  performance undertakings including the review of
  Build-Operate-Transfer (BOT) Law.

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Issues and Problems
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Issues and Problems
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Issues and Problems
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Issues and Problems
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Issues and Problems
Public Assumption on Private Debts -Jean Enriquez

• Over P50 billion of private debts already passed
  on to public hands in 1992
• The new export orientation during the 70s called
  for infrastructure investments that domestic
  savings alone could not finance
• Global economic crisis struck in 1974-75 and then
  again in 1980-81
• A major global shock would come with the
  unilateral decision of the US, a major creditor,
  to raise interest rates in 1979-80
• By the time of its collapse in 1986, the Marcos
  regime had built a 28.206-billion debt legacy
  for the Filipino people from 3.053 billion in
  1975
• For crony companies in the brink of bankruptcy,
  a P1-billion rescue fund for "distressed"
  corporations was put up, ostensibly to prevent
  layoffs in the face of an impending recession.

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Issues and Problems

• Faced however with the challenge of averting an
  economic crisis on one hand and honoring the
  Marcos regime's debts on the other, the Aquino
  administration opted to take upon itself - or
  rather the Filipino people - the decision of
  paying them all, "if only for honor
• Two years later, assumed debts accounted for 38
  percent of the increase in the national
  government's foreign debt
• By the time Fidel Ramos came to power, total
  foreign and domestic obligations assumed by the
  national government amounted to P194.857 billion
• BOT scheme offered another way of loading
  business risks on to the public. Under this
  arrangement, the private sector is contracted to
  build and operate infrastructure projects for a
  number of years, after which time the completed
  projects and facilities are turned over to
  government.
• Government to enter into BOT contracts called
  power purchase agreements as a quick way out of
  the severe energy crisis that hit in the early
  90s.

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Issues and Problems

• An amount that is over 100 percent of the monthly
  basic electricity charge now goes into this
  seemingly innocuous item called the PPA or
  purchase power adjustment
• Joseph Ejercito Estrada simply took up its
  predecessor's BOT way of doing business. Private
  investments for completed BOT projects nearly
  doubled from 3.5 billion in CY 1997 to 6.6
  billion during his short-lived presidency
• Only three months into her presidency, Gloria
  Macapagal Arroyo was quick to announce her
  willingness to grant more guarantees to projects,
  as long as stricter measures can be ensured.

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Issues and Problems
ECAs in the Philippine Power Sector and the
Continuing Debt Problem -Maristella Cardenas

• Export Credit Agencies (ECAs) support have only
  rebounded to more harm than good for the people
  of the recipient countries.
• Pre-privatization period (1970s 1980s), the US
  Export-Import Bank, an ECA of the United States
  of America, prodded the Philippine government to
  undertake a costly nuclear power project the
  Bataan Nuclear Power Plant (BNPP). The plant
  later became a white elephant due to technical,
  environmental, and corruption issues surrounding
  the project.
• In 1970, the Philippine debt was only 1.6 B.
  This amount rose to 17.4 B in 1980. After a
  decade, the amount rose again to 86.6 B largely
  due to the National Governments assumption of
  debts of the government-owned and controlled
  corporations including the National Power
  Corporations (Napocor) debt from the BNPP
  project.
• 2002, debt service for this project was 43
  million or PhP2.3 B.

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Issues and Problems
ECAs in the Philippine Power Sector and the
Continuing Debt Problem -Maristella Cardenas
The BNPP is a grand tale of greed, corruption,
and fraud supported by US Eximbank BNPP, made
up two 600-MW nuclear reactors, was the biggest
power project ever undertaken in Philippine
history until the 80s construction of the plant
started in 1977 and was completed in 1984. The
contract was signed in February 1976 between the
Philippine government through Napocor and the US
company Westinghouse. To secure the contract,
the US company bribed Marcos crony, Herminio
Disini, facilitated the approval of the
contract. During the bidding, the contract was
only 500 M, but after bagging the contract,
Westinghouse raised the contract price to 1.2 B.
US Eximbank justified this by saying that the
price was still lower than their estimate of 1.9
B.
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Issues and Problems

• US Eximbank provided loans worth 277.2 M in
  January 1976 and 367.2 M guarantee despite full
  knowledge of Westinghouses under and overpricing
  of the contract. It extended 308 M guarantee for
  two more loans for the project.
• As of 1986, US Eximbanks exposure to the BNPP
  project was 900 M.
• It was only in 1981 when all legal questions to
  the nuclear plant export were resolved in the US.
• The plant never became and should never be
  operational because of the serious safety and
  health hazards that it poses on the host and
  nearby communities. But Filipinos continue to pay
  for this project until now.
• In 2002, debt service for this project was 43
  million or PhP2.3 B.

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Do we need Debt Relief?
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The only man who sticks closer to you in
adversity than a friend is a creditor.  Author
Unknown
He looks the whole world in the face for he owes
not any man.  Henry Wadsworth Longfellow
Creditors have better memories than debtors. 
Benjamin Franklin
Debt is the worst poverty.  Thomas Fuller,
Gnomologia, 1732
Who goeth a borrowingGoeth a sorrowing.Thomas
Tusser
Before borrowing money from a friend, decide
which you need most.  American Proverb