A borrowing tale of two presidentiables

Recently, media reported on an interesting contrast between preside ntial aspirants Vice-President Leni Robredo and former Senator Bongbong Marcos, Jr. on their stand on the level of National Government (NG) debt.

They were interviewed by talk show host Boy Abunda, answering the same questions at different times of release of their respective face-to-face engagement.

The question was premised on the size of the National Government (NG) debt quoted at P11.9 trillion, and was rather straightforward: “If you win as President of the Philippines, how will you tackle the payment of our national debt?”

Marcos Jr. was categorical that “we have to create value in our economy.” He must be referring to the source for debt servicing. He recognized that COVID-19 crowded out other items of public expenditure. Checks and balances have to be strengthened to ensure proper disposition of borrowed funds. He also called for minimizing corruption while admitting corruption could not be totally eradicated.

The most telling part of the Abunda interview is Marcos Jr.’s reiteration of his previous position that “if you compare this with other countries, we are doing better than they are.” He cited a ratio between the debt level and the Philippines’ gross domestic product (GDP) that is obviously dated at less than 60%, one of many global metrics of debt sustainability.

At end-September 2021, the country’s NG debt stood at P11.917 trillion or 63.1% of GDP, already in excess of the 60%.

Robredo was likewise right in underscoring the need to work hard to increase our GDP to pay back our maturing loans, acknowledging the equally important support measures like fixing the government and institutions to guarantee success. She was emphatic to argue that increasing the people’s trust in the government is the only way we can ensure the sustainability of our economic output. Loans are not patently wrong as long as the proceeds are properly used, and with good social returns.

The Vice-President showed her market knowledge by expressing her intention to honor such debt commitment “because the integrity of our country depends on it.” Flatly, she rejected borrowing to feed corruption. She knew her debt numbers, clarifying that the pandemic brought the 40% debt to GDP ratio before the pandemic near the precipice, to around 60%. Our borrowing space is getting tighter.

Fiscal responsibility is the issue here because the national debt has already breached the notional metric of 60% debt to GDP ratio. Persistently high debt ratios could very well raise the issue of fiscal sustainability. We don’t really wish to be nostalgic about the Marcos years in the early 1980s because it was plain and simple, a nightmare. Our elder economic and financial statesmen had to fly to New York and London to request for debt restructuring because our economy was in deep recession and we did not have enough foreign exchange (FX) to service our maturing external debt obligations. We had miniscule FX to fund even our imports of key commodities such that we had to ration FX and depend on the Binondo central bank.

As a result, we were forced to borrow from the International Monetary Fund, cap in hand, to finance our budget deficit and to swallow those impossible conditionalities and prior actions to demonstrate our commitment to economic reforms. Bad governance was considered the biggest threat to debt repayment and economic recovery. If we refused, our private creditors would not agree to reschedule our maturities and would have thumbed down our eligibility to participate in the Brady Plan, a debt reduction scheme for highly indebted countries.

Even as the dark days are now behind us, being careless about statistics and cavalier about indebtedness are therefore not good for a presidential run.

Debt data drives our views on how to deal with it, always very careful not to take a position that could transport us back to one of the most humiliating chapters in our economic history under the Marcos dictatorship. It’s going to be a masochistic rewind, that point in social media about bringing back the “golden years” of the 1980s.

A good perspective should help us to assess the NG’s latest debt report at a lower level of P11.73 trillion, reflecting the additional debt flows of P1.93 trillion in 2020 and P2.07 trillion in 2021. Nonetheless, that level already exceeded the NG’s target of 59.1% and the European standard of 60%.

When debt levels are deemed excessive, higher debt servicing reduces capital accumulation and infrastructure. In the Philippines, for the first 10 months of 2021, we paid P371 billion in interest and P277 billion in principal or a total of P648 billion. This is over 14% of the national budget of P4.5 trillion for 2021 that could have otherwise financed economic and social services as well as infrastructure. Before the pandemic, we paid only P500 billion.

These debt levels could be exacerbated by the amount of the Republic’s contingent liabilities. Contingent liabilities emanate from loan guarantees for government-owned or -controlled corporations, government financial institutions, guarantee institutions, PPP projects, and the buy-outs of independent power producers. If something goes awry, those contingent liabilities become part of NG’s actual liabilities.

An update of the contingent liabilities of GSIS, SSS, and PhilHealth alone is even more inconceivable. The Department of Finance (DoF) last December directed these government insurance institutions to observe proper accounting methods. In compliance with this directive, their financial reports showed combined total liabilities of P9.94 trillion, just a few shades from the latest P11.73 trillion NG debt. We believe Secretary Sonny Dominguez’ assurance that “there is no need for the public to be alarmed about these huge liabilities” because of their sound financials, but bad governance can always eat them away.

Quite strangely, not everyone is aware that if debt continues to accumulate, the economy will be most vulnerable to any change in monetary policy stance, particularly in the US. Our local central bank might also be forced to tighten and that would easily translate into higher debt servicing costs.

Yet we are barely into an early recovery.

Even the Financial Stability Coordination Council, chaired by the Bangko Sentral ng Pilipinas, estimates that while the Philippine economy is expected to continue to rebound, “it may take until the fourth quarter of 2023 to recover lost incomes from the coronavirus pandemic.” To be sure, the Government should have put up a plan to restore fiscal sustainability. But we are not keen on suggesting that through sharp spending cuts or tax increases. They are politically costly. Instead, some budgetary realignment may be adopted with a huge dose of political will.

If neither Marcos Jr. nor Robredo is lying, we pray, and both believe in taking out corruption from the governance equation, we are looking at some savings of at least over half a trillion pesos.

The fiscal plan to reduce the deficit and the debt should also be spaced out very carefully. We recall the experience of England after the Napoleonic wars in the early 1800s in piling up debt beyond twice its annual output. Until 1900, England busied itself but succeeded in putting back its fiscal house in order. The pandemic factor would definitely make the market more forgiving at this time. A planned reduction in both the deficit and the debt over a reasonable period will definitely help calm the market to sustain its partnership with the Republic.

Over time, as we pursue fiscal consolidation, taxes should be rationalized in order to minimize those remaining distortions in the economy. Here, the challenge is the strong interest groups which could fund billions of pesos in lobby money. Transparency and a clear fiscal roadmap for the next six years, and beyond, should be an effective counterweight because the civil society would detect any departure is an assured route to fiscal perdition.

By then, we should know which one of the two leading presidentiables is telling a tall tale, and lying.

Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.