It’s a race between the economy and the debt


The Philippine economy has to outgrow the debt! The reverse scenario is unthinkable — it will send the Philippine economy in the direction of Sri Lanka. The Philippine economy grew at 8.3% in 2022 Q1 but that was helped along by a low base of 2021 Q1 and revenge household spending. Revenge spending will quickly ease up and the low base catapult will have disappeared for the 2022 Q2 and henceforth. We will be lucky to make 6% for the rest of the year. The till of the Philippine treasury has a negative balance with a debt of 63% (around P12 trillion) of GDP and the fiscal deficit at 8+% of GDP.

Dr. Vaughn Montes revealed during the FEF press conference on July 8, that only 18% of the debt burden is foreign exchange-denominated which is good news because the government can get more lenient treatment from local creditors. Likewise encouraging is that our foreign reserves position is still very comfortable (in excess of eight months of imports) although understandably on a slight downward trend. However, the debt denominated in foreign currency is still growing, although G2G borrowings and borrowings from multilateral institutions afford a greater potential for rollover and refinancing.

I cannot say how fast the debt will grow as the turmoil in the global economy is hard to predict: the Russia-Ukraine war is getting protracted and the withdrawal of Russian oil will continue; a determined upward production response by the non-Russian oil production will clearly soften and shorten the oil price crisis. The fact is we are at the moment in a guessing game. Nevertheless, an economic growth of 6-7% should be enough to cover any further surprises on the debt front.

Inflation has already reached 6% and the exchange rate has breached P56/$. We were in this situation in 2004-2005 with the political turmoil of Garci and the Hyatt 10 resignation. The Bangko Sentral ng Pilipinas (BSP) is set to raise interest rates further and that would pause economic recovery as the newly found exuberance on the demand side of the market will again be tempered. Which is why the BSP is reluctant to follow the US Fed example of more aggressive interest rate hikes. Given that rapid economic growth is our target, the BSP’s reluctance makes sense. Furthermore, supply shortfalls-led inflationary spikes are never directly cured by a higher interest rate which only serves to shrink the economy.

Unlike in 2016 when the government had money flowing out of its ears, the fiscal resources to back the extended Build, Build, Build (BBB) program moving forward has dried up and thus the government infrastructure program will understandably experience a pause. Higher taxes upon a polity that has already suffered a serious fall in income will also dampen market demand, apart from inflicting real pain and possibly bringing social unrest. There is also a growing clamor for safety net spending as a result of absolute destitution resulting from the loss of jobs and higher food prices. That clamor cannot be ignored since social disorders can start from such destitution.

When rapid economic growth is of the essence, the question of how to accelerate investment becomes paramount. It is the iron law of economic growth that without rapid investment the former will go pfftt. The Philippines has over decades traditionally lagged behind its more dynamic neighbors in the investment rate — 20% of GDP vs. 35-40% of GDP. Even in the last 12 years of the last two presidents’ tenures, we hardly breached the targeted 25% of GDP. Government infrastructure spending has improved from about 2.5% of GDP from 1980-2015 to 5-6% of GDP. That despite the correctly ambitious BBB. Now BBB will have a pause.

How do we maintain high infrastructure spending while being bereft of fiscal resources?

1.) For arterial infrastructure, there is absolutely a need to scale up the resort to 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 players because of some actuation of the immediate past administration: the refusal to honor the decision of the Singapore arbitral court on the compensation to the Metro Manila water services concessionaires coupled with the threat of expropriation, signaled that the government cannot be trusted to abide by the contracts it signed. It is one thing to open new markets to foreign players (the new APC does that), it is another that contracts closed in those 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 iron-clad commitment to the rule-of-law: honor contracts it has signed;

1.b) Likewise, the new administration should recast the pending implementing rules and regulations for the New PPP law to include a strong MAGA (material adverse government action) provision as one signal of that commitment; and,

1.c) start the process of honoring the Singapore arbitral ruling on the water concessionaires. One source of new investment is the foreign direct investment community. The Duterte government showed little regard for the rule-of- law by raising the effective corporate income tax for extant PEZA (Philippine Economic Zone Authority) locators from 17% (the equivalent of the 5% gross income tax by Department of Finance calculation) to 25% without adequate compensation. The PEZA investment commitments have been falling ever since.

2.) Perhaps for potential PEZA locators, a 17% corporate income tax offer for 10 years (which is Vietnams’ offer) would be assuaging.

3.) Lift investment compression by opening up mining and forestry arenas. Let’s get the $6-billion Tampakan Gold and Copper Mining in Bukidnon moving.

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

5.) Attract private capital to the farm sector by facilitating (by a law if need be) the consolidation of farms to increase productivity through returns to scale.

6.) Articulate clear pro-tradables ecology: for example, exempt the electricity tariff to manufactures and agribusiness from universal and stranded assets and stranded debts imposts.

7.) For low-lying and quick investment and employment generation, incentivize via a contingent tax on idle rooftops — contingent since it expires the moment 20% of the rooftop is utilized for solar PV installation. Good news: the Gokongwei group has solarized the rooftops of all its malls and sites. Kudos.

Raul V. Fabella is a retired professor of the UP School of Economics, a member of the National Academy of Science and Technology and an honorary professor of the Asian Institute of Management. He gets his dopamine fix from bicycling and tending flowers with wife Teena.