Will building spree hock Philippines to China?

THE TITLE may sound familiar, because it was the head of our “Postscript” of May 16 warning five months ago that the $167 billion the administration plans to borrow for its infrastructure program could balloon to $452 billion in 10 years and lead to debt bondage to China.

The other day, Vice President Leni Robredo raised the same concern that a debt trap may result from the administration’s “Build! Build! Build!” program. She took off from a plan for a Bicol Express rail line between Manila and the Bicol region needing P175 billion from China.

Asking if there could be better financing schemes, she said: “Our fear is we might get stuck in a debt trap like the one experienced by Sri Lanka.” Easy loans could be tantalizing to emerging economies in a hurry to develop.

Netizens have noted also that while President Rodrigo Duterte rejected a 250-million-euro GRANT from the European Union, he was snapping up LOANS from China that could burden the next generation of Filipinos and succeeding administrations.

One question: Why cram within the last three years of Duterte’s term the closing of the infrastructure deficiencies of the past decade using massive loans that could lead to a debt trap?

But Finance Secretary Carlos G. Dominguez said the infrastructure buildup would be funded mainly by additional revenue from coming tax reforms as well as local borrowings.

He said: “The government will take advantage of the excess liquidity in the domestic market by borrowing 80 percent from banks and other financial institutions here, while tapping only 20 percent of its loans from overseas lenders.

“The administration is bent on having its Comprehensive Tax Reform Program approved, so it could raise revenues to help bankroll the plan to modernize the country’s infrastructure backbone.”

Among other objectives, the CTRP aims to lower personal income tax rates while imposing higher taxes on oil, vehicles, as well as sugar-sweetened drinks.

Budget Secretary Benjamin Diokno said that “whether through borrowings or by paying as you go, we have to raise an additional $7 billion of taxes every year” to increase the share of revenues to GDP to 28 percent by 2022 from 16 percent in 2015.

Socio-economic Planning Secretary Ernesto M. Pernia has said: “The administration will raise infrastructure spending… build major connectivity networks, spawn new growth centers nationwide, support production value chains reaching deep into rural areas, and better protect local communities from calamities.

“We plan to pour in up to $170 billion for public infrastructure from 2017 to 2022, making this period ‘the golden age of infrastructure’ in the Philippines. We also plan to complement public spending with private investment through Public-Private Partnerships currently with our robust pipeline of at least 40 major projects amounting to more than $25 billion.”

• ‘Forbes’ analysis warns of debt trap

OUR column of May 16 was about an analysis in Forbes.com by political risk analyst Anders Corr, cautioning about possible pitfalls in massive borrowing from China which has been offering concessional loans to President Duterte.

Last April 18, the administration’s economic managers presented at a “Dutertenomics” forum in Pasay an infrastructure program needing P3.6 trillion from 2018 to 2020 covering transportation, water resources, sewerage and sanitation, flooding, solid waste, maritime, social infrastructure, energy, information communications technology, and other areas.

Excerpts from the column: “In Phnom Penh (that week), President Duterte told investors at the World Economic Forum on ASEAN that the Dutertenomics program will need some $160 billion aside from the budget funding of ‘Private-Public Partnership’ projects.

“‘The Philippine people must be forewarned about the dangerous China deal,’ said Corr, who holds a PhD in Government from Harvard, and a BA and MA in International Relations from Yale (summa cum laude). He assumed that the loans are likely to come from China.

“Corr said: ‘Duterte and his political allies are seeking billions in loans at unknown interest rates from China, whose companies stand to benefit by offloading idle Chinese industrial capacity to build costly infrastructure for which no proper cost-benefit analysis has been done.

“’(Duterte et al.) could gain hundreds of millions of dollars each in finders’ fees from such loans that the taxpayer will have to pay. This should be considered odious debt if the terms are not transparent to the public in advance, if public cost-benefit analyses are not done for each deal, and if each deal is not approved by Congress.

“Duterte apologists could dismiss Corr’s comments as just one man’s opinion based on wobbly assumptions, but listen to what he said further:

“’According to the South China Morning Post on May 12, Secretary of Budget and Management Benjamin Diokno estimated some $167 billion would be spent on infrastructure during Duterte’s six-year term, under the slogan ‘Build! Build! Build!’.

“’That could increase current Philippine national government debt of approximately $123 billion, to $290 billion. But that does not include interest. High rates of interest that China, the most likely lender, could impose on the new debt could balloon it to over a trillion US dollars in 10 years.

“’More likely at 10 percent interest the new debt could go to $452 billion, bringing Philippines’ debt-to-GDP ratio to 197 percent, second-to-worst in the world. That understates the burden to the Philippines, as existing national government debt would also accrue interest over that time, and such interest was not included in the analysis.

“’Dutertenomics, fueled by expensive loans from China, will put the Philippines into virtual debt bondage if allowed to proceed.

“’Duterte and his influential friends and business associates could each benefit in finders’ fees, of 2-7%, for such deals.’”

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ADVISORY: All Postscripts from 1997 to the present can be accessed at manilamail.com. Follow me on Twitter as @FDPascual. Email feedback to [email protected]