NG borrowing scheme may lead to new debt crisis — Paeng

Former Bangko Sentral ng Pilipinas (BSP) Governor Rafael Buenaventura has warned that the National Government’s present borrowing scheme could lead to a debt crisis.

"Our enormous financial needs and refinancing requirements require us to continue our foreign borrowings but if we can limit them to refinancings and for capital development (new infrastructure) we should be fine. If we keep borrowing to cover the cost of running the government we are definitely headed for trouble," Buenaventura said in his speech titled: "The Amber Light: Where we stand regarding foreign debt levels and our financial markets," delivered in a Makati Business Club (MBC) forum.

Though Buenaventura said he believes the country is not yet experiencing a debt crisis, he advised the economic managers to watch out for various warning signs.

"Our foreign debt situation is not bad, but not good either as of now," he said. "Most of our foreign borrowings are medium or long term which means five years or longer. Thus, there is no bunching of maturities and our debts mature at a manageable rate over many years."

Based on data presented by Buenaventura, the projected external debt service payments on medium to long-term (MLT) borrowings would reach $7.6 billion in 2005; $7.9 billion in 2006; $7.1 billion in 2007; and $5.8 billion in 2008.

In these periods, bulk of the MLT borrowing payments account for public sector debt service.

With this trend, he said the government would not be able to do away with foreign borrowings, thus the need to be "watchful" of the warnings signs. "We are assuming global financial markets remain benign with high liquidity levels seeking higher yielding debt papers like ours; we are assuming the political situation in the Philippine does not undergo another major crisis; we continue to run budget deficits and our cost of borrowing keeps creeping up.

"Principal maturities and interest payments in 2006 for both the public and private sector amount to over $8 billion in 2007, it is now almost $6 billion, a substantial amount being public sector. So even if we start running budget surpluses now, we are far from doing away with foreign borrowing," he said.

The former central bank official said to be able to address the possibility of a debt crisis, the government should work hard to broaden banking and financial reforms.

The government, Buenaventura said, should also be adhering to capital market development.

"We should develop our capital markets for both equities and debt so we can borrow domestically," he said. "I also firmly believe that full development of the domestic capital market is key to achieving a more resilient financial system, more stability in the exchange rate and better public sector financial management."

Among the capital market reforms, he said, that need to be pushed are: the Personal Equity and Retirement Account (PERA) bill; Revised Investment Company Act (RICA), Corporate Recovery Act (bankruptcy reform); proposals to strengthen financial regulators including the BSP so they can all properly discharge their investor protection mandates; and the fine-tuning of financial taxes to remove distortions.