Philippines warned against China loan pledges

MANILA, Philippines — The Philippines must tread carefully in dealing with funding commitments from China for its infrastructure program especially now that the current account deficit is “already approaching unsustainable levels,” said London-based Capital Economics.

In an economic update, the think tank said while the decrepit state of infrastructure in the country makes financial assistance from China attractive, rapid spending would also significantly widen the deficit and seriously hurt the peso.

The firm also cautioned against the “corruption problems associated with Chinese investment elsewhere in Asia.”

“By seeking closer ties and increased investment from China, President Duterte risks repeating the mistakes made by other countries in the region,” Capital Economics said.

“With the current account deficit already approaching unsustainable levels and given the corruption problems associated with Chinese investment projects elsewhere in Asia, the Philippines would be better off shunning Chinese investment,” the report added.

Following the two-day visit to the Philippines of Chinese President Xi Jinping this week, the two countries signed several agreements on economic cooperation and feasibility studies for increased infrastructure investments, as well as funding for the rebuilding of war-torn Marawi City.

The Philippines and China also signed a memorandum of understanding on oil and gas development in the West Philippine Sea.

“Although infrastructure spending in the Philippines has increased significantly over the past few years, the quality of road, rail and port links is still rated among the worst in the region. With the increase in spending already putting the government’s finances under pressure, extra money and assistance from China have obvious attractions,” Capital Economics said.

The firm noted that while there are few details available on the agreed upon Chinese investments, these are likely to reach billions of dollars, expenditure that can lead to the widening of deficit.

At present, the Philippines current account deficit is still only equivalent to around 1.5 percent of gross domestic product (GDP) and the weakening of the peso has been considered to be manageable.

Early this week, Budget Secretary Benjamin Diokno assured the public that the deficit would not exceed three percent of GDP for then whole year, even with the sharp rise in the third quarter.

The government has decided to go full blast with its ambitious infrastructure program as it believes infrastructure improvement would ultimately boost prospects for the industry sector, particularly in manufacturing and exports.

“There is a danger, however, of infrastructure spending increasing too quickly,” Capital Economics said.   

“In a worst case scenario, the Philippines could go the same way as Pakistan, where a surge in Chinese infrastructure investment has led to a widening of the current account deficit to around five percent of GDP, a collapse in the currency and the need for a further IMF bailout,” it added.

The firm expects the deficit in the country to widen to around 2.5 percent of GDP next year, putting more pressure on the peso.

“In our view, global sentiment towards emerging markets is likely to worsen, and there is a risk of further sharp falls in the peso. Given the relatively high level of foreign currency debt in the country, and with inflation well above target, a sharp fall in the peso would pose a major threat to the economy,” it said.

Should the Philippines pursue Chinese funding for infrastructure development, Capital Economics urges the country to review its funding priorities.

“The upshot is that while improvements to the country’s infrastructure are desperately needed, the pace of increase needs to be managed properly in order to avoid further balance of payments strains. If Chinese plans do eventually go ahead, the Philippines would need to row back on its own spending plans,” the think tank said.