Restructuring

Restructuring is a big word. When Mr. Fernando Poe Jr. finally got around to uttering it, alarm bells sounded in the financial markets.

So widespread was the alarm that the Bangko Sentral ng Pilipinas had to break its usual silence, asking the presidential candidate to elucidate in greater detail what he meant by the use of that term. The financial markets just wanted to be doubly sure that the presidential candidate knew exactly the difference between restructuring and repudiation.

The handling of our external financial obligations is such a sensitive thing. It is even more sensitive because of the political anxieties of this time. Any stray remark about how our nation’s financial obligations will be handled could lead to a ratings downgrade, a selldown of Philippine bonds, capital flight, sharp spikes in interest rates and adverse speculation against our currency.

The sensitivity is understandable. Mr. Poe is perceived abroad as a populist candidate with little grasp of the complexities and the volatility of global financial transactions and sovereign debt obligations.

A few weeks ago, I received urgent phone calls from financial houses and investment strategists abroad regarding wire reports about something that Mr. Poe’s running mate, Loren Legarda, said. I didn’t hear her say it. Our local media did not pay sufficient attention to what she had said. But investment houses observing our strange political exercise had their ears cocked to any indication about what the major candidates intend to do about our sovereign financial obligations. They heard something that sounded like an unsound approach to our financial obligations.

Legarda’s camp issued a clarification shortly after that. But the clarification, although sounding quite mainstream, failed to reassure investors that this tandem fully understood the situation and will not, henceforth, pander to populist appetites by obliging to demagoguery about the debt.

In the case of Mr. Poe’s anxiety-inducing statements about restructuring, it was KNP spokesman Francis Escudero who had to step forward and make the clarifications. That is not half as reassuring as when Mr. Poe finally steps out of the shadows and makes an extended clarification himself.

Mr. Poe must himself demonstrate he understands the fullness of the problem and the economic statesmanship that is required to deal with it. That is his responsibility as a candidate.

He cannot just practice saying the word "restructuring" and then drop it from out of the blue to show some inkling of economic matters. That is unfair. He must stand behind a rostrum and elucidate his fiscal and debt strategy.

At any rate, restructuring is not anything new. And FPJ has not added anything newer to it so far. A short, scripted quip about restructuring does not a novel strategy make.

Since we went through the debt debacle of the early eighties, we have been insistently restructuring our debt. We have taken longer term loans to pay down short term debt. We have floated bonds to avoid fixed rate borrowing. We have securitized assets and future income flows. We have availed of Brady bonds, took advantage of the Obuchi Fund and accepted debt-for-nature swaps.

In a word, we have done everything to restructure our external indebtedness.

Any new idea about how we could restructure it further must be a dramatic discovery that has so far escaped the financial experts. FPJ owes it to the entire Third World to come forward and explain what has to be a dramatically new insight on how we could restructure further.

Remember that indebtedness is not a uniquely Philippine problem. It is the problem of many nations, a lot of them more desperate than we are. Why, for instance, should we be given better treatment from creditors than Bangladesh?

FPJ should tell us that.

Every junior economic student knows that we can deal better with the foreign debt if we improve our fiscal position. If we try to renegotiate our debt further, we must put something new on the table regarding our budget deficit. It is that chronic deficit that has led us to debt and that continues pushing us deeper into debt.

Last week, Raul Roco tried to score points for fiscal discipline by saying that we would have a balanced budget by 2007 if he is elected. But the only solution he has to balancing the budget is to raise "sin taxes" (taxes on alcohol and tobacco). The figures show, however, that "sin taxes" account for only a small fraction of one percent of our total revenues. Even if we sell cigarettes for a hundred pesos a stick, that will not do much to balance our budget.

Raul Roco owes us an explanation on this too.

The only realistic way to balance the budget is to cut massively into our bloated bureaucracy, raise taxes dramatically across the board and go through several years of really tightwad budgeting. Any candidate who says this, however, will surely lose. People hate taxes.

Debt service eats up a third of government’s money. Of the amount left, 80 percent goes to salaries of government workers. Much of what is left goes to operating expenses. We have painfully little available for capital outlay, infrastructure investments and economic pump priming.

It is a politically profitable thing to rail about the debt. But it should be a politically responsible thing to give our people the real score: a sovereign obligation can only be breached at disastrous and immediate cost to our wellbeing.

If we do anything unilaterally, such as defaulting on the debt or repudiating it outright, we will fail to finance ourselves. No one will lend us money. Our bonds will lose value. Our interest rates will balloon.

Whether we like it or not, we cannot afford not to borrow until we achieve a robust budget and trade surplus.

Until we are able to do so, we should avoid populist demagoguery about doing something dramatic about our debt service load. It will not only unduly aggravate our creditors and scare away investors. It will also be unfair to our people who deserve to be fully enlightened about the realities of public finance.

If FPJ wants to impress is by raising the possibility of drastically reducing our debt load, he must first impress us by discussing himself a clear fiscal strategy to improve our tax effort and strengthen revenue flows to public coffers. He must impress our creditors by demonstrating that he can govern credibly and exercise economic statesmanship.

Until he is able to do that, it is safer for all of us that he maintains his bizarre silence on policy issues and limit himself to repeating punch lines from his old movie scripts.