This application to the Cassandra Club has been rejected


Ben D. Kritz

IN a column over the weekend, Forbes contributor Anders Corr drew the alarming conclusion that the Duterte administration’s plan to spend $167 billion to build infrastructure between now and 2022 would put the Philippines in “virtual debt bondage” to China.

“The Philippines is at a crossroads,” Corr wrote. “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 and his allies could gain hundreds of millions of dollars each in finder’s fees from such loans that the Philippine 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.”

To support his argument, Corr pointed out that the interest on $167 billion in loans could, at even a moderate interest rate, push the Philippines’ debt from $123 billion to about $275 billion in the next five years. At a more likely interest rate of about 10 percent, Corr said, the country’s debt could reach $452 billion, pushing the debt-to-GDP ratio to 197 percent, which would be the second to the worst in the world (the ratio was about 42 percent at the end of 2016).

Corr is a qualified commentator – I am a frequent reader myself – but he completely missed the mark with this particular screed. I’ll handle the resident economic Cassandra duties around here, pal, thank you very much.
The first and most obvious error Corr made is the assumption that the entire $167 billion price tag for the infrastructure drive – the figure comes from Budget Secretary Ben Diokno, as reported by the South China Morning Post last Friday – will be funded through loans. Certainly, a significant part of it will be, but the administration is also planning to tap official development assistance (ODA), public-private partnerships (PPP), and its own revenues that will presumably come from the tax reform package. Plus – and this is a significant caveat – not all of the debt funding will be in the form of loans. Given the Philippines’ relative attractiveness as an investment destination, at least for now, debt funding through securities is a better option. That still counts as debt, and is still included in the debt-to-GDP ratio, but it is spread out among many creditors, and interest rates are under normal circumstances nowhere near Corr’s 10 percent estimate.

If other funding means account for half of the $167 billion infrastructure price tag, that reduces Corr’s alarming “more likely” scenario to a total debt of about $199 billion by 2022. That would push the debt-to-GDP ratio to about 68 percent – high, but not unmanageably so.

The second erroneous assumption that Corr makes is that China is going to be the investment source for most, or all, of the infrastructure that is planned. First of all, as the very SCMP report that Corr cited pointed out, many of the things being planned are not even viable “plans” at this point, but aspirations. The reality is, given the social, political and procedural complexities faced, very few big-ticket projects that are not already underway will be completed before Duterte steps down from office. And given the traditional capriciousness of successor administrations in the Philippines, there is a strong likelihood that most of the aspirations won’t survive him.

That article also pointed out that public skepticism about China in spite of the Duterte administration’s apparent friendliness with our Big Red Brothers is going to subject any project with Chinese participation to at least a little extra scrutiny at some level – particularly at the local level, which in the Philippines has an outsized ability to put the brakes on large-scale development.

Nor is the Duterte administration exclusively courting China for infrastructure investment. Russia, Europe, the more financially capable of the Philippines’ Asean neighbors, the United States, and especially, this country’s own conglomerates, are all considered prospective investors. While China may understandably have an edge, it by no means has an exclusive.

All things considered, it is probably quite safe to dismiss Anders Corr’s warning of impending debt slavery.
Nevertheless, his entire perspective should not be dismissed. The Philippine public absolutely has the right to know what they’re paying for, and to whom, and thus the call for transparency and careful economic and political review of any proposed project is a prudent one. The government should also consider it a friendly reminder that we are paying more attention to what it does than what it says, and act accordingly.


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