Bernardo M. Villegas
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The Responsible Financing of Dutertenomics (Part 1)

          I recently got an email from a Filipino who migrated to the U.S.A. but whose children still live in the Philippines.  He was alarmed by an article he read in Forbes Magazine authored by a certain Anders Corr.  He had reason to be alarmed about the future of his children because according to Mr. Corr, financing Dutertenomics (Build! Build! Build!) could increase current  Philippine national government debt of approximately $123 billion, to $290 billion and most possibly $452 billion if China is the “most likely lender at 10% interest.”  Given his most ridiculous assumptions, the Philippines’ debt-to-GDP ratio will rise to 197%, second-to-worst in the world.  The extrapolations made by the author are a perfect example of GIGO (Garbage In Garbage Out).

         If there is one thing we Filipinos can be proud of, it is that over the years we have been able to build some of the most professional and solid institutions tasked with prudent monetary and fiscal management.  Year after year, our Governor of the Central Bank and our Secretary of Finance have been awarded top laurels in the Asian region:  Best Central Bank Governor and Best Secretary of Finance.  Especially after the smooth turnover of the position of Central Bank Governor to a very experienced insider (Nestor Espenilla) and considering the very competent economic team made up of Secretary of Finance Carlos Dominguez, Secretary of Budget Benjamin Diokno and NEDA Director General Ernesto Pernia, the probability that the Philippines will borrow from China the funding needed for our ambitious infrastructure program at the rate of 10% per annum is ZERO. 

         Despite all the hoopla about the Asian Infrastructure Investment Bank (AIIB) established by the Chinese, our professional managers are very aware of the harsh fact that the Chinese government is facing a serious financial risk.  Massive corporate debt and non-performing loans have affected China’s ability to maintain stable economic growth, as recently reported in a publication of the Japan Research Institute entitled “Moral Hazards in China from the Perspective of the Corporate Bond Market.”  As the report states:  “The ratio of corporate debt to GDP now exceeds that of Japan during the bubble period, and leverage has reached the danger level when viewed from a macro perspective.  If real estate prices fall in this environment, financial institutions will suffer major losses due to the erosion of collateral values.  There would be a rapid increase in financial institution collapses, bringing with it the risk of a financial crisis.”  On top of the hard landing that China may experience as economic growth slows further, its economy may experience a financial crisis resembling what happened in Japan in the early 1990s.

         As Shinichi Seki of the Japan Research Institute wrote, “Market mechanisms have long been dysfunctional in the Chinese corporate bond market, in the sense that there is rigid compliance with principal redemption and interest payments, regardless of the issue selected for investment.  This is because the Chinese government has guaranteed the debts of state-owned enterprises and prevented defaults.  Government guarantees have distorted the financing structure of state-owned enterprises and caused the corporate debt problem to become more serious.  Despite the fact that private enterprises are managed more efficiently than state-owned enterprises, government guarantees allow state-owned enterprises to procure finance at a lower cost.  This situation has created a moral hazard, since state-owned enterprises can easily accumulate debt in excess of their repayment capacity, while lenders tend to be lax when checking corporate financial positions.  There are similar problems with bank lending, and government subsidies are also distorting market mechanism.”  These practices will surely put our economic and financial managers on guard against over borrowing from Chinese banks.

         It would really be the height of imprudence if our economic and financial managers would put all their eggs in the Chinese market.  That is why the “rebalancing” that President Duterte is talking of includes closer economic and financial relations with Japan, Taiwan, South Korea and other capital-rich countries in the Middle East and other parts of the world.  The Chinese will not have a monopoly of funding, if at all, our investments in infrastructure.  For a fact, since I do a lot of road shows, I am getting a lot of inquiries from funders from Japan, South Korea, Taiwan, Spain, the UK, and the Arab Emirates in the Public Private Partnership (PPP) projects that have been identified by the Duterte Administration.  These projects, unlike in the last Government, is open to unsolicited proposals.  Some of these major infrastructure projects can be implemented at the level of the LGUs without the need for NEDA approval and can be implemented in record time as long as the private partners have more than fifty percent of equity.

         At this juncture, let me express my disappointment at the many delays in implementation of PPP projects at the national level.  It seems that people at the Department of Transport cannot put their act together because politicians keep on interfering in their decision making.  The resignation of the deputy secretaries of the DOTr is a bad omen.  Another worrying event is the recent announcement that the PPP projects involving some international airports will now be shifted to the General Appropriations of the Government who allegedly is able to more quickly  implement them through ODA and public funds. In fact, in a recent Business World forum, NEDA Undersecretary Rolando Tungpalan announced that about two-thirds of the government’s medium-term infrastructure spending will be sourced from government funds with the remainder split between overseas long-term loans and public-private concessions.  Of the P 8.4 trillion infrastructure spending under the 2017- 2022 Public Investment Program, 60% will be implemented with funding from the general appropriations act while the remaining projects will be carried out through PPP at 18% and ODA at 15%. I would like to give the Government officials the benefit of the doubt but the experience is that the Government is not very efficient in implementing airport and other transport-related projects, especially if ODA is involved.  There is so much red tape in obtaining funds from ODA sources, not to mention all sorts of conditionalities to which our President is allergic. 

         Because of the great probability that projects managed by national agencies may again succumb to the paralysis by analysis syndrome for which the last Administration was criticized, I am actively encouraging enlightened LGUs heads to implement PPP projects under the Local Government Code of 1991.  Under this Code, LGUs can partner with the private sector in building infrastructure projects (like the bridge in Cordoba, Cebu).  As long as the private partner has more than 50 percent of equity, the project can be implemented without having to get NEDA approval.  As examples, some of us are watching very closely  the  four infrastructure projects that the Province of Batangas can implement under the provisions of the Local Government Code of 1991 without having to involve national agencies.  These are a cargo train from Calamba to the Batangas port; the redevelopment of the Fernando Air Base in Lipa City into an international cargo airport; the expansion of the Batangas seaport to include Phases 3 and 4; and the extension of the Star Tollway to major tourism destination points of the province such as Mabini, San Juan and other frequently visited beaches.  (To be continued.)