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

          A more realistic assessment of the sources of funding for Dutertenomics was presented in a recent Business World Economic Forum by a top investment banker with extensive experience in Asia.  Francis Sebastian, Chairman of the largest Philippine investment bank, the First Metro Investment Bank, indirectly refutes the assumption of Mr. Corr that we have to turn to the Chinese for most of the funding of our infrastructure needs.  According to Mr. Sebastian, there is abundant long-term funding from local sources because of sound Philippine macroeconomic fundamentals that are conducive to, and supportive of infrastructure projects.  He enumerates these favorable circumstances:

         1.  Interest rates are low and will most likely stay low.  This is how the 10-year fixed rate government securities have fallen in the last 20 years.  In the past, with double digit borrowing rates, or conversely when investors were enjoying returns in the high teens for risk free assets, it was not surprising that most of our infrastructure projects had been done long ago during the time of President Ferdinand Marcos.

         2.  Part of the reason for low interest rates is that we have tamed inflation.  The Central Bank has perfected the art of inflation targeting and we can expect that under the new leadership of future Governor Espenilla, inflation rates will continue to remain low.

         3.  The depreciation of the peso will be under control.  Our foreign exchange reserves are sufficiently high.  We have steady inflows from our OFWs and the BPO-IT sectors which offset our trade imbalances.  The three are interlinked:  low interest rates, low inflation and a stable peso can create a virtuous cycle that produces a stable financial environment conducive to funding infrastructure projects.

         4.  The domestic financial system is extremely liquid.  Savings rates (savings as a percentage of Gross National Product instead of Gross Domestic Product) have risen dramatically from 20% to almost 40% of GNP, while the loan to deposit ratios of local banks are still quite low at 70%, compared to Thailand’s 104% and Indonesia’s  91%.

         5.  As mentioned above, years of prudent monetary and fiscal management have brought the debt profile of the Philippine government to a very strong position.  Debt to GDP is only 42.5% as compared to 100 to even 200% in some developed countries.  This comfortable debt situation can enable the Philippine government to borrow more (though not necessarily from China), also considering that we have an investment grade rating that has improved significantly over the last ten years.  The Philippines has had the lowest budget deficit as a percentage of GDP in Southeast Asia in recent years.  Total foreign exchange reserves to total monthly exports also has been the highest among its peers. We also have managed to have the lowest external debt to GNI in the region. 

         Mr. Sebastian is well aware of what the Government had just announced as regards some of the major international airports projects such as those in Iloilo, Bacolod, Bohol, and Cagayan de Oro.  The Government prefers to fund them through Official Development Assistance (ODA) instead of relying on the PPP mode.  Assistance from foreign governments can come in the form of ODA as well as commercial loans. As an example, Metrobank just signed a cooperative agreement with China Development Bank and China Exim Bank.  These funds can be supplemented by foreign direct investments promoted by foreign government banks as in the case of the Bank of China that arranged a very successful business conference in Manila attended by some 100 Chinese businesses.  The targeted amount of such FDI inflows from China is 9 billion US dollars which the Japanese are matching with one trillion yen of their own.

         I agree with Mr. Sebastian that another way we can limit our borrowing to fund the massive infrastructure spending under Dutertenomics is to pass the Comprehensive Tax Reform Program (CRTP)  which the House of Representatives approved with a large majority last May 31, 2017.  The expected increase in revenues from the CTRP will be the main source of funding the infrastructure projects that will be focused on the countryside, such as farm-to-market roads, irrigation systems, post-harvest facilities and other support services needed by the small farmers who are among the poorest of the poor.  Urban infrastructures such as toll ways, railroads, airports and seaports can be funded mostly through the Private Public Partnership (PPP) mode.  This is where multilateral agencies such as the AIIB of the Chinese or the Asian Development Bank can help very strategically.  They can serve as catalyst in mobilizing private financial resources, by innovating financial products for infrastructure projects, developing capital markets—both equity and fixed income—and providing necessary intermediation and credit enhancements to upstart these development efforts.  For projects that are under PPP, multilateral agencies can provide an independent and balanced view of potential conflicts and disagreements.  Their involvement in PPPs can add more confidence among private investors and lenders.  Multilateral development banks can help the government balance public good and private interest.  (To be continued)