Analysis
Damned
Either Way, Debt Crisis Or Not
The
Philippines will soon plunge into a repeat of its foreign debt crisis a la 1983
or, more recently, Argentina circa 2001. That’s unless the government succeeds
in its desperate sell-out to foreign investors and harsh austerity measures.
Either way the people are in for a miserable time.
By
Sandra Nicolas
Bulatlat.com
The
London-based bank Standard Chartered this week warned, as a “worst-case
scenario,” that the country could slip into a foreign debt crisis if the new
government after May “loses the faith of foreign investors through
irresponsible policies.” President Gloria Macapagal-Arroyo quickly dismissed
the report as “extreme” and asked that “[we] not deal in doomsday
scenarios that will aggravate anxieties and erode confidence.”
Unfortunately
the best and worst case scenarios both leave the Filipino people out in the
cold. The specter of a foreign debt crisis exists because of increasingly scarce
foreign exchange, on one hand, and uncontrollable public borrowing. on the
other. At around 72 percent of gross domestic product (GDP), the country’s
foreign debt stock of US$56.3 billion as of September 2003 is possibly already
the highest level in Asia. Levels in Thailand, Malaysia, Taiwan, Korea, India
and China by the same measure range from around 10-50 percent; only
Indonesia’s 69 percent level comes close.
But
foreign exchange to service this debt is becoming scarce because of the global
slump in electronics, falling agricultural commodity prices, and jittery equity
and speculative investments. Witness the hazards of mono-export dependence on
electronics (some 70 percent of total exports), agricultural exports, and an
engineered addiction to foreign capital. The exchange rate has been hitting
record highs – so far, PhP56.20 to the US$1 last week – and its impact is
magnified by the economy’s long-standing reliance on imports of raw materials,
consumer, intermediate and capital goods.
Literally
the single biggest factor holding a debt crisis at bay are overseas remittances.
At about US$7 billion annually (not even counting perhaps US$4-5 billion more
unrecorded) they are around 10 percent of GDP making the Philippines the most
overseas worker remittance-dependent economy of any significant size in the
world. Overseas Indian and Mexican workers send back about US$10 billion yearly
but since their economies are much larger the equivalent figure is less than 2
percent of their GDP.
The
government is overwhelmingly the country’s single biggest borrower and
accounts for 65 percent of the country’s foreign debt. This reliance on
foreign sources also results in some 60 percent of its debt being in foreign
currencies. Yet it alarmingly continues to mismanage its finances. The budget
deficit has been soaring for the past six years with close to half of the
national budget already going to interest payments.
“Best”
for whom?
The
“best” case is that foreign exchange is somehow generated and the need to
keep on borrowing is tempered. This means that the government is able to attract
foreign investments in energy, mining, assembly manufacturing, call centers and
the like. However this can only happen by overcoming public outrage against
rising electricity prices, bypassing or removing nationality restrictions in
mining, busting unions, repressing wages and giving outrageous investment
incentives.
“Best”
also means that the government is able to rein in its budget deficit which was
PhP199.9 billion in 2003 or around 5 percent of GDP. It’s useful to note that
whatever triumphant government crowing about “meeting deficit targets,”
these are more than double the original 2003 targets of PhP98.4 billion and 2.1
percent of GDP in President Arroyo’s Medium-Term Philippine Development Plan (MTPDP)
2001-2004 .
But
reining in the deficit inevitably means harsh austerity measures and higher
taxes. The needed austerity is made worse by how revenues have been steeply
dropping, in no small part due to liberalization measures and corruption. Last
year perhaps PhP130 billion was lost in tariff cuts and foreign investment
incentives and PhP170 billion to corruption. As a result, national government
revenue effort is down from 18.2 percent of gross national product (GNP) in 1997
to 13.7 percent in January-September 2003. Total public debt of PhP3.8 trillion
is already some five times total revenue – in contrast to Thailand’s, for
instance, which is just one-and-a-half of total revenue.
The
re-enactment of the 2003 budget already hits social services hard. For example,
the Department of Education (DepEd)
loses PhP3.9 billion meant for the hiring of new teachers, the construction of
additional classrooms and increases in school level maintenance and other
operating expenses. Yet education budgets since 1997 have failed to even keep
pace with inflation. This while a supplemental budget is passed to finance not
only the May elections but also a pay hike for the military.
“Worst”
for the people
The
“worst” case is the opposite: foreign exchange keeps getting scarcer and
scarcer while the government becomes unable to borrow to repay its debts. There
are signs that the economy is heading toward this.
Principal
and interest payments on foreign debt are rising rapidly. The so-called debt
service burden has risen from 6.8 percent of GDP in 1997 to 9.7 percent by the
third quarter of 2003; measured versus export earnings, it rose from 11.6
percent to 18.0 percent over the same period. Nor are there gross international
reserves (GIR) to spare. The country’s US$16.8 billion in GIR at the end of
2003 are not even half of Indonesia’s (US$34.0 billion), Thailand’s (US$40.3
billion) and Malaysia’s (US$40.4 billion).
Net
direct and portfolio investments in the first nine months of 2003 fell a massive
96 percent from the same period in 2003 to just US$90 million from US$2.2
billion. This belies frequent government reports of merely registered as opposed
to actual investments. Meanwhile the cumulative trade deficit from January-October
2003 of US$1.6 billion is the worst since 1997.
And
looming ominously is a huge 470 percent increase in maturing bond payments by
the national government, from an average of PhP350 billion annually between
2002-2007 to a tremendous PhP1.6 trillion just in 2008.
While
these are the objective economic conditions it remains difficult to say what
exactly will precipitate a payments crisis. It could be domestic political
turmoil or intensified global economic crisis or some other upheaval. One thing
certain though is that, at least in this regard, the results of the May
elections and the eventual government will be more or less immaterial.
The
response of mainstream bourgeois economics is inevitably and painfully some
combination of: tight money, devaluation, greater trade liberalization,
unrestricted entry of foreign capital and, perversely, more loans. “Economic
adjustment” always ends up in industrial bankruptcies, falling output and
investments, cutbacks in social services, higher unemployment and crushing
poverty.
Such
as in Argentina. Its debt crisis in 2001involved US$132 billion and is the
largest sovereign debt default in history. In its aftermath, the country went
through three presidents – de la Rua, Duharte and Kirchner – in as many
years. Martial law was declared, government spending was cut 20 percent, state
salaries, pensions and education were drastically cut, official unemployment
soared to 22 percent and half the population was thrown into poverty. All this
from a country lauded just a few years earlier as a neoliberal “economic
miracle.”
The
truth will out
The
perpetual hazards of neocolonial backwardness are evident in the country’s
economic history, and it’s plagued by a never-ending cycle of pseudo-booms and
very real busts. Yet President Arroyo, allegedly an economist, nonetheless still
insists that “our economy is sound and strong, there is absolutely no sense in
extreme scenarios” and that “the pressure on the peso is transitory.”
The
truth will come out, but not from Malacañang. Bulatlat.com
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