REY GAMBOA:  OF  DEBT  TRAPS  AND  SWAPS

MANILA, October 6, 2005
 (STAR)  BIZLINKS By Rey Gamboa - Finally, the Arroyo administration is talking about some form of a debt relief, this time taking the issue to a global audience. Not that the Philippines invented the concept of debt relief. It has always been there for those whose inclination is to spend more than their earnings.

The Philippine proposal for creditors is to consider converting some of the debt payables into equity for social development projects. This comes at the heels of the Group of Eightís initiative in July to condone $40 billion in debt owed by18 developing economies, almost all in Africa.

Our leaders are saying that there should be due consideration for other countries like us that are similarly stuck in a debt quagmire where every day that passes only buries us deeper in this financial quicksand.

After all, the Philippines now already spends a third of its annual budget just to pay interest on debt. This country is like your typical credit card user who pays only the minimum due and sees his principal debt growing by leaps and bounds each month.

Of the record P1.05 trillion budget proposal for 2006, P340 billion will go to debt servicing. This amount is P38.3 billion or roughly 10 percent higher than what had been earmarked for interest payment this year.

Then there is the P381 billion in principal debt that must be amortized next year. This is an off-budget item, meaning it will only be paid if there is a surplus from the budget. Unfortunately, there wonít be any surplus in the budget to settle principal debts.

In fact, the government will have to borrow P124.9 billion next year to breach the funding gap of its over a trillion-peso budget because revenue collection would only bring in P968.6 billion. Of this, P675.4 billion must come from the Bureau of Internal Revenue and P190.5 billion from the Bureau of Customs. So the debt trap has made us dependent on borrowings such that every year, we borrow more to service our debts. In other words, just like the harassed credit card holder, our country is paying old debts with new debts.

Politics of debt swap

The presentation by the tandem of President Arroyo and Speaker de Venecia to the global forum of the idea of debt-equity swap is the administrationís way of demonstrating that it is doing something to break, at least partially, the vicious debt cycle.

While the concept of swapping debt to equity may technically be feasible, it may only be realistically applicable to bilateral obligations, similar to those extended by export credit agencies. Of the $54.1 billion of the governmentís foreign debts, $16.3 billion is owed to bilateral institutional creditors.

The rest, or approximately 70 percent, is owed to bondholders, banks and multilateral agencies like the World Bank and the International Monetary Fund. Trying to get their cooperation for any form of debt relief, like the debt-equity swap, appears to be a "mission impossible."

Some are even saying that hinting to these creditors that the government will seriously pursue this approach may even spur a worse financial situation compared to where we are now. Many are of the view (one of them is my co-columnist Boo Chanco) that this debt-swap proposal is merely good for press release purposes and a few headlines. It was good political grandstanding.

Inevitable demise in a debt trap

Whatever may eventually happen to this debt-swap proposal, the one thing that is definite if we are to lift ourselves out of this financial mess is that we must stop getting more and more snarled in the debt trap. As former BSP Governor Rafael Buenaventura was quoted, the government must stop its propensity to borrow.

And, while admittedly it will be a difficult struggle, the government must explore some form of a debt relief with our creditors in the face of the continuing budget deficit, mounting debt, and declining capacity to spend for important infrastructure and even basic services.

Let us shed the "macho" image. Letís admit to all and sundry that we are in a financial bind and cannot pay now, and would need some leeway to put the economy back on track.

To be consistent with pleadings to creditors, however, the government has to genuinely cut expenditures (no more convoy of supporters to the Presidentís trips abroad, no more multi-million dollar PR and lobby contracts) and streamline the bureaucracy, vigorously pursue revenue collections, ruthlessly go after tax evaders, cut through bureaucratic red tape, and complete the privatization of government business holdings.

To demonstrate that revenues are being used efficiently to boost the economy, the drive against graft and corruption must produce results, that is, guilty parties must be placed behind bars.

There are so many things that this government must do to restore order in its finances. Many of the required actions may not be popular and may even threaten political survival.

But there is no easy way out of a trap. And surely, staying in the debt trap will mean inevitable demise economically. And what the Garci tapes failed to do, the economy could.

RP interim public sector deficit at 1.5 percent of GDP 10/07 12:36:15 PM

MANILA (AFP) - The Philippines' combined public sector budget deficit stood at 41.6 billion pesos (742.85 million dollars) in the first half, well below official targets, the finance department said Friday.

It was equivalent to 1.5 percent of the gross domestic product (GDP), compared to the programmed ratio of 3.7 percent of GDP, the government agency said in a statement.

The national government, the major government-owned corporations and the pension funds that are included in the computation all improved their financial situation, it said.

Better revenue collections and interest payments savings led to a lower national government budget deficit of 67.5 billion pesos, below the first half ceiling of 98.5 billion pesos.

Lower-than-programmed fixed asset acquisition costs and higher operating receipts by the 14 state-owned and -controlled corporations included in the measure led to an aggregate deficit of 9.6 billion pesos, representing 22.5 percent of the full-year program of 42.5 billion pesos for the sector.

Meanwhile, the central bank said the Philippines' gross international reserves rose to a record 18.589 billion dollars last month, boosted by proceeds from the national government's billion-dollar global bond offer in September.

The previous record high was 17.944 billion dollars in end-August.

Central bank governor Amando Tetangco said the end-September figure was enough to cover about 4.1 months of imports of goods and payments of services and income.

However, he said the reserves position was expected to ease in the near term as the national government withdraws its foreign exchange deposits with the central bank to cover its foreign exchange requirements for the last three months of 2005.


Chief News Editor: Sol Jose Vanzi

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