Category: economy

The Debt Trap

JAH ROSALES @alyasjah | PhilStar 4 Mar. JUST IN:

The outstanding debt of the Philippines hits a record P12.03 trillion as of January. This now stands as the largest debt pile that the country has posted in history. 

Lucked on this 11-point reaction of banker @Manny Gonzalez on Facebook in a @Boo Chanco thread.  In effect it disputes the Manila Times editorial where Central Bank governor Benjamin Diokno is cited as saying that Filipinos should not worry about the public debt.   

I’ve always worried about the public debt especially in relation to the automatic appropriation law for debt service, originally Marcos PD 1177. But there’s a lot more to worry about, and Gonzalez offers a banker’s perspective.  Plenty of food for thought before we end up (if we aren’t already) walking off that cliff.

MANNY GONZALEZ.  Back in the 1970s I was one of the very first bankers to nearly get fired over disagreements on how to gauge country creditworthiness. My superiors wanted to lend to Country X; I tried to veto the syndicated loan on the grounds that Country X had only one viable export (i.e., source of repayment for the loan). Guess who won. But I was wrong. Now the country has three big hitters in its export economy, and it runs a current account surplus (meaning in principle it has the means to pay down its debt).

1. Our 2022 deficit is roughly P 1.7 Trillion (P5 Trillion Expenses, P 3.3 Trillion income). This equals about USD 30 billion in round numbers, vs. current external debt of USD 110 billion.

2. The deficit will have to be funded with borrowings, or the government must print money.

3. Assuming we don’t just print money, the borrowings will have to be mainly foreign, because borrowing all of that locally (equal to USD 15,000 per living Filipino) would soak up liquidity and fiscally depress growth prospects.

4. Right now, borrowing USD 30 billion will not be a problem. Not because of anything about the Philippines, but because world interest rates are so low that institutions with money are chasing any investment that yields more than a US Government Note.

5. But this might not always be the case. The history of sovereign lending is that the money keeps flowing. Until, one day, it doesn’t. Then there is a massive devaluation and economic hardship.

6. Many countries you wouldn’t suspect have large external debts – Japan and Switzerland, for example. The difference with the Philippines is that Switzerland has a balanced budget and a current account surplus so lenders feel secure. Japan has a huge budget deficit, but a current account surplus, and such is its international reputation that investors see lending to Japan as a way of getting a few more fractions of a percent interest without much extra risk. Neither Japan nor Switzerland is in any imminent danger of having the borrowing tap turned off.

7. The Philippines, though, has both a current account deficit and a national government budget deficit. One or both of these need to be fixed or one day, at the drop of a hat and with very little prior warning, lenders will stop funding our deficits and not only that will want all their previous lending repaid.

8. This finally brings me back to the question no one in this country is asking: How are we spending that P5 Trillion (the national government’s planned expenditures for 2022). To recall my Country X, it spent its foreign borrowings more or less wisely, developing two viable export sectors from nothing. (Good thing, too, because its original export has withered due to world market conditions.)

9. How is our P5 Trillion being spent? 1/5 (equal to almost 70% of the budget deficit) is spent on NCR, where it costs (apparently) THREE TIMES MORE to give residents basic services, than any other part of the country. It costs more to provide water to Manilans, and will get ever more costly, as aquifers run dry; it costs more to protect them from criminals, given the congestion and squalor. We are even apparently spending USD 200 million to “improve the earthquake resistance of government buildings in NCR”. (Can you think of any government building in Manila in the past 100 years that suffered even USD 10 million damage? This is like hiring and paying a brain surgeon to tell you to put a Band-Aid on a cut. The remedy is 100 times more costly than what it supposedly avoids. This particular project is courtesy of the World Bank, which has become one of the most clueless organizations on earth.)

10. As for the rest of the P 5 Trillion, I couldn’t identify anything in it that has a clear chance of increasing tax collections or generating export earnings. They’re all just general hopes and wishes that if we Build, Build, Build (bahala na what we build), somehow GDP and exports will rise, and further down yet, someone will pay more taxes. Not bloody likely. MOST OF THE PROPOSED BUILD, BUILD, BUILD PROJECTS HAVE A NEGATIVE ECONOMIC RATE OF RETURN, ON TOP OF A NEGATIVE FINANCIAL RATE OF RETURN. That means they will weigh directly on both the government budget and the international current account balance. The Metro Manila subway is a SURE LOSER in every respect. No country in the world has succeeded in operating a subway system at a profit. Making a commute more comfortable or prestigious is not an economic “benefit”. Linking already-congested areas to each other is not “economic development”. A subway system is CONSUMPTION, not INVESTMENT. The same arguments apply to all these new airports designed to glorify local politicians. New York is one of the world’s very few cities with three major airports (LaGuardia, JFK, and Newark). Why does Metro Manila need FOUR?

11. By the way, the most indebted country in the world is Palau. It owes almost USD 1 million per living Palau person. That is because Palau listened to the Chinese government, and borrowed freely for its own Build Build Build. Until one day the Chinese asked to be repaid.

What is most tragic is that not a single one of our leaders, technocrats, or Presidential or even Vice-Presidential candidates, seems to have any opinion on the budget except to mouth that, sure, Build is Good.

We are walking off a cliff, and no one seems to understand that we are.

Why are oil prices rising, and what we can we do about it?

Overpriced gasoline and diesel, for instance, gave oil firms an estimated P38.47 billion (US$757.13 million) in additional income, of which P4.62 billion ($90.93 million) went to the government as value-added tax (VAT).

By ARNOLD PADILLA
Bulatlat.com

MANILA – Since the start of the year, local pump prices have increased significantly. The government, as always, explains this as the operation of global market forces. Remember that the government deregulated the oil industry, and the country imports almost all its petroleum needs. As such, local price adjustments merely reflect the movement of international oil prices and fluctuations in the peso-dollar exchange rates. At least, that is what government and the oil firms want us to believe.

P4-5 overpricing at the pump this year

But this explanation is not as straightforward as it appears to be. Pump price adjustments do not reflect global price movements. As of the first week of October, the price of gasoline in the Mean of Platts Singapore (MOPS) has gone up by about P11.49 ($0.23) per liter. Meanwhile, the pump price of gasoline as of Oct. 5 has jumped by P16.55 $(0.33) per liter – P5.06 ($0.10) higher than MOPS. The same thing is true with diesel. MOPS diesel increased by around ?10.86 per liter while the pump price of diesel surged by P15.00 ($0.30)– a difference of P4.14 ($0.087) per liter.

MOPS is the benchmark that the country uses for local petroleum products, according to the Department of Energy (DOE). It is “the daily average of all trading transactions of diesel and gasoline as assessed and summarized by Standard and Poor’s Platts, a Singapore-based market wire service.”

The difference between the adjustments in MOPS and actual price changes at the pump is a form of overpricing that has thrived under the Oil Deregulation Law. This 25-year-old law allows oil companies to implement automatic price adjustments based on global price movements.

By implementing higher price hikes or lower rollbacks than international price adjustments, oil firms and the government can collect billions of pesos in extra profits and taxes. Overpriced gasoline and diesel, for instance, gave them an estimated P38.47 billion (US$757.13 million) in additional income, of which P4.62 billion ($90.93 million) went to the government as value-added tax (VAT). This exploitation of the consumers by the oil companies and government becomes even more reprehensible amid the pandemic that has massively wiped away jobs and incomes.

 READ ON...

Politics, economics, rice

ORLANDO RONCESVALLES

The production, consumption, and importation of food (rice or grains) have posed contentious as well as analytically difficult issues even when economics was still in its infancy. In the early 1800s, David Ricardo came up with the idea of comparative advantage to explain why countries trade. On its face, it presented a paradox because comparative advantage suggested that a poor country (one endowed with limited technology) should export a good such as rice even if it didn’t have an absolute advantage in its production (it just needed to have a comparative advantage). Ricardo was also not one to advocate self-sufficiency as he was pretty much a proponent of free international trade. Today’s debate on the merits of rice tariffication presents conundrums and even unanswered questions, though the latter have perhaps more to do with politics than economics.

But even earlier, when economics was not yet a social science, kings and despots already knew that to survive insurrections, they made sure that the price of bread or grain (or any food staple) was affordable to the masses. The Roman poet (Juvenal) considered on or around 100 AD that political stability required whoever was in power to provide bread, as well as circuses! Forget the Romans. The Bible has its share of stories where kings had the burden of protecting their subjects from suffering in times of famine. Closer to home here in the Philippines, when the price of rice spiked in 2018 and became part of an inflation scare, there was a fair amount of wrangling on what to do.

The conventional wisdom today in economics, particularly in the textbooks on international economics, hasn’t changed much in the last two hundred years. Free trade, because it is voluntary and anchored on the concept of comparative advantage, was (and still is) a good thing. And yet, here we are in today’s age of wondrous innovations dubbed as the “fourth” industrial revolution, fulminating at the specter of rice prices remaining high for the consumer but falling to penury-inducing levels for rice farmers. What has gone wrong?

Read on…

Shooting Stars and the Falling Peso

O. Roncesvalles

I remember a time in 2012 when many big-bank economists predicted that the Philippine peso would remain a shooting star at around P42/$ by year-end. The peso then was a ‘darling’ currency, having nicely recovered from a low of about P49/$ in the wake of the Financial Crisis of 2008. Little did the bank economists know that there would soon be a literal u-turn; the peso shortly began its doldrums to where it is today at P53/$. It hasn’t been a pretty sight for the responsible authorities at the central bank.

Read on…