instead of chacha, revoke automatic appropriation for debt service!

my first reaction upon hearing of senate president enrile’s and house speaker belmonte’s joint call for charter change soon after the impeachment and ouster of the chief justice, of which they were prime movers, was to wonder, ano ito, quid-pro-quo?  the president owes them for corona and this is what they want, okay, hope for, in exchange?  it’s a relief, of course, that the prez was quick to reply that chacha is not a priority of his administration, kahit na i don’t agree with the it-aint-broke-so-why-fix-it rhetoric.

this time the arguments for deleting, changing, whatever, the nationalist, protective economic provisions are old and new.  old is the one about attracting foreign investments that our economy direly needs daw.  new is the one about giving the military a bigger budget than education, the better to build an armed force capable of driving away the chinese from west philippine sea territory.

re foreign investments, as usual some agree, some disagree: economist calixto chikiamco and senator joker arroyo agree; economist solita “winnie” monsod and columnist conrado de quiros disagree.  re an improved military budget, however, i have yet to hear anyone agreeing.  the palace via lacierda says there are already efforts to upgrade the capability of the military for a minimum defense position.  senator trillanes prefers the more prudent alternative of a peacefully resolving our differences with china and reviving our relationship as economic partners.  and senator miriam thinks charter change to boost military strength is “just wrong”:

“We just don’t have enough resources to be a world or even a regional military force… What we need is a more effective Coast Guard, not the Navy itself,” she said.

She added that she finds nothing wrong in the Constitutional provision requiring the government to allocate most of its annual budget to education.

“The hierarchy of priorities should begin with the mind. If we are clever, we can outclass the Chinese,” she said.

philstar columnist ana marie pamintuan also objects to a bigger budget for defense than for education.

The Constitution stipulates that the state “shall assign the highest budgetary priority to education…” Enrile thinks this should be subject to change depending on the nation’s needs.

Debt payments in fact have always eaten up the largest chunk of the annual national appropriation. Maybe Budget Secretary Butch Abad can devise a similar creative way of going around the constitutional provision to finance the achievement of the administration’s goal of minimum defense capability.

… As it is, education (and health, for that matter) are still pitifully lacking in funding. So if defense spending will be increased, it will have to be taken from other budgetary items.

indeed.  it’s not as if education’s budget is anywhere close to enough.  the dismal lack of classrooms and textbooks and toilets and running water for our public schools is public knowledge.  so is the low low pay of our teachers — no wonder they opt to work as domestic help abroad as a matter of survival.  so is the poor quality of public education hereabouts — k-12 won’t make a significant difference, promise!  not without money for teacher and curriculum upgrades.

so really, it’s a major major puzzlement how the senate president can even think of making bawas from that pitifully inadequate budget just to make dagdag to the defense budget.  yes, china is a problem.  yes, we need billions, even just for minimum defense, much more for the wishlist of jetfighters, mini-submarines, well-armed frigates, corvette-size combat vessels and minesweepers.  but changing the charter to take money away from education to fund any of that is simply daft, when we could, should, as pamintuan suggests, be looking instead at annual debt payments that eat up the biggest chunk of the budget.

pamintuan, however, is mistaken in thinking that the automatic appropriation for debt service is provided for in the constitution.  read the freedom from debt coalition (FDC)”s Briefer on the Automatic Debt Servicing Provision

It was during the Martial Law in the Philippines that automatic appropriation for debt service was first codified, in Section 31(B) of Presidential Decree 1177 (Budget Reform Decree of 1977). In consonance with her “honor-all-debts” policy, Aquino signed into law the Administrative code of 1987, copying en toto Section 31(B) of PD1177 into Section 26(B) of the code. Section 31(B) of PD1177 also serves as its legal basis.

read this explanatory note to House Bill 1962 authored by kabataan partylist rep mong palatino proposing the repeal of the automatic appropriation for debt service:

Because the government willingly binds itself to a law enacted not through the legislature, but by the decree of a dictator during the dark days of Martial Law to automatically spend more than a third of its annual budget on debt service, its spending on social services, from education to health care has always been grossly insufficient …

so there.  THAT deserves to be repealed, amended, undone.  THAT should be the priority of congress, not charter change.  i’m not saying let’s not pay our debts, i’m saying let’s pay in amounts we can afford.  what the senate and the house of reps should be wanting to change is not the constitution but this odious marcos decree that cory copied in full, unconditionally, without reservation, and which the fernan supreme court upheld :(

here’s senator angara, who also wants the policy changed:

Angara, vice chairman of the Senate Finance Committee, said that debt servicing eats up a significant portion of the national budget, depriving the poor of their right to social services. He said that at least 40 percent of the country’s budget goes to servicing of interest payments and principal amortization of debts.

During the interpellation for Senate Bill No. 2857, “An Act Institutionalizing the Participation of Civil Society Organizations (CSOS) in the Preparation and Authorization Process of the Annual National Budget, Providing Effective Mechanisms Therefore, and for Other Purposes”, Angara stressed that the policy on automatic appropriations on debt service further encourages reckless borrowing and spending as it guarantees payment without legislative intervention and without going through a thorough screening.

“The power to realign the budget and savings and the automatic debt appropriations make for a deadly combination as it allows the manipulation of the National Budget. As long as these loopholes exist, the temptation will always be present. We must therefore revisit and propose amendments to the budget laws to ensure fiscal discipline,” he proposed.

so, really, when i read this in the news today:

Senate President Juan Ponce Enrile said he did not have in mind doing away completely with the 60-40 ratio favoring Filipino investors over foreigners.

“Just that we need to give ourselves the flexibility by authorizing Congress to change the ratio when there is a need for it. But (the idea is) always to protect the interest of the Filipino people in controlling the economy,” Enrile explained in a radio interview over dzBB radio Sunday.

… my reaction was, OMG, invoking the interest of the filipino people in controlling the economy!  does he think we’re morons?  if the interest of the people were truly the guiding principle of congress, matagal na dapat na-undo ‘yang automatic appropriation for debt service na ‘yan.

read walden bello’s In the shadow of debt: the sad but true tale behind a quarter century of stagnation that i blogged about in may 2008, when gloria’s congress was pushing for con-ass.  i was against chacha then as i am against chacha now.

hindi charter change ang dapat nating pinag-uusapan.  not at all.  ang dapat nating pinag-uusapan ay ang pagbabago ng debt policy natin.  we spend on the average half of the budget on bayad-utang and bayad-interes para lang makautang uli.  ano ba yan.  enough na please of the model debtor strategy that has only made a basket case of our economy.

and in the comment section, TonGuE-tWisTeD wondered,

Do these big lenders give the president of a country incentives or commissions for paying early? Gloria says we need to take advantage of the strong peso by retiring most of our debts earlier. Fishy, no?

and president aquino has been doing exactly the same thing, sabay pahiram ng one billion dollars sa IMF, sabay gloat that we are no longer a debtor country but a creditor na daw.  LOL!  read Govt debt hits P5.147 trillion and weep.



  1. Hi Angela,
    this is an issue whenever an Argentina or Russia (now Greece) threatens to default on its sovereign debt. The question: Should a country default?

    The stock answer, which has its merits of being realistic, is that if a borrowing country does not “tie its hands” before it borrows, it will have to pay a much higher interest rate. To make this easy to understand, think of how credit card interest rates are so much higher than (often three times) those on debt secured by real estate. The reason has to do with the fact that credit card debt is unsecured, and is easy to default on it. Moreover, sovereign debt is unique; the international law concept of sovereignty allows the borrower to renege (because a sovereign cannot be sued without its consent). Creditors since time immemorial understood this, and price the loan interest rate according to the risk of a sovereign default. A sovereign borrower who wants a “low” interest rate will get it if it makes a credible promise, such as through its legislation, that it will not renege.

    The inevitable conclusion is this. If we didn’t have that Marcos-era provision (ratified by Cory), we would be even poorer today because we would have had to pay much higher interest rates on our external debt. Because of “reputation” effects, a benefit from the current law is that even our private sector can borrow abroad at lower interest rates than otherwise. In short, changing that law to make it easier for us to default would be a major blow to the economy.

    Your concern is somewhat different. What if we had an irresponsible government that borrowed and squandered the funds? Should we not have a remedy? I think we should, but the remedy could be something other than an announcement that we would renege if our current leaders had become irresponsible. We cannot expect foreigners (i.e. lenders) to make sure that we have responsible governments; that rule would not help our reputation as upright citizens of the world. Of course this doesn’t prevent a foreign lender, particularly an official one, such as the World Bank, from requiring clauses that help ensure that the borrowed funds are not misspent. In a way that’s a remedy also, but not the kind that we can be proud of.

    • “As the University of the Philippines professors who authored the famous 1985 ?White Paper? warned: ‘The search for a recovery program that is consistent with a debt repayment schedule determined by our creditors is a futile one and should therefore be abandoned.'” (In the shadow of debt)

      so are we to simply lie back and enjoy this? if enrile et al are truly creative and are truly concerned about the economic interest of the filipino people, they should be able to come up with new budgetary policies that will assure our creditors that we will continue to pay. then we do as thailand did… this should be an election issue. we need new leaders with chutzpah who truly care.

      • Angela, I’m confused.

        What did Thailand do? Supposedly it “pushed down” interest rates. Debt is a contract and the interest rate cannot be willy-nilly set by one party. It’s perhaps more likely that Thailand avoided debt by using equity — i.e. enticing direct foreign investment inward. If they did, then there must have been incentives for the direct investor. Nothing wrong with that if you do it with eyes wide open, and you find a way to arrange some kind of technology transfer. Essentially this requires bargaining from strength: Telling the investor/lender, I have a responsive responsible economy, come join us, and we won’t leave you holding the proverbial bag. But if we talk like we can or want to renege somewhere down the line – on direct investment you renege by confiscation – no sane lender/investor will deal.

        But your language – that we might “lie back and enjoy it” sounds a bit like saying being a debtor is equivalent to being raped. Nobody forced us into debt, except perhaps our ‘irresponsible’ leaders. The foreign lenders may have some kind of culpability if they knew the funds would be stolen or misused, but then again, the root cause would have been our choice (or perhaps we didn’t have any because we have a sham democracy) of leaders.

        In effect, those leaders who want us to suggest to the world that we are a nation of balasubas are themselves being – well – for lack of a better word, irresponsible.

        • sorry, lie back and enjoy it only in the sense na parang from what you say, there’s nothing we can do about this debt trap. i’m not blaming our creditors as much as i’m blaming our, yes, irresponsible leaders. just read the papers, the prez saying no to chacha and speaking of “reaching the economic heights that we want” anyway. economic heights! hayy.

          • BrianB

            But we can borrow to spend, and we have that law we can keep borrowing at lower rates, more investors would buy our bonds at a good rate and in the end we get more investments.

            There seems to be two political sides on the debt issue.

            1. The conservative-protectionist side that want less debt or no debt at all

            2. The global side that doesn’t fear debt (Is Japan afraid that their debt will continue to rise until 2020?) but uses economic growth to gain more trust from creditors and, therefore, get a more positive credit rating (sometimes we borrow as a form of investment as well)

            To fully appreciate this issue, we can draw the line between two schools, debate it in public and let the voters inform their congressional reps.

          • I understand the frustration. But it seems we’ve done the best we can on the old debt, unless the folks who want to renege have a better idea.

            Perhaps the Thailand approach might work if we can minimize corruption and rent-seeking in foreign direct investment.

            But as it is we remain vulnerable to ‘state capture’ tactics of investors. Just look at how green energy is being implemented. There we don’t borrow, but then we saddle the electricity consumer with ‘universal charges’ to guarantee foreign investors’ return on investment. Or look at water systems. We also don’t borrow but we want to solve the problem of inadequate supply. So we privatize and this results in a steep price to the consumer (just check your latest water bill and be horrified).

            Perhaps this is an area where all the best minds can be challenged.

    • ricelander

      Hmm, best defense I’ve read so far about automatic appropriation.

      In the past, I was batting for re-scheduling of payment: partial suspension of payment for say three to five years and redirecting these resources to massive infra buildup and other backlogs, it would do wonders. But then you get the same effect by automatic appropriation and committing to new loans…

      • Hey ricelander,

        The reality is that automatic appropriation includes a big chunk of principal that’s maturing, and then the lenders allow us essentially automatically also to re-borrow the principal plus a little bit more. So, yes, in a sense it seems a charade.

        We could borrow a lot more, given our ratios when compared with other countries, but perhaps it wouldn’t be wise until we can get a good grip on how to ensure that the borrowed funds are spent properly. This is easier said than done.

        In the meantime, the low net new borrowing profile is good for lowering the interest rate we have to pay, and perhaps also for raising our credit rating (even though I believe the credit rating agencies are not all that good at it).

  2. BrianB

    Thanks for the explanations O. I’m sure everyone is interested about this foreign debt. In my case, I’ve been conditioned to think of this debt as a national shame. Wouldn’t it be easier to look at national progress in terms of debt rating or how low our interest rates are when our government borrows money. Has it become lower?

    Shouldn’t we also acknowledge that most of these debts are bonds? How much do we actually borrow directly from lenders? As far as debt vs gdp, we’re actually better off the the US right now, a friend of mine claimed. Is this true? Most of Europe are worse off including France and Italy.

    • Debt by itself is nothing to be ashamed of. You would borrow on a mortgage to have a house. Creditors will think you a lesser risk if you had such a mortgage and your record of repayment was good.

      The shame, if any, is with the use of borrowed funds.

      But credit ratings are also not always reliable. The 2008 financial crisis was due in part to credit ratings agencies who didn’t do a good job.

      • O.R@
        “The shame, if any, is with the use of borrowed funds.” Thats the reason i am for debt repudiation. For the past 40 years we are paying interest for behest loans that ended in secret Swiss banks accounts as well as in tax-heaven colonies, castles in Europe, high-end condos in USA. The Inquirer reported today that we have already spent ph-53 billion for foreign interest alone for the first six months, projected for one year is about over ph-100 billion pesos. Wow!! this amount could well be used for education and other poverty alleviation and development of infrastructure of public utilities to benefit the struggling middle class wage earners. If these well entrenched lender
        has social conscience to extend assistance by way of political loans, they should atleast write-off the onerous interest that overburdened the citizens for loans passed on as guaranteed by govt.

    • “Surprisingly, the Philippines is only at 51.2% (of GDP)? So, how come for Filipinos it’s almost like the house is burning as far as the external debt is concerned.”

      hmm. i think because we’re not seeing where it goes, we’re not seeing infra, or real economic growth that truly “trickles down”. these debts are supposed to be for “development”. what development, where.

      • The BNPP loan I think was our biggest hell hole. It was like you bought a house, did not like it but kept paying for the amortization nonetheless with half your paycheck, all the while you have to move to a bigger more expensive apartment.

      • …these debts are supposed to be for “development”. what development, where.

        Loan-funded government projects as I understand do not have immediate or direct payback akin to profit. The pay back eventually comes in the form of increased revenue collections from expanding business activity hopefully resulting from better business climate occasioned by such loan-funded projects. What happens then if after all those government spending financed by loans, no compensating increase in investment and business activity follows? Then you have to borrow some more to pay loan obligations. That is why government spending as a strategy to boost GDP can backfire big time if Investment do not follow or takes too long a lag time to follow suit because the government would then be forced to impose more taxes and borrow some more to sustain growth plus pay for the increasing loan obligations.

  3. See it this way: you are a foreign investor with lots of money to spare. you take a look at the Philippines and find a 60-40 restriction, the rest in the neighborhood allows you 100%, all other things equal, where will you likely go?

    As it is, don’t you find the 60-40 arrangement complicated? I wonder who will provide the 60% counterpart?! Some cooperative of Filipino farmers or some association of Filipino tricycle drivers or Filipino whateverelse associations? Or the usual suspects: freeloading influential economic elites who provide some token share and the right connection to arrange for dummy corporations to skirt the restrictions

    • joji-Diehard Pinoy

      In my Finance 101, fund management gurus recommends the use of leverage borrowings as one strategy to obtain funding without capital buildup. Hence,i believe we dont need to amend our Constitution to change 60-40 capital ratio to attract investments. A businesman should not put his egg in one basket by 100% investment. the development of bond market and flexible money market are vehicles in which capital funds are sunk in the system to propel economic growth and increased investment. In addtion, creating a stable political climate and secured remittance of profits are really the best incentives for foreigners to come in. I agree with the opinion of C.Quiros, anyone seeking to cha-change for this reason is an idiot.

  4. The 60-40 rule is kind of weird. It probably results in secret dummy arrangements, so doing away with it makes sense if you don’t like the dummies. But an open regime looks like we’re not getting anything from the outsiders, so that looks like a non-starter too.

    Most likely, then, is that those who favor the present rule are the elite. And then, those who want to open up the country are confident that they can make the foreigners compete against each other to give us a good enough deal. But it’s also quite possible that the foreigners know how to ‘gang up’ against us, and we’re powerless (that’s the story of the nationalists). Whom should we believe?