Deeper into debt. More than half of the country's debt is owed to multilateral institutions like the International Monetary Fund (IMF), the World Bank and the Asian Development Bank, donor countries like the United States and Japan, and export credit agencies. Dollar denominated loans account for 54% while 27% are in Japanese yen. Since the loans are mostly US$ and yen-denominated, the principal and interest payments fluctuate with the movement of the peso against these currencies. National Treasurer Leonor Briones estimates that debt servicing increases by PhP1 billion to PhP2 billion for every peso fall against the US$. To date, the peso has dropped nearly PhP10 from the year-end exchange rate of PhP40.31:US$1. This translates to a PhP10 to PhP20 billion increase in debt payments. This amount could have been used to build up to 57,000 low cost housing units for poor Filipinos.
An increase in debt servicing would also mean an increase in the budget deficit. At the start of the year, the government had estimated to generate revenues amounting to PhP597.7 billion and incur a deficit of PhP40 billion. It has committed a PhP62.5 billion budget deficit ceiling under an economic program with the IMF. As of October, however, the deficit has reached PhP92.5 billion due to shortfalls in revenue collection.
Financing for the deficit may be sourced from additional domestic or foreign borrowings or through monetary creation. Whichever method will have potential negative repercussions to the economy. Borrowing domestically may drive local interest rates up as the government competes with the private sector for locally available funds. The law of supply and demand states that prices increase as supply decreases and demand increases. In the same way, local funding institutions may raise interest rates as the demand for loans increases. More foreign borrowings, on the other hand, will further expose the government to foreign exchange risks (i.e., higher interest and debt payments as the peso declines in value). Meanwhile, the worry over money creation or putting more money into circulation is that it might spur spending and lead to higher inflation.
What now? The United States government earlier this year granted debt relief to poor South African countries. Mr. Ricardo Quintos has started a campaign asking leaders of the Philippine Catholic Church and concerned citizens to appeal for debt forgiveness. There is a signature campaign on the Appeal for Solidarity for the Philippine Jubilee Call for Debt Relief. While the Philippines may not qualify for outright debt relief, the condonation of interest payments would be a welcome break. This would mean over US$2.0 billion or PhP100 billion annually that may be allocated instead for basic services and infrastructure. It may also be used by the government for job creation. This amount is almost equivalent to the market capitalization of San Miguel Corporation, one of the country's largest companies, which employs 11,000 people.
Another solution may be the repeal of Section 26(b) of the Administrative Code of 1987. This way, the government will have more flexibility in allocating its budget and prioritizing the education, health care and social welfare of the Filipino people.
References:
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