Sunday, December 31, 2006

Yes, Anonie, there's a Santa from the South

Yes, Anonie, there’s a better holiday package to answer our debt problem.

Anyway, in your wish list, which I’m quoting here verbatim, you mentioned two with which to deal with the matter: “(a) continue with Cory-FVR-Estrada-GMA policies (efforts to renegotiate the loan terms but follow world-banking procedures); (b) the Philippines to declare it will stop payments on the Marcos-’Nuclear-plant’-loans.”

At this point, I’m basically still hovering at macro level and I guess you are right on the money when you raised debt burden as a high priority issue.

I most certainly regard the Philippines’ gargantuan debt AND the lackadaisical performance of the economic elites as the two greatest obstacles to our economic takeoff and to a sustainable economic development. This means that problems often associated with dirty politics or certain perceived flaws of the constitution would be of second order. Therefore, in my view, to make the trapos and the constitution bear the blame for the ills of the nation, as many are prone to whine about, is to disguise the country’s real maladies.

How does our debt burden look like?

A bunch of Filipino economists (the “UP 11,” remember?) came up in August 2004 with a position paper affirming that the Filipinos - or logically the economic elites for that matter - hold most of the government’s peso-denominated debt and “a good chunk” of the dollarized domestic debt. The paper also indicated that the national debt at 3.36 trillion pesos as of the end of 2003 is “split almost equally between foreign and domestic liabilities.”

A more recent analysis by cvj in mlq3’s blogsite is equally interesting and shows that under the GMA regime, the Philippines has so far incurred US $3.8 billion in foreign debt and US $ 6.2 billion in domestic debt, both figures being in excess of those incurred by her immediate predecessors. What is however noticeable from cvj’s configuration is that the 40/60 split (versus the 50/50 split pursuant to the UP 11 report) has been the ballpark average of our public borrowings since Pres. Cory Aquino. Now, considering that only 60 or so families control the domestic financial market, may one likewise infer that, based on cvj’s figures, about 60 percent of the national debt is owed to a very small minority of economic elites?

Whether the debt burden is split 50/50 into foreign and domestic, or 40/60, would be of no moment because, as I see it, it remains indicative of the overriding interest on the part of the domestic wealth holders in renting their money at guaranteed earnings relative to otherwise risking such wealth in rational productive investments. With the debt service (the “income” to the lenders) calculated at about 30 percent of the national budget, the portion of the overall national revenues going to only some individuals is obscenely mind-boggling, or, to put it differently, enough to lull the rentier persona of the entrenched economic elites into passive investment.

Again, with about a third of the national budget being by law automatically earmarked for debt service, what incentives do these rentier families have, to take greater risks either to compete with their regional counterparts or to develop the real economy of the nation?

Little wonder, the Philippines’ richest guy, aside from his sizeable stake in the finance economy, appears content with building giant malls catering largely to the consumption proclivities of OFW remittance recipients. Meanwhile, the economic benefits derived from the country’s leading manufactured export (electronics) are practically set off by heavy import components. Shouldn’t we matter-of-factly be seriously thinking of setting the stage for attaining the competitive advantage of producing locally those import components? Or should we rather take the stance of blogger anna de brux and many others of similar persuasions who seem to “have no issue with anyone making loads of money provided their business is legit and that they’re paying the right taxes”?

Well, a couple of years ago, Senator Manuel Villar, Jr. as chairman of the Senate Committee on Finance, explained at a Senate briefing on the 2005 budget proposal that banks would rather acquire Treasury bills and other sovereign debt instruments than lend to businessmen because aside from the rates being so attractive, the “investments are risk-free and protected from depreciation.” The preference of rich Filipinos to invest in the financial rather than in the real economy, deprives the nation of “a critical mass of projects that will be necessary to jumpstart and sustain the country’s economic development,” once frankly admitted by Trade and Industry Secretary Cesar V. Purisima.

We, as a nation, have to get our acts together if not for ourselves for the next generation. Scapegoating trapo politics or relying on primarily political solutions to essentially economic problem is a deliberate diversion from the true problem in which the nation is deeply immersed, i.e., the stark reality that the performance of our risk-averse economic elites is third-rate so that even if certain growth is seen in absolute terms, the Philippines remains a laggard in the region in relative terms. How our neighbors’ will to develop has readily bypassed our country in the short term, to become the covetable tiger economies in the region is now taken for granted. Yet, of very late one more comparatively stellar performance that’s mocking us to our face is the continuing economic surge from behind of once war-torn and debt relief candidate Vietnam.

Anonie, I call your first option above as the vicious cycle of generosity of “adjustment lending” from false Santas of the North. It comes with a dear price: externally imposed deregulation, privatization, liberalization and fiscal discipline, all meant to please foreign creditors and rating agencies. The net effects, as we are experiencing, are slow economic growth, heightened levels of poverty, forced cutbacks on vital physical and social infrastructures spending and increased unemployment from resulting de-industrialization.

We missed the second option boat during Cory’s time. Indeed, to raise a howl at this juncture about dictator’s debts or “odious debts” will be naughty and not nice.

I have had the chance to indulge in the rhetoric of a wish for a third option:
If then the paramount goal were to stop the escalating government debt as a proportion of GDP, won’t it be possible to attain it should the growth of GDP outpace the ever-rising debt? This would only mean that past the crisis and beyond some short-run government bureaucratic measures (such as new tax schemes and pork barrel curtailments), the wealth creators at the firm level must lead the march toward competitiveness and productivity growth, the intuition of the now famous “UP 11” that it would be “no more than whistling in the dark” notwithstanding. Therefore, rather than despair, perish or self-destruct, Filipinos must take the course that remains wide open for them - build and produce to earn enough to pay debts, provide basic needs, keep an efficient bureaucracy and build even more. When government capital expenditures are at a minimum, the private sector must take up the slack in investment to boost employment and enable the citizens to pull through a sense of confidence in the future.
Slowly, we have grown to perceive that the appropriate solutions to the country’s maladies require both funding and character change. With a sense of country and responsibilities for their own population, the economic elites, like patriotic Santas it is hoped, would resolve to give away both.

A BLESSED, PROSPEROUS and PEACEFUL NEW YEAR TO ALL!

4 Comments:

Anonymous Anonie said...

Public-sector economics is a politicians dream because one can win elections by espousing populist proposals (renege on foreign debt and increase minimum wage probably the most attractive to Filipinos) while postponing to 3 years later the damage to the economy and the population. I think it was Jeg (a blogger) who said "That’s how the populist president Erap got elected: by danglng the promise of direct government intervention in the daily lives and problems of the people, especially the poor."
The Opposition should really be required to put to paper what their positions are (proposed expenditures and proposals for how to raise funds) so that all --- from the World Bank to the local bank -- can express their opinions. Populist economic policies that fair poorly in world economics can result in higher interest rates on Philippine debt, which raises the cost of living to Filipinos.
[I dare say that every Oppositionist will have to acknowledge dependence on OFW remittances (at the same time that they deride GMA's "super-maid" and other policies that encourage Filipino labor to be exported overseas.)]

December 31, 2006 9:56 PM  
Anonymous Anonie said...

Abe,
You seem to demonstrate an anti-Filipino businessmen agenda. You deride them when you really should be appreciative when Filipinos buy Philippine debt. The reason is supply-and-demand. Any Philippine-debt offering not bought by a Gokongwei or a Tan or a Zobel (or by the depositors of the Philippine National Bank) gets bought by the next lower bidder... and "lower bidder" means that the Philippine government (hence the Filipino people) gets saddled with the same debt but at a higher interest rate.
By the way, here is a cut-and-paste from an Inquirer news item:
http://business.inquirer.net/money/topstories/view_article.php?article_id=39781

...
As a percentage of gross domestic product, total foreign obligations fell to 48.6 percent at the end of the third quarter against 50.7 percent at the end of June.

The country's debt service burden, which includes principal and interest payments on foreign loans, was at 11.4 percent of total exports of goods and services in the first nine months of the year, slightly lower than 11.6 percent at the end of June.

This debt service ratio, which reflects the country's ability to service current debt maturities using foreign exchange earnings, has improved steadily to 13.5 percent in 2005 from 2002 when it hit 17.1 percent.

December 31, 2006 10:16 PM  
Anonymous Anonie said...

Abe, One minor point. You can not conclude that purchase of Philippine-issued treasuries/bonds by the Gokongwei's (or the managers at Allied Bank, Phil Bank of Communications or any other bank) indicates that said individual or institution are risk-averse. You should do the same with your 401K or IRA, namely allocate part of one's assets to low-risk instruments.
In addition, it will be unnecessary (and foolhardy) micromanagement if the US government were to require Donald Trump to double or triple his investments in internet- or manufacturing stocks, which is what you seem to suggest for the Filipinos who have made money on shopping malls.
[PS: Here is a cut-and-paste from Wikipedia:
The SBA (Small Business Administration, USA) was established on July 30, 1953, by the United States Congress with the passage of the Small Business Act. Its function was to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns." Also stipulated was that the SBA should ensure a "fair proportion" of government contracts and sales of surplus property to small business. This was accomplished primarily through the Small Business Innovative Research program and government "set-asides."
.
The SBA also makes loans directly to businesses and acts as a guarantor on bank loans.]

January 01, 2007 5:31 PM  
Blogger Abe N. Margallo said...

Given the mediocrity of the Filipino political class, I’m actually looking, at this critical crossroad of our nation, for leadership from the economic elites, somewhere at the level of such ingenious American railroad men and financiers as Jay Gould, Edward Henry Harriman and J. P. Morgan whose shrewdness as well as sense of public responsibilities of wealth made America a global power. And greed notwithstanding, these American economic leaders, much like the Japanese zaibatsu, and later, the keiretsu (e.g., Mitsubishi, Sumitumo and Sanwa) and the Korean families who created the famous chaebols, have turned their nations around and triggered the second industrial revolution in America, the economic miracle in Japan or the founding of modern Korea in South Korea; these empire builders considered themselves first and foremost as Americans, Japanese or Koreans, something that should be compared to the hyphenated identities of the Philippine economic elites.

January 05, 2007 7:22 AM  

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