{"id":110066,"date":"2017-07-31T10:59:38","date_gmt":"2017-07-31T14:59:38","guid":{"rendered":"http:\/\/countingpips.com\/?p=110066"},"modified":"2017-07-31T10:49:51","modified_gmt":"2017-07-31T14:49:51","slug":"the-myths-and-realities-of-dutertes-infrastructure-initiative","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/07\/the-myths-and-realities-of-dutertes-infrastructure-initiative\/","title":{"rendered":"The Myths and Realities of Duterte\u2019s Infrastructure Initiative"},"content":{"rendered":"
July 31, 2017<\/div>
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By Dan Steinbock<\/strong><\/p>\n

A huge upgrade of infrastructure is vital for Philippines economic future. That\u2019s why it is contested by entrenched interests, including foreign powers. This is the first in a series of occasional commentaries about the Philippines transformation from an international viewpoint.<\/strong><\/p>\n

In the past year, President Duterte has initiated a series of economic reforms to accelerate economic development. Despite much \u201cpolitical noise,\u201d the government seeks sustained growth around 6.5- 7% in 2017, by banking on multiple initiatives, especially higher infrastructure spending.<\/p>\n

According to Ernesto Pernia, Director General of the National Economic and Development Authority (NEDA), investment spending must be ramped up to 30% of GDP for Philippines to become an upper middle-income economy by the end of Duterte\u2019s term in 2022, and to pave the way for a high-income economy by 2040.<\/p>\n

Yet, the huge infrastructure investment effort has been often misreported internationally. Infrastructure investment is a case in point.<\/p>\n

The allegation: Infrastructure as \u201cdebt slavery\u201d<\/strong><\/p>

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In early May, Secretary of Budget and Management Benjamin Diokno estimated that some $167 billion would be spent on infrastructure during President Duterte\u2019s six-year term. Only a day later, U.S. business magazine Forbes\u00a0released a commentary, which headlined that this debt \u201ccould balloon to $452 billion: China will benefit.\u201d<\/p>\n

According to the author, Dr. Anders Corr, the current Philippine government debt of $123 billion is about to soar to $290 billion because China, the \u201cmost likely lender,\u201d would impose high interest rates on the debt: \u201cOver 10 years, that could balloon Philippines\u2019 debt-to-GDP ratio as high as 296%, the highest in the world.\u201d<\/p>\n

These figures assume absence of transparency by the Duterte government and China on the interest rate, conditionality and repayment terms of $167 billion of new debt for the Philippines. Due to accrued interest, \u201cDutertenomics, fueled by expensive loans from China, will put the Philippines into virtual debt bondage if allowed to proceed.\u201d He assumes China\u2019s interest rate would amount to 10%-15%.<\/p>\n

But why would the Philippines accept such a nightmare scenario? Because, as Corr puts it, \u201cDuterte and his influential friends and business associates could each benefit with hundreds of millions of dollars in finders fees, of 27%, for such deals.\u201d<\/p>\n

He offers no facts or evidence to substantiate the assertions, however.<\/p>\n

The official story: \u00a0Debt decline, despite infrastructure investment<\/strong><\/p>\n

Recently, the Department of Budget and Management (DBM) anticipated the Philippine debt position to remain sustainable, despite deficit spending for infrastructure. Between 2017 and 2022, the Duterte government plans to spend about $160 billion to $180 billion to fund the \u201cGolden Age of Infrastructure.\u201d An expansionary fiscal policy shall increase the planned deficit to 2-3% of GDP.<\/p>\n

To finance the deficit, the government will borrow money following an 80-20 borrowing mix in favor of domestic\u00a0sources, to alleviate foreign exchange risks \u2013 which would seem to undermine the story of China as the Big Bad Wolf.<\/p>\n

The fiscal strategy is manageable because the economy, despite increasing deficit, will outgrow its debt burden as economic expansion outpaces the growth in the rate of borrowing. So what is the expected impact on the debt-to-GDP ratio?<\/p>\n

Given deficit spending of 3% of GDP, the DBM assumes growth will be 6.5%-7.5% this year and 7%-8% from 2018 to 2022 (plus inflation of 2%-4%). As a result, it projects the debt-to GDP ratio to decline from 41% in 2016 to 38% in 2022.<\/p>\n

The realities: \u00a0Growth over deficit financing<\/strong><\/p>\n

The current Philippine debt-to-GDP ratio compares well with its regional peers. It is half of that of Singapore and less than that of Vietnam, Malaysia, Laos and Thailand (Figure 1). The starting point for a huge infrastructure upgrade is favorable. True, in a downscale risk analysis, Philippine growth performance might not reach the target, but would be likely to stay close to it \u2013 which would still translate to a manageable increase in the debt-to-GDP ratio.<\/p>\n

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Figure 1 \u00a0 ASEAN: Debt-to-GDP Ratio, 2016 (%)<\/strong><\/p>\n

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Yet, Corr claims that Philippine debt ratio will soar seven-fold\u00a0in the Duterte era, whereas the DBM estimate offers evidence the debt could slightly decline. The difference between the two is almost 260%.<\/p>\n

Today, Japan\u2019s debt-to-GDP ratio exceeds 250% of its GDP. However, at the turn of the 1980s, the ratio was still closer to 40%, or where the Philippine level is today. Yet, Corr claims Duterte government would need barely 4 years to achieve not only Japan\u2019s debt ratio today but a level that would be another 50% higher!<\/p>\n

The realities are very different, however. The contemporary Philippines enjoys sound macroeconomic fundamentals, not Marcos-era vulnerability. Moreover, Corr\u2019s tacit association of Duterte\u2019s infrastructure goals with former President Marcos\u2019s public investment program (and the associated debt crisis in the 1980s) proves hollow. Duterte is focused on infrastructure (his infrastructure budget as percentage of GDP is 2-3 times higher in relative terms).<\/p>\n

Today, borrowing conditions are also more favorable (365-day Treasury bill rates are 3-4 times lower than in the Marcos era). \u00a0Furthermore, the Philippine gross international reserves, which amount to 9 months, are relatively highest among ASEAN economies and\u00a03-4 times higher than in the Marcos era (Figure 2).<\/p>\n

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Figure 2 Gross International Reserves, 2015-16 (months)<\/strong><\/p>\n

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In addition to realities, Corr\u2019s analysis ignores the dynamics of debt. Any country\u2019s debt position is not just the nominal amount of the debt, but its value relative to the size of the economy. An economy that is barely growing and suffers from dollar-denominated debt lacks capacity to pay off its liabilities, as evidenced by Greece. In contrast, with its strong growth record, the Philippines has the capacity to grow while paying off its liabilities.<\/p>\n

Geopolitical agendas, economic needs<\/strong><\/p>\n

Corr could have challenged DBM\u2019s assumptions about Philippines future growth, potential increases in infrastructure budget, contingent adverse shifts in the international environment and so on, but his purposes may be political.<\/p>\n

He is close to US Pentagon and intelligence communities, which strongly oppose Duterte\u2019s recalibration of Philippines foreign policy between the US and China. According to US Naval Institute, he has visited all South China Sea claimant countries and undertaken \u201cfield research\u201d in Vietnam, the Philippines, Taiwan, and Brunei. He has been an associate for Booz Allen Hamilton (as once was Edward Snowden). Though he has ties with international multilateral banks, he is less of an \u201ceconomic hit man\u201d and has more interest in U.S. security matters.<\/p>\n

Corr led the US Army social science research already in Afghanistan and conducted analysis at US Pacific Command (USPACOM) and U.S. Special Operations Command Pacific (SOCPAC) for U.S. national security in Asia, including in the Philippines, Nepal, and Bangladesh. Currently, he is researching Russia and Ukraine for the Pentagon. He has urged President Trump to use stronger military presence in the South China Sea, bullied Pakistan with sanctions, and supported independentistas in Hong Kong and Taiwan, labeled Chinese students abroad as Beijing\u2019s informants, while exploring US nuclear options against North Korea.<\/p>\n

Such objectives are far from neutral economic observation, but they do reflect political partisanship that is typical to Washington\u2019s neoconservative and liberal imperial dreams\u2013 but not the views of most Americans, according to major polls.<\/p>\n

In the Philippines, Duterte\u2019s supporters see Chinese debt as a business deal that will ultimately support the country\u2019s future. After Forbes, the Duterte government\u2019s critics were quick to report the story, but without appropriate examination of its economic assertions and possible strategic motives. Overall, while liberals tend to oppose the debt plans for geopolitical reasons, their economists are more sympathetic.<\/p>\n

In any real assessment, simple realism should prevail: When the rate of economic expansion exceeds that of debt growth, low-cost financing for public projects can make a vital contribution to the Philippines\u2019 economic long-term future.<\/p>\n

About the Author:<\/strong><\/p>\n

Dr Dan Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see http:\/\/www.differencegroup.net\/\u00a0<\/a><\/p>\n

The original commentary was released by The Manila Times on July 31, 2017<\/p>\n

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