The Philippine debt situation
IT has been pointed out, particularly in the past several months, that in the early 1960s the Philippine economy was second only to Japan in Asia. An article in the South China Morning Post two weeks ago recounted how a “status marker in the post-war Philippines, especially in Manila’s class-conscious, mestizo circles, was to have a black-and-white garbed, Pidginenglish-speaking Chinese maid from Hong Kong.”
Equally true was that all this changed during the Marcos presidency. Yet the Philippines is not the only or even the “best” example of a slow but significant deterioration of a thriving economy.
In 1902, Argentina was one of the richest economies in the world. By 1916 Great Britain enjoyed the most powerful economy on Earth because of its maritime trade and its vast colonies. However, only Argentina could compete with the United States as the “Second Most Powerful Economy.”
The 1916 presidential election brought Hipólito Yrigoyen to office, campaigning that he was “the father of the poor” and for “Fundamental Change.” He instituted mandatory pension insurance and health care and government low-cost housing. During the period known as the “Radical Republic” (1916-1930), with an average annual growth of 8.1 percent, it is still one of the greatest periods of economic growth in the history. Buenos Aires in the 1930s was known as the “Paris of South America.”
Increased government spending created employment but bureaucrats are not engines of economic growth. When certain economic sectors start hurting, future votes can be won by increasing government control. That control inevitably leads to extensive “crony capitalism.”
After the war, Juan and Eva Perón came to power with two objectives: social justice and taxing the rich—“rich” eventually meaning anyone who feels they can spend their own money better than the government. Taxes to pay for social programs are never enough, so the government borrows more and more.
The road to massive economy-destroying government debt is always paved with good intentions.
Concerns over the Philippine government borrowing for economic stimulus are important. However, even if this new debt reaches $10 billion, it is well within manageable and acceptable levels, regardless of the scare headlines.
Totally incorrect comparisons are being made to other nations with the idea that the only way the Philippines can pay these debts is through “money-printing.” The Philippines does not “print money.”
Actually, other nations do not either, but this is what they do: The Bank of Japan has directly purchased corporate bonds and commercial paper worth $188 billion in an economy battered by the coronavirus.
The European Central Bank has bought $1 trillion of private and public sector securities and debt. The Bank of Thailand has a $12 billion corporate bond stabilization fund.
What our Bangko Sentral ng Pilipinas did in March was to purchase P300 billion ($6 billion) of government—not private sector corporate— debt to fill the Covid-19 shutdown revenue gap. This accounts for 7.3 percent of the budget in 2020 and just about the expected budget deficit for this year.
This is not a country comparison. This is an assessment of individual government’s fiscal condition. According to Capital Economics last week, most developed markets—australia, Canada, France, Germany, Japan, and the US can tolerate higher debt levels. And which two emerging Asian economies are on that list? Vietnam and the Philippines.