Interest rates ‘will go to hell’ under federalism – Dominguez

The Duterte administration’s chief economic manager warned that the Philippines’ interest rates will skyrocket once the shift to a federal form of government is drastically adopted without taking into account its fiscal risks.

At a Senate hearing on Wednesday, Finance Secretary Carlos G. Dominguez III said that the country’s current investment grade credit rating status along with its stable interest rate environment “will

go to hell” under the draft federal Constitution.

Dominguez admitted that he is still unconvinced that changing the current form of government is for best of the economy, noting he got confused when he read the draft of the proposed federal Constitution.

“I did meet with former Senate President Aquilino Pimentel and some members of the commission, and I asked them who’s going to pay for the national debt? Who’s going to pay for the military?” Dominguez told the hearing.

But when Dominguez saw the draft federal Constitution, the finance chief found that it was silent on the national government’s multi-trillion pesos debt.

“We’re very confused by the draft,” Dominguez admitted.

Under proposed federal system, the regions will also get 50 percent share from all national income sources collected by the Bureau of Internal Revenue (BIR) and Bureau of Customs.

The 50:50 revenue sharing is detrimental to the national government, Dominguez warned.

Asked by Senator Ralph Recto about the estimated impact of the proposed revenue sharing scheme on the government’s fiscal position, Dominguez said “it’s a very large [budget] deficit.”

Recto further asked Dominguez about its effect on the country’s credit ratings and interest rates, Dominguez said it is “tremendous, it will go to hell… everybody pays higher interest rates, 600 basis points [increase].”

Dominguez also said that the proposed change in the constitution will derail the Duterte administration’s ambitious infrastructure program.

During a Senate hearing last Tuesday, Dominguez already admitted that he had reservations on the fiscal provisions of the draft federal constitution.

“I think there are a lot of issues that need to be worked out, and it’s good that it’s being discussed publicly right now, and that’s [fiscal] just one of the issues that we see from the fiscal point of view,” Dominguez said.

“If we don’t manage this correctly, this can end up to be a fiscal nightmare,” he added.

Congress is currently working on overhauling the 1987 Constitution and shift to a federal system of government to address the country's widening wealth gap and empower regional governments.