Foreign debt can be a boon or a bane for any economy. In the Philippines, it has been both.
As we all know, foreign debt can be used to finance infrastructure and social development projects which can accelerate economic development and improve people’s lives. But it also comes with risks. Here are some of them:
Foreign debt needs to be repaid in time. If an economy does not expand in step, debt service could take the lion’s share of the national budget and starve governments of funds. Risks arise if short term debts are used to finance long term projects. If the local currency devalues, foreign debts become more expensive. A decline in commodity prices can affect a debtor country’s ability to repay debt. Growing levels of debt can discourage foreign and private investment due to concerns of unsustainability and fear of default. If a country is struggling to meet interest payments, they may be tempted to borrow just to meet its obligations. Doing so can lead an economy to spiral into a debt vortex.
Foreign debt has had a bad reputation among Filipinos due to how it was misused in the 1970s. It will be recalled that in 1965, Marcos Sr. inherited a foreign debt load of only $600 million when he first assumed the presidency. The amount ballooned to $4.1 billion in 1975 when the country’s gross domestic product was only $16 billion.
In just two years, Marcos Sr. doubled the country’s foreign debt load to $8.2 billion while our GDP was only $22 billion in 1977. This elevated our foreign debt to GDP ratio to 37%. Mind you, this amount did not even include domestic debt.
The debts were used to build infrastructure and fuel economic growth. Problem was, many of the projects were white elephants that failed to pay economic dividends. Other projects were grossly overpriced. Some benefitted only a narrow sector of society.
In short, debt was mismanaged under Marcos Sr.’s baton and this was largely due to badly considered projects and corruption, enabled by the lack of transparency.
In the 1980s, the Philippines borrowed its way to repay its debts, thereby falling into a debt vortex. By the time the Marcoses were ousted in 1986, foreign debts ballooned to $26 billion, 43 times the amount in 1965. It was 50% of GDP.
The country remained in the vortex until 2003 when foreign debts grew further to $61 billion or 70% of GDP. Throughout this era, debt service accounted to well over 40% of the national budget. This explains why we were unable to invest in infrastructure, social development programs, and economic pump-priming activities.
The misuse of debt in the 1970s choked the country’s development for 25 years. This is how dangerous foreign debts can be, when misused.
Our foreign debt ratio improved from 2003 to 2022, notably due to the fiscal discipline imposed during the Benigno Aquino III presidency from 2010 to 2016. Notwithstanding the pandemic, foreign debts have decreased to only 27% of GDP or $109 billion as of this year. It is safe to say that the days in which foreign debt weighed us down are behind us.
How did we fix our foreign debt conundrum? The simple answer is that the economy grew faster than our borrowing rate. The economy grew from $87 billion in 2003 to $433 billion (forecast) in 2022. Foreign debt, on the other hand, grew by only $48 billion over the same period.
Mind you, our $109-billion foreign debt is not all ascribed to the state. Only $67 billion or 61% of it is attributed to government while $42 billion, or 39%, is attributed to the private sector.
Of government’s $67-billion foreign debt, 57% was borrowed from bilateral sources such as the Asian Development Bank and the International Monetary Fund. The balance is from debtor countries, mostly from Japan.
The bulk of the $42-billion debt of the private sector is attributed to international deposits in the local banking system. The balance is due to the obligations of private companies through their loans and bond issuances.
Today, foreign debts are utilized to build the infrastructure needed to propel the economy forward. This includes new highways, bridges, seaports, and railway systems.
Utilizing foreign debt for our development needs has become much safer today than it was in the 1970s. This is due to three reasons: First, the projects for which foreign loans are used are carefully vetted by the National Economic and Development Authority (NEDA) to ensure their viability. Second, the manner by which funds are spent is more transparent, thereby minimizing corruption. Three, lenders are more stringent in qualifying loan proposals and they impose strict milestones before the full amount of loan proceeds are released. Besides, the country has amassed enough foreign reserves to comfortably service our foreign obligations.
But by no means should this lull us into complacency. We must always remember the lessons of the 1970s and the hardships we had to go through just to put our foreign debt conundrum behind us.
In the end, well-considered projects, transparency, the absence of corruption, and debt restraint is key to making foreign debt work to our advantage.
Andrew J. Masigan is an economist
Facebook @AndrewJ. Masigan