Debt-equity swap to reap minimal benefits for RP
ANGELES CITY — A civil society expert on the public debt warned here yesterday against unwarranted rising expectations with a proposal to convert about half of the country’s foreign debt into creditors’ equity in selected Philippine companies.
The debt-equity swap idea was broached by Speaker Jose de Venecia before United Nations forums in New York when President Arroyo was also there last week to attend high-level discussions on security, foreign debt and related global issues.
Ms Leonor M. Briones of the Freedom from Debt Coalition, who is also a co-convenor of the Social Watch Philippines, said the De Venecia idea — a variation of which she said failed when tried here in the 1980s — was beguiling and therefore needs deeper study.
The Social Watch global network monitors governments’ commitment made at the 1995 Copenhagen Summit toward the eradication of poverty, unemployment and social disintegration.
She noted that such a swap was market-oriented, meaning that hard-nosed lending banks would go for it only if they could get back their money plus profit. They would not bite out of altruism or pity for poor debtor-countries, she added.
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TAMING THE BEAST: Briones discussed the country’s public debt and suggested approaches to “taming the beast” — now estimated to have burgeoned to P6 trillion — in the weekly Kampus Kapihan here at the Angeles University Foundation.
She was one of only two civil society advocates chosen from a global list by President Jean Ting of the UN General Assembly to speak at the recent 2005 Millennium Plus Five Summit. She spoke during the Financing for Development segment of the conference.
On debt-equity swap, she said that even if some of the lending banks pick some Philippine businesses in which to invest, their debt conversion would be miniscule as measured against the huge public debt that has plunged the country into a fiscal crisis.
“Such a drop will not cause a ripple in the consolidated public sector debt (CPSD),” she told us in a later conversation. The grand debt total has been placed by the government at P2.523 trillion in 1998, and had doubled to P5.298 trillion by 2004.
If contingent debt is added, the grand total for 2004 grows to P6.163 trillion (those are 12 ciphers after the decimal point!) Contingent debt is mostly debt of private firms whose borrowings are guaranteed by the government and most likely to be absorbed by it.
Debt-to-equity conversion could have some effect on development, she conceded, but only minimal effect on debt reduction if no comprehensive action plan for debt management is adopted.
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STRICTLY BUSINESS: Briones said the debt-equity transaction would revolve around two basic questions: What stock are we selling? What do the banks get in return for buying in?
She noted that there is hardly any viable government-controlled business venture left that could attract the lending banks.
Aside from that, she added, the businesses being offered must be linked to the Millennium Development Goals defined in 2000. These goals include reduction of poverty, dreaded diseases, infant and maternal mortality, as well as promotion of primary education, environment protection and gender equality.
In the 1980s, she recalled, there was a similar swap idea involving foreign debt being written off against public expenditure for environment protection. The plan did not catch on.
When the De Venecia proposal is presented soon to the so-called Paris Club, she said the banks are likely to just say they would study it without making firm commitments. It has happened before, and it will happen again, she told us.
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CONFUSING INFO: Government figures on the public debt keep changing and are sometimes confusing because there is not enough transparency and various parts of it are monitored by different agencies.
Data on the CSPD, which combines the deficits of the national government, government owned and controlled corporations (GOCCs) and local governments, are maintained by the Department of Finance.
Data on national government deficits and debts are maintained by the Bureau of the Treasury, while those on “Philippine External Liabilities” referring to the external debt of the public sector and the private sector are monitored by the Bangko Sentral ng Pilipinas
Briones pointed to what she called a paradox in fiscal deficits being financed by borrowing. In 2002, the budget for debt service was P185.8 billion, but the disbursements on debt service that same year reached P1.3 trillion, according to Commission on Audit data.
Also in 2002, COA reported that the actual income or revenue earned by the government totaled P601.8 billion against total debt service disbursements of P1.3 trillion.
In 2003, revenue totaled P653.7 billion. On the other hand, interest payments reached P234.2 billion, in addition to P1.2 trillion paid out to redeem government-issued securities and repay principal of outstanding loans from domestic and foreign creditors.
“Why does annual government borrowing always exceed the fiscal deficit, and add to bloating the total debt?” she asked.
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DEBT EATS RESOURCES: Briones also pointed out to what looked like skewed priorities.
While the peso figures showed that appropriations for economic, social, and general public services went up from 1999 through 2005, their respective allotments actually shrunk miserably percentage-wise — meaning, their shares went down drastically compared to the total national budget.
Yet during the same period, the allotment for debt services soared.
The budget share of economic services dropped from 25.25 percent in 1999 to 17.54 percent in 2005; social services from 33.81 percent to 28.02 percent; and general public services from 17.64 percent to 15.50 percent.
But the budget share of net lending rose from 0.09 percent in 1999 to 0.84 percent in 2005; and interest payments from 18.17 percent to 33.24 percent.
Translated to real terms, she said this has resulted in hospitals without medicine, students without classrooms and textbooks, and a general deterioration of essential services.
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DEBT MANAGEMENT: Briones suggested that we “think outside of the box of government solutions.”
The knee-jerk solution is mostly revenue-raising through more taxes. She cited the controversial Value-Added Tax as an example of a regressive tax that is hardly the solution to the fiscal crisis hounding the Arroyo administration.
She reiterated her suggestion that a Debt and Risk Management Unit be created. She said many progressive countries have such a body that monitors, for instance, interest rates, so the country can borrow when rates are low (assuming it is ready to act promptly).
For debt management, she also proposed bond exchange to lengthen debt maturity (this is already being done), the use of Official Development Aid as an alternative to commercial borrowings, the limiting of government guarantees for GOCCs, and the setting of a debt cap.
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PROPOSALS: Other suggestions made by Briones at the Kapihan for deficit and debt management:
In raising more revenue, there should be focus on progressive taxes, not regressive levies like the VAT. The trend is to favor indirect taxation. Progressive taxation is more equitable.
Expenditure cuts should be selective and not made indiscriminately across-the-board. Instead of decreasing expenditures for social development, these should be raised to cope with the increase in the number of the absolutely poor and address income inequality in many regions.
Involve the Bangko Sentral in the search for feasible, doable solutions. Solutions should not only be on “taming” the fiscal deficit. Efforts should be geared toward reducing the debt stock itself. The new Debt and Risk Management Unit can focus on this.
Talk now to the creditors, particularly multilaterals and bilaterals. Bring the plight of heavily indebted middle-income countries like the Philippines to international forums on debt like the annual meetings of the multilaterals, G-7 Plus One, and MDG assessments. The global “cancel-the-debt campaign” has to be expanded to include middle-income countries.