FDC Statement in reaction to the government’s paid advertisement titled “Foreign Debt Falls”
08 January 2009
Debt & Public Finance
The government’s recent paid advertisement published in different national broadsheets outlining the so-called achievements on debt is deceptive to say at the very least.
The claim that the government had been able to reduce substantially debt service, using external debt to Gross National Product (GNP) as an index, is founded on weak, if not faulty, assumptions. As with Arroyo's elusive dream of a "balanced budget", the logic with which the administration argues its case will, at the very end, prove to be a mere economic fantasy.
Let us take a look at the external debt first. The Bangko Sentral ng Pilipinas (BSP) itself reports that as of end-September 2008, the external debt levels is pegged at $53.48 billion, $1.58 billion dollars more than when she started office in end-2001 when external debt is pegged at $51.9 billion. This means that whatever decrease in external debt to GNP come only come from an increase in GNP, for as we would know, the GNP is used in the equation as the denominator.
In actuality, the administration’s computation for GNP and GDP are questioned by many experts – probably as a response to the series of advertisements on the spectacular 7.3% growth during the height of inflation last year. Former National Economic Development Authority (NEDA) Director General Cielito Habito, for example, said that he noticed a sudden slowdown of import growth during the time of Arroyo - from more than 10% annual import growth in the 1990s to low single-digit growth rates, even going at -5.4% at 2007. As we know, import is deducted from the export component of the GDP/GNP, so low imports necessarily mean higher GDP. We have good reason to believe that, with a healthy smuggling economy under Arroyo, this is a case of understated imports rather than less dependence on finished imported products.
In addition to the import slowdown, there are also challenges on the methodology of the computation itself. We mention here former NEDA Chair Felipe Medalla's earlier criticism on the inconsistency in the growth trends of Personal Consumption (PCE) as accounted for in the GDP computations and as accounted for the more accurate Family Income and Expenditure Survey (FIES) prepared by NSO. On top of this, there are other challenges on the accuracy, particularly on the inconsistency of the "base-year" approach currently employed. The point is that it is in interest of the administration to bloat GNP and GDP because this will eventually result to lowering of external debt to GNP ratio despite having higher nominal external debts.
Now that we know that GNP might in fact, be overstated, let us assume for once that GNP is correct as stated. We then look into what sector of the economy actually grew this year. The National Statistical Coordination Board (NSCB) itself reports that Net Factor Income from Abroad (NFIA, which is simply the sum of money coming in), a bulk of which is the OFW remittances, had a "24.7 percent growth, from 31.9 percent last year, which propped up GNP by 6.5 percent from 9.1 percent." This only means that a large part of economic growth did not come from the administration, but from the sweat (and blood, especially those in conflict-ridden areas) of millions of Filipinos working abroad. Surely, it is more than presumptuous that Arroyo claims their efforts as her own.
But let us look at the side of the economy which indeed grew because of the administration, the Government Consumption Expenditure (GCE). Looking at NSCB data, GCE posted high growths under Arroyo, at an average of 5.9% from 2001 to 2007. Incidentally, this was accompanied by at most, a fairly modest revenue effort, which grew only by 1.46% from 2001 to 2007. This is counter-posed to a manic borrowing spree by the administration, with gross borrowings posting an average of 10% of GDP from 2001 to 2007.
What can we conclude here? High spending plus static revenue efforts plus humongous borrowings can only mean a debt-driven GCE growth – a growth which is in part responsible for a “miraculous” 7.3% growth under Arroyo. Ironically, this debt-driven growth is what driving external debt to GNP/GDP ratios down, something akin to a loophole for what Arroyo only has to do is to borrow more and spend more in order to drive the ratio down.
The current pronouncement of a plan by the Department of Finance to raise $1 to $1.5 billion from the offshore bond market for this year is only an indicator of how much the administration is addicted to borrowings. In fact, we can say that the paid advertisement’s actual intention is to assuage a money market that may be worried at seeing the Philippine all-time high national government debt, now begged at P4.1 trillion.
Simply put, external debt to GDP/GNP alone cannot give us an accurate picture of the state of the Philippine debt. Relying on this alone as the Arroyo technocrats are doing is dishonest and misleading. A point to support this is the fact that paradoxically, we are increasing our external debt to GNP ratio by paying our debts, since the outflow of money translates to less NFIA, which means less GNP and thus, higher external debt to GNP.
But let us assume, for once, that Arroyo was able to indeed manage the debt problem without “cheating.” We then ask: at what cost? The truth is the government conducted an intensive “spending compression” and austerity effort during the middle of its term, presumably in order to tame the budget deficit and survive the fiscal crisis. This was the reason behind severe under-spending on social services (only recently had the trend been reversed, but not enough), concurrent with aggressive indirect taxation (read: VAT), during the middle of her term.
Clearly, assuming that Arroyo indeed had been able to “magically manage” the debt problem, it was done through punishing the Filipino people through lack of social and economic services as well as higher taxes. This is not something a President rapaciously looking for a legacy can be proud of, much more a President of almost ten years can brag about. -30-