Recent increases in the inflation and interest rates, accompanied by a depreciation in the peso against the US dollar, point to added pressure for the Duterte government’s economic managers to collect more from the Filipino taxpayers to support ambitious spending programs.
As spelled out in the 2017 budget, any rise in the cost of government borrowings through sales of Treasury bills and the LIBOR rates on foreign loans, inflation, and the peso exchange rate will push up government expenditure levels. In some cases, revenues will also go up, but these may not compensate for the expanded expenses.
For instance, any 1-percentage point increase in the LIBOR rate, the benchmark for adjustable rates on international financial instruments secured by governments and businesses, is projected to increase the budget deficit by P4.6 billion. The LIBOR rate currently stands at around 1.41 percent, up from 0.88 percent from the level this time last year — and the trend since January 2016 has been upward.
For every 1-point increase in Treasury-bill rates (average for all maturities), budget expenditures are seen going up by P3.2 billion and revenues will rise by P0.5 billion, resulting in a net increase in the deficit by P2.0 billion.
For every peso depreciation in the exchange rate, on the other hand, budget disbursements are projected to expand by P2.0 billion while revenues are forecast to increase by P9.2 billion. Since July 2016, when the budget for this year was drafted, the exchange rate has fallen by P3.54 against the dollar.
Added pressure coming
But a potentially bigger factor for a need to bolster national coffers is the large amount of concessional financing that the government expects from China. While the terms may look favorable for the Philippines (interest rates of 2-5 percent and repayment terms of around 20 years or more, usually with a 3-5 year grace period), the amounts involved also determine how much “counterpart financing” may be required on the country.
According to recent studies on the features of Chinese official aid, conditions on counterpart financing vary, with some less developed countries required to put up only 20 percent of the total cost, while others get from 50 percent.
ANALYSIS: A closer look at Chinese foreign aid and investment
A feature of Chinese official aid is also to tie the financing to access to the aid-receiving nation’s production of a range of natural resources — oil, farm or fisheries supplies — usually with Chinese companies getting separate contracts to undertake these extractive operations.
In the recent past, the Philippines has been unable to secure fund releases under official development assistance agreements with certain multilateral institutions and bilateral partners because of inability to put up local counterpart funds. Either tax revenues were not sufficient or other urgent priorities came in the way of allocating the government’s resources.
According to latest available data from the National Economic and Development Authority, a total of $9.79 billion in official aid funds were available to the Philippines. But because of a poor absorptive capacity, disbursements from this large pool of financing for development projects have remained low.
The $9.79 billion in official aid in the pipeline is composed of $6.16 billion in 53 project loans, and $3.63 billion in 11 program loans. The World Bank was the biggest source for this pool, with $3.44 billion, while the Japan International Cooperation Agency accounted for the second-biggest with $3.13 billion.
As of mid-2015 (latest available government data), the disbursement ratio stood at 53 percent, with an improvement in the availment performance in the second quarter of that year. Around 80 percent of the fund releases scheduled for that period were actually disbursed.
Unless some concessional terms are granted by the China Export-Import Bank, the main agency in disbursing foreign assistance, the huge amounts committed by Chinese officials in the next few weeks may only succeed in further bloating the large amounts of unused funds in the Official Development Assistance pipeline.
If Philippine officials are looking at pledging agricultural or fishery production in exchange for the expected Chinese aid, it would be useful to review the experience of other developing countries that had entered into similar “barter-like” arrangements — they subsequently suffered declines in their credit ratings as a result.
Significantly bigger tax collections will help ensure that this latter scenario will be averted. For the Philippines to actually benefit from the promised billions of dollars’ worth of development assistance from China, the Filipino taxpayer will just have to pay more.