MANILA - Philippine finance officials on Wednesday assured the public that the country can pay its loans to China, after concerns were raised that Manila might end up surrendering its prized resources to Beijing if it defaults on its debts.
Supreme Court Senior Associate Justice Antonio Carpio earlier warned that China could seize natural gas deposits in Reed Bank (Recto Bank) if the Philippines is unable to pay the $62-million Chinese loan for the Chico River Irrigation Loan Agreement.
The justice’s warning prompted greater public scrutiny on the deal, aimed at providing stable water supply to around 8,700 hectares of agricultural land in Northern Luzon.
Finance Undersecretary Bayani Agabin said the scenario of the Philippines defaulting on its debt obligation is “remote” given the country’s credit history and its practice of automatically appropriating funds for its debt.
“The Department of Finance challenges critics to look and study the Philippines’ credit history. If you look at it, we’ve never had a history where we renege on our obligations, even during the most difficult times,” Agabin said in a Palace press briefing.
“The government is responsible in managing the country’s debts, be it external or internal.”
And even if the Philippines defaults on its loan, the two countries will have to undergo an arbitration process, which Agabin said would not be lopsided against the Philippines.
The arbitration venue for the Chico deal is in Beijing, but Agabin said any decision of the tribunal must first pass through a Philippine court for it to be enforceable.
“This way, we will be protected from any unfair treatment during the arbitration,” Agabin said.
Finance Undersecretary Mark Dennis Joven also debunked the perception that the Chico loan agreement is onerous, as he maintained the provisions in the deal are standard and can also be found in the country’s loan agreements with other countries, such as Japan, South Korea, and France.
Joven explained that the governing law for the loan is understandably Chinese because Beijing is the one lending the money.
“All our bilateral agreements with China, Japan, Korea, France and with China under previous administrations, all of them have a choice of governing law provisions. And all of these choice of governing law provisions refer to the law of the lender, not the law of the borrower,” Joven said.
“Because if we rely on our own law or borrower’s law, then there will be a lot of avenue for us not to pay the loan we owe. And we as Filipinos are not like that,” he added.
Joven said the provision on the waiving of “sovereign immunity” is also a standard in all loan agreements. He explained the waiver only applies to the “arbitration proceedings and the enforcement of arbitral award.”
“We only waive sovereign immunity only in so far as the arbitration proceedings and the enforcement of the arbitral award. We do not waive sovereign immunity if it does not relate to the arbitral proceedings or the award,” he said.
Joven explained that Article 8.6 of the loan agreement states that an arbitration ruling may only be recognized by the Philippines if it is “not obtained through collusion or fraud, and such award was not based on a clear mistake of fact or law,” and that the award is “not contrary to public policy in the Republic of the Philippines.”
“Assuming that there is a dispute which underwent arbitration, eventually you will need to go to Philippine laws to seek your answers,” Joven said.
“You cannot rely on Chinese law especially in the definition of what is a government asset or what is a public asset.”
He also debunked the notion that the Chinese deal is disadvantageous to the Philippines because of its supposedly high interest rates.
He said for the Chico project, China imposed a 2-percent interest rate, which is better than the 2.7-percent interest rate Japan imposed for the North-South Commuter Rail project, and the 3.69-percent interest rate by France for the Cebu Bus Rapid Transit project. The figures were all based on equivalent fixed US dollar rates.
Finance Assistant Secretary Tony Lambino, meanwhile, said as of the end of 2018, the Philippines’ total project debt exposure to China was at 0.66 percent, lower than Japan’s 8.9 percent.
REED BANK NO COLLATERAL
Agabin, meanwhile, stressed that no portion of the Philippine territory or maritime domain was made collateral for the Chinese loans.
“The collateral is agreed upon by the parties at the start of the loan. In the loans we have, regardless of which country, the Philippines does not offer any collateral,” Agabin said.
Lambino, meanwhile, noted that Carpio only warned of a possible taking of gas deposits from Reed Bank, not Reed Bank itself, in case the Philippines defaults on its loans with China.
“We need to differentiate between Reed Bank and the concession… It was never Justice Carpio’s statement that Reed Bank is patrimonial property. I think it’s very clear from his statement that he’s talking about the oil and the gas. There’s a lot of confusion that has come about from that… lack of differentiation,” Lambino said.
Carpio had noted that the natural gas deposits in Reed Bank form part of the country’s patrimonial assets, which refer to properties owned by the Philippines in its private capacity and not for public use, public service or intended for development of national wealth.
Manny Pangilinan’s PXP Energy Corp. holds the right to drill in Reed Bank, which is both being claimed by Manila and Beijing.
Joven explained that since the Reed Bank concession was already granted, “I don’t think it’s possible, technically, for the Chinese government to enforce an arbitral award in its favor by getting that Reed Bank concession.”
“The only way for the Chinese government to recover Philippine properties located in the Philippines is to go through Philippine courts, right? So, if… it opts not to go through Philippine courts, then how can it get Philippine properties?” Joven said.
And even if the Philippines ends up paying China through gas deposits from Reed Bank, this is also as good as cash, Agabin said.
A 2013 report from the United States Energy Information Administration said Reed Bank could hold up to 5.4 billion barrels of oil and 55.1 trillion cubic feet of natural gas.
Concerns have been raised about the Philippines securing loans from China due to the two nations’ long-standing dispute in the South China Sea, a vital sea lane believed to be holding huge untapped natural gas and oil reserves.
The Philippines in 2016 beat China in a United Nations-backed arbitral tribunal which invalidated Beijing’s expansive claim to the sea. China, however, has refused to recognize the ruling.
Under President Rodrigo Duterte, Manila has sought to forge close ties with Beijing in exchange for improved economic ties.