Debt and the 2007 Budget

Freedom from Debt CoalitionJanuary 2007

DEBT Becomes Her

An Overview of the Debt Situation Under GMA

The country again is in grave danger from spiraling into a debt tragedy.

For one, the government under the administration of Gloria Macapagal Arroyo is increasingly relying on debt to keep its finances afloat.

Second, this administration is changing some fiscal procedural, management, and reporting rules that allow it to juggle funds and statistics simply to make its “numbers” look good.

Third, under GMA we are again witnessing unscrupulous borrowing practices and provision of government guarantees that can be expected to further add to our debt burden.

And lastly, under the GMA administration the little gains achieved in attempts of the national government to recover and hold accountable those responsible for behest and onerous loans under the Marcos dictatorship are now being compromised.

Heavy Borrowings

As of September 2005, total Philippine debt has ballooned to a staggering Php 6.5 trillion or UsD 116.3 billion.

From Php 4.5 trillion or UsD 89.78 billion in 2000 and Php 1.8 trillion or UsD 74.7 billion in 1994.

The county now stands as the 10th most indebted country in the world.

The current Philippine government under Gloria Macapagal Arroyo (GMA) has opted to take an aggressive borrowings and repayment policy.

The total borrowings of the Arroyo administration amount to more than the combined debts of the country’s past three presidents.

In power for only 5 years and 7 months, GMA has already borrowed a total of Php 2.77 trillion.

On the other hand, the combined debt of Cory, Ramos and Erap only totals PhP 1.51 trillion.

Aquino, (383B)(1987-1991)

Ramos, (401B)(1992-1997) Estrada,

(725B) (1998-2000)

Arroyo, (2.76T)(2001-July

2006)

383370 401015

725181

2756680

109924 146434 314090

1044195

273446254581 411091

1712485

0

500000

1000000

1500000

2000000

2500000

3000000

Total Borrowings per Administration

Gross Domestic Borrow ings Gross Foreign Borrow ings Total Borrow ings

Heavy Debt Payments

The most evident impact of the Philippines’ continued reliance on debt and its government’s lack of prudence in accessing and assuming debt is the ever-increasing burden of repayment.

In 2005 alone, the Philippine NG paid PhP 678.95 billion in interest and principal debt payments.

This amount represents 85 percent of the country’s total revenue collection and 52.7 percent of the total government budget for the same year.

49%

63%

76%

86%

85%

Revenues after Debt Payments

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

2001 2002 2003 2004 2005

year

amount ( in million pesos)

Debt Servicing Available Funds

PER MINUTE Debt Service: PhP 1.37 million

PER DAY Debt Service: PhP 1.98 billion

Per capita Debt Payment: PhP 8,400

Per capita SOCIAL Spending: PhP 3,400

Per capita ECONOMIC SPENDING: PhP 2,300

On the Fiscal Deficit: Beyond Image

Despite the ballooning debt, increasing interest and principal debt payments the GMA administration continue to project an image of a stronger fiscal position.

The manipulation of procedures, funds and statistics simply to project this image was discussed in a paper written by Maitet Diokno-Pascual, former FDC president, last July 2006.

Relying on Borrowings

Using data from the COA audit reports for the years 2002-2004, the combined debt-related cash outflows of PhP 4.5 trillion are 2.6 times the total tax revenues earned by the Arroyo government in the same period.

In order to keep afloat, Diokno-Pascual pointed at how the Arroyo government is borrowing heavily from itself.

Based on the same COA reports, from 2002 to 2004 the Bureau of the Treasury “invested” PhP 953.6 billion in Treasury bills issued by itself.

The amount came from the Bond Sinking Fund which is money set aside for payment of maturing government securities.

In effect, the Treasury earns from lending to itself. Nearly a third or 31.4 percent of the non-tax revenues earned by the Arroyo government from 2001 to 2005 consisted of interest earned from money the Treasury lent to itself.

What this means is that the Arroyo government augments its revenue by borrowing from itself.

Cutting Spending

At the same time, improvements in the deficit numbers were also achieved by massive cuts in government expenditures particularly for social and infrastructure spending.

From 2001-2005, the Arroyo government’s total expenditures exceeded total revenues by PhP892 billion.

A deficit is not entirely a bad thing, especially if it is incurred in order to support employment-friendly growth. But in the case of the Arroyo government, only nine centavos of every peso it spent from 2001 to 2005 was used for capital outlay.

In short, deficit spending was not channeled towards increasing and upgrading our productive capacity. Capital outlay fell from 2.1 percent of nominal GDP in 2001, to 1.3 percent of nominal GDP in 2005.

In 2005, the Arroyo government cut non-interest, non-IRA spending—social and infrastructure spending—by PhP 50 billion or a significant 10% of the year’s program.

In the first half of 2006, it cut even more posting cuts in social and infrastructure spending of 19 percent PhP 60 billion.

Since 2001, spending on social services and infrastructure has consistently fallen from 11.1 percent of nominal GDP to 8.6 percent in 2005.

In contrast, total debt service payments (interest and principal) have risen from 4.8 percent of nominal GDP to 5.5 percent over the same period.

Growing Contingent Liabilities

The growing indebtedness of the Philippines is also alarmingly bolstered by the advent of contingent liabilities.

As of end-December 2005, the NG contingent debt amounted to PhP 586.4 billion pesos or 14.53 percent of the total NG debt, while the broader public sector’s contingent debt stood at PhP 627.4 billion.

Under the GMA regime except for 2005, contingent liabilities have been growing annually by some 16 percent (2001 to 2004).

Bulk of which is accounted for by direct guarantees provided by the national government to foreign debts.

  2001 2002 2003 2004 2005Jan- May

2006

Total 495,777 591,738 708,539 833,708 586,350 591,912

 

Domestic Debt 23,167 21,065 22,635 33,135 48,183 48,134

NG Direct Guarantee 22,984 20,881 22,451 32,951 48,012 47,983

Assumed GFI Guarantee 183 183 183 183 170 151

 

Foreign Debt 472,610 570,673 685,904 800,573 538,167 543,778

NG Direct Guarantee 456,093 54,852 670,778 787,821 529,542 536,357

Assumed GFI Guarantee 16,517 15,821 15,821 12,752 8,625 7,421

GMA’s Compromise Deals

Under GMA, several institutions of government have been entering into compromise deals particularly in onerous and behest loan Marcos debt cases.

Instead of pursuing the Marcos debt cases in order to bring to court those who were directly responsible for these loans and to recover what in effect they stole from the Philippine government.

Following the pronouncements of PCGG Commissioners, as a policy, the GMA administration will pursue compromises on these cases.

Example: PNCC-Radstock Compromise Deal

Overview of the 2007 Budget

Total proposed budget for 2007 amounts to PhP 1.13 trillion. New appropriations only reach PhP 641.12 billion compared to

PhP 734.1 billion in 2006. Automatic appropriations for internal revenue allotments of

LGUs and for personnel retirement/gratuity funds will reach PhP 223.49 billion.

Interest payments on the debt only at PhP 328.73 billion. This amount is slightly lower than last year’s level.

The appropriations bill, however, did not reflect principal payments on the debt.

Budget Items 2005 (actual)2006

(adjusted) 2007 (proposed)

New General Appropriations 717,373,260 734,084,485 641,120,897

Automatic Appropriations: Interests 299,807,000 339,998,000 328,733,000

Automatic Appropriations: Others 75,428,410 36,299,961 223,493,582

Continuing Appropriations 37,410,055 102,499,298 -

sub total 1,130,018,725 1,212,881,744 1,193,347,479

Less: unobligated allotments 182,464,997 159,604,744 67,008,479

Total obligations (1) 947,553,728 1,053,277,000 1,126,339,000

Increase for IRAs

While the total budget posted a slight 2.4 percent real growth, it is only the automatic appropriations of internal revenue allotments (IRAs) to LGUs that reflected an increase. This single budget item increased more than five fold.

For 2007, government will be automatically appropriating a total of PhP 183.9 billion in IRA. In the previous two years, the NG classified this budget line item under general appropriations rather than being automatically appropriated.

Appropriations for regular government programs, operations and for new expenditures actually shrunk in real terms by 17.2 percent.

The decline in interest payments by 7.7 percent do not necessarily imply a reduction in debt burden but can be attributed to the US-Peso exchange rate and the retirement of short term debts for longer term maturity debts.

The President’s budget message claims the availability of funds for economic and social services and for new infrastructure projects. This is clearly misleading when the single biggest increase in the proposed budget are in fact already automatically appropriated.

Budget Items in % of TotalNominal

Growth RateReal Growth

Rate

New General Appropriations 56.92 (12.66) (17.21)

Automatic Appropriations: Interests 29.19 (3.31) (7.86)

Automatic Appropriations: Others 19.84 515.69 511.14

Continuing Appropriations - (100.00) (104.55)

sub total (1.61) (6.16)

Less: unobligated allotments 5.95 (58.02) (62.57)

Total obligations (1) 100.00 6.94 2.39

Across Sectors

Looking at sectoral allocations, debt service (for interests alone) eats up 29.2 percent of the total budget. This, however, does not contain debt servicing for principal payments.

If principal payments are reflected then it can be expected that debt servicing will eat a hefty chunk of the proposed 2007 budget.

This allocation is almost equal to the allocation for the whole of the social service sector which will receive 29.2 percent of the 2007 budget.

Economic services will only corner 20.7 percent of the budget.

Level%

Distribution

Growth Rate

(Nominal)

Sectoral Allocations 2005 2006 2007 2007 2007

Debt Service (interests) 299,807 339,998 328,733 29.19 (3.31)

Social Services 255,533 293,714 329,381 29.24 12.14

Economic Services 173,875 196,945 233,173 20.70 18.39

General Public Services 168,998 161,712 182,097 16.17 12.61

Defense 47,634 52,657 53,853 4.78 2.27

Net Lending 1,707 8,250 9,101 0.81 10.32

Grand Total 947,554 1,053,277 1,126,339 100.00 6.94

On Budget Financing

The appropriations bill regularly provides a copy of the national government’s budget financing plan. (Usually Table D of the BESF) This copy is not available in this year’s budget documents.

It is within this table, the one can see the allocation for principal amortization.

At the same time, this table also shows how much government is planning to borrow for the coming year in order to finance its principal amortization payments and in order to finance this deficit.

Previous years’ data on government financing showed that reduction in the fiscal deficit was caused primarily by GMA increasing its borrowings and cuts in spending for LGUs and social services.

Budget Advocacy Points

Transparency in the Presentation of the Budget

The presentation of this year’s budget did not reflect the principal amortization on debt payments disallowing us to see the complete picture on debt servicing.

While this amount is said to be an off budget item, in the past appropriations bill this has been reflected.

It thus becomes misleading when the President’s budget message claim that our debt burden has been reduced.

The national government financing plan must be presented by the Executive during the budget deliberations.

Repeal of the Automatic Appropriations Law (PD 1177)

The FDC consistently calls on the Congress to repeal PD 1177 particularly provisions that automatically appropriates payments for debt principal amortization and interests.

Automatically appropriated debt payments unnecessarily constrain government’s capacity to provide for vital economic and social services.

At the same, government ends up automatically appropriating scare resources for payments of debt that have been found behest and/or onerous.

Stop Appropriations for Interests and Principal Debt Payments for Marcos Debts

Immediately Investigate and Review Compromise Deals Entered into by the PCGG and other government agencies

As of end Dec 2005, the Bureau of Treasury estimates that the national government still has an outstanding obligation amounting UsD 783 million of all Marcos Debts.

This means we shall continue to pay for interests and the principal amortization of these despite the fact that debts are considered odious and most of these debts are under contention by government itself.

FDC asserts that payments for the remaining Marcos debts be stopped.

In the immediate, the PNCC-Radstock compromise deal must be reviewed.

Assess future indebtedness by Reviewing government’s growing contingent liabilities particularly the executive’s policy on providing sovereign guarantees even for private enterprises.

Do not provide budget counterpart; and,

Investigate new borrowings ridden with controversies such as the North Rail Project

Under the Senate investigation the PhP 28 billion North Rail Project approved by the GMA government is proving to be full of anomalies.

This project was approved despite the lack of competitive public bidding, the questionable legality of the buyer credit loan agreement (BCLA) and the lack of the contractor’s engineering experience and expertise.

Although funded by a loan, Congress can refuse to allocate counterpart funds for this project in order to derail its implementation pending a full review.

Not only will this avert implementation of an anomalous contract but it will also have a big impact in the country’s future indebtedness.