Forbes/ Opinion
Anders Corr, CONTRIBUTOR
Opinions expressed by Forbes Contributors are their own.
The Philippine people must be forewarned about the dangerous China deal. Buyer beware. Caveat emptor.
According to the South China Morning Post on May 12, “Philippine Secretary of Budget and Management Benjamin Diokno estimated some US$167 billion would be spent on infrastructure during Duterte’s six-year term, under the slogan ‘Build! Build! Build!’.” That could increase current Philippine national government debt of approximately $123 billion, to $290 billion. But that does not include interest. High rates of interest that China, the most likely lender, could impose on the new debt could balloon it to over a trillion U.S. dollars in 10 years. More likely according to my analysis, at 10% interest the new debt could go to $452 billion, bringing Philippines’ debt:GDP ratio to 197%, second-to-worst in the world. That understates the burden to the Philippines, as existing national government debt would also accrue interest over that time, and such interest was not included in the analysis. Dutertenomics, fueled by expensive loans from China, will put the Philippines into virtual debt bondage if allowed to proceed.
Effect of $167 billion in new debt on the Philippines, in terms of principal plus interest and debt:GDP ratio, over ten years. Source: Corr Analytics Inc Corr Analytics Inc
Effect of $167 billion in new debt on the Philippines, in terms of principal plus interest and debt:GDP ratio, over ten years. Source: Corr Analytics Inc
Duterte and his influential friends and business associates could each benefit with hundreds of millions of dollars in finders fees, of 2-7%, for such deals. Duterte reportedly sought to fast track some deals, and has publicly mooted the possibility of declaring martial law for a wide range of issues, including drugs, traffic, and the situation on Mindanao. Debt imposed on the public through corruption, fast-tracking or under martial law should be considered odious debt, and not repayable. The only way to stop such unjust debt is for the terms to be entirely transparent to the Philippine public in advance, for full cost-benefit analyses to be done by an independent authority on each deal, and for the Philippine Congress to vote on whether each deal proceeds. Failing that will lead to virtual Philippine debt bondage to China.
The attached chart shows how $167 billion of new Philippine debt will affect the Philippine economy over a period of 10 years, at different possible interest rates. It assumes monthly compounding of interest and is based on a standard compound interest formula. The effect will be very different depending on the rate of interest — which neither the Duterte Administration nor China has divulged. The Philippine people must demand to know and agree to this interest rate before the deals are signed.
Even at 5%, which is nearest the lending rate of interest published by the IMF and World Bank for the Philippines, the effect of such a large sum would be an increase in debt (in addition to existing debt) of $275 billion after 10 years. That would bring the Philippines’ debt:GDP ratio to approximately 136%. But at 20%, the maximum interest rate that might occur in a debt-distressed country like Argentina or Venezuela, the debt could balloon to $1.2 trillion in 10 years. That is an unlikely worst-case scenario, but worth calculating as an illustration of the importance of the interest rate.
The interest rate that China will offer the Philippines on such a large sum relative to GDP is likely higher than the World Bank rate, but likely lower than say 15%. Without much needed transparency from the Duterte government and China on the rate, conditionality, and repayment terms of $167 billion of new debt for the Philippines, the public should assume, to forestall a worst-case scenario, that the rate would be somewhere between 10% and 15%. Over 10 years, that could ballon Philippines’ debt:GDP ratio as high as 296%, the highest in the world.
At any likely interest rate, the Philippines will have trouble repaying $167 billion in debt, plus interest, to China. The Philippines will have to give political and economic concessions to China in order to repay annual interest, or renegotiate such a large quantity of debt. That could include political concessions, for example giving up territory or oil rights in the South China Sea or Benham Rise, or it could include economic concessions, for example selling China its national companies, or agreeing to below-market rates on exports to China. Mongolia once agreed to sell coal to China at 11% of the global benchmark price in order to secure a loan to repay other loans. It could happen to the Philippines if it falls behind in interest payments on $167 billion.
In the worst case scenario, China would deem the Philippines too risky as its debt grows, and stop such renegotiations and another country, like Russia, could step in with even stiffer terms. This is currently happening to Venezuela, where in the last few weeks people are starving and dozens have been killed in anti-government riots. Venezuela took extensive loans from China, and could not repay them when the price of oil dropped. Venezuela’s President Maduro, who depends on the high-interest loans to keep his government in power, is so far indebted that China will no longer extend significant capital. To repay China, Maduro is seeking new loans from Russia. This is rightly resisted by Venezuela’s National Assembly, which wants the right to approve loans. Maduro tried to shut down the Assembly in response, and has been able to continue to seek the Russian loan against the Assembly’s wishes. Something similar could happen to the Philippines in 10 years, depending on interest rates agreed to in the coming months. These interest rates, and all details of the deals, need to be made public and approved by the Philippine Congress, or the loans should not go through.
The Philippines is at a crossroads. Duterte and his political allies are seeking billions in loans at unknown interest rates from China, whose companies stand to benefit by offloading idle Chinese industrial capacity to build costly infrastructure for which no proper cost-benefit analysis has been done. Duterte and his allies could gain hundreds of millions of dollars each in finder’s fees from such loans that the Philippine taxpayer will have to pay. This should be considered odious debt if the terms are not transparent to the public in advance, if public cost-benefit analyses are not done for each deal, and if each deal is not approved by Congress. The Philippine people must be forewarned about the dangerous China deal. Buyer beware. Caveat emptor.
Please follow me on Twitter @anderscorr, or contact me at corr@canalyt.com.
