The Philippines: “living on borrowed time”

If you really want to get depressed and angry at the Philippine politicians behind the current crisis, have a look at “Mess in Manila” in this week’s Economist (subscription link).

Articles in the international media on the Philippine political scene are typically full of words like “vibrant”, “colourful”, “exuberant democratic process” and similar clichés so beloved of foreign correspondents.

“Mess in Manila” is different because it is from the finance and economics pages. You can tell it is from the financial pages because words like “downgrade”, “deficit” and “capital flight” liberally sprinkle the page. Here’s an example of the cheery news you may find there:

“Default”, says Agost Benard of S&P, is “the question on everyone's mind”.

For someone from one of the main credit-rating agencies to speak so bleakly is very worrying. Last week, S&P and the other two main ratings agencies, Fitch and Moody’s, downgraded their outlook for the Philippines’ sovereign (i.e., government) debt from “stable” to “negative”. This could be the first step on a very rocky road. In terms of its debt to GDP ratio, the Philippines is the world’s largest sovereign debtor (see chart below). Scarily, half of that debt is denominated in foreign currency.

Let’s look at what might happen over the next few weeks.

If the Supreme Court junks EVAT again there will be an immediate full downgrade from the agencies (the guy from Fitch says that explicitly in the article).

The peso will fall, ironically making it even harder for the country to pay its dollar denominated debts. Quite apart from the exchange rate, borrowing costs will rise becasue of the downgrade.

At this stage, things may happen quite quickly. Gloria (or whoever replaces her) may decide that, since she can’t pay the debt anyway, she may as well make some political capital out of it and announce that she is not going to service this iniquitous mountain of debt entered into by her corrupt predecessors. This is technically a default. Much cheering (off stage) accompanied by the sound of the peso breaking through 100 to the dollar (unless fixed exchange rates are brought in).

What is more likely is that Gloria’s allies, specifically Bush and his friend Paul Wolfowitz at the World Bank, will decide that they can’t let a strategic ally like the Philippines fall into the primeval slime and will loan the government yet more money to stave off the crisis and service its short-term debt obligations. This will probably come with the stringent conditions typical of so-called structural adjustment policies, such as sacking half the civil service, improving revenue collection, cutting spending on education and health, etc. until that great capitalist dawn finally arrives and we can all heave a sigh of relief.

If you believe in that great capitalist dawn, then I suppose you’d better hope for the second option. However, in many ways a straightforward default may be best for the country. There is something particularly insane about getting out of debt by taking out still more loans. Argentina actually recovered quite quickly from its default (the largest in world history) in 2003 so a short sharp shock—the equivalent of a spell in debtors’ prison—may help to finally get people’s minds focused on what is important.

Of course, what do I know? None of this may happen and we may go on blissfully as before averting our eyes from that nasty debt mountain. Still, that gloomy Mr Bernard fellow seems to think our days are numbered: “The Philippines is living on borrowed time” he said.

Needless to say, this particularly movie will be seen in a greatly speeded up version if a "civilian-military junta" or any of the other more radical proposals comes into being.

Postscript: All of the above relates to sovereign debt, but all the major Philippine corporations are mortgaged to the eyeballs too. Benpres Holdings of the Lopez family was rumoured to be on the verge of defaulting a few years ago. It has managed to stave off disaster, but it, and many other major corporations, are extremely vulnerable to the sort of scenario described above, especially if the peso takes a bath. Which is why Noli de Castro (rumoured to have been “put there” by the Lopezes) may turn out to be such an important figure after all.

Comments

[Jon Limjap]

I think this kind of debt behavior can be seen from the richest (pure pinoy) capitalist to the poorest palista-naman-sa-tindahan-ni-aling-nena of the poor.

It's a really baaaad Filipino culture thing.

[Miguk]

Yikes, that is really frightening. If you ran a household budget like that, the spouse would revolt for sure!

[Vera]

Yep, it's a culture thing. Filipinos are known to promote "utang". According to my officemate, as long as he is able to loan, he will loan...it doesn't matter whether he will be able to pay it off thinking his debts will be erased when he dies.

Filipino parents should encourage their children to practice thriftiness and proper financial management. The state of a country is a reflection of the people living on it.

[mlq3]

Ah reckon ah should buy mahself ah nice shotgun and prepare for them thar end of days...

[leogre]

when fiscal reforms were being implemented and the new e-vat law was passed and signed, did the credit rating agencies upgrade the country's ratings? it looks like they didn't.

[torn]

Ha, ha, Manolo.

Very good comments from everyone, thank you. I was interested that so many people offered a cultural explanation for the government's debt woes. As a foreigner here, I'd be wary about advancing that explanation, for obvious reasons, but I think there is something in it. When I first arrived in the Philippines, a member of my staff had got herself into a horrific "borrow from Peter to pay Paul" situation, borrowing from those 5/6 gougers. Coming from a Presbyterian Scottish background the whole situation was just incomprehensible and terrifying to me -- I could not understand how she could live with the pressure. It seems less so now, as perhaps I have just become used to the utang culture. I guess anyone who is integrated into Filipino society at all has personal knowledge of people who borrow recklessly with no thought of tomorrow or the eventual day of reckoning. Jon is right, this kind of behaviour can be seen at all levels of society.

As for that member of staff of mine, I helped her as far as I could but her debts were just so enormous, running into millions of pesos, that she did the only thing possible and fled the country. It has a happy ending though as she now works happily for an international organization in Geneva. In all those years she has never come back here, even for a visit. I think her life would probably be at risk if she did.

[torn]

Leogre -- that's a good question. I guess the answer would be that even with EVAT in place the outlook would never have been better than "stable"; in fact "stable" seems a singularly inappropriate word for the Philippines, come to think of it.

Also, if you recall the chaotic process of passing the legislation--with both houses passing different versions of the bill -- it was not something that would inspire confidence.

I think we may have been lucky to get away with "stable" for so long actually.

[Sidney]

I lost hope in the Philippines :-(

[carlos celdran]

You've lost hope? So why did you move here Sidney?

[sarah]

speaking of culture, i find myself glad that my parents encouraged us siblings to be thrifty. they're good examples: they've never taken out a loan or used a credit card. =)

[tim]

Anyone soft-hearted or gullible enough to lend money to the philippines deserves to lose their shirt. Pinoys and pinays, I love you! Please go on taking the world - and especially the US! - for a ride for as long as they're willing to go on paying the barfines.

t.

[web design manila]

This is a Filipino behavior,though we've marked for being like that.lol