BY ANNA PATRICIA G. VALERIO, Special Features Writer

A GLIMPSE at the headlines that BusinessWorld ran in its first year not only gives a peek into the tumultuous history of the country’s pervasive debt burden, but also draws Filipinos to an issue that continues to haunt the new Aquino administration.

The borrowing binge that the Marcos regime indulged in during its two-decade rule snowballed the Philippines into a deep payment pit that it has been trying to get out of for more than two decades now.

The 1970s, which was marked by extensive loans from the international capital market, also heralded the country’s first debt crisis: tied to a spiraling balance of payments in 1968, the downturn caused record-breaking inflation and currency devaluation, with the peso being slashed in half.

From 1973, the country’s debt rose at an average of 27% per year. By 1982, annual debt payments had ballooned to $3.5 billion, an amount greater than the Philippines’ total liabilities in 1970.

Saddled with a $24.2 billion foreign currency debt, the state requested a 90-day moratorium on its obligations. The event was seen as the climax of its balance of payments dilemma: while the World Bank (WB) and the Asian Development Bank (ADB) granted lower interests for government loans, the latter’s debt service charges continued to escalate to alarming levels.

Aggravated by the global economic downturn and the political upheaval that followed popular opposition leader Benigno “Ninoy” Aquino, Jr.’s assassination, the period’s troubles culminated in Mr. Marcos’ departure for Hawaii in March 1986.

In a 2007 report, African Forum and Network on Debt and Development (AFRODAD) executive director Charles Mutasa shed light on just how rapid foreign debt had risen in the Martial law era: from below $1 billion in 1966 — the year former President Ferdinand Marcos assumed the top post in the country — it had reached a whopping $28 billion by the time he fled the Malacañang Palace 20 years later.

The hurdle of meeting service payments confronted the new government when Corazon Aquino was propelled to the presidential seat in 1986. Recorded at $3 billion, it drained both the country’s foreign exchange earnings and investible surplus. It also led the National Economic and Development Authority (NEDA) to push for another postponement, this time for two years, to let the country catch its breath and for Congress to introduce measures that would put a cap on annual debt service payments.

But both the Aquino administration and the Central Bank resisted these tactics, insisting that a more cooperative stance would be more beneficial for the country in the long run.

But then Finance Secretary Jaime Ongpin proposed at a senator briefing in 1987 that the debt servicing level, which was set at 22% to 29% at the time, be lowered to a more comfortable level of below 20%. The existing rate meant that the country would surrender 29 US cents out of every dollar it earned from exports and remittances to debt interest payments, at the expense of spending for development efforts.

Former Senate banks, financial institutions, and currency committee chairman Alberto Romulo was more ambitious, suggesting that the desired rate be pulled down to 10% of export receipts — a proposal that culminated in a bill, filed by former senator Ernesto Maceda, calling for a three-year suspension in foreign debt settlement.

Many analysts had been critical of the senators’ bold move. They argued that the Planters Products, Inc. (PPI) case, which demanded that the Philippine government guarantee the payment of the company’s $57 million debt to Barclays Bank of Britain, was not entirely a private issue: Foreign creditors, some bank officials surmised, felt that PPI’s financial capacity was impaired due to the Marcos regime, which controlled the company and meddled with its management by forcing it to sell at controlled prices.

Meanwhile, supranational groups warned that the bill would pit the Philippines against multilateral institutions like the World Bank, which could impair the country’s capacity to borrow in the future. Former Central Bank governor Jose Fernandez, Jr., for his part, argued that the prior deal made in July of the same year would suffice: $931 million saved in interest payments from 1987 up to 1992 and 17 years to pay with seven and a half years of grace period. 

This in addition to a January agreement under the Paris Club — an informal organization of official creditors — that allowed the country to postpone for 10 years principal payments of $870 million worth of loans due in 1988. Mr. Ongpin himself was wary about adopting the selective repudiation policy, which he feared could compromise the economic recovery scheme that at the time was already showing signs of success.

The debt management program loan approved by the World Bank in 1990, the first that the organization had financed, assisted in restoring the country’s creditworthiness by reducing external debt burden and opening businesses up to international financial markets — until the 1990s when ensuing capital inflow had a destabilizing impact on the economy.

While the first Aquino government only borrowed an average of $591 million a year — less than half of the Marcos regime’s annual loans — the country’s debt had grown to $30 billion in 1991. By the time former President Joseph Estrada took the presidential seat in 1998, the country was borrowing some $2.2 billion a year.

Former President Gloria Macapagal-Arroyo’s administration was another story. According to AFRODAD, the foreign debt service burden from 2001 to 2005 has been the heaviest in Philippine history — whether measured in absolute terms, in per capita, or in its ratio to gross domestic product (GDP) — and has been recorded as the most severe drain on the country’s national resources, economic performance, and development.

Indeed, history appears to be repeating itself, as the current government led by President Benigno “Noynoy” Aquino III now shares the same headaches that his mother faced after the country came out of the Marcos regime.

Ernesto Pernia, a professor at the University of the Philippines School of Economics, points out the striking similarities between the two administrations: “Cory’s government inherited a huge debt burden that needed to be serviced in terms of interest and principal payments, which in turn entailed more borrowings, further increasing the debt burden,” he says. “Noynoy’s debt problem is practically a repeat of Cory’s, a carryover of Gloria’s irresponsible debt buildup.”

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July 6, 2011
S4/p. 3-4, 6-7

(Revisited BusinessWorld’s 1987 headlines for the 24th anniversary issue.)