The Department of Finance (DOF) has allayed misapprehensions over a possible Chinese takeover of the Philippines’ patrimonial assets. There is no provision in the loan agreements signed between the two countries under the Duterte presidency that includes any form of collateral even in the unlikely scenario of the country failing to pay its debts to China.
Finance Undersecretary Bayani Agabin said that concerns over the waiver-of-sovereign-immunity clause in the loan accord between the Philippines and China for the Chico River Irrigation Project are unfounded, given that this part of the agreement only allows the “counterparties” to seek arbitration in case of a loan default, but not a Chinese takeover of any of the country’s properties.
Agabin said the waiver-of-immunity and arbitration clauses are standard in any loan agreements forged between states. These clauses are present not only in the loan agreements between the Philippines and China under the current government, but also in other loans accords entered into by the past administrations, with, among others, France and China.
“The waiver-of-immunity clause is usually included as a standard provision in loan agreements to enable the lender to bring the borrower before an arbitral court in case of a default on the loan,” Agabin said. “No takeover of our state assets is possible because we do not provide any collateral for any of the loan agreements we have entered into with any government.”
Agabin also said it is very unlikely that the Philippines will default on any of its loans, more so now with its strong fiscal position and low debt-to-GDP (gross domestic product) ratio on the Duterte watch.
Moreover, he maintained that the unlikely scenario of the Philippines defaulting on its loan payments is far-fetched because a Philippine law--Presidential Decree (PD) No. 1177--mandates the automatic appropriation of funds under the annual national budget for debt service.
Assuming, for the sake of argument, that the highly improbable scenario of the Philippines defaulting on its loan occurs, any ruling by the arbitral court that would compel the government to pay its debt would have to conform with the provisions of Philippine Constitution and public policy and could only be enforced if and when Philippine courts rule that such an arbitral decision is binding on our part, Agabin said.
Finance Undersecretary Mark Dennis Joven said, meanwhile, it is incorrect to compare the Philippines with other countries like Sri Lanka that had failed to pay their loans to China, because of the starkly different numbers when it comes to what they owe and what their respective economies produce.
In terms of the debt-to-GDP ratio, Sri Lanka’s is almost 80 percent, while the Philippines’ ratio is around 40 percent. The debt-to-GDP ratio compares what a country owes to what it produces. Hence, a lower debt-to-GDP ratio indicates a slimmer probability for a country to default on its loan.
In the World Economic Forum’s Global Competitiveness Index 2017-2018, the Philippines ranked among the top 40 countries with low debt-to-GDP ratios of less than 40 percent. The Philippines ranks 33rdwith a debt-to-GDP ratio of 33.7 percent while Sri Lanka ranked 109thwith 77.3 percent. The WEF index is based on data from the International Monetary Fund, which tracks the general government gross debt of countries in relation to GDP.
Earlier, Finance Secretary Carlos Dominguez III reassured the public that the Philippines will not fall into a "debt trap" to any other country as the government expands its infrastructure investments through concessional loan financing from its development partners.
Dominguez, at the same time, reiterated that in conformity with the Constitution and our laws, none of the pipeline projects funded with official development assistance (ODA) from countries like Japan and China allow for the appropriation or takeover of domestic assets in the event of a failure to pay, which, he said, is a very unlikely scenario.
The government’s borrowing program, Dominguez noted, remains “very conservative in the sense that we only borrow to invest in projects that will generate economic gains which are greater than the borrowing cost.”
According to Dominguez, no infrastructure project is funded through ODA without first going through a rigorous system of reviews and approvals by the Cabinet and the President, and unless it is certain that the project is economically viable and highly beneficial for the Filipino people.
Dominguez said the government’s debt is carefully structured to ensure that it does not borrow without raising its own capital for infrastructure projects, while at the same time sourcing a significant portion of financing from the local debt market to minimize exposure to adverse external factors.
He said that as of 2018, the government’s project debt exposure was only 0.66 percent to China and 9 percent to Japan in relation to the total debt.
By 2022, when most of the financing for the “Build, Build, Build” program will have been accessed, the country’s project debt to China will account for 4.5 percent, while that of Japan’s will be twice as large at 9.5 percent of the total debt.
Dominguez further said the highly concessional loans and grants received by the government to help fund the Duterte administration’s “Build, Build, Build” program will help make the economy fully competitive, create jobs, open more business opportunities, bring down logistics costs and realize better-distributed growth.