The Philippine Debt CrisisInternational Political Economy (IPE4103)

Philippine Debt: A Snapshot

Source AmountMultilateral 9,064Bilateral Loans 10,960Export Credits 8,297Bank Loans and Deposits 7,444Debt Securities 20,242Other 284Total 56,291

As of 2002 in $US Millions(Debt to GDP Ratio: 73%)

Background

Debt accumulation has an established history in Philippine economic policy.

Debt financing was used to alleviate persistent balance of payments problems in the 1950s and 1960s.

Loans from international institutions had figured prominently in the government’s development strategies.

It is apparent that the country’s spiral into debt has plenty to do with the state’s role in the economy and how it played that role.

Overview: Philippine Debt Crisis

1972-1975 Debt Buildup

Imposition of Martial Law, Debt-driven growth; external development financing, encouragement of foreign direct investments.

1975-1983 Debt Crisis

Continued external borrowing, public-sector initiated investments in capital intensive industries, lifting of Martial Law, debt-moratorium.

1983-1985 Debt Management

Lessened government expenditure, tighter monetary and exchange rate policies, lessened distortions on imports and exports.

Where Did Things Go Wrong?

Accumulated debt shifted from long-term to short-term maturing debt with variable interest rates, making it harder to manage.

Large-scale development projects required massive funding.

Officials tasked with auditing the use of the funds and the management of the economy had their authority subverted by the Executive.

GOCCs added to the problem by themselves accumulating debt that the government had to underwrite.

Other Factors

Adverse economic conditions.

The relative ease with which loans could be acquired.

Favorable US policy towards the Marcos administration.

The air of legitimacy that the administration’s technocratic team gave the government.

Concerns over the country’s financial and political instability.

1981: The Dewey Dee fiasco in the banking system.

1983: Assassination of Ninoy Aquino.

On the Role of the State

Manifestations of Embedded Autonomy

CustodianConventional role of the state as regulator: the state regulates and restricts initiatives by private actors. Preference is given to policing over promotion as policy.

DemiurgeTraditional role of the state as producer: the state competes with private firms in the market to achieve development objectives given insufficient capital.

Midwifery Apart from competing in market activity, states also offer incentives to market players to achieve development goals.

Husbandry States undertake activities to complement the those of market actors in order to achieve development goals.

The State as Custodian?

Argument: the Philippine Debt crisis can be explained in terms of the state’s role as custodian before and after the crisis set in.

The very nature of Martial Law, under which the country careened into crisis, resulted in a strong regulatory role both over economic activity and over access to the state machinery.

After the crisis set, the constraints facing the government disciplined its exercise of its regulatory function (i.e. both over the market and over the state machinery).

1986

After People Power in 1986, the Philippines had a unique opportunity to address its debt problem.

Possibility: Refuse to acknowledge the debt accrued by the deposed regime.

Concern: What would be the political-economic implications of doing so, considering the revolution unseated a de iure government?

In the end, the administration chose to honor the country’s debt obligations..

Developing Country Dilemma

Sovereign debt is usually denominated in dollars.

Thus, an appreciating exchange rate means that it becomes easier for the government to service its debts.

Governments would want to do this in order to improve their credit ratings, thereby allowing them to borrow more.

However, this comes at a cost: the country’s goods become less competitive vis-a-vis the rest of the world, which will eventually push down the real value of the exchange rate.

Thus, the appreciating exchange rate need not be a good thing: it may mean the country is living on borrowed time.

No More Money!- the end -