Special Feature



By Don Joseph J. Dejaresco, Special Features Writer


A brush with debt




Posted on July 14, 2015


A review of the headlines that filled the pages of BusinessWorld during its inaugural year tells of the late former President Corazon C. Aquino’s struggles against the far-reaching effects of decades-long borrowing by the Marcos regime which drove the country down in deep debt.

While this may seem strangely comparable to how the current Aquino government started in 2010 -- President Benigno S. C. Aquino III similarly inherited a huge foreign debt service burden from the Arroyo administration -- the conditions in 1987 was widely more precarious.

It was a period of tumultuous transition as the debt-ridden country grappled with both domestic and external pressures. While Ms. Aquino battled a persisting insurrection perpetrated by the Reform the Armed Forces Movement (RAM), which stifled the improvement of the nation’s credibility abroad, in one front, she also had to deal with the country’s debt woes in another. This prompted the government to mull over the adoption of a repudiation policy which sparked controversy and mixed reactions among key players in government, the public, and supernational groups.

The scheme to repudiate external debt started to draw the limelight when Ms. Aquino, in her first State of the Nation Address (SONA), expressed extreme dissatisfaction over debt renegotiations with the country’s creditors which failed to grant the government better terms in the repayment of the nation’s $28 billion debt.

She lamented that despite the significant decrease of country risk when democracy was restored, the Philippines was not accorded the same favorable terms as other countries, which were granted longer periods and better rates of repayment, limiting the country’s capacity for growth.

The former President’s appeal was based on the government’s inadequate capability to earnestly pursue its economic recovery program without external economic cooperation. It also highlighted the need for a cut in the country’s debt burden in order to increase flexibility in domestic resource management.

Adding to the county’s debt woes, the foreign creditors were also adamant that the government assume the liability of Planters Product, Inc. (PPI) to the Barclays Bank of Britain, prodding the President to bristle at their insistence during her SONA. They argued that the Marcos government meddled with PPI’s management and controlled the company, making the $57-million debt not entirely a private liability.

Former Finance Secretary Jaime V. Ongpin, who was insistent that the government should honor the financial obligations incurred under former President Ferdinand Marcos, hinted that he would resign to avoid having on his shoulders the burden of the “consequences” of repudiating the country’s foreign debt. He was adamant that the move would cripple the administration’s economic recovery program and isolate the country in the international financial community.

Then-Senator Ernesto Maceda, on the other hand, proposed a bill that would stop the country from paying principal obligations on all foreign loans for three years. Other senators were also intent on pushing for a selective repudiation of debts or the limitation of payments of about 10% of export receipts.

The senators also denounced the failure of negotiators, led by Mr. Ongpin and former Central Bank Governor Jose Fernandez, to yield a better repayment deal for the country. Appearing irked, Former Senator John Osmeña even asked Mr. Fernandez to resign during a Senate hearing, citing the latter’s seeming prioritization of maintaining good relations with the international financial community over obtaining better terms for the country.

The upper house’s intent to push for the debt moratorium, however, drew cautioning from the World Bank (WB) which said that the move could be “disastrous” for the country.

As foreign creditors could have been the Philippines’ only sources of funds direly needed to sustain the momentum of its economic recovery, a WB official warned that the move could imperil relations with multilateral agencies and foreign governments. And the country, in the long run, would lose more than it will gain.

Since foreign commercial banks were not volunteering to extend loans to any country whose existing debt is under rescheduling, and the Philippines was in that situation, the Maceda bill would pit the country’s government against multilateral institutions like the WB.

Michael Dobbs-Higginson, then a senior official of investment bank Merrill Lynch, deemed a debt repudiation by the country a “rather dramatic mistake,” pointing to Peru as a bad model.

He supported Mr. Ongpin and Central Bank’s Mr. Fernandez who both denounced repudiation as a measure that would accelerate economic recovery, noting that a “responsible government would not repudiate commitments.” He thought the reasonable solution was to ask for a renegotiation of commitments “in the spirit of compromise.”

However, Merrill Lynch, now the corporate and investment banking arm of the Central Bank of America, noted in its macroeconomic research report on the country that a renegotiation would be a waste of time and resources, which should instead be “directed toward ways and means” to significantly boost the country’s exports.

Meanwhile, the US government became wary of the Philippines’ political and economic instability, fearing setbacks in the country’s democratic recovery. This prompted the US to design a “Marshall plan,” an initiative that would ease Congress constraints on foreign aid programs and allow the private sector to extend more generous assistance.

Bipartisan consultations with the Raegan administration also yielded several factors that were to be included in the Marshall plan. The proposal’s economic side, in particular, intended to expand private sector investment in the Philippines, enhance trade opportunities, and coordinate solutions to the country’s external debt.

Other reports, however, noted the diminishing US government confidence in the Aquino administration’s capability to boost the country’s credibility overseas and improve investor confidence.

Beyond hampering the improvement of the country’s credibility abroad, kidnappings, the National People Army’s sparrow units, and the putsch attempts led by separatist military personnel also took their toll on the US government’s interest to provide aid to the country. At that time, despite its public declaration of extending support to the Philippines, the US government had not delivered on its promise to financially aid the country in its economic recovery. This included a $124-million endowment to the Philippines as economic support fund, which the Reagan administration asked from Congress.

Although US legislators authored a resolution endorsing support for the Aquino administration and condemning the overthrow plots, it did not include specific indications on the increase of financial aid to the Philippine government. It specified, however, that a successful overthrow of the Aquino government would have triggered US Law to cease American economic and military support to the Philippines.

Unlike the first Aquino administration, there haven’t been proponents of debt repudiation during the younger Aquino’s stint. Although history appeared to have repeated itself when Mr. Aquino, like his mother, took over from an administration that left behind a pervasive debt burden.

Although it was compounded by previous administrations’ handling of the country’s external debt, a 2007 report by the African Forum and Network on Debt and Development noted that the foreign debt service burden from 2001 to 2005 was the heaviest in the country’s history.

When Mr. Aquino became President, experts surmised that debt servicing would eat up most of the nation’s scant resources, limiting his capacity to deliver on promises.

Today, the country’s economy has managed to flourish, nonetheless. The Philippines has been recognized as one of the fastest-growing economies in Asia and the major international debt watchers have also upgraded the country’s credit ratings over the past two years, stoking investor confidence.