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Philippines External Debt
On October 17, 1983, it was announced that the Philippines
was unable to meet debt-service obligations on its
foreign-currency debt of US$24.4 billion and was asking for a
ninety-day moratorium on its payments. Subsequent requests were
made for moratorium extensions. The action was the climax of an
increasingly difficult balance of payments situation. Philippine
development during the decade of the 1970s had been facilitated
by extensive borrowing on the international capital market.
Between 1973 and 1982, the country's indebtedness increased an
average of 27 percent per year. Although government-to-government
loans and loans from multilateral institutions such as the World
Bank and Asian Development Bank were granted at lower-than-market
rates of interest, the debt-service charges on those and
commercial loans continued to mount. In 1982 payments were US$3.5
billion, approximately the level of foreign borrowing that year
and greater than the country's total debt in 1970. The next year,
1983, interest payments exceeded the net inflow of capital by
about US$1.85 billion. In combination with the downturn in the
world economy, increasing interest rates, a domestic financial
scandal that occurred when a businessman fled the country with
debts estimated at P700 million, escalating unrest at the
excesses of the Marcos regime, and the political crisis that
followed the Aquino assassination, the debt burden became
unsustainable (see
table 16, Appendix).
The Philippines had turned to the IMF previously in 1962 and
1970 when it had run into balance of payments difficulties. It
did so again in late 1982. An agreement was reached in February
1983 for an emergency loan, followed by other loans from the
World Bank and transnational commercial banks. Negotiations began
again almost immediately after the moratorium declaration between
Philippine monetary officials and the IMF. The situation became
complicated when it came to light that the Philippines had
understated its debt by some US$7 billion to US$8 billion,
overstated its foreign-exchange reserves by approximately US$1
billion, and contravened its February 1983 agreement with the IMF
by allowing a rapid increase in the money supply. A new standby
arrangement was finally reached with the IMF in December 1984,
more than a year after the declaration of the moratorium. In the
meantime, additional external funds became nearly impossible to
obtain.
In each of these arrangements with the IMF, the Philippines
agreed to certain conditions to obtain additional funding,
generally including devaluation of the peso, liberalization of
import restraints, and tightening of domestic credit (limiting
the growth of the money supply and raising interest rates). The
adjustment measures demanded by the IMF in the December 1984
agreement were harsh, and the economy reacted severely. Because
of its financial straits, however, the government saw no option
but to comply. Balance of payments targets were met for the
following year, and the current account turned positive in FY
(fiscal year--see Glossary)
1986, the first time in more than a
decade. But there was a cost; interest rates rose to as high as
40 percent, and real GNP declined 11 percent over 1984 and 1985.
The dire economic situation contributed to Aquino's victory in
the February 1986 presidential election.
When Marcos fled to the United States later that month, the
Philippine external debt had grown to over US$27 billion. The
country's most immediate concern was with meeting debt-service
payments. Reduction in the size of the debt was a longer term
issue. Debt servicing, US$3 billion in 1986, was a drain on both
the country's foreign-exchange earnings and its investible
surplus. Technocrats in the National Economic and Development
Authority recommended declaring another moratorium, this time for
two years, to allow the country a breathing space. Measures were
introduced in Congress in 1986 and subsequent years to cap annual
debt-service payments. The Aquino administration and the Central
Bank, however, consistently resisted both tactics, opting instead
for a cooperative approach with the country's creditors.
Some of the government and government-guaranteed debt was
incurred under questionable circumstances, and there were
persistent demands for repudiation of those loans that could be
shown to be fraudulent. In November 1990, the Freedom from Debt
Coalition, a nongovernmental organization, presented findings
from its investigation on six potentially fraudulent loans,
together worth between US$4 billion and US$6 billion. The
largest, a US$2.5 billion loan for the construction of the Bataan
Nuclear Power Plant, involved allegations of irregularities in
bidding procedures and design, overpricing, and kickbacks. The
Aquino government previously had filed a civil suit in the United
States against Westinghouse Corporation, the corporation with
which the Marcos government had contracted to build the nuclear
power plant, but the Philippines continued to pay interest
payments on the nuclear plant loans of US$300,000 per day while
the case was under litigation. In response to the coalition's
findings, however, the president said that the country would not
pay fraudulent loans, a statement interpreted as a major policy
change.
Government negotiators dealt mainly with three groups of
creditors in their efforts to reduce the burden of debt
servicing. The first, and in some ways the most important, was
the IMF, because its imprimatur was considered necessary to
conclude arrangements with other creditors. The second was the
Paris Club, an informal organization of official creditors. The
third group was the commercial bank creditors, numbering 330 as
of 1990. Bank negotiations generally were with the twelve-member
bank advisory committee, chaired by Manufacturers Hanover Trust.
The standby agreement that the Marcos government had
negotiated with the IMF in 1985 was discontinued shortly after
Aquino assumed office. The agreed-upon targets with respect to
government spending and increases in the money supply had been
wildly exceeded as Marcos dipped into government coffers in a
desperate effort to win the 1986 election. In addition, the
government wished to negotiate a more growth-oriented
arrangement. An agreement on repayment terms for US$506 million
of loans was concluded eight months later in October 1986. In
January 1987, an agreement was reached with the Paris Club to
stretch out over ten years, with a five-year grace period, US$870
million of loans that were to have been paid in 1987 and the
first half of 1988. The IMF accord also triggered the release of
US$350 million in new loans by commercial bank creditors that had
been held up when the agreement with the IMF broke down in early
1986. In March 1987, the Philippines and the twelve-bank advisory
committee came to terms on the rescheduling of the country's
US$13.2 million debt to private banks and a reduction in the rate
of interest. Signing of the agreement was delayed, however, by a
group of creditor banks led by Barclays Bank of Britain, who
demanded that the Philippine government guarantee the US$57
million debt of a private fertilizer firm, Planters Products,
Inc. An accommodation was not reached until December 1987.
A second round of negotiations began in 1989. The Paris Club
restructured US$2.2 million of debt coming due between September
1988 and June 1990. The IMF and commercial bank agreements
allowed the Philippines to undertake, in early 1990, a
three-pronged program under
Brady Plan (see Glossary)
guidelines.
First, the government used funds from the World Bank, IMF, and
other sources to repurchase US$1.31 billion of government debt
from private banks at the 50 percent discount at which they were
selling on the secondary market, which action reduced the
country's debt by some US$650,000, and, in the process, the
number of creditor banks fell from 483 to 330. Second, debt
coming due between 1990 and 1994 was rescheduled. Last, some
eighty banks subscribed to US$700 million in new loans.
In July 1990, it was reported that the IMF had reviewed
Philippine economic performance and found it "favorable" for the
period between October 1989, when the loan agreement was reached,
and March 1990. By September, however, the situation had turned
around. Agreed-upon targets had not been met with respect to the
sizes of the government budgetary deficit, the trade balance, or
the country's international reserves. As a consequence, the IMF
had refused to release the September tranche (installment of
funds) to the Philippines. In turn, Manila canceled the 1989
standby agreement and reopened negotiations with the IMF. A new
agreement was announced in early 1991. It involved a three-year
credit package, totaling US$375 million, only one-third of the
US$1.17 billion loan package suspended the previous September.
Among other things, the agreement required the Philippines to
implement new revenue-raising measures by the end of August 1991.
As a consequence of the country's failure to meet the
September standby agreement targets, the commercial banks in
February 1991 refused to disburse the last US$115 million of the
US$706 million credit line agreed to in early 1990. At a meeting
with Filipino officials, the bank advisory committee also
declined to discuss providing some US$500 million in new funds.
In February 1991, the Philippine government also said that it
would ask the Paris Club for deferment of payment on US$1 billion
in debts falling due from June 30, 1991 to July 31, 1992. In a
measure to reduce the risk of lending to the government by
commercial banks, in February 1991 the Philippines indicated that
it would approach multilateral financial institutions such as the
World Bank and the Asian Development Bank for cofinancing, in
return for which the Philippine government would give up the
possibility of rescheduling.
Efforts to reduce the external debt included encouraging
direct investment in the economy. In August 1986, the Philippines
initiated a debt-equity conversion program, which allowed
potential investors who could acquire Philippine debt instruments
to convert them into Philippine pesos for the purpose of
investing in the Philippine economy. Because the value of the
debt in the secondary market was substantially less than its face
value (about half, at the time), the swap arrangement allowed
investors to acquire pesos at a discount rate.
Most of the swapped debt was held by the Central Bank, which
could provide the peso proceeds to retire the debt only through
issuing new money, with obvious inflationary consequences. For
this reason, the program was suspended in April 1988. At that
time, US$917 million in debt reduction had taken place. Other
issues were raised, however, about both the benefits to the
Philippines and the fairness of the conversion program.
Debt-equity swaps, it was argued, amounted to a considerable gain
to investors, costing much less in dollars than was received in
pesos. If an investment had taken place without the swap, a very
large subsidy would not have been involved. Second, a
considerable portion of the conversions appeared to have been by
Filipinos bringing their wealth back into the country. Critics
questioned whether those who engaged in capital flight should be
awarded a premium for returning their wealth to the Philippines.
There also was the question of the arbitrage possibilities of
"round tripping," whereby investors with pesos engaged in capital
flight to obtain foreign currency, which was used through the
swap to achieve a much larger amount of pesos. Alternatively, an
individual with dollars could engage in a swap and then convert
pesos back into dollars through the exchange market. Although the
government had some regulations concerning length of investment,
the process was ripe for abuse. Nevertheless, the government
resumed the program in December 1990 with an auction of US$7
million in debt paper. The new program was reported to have been
altered to reduce inflationary pressures.
In March 1991, Philippine officials raised the issue of
"condonation," or debt forgiveness, of Philippine debt with
United States officials, requesting that the United States accord
the Philippines similar treatment to that accorded Egypt and
Poland. The United States resisted the entreaty, pointing out
that whereas US$33 billion of Poland's US$48 billion debt was
official, all but 20 percent of the Philippine debt was owed to
commercial banks.
The Aquino administration spent an enormous amount of time
and effort negotiating with various creditor groups to lower
interest rates, reschedule the country's debt, and reduce the
magnitude of the debt. A number of innovative schemes were
undertaken; more were discussed. It was a process, however, that
essentially meant running fast to stay in place. The size of the
country's external debt in June 1990, US$26.97 billion, was about
the same as the US$26.92 billion the country owed at the end of
1985, shortly before Aquino took office. Debt-service payments
also changed very little: US$2.57 billion in 1985 as opposed to
US$2.35 billion in 1990. The balance of payments pressures
remained. The growth of the Philippine economy, however, caused
the ratio of the country's debt to GNP to decline from 83.5 in
1985 to 65.2 in 1989, whereas that of debt service to exports
fell from 32.0 to 26.3 over the same period. Projected debt
servicing in September 1990 for the 1990s showed a rise from
US$2.35 billion in 1990 to US$3.25 billion in 1995, falling off
to US$2.08 billion in 1999.
Data as of June 1991
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