The past administration missed the opportunity to start closing the country’s yawning infrastructure gap by taking advantage of very low interest rates on loans that would have raised funds for these badly needed economic investments, Finance Secretary Carlos Dominguez III said.
Dominguez said that under the Duterte administration, the government took advantage of whatever opportunity was left to borrow at low, concessional rates by frontloading its borrowings and diversifying their sources to jumpstart its ambitious “Build, Build, Build” infrastructure modernization program.
The government, Dominguez said, had to act fast because the cost of borrowing money to fund its spending on infrastructure, education and other human capital investments would soon get higher because of the Philippines’s anticipated status of becoming an upper middle-income economy.
“From 2010 to 2016, the cost of money around the world was near zero. That was the best time to borrow, and we did not borrow,” said Dominguez during a recent media forum. “They were not aggressive enough to fund projects when costs were really, really low.”
Dominguez said when the Duterte administration took over, “borrowings costs have gone up because the economic environment has changed. They are still low compared to historical levels but not as low as they were from 2010 to 2016.”
With the Philippines’ forthcoming elevated status as an upper middle income economy, he said “our cost of money is going to be higher because we will no longer qualify for the lower interest rates for poorer countries.”
Dominguez was referring to low lending rates granted by development partners to countries classified as low-income and lower-middle income economies.
For instance, Japan’s Special Terms for Economic Partnership (STEP) facility for its Official Development Assistance (ODA) loans grant lower interest rates with fixed terms to low-income countries.
Lower-middle income countries like the Philippines’ current status, do not qualify for STEP rates but may be granted preferential terms but with higher interest rates. Upper middle countries get higher interest rates than lower-middle income countries.
Dominguez said the opportunities missed by the past administration because of its failure to borrow cheap funds were, among others, the rehabilitation of the Metro Rail Transit (MRT) System Line-3, construction of airports, and expansion of road networks outside Metro Manila.
He said borrowing money is not bad per se if the funds would be invested in strategic projects that would generate massive returns for the people, such as initiatives to expand access to, and improve the quality of, education and health care; and in infrastructure projects that have the highest multiplier effects, like creating more jobs and generating more business activities.
“Now, if we borrow and invest it in projects that don’t make a return, then that’s really very bad.,” he said. “Among the projects that we are investing in is better education. So a better education has a tremendous return to the economy. Also, better healthcare for Filipinos not only for their personal benefit but for their ability to contribute to the growth our country; and of course, in infrastructure.”
He said the gauge to determine whether the national debt is manageable is to measure it as a percentage of GDP or an economy’s ability to grow.
“If we are not growing and borrowing, that’s really bad. But because we are growing, we have the ability to borrow more because we have the productive capacity to pay more,” Dominguez said.
During the Arroyo administration, the debt-to-GDP ratio was at 75 percent, which went down to around 55 percent during the Benigno Aquino III administration, and continued to decline in 2018 at 41.9 percent under the Duterte administration, Dominguez said.
He said that in pursuing tax reform, topped by the Tax Reform for Acceleration and Inclusion (TRAIN) Law, the government now has the fiscal space to pursue an ambitious, cash-intensive infrastructure program as shown by the manageable debt level and the country’s sound credit ratings.
The debt-to-GDP ratio, Dominguez said, is expected to further decrease to 38.6 percent by 2022.