17th in a series on GMA's 9th State of the Nation Address

MANILA - Trimming public debt was one of the accomplishments President Arroyo bragged about in her 9th State of the Nation Address on Monday.

All smiles, Mrs. Arroyo claimed that the next generation will benefit from the huge reduction in public debt-to-gross domestic product (GDP) to 55% from 78%, and the cut in foreign debt to 32% from 73% under her term.

Her next statements were just as full of conviction.

"Kung meron man tayong malaking kaaway na tinalo, walang iba kundi ang utang, iyong foreign debt (We defeated a big enemy, which is debt, our foreign debt). Past administrations conjured the demon of foreign debt. We exorcised it," she said.

The numbers may be telling at first. However, a closer look into the Arroyo administration's debt records would show these are merely half-truths.

Biggest borrower

A series of data from the Bureau of Treasury reveals that under President Arroyo's watch, the country drowned in debt, which ballooned from just P2.2 trillion in 2000 to P4.26 trillion today. (At P4.26 trillion, each of the 92.2 million Filipino owes P46,178.)

This means the Arroyo administration contributed a total of P2.06 trillion to the debt stock, exceeding the aggregate amount of debts of the 3 presidents before her following the 1986 people power revolution.

Even in terms of real value, at inflation-adjusted 1985 prices, the Arroyo government's borrowings were way higher than those of the administrations of Cory Aquino, Fidel Ramos and Joseph Estrada combined.

The Arroyo administration's debts in real value totaled P923.76 billion as of 2008, more than double the P358.03 billion incurred by the past 3 presidents. This prompted her critics to say she had developed an "addiction" to borrowings.

With these numbers, one can't help but wonder: What then is the stark reduction in debt-to-GDP ratio that the President was boasting of?

The explanation is simple. Debt-to-GDP ratio measures what a country owes against what it produces. A lower debt-to-GDP ratio indicates that the country is more likely to pay its debt back and less likely to default.

Since the country's GDP grew higher than government debt under Arroyo's term, the debt-to-GDP ratio was lower. But this doesn't mean that the level of the total debt itself was better.

Interestingly, even Arroyo's proclaimed GDP growth in the past years has met contention from economists. Former National Economic and Development Authority Director-General Cielito Habito and UP School of Economics Professor Felipe Medalla cited, for example, "overstated" imports slowdown, and inconsistencies between the growth in personal consumption and family income and expenditures, which are key components of the GDP.

Hence, as anti-debt advocacy group Freedom from Debt Coalition (FDC) said, "debt-to-GDP alone cannot give us an accurate picture of the state of the Philippine debt," which is now at "all-time high."

Change in borrowing mix

Similarly, the reduction in the ratio of foreign debt to the country's total debt should be put into context.

Any reduction in foreign debt merits praise if it goes together with the level of the outstanding debt. This is not the case under the Arroyo term.

The Arroyo administration's foreign debt ratio dropped by more than half in 2009 because it gradually changed its borrowing mix, in favor of domestic debt, to minimize foreign exchange risks.

For instance, the government's borrowings for 2008 alone amounted to P501 billion, of which 86% percent or P429.77 billion was sourced from domestic creditors while the remaining 14% or P71.31 billion was sourced from foreign ones. Total borrowings for 2008 were up 12.5% from the year before.

In other words, the Arroyo government just offset the reduction in its foreign debt with the hike in the local, with the total debt remaining at high levels.
 
Root of the debt problem

President Arroyo's debt burden started as soon as she assumed office in 2001.

Back then, state-owned National Power Corp.'s (Napocor) coffers were starting to bleed from the onerous "take or pay" provision in deals with independent power producers (IPP). It required Napocor to pay for power from the IPPs whether or not these were actually consumed. Napocor's debt at the time was estimated at the P30-billion level.

The following year saw mass protests against Napocor's hefty power costs which were blamed for high electricity prices. Giving into populist demands, President Arroyo put a cap on what the power firm could charge for contracts it entered with the IPPs, effectively reducing its rate from P1.25 per kilowatt-hour (kWh) to P0.40 per kWh. The P0.85 difference was absorbed by Napocor as losses.

By 2004, Napocor's total liabilities had skyrocketed to P1.3 trillion, nearly half of the country's outstanding debt for the year.

With hardly enough revenues to fund the national budget, the government had no choice but to pay the bill, triggering the onset of a fiscal crisis.

This prompted President Arroyo to assemble her economic team and craft the Medium-Term Philippine Development Plan (MTPDP) whose core targets were: to reduce the government's reliance on debt, raise revenues substantially, and most importantly, balance the budget by 2010.

However, nearly a year into the deadline, the Arroyo administration has made little progress. Worse, in trying to achieve the goals, it resorted to cutting the budget for social services, heavy privatization and regressive taxation, according to economists.

Tax revenues

President Arroyo and her allies in Congress increased the value-added tax (e-VAT) to 12% from 10%.

While the benefits of higher VAT rate continue to bolster the government’s fiscal position until today, it basically also passed on to legitimate consumers the burden of debt that resulted from politically motivated but fiscally unsound decisions in the past.

Economists said that the e-VAT also acted as a stop-gap solution to the Arroyo government's failure to curb bribery and corruption within its revenue-generating agencies.

It is therefore not a surprise that the government's tax-to-GDP performance stands at only 11.5% as of the first quarter of 2009, still far below its target of 17.6% by 2010.

Privatization

President Arroyo also relied heavily on privatization proceeds to mask the shortfalls in government tax collections.

In 2007, when she claimed of nearly balancing the budget after recording just a P12.4-billion deficit, privatization proceeds were reckoned at a whopping P90.6 billion, an all-time high.

This is not to say there is something wrong with this fund-raising scheme. After all, it was well-recommended in getting rid of the debt-ridden Napocor after the fiscal crisis of 2004.

But it is unsustainable.

"What will the government do when there are no more assets left to sell? It's unhealthy to rely on privatization instead of the stable flow of revenues from tax collections," said former budget secretary and UP Professor Benjamin Diokno.

Debt payments

In trying to balance the budget, meanwhile, the government not only raised easy revenues and relied on privatization, it also reduced spending on social services and infrastructure—the critical factors to long-term economic growth and poverty reduction, both Diokno and the FDC said.

They added that President Arroyo was busy paying off debts for most of her term.

For instance, from January to April of this year alone, government debt payments have already amounted to roughly P300 billion, almost equivalent to the P330-billion stimulus package of mostly social services that the Arroyo administration should have but hasn't frontloaded in the first half of the year.

FDC said that debt payments have been one of the biggest items on the annual national budget, and have been "automatic" under the Arroyo government.

Another fiscal crisis

In the end, all the shortcuts taken by the Arroyo government to achieve its goals have turned out to be futile.

The government is still wallowing in the red, with its debt still high, revenues dwindling and deficit about to reach a record-high this year.

A balanced budget remains a distant dream. Another fiscal crisis is looming.

Although recent external catastrophes like skyrocketing food and energy prices as well as the global economic crisis are partly to blame for the country's deteriorating finances, Diokno said the government could have hurdled them well had it strengthened its fiscal policy.

"The Arroyo government blames its fiscal problems today to external factors. But she had 9 long years to prepare for all these. What did she do?"

The Arroyo government's goals were wrong to begin with. "The fiscal goals were disconnected from any development plan. The outlook is not how the government's fiscal policy contributes to the economy, but only how the government's books will look to its creditors," said FDC.

Contrary to what she claims, President Arroyo's key legacy is not the reduction in the country's debts, but otherwise. - Text and graphs by Judith Balea, abs-cbnNEWS.com