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Jed Dares P. Tonogan Prof. Melanie Reteracion-Sartorio

2003 33843
PM 231 (Public Fiscal Administration)
Master of Management (Public Management)
College of Management
University of the Philippines Visayas


THE CURRENT PHILIPPINE BORROWING POLICY

The General Appropriations Act (GAA) of 2012 reflects the countrys financial plan for
the year, enacted by the Legislature and approved by the Executive. One important provision in
the 2012 GAA is on debt policy. General Provisions of the 2012 GAA states:
Sec. 14. Government Indebtedness and Guaranty. Notwithstanding any
provision of law to the contrary, the total indebtedness of the national government
and any of its agencies, offices, GOCCs, which carry the sovereign guaranty of
the Republic of the Philippines, shall not exceed 60% of the latest GDP.

If for any reason, the national government or any of its aforestated
subdivisions would need to borrow money and that would increase its total
indebtedness beyond 60% of the latest GDP, it may do so provided it obtains the
prior consent of Congress.

Total indebtedness includes the issuance of bonds, certificates, or any
other instrument which are the obligations of the national government and/or any
of its subdivisions or agencies with sovereign guaranty.

However, this provision of the 2012 GAA has been directly vetoed by President Aquino
in exercise of such privilege as provided by Law to the Executive. In his veto message to the
Congress, he says:
For the past years, Congress has consistently prescribed a debt cap in the
GAA. For FY 2012, it seeks to limit once again total government indebtedness to
sixty percent (60%) of gross domestic product (GDP).

While I recognize Congress noble intent behind the imposition of this
rule, I firmly believe that the GAA is not the proper legislative vehicle to amend
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Presidential Decree No. 1961 (An Act Authorizing the President of the Philippines
to Enter into Foreign Currency Loan, Deposit and Guarantee Agreements and
Arrangements in support of the National Economic Recovery Program) and other
relevant laws such as RA No. 4860 (Foreign Borrowings Act). A change in our
borrowing policy ought to be more deliberately discussed and embodied in a
separate substantive law. For the foregoing reasons, I am constrained to
veto General Provisions, Section 14, Government Indebtedness and
Guaranty, page 1580.

Besides, no fiscal rule can take the place of governments unwavering
commitment to fiscal prudence and discipline, and this I have exhibited from the
very beginning of my Administration. Thus, our credit rating has thrice been
upgraded in my first year in office. Our average debt maturity has also been
extended from 7.9 to 9.2 years in a period of one year (June 2010 to June 2011).
Further, with the successful implementation of our international bond exchange
and buyback program, we have reduced our annual debt service cost from US$
69.6 Million to US$ 65 Million. Last, but not the least, is the significant reduction
of our consolidated public sector debt from 88.7% of GDP in 2005 to 73% by end
of 2010.

What can we imply on this borrowing policy of the Executive? First, we examine what
might be the positive effects of not putting a debt cap on our Budget.
The President contends that the GAA is not the proper venue to amend existing laws
which provide special powers to the Executive to enter into borrowing. Debt cap will have a
negative impact on government spending. It may limit spending on social services and
infrastructure. It should be remembered that the platform of government of the Noy Aquino
Administration is his Social Contract to the Filipino People. Narrowing the fiscal deficit and
public sector debt is a medium-term plan, so putting a debt cap is not practical at this time.
Furthermore, such debt cap may interfere with or may prevent government from taking
advantage of favorable market conditions. For example, in a period wherein the Peso is strong,
the Dollar is weak, and interest rates are low, the government can take advantage of this
condition by having more Peso-denominated debt to spend for social services and infrastructure.
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We can also see the commitment of the Aquino Administration in the management of
debt. For instance, interest payments as a ratio of the budget dropped by 3% or a rough
equivalent of 37 billion pesos last year. So, we might as well give the Administration a chance to
be flexible in its liability management program, to better serve and manage the economy.
On the other hand, without such cap, several cons can also be expected. First in the list is
the risk of overborrowing. Congress primarily put this cap to prevent overborrowing. As an
example, several European governments are in the brink of bankruptcy because they
overborrowed.
With special powers given to the President to incur debt in behalf of the Philippines,
without limit, such powers may be abused and is prone to corruption.
Moreover, removal of such provision in the GAA which requires Malacaang to get
Congress approval if it exceeds the debt cap does not provide for checks and balances between
the two co-equal branches of the government.
Some civil society groups also contends that such veto is just in compliance and blind
obedience with borrowing policies set by the World Bank and other international financial
institutions. They accused the World Bank and these institutions of requiring country borrowers
to limit their spending on basic social services.
Do pros outweigh the cons with regards to this debt management issue? Of course, our
main objective in the management of debt is not to overborrow and to narrow our fiscal deficit
and public sector debt. However, we should also bear in mind that we need to spend for the basic
social services of the people as well as in infrastructure to improve our economy. Limiting our
borrowing, especially when market favors, is opportunity lost, and it entails economic cost. The
President, having vetoed such provision created by Congress should communicate well his
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decision to constituents. He should prove that such veto is for societys general welfare rather
than a political exercise, or for personal gains. He should display his commitment by being
transparent to his liability management programs and he should disprove claims of critics that the
veto is just another abuse of executive privilege. Albeit there is no debt cap, he should try to limit
borrowing if not necessary and incur additional debt only when the market condition is
favorable.
There is no perfect debt policy. We cannot avoid incurring debt given our situation as a
country today. What is important is debt is properly managed, appropriately used to what it is
intended for, and serves general welfare of the public. Let us give the President a chance, the
flexibility he wishes in incurring debt for us. Let us just be vigilant that such privilege is not
corrupted and abused by the demons of the government.