The Philippine Public Debt

A Research Paper in
Public Finance (PA 204)
Presented to the School of Public Affairs and Governance (SPAG)
Silliman University, Dumaguete City,
Negros Oriental, Philippines

In Partial Fulfillment of the Requirements for the Degree

Masters of Public Administration
Atty. Tabitha E. Tinagan
Faculty

By

Mark Ronald C. Genove, RND

Summer 2015
1

Table of Contents
Page

I.

Introduction
The need for development is never ending. New roads, new
bridges, and other infrastructures are needed to improve the
economy and to help the people. Development can also come
through new technologies in agriculture, education, health, and
security.
What cannot be seen nor really thought about is for every type
of

development there is

a corresponding amount that the

government needs to pay. Then people would say that that is what
the taxes are for and they would be the same people who would be
complaining when new or higher taxes are implemented.
This paper will try to answer the question as to where the
government can get money and not get bashing for increasing
taxes. These are called public borrowing that sadly became a crisis
as time went on. The crisis started in 1983 when the Philippines
has started to default on it foreign debt payments. Then people
started pointing fingers as to who or where it went.
It will also include the theories on why countries need to
borrow. Who they can borrow from and who will end up paying for
the debt. What are the creditors asking for in exchange for the
money lent? Have we given in to there demands? And the most
important thing, how can we get out of this crisis.

II.

Related Literature

A. Public Borrowing
1.
Definition of Public Borrowing
Public debt can be defined in different ways depending
on how one would look at it. Encyclopdia Britannica
(2016) would define public debt in general as obligations of
governments, particularly those evidenced by securities, to
pay certain sums to the holders at some future time.
Economists Abel, Bernanke, and Croushore (2008) in their
book Macroeconics would define public debt as the total
value of government bonds outstanding at any particular
time.
Hernandez (2011) in his article Public Debt and Fiscal
Consolidation gives an insight as to how public debt is
incurred. He said that the public debts are incurred to
finance the activities of the public sector either through the
revenues from taxation or borrowing from the financial
market. The financial market can be in the form of term
loan facility where public institutions borrow directly from
financial institution. Another way is where the government
would borrow directly from the private sector through
regular auctions of government securities or through the
issuance of other sovereign debt papers.
Hernandez (2011) further stated that public debt could
be classified in into different forms. The different types are:
1. Type of public sector debt issuances. The national
government issues debts to finance a portion of its

operations,

apart

from

revenues

raised

from

tax

collection. Local government units also have the power

to borrow, as well as government-owned-and-controlled
corporations and government financial institutions. The
National Government may opt to explicitly guarantee
their borrowings. Taken together, public sector debts
are accounted in the consolidated public sector fiscal
position (CPSFP), which refers to the net deficit or
surplus

calculated

after

summing-up

the

budget

balances of all government entities.

2. Maturity structure. Public sector entities could decide
to borrow either short- or long-term, consistent with
their

borrowing

guidelines

and

debt

management

thrust. The National Government typically conducts its

short-term borrowings through the issuance of Treasury
bills (T-bills) that carry maturities of three months to
one year. Issuing longer-dated Treasury bonds, foreigncurrency sovereign debt issuances and such other
debentures finances long-term borrowings.
3. Currency composition. Public sector debts can be
contracted in local currency or in foreign currencies
(which are collectively known as ROPs in market
parlance).
4. Securitized public sector debts. The public sector may
also securitize its future cash flow streams to finance

current expenditures. For example, the government may

issue revenue bonds, which will be financed by
revenues collected from specific user fees, such as
highway tolls.
B. Theories on Public Borrowing
In Leonor Briones book titled Philippine Fiscal Policy (1983),
she stated that public borrowing is fairly modern. It was also
stated that there are two theories that has different views when
it comes to public borrowings.
One theory is by John Maynard Keynes who advocated for deficit
financing

and

the

unbalanced

budget

during

the

Great

Depression. He also stated that borrowing is an important tool

for achieving economic objectives like the stability in the
economy. This is true for industrialized countries that treat
public borrowing merely as a fiscal tool used for compensatory
purposes.
Least Developed Countries on the other hand would look at
public borrowing as the major source of funds rather than a
compensatory

one.

These

countries

tend

to

have

public

borrowing more than just that it actually affects both the

economic issues. The idea for deficit financing was made for the
depression in Europe and the U.S. where the Least Developed
Countries think that they have the same situation as they did.
Keynes in his theory said that a balance budget is not practical
during crisis. As the crisis could demand a large expenditure
from the government that can lead to large taxes that can

discourage investors. The governments effort would also

compete with the local business sector because of this. That is
why it is better to borrow to compensate for the inactivity of the
private sector in this situation. (Briones 1983)
Keynes further stated that borrowing should be matched
with a monetary policy to offset the instability in the economy.
This compensatory fiscal policy should be characterized by:
1. A budgetary deficit during the depression phase of a
business cycle;
2. A balanced budget in times of full employment and stable
prices;
3. A budgetary surplus during inflationary periods.
Since stable prices and full employment is almost impossible, a
balanced budget would not be a good thing every time, which
makes deficit financing a necessity. (Briones, 1983)
Keynes theory though will not completely work for the Least
Developed Countries. First reason is that this theory works only
for internal borrowing and as a compensatory tool. This is useful
when there is excess liquidity in the economy, which can be
transferred from one sector to another within the system. The
idea that this theory would work to correct instability in the
system would not answer the problems of Least Developed
Countries because their problem are external in origin. This can
come from oil crisis, inflation and recession in industrialized
countries. (Briones, 1983)

Second reason why Keynes theory would not work in Least

Developed Countries is that this was based on the assumption of
the fully developed economies going through cyclical difficulties.
Where they use fiscal policy tools to stimulate the economy. This
does not work in Least Developed Countries because productive
capacity is not yet fully developed, that when stimulants are
used it creates an inflationary result. (Briones, 1983)
Another theory on government borrowing is the Development
Finance Theory. Unlike the Keynesian theory that looks as
borrowing as an important fiscal tool Development Theory views
the borrowing as an integral part of the budget and is targeted
more on foreign borrowing. (Briones, 1983)
It is true that development is expensive. Development
finance theory believes that foreign borrowing can bring more
the finances. It brings with it foreign imports that can increase
investments and accelerate growth rate with lower tax. This can
bring in provisions for foreign exchange. This can also introduce
new technology and managerial know how. (Briones, 1983)
This can bring about development without having to increase
taxes.

Development

can

be

through

inflow

of

additional

resources. If ever there would lack of foreign exchange that the

country would need, the foreign borrowing can fill the gap.
(Briones, 1983)

The World Bank and the International Monetary Fund have a

big part in influencing on borrowing for development. This is
how they work.
International Monetary Fund
The fund was created out of the need to promote free
international trade and facilitate the inflow and outflow of
goods, services and currency among the major powers. The fund
developed an ideology of development that reflected the free
trade ideology of it biggest member, the United States. This is
unfortunate since the Philippines had a bad experience on doing
free trade with them. (Briones, 1983)
The loan package for the Least Developed Countries brings
with it an imposed Stand-by Arrangement and Stabilization
Program and these are its basic components:
1. Abolition or liberalization of foreign exchange and import
controls;
2. Devaluation of the exchange rate;
3. Domestic anti-inflationary programs, including:
a. Control of back credit; higher interest rates and
perhaps higher reserve requirements;
b. Control of the government deficit;

curbs

on

spending; increases in taxes and in prices charged

by

public

subsidies;
c. Control of

enterprises;

abolition

wage

so

rises,

governments power;

far

of
as

consumer
within

the

d. Dismantling price controls.

4. Greater hospitality for foreign investments.

The conditions given reflect on the theoretical framework

similar to the classic free enterprise laissez faire philosophy.
(Briones, 1983)
As a rule to the Least Developed Countries the International
Monetary Fund gives loans to help the Least Developed
Countries with their balance of payment. The World Bank on the
other hand grants loans that are directly applied to the
development projects. (Briones, 1983)
The World Bank
The World Bank is a group of banks coming from the
International Bank of Reconstruction and Development (IBRD).
This was brought about by the instance of the United States to
assist on the recovery and reconstruction of the countries
devastated by World War II to help them to participate in free
trade. World Bank also includes International Development
Association and International Finance Corporation. (Briones,
1983)
Since this was for the reconstruction for the devastation in
World War II the First recipients of the of the program loans
were

European

countries

namely

France,

Netherlands,

Denmark, and Luxembourg. By 1949 the bank changed its focus

to an increasing number of colonies declaring independence or

the Least Developed Countries. (Briones, 1983)
The lendings been mostly for infrastructure to serve as
foundation for economic development. The World Bank also
grants loans for mining, oil and gas, agriculture and rural
development, water resources, forestry and tree farming, urban
shelters, and education. Loans are on a program or project
based. Standard requirement would be a feasibility study to
show how much revenue can be granted for repayment.
(Briones, 1983)
World Bank/IMF Development Finance
Cheryl Payer the author of the book, The Debt Trap: IMF
and the Third World, and The World Bank: A Critical Analysis.
The former talks about how the IMF works in the Least
Developed Countries and the latter about the operations of The
World Bank. (Briones, 1983)
The two institutions support the philosophy of free trade
adopted by industrialized countries. The lending comes with
free flow of goods and services from the industrialized
countries.

This

includes

large-scale

infrastructure

and

programs. The sized of the loans result in heavy imports of

materials, expertise, and technology. The IMF then comes with
stabilization programs that are an essential condition. This

stabilization programs can be in the form of increased rates of

basic services, and discouraged subsidies. Taxes are raised even
if it is constrained in the inherent tax system of the Least
Developed Countries. Devaluation is also encouraged and
foreign investments are recommended. (Briones, 1983)
Development finance is just an extension of the free
enterprise theory the encourages free trade. Both IMF and
World Bank reflect this in their loan conditions. (Briones, 1983)
Another View on Development Finance
The International Structuralist Model is the third group of
theories. Their views are critical of the current approach of the
World Bank and IMF. The International Structuralist is part of
the growing group of scholars and writers that shows the
disastrous consequences of borrowing from the World Bank and
IMF. (Briones, 1983)
The group sees the how the World Bank and the IMF together
with the advanced countries are doing to the Least Developed
Countries. This is what V.I. Lenin calls as a logical continuation
of the theory of imperialism. There may be no physical
occupation but the colonial relationship continues through
political and economic dominance called neo-colonialism. This
happens through unfavorable trade relationship, establishment
of military bases, foreign investment, interference in political

affairs, foreign aid and borrowing and other forms of control.

(Briones, 1983)
Another theory called the dependency theory has another
explanation. Based from leading dependency theorist, Dos
Santos, dependence is a conditioning situation where the
economies of one group of countries (dependent economies) are
conditioned by the development and expansion of others
(industrialized economies). This is based on an international
division of labor that allowed industrial development in some
countries and some countries whose growth is in the hands of
the industrialized countries. (Briones, 1983)
C. The Current Philippines Public Debt Situation
Bangko Sentral ng Pilipinas Governor Amando M. Tetangco,
Jr. through the media release page in their website titled
Outstanding External Debt Drops in Q1 2015 (2015) announced
that the outstanding Philippine external debt stood at US$75.3
billion at end-March 2015, down by US$2.4 billion (or 3.0
percent) from the US$77.7 billion level at end-2014. The decline
was attributed to net repayments (US$2.0 billion), mainly by
banks. Negative foreign exchange revaluation (US$220 million)
arising from the strengthening of the US Dollar against other
currencies, and an increase in residents investments in
Philippine debt papers (US$100 million) also contributed to the
decline in the debt stock.

Bangko Sentral ng Pilipinas further stated that on a year-onyear basis, the debt stock likewise reflected a decline of US$3.6
billion (or 4.6 percent) from US$78.9 billion in March 2014 due
to: (a) negative foreign exchange revaluation adjustments
(US$2.2 billion); (b) net repayments (US$1.9 billion); and (c)
previous periods adjustments (negative US$220 million) due to
audit findings as well as late reporting of transactions.
However, the downward pressure of these developments on the
debt

level

was

mitigated

by

the

rise

in

non-residents

investments in Philippine debt papers (US$704 million).

The countrys external debt remained heavily biased towards
medium- to long-term (MLT) accounts, which represented 82.6
percent of total. This means that foreign exchange requirements
for debt payments are well spread out and, thus, more
manageable. [MLT accounts are those with maturities longer
than one (1) year.]
The weighted average maturity for all MLT accounts stood at
17.0 years, with public sector borrowings having a longer
average tenor of 22.2 years compared to 8.6 years for the
private sector.
ST external debt comprised the 17.4 percent balance of the debt
stock; consisting largely of bank borrowings, intercompany
accounts of foreign bank branches, trade credits, and deposits
of non-residents.

Public sector external debt stood at US$39.1 billion (or 52.0

percent of total debt stock), slightly lower than the US$39.3
billion level (50.7 percent) as of end-2014 due mainly to
negative FX revaluation adjustments (US$209 million) as the US
Dollar strengthened against most currencies.
Private sector debt likewise declined to US$36.2 billion from
US$38.3 billion a quarter ago due largely to the net repayments
of bank liabilities (US$2.9 billion).
Foreign holders of Philippine bonds and notes continued to
account for the largest share (33.5 percent) of total external
debt, followed by official sources (multilateral and bilateral
creditors 30.4 percent), foreign banks and other financial
institutions (28.9 percent), and foreign suppliers/exporters (7.2
percent).
The countrys debt stock remained largely denominated in
US Dollar (64.6 percent), and Japanese Yen (12.7 percent). US
dollar-denominated multi-currency loans from the World Bank
and Asian Development Bank comprised 10.4 percent of total,
while the remaining 12.3 percent pertained to 17 other
currencies.
D. Solutions for Public Debt
Qui Yunhe (2015) stated in the thesis titled Debt Crisis and Debt
Sustainability In Developing Countries that the debt crisis of
developing countries caused by failed management of debt risk
and showed solutions from the international community.

1. The Sovereign Debt Restructuring Mechanism (SDRM)

The International Monetary Fund proposed a new
Sovereign Debt Restructuring Mechanism in 2001, After the
Argentina Crisis, which provided a forum to discuss a
resolution.

This

proposal

introduced

an

international

bankruptcy court to help restructure unsustainable debts in

an orderly manner.
The core characteristics of this is that the national
government can request that the international panel be
convened to take charge in the negotiations with the private
creditors to do debt restructuring. Another characteristic
that has been proposed is to limit the lawsuit when the
debtor temporarily stops in paying the debt that can help the
debtor recover.
The framework for the SDRM is for the orderly workouts
and giving legal protection for the debtor in addition to
macroeconomic policies to be placed at the same time.
2. Collective Action Clauses, (CAC)
The U.S. and its counterpart in the G-10 and the U.S.
Treasury proposed Collective Action Clauses, a more market
friendly debt restructures. This is to be taken not as a
substitute to debt restructuring but more of a complement to
it. The CAC makes sure that the restructuring effort is not
forestalled. This also avoids a one sided competition that is

made

possible

under

the

unanimous

consent

rule

of

sovereign debts that is why most of the new sovereign debts

has Collective Action Clause.
3. Code of Good Conduct, (CGC)
The Banque France and the Institute of International
Finance proposed the Code of Good Conduct. The code
provides acceptable solution that can support all parties of
different interest and stand point. The code complements
both the Collective Action Clause and the Sovereign Debt
Restructuring

Mechanism.

The

code

also

enhances

negotiation process predictability and transparency as set by

the following principles.
They are:
(1)Early and regular dialogue based on trust among
debtors and creditors;
(2)Make the information transparent;
(3)Fair representation of creditors;
(4)Comparable treatment of the different creditors;
(5)Economic and financial conditionality of debt
rescheduling;
(6)Fair burden

sharing

between

the

different

stakeholders;
(7)Preservation, re-establishment or strengthening of
normal financial relations between creditors and
debtors;
These standardization principles make the debt
restructuring faster but gives more power to the creditors.
4. Solution from Institute of International Finance

The Institute of International Finance drafted principles

that create stable capital flows and fair restructuring in
emerging markets in June 2004. The principle refers to
taking precautions against and the solving of the external
debt crisis and is thought to be more flexible compared to the
Code of Good Conduct.
The main principles is that the debtor is obliged to have
an ideal economic policy like monetary, exchange, and debt
management policy. Another principle would ask that there
be public support for the policy which includes a supportive
legal system and investment environment.
The principle also includes that the debtor share
economic and financial information and that the information
should be transparent. At the same time the creditors should
also improve investment and risk management policy that
can include the countrys debt analysis, economic, and fiscal
policy. The International Monetary Fund should also provide
information on macroeconomics, equity gaps, and optimal
debt structure.
III.

Conclusion
Countries borrow money because they do not have enough
resources to support the economy. Maynard Keynes would say that
this is a way to augment what is lacking in the economy. What
happened is that most countries who are least developed tends to

use the borrowing more of the main source financing. This in turn
can lead to countries being stuck in the rut and not be able to pay
their debt, our country the Republic of the Philippines included.
Whats scary is Leonor Briones book is right about all the
things that are happening now, and the book was written in 1983.
Things like the government opposing minimum wage laws, and
protection for locally owned businesses. It may feel like things have
never changed since then, but it has. Our current debt has gone
down by $2 billion. From $77 billion to $75 billion.
The thesis of Yunhe (2015) gave four ways to try and solve the
foreign debt situation. This is in ways that involves the debt
restructuring; action clauses that aid in restructuring, getting good
conduct grades, and help from institute of international finance. All
of the four would some how say that we be good debtors and give
as much as we can to the creditors and then pay them as much as
we can.

IV.

References:
public debt. (2016). In Encyclopdia Britannica. Retrieved from
http://www.britannica.com/topic/public-debt
Abel, A. B., Bernanke, B. S., & Croushore, D. (2008).
Macroeconomics (6th ed., Addison-Wesley series in
economics). Pearson.

Hernandez, R. R. (2011). Public Debt and Fiscal Consolidation.

Bangko Sentral Ng Pilipinas Economic Newsletter, (11-04).
Retrieved from
http://www.bsp.gov.ph/downloads/EcoNews/EN11-04.pdf
Outstanding External Debt Drops in Q1 2015. (2015, June 19).
Retrieved from http://www.bsp.gov.ph/publications/media.asp?
id=3761
Media Releases
Yunhe, Q. (2015). Debt Crisis and Debt Sustainability In
Developing Countries (Masters Thesis, Bielefeld University,
Bielefeld, Germany). Retrieved from htttp://erasmusmundus.univ-paris1.fr/fichiers_etudiants/2417_dissertation.pdf