By ALECKS P. PABICO
Philippine Center for Investigative Journalism

GLORIA Arroyo will go down in Philippine history as the president with an inglorious track record, at least, on two counts.

First, her popularity rating has hit the pits of negative 38 percent, the worst scored by a president since Ferdinand Marcos.

Second, in just six years in office or until 2007, Arroyo has incurred a record P3.54 trillion in domestic and foreign debt, more than twice the combined total borrowings of the three presidents before her. This is the aggregate amount of debts Arroyo incurred based on official foreign exchange rates, according to the Freedom from Debt Coalition (FDC), a non-government anti-debt advocacy group.

When Marcos assumed the presidency in 1965, the Philippines had foreign debt of less than $1 billion. He fell from power in 1986 and left a total debt stock of $28 billion, or at the exchange rate of P20.38 at the time, just P570.6 billion.

In a span of 14 years, the Aquino, Ramos, and Estrada administrations contracted a total of P1.51 trillion in debts, P2.03 trillion less than what Arroyo has borrowed in her first six years in office.

Under Arroyo, the FDC estimates that based on 2007 interest and principal payments, taxpayers carry a debt servicing burden of P1.2 million every minute. Today, the FDC adds, every Filipino man, woman, and child owes creditors P42,819.42.

But when Arroyo delivered her eighth state of the nation address before the joint session of the 14th Congress last July 28, she made much of the fact that the current global economic slowdown triggering runaway surges in oil and food prices "did not catch us helpless and unprepared."

Arroyo harped about the strongest economic growth the Philippines posted in the last 30 years anchored on the 7.3-percent gross domestic product (GDP) growth rate in 2007 characterized by low inflation, a strong peso, and creation of a million new jobs. These, she said, were the results of the tough choices she made, and which she now claims are shielding the country from the worst effects of the global crisis.

The economic growth, Arroyo said, had almost made the dream of a balanced budget within reach. But more importantly, she emphasized, it enabled the government to "retir(e) debts in great amounts, reducing the drag on our country’s development."

On the strength of such macroeconomic fundamentals, the Arroyo government has been resorting to prepaying some of the country’s foreign debts, including at least US$220 million of debts claimed by the International Monetary Fund (IMF) and US$72 million owed to the Asian Development Bank (ADB).

During the 12-month period ending March 2008, prepayments as recorded by the Bangko Sentral ng Pilipinas (BSP) totaled US$1.2 billion. Nearly the entire amount, or US$1.16 billion, were for obligations maturing beyond 2008.

As a consequence, the BSP noted in June the continued improvement of the country’s major external debt ratio in the first quarter of this year, indicating an improving capacity of the Philippines to service its maturing foreign obligations.

Total outstanding debt as a percentage of aggregate output (GNP), the BSP reported, declined to 32.4 percent, from 35 percent in 2007 and 40.8 percent in March 2007.

In terms of GDP, the external debt ratio also improved to 35.5 percent – from 38.1 percent in 2007 and 44.2 percent in March 2007.

By the end of March 2008, the Philippines’s outstanding external debt (as approved and/or registered by the BSP) stood at US$54.6 billion. The figure is slightly lower than the end-2007 level of US$54.9 billion, but is actually higher than the US$54 billion recorded a year ago as of end-March 2007.

What has caused the debt stock to decline by only US$327 million, the BSP explained, are the foreign exchange revaluation adjustments as a result of the continued weakening of the U.S. dollar against the Japanese yen and the euro.

By the close of the first quarter of 2008, the adjustments amounted to US$2.4 billion, almost negating the impact of large net principal payments of US$2.8 billion. During this period, prepayments totaled US$322 million, US$298 million of which pertained to maturing debts in 2009 and beyond.

Year-on-year though, the foreign exchange revaluation adjustments reached US$3.4 billion to surpass net principal payments of US$2.8 billion, causing the debt stock to rise by US$565 million.

Notwithstanding the higher debt stock, the BSP said that no immediate impact on the country’s external debt payments is expected since most of the affected accounts are Japanese yen-denominated with very long repayment terms ranging from 20 to 40 years.

SUCH IMPROVEMENTS in the debt situation, however, do not hide the fact that since 2001 when Arroyo came to power, the country’s outstanding external debt has actually risen by US$3.7 billion, even reaching a high of US$57.4 billion in 2003.

While it declined to US$53.4 billion in 2006, attributed to the weakening of the U.S. dollar and Arroyo’s prepayment strategy, the external debt again increased by US$1.5 billion last year.

The Arroyo government has justified its practice of prepaying maturing debts, saying this saves the country several millions of dollars in interest payments. Yet, whatever slight decrease in the debt stock had been registered has just easily been offset by government’s continued heavy borrowings.

Economists have even likened Arroyo’s aggressive borrowing to repay maturing principals of old debts to a Ponzi game (commonly known as pyramiding) that can only be sustained as long as interest rates for new loans are lower than the previous ones.

No less than the ADB has pointed out the unsustainability of this core debt management strategy in a study in 2006.

What is worse, the FDC says, is that Arroyo’s borrowings have always exceeded the budget deficits.

In the FDC’s view, Arroyo has achieved two major fiscal records: Of four Philippine presidents since the 1986 EDSA people power revolt, she is the most aggressive borrower, and also the largest payer, of debts. From 2001 to 2007, the FDC reports that the Arroyo government had paid out P3.8 trillion to foreign and domestic lenders. This is more than double the combined debt service payments of P1.8 trillion of her three predecessors from 1986 to 2000.

And contrary to what her government would want the public to believe, the FDC warns that the debt problem is not yet over.

The P42,819.42 debt burden on every Filipino citizen does not include the national government’s contingent liabilities that by end-2007 has amounted to P484 billion, according to the FDC.

These are potential debts as a consequence of government’s expressed or implied commitments to directly assume the liability of other entities should these fail to honor their obligations. Much of these contingent liabilities are foreign-currency denominated amounting to P419 billion.

Economists like Dr. Benjamin Diokno have been questioning the legal basis for prepaying some national debts which are not yet due and demandable. The practice, says the former budget secretary under the Aquino and Estrada administration, undermines the power of the purse of Congress.

"The executive department has probably abused the automaticity of debt service payment by prepaying public debt without congressional imprimatur, and creating indebtedness – which translates into money to be paid out of the Treasury in the future – without prior approval of Congress," says Diokno.

"Under certain conditions, it is also poor economics," he argues. "For example, the government incurred huge losses when it prepaid foreign loans when the peso exchange rate was P50 to the U.S. dollar say two years ago, when we could pay now at P41 to the U.S. dollar."

Debt servicing has remained a top priority of the Arroyo government; it has consistently and fiercely upheld automatic appropriation for debt service – money that critics say should have been spent on the urgent needs of the people instead of the government resorting to giving meager doleouts.

Freed funds from the debt service, according to FDC, should be enough to cover whatever revenue shortfalls would result from the reformed value-added tax (R-VAT) on oil and electricity.

In her eighth SONA, Arroyo defended the continued imposition of VAT on petroleum products and power. Lifting this, she said, would turn back the fiscal reforms in place and would be tantamount to "strip(ping) our people of the means to ride out the world food and energy crisis."

But Lidy Nacpil, FDC vice president, dismisses Arroyo’s claim as "deceptive."

"It deflects from one of the fundamental reasons why we are so vulnerable to the economic crisis, which is the country’s enduring debt burden," she says, adding that the amount of debt service eclipses all other expenditures, including all the subsidy programs of the government.

"A moratorium alone on interest payments is more than enough to cover for the expected revenues for ‘General Sales Tax, Turnover, or VAT,’ pegged at P204.9 billion," points out Nacpil.

This year, payments allotted for the principal amortization of debts actually total P328.3 billion, and for interest payments, P269.8 billion.

In the first four months of 2008, P306.7 billion – P119 billion in interest payments and P187.7 billion in principal payments – have already been spent to service maturing debts.

There would have been less expenditure on debt service had Arroyo not vetoed the special provision in the P1.227-trillion General Appropriations Act of 2008 prohibiting interest payments amounting to P25.9 billion (out of the total P269.8 billion) for what Congress considered to be "tainted, fraudulent and useless loans" pending their renegotiation or condonation.

It was the first time in a decade, and under Arroyo, that Congress had passed such special provision.

In her veto message after signing the three-months delayed 2008 budget in March, Arroyo evidently deemed the country’s credit rating in the global community more paramount, noting "with grave concern" the proposed congressional prohibition on interest payments.