May 5, 2019

#10
Pio, Francis John Palmes

China loans: Are we falling into a debt trap?

Dutertenomics
It was 2016 when Duterte wooed millions of voters by promising a major
infrastructural boom unmatched by his predecessors since Marcos. Such was the order
of business since Day 1 of his administration as he embarked full throttle on his flagship
program ‘Build! Build! Build!’. But where will he get the money?

Unlike his predecessors, Duterte is ditching the Public-Private Partnership (PPP)

modality in favor of larger reliance on government revenues as well as Official
Development Assistance (ODA) (Heydarian, 2018). Of the $168 billion total infrastructure
investment requirement under the 2017-2022 Public Investment Program, the bulk of the
projects will be implemented through local financing at 66 percent. The remaining projects
will be carried out through Public-Private Partnership (PPP) at 18 percent and Official
Development Assistance (ODA) at 15 percent (Tungpalan, 2017).

What do we owe China so far?

Based on the latest data published by the National Economic and Development
Authority, only one project is currently financed with official development assistance loans
from China: a $62 million irrigation project benefiting farmers in the northern provinces of
Kalinga and Cagayan. In addition, two bridge projects worth $62.28 million are funded
through Chinese ODA grants.

This pales in comparison with the grants and loans provided by other bilateral
donors, particularly Japan — the Philippines’ top donor for many years. Japan currently
has 10 grant-funded projects in the country worth $141.33 million, and 22 ODA loan-
funded projects amounting to over $6 billion. The United States and Australia have active
grants to the Philippines worth $553.58 million and $422.1 million respectively, though no
ODA loans.

However, the list of pipeline ODA projects pending approval or endorsement in the
NEDA database reveal 19 that will be financed with Chinese ODA loans if they go ahead,
worth close to $14 billion. That includes billions of dollars’ worth of infrastructure projects,
particularly railways and bridges (Ravelo, 2018).

The scary part

By the end of Duterte’s first visit to Beijing in 2016, Chinese officials pledged $6
billion in foreign aid and $3 billion in loans, ostensibly to help finance Duterte’s flagship
infrastructure project called “Build, Build, Build”. This is the very first time China is offering
us foreign aid. Until now, China has not lent us any money but Duterte’s chief economist
confirmed talks are underway, and China is offering loans with 2-3% interest. Japan, in
contrast, is offering us loans with 0.25 to 0.75% interest. In economics, the price of a loan
is its interest rate. Thus, simple math tells us that China’s loans are at least 3 times more
expensive than Japan’s, and at most 12 times more expensive! (Punongbayan, 2018)

Some say the Chinese loans are expensive because they lend to risky states with
low investment grade (that is, a high probability of default). But the Philippines attained
investment grade status back in 2013, and credit rating agencies have improved and
reaffirmed it since. If we’re so creditworthy, why can’t they offer lower rates like Japan?
(Punongbayan, 2018)

Aside from the exorbitant rates, China’s loans also require the direct participation
of Chinese contractors (unlike Japan’s loans, wherein anyone can bid). So far, 3 infra
projects have been prioritized for Chinese loan funding, namely: the Chico River Pump
Irrigation Project, the New Centennial Water Source-Kaliwa Dam Project, and the North-
South Railway Project-South Line. This is fertile ground for collusion and corruption. As
warned by Supreme Court Associate Justice Antonio Carpio, the Chinese firms can
simply talk and assign among themselves who will get the irrigation project, the dam
project, and the railway project (Punongbayan, 2018)

China’s debt trap diplomacy

More importantly, the new loans offered by China must be understood in the
context of China’s broader, long-term development strategy called the “Belt and Road
Initiative” or BRI. BRI projects are often offered as China’s way to help poor countries
needing money to finance their own infrastructure and development projects. But in recent
years, many poor countries have found themselves unable to pay these loans and, hence,
are ensnared by China’s “debt trap”. As a form of payment, they are often left no choice
but to give China unprecedented access to their natural resources or strategic assets –
often at the cost of their own security and sovereignty.

West Philippine Sea as collateral?

Duterte has been openly indifferent about China’s intrusions in the WPS. Recently,
he even joked about the possibility of the Philippines being a province of China. Such
acquiescence has real consequences. China is now fencing some of our most important
resources in the WPS, including Reed Bank, which we direly need to supplant the fast-
depleting gas reserves of Malampaya. If we cannot access Reed Bank in 8 to 10 years’
time, our energy supply in Luzon will be cut off, and we can expect rotating blackouts
reminiscent of the 1990s. Obviously, Duterte’s dealings with China are far from fair
exchange. As succinctly put by professor Jay Batongbacal, an expert on our maritime
issues, “We are trading away too much, too early, and too soon in dealing with China.”
(Punongbayan, 2018)

Even supposing that an exchange is warranted, China is appropriating our

territories even without any of its infrastructure projects breaking ground. It’s like a bank
foreclosing your house even if it hasn’t given you any money yet (Punongbayan, 2018).
Bibliography
Heydarian, R. J. (2018). Duterte's Ambitious 'Build, Build, Build' Project To Transform
The Philippines Could Become His Legacy. Asia Insights, 1.
Punongbayan, J. (2018, March 2). What scares me the most about China’s new,
‘friendly’ loans. https://www.rappler.com/thought-leaders/197207-china-loans-
philippines-fears.
Ravelo, J. L. (2018). Japan, China battle for ODA influence in the Philippines.
https://www.devex.com/news/japan-china-battle-for-oda-influence-in-the-
philippines-93868.
Tungpalan, N. U. (2017). Presentation on the Official Development Assistance and
Public Private Partnership in Financing Public Infrastructure by NEDA
Undersecretary Rolando G. Tungpalan. http://www.neda.gov.ph/oda-ppp-public-
infrastructure-funding/.