The Philippine Experience in Public Borrowing

In the preceding chapter, some aspects of the economics of borrowing, the

objectives of debt management, the nature of public debt and other issues relating to
both borrowing and borrowing expenditure operations were discussed. The discussion
of public debt will end up in this chapter with a brief appraisal of the debt experience of
a developing country like the Philippines.
Public Debt Defined
But before going over the experience in the last decade or so, it is necessary to
know what types of indebtedness are included in the “public debt" of the Philippines. For
our purposes, public debt includes the direct borrowings of the National Government
whether from domestic or foreign sources, indebtedness of all local governments,
government agencies which are controlled operationally by political bodies and which
derive appropriations from Congress, and of government corporations which are
guaranteed by the national government whether such borrowings are from domestic or
from foreign sources.
The first three items specifically delimit the definition of public debt to
"government" debt - indebtedness of all bodies, judicial. executive or legislative,
whether national or local, that are within the center of government decision-making. All
debts incurred from outside this sector are included in our definition of public debt. The
fourth item is in the nature of contingent liabilities where the government only pays the
interest or the principal in case of default. These are known as guaranteed debts and
are conventionally counted as part of the public debt.
The definition excludes the borrowings of independent government corporations
which are not guaranteed by the National Government. Unless the debts of these
entities carry a national government entity, they are excluded because such
corporations are not strictly part of the government sector inasmuch as they do not
derive appropriations from Congress and are not subject to detailed operational control
by political bodies. For our purpose, therefore, they are treated as if they are part of the
private sector. Examples of these are the non-guaranteed debts of the Central Bank,
Development Bank of the Philippines, Philippine National Bank, Agricultural Credit
Administration, etc. For all intents and purposes, these debts are for these entities'
account.
Borrowing of one government agency from another are likewise excluded for the
simple reason that they constitute the transfer of resources from one pocket to another
and, therefore, cancel out in reckoning the government's total public debt outstanding.
Furthermore, the accumulations of the Bond Sinking Funds are deducted because
these generally constitute retirement of debt.
With this clarification of the concepts of debt, a discussion of the country's debt
experience is in order. The overall debt picture is discussed first, followed by a brief
analysis of certain aspects of the debt structure, the treasury bill program, debt policy
and the existing machinery for debt management.
The Overall Debt Picture
The behavior of the public debt from 1946 to 1970 manifest a continuous
increase in absolute magnitude as may be seen hi Table 1. From a low level of P141
million in fiscal year 1946, it went up to P5.8 billion in FY 1969 and increased further to
P7.1 billion in FY 1970. For FY 1966 for which data are available the overall increase of
slightly more than P3.5 billion was accounted for by the following:

The foregoing breakdown of the public debt indicates, among other things. that the
country relies heavily on foreign sources of financing, whether from foreign
governments or financial institutions or from foreign capital markets. This is generally
true of young debtor countries where foreign loans finance not only government
contributions to capital formation and, hence, economic development but also, to some
extent (especially in the early years for the Philippines) budgetary needs. The 32.3 per
cent accounted for by external loans is therefore no surprise at all. It should be noted,
however, that except for some P58 million floated New York market, most external
loans of the Philippines are negotiated rather than secured in the open market.
It is clear, therefore, that the domestic market cannot be relied upon to meet or
supply borrowing needs. This suggests (1) either the inadequacy of domestic savings,
the underdevelopment of the domestic capital market, or both; (2) while the government
borrows substantially for economic development purposes, it likewise incurs loans for
budgetary operations. The total resources available are obviously inadequate to cope
with the total capital and operational needs of the government. The proceeds from
Public Works and Economic Development Bonds (PW & ED), constituting some 20.1
per cent of the total, are used mainly for government contributions to capital formation,
such as hydroelectric plants, roads and bridges, airports, etc. Treasury notes, bills and
certificates of indebtedness are used essentially for budgetary purposes although, in a
few instances, they have been used to service bonded indebtedness.
If we add up the total contribution to the absolute amount registered by bonds
and securities of all sorts, (i.e., PW & ED, R & D, NPC, DBP, NAWASA, ACCFA bonds,
together with treasury bills, notes and certificates of indebtedness), we come up with
something like 50.8 per cent. As will be seen later, this does not mean that government
debt instruments have found a genuine domestic market. Backpay obligations are
significant, constituting a little over 7 per cent of the total. One word of caution is
necessary with respect to this type of indebtedness. They are past obligations of the
government and are not genuine debt in the sense that they are non-interest bearing.
The government does not get anything in return either by way of helping direct
government contributions to economic development or of financing its current
operations since this is for past services rendered by the country's war veterans.
No definite pattern can be established with respect to the annual rate of increase
of the public debt. The behavior is on the whole erratic. From fiscal years 1946 to 1951
it manifested sizeable percentage increases, possibly accounted for by postwar
dislocations in the revenue machinery and the economy as a whole which necessitated
borrowing especially from abroad. This was followed by decreases in fiscal years 1952
and 1953. The subsequent upsurge in fiscal year 1955 and fiscal year 1956 can be
subscribed to sizeable developmental expenditures financed by borrowings which, by
1957, started to create inflationary pressures. The "austerity program" adopted in 1957
accordingly effected various retrenchment measures including restraints on borrowing.
The subsequent erratic behavior is similarly reflective of borrowing policy which by and
large is "ad hoc" in nature.
Internal and External Debt
The predominant percentage of public debt outstanding is in terms of internal
debt which accounts for an average of about 81 per cent of total debt outstanding from
fiscal years 1950 to 1969 compared to an average of 19 per cent in the case of external
debt. However, it will be noted that since 1969, the ratio of external debt to the total has
increased, indicating that the country has increasingly relied on external sources to
finance its development. (see Table 2).
From this predominant dependence on internal sources, one can easily get the
impression that the country relies on a developed domestic capital market. What is
more, the bulk of domestic indebtedness is bonded. However, as will be discussed
presently, the bulk of the bond issues is negotiated — that is, they are not traded in the
open market. Most of the outlets of government bonds are usually government and
private financial institutions. External debt is obviously negotiated, except for some P58
million sold in the New York capital market in 1965. It can be safely said that external
debts are largely used for developmental purposes, except for borrowings during the
early postwar years when budgetary borrowings from the United States were resorted to
in order to tide over sagging finances even for current operations. In any case, the
substantial external debts are reflective of most debtor countries falling under the
category of developing areas.