 Global Economy > World Debt Threat
After Argentina,
Filipinos worry they’re next
By Daxim L. Lucas
Reporting from Manila, The Philippines
A popular line here these days is that the Philippines is going the way of Evita Peron’s mother country, which defaulted on $140 billion in foreign debt in 2001. Certainly, cursory parallels between the ailing economies of the Philippines and those of Argentina are jarring enough to make one want to convert his life savings into dollars.
Moreover, in this election season, rival presidential aspirants have inflamed impressions, warning both left and right that the economy is headed for the abyss unless they become the next occupant of Malacañang Palace.
At the Bangko Sentral ng Pilipinas, however, Deputy Governor Amado Tetangco, Jr. refuses to succumb to fashionable pessimism. “We are nowhere near the case of Argentina,” he said. “The comparison is unfair.”
Tetangco knows whence he speaks. He was a junior economist at the Central Bank when the Philippines declared a moratorium on foreign debt payments 20 years ago, after a default contagion beginning in Mexico and ravaging a global economy in recession.
The recent concern began when UK-based Standard Chartered Bank released a study that seemed at first to paint the Philippines with Argentinean colors, focusing mainly on the two countries’ foreign debt levels.
“The country is becoming increasingly vulnerable to external shocks,” wrote Steve Brice, the bank’s Southeast Asia chief economist, adding ominously that “the Philippines will remain on our watch list for potential further downgrades.”
BSP’s Tetangco notes, however, that the rest of the controversial report actually stresses that the Philippines is far removed from the Argentinean stuation. “The rest of the study rightly points out that we are nowhere near a default on our foreign debts,” he said. He pointed out that the country’s foreign debt stands at only $56.3 billion, equivalent to 71 percent of local economic output, or GDP.
In contrast, Argentina at the time of its default had foreign debt worth $140.2 billion, equal to only 52.2 percent of its economy. Since the sharp contraction of the Argentinean economy, its foreign debt is now 117.2 percent of GDP.
The Philippines has $16.8 billion in dollar reserves, enough to cover 4.7 months worth of imported goods and services.
While Argentina had $25.1 billion in reserves back in 2001, Tetangco said this had been rapidly whittled down by market panic since the Argentinean peso was pegged 1 to 1 against the dollar -- a method it adopted in the early 1990s to combat hyperinflation.
“We have a free-floating exchange rate, and that gives us a lot of flexibility that they did not have, if worse comes to worst,” Tetangco said.
If the Philippines consistently tops Argentina in side-by-side comparison tables, why all the fuss? Critics and defenders of government policy agree that the fiscal deficit is the problem shared by both countries. The Philippines even beats Argentina on this count, having posted a budget gap equivalent to 4.6 percent of GDP last year, versus the 3.3-percent gap reported by Argentina before its crisis erupted.
Newly installed Finance chief Juanita Amatong and Budget Secretary Emilia Boncodin are shouting themselves hoarse stressing that the Philippine government has a plan to eliminate the chronic deficits by 2009. But no one seems to be listening, despite last year’s stellar performance.
“What the market wants to see is consistency in the fiscal program,” said Tetangco, who routinely liaises with bank treasurers accused of driving the peso lower.”
Indeed, scrutiny of these details shows that the Philippines and Argentinean economies are world’s apart. Still, don’t be misled by credit-grabbing government spokesmen. That the country continues to have a relatively stable economy is not because of the policies of Malacañang, which has mostly failed to push crucial reform measures through Congress.
Instead, the relative stability should be credited to the technocrats and professionals at the central bank and the finance department who plod on despite the failures of their political masters in the administration. Statements by the country’s multilateral creditors, such as the International Monetary Fund and the Asian Development Bank, consistently warn of trouble down the road on one hand, while on the other hand trying to assure investors that a feared debt default is not in the horizon.
As Standard Chartered’s Brice put it: “This still does not mean that a default looks imminent. There is still time to act.”
While local policymakers should nevertheless worry about treading the path of the Argentines, it’s important to worry for the correct reasons and to rejoice about the differences. Unless reforms are made, the Philippines will surely fall into the abyss of economic doom, but not until it first falls into an abyss of ignorance.
Daxim L. Lucas is a senior reporter for TODAY in The Philippines.
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