Introspective
Business World, 4 December 2011
The Philippine gross international reserves now stand at about $75 billion and counting. The interest rate on “safe haven” sovereign bonds is close to zero and may be negative in real terms. Obviously, the high interest rate on offer in “problem country” sovereign bonds is too risky. It is not inconceivable that the foreign placement of our international reserves is now fetching negative interest rates. This is a tragedy. We could be paying safe haven countries to borrow from us!
Since 2002, we started being a consistent BOP surplus country, meaning we are now a net lender to the world. We are helping finance the US- and other rich country-deficits. The proximate reason for this is well known: OFW remittance and the consequent capital account surplus which now more than covers the still persistent trade deficit. Our national savings rate has since trended upwards somewhat to a respectable 25% of GDP. Our investment rate has however fallen to 20% in 2010. Among our neighbors in the Asian region, capital formation takes about 30 to 35% of GDP. The BOP surplus would disappear if our investment rate were just 5% higher. Why is it so low?
Government outlay for infrastructure continues to be about 2.5% of GDP compared to about 8% of GDP in our neighborhood. This is the principal reason why our infrastructure, especially the arterial variety, is so rickety and turns off domestic and foreign investors. The government must raise its capital outlay to 5% of GDP regardless of any success in the PPP program. The PPP can provide the wherewithal to raise capital outlay further from 5% to East Asian level of 8%. The problem is sourcing the P200-300 billion required for additional capital outlay. Government’s resources are already stretched meeting current ramped-up spending programs. And improved revenue flow from new taxes and/or improved tax effort will hardly be enough even if forthcoming.
Enter infrastructure bonds tailored to access the gross international reserves of the BSP. In lieu of placements in hard currency sovereigns which now earn next to nothing, placements in RP bonds earmarked for the financing of specific arterial infrastructure projects will earn higher return for the BSP. At the same time it gives the government the wherewithal to address the most pressing arterial infrastructure needs of the country without further foreign borrowing. For example, a 1-gigawatt baseload power generating plant will costs $1.5 billion. If the infra bond is peso-denominated, the risk of loss from currency depreciation is remote in the current OFW remittance-driven economy.
There are of course dangers in the BSP lending to the Philippine government. The latter’s credit rating even with the latest upgrade is lower than those of the traditional destinations. In the past this lender-lendee relationship was abused by the government in pursuit of “inflation finance”. Government would simply mandate the central bank to print more paper money which the government borrows to finance its deficits. The result was the horror of runaway inflation which in time invariably choked the real economy. But this danger is now remote. The BSP under the Tetangco watch is not only legally independent but has also shown itself to be effectively so. Malacañang has less influence on the BSP now than it has on Congress or the Judiciary. The BSP’s exposure being limited to infrastructure bonds, the government cannot use the window to finance its other spending programs. The BSP’s new and demonstrated competence means that it has earned the right, nay the obligation, to take on more responsibility for the economy. When the times required it, the US Federal Reserve Board innovated by purchasing corporate bonds as part of its QE effort.
Just because government procures an infrastructure asset does not mean that it must operate it. Once the asset is put on stream the government should immediately move it onto the PPP space by privatizing it. Thus, the government solves the market failure without risking a government failure.
The case of power generation plants is especially urgent. Our power reserves is running thin and our power cost is now neck and neck with Japan’s. And the private sector cannot seem to solve (thanks to EPIRA) the contracting problems associated with engendering greenfield power plants. We need to bulk up power generation and we need government in the picture. Unfortunately, financing is only one hurdle for government provision: EPIRA prohibits government from direct procurement without there being a power crisis and a declaration of a power emergency. If we wait for that, it will be too late. This silly prohibition exemplifies “instrument suppression,” proscribing certain policy instruments because they were abused in the past. As I previously observed, we still have to learn to hang cattle rustlers instead of horses.
The reality of the remittance-driven nature of the Philippine economy must now be recognized and, rather than rued, used as a stepping stone for moving forward. Harnessing the breathing space extended by the OFW remittance for arterial infrastructure is the next logical step in the development of the economy. We owe it to ourselves; we owe it to our OFWs.
