President Gloria Arroyo acknowledged for the first time Monday that the Philippines was now in a "fiscal crisis," as economists warned of an Argentinian-type debt default within the next three years.
"We are already in the midst of a fiscal crisis and we have to face it squarely," Arroyo said in a written statement.
PHOTO: EPA
Budget Secretary Emilia Boncodin said Arroyo had ordered aides to "evaluate the proposal to declare a state of fiscal crisis."
Such a declaration would allow the president to withhold, for a limited period, the release to local government units of a portion of the 30 percent of taxes collected by the government that is alloted to them by law.
Aides earlier rejected Philippine comparisons with Argentina's debt woes, saying Manila was still paying down its obligations. Buenos Aires defaulted on its public debt in January 2002 amid violent street riots.
A group of University of the Philippines economists warned a likely uptick in global interest rates will make it much costlier to repay the government's overseas debt raising the risk of default within the next two or three years.
"This [threat of non-payment] would result in a sharp cutback in subsequent credit, particularly from foreign lenders, and precipitate a crisis such as that Argentina or Turkey experienced," said the group, who include ex-cabinet members Benjamin Diokno, Felipe Medalla, Solita Monsod and Gerardo Sicat.
Manila last fell into a debt hole in 1983-1984, when it defaulted on sovereign obligations and was cast off from the international financial markets.
"While the economy is not yet on the brink at this time, it can probably afford at most three years to avert such a crisis -- with possibly a year at most to convince financial markets it is doing something to reverse the situation," the paper said.
Government debt has more than doubled since the mid-1997 Asian crisis to 3.36 trillion pesos (US$60.32 billion), or 130 percent of the gross domestic product (GDP), the paper said. Half of it is in local currency.
Defaulting on even the domestic portion would cause "major difficulties and bankruptcies for the domestic banking system" and "ruin millions of depositors," which would lead to "severe economic contraction, causing thousands of bankruptcies and throwing millions onto the streets," the paper said.
The professors said these scenarios "are being fended off only" by the billions of dollars in annual remittances of the Philippines' seven million-strong overseas work force.
But this could be reversed by "any large external shock, such as a sustained increase in world oil prices, or a sharp fall-off in workers' remittances, or, ironically, even rapid growth that caused the import bill to rise."
They said Manila should at the bare minimum raise 150.6 billion pesos more a year through fresh taxes and higher motor vehicle registration fees as well as by reducing funds alloted to local governments and cutting by half the pork barrel, or discretionary funds, allocated to legislators.
Meanwhile, despite speculation that Arroyo would replace some of her economic managers, the government announced Monday that she had decided to retain her existing team consisting of Budget Secretary Emilia Boncodin, Economic Planning Secretary Romulo Neri, Finance Secretary Juanito Amatong and Trade Secretary Cesar Purisima.
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