Philippines: The Marcos debt

5 November 2018 by Eduardo C. Tadem

Students from the University of the Philippines come together to protect the autonomy of the university from militarization under the Marcos Regime (CC - Wikipedia)

Another compelling argument against the “hero’s burial” for Ferdinand Marcos was his corruption-ridden mismanagement of the country’s debt. At the height of martial law in 1977, he issued Presidential Decree 1177 mandating the automatic appropriation for debt service Debt service The sum of the interests and the amortization of the capital borrowed. , thus starting the process that continues to this day of prioritizing debt repayments before budget allocations for social and economic services and other government expenditures. The Philippines is the only country in the world with such an automatic debt appropriation law, Walden Bello says.

In the 1970s Marcos took out huge amounts of foreign currency loans that by the 1980s his regime could not repay. He tried to hide the dire financial situation by overstating the figures for foreign reserves. By then the economy was in a free fall: GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
growth dropped 5.3 percent, prices of primary export commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. fell by 50 percent, workers’ wages were reduced, and unemployment hit one-fourth of the labor force. The crisis worsened with the assassination of Ninoy Aquino in August 1983. As foreign banks withheld their credit facilities, Marcos declared bankruptcy in October 1983 and sought a 90-day moratorium on principal debt payments. The World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

provided bailout loans to avert a default but with painful conditions like cutting the government budget, peso devaluation Devaluation A lowering of the exchange rate of one currency as regards others. , tariff dismantling, and ending subsidies. Marcos had become the proverbial debt addict wholly dependent on foreign aid.

The Philippines is the only country in the world with such an automatic debt appropriation law

Cronyism became more rampant as Marcos prioritized the bailout of companies owned by his friends and close business associates. The Freedom from Debt Coalition cited the proliferation of behest loans with government guaranteeing the procurement of borrowed capital without complying with banking rules and procedures. The most notorious case was the $2-billion Bataan Nuclear Power Plant, which was completed in 1985. Total repayments, which ended only in 2007, reached $22 billion, with a debt service of $140 million a year, $12 million a month, and $388,000 a day. Marcos, through a crony, was reported to have received an $80-million payoff.

Ibon Databank reported that the Philippine debt in 1983 comprised 91 percent of GNP Gross National Product
The GNP represents the wealth produced by a nation, as opposed to a given territory. It includes the revenue of citizens of the nation living abroad.
and 509 percent of export earnings. In addition, the loans became costlier as creditors imposed higher and floating interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
. When Marcos became president in 1965, the total debt was $600 million; by the time he was ousted in 1986, it had ballooned to $26 billion—a 4300-percent rise.

Mamoru Tsuda and Gus Yokoyama wrote in 1986 that hearings by the US House subcommittee on Asia-Pacific affairs revealed that “Japanese corporations had paid rebates to Marcos and his cronies, as well as to financial groups allied with the former President, in connection with Japanese yen loans to the Philippines.” Total commissions—in reality, bribes—allegedly paid by five Japanese corporations amounted to $1.03 million.

In April 1986, the Commission on Audit accused Marcos of diverting US aid funds, particularly the interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. earnings of P236 million from the Economic Support Fund (ESF) which were illegally disbursed and classified as “confidential fund” via a Malacañang memorandum. The COA also reported the “irregular and illegal” diversion of P35 million to the “confidential fund” of the ESF Council headed by Imelda Marcos.

A May 1986 report by the UP School of Economics said: “The foreign debt incurred by the old regime is one of the biggest obstacles to Philippine economic recovery. The Philippines is one of the most heavily indebted countries in the world: seventh in size of debt, sixth in debt to exports ratio, fourth in debt to GDP ratio, and ninth in debt service ratio.”

The UP report also said that “most of the projects financed by the foreign loans were unproductive; … not well chosen or were probably chosen precisely to finance capital flight through the overpricing of projects.” Furthermore, projects were found to be “overpriced, mismanaged, not viable to begin with, or made unviable by changes in exchange rate and the international environment.”

As a result, the government had “to squeeze basic services and maintenance expenditures, reduce investment in infrastructure, incur huge deficits, and raise taxes and user fees to service the debt,” the UP report said.


Eduardo C. Tadem

PhD, is professorial lecturer of Asian studies at UP Diliman and president of the Freedom from Debt Coalition.



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