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CAPITAL ECONOMICS REPORT

PH may fall into debt trap with China funds, says firm

By: - Reporter / @bendeveraINQ
/ 05:36 AM November 23, 2018

Turning to China for financing President Duterte’s infrastructure program may lead the government to make the same mistakes made by other Asian countries that have fallen not only into a debt but also corruption trap, London-based Capital Economics said on Thursday.

“By seeking closer ties and increased investment from China, President Duterte of the Philippines risks repeating the mistakes made by other countries in the region. With the current account deficit already approaching unsustainable levels and given the corruption problems associated with Chinese investment projects elsewhere in Asia, the Philippines would be better off shunning Chinese investment,” Capital Economics said in a report titled “Chinese Investment Could Make Problems Worse.”

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“Following a two-day visit to the Philippines, President Xi Jinping of China [on Wednesday] announced a number of new plans and feasibility studies for increased infrastructure investment in the Philippines, as well as funding for the rebuilding of Marawi,” the research company said.

“There were few precise details, but these investments are likely to total into the tens of billions of dollars. The two countries also signaled plans for joint oil and gas exploration off the coast of the Philippines,” it said.

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Under the “Build, Build, Build” infrastructure program, the government plans to roll out 75 projects, about half intended for completion within President Duterte’s term, alongside spending over P8 trillion on hard and modern infrastructure until 2022.

The program will also raise the share of infrastructure spending in the economy to 7 percent, at par with the Philippines’ neighbors.

But Capital Economics warned that “a big increase in spending comes with major risks.”

It warned that heavy use of foreign capital could lead to a  wider current account deficit and greater pressure on the peso.

Capital Economics said the Philippines may face the same problems that Pakistan, Sri Lanka and Malaysia faced as these countries enjoyed an influx of Chinese money.

“In a worst-case scenario, the Philippines could go the same way as Pakistan, where a surge of Chinese infrastructure investment has led to a widening of the current account deficit to around 5 percent of GDP, a collapse in the currency and the need for a further International Monetary Fund bailout,” it said.

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