DoJ chief opposes peso-only int’l loans

MANILA, Philippines—The Department of Justice (DoJ) has expressed its opposition to a pending bill in the House of Representatives that would require that all government contracts with foreign entities be denominated in Philippine pesos.

In a letter to Zamboanga City Rep. Erico Basilio Fabia, chair of the House committee on government enterprises and privatization, Justice Secretary Leila de Lima said House Bill No. 4136, if passed into law, “would not only be impractical but very difficult to implement.”

The bill’s sponsor, Quezon Rep. Danilo Suarez, had said there was a need to prevent unwanted financial losses for government agencies with respect to foreign loans that they enter into.

When foreign loans are denominated in Philippine pesos, future payments will not be subjected to market swings and government funds will not be prejudiced, Suarez said.

Suarez also cited as a basis for his bill Section 19, Article II, of the Constitution which says, “The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.”

He also pointed out that Section 10, Article XII, of the Constitution mandates the State to “regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities.”

No connection

De Lima, however, countered that she saw no clear connection between preventing market swings and a government contract’s currency. She said that as a borrower, the Philippine government could not dictate the denomination of a contract on the lender.

The DoJ chief said officials from the Department of Finance, government financial institutions and government-owned-and-controlled corporations (GOCCs) would lose their flexibility when negotiating for better terms and conditions with multinational lending institutions such as the World Bank, Asian Development Bank, Japan International Cooperation Agency, and other international commercial banks, if the government were to borrow funds and obtain foreign investments only in Philippine currency.

Regarding the constitutional rationale for the bill, De Lima said that “while the Constitution, in promoting a self-reliant and independent national economy, mandates a bias in favor of Filipino goods, services, labor and enterprises, it does not contemplate a bias in favor of the Philippine currency.”

She cited the case of Espina et al. v Zamora where the Supreme Court ruled that while Section 19, Article II, requires the development of an independent national economy controlled by Filipino entrepreneurs, it does not impose a policy of Filipino monopoly on the economic environment.

In the same ruling, the Court said that the objective of that constitutional provision is to “prohibit foreign powers or interests from maneuvering our economic policies and ensure that Filipinos are given preference in all areas of development,” De Lima said.

Stabilize the currency

She argued that to prevent foreign exchange losses, the government must instead work to stabilize the country’s currency when foreign-denominated loans, including foreign currency-denominated bond issuances, mature.

Suarez had cited a study by the Senate Economic Planning Office which showed that the 1997 Asian financial crisis exacted a heavy toll on many GOCCs that had substantial foreign denominated liabilities.

“A huge part of the GOCCs’ obligations were foreign loans and this has been the reason for the huge foreign exchange (forex) losses for many of them. The study also found out that four of the GOCCs with the highest forex losses also had the highest interest payments,” said Suarez, a senior deputy minority leader.

“High foreign-currency denominated debt exposure is a two-edged sword. Government agencies with huge exposure to foreign-currency denominated loans suffer losses when the peso depreciates. Conversely, they may also experience net foreign gains when the peso appreciates. While foreign funding is needed for many government programs, it is essential that the provisions of the loan contracts are favorable to the country’s interests,” Suarez had said in an earlier statement.