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PHILIPPINES FELL UNDER CHINA’S DEBT TRAP

China has been the world’s fastest growing economy in the 21st century. It pumps
out billions of dollars across the world in the form of loans into developing countries to
help fund and build major infrastructure projects. China invests a massive set of
international development project that are raising concern about how the country is
gaining influence and power across the world. It is said that the lending is motivated by
China’s desire to stimulate its own economy and obtain vital resources.
With regards with the global economic and political dominance, it has wantonly
trampled on the rights and sovereignty of many developing countries. That’s why one of
the biggest fears and concerns of people is the China’s “Debt Trap-Diplomacy”. This
works when China first offers to build and finance infrastructure projects in a developing
country even if such projects have low expected returns or are wholly unfeasible. Most
countries were hooked about this and immediately agreed without second thoughts.
Second, the borrower-country, often small and poor, will have difficulty in paying the debts
against China. Third, China collects as collateral the borrower-country’s natural resources
or assets. Included in the loan agreements are collateral assets by the countries in
exchange for the loan offered by China. Most likely, it is somewhat similar to taking over
or invading the country and becoming part and under the administration of China.
Recently, Philippines improves its relationship and develops a stronger tie with
ASEAN countries particularly, China. With the world’s largest currency reserve of $3.2
trillion, China can offer the Philippines numerous financial openings that are essential to
its progress especially in infrastructure projects, enhance bilateral trade or exchange, and
broaden social administrations to the Filipino individuals. Amid closer ties between the
two countries, Philippines secures Php 731.7 billion worth of deals with China, including
business-to-business contracts, public financing agreements, and soft loans for
development of projects. One of the key infrastructure projects of the government of the
Philippines is the “Build, Build, Build” program. Current administration said that it is the
solid backbone for economic growth as it aims to upgrade infrastructure, reduce poverty,
connect more people and communities and create more jobs to improve the lives of
Filipinos. The target public spending for the program is P8 to P9 trillion from 2017 to 2022.
Among the infrastructure projects, Kaliwa Dam and Chico River Pump Irrigation are the
main projects earmarked for Chinese financing. The purpose of establishing the Kaliwa
Dam is to ensure water security that aims to increase the raw water supply to meet future
potable water demand of Metro Manila and reduce dependence on the Angat Dam. This
dam has been on the drawing board until when President Duterte received a loan from
China that would fund 85 percent of its P12.2-billion value. The Chico River Pump
Irrigation aims to irrigate 8,700 hectares of land in the provinces of Kalinga and Cagayan.
It will provide a stable supply of water to for agricultural use, thus helping and benefitting
4,350 farmers and their families. The total projected cost of pump irrigation amounts to
P4.37 billion, with Php3.6 billion to be loaned from the state-owned China Export-Import
Bank as Official Development Assistance (ODA).
Though there were unfavorable provision stated in the loan agreements with China
and there were ways to avoid the trap, the Philippines still agreed to it which lead to risk
on the country’s natural resources and strategic assets. Philippines has 20 years to pay
for the loan and inclusive of a 7-year grace period. While the Philippines need assistance,
the government must be careful not to fall into China’s “debt trap”. What happened to
other countries like Mongolia, Montenegro, Pakistan, Maldives, Djibouti, Laos, Kyrgyz
Republic and Tajikistan, which are in risk of paying its debt, should serve as a warning
for the Philippines. Even though the Philippines may not actually be at debt risk as for
now, the continuous massive borrowing and overdependence in China, may lead us to
debt trap. If that happens, it will not only affect the government but also the whole
generation of Filipino. Repayment agreements may risk not only the Philippines’ natural
resources and strategic assets, but also its sovereignty. It may also cost the Philippines
its territory in the West Philippine Sea.
Based on the Philippines’ debt to GNI ratio last 2017 that measures the country’s
debt in relation to its national income, it tallied around 19.4% which means that the ratio
of the country’s debt to GNI is favorable since its still far from the 50-percent mark which
may indicate difficulty in payment of debts.
The trend of the debt-to-GNI of the Philippines dropped to a ratio lower compared
to the past years when our external debt was the same size as to our national economy.
It significantly means that the amounts that were loaned by China were not terribly large
that will disrupt our economy. There was an improvement in the national income of the
country wherein debts don’t form a big part of it. However, this doesn’t necessarily mean
that it was a wise decision to accept the agreement, GDP growth must be measured to
determine the ability to pay the loans based on the economy growth. The Philippine’s
gross domestic product growth managed to rise to 6.2 percent in the 3rd quarter of 2019,
but still not enough to pull it up to the target band for the year. The average growth for the
last 3 quarters was at 5.8 percent which are a few points away from the goal of 7 percent.
Compared to the GDP on 2016, it is lower than 7.2 percent growth rate tallied.
Unfortunately, there may be growth in GDP for the last quarters but will this enough to
serve as payment for the loan that our country has entered. In this time of unstable growth
in the economy, it is not wise to enter into agreements with onerous provisions that will
impair our economy and could lead to imprudent economic management.

It is a common principle when it comes to contracts and agreements, is that both


parties involved will benefit from the agreement where no one will be impaired from their
rights. The fact that the Chinese loan agreement includes unfavorable conditions; it must
not be given more thought before it is signed and accepted. It is never wrong to say “no”
and disagree on matters that are not in your favor especially when it comes to risks. It’s
ironic enough that our President wants to arrest without warrants those “5-6” lenders
because of their allegedly onerous agreements and yet he also entered into a contract
with onerous provisions without considering the possible consequences.

According to Banko Sentral ng Pilipinas, the country’s debt to China is relatively


small compared to the total external obligations of the country. BSP Deputy Governor
Diwa Guinigundo said, “The country’s external debt to China is less than $1 billion or $980
million to be exact. Out of the total of $980 million debt to China, the central bank official
noted that the short-term debt or the revolving credits is around $520 million while the
medium to long-term loans or those with maturity of more than five years amounts to $420
million.” He also added that he relative size of our debt to China will fall about 4 to 5
percent by 2022. However, it is still not safe to say that our country will not be buried from
debt to China for the next years if it continues to borrow a massive of amount money. In
addition, based on the Foreign Borrowings Act, it prescribes an elaborate system of
processing foreign loans. This means that the loan agreements between the two parties
undergone thorough process before it was approved for implementation. Mr Guinigundo
said there were no collaterals involve in the loan agreement, only the waiver of immunity
between the sovereign states which is standard among loan contracts between states.
Even though there might have no collaterals involved, if we will fell for China’s debt trap
and are unable to pay off debts, Philippines might end up surrendering some of its
strategical assets and natural resources as payment for these debts. Like what happened
to Ecuador, they surrendered 80 percent of their oil resources to pay its debts wherein it
was not this part of their agreement.

It was also pointed out that the economic rate of return of the infrastructure projects
from the loans were above 10 percent. Are these 10 percent economic rate return enough
proof that the infrastructures loaned are feasible and able to produce favorable results in
the future?

Tons of questions are still left unanswered whether it was really a wise idea for our
country to enter in a loan agreement with China considering the provisions undertaken.
There may be pros involved like more funds to provide infrastructures that will benefit the
public but we cannot ignore the fact that there are cons especially the consequences that
we must face when our country will be buried under the trap that was planned by China.
All we can hope is for the welfare of our country, improvement of our economic status
and favorable outcome from the infrastructures loaned so both parties benefited on the
agreement signed upon.

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