Ben and Jerry's

Crisis - a paroxysmal attack of pain and distress or disordered function; an emotionally significant event or radical change in status in a person's life; the point of time when it is decided whether an affair or course of action shall proceed, be modified or terminate; decisive moment; the turning point such a point in the course of the action of a play or other work of fiction (compare climax, resolution); the immediate sequel to the culminating point of a period of prosperity in rising market at which the business organism is severely strained and forced liquidation occurs (see business cycle); an unstable state of affairs in which a decisive change is impending such as recurrent cabinet crisis trouble (France); a psychological or social condition characterized by unusual instability posed by a excessive stress and either endangering or felt to endanger the continuity of the individual or his group such as social condition requiring the transformation of existing cultural patterns and values (see juncture). (Webster's Third New International Dictionary)

Crisis - a state of affairs with the distinct possibility of a highly undesirable outcome. (Webster)

Fiscal - relating to taxation, public revenues or public debt management and policies (Webster's Third New International Dictionary)

DIMENSIONS OF THE PHILIPPINE FISCAL CRISIS:

A ROADMAP TO FISCAL REHABILITATION

by

REP. JOEY SARTE SALCEDA

Lakas-Kampi, 3D Albay

Chairman, House Committee on Economic Affairs

Senior Vice Chairman, House Committee on Appropriations

A thousand needles on thyself before a single needle on thy patient.

Is the Philippines in the midst of a fiscal crisis? Yes, and that is the singular conclusion of eleven UP professors in their paper entitled The Deepening Crisis: Real Score on Public Debt and Deficit released Aug. 23. In his paper "A Roadmap to Fiscal Deliverance", DOF Secretary Isidro Camacho gave us an earlier glimpse of such crisis in 2003 promptly after resigning.

Fiscal crisis, financial crisis and economic crisis are economic tendencies that usually happen together or one after the other. They are just typologies used interchangeably because they all mean pain particularly to the man on the street. What happened during the time of Marcos was a foreign debt crisis that cascaded into an overall economic crisis due to a political event risk. It was characterized by runaway inflation, receding GDP, business closures and jobs destruction. During the time of Ramos, it was essentially the Philippine version of the Asian financial crisis. It was typified by collapsing stock markets, peso devaluation, falling property prices and rising non-performing loans in the banking sector. However, due to reforms on deregulation, liberalization and privatization, the country was able to prevent it from evolving into an economic crisis, GDP fell by less than -1% in 1999. One can think of fiscal crisis as Typhoon Signal No. 1, financial crisis as No.2 and economic crisis as No. 3. We are in the frying pan, not yet on the fire. It is HIV-positive, not yet AIDS-afflicted. It is a crisis, not yet a catastrophe.

The Philippines is under storm signal no. 1 - a fiscal crisis that is characterized by the structural weakness in government financial condition but which can eventually infect the private sector and the rest of the economy through interest rate shocks as the medium of contagion. Its main features include dependence on borrowings to finance even the most minimum government function and a debt stock-deficit spiral. Moreover, in the 2005 budget proposal, interest payments have become the biggest budgetary item overtaking wages for the first time in our fiscal history. Yet, the private sector is generally healthy with NPLs falling from 19% to 13.7%, corporate profits rising by 12% with telecom giants at a faster clip. With nominal GDP of 6.4% in 1Q, a stable peso and inflation under control, albeit rising, it was just the government; and the economy was doing fine despite the government.

Our task then in the administration is to put a sick government into intensive care and radical surgery and insulate the private sector from the contagion via an interest rate shock. Our financial diagnosis suggests that the country is in advanced stages of fiscal metastasis as shown by the rapid spiral in debt service and debt stock which needed to be contained and reversed immediately while secular growth in revenues was structurally constrained.

The current mood is to avoid finger pointing, look forward and solve the problem. Yet while seeking solutions, as a people, we still need to clarify those events and account for those decisions that brought us to this 3rd major crisis in barely two decades. The Philippines almost invariably falls into a crisis every 7 years. Thus, this paper represents a seminal attempt in exploring the anatomy of the current Philippine fiscal crisis so that we can arrive at an appropriate prescription.

1. The crux of the fiscal crisis is the unsustainable debt stock of P3.35trillion of the National Government (NG) as of end-2003 and a P5.39trillion total public debt stock as of September 2003. While nominal GNP has grown by only 11%, NG debt has grown at 17% pa and tax revenues grew by only 5.41%. Result: NG debt rose from 53% to 76% of the gross domestic product or GDP while total public debt rose from 103% in 1997 to 137% in 2003. To match maturing foreign debt, the country has tapped international credit by an average of US$3billion in annual foreign bond issues making it the second biggest issuer in Asia after Japan. This is already one of the fundamental anomalies that manifest our evolving fiscal crisis.

2. The eleven UP economists reached their conclusion using an economic model that showed that the current debt stock of the National Government of P3.355 trillion is unsustainable at 76% of GDP. It is even more appropriate to use the total public debt stock of P5.39trillion as basis for formulating strategy since almost all of GOCC debt naturally migrate to the NG, P500bn, mostly foreign debt, from Napocor is likely to migrate as soon as 2005.

3. Given its sheer size (P3.355trillion), the speed of its increase of three times or P2.011trillion from 1997 to 2003 and the proportion of total public debt (P5.39 trillion) to the national output