Warning Signs

Our Government is becoming known for not paying its bills.

Foreign chambers of commerce have publicly demanded the Government pay them the VAT refunds owed them. One company alone has outstandings of Php 3.8 billion. Many of the companies are Japanese electronic exporters employing thousands of Filipinos and generating much needed foreign exchange. They have threatened to pull out if the issue is not resolved. Japanese rarely speak out so the problem must be serious.

The foreign chambers have cited the VAT refund as a reason for international investors to avoid the Philippines when Vietnam, Indonesia, Thailand and Malaysia are seeing massive inflows from suppliers relocating out of China. In 2022 the Philippines FDIs dropped 22% to only $9.6 billion and have continued to fall this year. This belies what DoF Sec. Diokno said are the “trillions of pesos” in foreign investments from the President’s many international trips.

The VAT is not the only thing this Government is not refunding. Philhealth has Php 27 billion in unpaid claims to private hospitals.

The Government is not paying the military the pensions promised them.

The Government is not paying contractors unless they kick back 20-40% of the contract price.

The Treasury is disbursing in some agencies only 30% of their budgetary allocations to keep our budget deficits from ballooning and threatening our credit rating. 

Congress is reneging on the President’s SONA promise to electrify the countryside. It slashed the budget of the National Electrification Administration from Php 6 billion to PHP 1.6 billion. Put this in the category of the campaign promise of Php 20/kg of rice.  

On a retail level authorities are delaying the travel tax refund of Balikbayans who are exempt on airline ticket purchases in Manila. This is hurting our tourism.

In my career I have restructured as well as acted as receiver for bankrupt companies so I can spot a flailing enterprise when I see one. Whether a corporation or an economy they all exhibit the same symptoms just before they get into trouble. Here are what distressed companies look like:

1. They stop paying their bills especially to non-essential suppliers- They know suppliers will not sue them unlike banks and bondholders. This buys some relief but ultimately the company runs out of raw materials and spare parts driving it further into a hole. The Philippines is seeing this right now. When foreign investors are not paid what is due them, they will leave and spread the word.
2. They “kite” funds- Management moves money around taking from Peter to pay Paul. It is a Ponzi scheme and we are seeing signs of it in our Government. Confidential funds of agencies are shifted from one office to another. To finance the controversial Maharlika Fund our economic team raided the coffers of the Landbank and the DBP, monies intended for loans to SMEs and farmers. This has imperiled the capital of these GFIs who have asked the BSP for “forbearance” i.e. temporary relief from BSP mandated capital requirements. To restore the banks’ capital the President ordered the LB to temporarily stop paying dividends to the Government. This will deplete the funds of the Treasury who then has to fill the gap with higher taxes or more borrowings. Our DoF Secretary heads our Treasury, chairs the Landbank and is about to chair the Maharlika Fund in a clear conflict of interest. In the end it is the Filipino taxpayer who has to foot the bill but nobody is telling him that.
3. They sell the family treasures – This provides short term relief but eventually even this is spent. The Philippines is considering privatizing PAGCOR and NAIA. This money is by law slated to go into the black hole that is the Maharlika Fund.
4. They under serve their stakeholders – To save money Government agencies are under spending their budget allocations, scrimping on education and health services and building inferior roads and bridges.
5. They fudge the numbers and talk up the company prospects to keep creditors at bay – Philhealth reported a profit of PHP 46 billion as of Sept. 30 2022 even if it had a negative capital of Php 768 billion i.e. it is bankrupt. The Philippines is reporting rosy debt/GDP ratios without saying these exclude our payables be it the VAT refunds that multinationals have cited or payment to contractors and hospitals or pensions due the military personnel.
6. They hoodwink their external auditors – Companies have external auditors to validate their financial standing. For economies, the equivalent are the credit rating agencies. Investors look to these rating agencies when deciding whether to buy our sovereign bonds. Yet rating agencies are an inadequate standard of good financial house keeping. One, they are based on lagging economic indicators and not on the future direction of an economy. They tell you where you came from but not where you are going. Two, they do not reflect governance, corruption, income gaps and the quality of government goods and services e.g. roads built under specs. Three, they exclude other financial liabilities like payables and pensions. Four, they grade economies on the curve: They do not say how strong you are, only how you are doing relative to your peers. And, lastly, they can be massively wrong. Credit Suisse, the Swiss banking giant, went from investment grade to extinction in just 3 days. 
7. Stakeholders lose trust in management – Creditors stop believing the hype and start charging higher interest rates to cover the risk premium. Suppliers scale back. Foreign investors pull out.
8. Top management starts to look out for themselves and not the business – In their mid 70’s, our economic technocrats are seemingly focused on building their retirement nest eggs with, for example, the fabulous compensation packages from Maharlika. In the meantime their bosses raid the coffers before the whole thing folds. Ernst & Young, the international consulting firm, reports that businesses lose 5% of revenues to fraud and corruption. If applied to our economy the latter would amount to one trillion pesos or 18% of our National Budget.
9. The debt keeps mounting with no prospect of ever paying it – Our country owes over Php 14 trillion. Our chief economic manager says that is “manageable” and we can grow our way out of it. This has not happened in this century despite our “stellar” growth. In 2022 the economy grew by 7.6%, the highest in 20 years, but our debt continued to grow by Php 1.2 trillion.

Our economic mangers cite our investment grade rating as evidence our Republic is strong. We have seen how rating agencies are limited in their assessments.

Our economic managers compare our credit metrics with the U.S., Japan and Europe, nations whose currencies are international reserves. It is apples and oranges.

Our economic managers mention the long maturity of our debt without mentioning how we will pay what is due. Next year our National Treasurer says we will have to pay Php 600 billion in interest and refinance PHP 1.2 trillion in maturing obligations in a difficult credit environment. Some of this will be sourced locally thereby crowding out SMEs from working capital and investment.

The Government recently raised $600 million from the local retail market without disclosure of the risks. Philippine banks pushed the product to their unsophisticated clients who are now probably losing money from the recent run up in interest rates.

This country is running on fumes but our credit rating agencies have not caught on. Our economic managers have done a good job at masking our true state of affairs with opaqueness on governance and corruption, by talking up the economy, by playing with the numbers, by not servicing non-interest bearing payables, by kiting, by Government providing inferior goods and services and by looking after their personal interests rather than those of the nation. These are all the classic signs of a failing enterprise.

Fitch, the international rating agency, is the first to express concern. It warned the ratings of the LB and the DBP could be lowered following the Maharlika raid on their capital. Hopefully that does not lead to a downgrade on our sovereign standing and to a spill over to the other rating agencies.

To reverse the course we need new leadership, economic managers who have actually run a business and return us to basics: Raise revenues, watch costs, stop leakages from corruption, lead, motivate employees and build trust from stakeholders. Are the economists such as we have the right people to do that?