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Local government bonds: Will they work?

/ 05:10 AM November 24, 2018

When we earn less than what we need to spend, what we do is borrow money. The “we” can apply to individuals, to corporations, or to sovereign countries or governments.

Often—for governments especially—borrowing money is not a problem. They borrow money to pay for borrowed money, and lenders are easy to find. For example, latest available data show that the total (gross) amount of US government debt (USD21T) is bigger than that country’s gross domestic product, or GDP (USD20T). Stated differently, the current debt-to-GDP ratio of the federal government of the United States is 105 percent.

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Some countries have even higher debt-to-GDP ratios: Japan (236 percent), Italy (131 percent) and Singapore (110 percent), among others.

The Philippines? The trend over the past decade shows a decreasing rate, from 55 percent in 2008 to 42 in 2017. The amount of total national government debt in 2017 stood at P6.6 trillion, 67 percent of which was domestic debt while 33 percent was foreign debt.

The debt-to-GDP ratio is one of the indicators of a country’s capacity to pay. Experts tell us that a low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient enough to pay back debts without incurring further debt.

Because government borrowing does not seem to worry policymakers even for debt guzzlers like the United States and Japan, perhaps what may interest taxpayers more is determination of the “need to spend.”

There are cases where countries (or areas within them) can promote people’s welfare better by buying public goods and services now, using borrowed money (at cost, meaning with interest) than waiting for a later date when cash flow positions could be expected to improve. A quick example is expenditure on key infrastructures, like road networks or hydroelectric plants that stimulate job-generating private investments and further promote downstream livelihood opportunities. Investments like these often pay for themselves over a long period of time.

The development goal becomes more attractive when economic opportunities are seen spilling into the countryside, with added expected benefits—from the whole nation’s perspective—of easing urban poverty and congestion, greater equity in wealth distribution, creating a variety of conditions for social leveling, etc., all of which can go a long way in checking rural insurgency.

This idea is cropped from the backdrop of the Philippines’ possibly becoming a federal nation where, as an assumption, the federal states will have more autonomy at finding sources from which to fund their development projects. A possible setup can emerge where, like what the national government does, LGUs can issue debt papers or instruments (such as notes or bonds) to raise money.

While other countries like the United States and Brazil have enabled their municipal governments to issue debt instruments or securities, this funding option has yet to gain traction among most LGUs in the Philippines, except for some megacities like Cebu City. The more common practice has been for LGUs to vie for bilateral loans, involving, in many cases, development banks like Land Bank and the Development Bank of the Philippines, whenever they see the need to borrow money.

Over the past several years, the Bureau of the Treasury—in collaboration with the Department of Finance and the Bangko Sentral ng Pilipinas, among other related government agencies—has developed a robust environment for debt management operations that include improved investor relations, enhanced organizational capacity and optimized analytical tools for policy action, streamlined processes for origination (e.g., auction of treasury bills and bonds), as well as big data management required from the recording, monitoring and servicing of national government debt.

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The external environment contributes to the vigor of the entire debt management apparatus, such as the overall health of the economy—buttressed by a predictable political climate—that can justify positive credit ratings on a consistent basis. It is this kind of ratings that makes it easy for governments to find lenders, and incur debt at the least possible cost to the taxpayer.

Investment opportunities for LGUs are legion, among them:

Real estate development. That Metro Manila needs to be decongested is obvious; LGUs can easily see opportunities from that big problem. Hint: Build a hub for a national government agency, one that offers free housing for 1,000 to 2,000 employees, on top of state-of-art digital connectivity infrastructures. Then invite a government agency that rents property for its offices in Metro Manila or nearby areas to relocate. In five years, the host LGU should see a rapid increase in the number of economic establishments within the area, providing livelihood opportunities for its residents.

Urban planners would also do well to shape ideas for similar ventures. For example, the Tacloban North Township Project of Tacloban City can be a model for uprooting entire communities from danger zones to a more ideal settlement area.

Land banking. LGUs that think through issues of squatting (which is a tax on idle property) and disaster response should

also do well to buy land now (while still available and relatively cheaper) for the future needs of their constituency.

Aged care homes and services. LGUs can add value to what the Philippine Retirement Authority offers by building specialty facilities for the elderly, including those that require medical care for dementia, Alzheimer’s and other physical ailments caused by wear and tear. Filipinos excel in caregiving (a competitive advantage) largely because of our culture: respect for elders and moorings from extended families.

The market is simply too big (and growing by the day) to be ignored. Estimates show that, in 25 years, almost one-third of the population of the United States, Japan and most European countries would be nearing retirement age. Unlike the Philippines, the ties that bind families in these countries are not as “strong,” where elders are often left to fend for themselves. These elders, one may further note, are not “freeloaders,” thus boosting the financial viability of such investments.

Organic agriculture. The objective is to help local farmers compete with established producers and traders by organizing and continuously training them, and providing them with the required startup and working capital requirements. The “organic” niche can help them stand out from the competition.

Franchisee for disaster relief. LGUs can “subcontract” from the Department of Social Welfare and Development its disaster relief operations on a bill-me-later basis. Government personnel, except probably those who have military or police training, are hardly known for their skills in logistics management. But all other things being equal, LGUs are in a better position to respond more effectively to disaster relief needs due to their proximity to affected areas.

In conclusion, LGUs do have many opportunities to innovate on their service delivery systems by investing in projects that are outside of their usual development portfolio. A robust structure for managing public debt, led by the Bureau of the Treasury, exists. It can be tapped to help them generate the funds they need from the domestic capital market.

Ingming Aberia is UNCTAD consultant for the Strengthening Debt Management Project in the Philippines.

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