“debt trap avoided”; Marcos urged review of China loans

Former Finance Minister Carlos Dominguez III (PHOTO MALACAÑANG)

MANILA, Philippines — The Philippines has avoided a “debt trap” after halting its requests for loans from China to fund three major railroad projects under the Duterte government’s “Build, Build, Build” program, the head of one said local think tank on Saturday.

Also on Saturday, former Treasury Secretary Carlos Dominguez III, who called off the loans in May, reassured Filipinos that Chinese financing for several major infrastructure projects under the Duterte administration was “favorable” for the country and comparable to the soft loans provided by Japanese and other lenders.


“The Philippines has avoided a Chinese debt trap by suspending loans for the three railway projects given the onerous nature [China’s] Loan arrangements compared to those of Japan,” Dindo Manhit, president of the Stratbase ADR Institute, told the Inquirer.

Cesar Chavez, Secretary of State for Railway Transport, announced the termination of the loans on Friday, telling reporters that the Chinese lender, the state-owned China Eximbank (Cexim), is charging 3 percent interest on the loans, much higher than the 0.01 percent of Japan levied tax rate.

The railway projects that would be part of Duterte’s “legacy” were the Philippine National Railways (PNR) 380-kilometer Bicol project, the 71.13 m Subic-Clark railway project, and the first phase of the Mindanao railway project.

Can still be cancelled

President Ferdinand Marcos Jr. had instructed the Department of Transportation (DOTr) to review possible Chinese loans for railroads. Finance Minister Benjamin Diokno said the new government would “reconsider” the projects and if they still prove “worthwhile” the government could reinstate the loan applications.

Manhit said, “It is not a problem to revisit and review talks with China as long as it is comparable to loans to Japan,” which were granted at near-zero interest.

He also urged the Marcos administration to review the contracts of other loans from China “as a step towards introducing principles of good governance through greater transparency and accountability in ODA.” [overseas development assistance] loans.”

Manhit said Duterte’s other China loans could still be reversed or canceled because the review commission found their projects failed to comply with the country’s procurement law and even the certification process for environmental compliance.

Citing a report by Treasury Secretary Mark Dennis Joven, who negotiated foreign loans during the Duterte administration, Dominguez said Cexim “has yet to disclose the cost of financing it intends to offer.”

“However, Cexim has stated that it intends to roll over credit while covering at least marginal funding costs.”

“With U.S. dollar benchmark interest rates currently up to around 3 percent, Cexim will push to at least regain that funding rate,” Dominguez said.

Other Duterte projects

The Duterte government had signed loan agreements with China to finance the National Irrigation Administration’s pumped irrigation project on the Chico River, the Metropolitan Waterworks and Sewerage System’s New Centennial Water Source-Kaliwa Dam project, the PNR South Long-Haul railroad project, and the 3.9 km to fund bridge project Samal Island-Davao City.

Only the loan for the bridge connecting Duterte’s hometown with the neighboring island was denominated in Chinese renminbi. The other three loans were in US dollars as Filipino officials wanted parity and comparable interest rates with other ODA loans made by other bilateral development partners as well as multilateral lenders.

“One way to avoid a ‘debt trap’ is to make sure the project being financed has an economic return that is greater than the cost of the loan. Another is to align lending terms with those who govern lending from reputable international sources,” Dominguez told the Inquirer.

The three railroad projects have a combined cost of 275 billion pesetas – 142 billion pesetas for the PNR-Bicol project; P83 billion for the first phase of the Mindanao Rail; and P50 billion for the Subic-Clark railroad.

The Treasury Department has not disclosed the exact amount of credit requested for each of the three railway projects.

2.02% of total ODA

In 2021, the state planning agency National Economic and Development Authority (Neda) reported that China accounted for US$620.7 million in ODA loans and grants at the end of 2020, or 2.02 percent of the total ODA portfolio. This compares to China’s previous pledge of up to US$9 billion in ODA grants and loans for the Philippines’ flagship infrastructure projects.

By comparison, Japan’s outstanding ODA loans and grants to the Philippines totaled US$11.2 billion, or 36.4 percent of the total of 45 commitments. South Korea also had larger ODA to the Philippines than China, with 21 soft loans and grants worth US$809.9 million.

All overboard

Former Neda boss Ernesto Pernia doesn’t think the Philippines is in danger of being lured into a Chinese debt trap.

“China has simply taken too long — after the Philippines had already submitted the required project proposals — to come up with three names of candidate contractors for the Philippine government to choose from and release funds for the projects,” Pernia told the Inquirer.

When asked if he also found Chinese ODA to be sluggish, Dominguez replied: “The partnership between nations has many facets and cannot be judged on just one dimension.”

He said that the Chinese loans received from the Duterte government are all fine.

“Every effort has been made on the Philippine side to finance these projects on favorable terms and conditions broadly comparable to loans from other sources,” Dominguez said.

Duterte’s economic officials said they have been “very cautious and strict in reviewing” funding agreements and implementation agreements for China-funded projects.

In 2016, Neda’s Investment Coordination Committee (ICC) issued guidelines detailing the process of selecting Chinese contractors for China-backed projects after Duterte sought closer political and economic ties between Manila and Beijing.

The ICC rules should avoid a repeat of the Northrail and ZTE debacles – anomaly-laden projects the Arroyo government entered into with Chinese companies.

Beijing committed nonetheless

At a news conference in Beijing on Friday, Chinese Foreign Ministry spokesman Wang Wenbin said China remains committed to providing aid to the Philippines and will work with Mr. Marcos in pursuing “conventional and high-tech infrastructure” projects .

“The Philippines has always been a priority in China’s neighborhood diplomacy,” Wang said.

He did not go directly into the announced withdrawal of the rail loan applications.

“The Chinese side will support the Philippines in its efforts to achieve food self-sufficiency and agricultural modernization, strengthen conventional and high-tech infrastructure, and improve its energy structure to bring more tangible benefits to the Filipino people and the Chinese as well.” bring people,” he said.

The Chinese official said the two countries would focus on four key areas — large-scale agriculture, infrastructure, energy, and cultural and personal exchanges — “to strengthen friendship and cooperation.”



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