BSP bucks declaration of fiscal crisis

The Bangko Sentral ng Pilipinas (BSP) opposed yesterday the proposal to formally declare a fiscal crisis, warning that the ensuing confusion might precipitate an actual fiscal crisis that the government is trying to avoid.

The idea of declaring that the government is in fiscal crisis was floated by legislators last week as the Arroyo administration admitted that its borrowing is about to cross over for the first time from mere re-financing of existing loans to incremental borrowing.

The lawmakers said that declaring a fiscal crisis, would allow the Arroyo administration some flexibility to undertake drastic measures to address its revenue and spending problems.

However, BSP Governor Rafael B. Buenaventura said that such a declaration would only create confusion among creditors, credit rating agencies and the markets.

"For starters, we are not in a fiscal crisis situation yet," Buenaventura said. "Strictly speaking, being in a fiscal crisis means we are about to default on our obligation within the year and we are nowhere near that point yet."

Given the National Government’s debt profile where the average loan maturity was still at 19 years, Buenaventura said there was enough time to prevent exactly that kind of crisis from ever developing.

"It’s a crisis if we are about to be in default and by then, it would have already been too late for any kind of executive and legislative flexibility," Buenaventura said.

However, Buenaventura admitted that since the Arroyo administration has used up its so-called primary surplus, it would have to go into incremental borrowing while instituting measures to boost its revenues.

The primary surplus is an indication that the government only needed to borrow to refinance its existing obligations since it was still generating enough revenues to finance the deficit created mostly by debt servicing.

Once this primary surplus is used up, however, this means that the government would have to borrow not only to refinance its old obligations but also to get funds for actual budgetary spending.

As of the end of the semester, officials estimated that the government was down to a break-even point and the surplus would become a primary deficit from the second half of the year onwards.

"In that case, we cannot avoid incremental borrowing," Buenaventura admitted. "But that is not sustainable. We have to do something so that we won’t have to get more incremental borrowing than we have to."

One thing the country has going for it, Buenaventura said, was that its debt profile was actually healthy. "But it only means that there is time to undertake all these revenue reforms," he said. "If we don’t use that time to actually do it, then we will really be in a crisis."

Buenaventura said the government had the burden of showing a trajectory towards balancing the budget and putting a cap on its incremental borrowing.