Prudence

Part of the vigor that is driving our economy is the increasingly prudential management of our fiscal accounts. In the first three quarters of this year, the public sector deficit fell significantly below target.

True, the figure includes substantial revenues from the privatization program and the collections from the BIR and Customs are not yet as strong as they should be. But the improvements are visible.

True, as well, the smaller deficit is also due to lesser debt service expense as a result of the remarkable appreciation of the peso. But the declining debt service was not unexpected. It is, in a matter of speaking, part of the dividend from fiscal prudence and good economic management.

As we begin borrowing less, and as the peso is expected to strengthen some more (barring self-inflicted political disasters), the debt service expense will continue to drop. This will free more funds that, hopefully, will be judiciously used to invest in infrastructures and better health/education services.

Our finance authorities have announced a program for increasing the domestic component of the borrowing mix. This should happen at about the time the peso has stabilized and stopped its steep appreciation. Otherwise, we will be borrowing in an appreciating rather than depreciating currency — as we are now enjoying with regards to dollar-denominated debt.

Another consideration in altering the borrowing mix is the interest rate differential between debts in foreign and domestic currencies. If borrowing in a foreign currency will give us lower interest rate advantages, there should be no sense in insisting on borrowing in pesos.

The outlook, however, are further cuts in our policy rates. That should make interest rate differentials negligible and give us the added value of slowing down the peso’s appreciation (if that is what we want to do).

Credit should also be given to the excellent management of government-owned or ‑controlled corporations (GOCCs) and government financial institutions (GFIs). There are a few exceptions, of course, such as the subsidy-hungry National Food Authority (NFA) and the subsidy-dependent state universities where political resistance inhibit profitability.

The NFA was designed to lose. That was a policy decision taken decades ago. Every year it loses billions, adding to the pressure for government to borrow, for money to be diverted from essential public investments and, in the past, helping keep the currency fragile.

It used to be that losses incurred by GOCCs and GFIs inflated the consolidated public sector deficit so much so that even as government makes a budget surplus, these losses result in an over-all deficit. Today, however, excepting the politically intractable loss-makers, the GOCCs and the GFIs contribute to public revenues rather than require subsidies as a general rule. That is important in maintaining over-all fiscal prudence, holding down inflation and enabling government to invest for the future.

I’d like to talk about the DBP and its profitability. But that might not be proper, considering I am associated with this financial institution.

Let me, instead, use the GSIS as an illustration. This institution demonstrates how tough reforms can turn around a government-controlled corporation and bring it to profitability.

Just a few years ago, everyone fretted about the GSIS’s shortening actuarial life. Benefits-driven and inhibited from raising contribution rates by short-sighted political pressures, heavily infested with syndicates of every variety that thrived off ghost beneficiaries and saddled with organizational inefficiencies, it once seemed the GSIS might not live long enough to pay my benefits.

At the end of 2006, however, the GSIS posted a net income of P40.9 billion, the highest revenue among all GOCCs. That is 7.6% higher than the net revenue of the previous year. It is a revenue volume that will likely be surpassed this year.

At that level, the GSIS is the top earning GOCC. It is followed, at far second, by Philippine Health Insurance Corporation which posted a net revenue of P9.1 billion. At third is the Social Security System with an income of P6.1 billion.

When the present management, led by Winston Garcia came in, the actuarial life of the GSIS was down to 24 years. After the management of the fund was improved and the organization streamlined, the actuarial life of the GSIS is now 46 years.

The profitability of the fund is due both to more adept investment decisions as well as savings due to improved administration. By breaking up fake loan rackets, assiduously collecting unpaid amortizations from other government agencies and cracking down on overpricing in the fund’s procurements, the GSIS was able to save hundreds of millions and collect hundreds of millions more.

Computerization improved the fund’s servicing of its clients. In 2006, the GSIS was able to grant a total of P66.9 billion in benefits to its members compared to P62.3 billion the previous year. As a result of the implementation of the Consolidated Loan Program, the fund was able to condone P928.29 million in surcharges. The biggest beneficiaries of this condonation (as a result of improved efficiency) are the public school teachers, who compose half of the GSIS’s 1.3 million members.

What this demonstrates is that a government-controlled corporation can improve revenues and at the same time improve services delivered. The two goals ought to be complementary rather than contradictory.

In a larger way, the national government can exercise fiscal prudence and, precisely because of this, deliver superior social services. It is all a matter of quality management.