Ferdinand “Bongbong” Marcos Jr. wants to renegotiate P275 billion in loans from China’s Eximbank to finance three major railway projects, including the ambitious Mindanao train system.
The previous administration’s finance secretary, Carlos Dominguez, was forced to cancel the loans after Beijing failed to act on the Philippines request for funding under its “Build, Build, Build” program.
In short, China refused to fund the railway projects – the 70-kilometer train system connecting Subic and Clark; the 380-kilometer train system from Manila to Legazpi City in Albay, Bicol; and the Tagum-Davao-Digos train system.
In 2016 during Rodrigo Duterte’s first visit to China, Beijing pledged some $24 billion in investments and official development assistance (ODA) grants and loans to fund more than 100 key infrastructure projects.
It was a departure from his predecessor’s private-public partnerships to build roads, bridges, airports, and seaports. Duterte placed so much faith in China’s help but only a fraction of what was promised was delivered.
As of 2020, China has only provided a total of $620 million in ODA loans and grants, or 2 percent of the total ODA. Japan’s ODA amounted to $11 billion or 36.4 percent of total ODA, while South Korea gave more than China, at more than $800 million.
China’s generous pledge could have influenced Duterte’s pro-China policy, which set aside the 2016 arbitral ruling in the South China Sea and distanced the Philippines from its oldest security ally, the United States.
After six years, China failed to deliver on its promises but has taken advantage of the Philippines’ softer position in the West Philippine Sea. Beijing has increased its presence and activities in the country’s 200-nautical-mile exclusive economic zone (EEZ).
Duterte’s China appeasement policy to win trade and investments obviously failed. It could be a blessing in disguise that the country has minimal exposure to Chinese loans.
Beijing charges 3 percent interest on both commercial and ODA loans compared with Japan’s almost zero interest rate with a longer 30-year grace period for repayment.
Marcos should think twice before entering into loan agreements with China that have higher interest and shorter duration loan repayment. The Philippines might fall into a debt trap similar to what happened in Sri Lanka.
Colombo had been borrowing heavily from China, India, and Japan. China’s $12-billion loans accounted for the bulk of its foreign debts. In 2017, Sri Lanka was unable to repay its $1.4-billion loan for port construction and was forced to lease out the facility to a Chinese company for 99 years.
China acquired a potential naval base in Sri Lanka, a strategic location in the Indian Ocean, which made India nervous.
Sri Lanka’s economic woes could be blamed not only on its huge China debt but the pandemic and the conflict in Ukraine, which resulted in higher inflation and shortages in food, fuel, and medicines.
Sri Lanka’s economic crisis has led to massive protests that forced its president, Gotabaya Rajapaksa, and his brother Prime Minister Mahinda Rajapaksa, to resign.
The situation in the Philippines is much different. But it could fall into a debt trap similar to Sri Lanka, Laos, and Kenya if it will rely on Chinese loans.
If Marcos Jr. really wanted to renegotiate the loans for the three railway systems, the interest rates should be brought down to the level of concessional loans offered by Japan, which also provides a longer grace period for repayment.
Marcos should avoid falling into a debt trap. Japan and South Korea could be better partners for these railway systems. There are many local conglomerates, like San Miguel and the Manny Pangilinan group of companies, which might be interested in entering into a PPP arrangement to build these railways.
Marcos should look at the best way for these train projects to be pursued.
And the best way is to avoid getting loans from China.