Chaitanya Kalbag 

MANILA, April 18, Reuter – Filipino and foreign businessmen have launched a sharp attack on the Philippines’ 20-month-old debt/equity swap program, charging it is too restrictive and arbitrary and actually deters investors. 

“Disillusioned investors are the worst possible advertisement for the Philippines,” said a statement issued jointly by the Philippine, American, European, Japanese and Australia-New Zealand chambers of commerce. 

The statement said the country’s economic recovery would not quicken unless capital formation was encouraged. 

Although it is swamped with applications, the Central Bank has said it is slow in approving the conversions because of fears the additional pesos generated could add to inflation. 

The swap program, launched in August 1986 and aimed at reducing Manila’s 28 billion dollar foreign debt, allows investors to make government-approved investments by using the peso proceeds of Philippine debt paper purchased at a discount from the country’s creditor banks. 

As of March 7, the Central Bank had received 369 applications valued at 1.65 billion dollars. 

The Central Bank has approved 275 applications worth 843.3 million dollars but only 110, valued at 381.3 million dollars, have been finalised. Bank officials have said approvals will be restricted to about 180 million dollars a year. 

Earlier this year, Bank governor Jose Fernandez said investors would be encouraged to finance equity investment through private-sector debt paper using currency already in circulation. Such swaps would not be charged transaction fees. 

Government debt is easier to sell at a discount, but processing takes longer because the Central Bank must issue new pesos, thus increasing money supply, Fernandez said. 

The bulk of the debt/equity swaps – some 358.1 million dollars worth–has been Central Bank debt paper. 

The business groups’ statement said the volume of applications indicated there was keen investor interest. 

“Yet, when the investor actually embarks upon this swap application, he finds the going astonishingly difficult,” it said. Investors were expected to provide voluminous information attested by Philippine consulates in their home countries. But at the end of a six-month application process there was no guarantee the swap would be approved by the Central Bank’s Monetary Board, the statement said. 

“The situation which now prevails is one of confusion,” the businessmen’s statement said. “To an investor, it is unacceptable that an investment which meets all published criteria can then be rejected.” 

The statement added that the Central Bank’s preference for investments in fixed assets over working capital to put idle plants to work was illogical. 

Swap proceeds, required to be invested in special series Central Bank bills, were only released against invoices for work done—a requirement that ignored the fact Philippine contractors often demand cash advances. 

Fernandez said in a recent speech that closed debt/equity transactions had increased foreign investment by 15 million dollars in 1986 and 166 million dollars in 1987, while net direct foreign investment inflows rose from a scanty 17 million dollars in 1985 to 140 million in 1986 and 222 million in 1987. 

About 281 million dollars of debt had been retired up to the end of 1987 and the country saved about 298 million dollars in interest payments, he added. But the effect on the money supply had been substantial, with reserve money, defined as currency in circulation plus reserve balances of deposit banks, expanding by 4.3 billion pesos up to the end of 1987. 

“A strong argument exists that additional inflation is a price worth paying in exchange for strong investment induced growth, particularly if that growth exceeds the growth in inflation,” the businessmen’s statement said. 

 “The debt conversion program needs either to be effectively and fully implemented by the Central Bank or else cancelled as its continuation at an insignificant level will have minimal economic benefit.”