What happens if the Philippines can’t pay off loans from China?

Anna Gabriela A. Mogato, Ralf Rivas

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What happens if the Philippines can’t pay off loans from China?
(UPDATED) Senatorial candidate Neri Colmenares raises the alarm over the looming Chinese debt trap. The finance department shrugs off fears and says the Philippines can pay off the debt.

MANILA, Philippines (UPDATED) – Will the Philippines fall into China’s debt trap?

This was the concern of former Bayan Muna representative and senatorial candidate Neri Colmenares, zeroing in on the Chico River Pump Irrigation Project.

He raised the alarm over the “onerous” project requiring high interest rates and provisions seemingly waiving off the country’s sovereign immunity.

What is the project about? The Chico River Pump Irrigation Project is the first flagship infrastructure project financed by China under President Rodrigo Duterte’s “Build, Build, Build” program.

It aims to help some 4,000 farming families by irrigating around 8,700 hectares of agricultural land in Kalinga and Cagayan.

What are the loan terms? In a document obtained by Colmenares, the project has an interest rate of 2%, much higher than Japan’s rates of 0.25% to 0.75%

The total project cost totals to P4.37 billion, while the loan agreement only covers P3.69 billion. 

The agreement also slaps a “management fee” worth $186,260 and a “commitment fee” worth 0.3% per annum. According to the agreement, this will be “calculated on the undrawn and uncanceled balance of the Facility.”

This is to be paid “in full without counterclaim or retention.” (READ: [OPINION] What scares me the most about China’s new, ‘friendly’ loans)

Dangerous provisions? Colmenares was wary of the provisions that state that the Philippines’ sovereignty will not be recognized, which means that China may take control of the country’s patrimonial assets. 



The agreement makes mention of the Philippines having to waive off its right to immunity twice, namely in Articles 5 and 8.

By signing the deal, the Philippines under Article 5.5 is not “entitled to any right of immunity on the grounds of sovereign” in the case of arbitration and execution of any legal processes in relation to the project. 

This is reiterated in Article 8.1, which stated that the country will also have to waive off “any immunity on the grounds of sovereign or otherwise for itself or its property in connection with any arbitration” that stems from unresolved disagreements related to the irrigation project. 

However, the agreement stated that diplomatic, military, or non-commercial assets would still retain its immunity.

“The government cannot be sued so it’s immune from [being] sued. But this time, there’s no immunity so it’s dangerous. What if you can’t pay? What will they get?” Colmenares told Rappler in a phone interview.  

The arbitration will only be pursued if a “friendly consultation” fails to solve any dispute, and will be dealt with following the rules of the China International Economic and Trade Arbitration Commission.

Colmenares told Rappler that the vaguely-worded sections in the agreement may mean that China is gunning to take control of the government’s commercial assets through government-owned and controlled corporations or even ports.

Given that arbitrations will be handled using Chinese laws and will be held in Beijing, Colmenares said that not only does he fear that China may twist the interpretation of the term “patrimonial assets,” but the Philippines will not even have a chance to win. 

“What is the government referring to as ‘patrimonial assets’? Does it include our natural resources?…. What are the limits of patrimonial assets for commercial purposes? The government should answer that,” he added in a mix of Filipino and English. 

Should Filipinos worry? Finance Assistant Secretary Antonio Lambino hit back at Colmenares, saying that all loan agreements are not confidential.

He told Colmenares not to rely on leaked documents, as he can simply request them on the proper forum.

Moreover, Lambino assured the public that the project went through a rigorous process, hurdling tests from the Department of Justice, the Department of Finance, and the Bangko Sentral ng Pilipinas.

Lambino also explained that the interest rates from the Chinese loan were still cheap, despite Japan offering much lower figures.

‘Yung rate po ng ating loan agreement ay concessional. Ibig sabihin ay mas mababa sa kung nag-access tayo ng pondo sa private market o kung nag-access tayo ng pondo sa kahit anong multilateral development bank,” Lambino said.

(The rate of our loan is concessional. It means that it is still lower than accessing funds from the private market or from a multilateral development bank.)

Kung ikukumpara ang China loans sa Japanese loans, hindi po yan malinaw ang comparison kung titingnan lang natin ang nominal rate. Kailangang tingnan ang project cost, foreign exchange rate, and iba pang factors. Makikita natin na halos pareho lang po ang rates na nakukuha natin and sulit,” Lambino said.

(Comparing the nominal interest rates of loans from China and Japan does not give a clear picture. We need to look at the project cost foreign exchange rate, and other factors. We can see that both rates are similar and worth it.)

Lambino added that the Philippines has 20 years to pay for the loan and inclusive of a 7-year grace period.

In terms of the arbitration clause, Lambino explained that these have to be acceptable to both parties. However, he did not specify whether the Philippines has a chance of giving up land to China.

He assured Rappler that he will explain further the loan terms in detail for the public’s benefit.

Can the Philippines pay up? Lambino said the total debt of the Philippines to China is only 4.5% of the total debt.

Our debt with Japan is 9.5%. Kayang-kaya nating bayaran ang mga utang na ito (we can easily pay up these debts),” he said.

He went on to explain that the country’s debt-to-GDP-ratio, or the ratio between loan obligations to the size of the economy, stood at 41.9% in 2018. Lambino said the programed ratio was 42.1%, which means the government performed better than intended.

He said any speculations regarding the debt trap was purely “hypothetical.” – Rappler.com

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Ralf Rivas

A sociologist by heart, a journalist by profession. Ralf is Rappler's business reporter, covering macroeconomy, government finance, companies, and agriculture.