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Local Government Bonds: Will They Work?

When we earn less than we need to spend, what we do is borrow money. The “we” can apply to individuals, corporations, or sovereign countries or governments. Often times, especially for governments, borrowing money is not a problem. They borrow money to pay off the borrowed money, and lenders are easy to find. For example, the latest available data shows that the total (gross) amount of US government debt (USD21T) is greater than that country’s gross domestic product, or GDP (USD20T). In other words, the current debt-to-GDP ratio of the US federal government is 105 percent.

Some countries even have higher debt-to-GDP ratios: Japan (236 percent), Italy (131 percent), and Singapore (110 percent), among others.

Philippines? The trend during the last decade shows a decreasing rate: from 55 percent in 2008 to 42 in 2017. The total amount of national government debt in 2017 was Php6.6T, 67 percent of which was internal debt while that 33 percent was foreign debt.

The debt / GDP ratio is one of the indicators of a country’s ability to pay. Experts tell us that a low debt-to-GDP ratio indicates an economy that produces and sells enough goods and services to pay off debts without incurring more debt.

Because government indebtedness does not appear to be of concern to legislators even for debt consumers like the United States and Japan, perhaps what might be of more interest to taxpayers is the determination of the “need to spend.”

There are cases where countries (or areas within them) can better promote people’s well-being by purchasing public goods and services now, using borrowed money (at cost, that is, with interest) than by waiting for a later date when cash flow positions can be expected to improve. . A quick example is spending on key infrastructures, such as road networks or hydroelectric plants, which stimulate job-creating private investment and further promote livelihood opportunities downstream. Investments like these often pay off over a long period of time.

The development goal becomes more attractive when economic opportunities spread across the countryside, with the additional benefits expected, from the perspective of the whole nation, of alleviating urban poverty and congestion, greater equity in the distribution of wealth. , the creation of a variety of conditions for social leveling, etc. . -all of which can go a long way toward curbing the rural insurgency.

This idea comes from the backdrop of the possibility of the Philippines becoming a federal nation where, of course, the federal states will have more autonomy to find sources with which to finance their development projects. A possible configuration may emerge in which, as the national government does, LGUs can issue debt securities or instruments (such as promissory notes or bonds) to raise money.

While other countries such as the US and Brazil have allowed their municipal governments to issue debt instruments or securities, the consideration of this financing option has yet to gain ground among most LGUs in the Philippines, with the exception of a few megacities. like the city of Cebu. Rather, the most common practice has been for LGUs to compete for bilateral loans, involving development banks such as Land Bank and the Philippine Development Bank in many cases, whenever they see the need to borrow money.

In recent years, the Treasury Office, in collaboration with the Department of Finance and Bangko Sentral ng Pilipinas, among other related government agencies, has developed a robust environment for debt management operations that includes better investor relations, increased organizational capacity and analytical tools optimized for political action, streamlined processes for origination (e.g. auction of Treasury bills and bonds), as well as the management of big data necessary for the registration, monitoring and service of the national government debt.

The external environment contributes to the vigor of the entire debt management apparatus, as does the overall health of the economy, supported by a predictable political climate, which can justify consistently positive credit ratings. It is these types of qualifications that make it easier for governments to find lenders and incur debt at the lowest possible cost to the taxpayer.

The investment opportunities for LGUs are innumerable, and I want to discuss some of them extensively here.

(1) Real estate development

That Metro Manila needs to be decongested is obvious to LGUs who easily see opportunities from that big problem. Tip: Build a hub for a national government agency, one that offers free hosting for 1,000 to 2,000 employees, as well as state-of-the-art digital connectivity infrastructures. Then invite a government agency that rents properties for their offices in Metro Manila or nearby areas to relocate. In five years, the host LGU should see a rapid increase in the number of affordable establishments within the area, providing livelihood opportunities for its residents.

Urban planners would also do well to shape ideas for similar businesses. For example, the Tacloban North Township project in the city of Tacloban can be a model for uprooting entire communities from danger zones to a more ideal settlement area.

(2) Territorial banking

LGUs thinking about issues of squatting (which is a dormant property tax) and disaster response should also do well to buy land now (while it is still available and relatively cheaper) for the future needs of their constituents. .

(3) Homes and services for the elderly

LGUs can add value to what the Philippine Retirement Authority offers by building specialized facilities for seniors, including those requiring medical care for dementia, Alzheimer’s and other physical ailments caused by burnout. Filipinos excel (competitive advantage) in providing care in large part because of their culture: respect for the elderly and ties of extended families. The market is simply too big (and growing by the day) to be ignored. Estimates show that in 25 years almost a third of the population of the US, Japan and most European countries would be approaching retirement age. Unlike in the Philippines, the ties that bind families in these countries are not as “strong”, where the elderly are often left to fend for themselves. It should also be noted that these seniors are not “profiteers”, which boosts the financial viability of these investments.

(4) Organic agriculture

The aim is to help local farmers compete with established producers and traders by continuously organizing and training them, and providing them with the necessary start-up and working capital requirements. The “organic” niche can help them stand out from the competition.

(5) Franchisee for disaster relief

LGUs can “outsource” their disaster relief operations to DSWD on a subsequent billing basis. Government personnel, except probably those with military or police training, are little known for their logistics management skills. But all things being equal, LGUs are in a better position to respond more effectively to disaster relief needs due to their proximity to affected areas.

In conclusion, I tried to show that LGUs have many opportunities to innovate in their service delivery systems by investing in projects that are outside their regular development portfolio. There is a solid structure for the management of public debt, led by the Treasury Office. It can be leveraged to help them generate the funds they need from the national capital market.

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