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, especially for governments, borrowing money is not a problem. They borrow money to repay 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 ($21 trillion) is greater than that country’s gross domestic product or GDP ($20 trillion). Put another way, the US federal government’s current debt-to-GDP ratio is 105 percent.

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

Philippines? The trend over the last decade shows a decreasing rate: from 55% in 2008 to 42% in 2017. The total amount of national government debt in 2017 was Php6.6T, 67% of which was internal debt while 33% 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 debt without incurring more debt.

Because government borrowing doesn’t seem to concern policymakers, even debt gobblers like the US and Japan, taxpayers may be most interested in determining the “need to spend.”

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

The goal of development becomes more attractive when economic opportunities spill over onto the countryside, with additional expected benefits – 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 to controlling rural insurgency.

This idea arises from the context of the Philippines possibly becoming a federal nation in which, as an assumption, the federal states will have more autonomy to find sources to finance their development projects. A possible configuration may arise where, as the national government does, LGUs can issue papers or debt instruments (such as 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, consideration of this financing option has yet to gain traction among most LGUs in the Philippines, except in a few megacities such as Cebu City. Rather, the most common practice has been for LGUs to compete for bilateral loans, in many cases involving development banks such as Land Bank and Development Bank of the Philippines, whenever they see the need to borrow money.

In recent years, the Treasury Office, in collaboration with the Department of Finance and Bangko Sentral in the Philippinesamong other related government agencies, has developed a robust environment for debt management operations that includes improved investor relations, increased organizational capacity and streamlined analytical tools for political action, streamlined processes for origination (for example, debt auction, Bills and Treasury Bonds), as well as big data management necessary for the registration, monitoring and service of the national government’s debt.

The external environment contributes to the vigor of the entire debt management apparatus, as does the general health of the economy, supported by a predictable political climate, which can justify consistently positive credit ratings. It is these types of ratings 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 myriad, and I want to discuss some of them at length here.

(1) Real Estate Development

That Metro Manila needs to be decongested is obvious to LGUs who readily see opportunities from such a big problem. Tip: Build a hub for a national government agency, one that offers free housing for 1,000 to 2,000 employees, plus state-of-the-art digital connectivity infrastructures. Then invite a government agency that rents property for its offices in Metro Manila or nearby areas to relocate. Within 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 ventures. For example, Tacloban City’s Tacloban North Township project may be a model for uprooting entire communities from danger zones to a more ideal settlement area.

(2) Land Banking

LGUs looking at squatter (which is a tax on idle property) and disaster response issues should also purchase land now (while it is still available and relatively cheaper) for the future needs of their constituents.

(3) Homes and Services for the Care of the Aged

LGUs can add value to what the Philippine Retirement Authority offers by building specialized facilities for seniors, including those who require medical care for dementia, Alzheimer’s disease, and other physical ailments caused by wear and tear. Filipinos excel (competitive advantage) in caregiving in large part because of their culture: respect for the elderly and ties to 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 will be close to retirement age. Unlike the Philippines, the ties that unite families in these countries are not as “strong”, where the elderly are often left to fend for themselves. These elders, it can be further noted, are not “caps”, which drives the financial viability of these investments.

(4) Organic Agriculture

The goal is to help local farmers compete with established growers and traders by continually 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 may “outsource” their disaster relief operations to DSWD on a post-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 of their usual development pipeline. There is a robust structure for the management of public debt, led by the Bureau of Finance. It can be leveraged to help them raise the funds they need from the domestic capital market.