Last year, President Rodrigo Duterte’s spokesperson Salvador Panelo boastfully said that there is nothing wrong if the government used the gas-rich Recto Bank (Reed Bank) as collateral for a $62-million loan agreement with China. “China seizing Recto Bank, should there be a default in the repayment of the loan, is not a possibility because we never reneged,” Panelo told reporters. “We are known for paying our obligations,” he added.
Panelo made his remarks in response to the warning of then-Supreme Court Senior Associate Justice Antonio Carpio during a presentation, saying that China could seize Recto Bank if the Philippines fails to repay the loan for the Chico River Pump Project in Kalinga province.
Indeed, Panelo was very confident that whatever the lending bank’s terms were, “The Philippines has the money to repay it… and China knows that,” he said. He also believed that the economic managers allowed the provision because they knew the country could repay the loan.
On Carpio’s statement that the loan contract is expected to be the template for other loan contracts with China, Panelo said: “If we show the Chinese government that we are on time, regularly paying, if you were the lender you will know the borrower is good and there is no need to impose onerous conditions on them. So not necessarily that this will be the template.”
Well, that was a year ago, before the world was struck by the new coronavirus COVID-19 pandemic that has caused misery and pandemonium in the world’s population. So far the pandemic has claimed close to six million people and 360,000 deaths so far. And it’s growing exponentially!
President Duterte declared a lockdown in Metro Manila, which kept the more than 13 million residents quarantined at home. With no income, it hurts the people badly. The government announced that daily-wage earners and poor communities affected by the “enhanced community quarantine” (ECQ) would be provided with food assistance from the government. Meanwhile, as spending for COVID-19 response pile up, revenue collection slows down, which could cause a budget deficit to balloon to around P1 trillion ($45 billion) or more.
The immediate social, political, and economic consequences will at least be for the next two years. However, the indirect effects may permanently shift the world to a new normal of uncertainty and impermanence. Everything will be constantly changing.
The economic consequence will be particularly hard especially for countries that are indebted to China, the world’s number one infrastructure financier, who has deployed a debt-based model of imperial control.
As a result, these countries have fallen into a debt-trap, which forces them to struggle to service their debts to China. And a lot of them would default on their loans; thus, putting the collaterals that they put up at risk of foreclosures.
Ultimately, as China’s economic expansionism increases while the rest of the world’s economies shrink. One by one, the indebted countries would lose sovereign control of infrastructure projects that China financed. This so-called “debt-trap diplomacy” has already reared its ugly head in Sri Lanka who lost the Hambantota Port on the Indian Ocean.
A recent report said that at least 16 countries are vulnerable to China’s economic coercion, including Kenya, Pakistan, Zambia, Djibouti, Cambodia, Laos, Thailand, Malaysia, Myanmar, Tonga, Micronesia, Vanatu, and the Philippines. They have all been identified as at risk of similarly losing sovereign control over areas of interest to China, as they all already owe more than 45 percent of their gross domestic products to Beijing over the One Belt, One Road (OBOR) Initiative, China’s ambitious project to interconnect Asia, Middle East, Africa, and Western Europe. Many experts said that OBOR is China’s playbook to take control of the world economy; thus, becoming the world’s superpower – economically, politically, and militarily. All these without firing a single shot!
Another port that is at risk of Chinese takeover is Kilindini Harbor, the biggest port in East Africa, which was the collateral for the Chinese loan for the Kenya Railways Corporation (KRC). If Kenya fails to begin repayment of the $2.3 billion loan, China would seize the Kilindini Harbor. The massive construction loan was the result of Kenya participating in OBOR.
But the problem was that the feasibility studies were performed by China, which might have estimated high revenue to be able to service the loan. This led to fears of Kenya’s ability to repay the loans, which would trigger the seizure of the collateral. Should there be any dispute with the Chinese bank, it would be handled through an arbitration process in China, not in Kenyan courts.
Next in China’s sight is the Chinese military base in Djibouti. Several warships and a 10,000-man army are now deployed permanently to Djibouti. This military base is China’s first on the African continent.
Another port that is suspected of being a secret Chinese naval base is Pakistan’s Gwadar civilian port. It was reported that Pakistan’s debt liabilities have risen from $83 billion to $88.9 billion in 2017. It was also reported that Pakistan’s debt would balloon to $100 billion by 2024 of the total investment of $18.5 billion. It’s just a matter of time before Pakistan defaults on its debt, at which time China will take over sovereign control of Gwadar, at which time China will announce its military presence at Gwadar.
But what is interesting to note is that China has gained a military footprint in Pakistan, which she can use to counter the presence of the U.S. in the Indian Ocean and Arabian Sea. China could also use Gwadar to refuel her submarine fleet; thus, extending her navy’s global reach beyond the South China Sea. And in times of conflict with the U.S. or India, China would have the ability to block the chokepoint at the Strait of Malacca; thus, cutting off the huge U.S. naval forces in the Pacific from getting into the Indian Ocean and Arabian Sea.
It is evident that China is building an economic hegemony along its OBOR projects with the Philippines at the tail end of it in Southeast Asia. However, the Philippines’ debt to China is not much considering that of the $24-billion loans Duterte obtained from China in his “Build, Build, Build” project, only $148 million has been used so far – an irrigation project worth $73 million and two bridges in Manila worth $75 million.
With the country deeply immersed in deficit spending due to the pandemic, it would be prudent to stop the other projects from moving ahead with the rest of the loan, which is $23.85 billion. That’s a lot of moolah to pay if Duterte proceeds with the unfinished portion of his “Build, Build, Build” project.
What President Duterte should concentrate on is to adapt and prepare for the new normal in years to come and to avoid falling victim to China’s debt-trap diplomacy. The question is: Can the Philippines survive a post-pandemic world?