Foreign Relations of the United States, 1955–1957, Southeast Asia, Volume XXII

377. Memorandum From the Assistant Secretary of State for Far Eastern Affairs (Robertson) to the Deputy Under Secretary of State for Economic Affairs (Prochnow)¹

Washington, February 14, 1956.

SUBJECT

• Recommendation to the Export-Import Bank Regarding Loans to the Philippines

Problem

What support should the Department of State give to Governor Cuaderno’s² request for financial assistance from the Export-Import Bank?

Discussion

1. The Philippine external financial position has deteriorated seriously in the past year posing serious economic problems for the Philippines and for U.S. economic policies toward that country. Philippine foreign exchange reserves now total about $220 million, a drop of about $100 million in the past fifteen months. This fall primarily has been the result of increased imports designed in considerable measure to encourage economic development. According to the Philippine Central Bank, the present low level of reserves will necessitate a drastic cutback in exchange allocations for imports of capital equipment necessary for the establishment of new enterprises. Exchange allocations for imports of consumer goods already have been sharply cut in recent months and the Bank fears that inflationary pressures soon will be evident, partially as a result of this action.

2. Pressures for expanded economic development in the Philippines are intense from all quarters. A powerful economic group, spearheaded by representatives on the Philippine National Economic Council is advocating a program of increased deficit spending, various financial measures which probably would lead to devaluation, and large-scale loans from the United States (variously proposed at from $½ billion to $1 billion). The other economic grouping headed by Governor Cuaderno of the Central Bank fears the inflationary effects of large-scale deficit spending and devaluation on the political stability of the Philippines and advocates a continuation of the present relatively conservative financial policies for the next few years. Their expectation is that the increased investment in foreign exchange earning and foreign exchange saving industries will result in considerable improvement in both the internal and foreign exchange position of the Philippines.

3. In view of the current foreign exchange crisis, Governor Cuaderno has come to the United States, reportedly at the request of President Magsaysay, in order to seek from the Export-Import Bank a loan of $10 million and an additional line of credit of $20 million designed to help tide the Philippines over this interim period. The $20 million line of credit would be similar to the $5 million line which the Export-Import Bank has already furnished the Philippines for financing the foreign exchange component of small industrial loans and which has been relatively little used to date.³ According to the Central Bank, a reason for its non-use is that any credit in excess of $100,000 must be referred to Washington for approval and that this discourages applicants. Governor Cuaderno is requesting authority to approve loans up to $1 million without reference to Washington, with the understanding that if the Export-Import Bank disapproves any of the loans, the Central Bank would grant the dollars out of its own reserves. It is believed that most of the other factors which caused the non-use of this credit have been largely cleared away and more active use may be expected in the immediate future.

4. Ambassador Ferguson (Embassy telegram 2019⁴) stated that if Governor Cuaderno does not come back from the United States with concrete results, such as an increased Export-Import Bank line of credit and liberalized Export-Import Bank procedures there is considerable likelihood that “Philippine financial policies will undoubtedly take an increasingly inflationary turn with results which I believe will be detrimental to the Philippines and to U.S. objectives in this country”.

5. FE supports Ambassador Ferguson’s views regarding the importance to U.S. objectives in the Philippines of a satisfactory response to the Philippine request for assistance. The Philippines is unique among Asian countries in that the initiative for economic development activities is primarily in the hands of private entrepreneurs rather than in the hands of government. Sympathetic consideration of the Philippine request by the Export-Import Bank will permit and encourage a continuation of this Philippine policy while a negative response may well force President Magsaysay to take economic measures which would discourage the inflow of foreign capital and lead to increased governmental intervention. Furthermore, the increased deficit spending which will probably occur if the Philippine request were denied would create considerable social discontent against the Magsaysay administration and could very well result in the latter being less sympathetically inclined toward the U.S. and in the longer run in the election of an administration far less friendly to the United States. Finally, the Philippine Government at the moment is exceedingly upset at U.S. actions in the fields of tobacco disposal and sugar legislation, which in the Philippine view show little consideration for legitimate Philippine interests or sensitivities. A negative response on the present Philippine request at the same time that we are entering into very delicate military bases negotiations with the Philippines will make successful negotiation of this important agreement exceedingly difficult.

6. The attached memorandum⁵ from the staff of the Export-Import Bank to the Board of Directors implicitly recommends that the Bank make a $50 million to $100 million loan commitment for use during the calendar years 1956 and 1957 to be used, presumably, through the establishment of line of credit for project-type assistance and the expansion of the small industrial loan program now made available to Philippine commercial banks by the Export-Import Bank.

Recommendations

In view of the implicit recommendation of the Bank’s staff it would appear desirable to agree to the adequacy of a $50–$100 million loan commitment for calendar years 1956 and 1957. If agreement is obtained on this overall recommendation, the specific mechanisms for carrying out this proposal more effectively might be the following:

1. Raise the present $5 million line of credit to Philippine commercial banks to $20 million. The Central Bank should also be given the authority to approve loans up to $500,000 (rather than the $1 million requested by Governor Cuaderno) without prior reference to the Export-Import Bank. If any loans are disapproved by the Export-Import Bank on post audit, the Central Bank would agree that the dollars would be provided out of other Central Bank funds.

2. Establishment, for the account of the Central Bank, of a line of credit of $10 million for the purchase of capital equipment for the United States by private entrepreneurs. (This line of credit to the Central Bank would differ from the one proposed under recommendation No. 1 in that it would be to the Central Bank and not to commercial banks. The same post-audit procedure under recommendation No. 1 could be followed here.)

3. Establishment of a $30–$50 million line of credit for large-scale project assistance which would enable the Philippine Government, or private firms, to turn to the Export-Import Bank as a source of foreign exchange when they have complete projects to show the Bank (rather than individual applications for importation of capital equipment). Although Cuaderno has not specifically requested this, the Export-Import Bank memorandum indicates they are willing to make an accommodation to President Magsaysay’s view, as reported by Cuaderno, for the need of additional assistance for large-scale economic development projects.

The above recommendations would appear to meet the Philippine requirements in almost all respects. The line of credit proposed under recommendation No. 1 would enable the Export-Import Bank to be a source of dollar financing to Philippine applicants who have to borrow from commercial banks in order to purchase industrial machinery; the credit line in the second recommendation would permit dollar financing by the Export-Import Bank for those firms which have the peso capital and do not therefore have to borrow from commercial banks. It would remove the foreign exchange burden, however, from the Central Bank. The credit line under the third recommendation would be available for large-development projects in the Philippines under consideration by the Philippine Government or by private firms.

1. Source: Department of State, Central Files, 896.10/2–1456. Confidential. Drafted in PSA.
2. Michael Cuaderno, Governor of the Central Bank of the Philippines.
3. This loan agreement was concluded in July 1954.
4. Dated January 23, not printed. (Department of State, Central Files, 033.9611/1–2356)
5. Not attached to the source text and not found in Department of State files.