July 14, 2022

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Debt-to-GDP ratio still manageable — DoF

By Diego Gabriel C. Robles

AMID CONCERNS over the Philippines’ ballooning debt, Finance Secretary Benjamin E. Diokno said the debt-to-gross domestic product (GDP) ratio is “not the sole criterion that matters” in assessing the economy’s health.

Mr. Diokno told reporters that the country’s debt-to-GDP ratio, which stood at 63.5% as of end-March, is still manageable.

He made the statement after sharing Bloomberg’s Sovereign Debt Vulnerability Ranking, which included countries with debt-to-GDP ratios lower than the Philippines such as Nigeria (37.4%), Turkey (43.7%) and Mexico (58.4%).

The Philippines was not on the list of 25 countries with the highest default risk this year.

The Department of Finance (DoF) chief said macroeconomic fundamentals, demographic profile, resiliency, and quality of political institutions should also be considered in assessing an economy’s health.

“The fiscal and monetary authorities are in control. The debt-to-GDP ratio is manageable. The banking system is sound and more than adequately capitalized; [nonperforming loans], which [are] low, continues to fall. The banking industry has [built] in enough buffers,” Mr. Diokno said.

Economic managers are aiming to bring down the debt-to-GDP ratio to 61.8% by yearend. The debt-to-GDP ratio is expected to steadily drop to 61.3% by next year all the way to 52.5% by 2028.

Mr. Diokno also noted the country’s economic prospects are “bright” and external sector remains robust.

“[Our] gross international reserves [are] more than enough and there is a steady structural inflow of foreign exchange [from] OFW remittances, BPO receipts, [and] rising exports,” he added.

Preliminary data from the BSP showed the country’s gross international reserves stood at $101.983 billion at end-June, falling 3.5% from the record $105.762-billion level seen in June 2021.

Overseas Filipino workers’ (OFWs) remittances jumped by 3.9% in April to $2.395 billion.

Meanwhile, exports rose by 6.2% year on year to $6.310 billion in May but were offset by imports that grew by 31.4% annually to $11.989 billion.

The Development Budget Coordination Committee (DBCC) retained this year’s export growth target to 7%, but increased import growth goal to 18% from 15% previously.

The economy is expected to grow by 6.5-7.5% this year, and by 6.5-8% annually from 2023 to 2028.

DEBT LEVELS
The national debt can return to pre-pandemic levels if there is faster growth, favorable interest rate conditions, and a longer time horizon, a researcher from the Philippine Institute for Development Studies (PIDS) said.

“If we assume that GDP growth, real interest rate, and the exchange rate are fixed and constant, then the only major variable that the government has a handle on is the primary balance,” said John Paul Corpus, PIDS supervising research specialist, on a PIDS webinar on Thursday.

Primary balance is the difference between a government’s revenue and its non-interest expenditure.

“The government must improve its primary balance, either by cutting primary spending or raising more revenues, or doing a combination of both,” he said.

Nonetheless, quickly returning would be challenging as “fiscal policy might need to continue to be conducive to supporting the country’s economic recovery, especially given the difficult global economic environment,” Mr. Corpus added.

Mr. Diokno said last week that it is not “crucial” to return to the 39.6% debt-to-GDP ratio seen as of end-2019, considering the country’s experience at the height of the coronavirus pandemic.

“We have to prioritize growth first rather than going back to that number,” he said.

OUTGROWING DEBT
The National Government’s outstanding debt slipped by 2.1% to P12.5 trillion as of end-May.

“It may not be something to worry about for some but it is something to worry about for ordinary people who directly feel its impact. We can outgrow debt only if all sectors and stakeholders will cooperate and coordinate,” John Paolo R. Rivera, an economist from the Asian Institute of Management, said.

Analysts agreed that outgrowing the debt would require at least 6% annual GDP growth in the next six years.

“Debt is expected to remain elevated with the borrowing and spending that the government will need to do to support recovery amid inflation headwinds. As such, sustained growth will give it some room to do this while balancing fiscal prudence,” said Robert Dan J. Roces, chief economist at Security Bank Corp.

Leonardo A. Lanzona, director of the Ateneo Center for Economic Research and Development, said the government should still prioritize investing in human capital over debt repayment.

“These should mean significant investments in education, housing, and nutrition, which are investments needed to place the economy back [on] its feet… Ignoring these in favor of short-term maturing investments for economic recovery and debt repayments can force the economy to drift away further from the initial human capital stocks before the pandemic, placing us in a much more difficult position in the long term,” he said.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said fiscal discipline is needed to cut the debt-to-GDP ratio, which includes rationalizing government spending.

“These were done by the economic teams of the previous three administrations and were successful in reducing the debt-to-GDP ratio and even led to credit rating upgrades,” Mr. Ricafort said.

For Senior Economist Nicholas Antonio T. Mapa of ING Bank N.V. Manila Branch, “the longer we have a [debt-to-GDP] ratio above 60%, the more we will be susceptible to ratings action.”

“Fitch [Ratings] noted in its recent report that they had concerns about the uncertainty [of] medium-term growth prospects as well as possible challenges in unwinding the policy response to the health crisis and bringing government debt on a firm downward path,” he said via e-mail.

Fitch Ratings in February kept the country’s investment grade “BBB” rating, but kept the “negative” outlook as it flagged uncertainties in the country’s medium-term growth and hurdles to bringing down debt. A negative outlook means a downgrade is possible within the next 12 to 18 months.

S&P Global Ratings last affirmed the country’s “BBB+” rating with a stable outlook in May 2021. Meanwhile, Moody’s last affirmed its “Baa2” credit rating with a stable outlook for the Philippines in July 2020.