Bangko Sentral ng Pilipinas Governor Benjamin Diokno expressed optimism the Philippines will maintain its investment-grade scores from Fitch Ratings, Moody’s Investors Service and S&P Global Rating as the country’s debt level remains manageable.
Diokno made the comment over the weekend following economists’ opinion that the country’s record P12.03-trillion government debt might be a cause for concern.
“The common misconception is that the absolute level of the public debt matters. It shouldn’t be. What matters is the level of public debt as percent of the size of the economy [or the gross domestic product, GDP], whether public debt is sustainable, and whether public borrowings were justified,” Diokno said.
The public debt to GDP ratio prior to the pandemic was 39.6 percent. It rose to roughly 61 percent as the government ramped up pandemic response. The debt consists of 70 percent local borrowings and 30 percent foreign.
Diokno said the domestic debt included the zero-interest P300 billion in provisional advances by the BSP to the national government—which was lower than the similar loan the government received from the BSP worth P540 billion. The BSP expects the provisional advances to be fully settled by end-June 2022.
Diokno said that by international comparison, a debt-to-GDP of 61 percent is manageable.
“Is the current level of public debt sustainable? The short answer is yes. The often-used metric for debt sustainability is debt as percent of GDP. The old doctrine suggests that 60 percent is the threshold. [This is one of the two eligibility requirements for countries that would like to join the Euro community; the other requirement is that the deficit-to-GDP ratio should be lower than 3 percent. These twin requirements are supposed to be measures of the fiscal health of the potential member country],” he said.
“As I mentioned earlier, before the pandemic, the Philippines debt-to-GDP ratio was 39.6 percent and as a result of the pandemic, it is now slightly above 60 percent,” he said.
Diokno said that at the current ratio, the public debt was quite manageable. He said the country could easily outgrow its debt as the Philippine economy would likely grow much faster than its debt. Put differently, he said the denominator (nominal GDP) “is going to grow much faster than the numerator [nominal level of debt].”
The Philippines debt-to-GDP ratio at 61 percent is much lower than that of other countries where the ratio ranges from 100 percent to more than 200 percent, he said.
“Another metric is the foreign debt to GDP ratio. For the Philippines, it is 27.3 percent [the lowest in the ASEAN-5 countries], which means the servicing of its foreign debt is fairly manageable. Most of its foreign debt are medium to long term, and a big chunk of which has fixed interest rates,” Diokno said.
Diokno said the Philippines is not a typical emerging economy, as its first line of defense is its market-determined foreign exchange system where the supply-demand dynamics determine the exchange rate, subject to BSP’s participation only to smoothen the fluctuations.
“Our gross international reserves are ample, equivalent to more than 10 months-worth of imports of goods and services. The received doctrine is that three months-worth of imports and services are sufficient. And we have a steady sources of foreign exchange inflows from overseas Filipino remittances, BPO receipts, exports earnings and surging foreign direct investments,” he said.
“The above facts are strong arguments why the likelihood that the Philippines’ ratings will be downgraded by rating agencies are nil. Last month, Fitch affirmed the country’s investment grade ‘BBB’ rating, amid a wave of downgrades of many emerging economies. The other major ratings agencies—S&P and Moody’s—agree,” Diokno said.
He said the increase in public debt was due largely to the pandemic and the higher spending for the “Build, Build, Build” infrastructure program.
He noted that the economy contracted by 9.6 percent in 2020—the worst since World War 2—and government revenues plummeted. The government needed to increase spending to finance new programs, such as, the hiring of more medical personnel, purchase of drugs and medicine, building of additional health facilities, purchases of vaccines, distributing cash and non-cash grants, and others.
Diokno said budget deficits climbed from 3 percent of GDP before the pandemic to about 8.2 percent in 2021.
The Bureau of the Treasury said last week that the country’s total outstanding debt as of end-January 2022 increased by P301.12 billion or 2.6 percent to a record P12.03 trillion due to the net availment of both domestic and external debts.
An economist said the government should exert efforts to increase tax revenue collections to maintain the country’s debt and budget deficit in manageable levels.
Michael Ricafort, chief economist of Rizal Commercial Banking Corp., said the increase in debt happened amid wider budget deficit and government borrowings recently, as well as weaker peso exchange rate versus the US dollar recently that led to bigger peso equivalent of the outstanding debt.
The government incurred a budget deficit of P1.67 trillion in 2021, or 21.78 percent higher than P1.37-trillion deficit in 2020, as the 10.60-percent expansion in expenditures outpaced the 5.24-percent increase in revenues.
Ricafort said “there is a need to further increase tax revenue collections, in terms of intensifying/stricter collection of taxes, more tax/fiscal reform measures, especially in view of the new Philippine president to be elected in May 2022, in an effort to structurally increase the recurring government tax revenues, anti-corruption and more good governance measures to reduce leakages in government spending.”
He said doing this would result in keeping the budget deficit and the country’s debt, as well as the country’s fiscal performance at sustainable levels over the long-term and for the coming generations.
The country’s debt-to-GDP ratio eased to 60.5 percent as of end-fourth quarter 2021 from 63.1 percent as of end-third quarter.