The Philippines’ outstanding P12.03 trillion debt is not something to be excessively worried about because the debt level remains sustainable, manageable and justified, according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.
Diokno on Sunday, March 6, in a Viber message to reporters also said that a pandemic-induced rising debt is unavoidable but not likely to lead to a credit rating downgrade in the future.
“(There) 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,” said Diokno. Fitch Ratings on Feb. 18 affirmed the Philippines’ credit rating of “BBB,” a notch above minimum investment grade, citing economic gains and sustained recovery from the ongoing two-year pandemic.
Last week, the Bureau of the Treasury announced a National Government (NG) debt that has exceeded P12 trillion for the first time in the country’s debt-laden history which started to balloon during the period of Martial Law from 1972 under the Marcos regime.
The public debt to GDP ratio rose to 61 percent due to mostly pandemic-related borrowings. Before the pandemic, debt to GDP ratio was at 39.6 percent.
Diokno said the domestic debt includes the zero interest P300 billion in provisional advances by the BSP to the NG, and he noted that “this is lower than the similar loan the NG received from the BSP worth P540 billion (and that) BSP expect that the provisional advances will be fully settled by end June 2022.”
The BSP chief pointed out that a debt-to-GDP of 61 percent is manageable by global standards, and that at this level, the country’s public debt is sustainable.
The metric for debt sustainability has a threshold of 60 percent. Diokno said this is one of the two eligibility requirements for countries joining the Euro community. The other requirement is a deficit-to-GDP ratio that should be lower than three percent.
Diokno said another factor that should convince Filipinos to worry less is the country’s foreign exchange policies.
He said that while a possible weakening of the peso is expected on account of advanced economies’ policy normalization, primarily the US Federal Reserve’s move to increase interest rates soon, this will impact on the rest of the world, not just the Philippines. And, how it will affect currencies will depend on the level of foreign indebtedness, foreign exchange buffers, growth and inflation.
“The Philippines is not the typical emerging economy,” said Diokno. “Our first line of defense is our market determined foreign exchange system where we let the supply-demand dynamics determine the exchange rate, subject to BSP’s participation only to smoothen the fluctuations,” he said. Presently, the country’s gross international reserves amount to $108.50 billion as of end-January 2022 versus the external debt of $106 billion as of end-September 2021.
“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 GDP), whether public debt is sustainable, and whether public borrowings were justified,” said Diokno.
The BSP chief maintains that public debt is “quite manageable” and the country could “easily outgrow its debt since we expect the Philippine economy to grow much faster than its debt.”
“Put differently, the denominator (nominal GDP) is going to grow much faster than the numerator (nominal level of debt),” he said. He also pointed out that 61 percent debt-to-GDP ratio is “much lower than that of other countries (since) for other countries, their debt-to-GDP ratio ranges from 100 to more than 200 percent.”
“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,” he added.
Diokno said the increase in public debt was justifiable because it was incurred during a public health crisis when the economy was stalled, but a higher spending was necessary for the government to continue its infrastructure development and at the same time, secure funding for COVID-19 response.
“As a result of the pandemic, the economy contracted. As a result, government revenues plummeted. At the same time, the government has 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. As a result, budget deficits climb from three percent of GDP before the pandemic to about 8.2 percent in 2021. In brief, the government has to borrow money to finance the ballooning budget gap,” said Diokno, who was the former budget secretary before being appointed BSP governor in 2019.
“Think of the counterfactual: had we not done what we did as a nation and invested in the vaccine, we would still be languishing from COVID-19 and the economy would still be in deep slump,” he said.
Domestic GDP rebounded in the second quarter 2021 after five consecutive quarters of decline. The GDP recovered with a 12 percent growth mid-2021. The positive growth was sustained, resulting to a 5.6-percent full-year growth last year, which exceeded the government’s five to 5.5 percent projection for 2021.
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