By Luisa Maria Jacinta C. Jocson, Reporter
THE GOVERNMENT can still take on additional debt servicing without negatively impacting fiscal space, analysts said.
“Compared to some of its Southeast Asian neighbors, the Philippines has a lower debt-to-gross domestic product (GDP) ratio, which suggests that it may have more capacity to take on additional debt servicing,” Ateneo de Manila University economics professor Leonardo A. Lanzona said in an e-mail.
The country’s debt-to-GDP ratio stood at 60.9% as of end-December, still slightly above the 60% threshold considered manageable by multilateral lenders for developing economies.
“Furthermore, the terms and conditions of the debt are also principal factors to consider. If the government can secure favorable terms, such as lower interest rates or longer repayment periods, it may be able to take on more debt servicing without significantly affecting its financial stability,” Mr. Lanzona added.
This year, the government’s debt service program is set at P1.6 trillion, 23.3% higher than last year’s P1.298-trillion program.
In January, the government paid P47.831 billion for debt servicing, down by 77.8% year on year.
At the end of February, outstanding debt hit a record high of P13.75 trillion, as the government borrowed more to finance its pandemic response.
Aside from the Philippines, other countries in the region have also seen their debt-to-GDP ratios rise during the pandemic.
“Gross financing needs have correspondingly increased. The sum of budget deficits and funds required to roll over debt maturing in 2023 have risen. Interest rate increases would further add to existing debt burdens, while depreciation against creditor currencies such as the US dollar would increase the cost burden for economies with large external obligations,” the ASEAN+3 Macroeconomic Research Office (AMRO) said in its latest Regional Economic Outlook 2023 report.
AMRO said the ASEAN+3 (Association of Southeast Asian Nations plus China, Japan and Korea) economies should assess fiscal sustainability risks to address vulnerabilities.
“Large fiscal deficits and high government debt may raise concerns about fiscal sustainability. Sizeable financing needs may cause financing stress, especially when market conditions are not favorable. Suboptimal debt structure (e.g., a high share of external debt and short-term debt) would increase vulnerability to rollover, exchange rate, and interest rate risks,” it said.
Using a short-term fiscal sustainability indicator, AMRO found that fiscal stress rose in more than half of ASEAN+3 economies since the onset of the pandemic.
“This does not necessarily mean that a fiscal stress event is imminent, only that close monitoring and careful macro-fiscal management are required to reduce the risk of one in 2023,” it added.
Meanwhile, analysts said that the government should continue to work towards keeping a manageable level of debt.
Terry L. Ridon, a public investment analyst and convenor of think tank InfraWatch PH, said the government must keep its debt-to-GDP ratio under 60% to “assure sustained government operations, services and projects.”
The government aims to trim the debt-to-GDP ratio to less than 60% by 2025, and to 51.5% by 2028.
“The government should continue reviewing indicative development projects and determine which should be prioritized or deferred to a future time. While long-term considerations are important, short-term and medium-term political risks can imperil debt management if economies are allowed to incur debt beyond internationally accepted limits,” Mr. Ridon said in an e-mail.
ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said it is important to improve the debt-to-GDP ratio in order to prevent a possible credit rating downgrade.
“We’ve noted the relatively high debt-to-GDP ratio for some time now and although we’ve managed to escape potential ratings action, we also believe that for as long as we stay above the threshold, we remain susceptible to potential downgrades in the future,” he said in a Viber message.
Fitch Ratings last October maintained the Philippines’ long-term foreign currency issuer default rating at “BBB,” but with a “negative” outlook. A negative outlook means Fitch may downgrade the Philippines’ credit rating in the next 12 to 18 months.
The credit rater at that time flagged the country’s high debt levels, which were broadly in line with the ratings, but were higher than “BBB” peers due to weak revenues.
According to Fitch, risks that could lead to a credit rating downgrade include reduced confidence in returning to strong medium-term growth and the failure to cut the debt-to-GDP ratio.
As government spending is likely to be soft this year, the private sector may need to drive economic growth. The government is targeting 6-7% GDP growth this year.
“It looks like the strategy is to rely on solid private sector efforts to power growth and at the same time lower the debt-to-GDP ratio by way of a larger denominator,” Mr. Mapa said.
Excessive debt levels can result in economic problems such as high interest payments, and reduced access to credit markets, Mr. Lanzona said.
“However, the times call for an aggressive government that can meet the challenges of the future and provide the poor with a better opportunity to prosper. Addressing these issues may call for a larger public debt which can only be sustainable with better financial management and stronger institutions,” he said.
On the other hand, the Economic and Social Commission for Asia and the Pacific (ESCAP) in a recent report showed that high debt levels are not necessarily harmful to economic growth, and can even be used as a tool for development.
“On the other hand, development deficits and climate risks, if left unaddressed, will have serious implications for growth and the sustainability of public finance,” ESCAP said in its Economic and Social Survey of Asia and the Pacific 2023 report.
ESCAP said there was no consensus on the “optimal level of public debt.”
It cited one study that showed there was a “significant and positive impact of public debt” on GDP growth in six ASEAN countries from 1995-2015, specifically in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
ESCAP also noted that “sizable revenue potentials can be realized through the broadening of the tax base and overall improvements in tax administration.”