JUST right before the Covid-19 pandemic hit the country, the Philippines notched its record-low debt-to-GDP ratio of 39.6 percent in 2019.

Now, almost two years since the pandemic began, the government sees the country’s debt-to-GDP ratio surging to its highest level in 16 years at 59.1 percent by yearend, and to peak at 60.8 percent in 2022—slightly above the higher end of the threshold set by the International Monetary Fund for emerging markets and developing economies like the Philippines. However, this is seen to gradually taper off to 60.7 percent in 2023 and 59.7 percent in 2024.

In nominal terms, the national government projects that its outstanding debt would reach P11.73 trillion this year and P13.42 trillion by 2022.

Given the rise in the country’s debt levels along with the drop in revenues and the widening of the budget deficit, groups like Freedom from Debt Coalition warned in a recent forum that the country may be facing a crisis similar to that seen in the 1980s.

However, Finance Undersecretary Mark Dennis Joven, who heads the Department of Finance’s (DOF) International Finance Group, said the current debt situation is still manageable, even if the debt-to-GDP ratio peaks at 60.8 percent next year.

“I think we have to consider this, this debt-to-GDP [ratio] basically it’s not an absolute number, you know, once we reached 60 percent, it’s already unsustainable. It’s a factor of various things, among which is our ranking as against neighboring countries,” he said.

Unlike the ’80s situation

THE debt situation is different from that of the 1980s, Joven pointed out, because back then the country was dealing with a bad Balance of Payments position, a high external debt load as a share of its economy, and a not-so-robust tax effort.

While Philippine economy also contracted in the 1980s, the DOF official expressed confidence that the worst is finally over and that the economy is on track to recover.

“Right now, GDP shrank but I think the worst is over and we’re seeing shoots of revival in our economy,” Joven told the BusinessMirror in an interview.  “Now, we can see that, notwithstanding the pandemic, the tax effort is not deteriorating drastically, so with all of these factors, I think we can get through this without necessarily feeling the pain of the economic crisis in 1984 to 1986.”

Financing mix

LOOKING at the DOF’s projection on the country’s debt-to-GDP ratio, UnionBank Chief Economist Ruben Carlo Asuncion still believes that it may take a decade for the ratio to return to its prepandemic level based on historical evidence.

“There is a chance [that it would take] 10 years if monetary-fiscal policy coordination misses the mark,” Asuncion said in a mix of English and Filipino.

While Joven said it would take some time for the Philippines to see its debt ratio going back to the 2019 level of around 40 percent, he said he does “not necessarily agree” that it would take a decade.

In managing the country’s debts, Joven said the government seeks an optimal financing mix of foreign and domestic loans. The government is also considering other factors, such as overall financing cost or the overall cost of interest when borrowing.

“So basically during times when we see…risk increasing, we shift toward domestic debt versus international debt,” he said.

“Our other strategies include prolonging the tenor, so basically this would mean extending or borrowing as much as possible from ODA [Official Development Assistance] sources because these have the longest tenor, then moving toward commercial external debt, then commercial domestic debt, which typically has the shortest tenor.”

To bring down the country’s debt-to-GDP ratio to prepandemic levels, Joven said the country needs to outgrow its debt.

“As you know, one of the main reasons for the sudden increase in the debt-to-GDP [ratio] was the drastic drop in GDP. In other words, one of the main determinants of a lower debt-to-GDP is really moving back to the growth trajectory that we have been experiencing for the last two years.”

The DOF said the government is also working on a fiscal consolidation plan, which includes recommended measures for the succeeding administration. This will not only bring down the debt-to-GDP ratio but also narrow the budget gap.

“The plan is, of course, to reform the tax system to make tax collection more efficient. Number two, to make the GOCC [government-owned and -controlled
corporations] system also more efficient to enable us to collect more dividends; and number three, to control the expenditures to the extent possible, of course, without harming the economic growth,” he said.

Asuncion said it would have been better if government spending is more robust to support the country’s economy and allow the Philippines to grow out of its debt.

He said, however, that the current level of government spending is already enough for the country to somehow bring down its debt ratio.

Capital market devt

BESIDES supporting the country’s economic growth, Asuncion said the government can also focus on capital market development which could create more jobs, improve incomes and result in more revenues for the government.

He also stressed the importance of passing the pending priority economic bills, such as those that will expand the country’s tax base and encourage more investments.

These include the bills on taxation of digital transactions, the remaining packages under the Comprehensive Tax Reform, particularly the Passive Income and Financial Intermediary Taxation Act, Real Property Valuation Reform Act, amendments to Public Service Act, Foreign Investments Act, and Retail Trade Liberalization Act.

On the Makabayan bloc’s proposed imposition of a wealth tax, Asuncion said he supports this but he said the timing of its implementation is crucial.  “As for the wealth tax, I think this could be done later. Maybe after we have fully opened up the economy, because timing is key. In this way, you don’t scare off people right away.”

Aside from imposing wealth tax to increase revenues, some sectors have also proposed the declaration of a debt moratorium.

According to Finance Assistant Secretary Maria Teresa Habitan and Finance Undersecretary Gil Beltran, the Philippines had a “standstill arrangement” in the 1980s.

“We did not use the term ‘debt moratorium.’ It was called a ‘standstill arrangement.’ Interest payments continued, but amortization payments on most debts were postponed,” Habitan said.

Asuncion said the government can use debt moratorium as a last resort but he warned that doing so may affect the country’s investment grade rating.

“If we still have the means, the space and the ability, I don’t think [debt moratorium] is an option. I would say it should be the last resort, the very last chair in the classroom.”

For Joven, declaring a debt moratorium is not an option for DOF even in a worst-case scenario, adding that taking this route may put the country at risk of a credit rating downgrade, which can lead to higher financing costs.

Finance Assistant Secretary Ma. Edita Tan agreed with Joven, adding that the country has already learned from dealing with past crises.

“We’ve learned from that and then we improved on our macroeconomic structures and we’ve done a lot of reforms. Because of that, we actually survived a lot, even the Asian financial crisis and the Lehman crisis,” Tan said.

Image courtesy of Bernard Testa

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