The Philippines celebrated its Independence Day (yesterday, June 12) but nowhere is it near true freedom politically, socially, morally, and economically. What with a debt burden so huge—nearing P13 trillion, which would enslave future generations of Filipinos to paying these economic clutches.
As outgoing Finance Secretary Carlos Dominguez III said; “It would need at least 10 years before the debt-to gross domestic product (debt to GDP) ratio will return to its pre-pandemic level of 40 percent.”
Our debt to GDP ratio even surpassed (at 65 percent) the international benchmark of 60 percent set by lenders to developing countries. This is even higher than the 39.6 percent debt to GDP ratio seen at the end of 2019 or pre pandemic.
“Assuming that a debt-to-GDP ratio of 40 percent is the ideal health, it could take us a minimum of 10 years to get back [on track]. That is the effect of COVID-19 (coronavirus disease 2019),” he said during a briefing on Wednesday.
Debt stock
As of April 2022, our debt stock ballooned to a record P12.76 trillion, reflecting a binge borrowing to finance the pandemic response. But most of it was not really used for the purpose they were obtained, but to corruption.
The Philippine Institute for Development Studies (PIDS) estimated the debt-to-GDP ratio will peak as high as 66.8 percent by 2023 and 2024, before falling to 65.7 percent by 2026.
The PIDS presented to the Department of Finance on Wednesday its report on the fiscal effect of the COVID-19 on the country.
PIDS Research Specialist John Paul C. Corpus outlined three scenarios and dates when the government could achieve the ideal debt-to-GDP ratio of 40 percent.
To reach this ratio by 2031, a median annual primary balance (revenues minus non-interest expenditures) increase of 2.42 percent of GDP would be needed, based on the most optimistic scenario that assumes a GDP growth rate of 7 percent and a real interest rate of 2 percent, Business World reported.
To reach the 40 percent debt-to-GDP ratio by 2041 and 2051, a median annual increase of primary balance of 0.86 percent of GDP and 0.35 percent of GDP respectively are needed, under optimistic conditions.
“So, the longer the terminal date, the easier it becomes. So, the long COVID could be 20 years,” Dominguez said.
‘Not easy to reach’
PIDS fellow Justine Diokno-Sicat, who co-authored the report, told reporters it will not be easy to return to pre-pandemic debt-to-GDP ratio.
If the government does not immediately return to a pre-pandemic debt-to-GDP ratio, she said the only real risk is a credit rating downgrade.
Fitch Ratings in February affirmed the Philippines’ investment grade rating but also maintained the “negative” outlook amid “possible challenges in unwinding the policy response to the health crisis and bringing government debt on a firm downward path.”
A negative outlook means Fitch could downgrade the Philippines’ credit rating in the next 12 to 18 months.
“We’ve been talking with multilaterals; the World Bank was one of them. There’s some sort of meeting of minds that the primary goal is really to bring life back into the economy, and that will naturally correct the debt,” Diokno-Sicat said.
Economic managers target a 7-8 percent GDP growth this year.
Dominguez earlier said the Philippines must grow at an average of 6 percent annually in the next six years to reduce the country’s debt.
WB says ‘debt stock still manageable’
The country’s outstanding debt remains manageable despite breaching the internationally accepted sustainable threshold, the World Bank (WB) said, but stressed the need for a solid fiscal consolidation plan and high economic growth.
“We think the debt is still manageable. Most of our debt is long term, domestic and peso-denominated,” Kevin C. Chua, World Bank senior economist in Manila, said during a briefing on Wednesday.
Chua said the debt will remain a drag to the country’s economic growth, which the World Bank sees at 5.7 percent GDP for 2022 and 5.6 percent on average in 2023-2024.
“We are recommending fiscal consolidation. The way to address the high debt ratio would be higher economic growth and the pursuit of fiscal consolidation,” he said.
The Department of Finance (DoF) last month unveiled a fiscal consolidation plan which aims to raise an average of P284 billion every year for the next 10 years to repay the P3.2-trillion additional debt incurred during the pandemic.
“Some of the recommendations would be improved revenue collection, digitalization, making it easier for businesses and individuals to pay. Also making spending more efficient to avoid leakages and wastage. Third will be to increase the value of money in procurements,” Chua said.
Despite the strong 8.3 percent growth in the first quarter, WB retained its 5.7 percent GDP growth forecast for the Philippines this year due to the “very weak external environment,” Chua said.
It cut in April the GDP outlook from the 5.8 percent forecast given in December 2021.
“The trend in the recent quarters reflects our optimism the country can maintain robust growth this year. Continuing growth in 2022 will be driven and supported by greater mobility of people, wider resumption of face-to-face economic and social activities and strong public investments,” World Bank Country Director Ndiamé Diop said during the same briefing.
“To sustain growth beyond 2022, we believe increasing private investments and further reducing infrastructure gaps will be essential.”
Regardless, Chua said WB’s forecast growth for the Philippines is still one of the fastest in the region for this year. However, the forecast is still below the government’s revised full-year growth target of 7-8 percent.
Other risks
Other risks to the Philippines economic outlook include geopolitical uncertainty, tightening global financing conditions, as well as threat of a new variant-driven surge in coronavirus disease 2019 cases.
“Another reason why we gave a 5.7 percent growth forecast for the Philippines is that rising inflation may also impact consumption in the country,” Chua said.
Inflation accelerated by 5.4 percent year on year in May, the highest in three and a half years, as food and fuel prices continued to rise. Government must keep a close watch on inflation.
Higher prices have a direct impact on poverty, with WB estimating a 10 percent rise in the global price of cereals will raise the poverty headcount by one percentage point. This means an additional 1.1 million Filipinos will be plunged into poverty.
A 10 percent rise in energy prices is projected to increase the poverty headcount by 0.3 percentage point, pushing 329,000 more Filipinos into poverty, it said.
“Authorities have to use all available policy tools to address inflation, including monetary measures to prevent the de-anchoring of inflation expectations, and supply-side measures such as importation and lower tariffs and non-tariff barriers for important commodities to help augment domestic supplies as needed, and greater support to agriculture production through extension services, seeds, and fertilizer,” Chua said.
He ruled out “stagflation,” or high inflation and slow growth for the Philippines.