Debt’s many faces

Debt has been one hot topic in recent days, raising anxiety levels of beleaguered individuals, companies, and even nations to high gear all because this raging pandemic caused by the novel coronavirus has put on hold most economic activity.

A year ago, nobody would have thought that fortunes could be overturned beyond redemption simply because one had the tough luck to be in the “wrong” job or business. The challenge to adapt has drawn out the worst and best of many of us.

For many countries, a ballooning debt has been a function of how they are suited to face a health crisis. The US, for example, shelled out one of the largest pandemic relief packages, bringing the public share of its national debt to a little over 100 percent of GDP.

The World Economic Forum (WEF) recently discussed the world’s debt, noting that the combined pandemic monetary responses of governments have added up to $20 trillion since the third quarter of 2019, bringing global debt to $277 trillion at the end of 2020, or 365 percent of world GDP.

If one uses the debt-to-GDP metrics, i.e., calculating total debt by dividing this with annual GDP, you would surmise that the world is headed for doomsday.

Taking the World Bank’s view that the allowable threshold for government debt should be at 77 percent of GDP, and that every percentage point beyond this threshold detracts 0.017 percentage points from annual growth, then many countries – even those that belong to the top five of the developed world – would be in deep shit.

Different views

Debt, however, is not what it oftentimes seems to be. Take the example of Canada. The WEF says that Canada’s debt-to-GDP ratio, excluding the financial sector, increased by almost 80 percent, the highest of any developed country, but not because of any pandemic response injections to its economy.

Government borrowing, it appears, surged as Canadians affected by the pandemic availed of relief funds from the state-funded Canada Emergency Response Benefit (CERB). The high withdrawals over seven months reached a staggering $60 billion.

The heavy CERB withdrawals, as much as $1,500 a month for a needy Canadian, came at a time when Canada’s GDP was declining at an annualized rate of 38 percent during the second quarter of 2020, making it its worst three-month performance on record.

Canada’s story, however, pales in comparison with the US, whose national debt is expected to hit $35.3 trillion, or 107 percent of GDP by 2031, mainly because of a continuing increase in the federal budget deficit by an average of $1.2 trillion a year. This would make it the highest debt-to-GDP ratio in US history.

The Philippines is no exception to most economies in the world in having hiked debt levels during the height of the pandemic, although its borrowings – however large it seems – pales in comparison to what other peer countries in the region have accumulated.

In fact, while our debt-to-GDP ratio of 54.5 percent last year is at its highest in 14 years, the arrival of vaccines is an insurance of sorts that the Philippine economy will be able to reboot soon. With GDP expected to bounce back to pre-pandemic levels, the acquired debts last year should be inconsequential.

China, which had one of the highest debt accumulation last year, has another view that debunks the importance of debt-to-GDP as a measurement of net worth; instead, it opts to describe public net value as simply a summation of assets minus liabilities.

An article by two Chinese economists – Justin Yifu Lin, IFF Advisory Committee member and dean of the Institute of New Structural Economics at Peking University, and Wang Yan, deputy director of the IFF Institute and former World Bank senior economist – has been vocal against the IMF and World Bank’s adherence to the sustainable debt concept using debt-to-GDP metrics.

They opine that this view is myopic in that it does not define the type of debt (domestic or foreign), what it is used for (consumption or investment), and whether GDP will be affected in the long term after the completion of the project.

‘Arise’

Understanding debt in a bigger context is always a welcome move, just as weighing the soundness of a repayment strategy is equally important. For the Philippines, this could come in handy when deciding the fate of the recently proposed Bayanihan “Arise” 3 pandemic relief package.

The bill, which seeks to augment the financial assistance allotted by Bayanihan “Heal” 1 and Bayanihan “Recover” 2, calls for P420 billion to mitigate the economy’s lackluster performance because of the lockdowns and the high inflation levels last month because of a food supply problem.

The money will largely be allocated for capacity building of impacted sectors, including agriculture, and additional dole outs for affected families. Proponents of the bill cite that Arise will be the best way to counter any threat of stagflation, a possibility that is being ruled out by economists.

The economic team, as expected, has politely responded by offering to work closely with the legislature in threshing out the details of the proposed bill. Along with other cited conditions, the response was as good as a thumbs-down.

Then again, who knows if politics – or adverse mass sentiment – will prevail in the final decision-making.

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