ADB urges proactive debt management amid Ukraine war

MANILA, Philippines — The Philippines needs to manage its ballooning debt proactively as the country and the rest of emerging markets (EMs) are expected to wade through turbulent waters with the looming US Fed hikes, according to the Asian Development Bank (ADB).

In its recent blog, the ADB said impending US interest rate hikes would exert significant impacts on Asian economies through trade, exchange rates, and financial markets.

ADB economist Cyn-Young Park said EM economies are expected to navigate increasingly turbulent waters ahead and an immediate challenge for the region is to strengthen macroprudential surveillance and preempt new sources of financial instability.

Park warned that Fed’s tightening, as what happened several times in the past, leads to economic slowdown not just in the US, but also in EM economies such as the Philippines.

Park said debt has increased across economies as countries expand fiscal policy to address the pandemic.

In the Philippines, debt has swelled to another record-high, breaching the P12-trillion mark as of end-January amid continued efforts to fund pandemic response.

“The risk of debt vulnerability runs high, especially for the economies facing high external debt service burden while sustaining large structural current account deficits and holding insufficient foreign exchange reserves,” Park said.

“In order to mitigate external vulnerabilities, more proactive public debt management is needed, for example by lengthening the maturity structure and building a more sustainable debt service profile,” she said.

She also called to further local currency bond and capital market development to reduce reliance on external debt financing and improve financial resilience.

Further, Park emphasized that governments in the region need to carefully monitor the risks of higher inflation and prepare to rein in inflation expectations.

Once the Fed starts raising interest rates, she said local currency depreciation driven by widening interest differentials could further complicate the inflation battle.

Headline inflation in the Philippines has yet to move upward, but upticks are already seen in the coming months as the Ukraine-Russia crisis is putting pressure on global oil prices.

Park maintained that higher interest rates would curb aggregate demand, thereby reducing external demand for Asian exports.

“Although the region’s strong growth outlook and healthy external positions mitigate the risk, authorities need to remain vigilant and prepare for a sudden change in international investor sentiment,” Park said.

“Strong economic recovery is the only way out of the crisis. Asia needs to seize the opportunities arising from rapid digital transformation to further boost productivity and capture potential gains in economic growth and employment,” she said.