Obviously the Philippine government isn’t, at least for the moment, as it joins a long list of other governments in the world that have significantly ramped up their public borrowings in the last two years in response to the crisis spawned by the pandemic.
Our growing government debt, however, has been gaining some attention from multilateral development institutions, primarily because of its boldness in going after new borrowings, initially to pay for pandemic-related expenses, and this year to bridge a spending fund gap for state expenditures.
Conservative analysts see the increased borrowings as a greater risk, with the US Fed targeting to hike its interest rates to 1.9 percent by the end of the year from near zero in end 2021. With higher interest rates, paying debts in the future could become more cumbersome.
Further more, the threat of a return to lockdowns from a new virus strain that is more threatening than the latest Omicron variant emerge is still very much a risk, especially since the Philippines is far from achieving mass immunity because of still below-ideal levels of vaccination.
Currently, the country’s outstanding debt has breached P12 trillion to support government’s spending and higher external payments resulting from a weaker peso, after the government borrowed P301.1 billion in January, which included maturing Treasury bills and bonds.
Debt watchers of emerging economies, as with the economic team of the current administration, however, are less worried. They cite that the bulk of loans still carry long-term rates, which means repayment periods of over 10 years and at relatively low interests.
Sustainable and manageable
Two words support this optimism: sustainable and manageable. Sustainability comes from a belief that the Philippine economy will continue to grow at near pre-pandemic levels, catapulting the country again as one to watch in the mid-term in Asia.
Borrowings are seen as essential to financing more infrastructure projects that would spur further economic growth. Thus, debts will be taken cared of by the solid fundamentals that now support Philippine economic growth, which includes a spate of new laws that target to stimulate businesses into earning more, and consequently, have additional funds to reinvest to support a healthy growth cycle.
It will be recalled that the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, passed into law last year, provides a lower corporate tax rate of 20 percent for micro, small and medium enterprises or MSMEs from 30 percent, retroactive to July of 2020.
Providing MSMEs with this tax relief is expected to free some P1 trillion for over a million registered business establishments in the next 10 years, which could be spent in expanding and modernizing their operations while expanding their worker base.
Increasing the number of productive Filipinos in the work force is a great booster to economic recovery, as well as supportive of a growth in consumer spending that would augment money remittances earned abroad by migrant Filipino workers.
Other indicators of debt sustainability are the continued strength of remittances by overseas Filipino workers, estimated to grow by another four percent this year, even with all the uncertainties that the Ukraine-Russia conflict poses.
The country’s debt-to-GDP ratio by end 2021 at 60.5 percent is still within the internationally acceptable threshold of 60 percent, and is seen to shrink in the coming years with continued economic growth. This will justify the higher government spending and debts.
The current account surplus also supports lower borrowing costs, and this continued surplus is seen to equal 1.5 percent of GDP for the remaining months. Additionally, a healthy foreign exchange reserve is an additional factor supporting debt sustainability.
Should any unexpected factors emerge that would threaten economic forecast, the country’s economic team are banking on the availability of new loans, largely through bond offerings, to quickly offset any imbalance. This is the management side of debt.
So far, investor appetite for Philippine bonds remains bullish. During the first quarter, the country issued $2.25 billion in bonds. Just recently, Japanese investors in the Samurai debt market snapped up P29 billion worth of bonds, signifying support for the Philippines’ perceived strong credit standing in the global capital market.
We can still comfortably believe that the Philippines will be able to muster enough resources to meet debts, even if it is through more debts. At the very least, our confidence can come from the fact that among emerging economies, our country is not one on the list that is in danger of default.
Repayment plan
In the coming weeks, we should hear from the economic team a new fiscal consolidation package that would tackle repayment and lowering of loan levels. The biggest challenge would be improving state earnings while the economy is still recovering from the pandemic.
The CREATE Act is still in its infancy stages, and seeing a multiplier effect on economic growth will take a few more years. The government will likely look at new taxes, although it would not be too keen on this route, recognizing the current conditions globally and locally.
Squeezing the government machinery to maximize tax collections by plugging loopholes stands a better chance. We’ve heard of the Department of Finance talking about a “wealth tax” on the rich through a “corrected” assessment of land values, which the Finance Secretary said could additionally net the country billions of pesos annually.
The interim when all these uncertainties of a pandemic and war are still in play make for interesting times, and we wait with bated breath on what plans the current economic team is hatching.
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