Debt-to-GDP ratio remains over threshold

MANILA, Philippines — The country’s outstanding debt, as a share to the overall economy, eased in the first quarter, but remained above the internationally accepted threshold, putting pressure on the government’s effort to manage debt more sustainably.

Following the 6.4 percent gross domestic product (GDP) print in the first quarter, the share of national debt to the country’s output eased to 61 percent from the 63.5 percent in the same period last year.

However, this was slightly above the end-2022 debt-to-GDP ratio of 60.9 percent.

As of end-March, the national debt is at a fresh new-high of P13.86 trillion.

The current debt-to-GDP ratio remains above the internationally accepted threshold of 60 percent, which still puts the Philippines at a vulnerable spot in terms of its capacity to pay off its financial obligations.

It should be noted that reducing the debt-to-GDP ratio would mean that economic growth should outpace the level of borrowings of the Philippines.

Although the Philippines has managed to sidestep ratings action so far, ING Bank senior economist Nicholas Mapa said staying above the international threshold keeps the country susceptible to potential downgrades moving forward.

“Most of our neighbors are more advanced in their fiscal consolidation efforts post-COVID, and with Philippine growth outperforming the region, we hope we also get ahead of our fiscal consolidation timeline,” Mapa said.

The first quarter GDP is a slowdown from the previous year, but was above the market consensus of a six percent growth. Similarly, the Philippines recorded better expansion than China, Indonesia, Singapore, and Vietnam.

For Leonardo Lanzona, economist and professor at the Ateneo de Manila University, the Philippines still has more capacity to take on additional debt servicing in comparison to its Southeast Asian neighbors.

However,  Lanzona warned that the ability of the government to service its debts depends not only on the amount of debt, but also on its capacity to generate sufficient tax revenue and manage its finances effectively.

Further, Lanzona noted that the terms and conditions of the debt are also principal factors to consider.

“If the government can secure favorable terms, such as lower interest rates or longer repayment periods, it may be able to take on more debt-servicing without significantly affecting its financial stability,” Lanzona said.

“It is often recommended that governments should aim to maintain a manageable level of debt to ensure their long-term financial stability,” he said.

This, as excessive debt levels can lead to a range of economic problems, such as high interest payments, inflation, and reduced access to credit markets.

Similar to the past three administrations, Rizal Commercial Banking Corp. chief economist Michael Ricafort maintained that the debt-to-GDP ratio could be reduced to as low as 50 percent if the economy grows significantly, alongside tax and fiscal reform measures.

“Tax and fiscal reform measures to further intensify recurring tax revenue collections, as well as more disciplined government spending, especially the proposed rightsizing of the government,” Ricafort said.

But for Lanzona, the most efficient form of taxes are wealth or income taxes since these are not transferable to consumers unlike the value added tax.

“Most wealthy persons in the Philippines are engaged in real estate. It is unlikely that they will leave the country and bring their properties abroad just to escape these taxes,” he said.

The administration targets to bring down the debt-to-GDP ratio to less than 60 percent by 2025 and further down to 51.1 percent by 2028.