Debt

Of course, we are deeper in debt. There is no productive point in moaning and groaning about it.

The pandemic presented our economy with a severe challenge. Properly responding to the public health crisis required we seek emergency financing. Government had to procure millions of test kits, beef up our hospital capacity, extend assistance to vulnerable families and, eventually, purchase tens of millions of vaccine doses.

Anyone who has seen a loved one through hospitalization will understand this. We could not walk away from this pandemic on the ground that the costs of doing anything will be prohibitive. We had to bite the bullet and put out the cash. People’s lives were on the line.

The Department of Finance estimates government lost P1.4 trillion in revenues as our pandemic-hit economy contracted severely through 2020. The country had to quickly source about P709 billion by way of emergency borrowing.

The budget deficit continued to grow this year. Public spending is expected to rise further to P4.74 trillion or 12 percent higher than last year’s expenditure. The larger budget gap will need to be financed through borrowing.

For 2021, the deficit is expected to widen to P1.86 trillion. That represents about 9.3 percent of our GDP. Total national government debt is expected to balloon to 58.7 percent of GDP compared to 54.5 percent in 2020 and a historic low of 39.6 percent in 2019.

These are good numbers, actually.

A debt load of 58.7 percent is eminently manageable. We had expected the number to be worse. Several developed economies carry debt loads that are well over 100 percent of their GDP.

As a matter of policy, two thirds of our borrowing is from local sources, denominated in pesos. That reduces currency exchange fluctuations as a risk factor.

We are able to maintain this policy because of the high liquidity in the domestic market. High liquidity is both a good thing and a bad thing. It signals that domestic enterprises are not using available capital resources to invest. Government borrowing from the domestic market helps protect our banking system from the perils of holding on to too much unproductive cash.

When the pandemic hit us, we had enough fiscal buffers to support a strong public response. The tax reforms of the preceding years enabled the country to raise its tax efforts to 16 percent of GDP. This is above the regional average.

Never for a moment were we in danger of running out of cash even as the pandemic required a large amount of unplanned spending. Our gross international reserves climbed to about $110 billion – the equivalent of 14 months worth of imports. The underside to this, of course, is that we have not been importing enough capital goods to support stronger industrial growth in the coming period.

At any rate, the peso actually strengthened through the period of pandemic. This is in contrast to previous crisis episodes when the peso collapsed, thereby magnifying the adverse impact of the crisis for our consumers.

Notwithstanding mobility restrictions and a fall in imports, our revenue agencies continued their work effectively. Credit will have to go to the administrative reforms achieved at both the BIR and the Customs Bureau – especially the rapid shift to digitalized processes. As a result, 90 percent of our taxpayers paid their dues electronically.

Our banking system, regulated for years in the most conservative fashion by the BSP, did not buckle under the pressure of a severely contracting economy. We have not seen the bank runs we saw in previous crisis episodes. The NPL rate climbed from under 2 percent to a little over 4 percent. That is a tolerable setback.

Our banking system is fully functioning. It is able to extend lending to our distressed enterprises.

Despite all the difficulties of the past year, our superior credit ratings have been maintained by the agencies. This enabled government to borrow at the best rates. Since the sovereign rating is the ceiling for private sector borrowing rates, private enterprises benefit as well from more affordable financing.

One major reason we have been able to conserve our exemplary credit ratings is the fiscal discipline maintained by the Duterte government. The executive branch has so far resisted the impulse of politicians to hand out money like it was going out of style, insisting on “fiscal responsibility.”

This basic discipline prevented us from going overboard during the depths of the health crisis. Despite populist pressure to open the floodgates of spending, the Duterte government insisted on sustainability.

Our economic managers insisted on maintaining a longer-term outlook on the crisis. The response to the pandemic will likely be a marathon and not a sprint, the Finance Secretary prefers to put it. We needed to maintain the capacity to support a long battle against the infectious virus.

Because of the administration’s stubborn insistence of sustainability, the Bayanihan III bill is in the doldrums. It is a spending plan that folds in so many other concerns under the misleading heading of “stimulus.” The bill, apart from recommending largely symbolic cash allocations for all citizens, includes outlay to cover the needs of our pension system for uniformed personnel.

The cash allocations are economically pointless. The looming pension fund crisis is a problem that needs to be dealt with separate from the pandemic response.

Both the Budget and Finance departments have not issued certification that this generous spending bill could be reasonably funded. Because it involves dole-outs rather than economic investments in the main, it fails to meet the standards of fiscal discipline.

It will push our debt to dangerous levels.