Understanding the P11.16T Philippine debt

With the increasing huge borrowings of the Philippine government to support the public health and contain the economic fallout of the pandemic, there are growing concerns about the sustainability of these borrowings. The outstanding amount as of June 30, 2021 is at “P11,160,000,000,000.00,” rounded to the nearest billion or $223,000,000,000.00. Strictly speaking, this is the debt of the Philippine government but indirectly this is the debt of the Filipino people, since payments will come from the income of the country or the earnings of the people. If we divide the P11.16 trillion by 110 million Filipinos, it comes out at P101,454 per person’s share of this debt as of June 2021.

In 2016, this government’s debt was at P5.9 trillion. We have been increasing this steadily to finance government expenditures as revenues from taxes, customs duties, and other gov’t income were not enough to cover the budgeted gov’t expenditures. We incur budget deficits every year, so we keep on increasing borrowings, and this will double the total debt by end 2021 to P11.98 trillion. About 71% of this debt is borrowed domestically from the BSP and from the public, while 29% is borrowed from institutional and private foreign lenders.

Government borrowings or debt is intrinsically neutral; it could be good or bad for the country depending on its magnitude, the use, and the management of the debt. It is a function of the size of the debt in relation to the resources/assets of the borrower, the ability to service the principal and interests, and the use of the debt. So national debt is stated as a percentage of the country’s GDP/economy, debt servicing in relation to the country’s international reserves and government revenues, and the effectiveness of the government in deploying debt to productive investments that will grow the economy.

By the end of 2021, this Philippine debt will be 60% of our GDP of P20 trillion. This will be 45% of our gross international reserves, and at an average cost of 2% per annum, will eat P223 billion or 5% of the national budget excluding payments for the principal. This means that our GDP/economy and government revenues should grow by at least 5% annually to be able to service the debt amortizations of principal and interests. This will happen if the borrowed funds are deployed in productive investments by the government. And if graft and corruption is diverting 20% of the government budget and we reduce this to 10%, then we can easily cover the annual national debt service, as this will be P450 billion.

The debt to GDP ratio is not a definitive indicator of debt capacity/sustainability for countries, as it does not relate to the total resources of the countries. At best, it is an indicator of debt servicing capability. A debt/asset or debt/equity ratio would have to consider the total resources of the country which would include all of its natural, human, and technological resources. This is why Japan, the US, Singapore and other highly-developed countries carry debt/GDP ratios of over 100%. Their technological/scientific and human resources are the intangibles that aren’t reflected in their GDP. On the other hand, underdeveloped and developing countries have only their natural resources as backup assets. So, the Philippines, Indonesia, Vietnam, and other smaller countries have to guard their territorial lands and waters, as these are tangible and bankable resources.

Economics is the study of the allocation of scarce resources. Debt is also a scarce resource that has to be well managed. For our economy and country to survive this pandemic, we need a more competent and responsible government. Populist policies have to be tempered with the fiscal realities of reducing budget deficits. And we have to attract more local and foreign investments to provide the capital to grow the economy in the long term.