Paying the P13 trillion gov’t debt

Unless miracles happen, by June 30, 2022 when Duterte turns over the presidency to BBM the outstanding Philippine government debt will be ?13 trillion. The miracle will be if another person is proclaimed president, or if a big oil deposit is suddenly discovered in the country. This huge debt obligation is 63% of the P21 trillion Gross Domestic Product of the country, 3.5 times the government expenditures budget of 2022, and four times the annual revenue of the government. At this current level, we also have to allocate 13% of the national budget to service the interest and partial payment of the principal of this debt. Scaling this issue to a middle-class family, if your family owes P2 million which is four times the family annual income of P500,000, and you have to allocate P70,000 a year to slowly pay off the debt, you are in a tight squeeze. While not hopeless, there is very little space that a sickness or disaster in the family will push you to poverty. This is why economists have said that the incoming government has very little fiscal space.

The existing debt situation limits the borrowing options of the government as it had breached the 60% prudent borrowing limit for developing countries, and may affect its international credit rating that will lead to higher borrowing rates. This will also limit the pump priming expenditures of the government for infrastructures and services that may decrease the growth for the economy. A situation that may trigger a vicious economic downward circle rather than a virtuous upward circle. While the country’s robust $110 billion (P5 trillion) International Reserves are assurance to the foreign lenders that the country has the foreign exchange to service foreign debts and pay for imports, these funds are mainly owned by the Central Bank, the private sector and partly the government. It can only be commandeered by a dictatorial government, which Ferdinand Marcos Sr. did during the martial law years, when all foreign banks stopped lending to the Philippines.

In the second term of Marcos Sr., I was one of the consultants assigned to the Central Bank, and there was an External Debt Management Office (EDMO) created to monitor the Philippine foreign debt which were mainly by the government. Despite this, the International Reserves were depleted by 1984 that someone in the Central Bank fudged the figures, shaming the government when it was discovered in an SGV audit. As I was then treasurer of a large bank, it was known to all bankers who did it. This was one of the triggers of the EDSA People Power Revolution that deposed Marcos.

Over and above the limited borrowing capacity and the higher interests rates from lenders and the possible lower GDP growth brought about by the governments debt problems, world events and developments will weigh in and compound the country’s problems. Skyrocketing oil prices, global inflation, lingering pandemic, and the Ukraine situation have domestic implications. The offsetting factor may be the highly-competent economic team that will steer the economy. Diokno, Balisacan, and Medalla are as good as they can get. They will need to temper the increase in taxes proposals so that it will not be a disincentive to private investments. They will have to shift infrastructure to Public Private Partnerships (PPP) rather than from the budget. They will have to remove insertions/fat from the budget. They have to improve tax and custom duties efficiency, diminish graft and corruption, and grow the economy by 10% nominally for the next six years. These are all tall orders that need political will to support the economic team. The payment of the Marcos P203 billion in back taxes and a share of the Tallano gold would help if it comes, but most of all confidence in the incoming government, if it also comes.

If you are superstitious 13 is not a lucky number, but as there is a 70% probability of the economic team succeeding, the incoming administration has this game to lose by bungling the political dimensions.