Do countries go bankrupt?

Considering that the Philippine government has outstanding debt to local and foreign creditors nearing P14 trillion which is already 64% of its GDP, the recent Department of Finance announcement of another $3 billion debt via a bond issuance is starting to raise alarms in some sectors. As the Philippine government will be running an average budget deficit, (revenues less than its expenditures) of P1.4 trillion yearly for the next five years, and the World Bank/IMF prediction of half of the countries in the world to be in recession in 2023 and 2024, there is a cause of concern on over-borrowing, and our ability to pay all of these debts. The aftermath of the COVID-19 pandemic and the ongoing Russia-Ukraine war will cause 54 countries to default on their foreign debt obligations, and affect the most vulnerable in terms of inflation, food shortages, and inability to maintain their living standards.

International financial reporting considers a country/government that is unable to pay its debt obligations as bankrupt, if the country’s economy is not enough to pay its debt based on its GDP size and growth. This is because it is difficult or almost impossible to foreclose on the domestic assets of the government or the country. The strict financial, accounting, and legal definition of bankruptcy is when the liabilities of a company/government/country far exceeds their realizable assets, which really means insolvency. So, the courts or the banks would do a revaluation of the assets, both real and intangibles, to determine if a rehabilitation or a liquidation is the next step and proper solution.

Technically, a country does not go bankrupt. It’s the government of that country that goes bankrupt, but the ramifications on the country and its people are so bad, foreign and local creditors agree that the country is bankrupt or insolvent. Inability to pay foreign debts means no imports, no foreign exchange to pay for imports, so shortages in medicines, critical food supplies and fuel, spare parts for equipment, etc. Then, hyper-inflation as the government prints more money to pay the domestic debts, then a financial/banking crisis as the government restricts withdrawals, loans, foreign exchange and imports. Then, social and political unrests as poverty and economic disparity deepens. These are actually happening now in Sri Lanka, Lebanon, and in a lesser degree in some other underdeveloped countries. And it happened in the Philippines in the martial law years of Marcos Sr.

Due to the good fiscal position of the Philippine government in the years 2006 to 2016, the massive borrowings of the Duterte presidency was comfortably absorbed by the economy. In those years, the government’s outstanding debt was never over 40% of GDP. By 2022, the large borrowings for the pandemic, infrastructure, subsidies, and the graft and corruption leakages brought the debt level to 63% of GDP. The warning threshold for developing countries is 65%, and the critical threshold is 77%. So, the Philippines is in the debt warning status but will be nearing the critical status with the additional $3 billion loan, if our GDP stalls and we do not pay the debt installments. This will require good fiscal/monetary management and political credibility/stability.

There are many countries with higher debt to GDP ratios than the Philippines but most of them are highly-developed countries with large economies and intangible assets like technology, intellectual property rights, mineral rights, and stable political systems. All these matters in terms of economic growth and confidence in the country. So, it is detrimental to the Philippines to lose its mineral rights in its territorial waters to China, and to lose its talented people to other countries. The government/country has to hold and develop its assets to grow the economy for the people.

If the Philippines was a business entity or a person, it is not insolvent or bankrupt, but the Philippine government is illiquid, unprofitable, and has a negative cash flow from operations resulting on more borrowings.

To my readers who asked why I did not detail SNAFU in my last column, I actually did but my editor deleted it as I spelled the “F” word in full. So, here goes, SNAFU means “Situation Normal All F_____ Up”.