Part One
THE country’s debt status is explained to be headed to continued sustainability as the ratio of national government debt to GDP is expected to be further reduced to 40.6 percent for 2017, and to a lower figure of 40.47 percent by the year 2018, according to the Bureau of the Treasury (BTr).
According to National Treasurer Rosalia V. de Leon, the declining trajectory of government debt is expected to be sustained in the coming years, as the government will implement mitigating measures in terms of addressing risks with its borrowing plan, among others.
“The declining trajectory will be sustained as 2017 national government debt to GDP will be further reduced to 40.6 percent and to 40.47 percent in 2018. Debt sustainability will be strengthened as we mitigate risks associated with our borrowing program, namely, foreign-exchange risk, interest-rate risk and refinancing risk,” de Leon told the BusinessMirror through electronic mail.
For this year, the government is expecting a GDP ratio of 6.5 percent to 7.5 percent by the end of the year, while it targets a ceiling of 7 percent to 8 percent in 2018.
Based on BTr data, for 2016, the debt-to-GDP ratio of the country reached 42.1 percent coming from the high 2010 figure of 52.4 percent.
80:20 ratio
ACCORDING to de Leon, the reduction in debt-to-GDP ratio over the years can be attributed to several government efforts.
These efforts include moves to sustain economic growth in the country, improve fiscal position with narrowing the deficit as a percentage of GDP, better collection through improved tax and revenue efforts, prudent as well as proactive liability management including lengthening of maturity profile, retiring high-coupon bonds and bias toward peso financing.
The sustained contraction in debt is based on the government’s various debt indicators, which was explained to show the Philippine NG headed toward debt sustainability.
“Our various debt indicators will show that the Philippine national government is headed toward continued debt sustainability,” she added.The NG’s thrust to program borrowings is an “80:20 ratio”. This means 80 percent of funds will be sourced or borrowed from local markets, while 20 percent will come from offshore accounts. It is a move to take advantage of the liquid market, in the country and further minimize risks brought about by external shocks.
“First, we are implementing our borrowing program with a heavy reliance toward domestic sources of debt in order to take advantage of ample domestic liquidity and mitigate against potential external shocks,” De Leon explained. “In that regard, our borrowing program employs an 80 percent to 20 percent domestic-external financing mix.”
Peso preference
WITH a peso-denominated debt portfolio, the government reduces its risk of shocks coming from
foreign-exchange movements. BTr data showed that, as of March this year, 65.8 percent of total borrowings are peso-denominated.
“This is an improvement from the 2010 peso-denominated debt percentage of 58.1 percent, and we forecast this level to reach 67.5 percent by end of 2018,” de Leon said.
In terms of interest rate, the government has minimized its risk to adverse changes in the interest rate environment, since it maintains a structure wherein less than a tenth of the country’s total debt is based on floating rates.
“Third, we have minimized our exposure to adverse changes in the interest-rate environment by maintaining an interest structure where less than a tenth of our total debt is based on floating rates,” de Leon noted.
Risk appraisal
THE NG has also improved efforts in terms of managing its refinancing risks, with the average maturity of outstanding debt floating within the government’s medium-term target of seven to 10 years.
“As an update, we can see the average maturity of our outstanding debt, from both domestic and external sources, hovering at the upper bound of our medium-term target of seven to ten years,” de Leon said.
She further pointed out that interest payments (IP) made by the government has been significantly decreased. De Leon said interest payments as percent to revenues reached 13.8 percent in 2016, from 24.4 percent in 2010. Interest payment as a percentage of expenditures, meanwhile, reached 12 percent last year from the 19.3 percent in 2010.
“With lower debt burden, more fiscal space is created for productive and growth-enhancing spending, like infrastructure and social services. These trends will continue as IP/revenue will decline to 13.8 percent in 2017 and to 12.9 percent in 2018. Similarly, IP/expenditures will further decline to 11.5 percent in 2017 and to 10.8 percent in 2018,” she added.
Fresh debt
ACCORDING to Freedom from Debt Coalition President Eduardo C. Tadem, $167 billion worth of new loans will be acquired by the Duterte administration to fund its massive “Build, Build, Build” infrastructure program. Under the program, the NG debt stock is expected to swell at an estimated 136 percent compared to the 2016 level.
Tadem further pointed out that an estimated annual additional revenues amounting to P200 billion will come from new tax measures. These measures include the Tax Reforms for Acceleration and Inclusion.
“Liability-management strategy is working, capacity to pay is improving,” Tadem said in his presentation during the Philippine Debt Situation Forum held at the Polytechnic University of the Philippines in Manila on June 27.
He pointed out that average annual GDP-growth rate for the last six years stood at 6 percent, with debt indicators improving. Tadem said debt ratios are moving on a downward trend, indicating the country’s better capacity to pay. It should be noted that the country’s moves to reduce its debt and service began in 1990.
The first debt and debt-service reduction operation the World Bank financed was the Debt Management Program Loan to the Philippines, the World Bank Group’s Independent Evaluation Group said. “Its main objective was to help restore the Philippines’s creditworthiness by reducing the destabilizing pressures exerted by an excessive debt-service burden.” To be continued
Image credits: Nonie Reyes