The Internet has unfortunately created a monster of misinformation and misperception. We like to think that it is the fault of “false news” and “fake news.” But it goes much deeper than that.
We view the world through our own life experiences and our own knowledge. Think back of the things you thought were true as a child that you know now to be wrong. A watermelon will not grow in your stomach if you eat a seed.
However, the world is much more complex than our own wisdom—knowledge plus experience. But too many people think that because of the huge increase of information flow that comes from the Internet, everyone is suddenly an expert.
As a result, everyone who has a credit card, a home mortgage, or a car loan is a genius about debt.
There are three broad types of debt: government or sovereign debt, corporate debt, and consumer or household debt. Within each of those categories are various different kinds of debt. For example, a home loan is “collateralized debt,” meaning the bank can seize your property for non-payment. Credit cards are “unsecured,” meaning that the bank lends to you on the “faith” that you will pay your debt.
These are the loans the people are familiar with, but they have absolutely no substantial similarity to government or sovereign debt that you hear all the whining and complaining about.
The banks expect consumers will pay the debt. No one ever expects a government to “pay off” their loan. You are a company—financial or non-financial—that has $100 million that you do not need for your core business. It is an asset. You loan that money to the government and it is still carried as an asset. All you want the government to do is to pay the interest. At the end of the loan period, the government will pay back the principal to you by borrowing new money from someone else. The loan is really never paid off unlike what you do for your car or refrigerator.
This idea that “every person owes their portion of the government debt” is wrong and silly. It is true that too high government debt service—as what happened until President Gloria Macapagal-Arroyo cleaned up the government finances—can damage an economy. But the government borrowing a few million or more at 0.01 percent annual interest does not mean that in 10 years you are going to get a bill for the “debt.”
However, corporate debt which may need to be paid off or might not be able to be “rolled-over” into new borrowing can be very serious to the economy if a large company fails.
German automaker Volkswagen has a corporate debt of $200 billion. The total foreign debt of the Philippines is only $84 billion, and South Africa, Thailand, and Taiwan owe a total of about $150 billion. Of course, VW is good for the loan. But as an economy, we should be as concerned if not more about corporate debt than government debt as long as the government credit rating is sound and the outlook stable.
Philippine total corporate debt has decreased from nearly $120 billion in 2014 to the current $88 billion. As a percentage of total GDP, Philippine household debt is 9.7 percent, one of the lowest in the world. Philippine corporate debt is 26 percent of GDP, one of the lowest in the world. Philippine government foreign debt as a percentage of GDP is less the 50 percent, while the global average is 53 percent.
Image credits: Jimbo Albano
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