Global investment banking giant Goldman Sachs economists Andrew Tilton, Danny Suwanapruti, and Jonathan Sequeira have painted a shiny economic outlook in 2021 for the Philippines and our Asean neighbors.
Their Philippine projection rests on what they say is the country’s growth potential and the availability of Covid-19 vaccines that are “expected to control the outbreak sooner than later,” notwithstanding the economic pit I believe our country has fallen into and the precipitous recession being experienced in the Asean region. They expect growth to “rebound the most in the Philippines [9.4 percent] and Malaysia [6.6 percent], which were among the hardest hit by virus containment this year.”
The banking giant nonetheless forecasts the country’s gross domestic product (GDP) this year to account for the enormous shrinkage in Asean at 8.5 percent; Malaysia at 6.5 percent; Thailand, 6.3 percent; Singapore, 5.8 percent; and Indonesia at 1.8 percent, or an average drop of 4.5 percent across these five countries.
But much of Goldman’s optimism is anchored on the slowing down of the pandemic, easing up of health protocols, the effectiveness of the vaccine, and the speed by which it will be administered to large swaths of the Asean population. There goes the caveat!
I’m not sure, however, if Goldman has also taken into account the huge debt the Philippines has accumulated since the onset of the pandemic. The International Monetary Fund’s (IMF) world economic outlook data base lumps the Philippines among the world’s indebted governments. The country’s percentage of public debt-to-GDP rose from 36,669 in 2019 to 48,858 as of October this year.
We borrowed P3.22 trillion between January and October this year, outstripping the P3-trillion full-year program, even as the national government locked in another P540 billion from the Bangko Sentral ng Pilipinas (BSP) to augment its pandemic war chest.
As of October, according to government data, our debts have amounted to a record P2.65 trillion, distended by the P840 billion in short-term borrowings through the BSP and the Bureau of the Treasury’s repurchase agreement.
My point is this: Our enormous debts can weigh down growth. High-level debts could restrain our capacity to service them and dampen investors’ interest in parking their funds here. From where we’re at, our country couldn’t afford to receive a credit downgrade because it will jack up borrowing costs, possibly crowding out the private sector and tightening the noose on interest rates.
So much will depend now on how we can service our debts. Stock analyst Den Somera of Eagle Securities—one of the most respected in the industry—told BusinessWise that, as long as our country can pay, there should be no problem. I agree, but then again, paying our debts would strain the country’s ability to raise funds. Taxpayers would surely bear all the burden. Also, doubts still linger as to whether we could free ourselves from the pandemic soon enough. Considering the protracted demand contraction and constrained fiscal offset to private sector balance sheets, it is highly possible that the country may also accumulate greater permanent output losses going forward.
Bob Herrera Lim, managing director of Teneo—a global CEO advisory firm providing strategic counsel to global corporations—told BusinessWise that there must have been an overestimation in the country’s ability to rebound: “We will probably get the vaccine later than our SE Asian peers; LGUs will be very conservative, [and] DOF will keep stimulus low.”
He cited three reasons for the Philippines experiencing a weak recovery in 2021. The first reason, Herrera Lim said, would be “the low emergence from the health care crisis [due to our being] late to vaccine procurement [which means the vaccines will only be] disbursed in volume later next year or even in 2022.” Without an “exit from the pandemic,” he pointed out, “LGUs may continue to impose restrictions on travel, and other countries may see us as a riskier travel destination—all weakening tourism and trade ties. Finally, the Philippines has kept to a smaller stimulus relative to other countries in the region. If the downturn persists, then the current stimulus program could prove insufficient.”
Luca Ventura of Global Finance says that governments spend money on health care, education, infrastructure, defense activities, and a plethora of other services and goods. He asks: “But why do governments have to borrow money? For the simple reason that things do not always go as planned, and that the only way to dig the world out of debt now appears to be [acquiring] more debt.”
To my mind, many economists are skeptical about the ability of our policy-makers to manage the pandemic-driven global depression. This incredulity extends to the establishment of a fixed debt-to-GDP ratio—often simply referred to as the “tipping point”—after which productivity rates decline or the risk of default increases substantially. Certain empirical evidence corroborates these economists’ skeptical position.
The pandemic undoubtedly unmasked the debt weaknesses of many developing countries. If not confronted with across-the-board and on-the-ball innovative actions, the situation could spiral into a prolonged crisis, with ruinous aftermaths for poverty alleviation and, more broadly, supportable economic expansion.
Borrowings are often resorted to for economic growth in the future. It has thus become incumbent for our country’s finance leaders to show fiscal self-restraint. If we were to persistently run deficits, sooner or later we will reach the default point. Even if we were able to avoid default, the snowballing cost of financing debt becomes an unaffordable burden on the shoulders of younger and future generations. Is a runaway national debt, caused by our leaders’ lack of reliable, judicious, and forward-thinking fiscal decisions, what we want to leave our heirs?
For comments and suggestions, e-mail me at mvala.v@gmail.com