The fiscal debt has generated some controversy on whether our economic managers are obsessed with the credit rating of the country and scrimping on funds used to alleviate our pandemic and economic woes.
The Philippine government debt was P11.6 trillion as of July 31 this year. It is expected by the Bureau of Treasury to be around P11.73 trillion, or about 51.88 percent of gross domestic product, by the end of the year. This is an increase from 37 percent of GDP in 2019 (before the pandemic) and from 47 percent in 2020 (in the first year of the pandemic). The Bureau of Treasury predicts that Philippine debt will reach P13.41 trillion next year (2022), surpassing the important threshold of 60 percent of GDP. This traditional threshold warns that the higher it goes up from 60 percent, the higher the chances of default. That is why the government is trying to slow down incurring debt by 20 percent.
Well-known economists (Professors Emmanuel de Dios, Solita Monsod, and Josef Yap) in a PCIJ article had criticized the government as scrimping over much-needed borrowings and being overly scared of the credit rating agencies.
First, as the professors said, Philippine debt is made up of 70 percent domestic debt and doesn’t contain much foreign exchange risk. May I also add that the terms of the multilateral loans are long term (15 to 25 years), so they’re not an immediate threat in the early recovery years.
Credit rating agencies and foreign banks scaring us?
IN early 2021, Fitch and S&P had decided not to impose credit downgrades in 2021 and to start only in 2022.
But on July 12 this year, when the Delta variant surge just started here, Fitch gave us a “negative outlook” on our foreign debt, citing:
a) lower medium-term growth as a result of “scarring effects.” These are the effects of long periods of unemployment which would lead to decreased physical and mental health, higher stress, and lower well-being. This, in turn, will lead to lower pay and chances of finding a job later in life.
b) “challenges associated with unwinding extraordinary stimulus measures and restoring public finances” (using the exact words of Fitch Rating).
Recently, the international bank ING came up with an article that interpreted the negative outlook warnings of Fitch to the Philippines and Indonesia as possibly the first of a series which will slowly reduce confidence in these economies. The final credit downgrade in 2022, if it happens, may cause massive selloffs. ING says that if the Philippines does not improve, a credit downgrade may occur in July 2022.
Help from the IMF
One positive thing that will help our debt situation is the $2.8 billion worth of special drawing rights (SDRs), which the International Monetary Fund allocated to us from the total $650 billion it has distributed to the countries in the world in August 2021. The $650 billion is the biggest disbursement and assistance by the IMF to the countries of the world, this time to help during the pandemic—as a funding source and part of foreign exchange reserves.
The disbursement of SDR’s had been suggested by economists Joseph Stiglitz and Jayati Ghosh when the pandemic broke out in early 2020. It took some time for the IMF to implement the plan.
Lack of international cooperation on financing
Many progressive economists, such as Carmen Reinhart and Kenneth Rogoff, have gone much further and suggested that during this grave pandemic period, a temporary external debt payment moratorium be given to sovereign debts. This includes debts owed to multilateral lenders, sovereign creditors, and private investors. This has not happened, perhaps because many developed countries are also being attacked by Covid surges. But an initiative to help the really hard-hit developing countries (like ours) must start to take shape soon as the Covid situation worsens in the second half of this year.
Integrity and accountability
This brings me to the most important point. Our economic managers have been quite prudent in borrowing funds to meet the health and economic challenges that this pandemic has brought. But today, it seems that there are allegedly strong indications that the pandemic funds had been anomalously used to benefit people and companies close to top officials of the government. If true, this has also led to lower finances and overpriced medical supplies for the fight against Covid. This not only betrays the goodwill of the people but may be used by the credit agencies as an excuse to give credit downgrades to the Philippines for deterioration in governance as well as anomalous use of borrowed fiscal funds. Thus, a very thorough and complete investigation of these cases should be a priority.
Dr. Joseph Anthony Y. Lim is a Professor of Economics at the Ateneo de Manila University.