Outgrowing debt

To bring down the Philippines’ debt-to-GDP (gross domestic product) ratios to a more manageable level, the country’s new economic team led by Finance Secretary Benjamin Diokno was quick to reply that the way out is simply to outgrow the debt by having the economy grow at a faster rate.

This is a textbook answer right off the bat, or at best, a traditional economist’s formula when discussing how debt correlates with GDP. What is not discussed in detail, though, is how the economy will find its wings after being badly clipped after two years of restrained economic activity because of the pandemic.

Philippine debt has ballooned since 2020 to P12.5 trillion by endMay 2022, largely because of an emergency P3.2 trillion borrowing to finance the government’s pandemic response programs, a large part for the rollout of free vaccines to at least 70 percent of the population.

The debt-to-GDP ratio, as of the first quarter of 2022, was at 63.5 percent, higher than the acceptable 60 percent threshold set for emerging economies by international standard setters. While this is not high enough to trigger alarm bells, it is far higher than the 39.6 percent recorded at the end of 2019.

We had been able to bring down our debt-to-GDP ratios below 40 percent from a record high of 74.9 percent in 1993 resulting from over two decades of disciplined financial programs imposed by several administrations. The ultimate reward for this was the gradual improvement of our financial standing from ratings agencies like Fitch, Moody’s, and Standard and Poor’s.

Our credit standing had gradually risen to investment grade through incremental increases after regular reviews, although the pandemic had shaved off some small points leading to some degree of retrograding. Still, even with the increased risks pointed out, the Philippines is much better off than it was after the end of the first Marcos presidency.

Higher GDP growth

Before the pandemic, the Philippines was the envy of emerging economies in Asia more for its financial discipline than for its economic programs. Still, this resulted in GDP growth that was consistently one of the highest in the region for years.

The country’s strong economic growth was almost always attributed to the strong dollar inflows from repatriated earnings of overseas Filipinos, many of them migrants who held time-bound contracts, which in turn spurred robust domestic consumption.

Remittances were shored up by earnings from those employed in the business process outsourcing (BPO) sector, which also mopped up a large part of the jobless population. BPOs also served to increase income levels of those employed, which helped uplift more Filipinos to middle class status especially when residing outside Metro Manila.

Unfortunately, other economic activities that could bring in additional export earnings, but unrelated to increasing domestic consumption, remained fledgling. Inbound tourism, for one, continued to be a laggard compared to countries like Indonesia, Thailand or even new-player Vietnam.

Exports of our agricultural products were struggling, often for failing to pass phytosanitary standards set by importing countries. Countries around the Mekong Delta were going full blast in the export of agricultural produce to China.

Our mismanagement of the country’s agricultural program led to Filipino farmers sinking deeper into poverty and their numbers decreasing. We were once one of the world’s biggest sugar exporters; today, we even have to import this commodity to fulfill local demand.

Our food importation has gradually increased over the years, not just in volume, but also in variety. For an archipelagic country abundant in aquatic resources, importation of the poor man’s scud fish has become more regular because of local undersupply.

Grow, grow, grow

Clearly, the economy could perform better if the right attention were given to sectors that have the potential to become better economic contributors. If we were to go by the Finance Secretary’s formula for paring down debt, more attention should be given to an economic resurgence program.

The previous administration focused on a platform of fiscal reforms, and this did wonders to correct many of the imbalances of how the government earns from taxation. Diokno and his team have simply to polish off what remains outstanding.

Coping with the burden of extraordinary spending financed through loans during the last two years will certainly need a different kind of fiscal discipline. The new economic team may opt to pursue improved tax collections over new taxes, but it definitely needs to outline a program that will keep economic growth on track in view of the many risks that abound in a post-pandemic world.

Surviving the perils of a post-pandemic world will depend on how well we will be able to grow, grow, grow our economy in the next few years.

Stagflation risks

We are seeing inflation rates peaking at record levels in developed economies amidst low economic growth and high unemployment rates in less developed economies. Economists are warning of a real stagflation risk, something that did occur in the 1970s arising from world oil politics.

A most recent report by the World Bank already halves global economic growth to 2.9 percent this year compared to 5.7 percent in 2021, while that of emerging markets and developing economies slashed to 3.4 percent from 6.6 percent.

The Russian attacks on Ukraine and the extended lockdowns in China have only aggravated unstable financial and economic conditions of most countries through protracted supply chain uncertainties and rising crude oil prices.

The Philippines may be enjoying a continued stable growth outlook this year, but let’s not be complacent because we’re not exactly in a most secure position.

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