DEBT BURDEN: HOW LONG CAN THE PHL CARRY THAT WEIGHT?

FIVE decades since the The Beatles advised people “to carry that weight” in 1969, the Philippines’s debt burden stood at P7.73 trillion ($159.34 billion) as of end-2019. The dollar amount was equivalent to the budget deficit the US addressed nearly two decades ago.

While the Fab Four wasn’t referring to anything, much more debt, the burden of borrowings were carried long and will be carried long according to people Businessmirror talked to amid and even after the Covid-19 pandemic and the Duterte administration.

Nonetheless, the latter is credited with the feat of bringing down the debt as a share of the economy to a historic low of 39.6 percent. Now it is bracing for a much higher debt-to-gdp (gross domestic product) ratio this year at 53.91 percent; a level the country has not seen in more than a decade. The ratio—how an economy can pay off debts—is even expected to surge to 58.28 percent and 60.04 percent of GDP for 2021 and 2022, respectively.

By the end of this year, the national government expects its outstanding debt to reach P10.16 trillion, up by 31.42 percent from last year’s amount.

Increasing debt

FOR the first half of the year, the national government’s outstanding debt has breached the P9trillion mark as it surged by 15.1 percent from a year ago as the country borrowed more to fund its spending measures against the Covid-19 pandemic.

The government’s gross borrowings have also surged past P1.7 trillion for the same period, already surpassing the state’s original P1.4-trillion borrowing program for this year.

The latest Budget of Expenditures and Sources of Financing document released by the Department of Budget and Management this week shows a stark reality. The paper said the national government’s debt service expenditure this year is seen to reach a total of P1.005 trillion, up by 19.33 percent from last year’s actual total debt service of P842.450 billion. These figures already include interest payments and principal amortization.

Government’s debt service bill in the January-to-june period this year jumped by 42.07 percent to P547.347 billion from the previous year’s P385.254 billion.

And according to former Labor Undersecretary Rene E. Ofreneo, these figures indicate that the country continues to be mired in such a debt crisis.

No let-up

OFRENEO, currently president of the nongovernment Freedom from Debt Coalition, believes the Philippines is already in a debt crisis since the 1980s.

“In other words, the debt crisis never left us,” Ofreneo told the Businessmirror, where he is also a columnist, in an interview. “One clear indication of a debt crisis is that the biggest expenditure on the budget is always on debt service.”

Ofreneo, author of the 1984 seminal paper “The Philippines: Debt Crisis and the Politics of Succession,” expressed alarm over the “rapid contraction of the economy.” According to him, this year’s contraction would take its toll on the country’s debt management. Ofreneo also warns that the economy at a historic low of 16.5 percent in the second quarter of the year marks it officially in a recession could even worsen relative to the headwinds brought by the pandemic.

“We have a rising debt-to-gdp ratio and we also have indications of declining or imploding economy, rising unemployment,” he told the Businessmirror. “And so, in the end, the capacity of the economy to grow and to manage the debt is worrisome.”

Unemployment rate in April rose to a record-high 17.7 percent from 5.1 percent in the same period last year, based on the Labor Force Survey conducted by the Philippine Statistics Authority. Underemployment rate also rose to 18.9 percent from 13.4 percent last year.

Crisis character

IBON Foundation Executive Director Jose Enrique A. Africa offers a dissenting voice: the country is not yet heading into a debt crisis.

However, Africa pointed out the basic nature of a debt crisis is still the same now as in the 1980s, which he said is mostly a “balance of payments and foreign exchange crisis.”

Africa said in an e-mail to the Businessmirror: “In our view, an immediate debt crisis isn’t at hand but the country’s vulnerability is increasing. The main problems are: rapidly increasing borrowing, which isn’t being spent as well as it could be to restore the economy; consequently diminished prospects for growth; and weak revenue generation from over-relying on consumption taxes and avoiding higher direct taxes on income and wealth.”

He explained that some specific conditions today and the 1980s differ. Africa cited the level of the country’s foreign debt, which has fallen to just around 20 percent to 22 percent of GDP today from 60 percent to 100 percent of GDP in the early 1980s.

Labor’s contribution

AFRICA added that “meanwhile, the foreign exchange constraint has been considerably eased by huge overseas remittances.”

He noted that remittances have grown considerably from 1.5 percent to 3 percent of GDP in the early 1980s to 8 percent to 10 percent in the last decade.

According to Africa, remittances have also been the biggest factor in the rising Gross International Reserves (GIR), which increased from a few weeks to 3-months’ worth of import cover in the early 1980s to 7-months’ to 8 months’ worth today.

The Philippines’s GIR reached an all-time high anew at $98 billion as of end-july as the Bangko Sentral ng Pilipinas (BSP) booked revaluation gains from its gold holdings. This, as the national government’s foreign currency deposits with the Central Bank and BSP’S income from investments abroad increased for the period as well.

This can cover 8.9 months’ worth of imports of goods and payments of services and primary income. The GIR level is also about 7.5 times the country’s short-term external debt based on original maturity and 4.9 times based on residual maturity.

Still, Africa said, “it’s probably no exaggeration to say that the biggest factor making external debt more manageable is not really so-called structural reforms by economic policymakers but rather the labors of the 10 million to 12 million Filipinos forced overseas for work.”

Up by 1.24%

IN the first quarter, BSP reported that outstanding external borrowings stood at $81.4 billion, which is 2.6 percent lower from the enddecember 2019 amount of $83.6 billion. The drop was attributable to net repayments of $4 billion for the settlement of maturing shortterm borrowings by the private sector, the BSP explained.

Comparing this to the year-onyear figure, however, it shows that external debt inched up by 1.24 percent from $80.4 billion in the first quarter last year.

“External debt refers to all types of borrowings by Philippine residents from non-residents, following the residency criterion for international statistics,” according to the BSP.

RCBC Chief Economist Michael L. Ricafort explained that most of the country’s foreign borrowings are long term in nature.

Foreign loans with mediumterm and long-term tenors account for 83.6 percent of total external debts, with maturity averaging nearly 17 years—with 20.9 years for government debts and 7.4 years for private sector borrowings. Short-term foreign loans, meanwhile, accounted for the balance of 16.4 percent.

zricafort noted that the Philippines’s external debt of $81.4 billion—equivalent to 21.4 percent of GDP—IS “among record lows and also relatively lower compared to similarly-rated countries.”

Shift in profile

AFRICA noted another difference in the debt crisis in the 80s and the current debt debacle: the shift in the profile of creditors.

“There was a shift from banks and other financial institutions to bondholders with the banks’ share of foreign debt going down to around 29 percent today from 60 percent to 70 percent in the early 1980s while the share of bondholders increased to 32 percent today from three percent to five percent back then.”

“The balance was taken up by multilateral and bilateral creditors, increasing their share slightly over the past decades,” Africa said. “The shift from banks to bondholders goes far in explaining the increased influence of credit ratings agencies.”

His words, however, fail to bring comfort to the banking industry as nonperforming loan (NPL) ratios reach a level higher than the usual figure and the highest in recent years.

Inched higher

ECONOMISTS interviewed by the Businessmirror were not surprised. They said it was only expected given the current economic slowdown amid the coronavirus pandemic.

ING Bank Manila Economist Nicholas Antonio T. Mapa said the most recent June data shows a slight uptick in the NPL ratio. “This was to be expected given the substantial destruction in economic activity, translating to lost income and frozen cash flows,” Mapa said.

The BSP reported that bad loans grew nearly 27 percent to P273.6 billion as of end-june from P215.91 billion in the previous year for the same period. Total borrowings in the first half inched up by 5.15 percent to P10.82 trillion year-on-year.

These figures resulted in a gross NPL ratio of 2.53 in June, higher than the average of below 2 in the recent past years. That level was first breached in January; it hasn’t declined since.

Past due loans in June, meanwhile, climbed by 26.4 percent to P375.27 billion from P296.89 billion last year.

Viewed to rise

HOWEVER, De La Salle University (DLSU) economist Maria Ella C. Oplas said she wasn’t surprised that the public is prioritizing funds for basic necessities, bringing the loan principal and interest payment at the bottom of their list.

Oplas said it was “normal, considering the situation that we are in right now where we need to prioritize spending for the people and the containment of the pandemic.”

She added that bad loans are only expected to rise.

The Central Bank in May said that the financial system is expected to book P556.6 billion worth of NPLS in 2020 amid the economic downturn. This is equivalent to 5 percent in NPL ratio—the portion of NPL to total loans—which is more than double of what the sector has been dealing with in recent years.

The banking industry might not be able to recover 50 percent to 80 percent, or P278.3 billion to P445.28 billion, of the estimated bad loans, the BSP added.

Expected surge

BSP Governor Benjamin E. Diokno gave assurances that the Philippine financial system can withstand the recent surge in bad loans. After all, he said it was only expected given what the pandemic has caused on the households and businesses.

“We are confident that this [NPL ratio] will remain within manageable level considering the Philippine banking system’s adequate capital and ample provisions to absorb the rise in bad loans,” he told the Businessmirror.

The banking sector’s capitalization reached P2.37 trillion in the first half, which is 7.73 percent higher than P2.2 trillion last year for the same period. Capital adequacy ratio stood at 12.73—better than the regulatory requirement of 10—as of end-june.

Allowance for credit losses of the banking industry, meanwhile, registered at P300.35 billion in the first semester, which is nearly P100 billion more compared to last year, according to latest BSP data.

Double-digit contraction

MAPA agrees that the local banking sector is robust enough to absorb the impact of the pandemic on its loan portfolio.

“I think the Philippine banking system remains formidable given high levels of capitalization and sound metrics,” the ING Bank Manila economist said.

Still, he emphasized that these factors don’t eliminate credit risks.

Should the economy continue to contract in a longer period, Mapa said that even the strongest “defenses may start to show signs of strains.”

“Successive quarters of doubledigit contractions will put additional pressure on banks’ liquidity and capital, especially if cash flows remain frozen,” he explained.

The Philippine economy

plunged into a recession in the first half after registering contraction in GDP for two consecutive quarters. GDP fell by 9 percent on average in the first semester.

Economic growth

COMPARING the situation in 2001, Diokno said that the financial system appears to be doing better still.

The NPL ratio peaked in November that year at 18.66 percent during the Asian financial crisis. In the first year of the new Millennium, the economic growth of the Philippines slowed to 2.9 percent from 4.4 percent the previous year.

Oplas pointed to other countries to emphasize the Philippines’s condition as less worrisome. The DLSU economist said that the country’s current NPL ratio was lower compared to its neighbors. She cited Thailand and Indonesia with and NPL ratio of 3 and India with 9.1. Meanwhile, Vietnam, Malaysia and Singapore recorded NPL ratio below 2.

Valuable times

THE Central Bank has also made it enticing to borrow locally after bringing down the key policy rates. “[W]e note that domestic conditions remain ripe for borrowing given copious amount of excess liquidity and the resultant low interest rate environment,” Mapa explained.

Though the Monetary Board took a pause on policy easing this month for the first time in 2020, the interest rates were still considered low.

The key policy rate was unchanged at 2.25 percent. Interest rates on overnight deposit and lending facilities remained at 1.75 percent and 2.75 percent, respectively.

Apart from this, the Central Bank has already reduced the reserve requirements for universal banks and rural banks. This means that more funding can be allocated to their loan portfolio. BSP said in July that its initiatives to release liquidity into the financial system reached around P1.3 trillion already.

“BSP has helped keep the domestic environment conducive for borrowing activities and now we need to hope consumer and business sentiment can improve and utilize the liquidity on hand,” Mapa said.

Expressed worries

THE government has offered to place a moratorium on payment of loan principal and interest to provide relief at a time when the public is having a hard time to earn money amid the lockdown measures.

The House of Representatives recently approved on third and final reading the proposed P162 billion Bayanihan to Recover as One Act, or the Bayanihan 2, which includes the extension of loan settlement of up to one year for payments falling between March 16 and December 31.

The Bankers Association of the Philippines (BAP) and Fintechalliance.ph both expressed worries over the proposal on grace period, saying this could hurt the financial system.

With this, the organizations proposed to shorten the grace period to 30 days instead.

“We have to ensure the stability and robustness of the banking system in order to help our economy pave the way towards recovery,” BAP Managing Director Benjamin Castillo said.

Fintech Alliance.ph said that a yearlong debt moratorium would not be sustainable for financing and lending companies, as this can reduce available and affordable credit, especially to the unbanked sector which the fintech industry primarily serves.

Diokno also aired his concern that the proposed period on debt moratorium is seen hurting the capitalization of the banks given that its liquidity may be affected as well. He said a “sound banking system” is necessary to maintain affirmations in the Philippines’ credit ratings.

Lessen burden

AFRICA warns that government’s “stingy” response to the pandemic may make the debt situation worse.

He emphasized that what the country needs right now is a bigger-debt-driven response to lessen the burdens of debt in the future.

Africa argued the “meager” Bayanihan 2 will have a minimal effect in moderating the recessionary impact and won’t be enough to promote a strong recovery.

“The government’s stingy response to the pandemic is driven by a fetish with creditworthiness and a fixation that deficits and debt will make our credit ratings worse,” Africa said. “This is misguided.”

He noted that “at the very least, such stinginess means that credit ratings are preserved – and a debt crisis avoided – at the expense of properly addressing the unprecedented health, human and economic crisis at hand.”

“A weak response to the pandemic would make more people sick, unnecessarily delay a return to some kind of economic normalcy, and worsen closures, joblessness, and falling household incomes,” Africa added.

Ibon is proposing a “much more appropriate” P1.6-trillion stimulus package with P80 billion in health interventions, P750 billion in emergency relief for households and P730 billion in enterprise support.

Offered proposals

OFRENEO thinks the government must take several “decisive steps,” including requesting for a debt moratorium from foreign lenders, imposing wealth tax, among others, to address the overall fiscal situation.

Africa, for his part, has since called for restructuring of debt service to development banks and the like and imposing wealth tax, among others, to finance the much-needed stimulus package.

He also agreed with Ofreneo that taxing the wealth of the country’s richest people would be a good move for the government amid the pandemic, adding that the government could raise P240 billion annually from imposing a wealth tax on the richest 50 Filipinos and another P130 billion from collecting higher personal income taxes on the richest 2.5 percent of families.

Apart from this tack, Africa also urged the government to impose a two-tiered corporate income tax (CIT) scheme with lower CIT on micro, small and medium enterprises (MSMES) as this will generate P70 billion in additional revenues.

“The country’s richest and super-rich will easily weather the pandemic whose economic wounds are scarring are borne most heavily by the poor and middle class. This just underscores the rationality of making the country’s tax system more progressive with higher direct taxes on income and wealth,” he said.

Particularly unconscionable

AFRICA and Ofreneo thumbed down the Department of Finance-backed Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, saying this will not help the country in the middle of the pandemic.

While the CREATE bill will immediately cut the CIT rate from the current 30 percent to 25 percent, Ofreneo said this will not entice foreign investments to come into the country while the global economy is in a downturn.

“The IMF [International Monetary Fund] said this is a crisis like no other. You have simultaneous contraction all over the world. And so in the meantime, you are trying to pass a tax law [that is somewhat] surrealistic or bizarre because you are trying to encourage foreign investment that will never come or will come or [if it does come], I don’t know what will be the impact on the economy because it will take one to two years or more before, assuming [the] investment [is] productive, [before it takes] off,” he said.

Africa added that foregoing hundreds of billions in revenue to boost the profits mostly of large firms, not MSMES, is “particularly unconscionable given the huge pandemic response needs of the nation.”

“The best way to manage rising debt and the country’s debt-togdp is to greatly improve revenue generation with a more progressive tax system,” he said.

Another move that the government could take is postponing big-ticket public infrastructure projects under its “Build, Build, Build” program and replacing it with infrastructure projects that would rebuild urban poor communities. He thinks this will have a multiplier effect in terms of job generation and stability of the society, Ofreneo said.

“Prioritize the bridge and road for the poor; poor communities that have unusable pathways.

There should be community centers where people can efficiently resort to,” he said in Filipino.

Postponing big-ticket infrastructure projects is also another way for the government to raise revenues for the stimulus package, added Africa.

Managed debt

FINANCE Assistant Secretary Antonio G. Lambino II said the government ensures that borrowings stay at a “sustainable and responsible level,” arguing that it has shown a strong debt management record over the past three years.

“The Duterte administration’s prudent approach to fiscal and economic management will continue to provide us with solid footing as we confront our economic challenges. This has put us in a much better position than where we were in the 1980s,” he said.

The DOF spokesman also said the state is spending resources on public investments that will yield long-term economic benefits and increase the country’s capacity to service our fiscal obligations.

“In fact, in 2019, we managed to increase our infrastructure investments to 5.4 percent of GDP, or double the average infrastructure spending to GDP for the past 50 years. Infrastructure is among the best public investments in terms of economic impact, as it creates jobs and stimulates economic activity. Completed infrastructure projects uplift the quality of life in their areas and promote even more economic growth. Our public investments have also resulted in concrete improvements for our people,” he said.

According to Lambino, the country achieved the lowest recorded rates of unemployment at 4.5 percent, underemployment at 13 percent and poverty incidence at 16.7 percent at the end of 2019.

“Compare [the latter rate] with 23.5 percent when the President took over in 2016,” he added.

Expected doubling

EVEN if the government expects deficit-to-gdp ratio to more than double to 9.6 percent of GDP this year from 3.4 percent of GDP in 2019 due to lower-than- expected tax collection and increased spending on healthcare and emergency relief, Lambino said the economic team is aiming to keep the deficit at a manageable level as they seek additional borrowings for recovery programs.

A deficit occurs when government’s expenditures exceed its revenues.

Besides, Lambino said the international community has also given their vote of confidence in the country as a credit-worthy economy, proving that the country’s debt situation is indeed manageable.

“Our investment grade credit ratings have been affirmed by Fitch, Moody’s and S&P despite the present economic challenges,” he explained. “These credit ratings have allowed us to access financing from our development partners and the commercial markets at lower interest rates and longer repayment periods.”

According to Lambino, finance officials expanded government expenditures in the first semester of 2020 by 27 percent, compared to the same period last year.

NPAS painful

DIOKNO also emphasized that reforms to keep the banking industry robust have been in place since the Philippines was struck by the Asian financial crisis.

These include putting in place risk management systems and aligning current policies with internationally-recognized standards, Diokno said.

In line with building up the banking system’s defense, the BSP backed the Financial Institutions Strategic Transfer (FIST) Act. This aims to help financial institutions manage their bad debts and other non-performing assets (NPAS) amid the adverse financial impact of the pandemic by selling them to asset management companies.

“NPAS are unproductive assets and keeping them is very costly from a capital management perspective,” Isla Lipana & Co. Assurance Partner Zaldy D. Aguirre said. “The financial impact of holding on to these NPAS can be unbearably painful for banks.”

Selling NPAS to financial institutions strategic transfer corporations can help banks convert them into cash faster, Aguirre added.

He said that proceeds of sale can be allocated for the liquidity reserves and be reinvested in interest-bearing loans or any other income-generating activities.

The House of Representatives approved on third reading the FIST Act in June.

Taking steps

FOR Oplas, allowing businesses to resume operations with strict guidelines and protocol to social distancing can alleviate the debt situation.

“Firms [can then] start producing and the government can now do something other than just spend,” she added.

With more revenue inf lows seen from reopening of businesses, Oplas said the borrowers can be able to meet their payments.

Doing this and keeping healthy monetary and policies in place may help the country weather the Covid-19 pandemic and the measures government institutes to contain it.

Hopefully, these would also ease the heavy debt burden that weighs down the Philippine economy and the actors that carry that weight.

And carry for a long time, indeed.