Filipinos brace for debt avalanche

Filipinos are bracing themselves for increasing government debt as the coronavirus unleashes an unprecedented havoc on Philippine society that quickly moved from a health crisis into a full-blown economic recession.

As the country’s coronavirus cases soar, the government also faces another gruelling challenge in raising money for workers’ salaries, as well as expenses related to its operations, plus heightened demand for social support following an economic shutdown.

Never in history has the government had to borrow so much in so short a time this year to raise funds to help ameliorate the plight of its citizens as extended lockdowns closed industries and dislocated livelihoods of so many.

Like an ordinary Filipino who worries every day about being able to pay his bills after losing a job or taken a cut in pay due to the outbreak, the government is also feeling a significant financial pressure today after its revenues saw large declines because of the depressed economy.

As tax collections plummet, the government compensates its lower revenues with increased borrowing.

As of June this year, the government borrowed ₱1.72 trillion, that’s more than double than its ₱840.8 billion borrowings last year, and already exceeded the ₱1.4-trillion financing it originally planned for 2020.

Government debt is not a free lunch, it is always has to be paid and it is paid out of taxes and other forms non-tax revenues.

In the first six months of the year, the government had settled ₱547.347 billion worth of loans, that’s higher by 42.07 percent compared with ₱385.254 billion in the same period last year.

But despite the increased debt servicing, the total outstanding debt of the national government further rose to ₱9.05 trillion at end-June, that’s equivalent to around ₱83,000 debt for every Filipino.

Eighty-three thousand pesos is a jaw-dropping amount for an ordinary Filipino earning a minimum salary of 11,300 a month, but is it already at a risky level for a country once considered among the fastest-growing economies in Asia?

While the total amount of government debt continues to pile up, its share to the country’s economy, as measured by the gross domestic product (GDP), has substantially decreased from as high as 71.6 percent in 2004 to 39.6 percent in 2019.

For investors and economists, the debt-to-GDP ratio, not the total outstanding debt, is the useful tool in gauging the country’s creditworthiness or ability to pay off its debt — a higher ratio indicates a higher risk of default.

But the Philippines is now facing the nation’s worst economic crisis on record because of the coronavirusinduced lockdowns that knocked off around ₱1.5 trillion per month from the local economy.

To mitigate the economic impact of the pandemic, the Duterte administration is planning to borrow more cover the budget and programs aimed at reviving the economy, which contracted by 9.0 percent in the first six-months of this year.

Finance Secretary Carlos G. Dominguez III, the government’s chief economic manager, indicated that the government will need a total of ₱6 trillion worth of borrowings for this year and next year to weather the COVID-19 crisis.

For this reason, the closely watched debt-to-GDP ratio is projected to rise to 53.9 percent by the end of 2020 and 58.3 percent in 2021.

Despite the remarkable rise in debt, the government’s economic team maintained that the ratio will still remain within the 60 percent internationally recommended debt threshold.

The Philippines is on a solid footing even amid the pandemic, thus the three major international credit rating agencies maintained the country’s financially sound investment grade status.

Since the downgrade in July 2005, the Philippines received 25 favorable actions from the debt watchers, bringing the country’s credit rating to “BBB+” or just a single notch below the much coveted A-scale for S&P Global Ratings.

Fitch Ratings and Moody’s Investors Service, meanwhile, both rated the Philippines two notches above minimum investment grade at “BBB” and “Baa2,” respectively.

As of now, the Philippine government demonstrates a very low probability of default and can certainly honor its debt obligations, which are 68 percent held by Filipino creditors and only 32 percent are owed to foreign lenders.

“Debt moratorium has not crossed our mind. It was never entertained or will ever be a part of our crisis response measures,” Dominguez assured.

The finance chief also said the Philippines has the resources to survive the onslaught of COVID-19 using its fiscal and monetary measures.

Several economists have also said the country has macroeconomic fundamentals, with GDP growth averaging 6.4 percent, while the government’s revenue effort or collection from taxes and other sources reached 16.9 percent of GDP in 2019, the highest in 22 years.

The Philippines’ 2019 debt-to-GDP ratio is also very low compared to other economies in the region, where one country’s debt has crept past 80 percent of its economy.

Inflation has also remained low at 2.7 percent in July, which is within the 2020 target of 2.0 to 4.0 percent.