DEBT SPECTER HOUNDS NEXT CEO OF THE LAND

As debt piled up at a faster pace than first-quarter economic growth, the Philippines’ outstanding obligations as a share of gross domestic product (GDP) further climbed to 63.5 percent as of March.

The latest Bureau of the Treasury (BTr) data showed that the latest quarterly debtto-GDP figure was the highest since 2005, when the ratio was at 65.7 percent.

The government earlier reported that GDP grew by a better-than-expected 8.3 percent year-on-year during the January-to-March period on the back of further economic reopening, and notwithstanding the Omicron surge at the start of this year. However, the national government’s outstanding debt jumped 17.7 percent year-on-year to a new high of P12.68 trillion as of end-March following two commercial borrowings through bond issuances—one each in the domestic and offshore debt markets—to finance the national budget before the quarter’s end.

The national government’s outstanding debt was expected to climb to a new record-high of P13.42 trillion by this year’s end.

Even if the economy could grow by 7-9 percent as targeted in 2022, the debt-to-GDP ratio—a better measure of a country’s capacity to repay its obligations—had been projected to further rise to 60.9 percent of GDP, from the 16-yearhigh 60.5 percent last year.

The elevated debt-to-GDP level is seen to put the country’s investment-grade credit ratings at risk, leaving the incoming Marcos Jr. administration with narrower fiscal space amid the prolonged COVID-19 pandemic.

Separate BTr data showed that the outstanding locally issued government securities— which accounted for the bulk of the domestic debt stock—as of end-April climbed to a fresh record-high of P8.64 trillion. Long-dated Treasury bonds breached the P8-trillion mark for the first time to P8.01 trillion, while outstanding Treasury bills further dropped to P622.6 billion due to maturities.

Also, the latest data from the Department of Finance’s Bureau of Local Government Finance showed that 13 local government units (LGUs) had borrowed P1.8 billion in April to bankroll their priority projects, mostly infrastructure. During the first four months, a total of 86 LGUs sought a combined P14.6 billion in loans from government financial institutions.

‘Tricky balancing act’

In a May 10 report, Oxford Economics assistant economist Makoto Tsuchiya and lead economist Sian Fenner warned that presumptive President Ferdinand Marcos Jr.’s campaign promise to extend more dole outs would result in expansionary fiscal policy, which could lead to bigger debts as well as budget deficits.

“Marcos faces a tricky balancing act between supporting the economic recovery and containing the Philippines’ burgeoning fiscal deficit. Based on the latest budget, we expect it to average 8 percent of GDP this year, only a modest narrowing from 8.5 percent in 2021 amid some improvement in revenues on the back of stronger domestic demand,” Oxford Economics said.

“However, Marcos’ fiscal agenda is unclear. He may lean toward further fiscal expansion, which could lead to credit ratings downgrades and increased risk aversion for Philippine assets,” Oxford Economics added.

“We do expect some policy continuity including the ‘Build, Build, Build’ infrastructure program, with capital outlays worth P981 billion (5 percent of GDP) penciled in for this year. This bodes well for the investment and construction outlook, despite the rising costs of construction. Marcos has also discussed introducing more rice subsidies, likely in the form of the cash handouts we have seen already this year, to mitigate the squeeze of higher food prices on household incomes,” Oxford Economics noted. “Beyond this, and some emphasis on digital infrastructure, the fiscal agenda is unclear. This is likely to leave some businesses and investors sitting on the fence until the new Cabinet is formed and a statement on fiscal policy is delivered, which could take up to seven weeks.”

It did not help that the Marcos administration would inherit a “very limited” fiscal space, the economists said. They see a possibility that Marcos will take on a more expansionary fiscal agenda.

Oxford Economics anticipates spending of 23.8 percent of GDP, or P5.012 trillion this year—only marginally less than the fiscal year 2022 budget. It added that the new administration could increase spending on items such as more cash handouts to reduce the rising cost of living facing households or offer tax relief without any substantial revenue- generating policies or clarity over the path of medium-term fiscal consolidation.

“While the additional fiscal spending would support the recovery, it would undoubtedly catch the attention of the major rating agencies,” it said.

Fitch Ratings already lowered the Philippines outlook to negative in July last year. A possible outlook revision by other rating agencies or an outright rating downgrade is seen to push up borrowing costs that have already risen significantly this year, amid tighter global monetary conditions, weighing on projected recovery in domestic demand for this year.

The outgoing administration will turn over a comprehensive fiscal consolidation and resource mobilization to pay for ballooning debts and narrow the yawning budget deficits.

Oxford Economics projected the debt-to-GDP ratio to peak at 63.8 percent this year—still beyond the 60-percent threshold deemed by debt watchers as manageable for emerging markets.