WB warns of growing risks from financial fragility

The Philippines should move to manage its debts in an orderly and timely manner, especially as developing economies are facing increased risks from financial fragility due to the pandemic, according to the World Bank.

In its latest report, the World Bank emphasized how lower-middle income countries like the Philippines have dramatically increased their levels of sovereign debt amid COVID-19.

The Washington-based multilateral lender said these debts need to be proactively managed in an orderly and timely manner.

“The historical track record shows that delays in addressing sovereign debt distress are associated with protracted recessions, high inflation, and fewer resources going to essential sectors like health, education, and social safety nets, with a disproportionate impact on the poor,” the World Bank said.

Last year, the country’s outstanding debt jumped 20 percent to P11.73 trillion, as both domestic and external obligations increased. Such debt levels now account for 60.5 percent of gross domestic product.

As the pandemic resulted in increased debt among many economies, the World Bank said developing countries face growing risks from financial fragility and the need to focus on creating healthier financial sectors.

It noted that debt impairs access to credit, and disproportionately reduces access to finance for low-income households and small businesses.

“The risk is that the economic crisis of inflation and higher interest rates will spread due to financial fragility. Tighter global financial conditions and shallow domestic debt markets in many developing countries are crowding out private investment and dampening the recovery,” World Bank Group president David Malpass said.

The twin health and economic crisis that started in 2020 has resulted in a decline in economic output, increased poverty and jobless rates, and widened inequality, especially among the most vulnerable sectors.

These prompted governments to scale up stimulus packages, which led to higher debt levels.

The Philippines is no exception after it hit a record-high level of debt last year as the government ramped up borrowings to address the health crisis.

In its report, the World Bank also called for the proactive management of distressed loans, highlighting that many households and firms are confronted with unsustainable levels of debt due to lower income and revenue.

The bank said effective insolvency mechanisms can help avoid the risk of long-term debt distress and lending to ‘zombie’ firms that undercut economic recovery.

“Improving insolvency mechanisms, facilitating out-of-court workouts, especially for small businesses, and promoting debt forgiveness can help enable the orderly reduction of private debts,” it said.

Further, the World Bank maintained it is critical to work toward inclusive access to finance to support the recovery from the pandemic.

In low-and-middle income countries, 50 percent of households are unable to sustain basic consumption beyond three months while average businesses only have cash reserves to cover two months of expenses.

“Households and small businesses have been at greatest risk of being cut off from credit, yet access to credit improves the resilience of low-income households and enables small businesses to navigate shutdowns, stay in business, and eventually grow and support the recovery,” the bank said.