MANILA, Philippines — As debt piled up at a faster rate than first-quarter economic growth, the Philippines’ outstanding bonds as a percentage of gross domestic product (GDP) soared further to 63.5% in March.
The latest data from the Bureau of the Treasury (BTr) on Thursday May 12 showed the latest quarterly debt-to-GDP figure was the highest since 65.7% in 2005.
Earlier on Thursday, the government announced that GDP grew by a better-than-expected 8.3% year-on-year in the January-March period, thanks to further economic reopening, and despite the Omicron push. at the beginning of this year. .
However, outstanding national government debt jumped 17.7% year-on-year to a new high of P12.68 trillion at the end of March after two commercial borrowings through bond issues – one in the domestic and offshore debt markets – before the first quarter ended to finance the national budget.
The stock of national government debt is expected to reach a new high of 13.42 trillion pesos by the end of the year. Even if the economy grew by 7-9% as expected in 2022, the debt-to-GDP ratio – a better measure of a country’s ability to repay its obligations – was still expected to rise to 60.9% of GDP. , from 16-an annual high of 60.5% last year.
The high debt-to-GDP ratio could jeopardize the country’s investment-grade credit ratings, while putting pressure on the government — especially the incoming Marcos Jr. administration — for more fiscal space. close in the context of the protracted COVID-19 pandemic.
Separate BTr data also showed on Thursday that the stock of locally issued government securities – which accounted for the bulk of outstanding domestic debt – at the end of April hit a new record high of 8.64 trillion pesos. . Long-term treasury bills crossed the 8 trillion peso mark for the first time at 8,010 billion pesos, while outstanding treasury bills fell further to 622.6 billion pesos due to maturities. .
In addition, the latest data from the Local Government Finance Bureau (DOF-BLGF) of the Ministry of Finance showed that 13 local government units (LGUs) borrowed 1.8 billion pesos in April to finance their priority projects, mainly projects. infrastructure. In the first four months, a total of 86 LGU borrowers requested a total of 14.6 billion pesos in loans from government financial institutions (GFIs).
In a May 10 report, Oxford Economics Deputy Economist Makoto Tsuchiya and Chief Economist Sian Fenner warned that Marcos Jr’s campaign promise to hand out more cash handouts would lead to expansionary fiscal policy, which which could lead to larger debts as well as budget deficits.
“Marcos faces a delicate balance between sustaining the economic recovery and containing the Philippines’ burgeoning fiscal deficit,” Oxford Economics said.
“Based on the latest budget, we expect it to average 8% of GDP this year, only a modest narrowing from 8.5% in 2021 amid improving incomes thanks to a stronger domestic demand,” added Oxford Economics.
“However, Marcos’ fiscal program is unclear,” Oxford Economics said.
“It could lean towards further fiscal expansion, which could lead to a credit rating downgrade and increased risk aversion for Filipino assets,” Oxford Economics added.
“We expect some policy continuity, including the ‘Build, Build, Build’ infrastructure program, with capital spending worth 981 billion pesos (5% of GDP) planned for this year” , said the think tank.
“This bodes well for the outlook for investment and construction, despite rising construction costs,” he said.
“Marcos also considered introducing more rice subsidies, probably in the form of cash grants that we have already seen this year, to ease the pressure of rising food prices on household incomes,” noted Oxford Economics.
“Beyond that, and the focus on digital infrastructure, the budget agenda is unclear. This will likely leave some companies and investors sitting on the fence until the new cabinet is formed. and that a fiscal policy statement be released, which could take up to seven weeks,” the think tank said.
Oxford Economics said it didn’t help that Marcos Jr. inherited “very limited” fiscal space.
“It’s also possible that Marcos will announce a more expansionary fiscal program than what we currently expect,” he said.
“We expect spending of 23.8% of GDP, or 5.012 trillion pesos this year, only slightly less than indicated by the fiscal year 2022 budget,” said Oxford Economics.
“But the new administration could increase spending on things like more cash handouts to reduce the rising cost of living for households or tax breaks, without any substantial revenue-generating policies or clarity on the way forward. medium-term fiscal consolidation,” he said.
“While additional fiscal spending would support the recovery, it would undoubtedly attract the attention of major rating agencies,” Oxford Economics continued.
“Fitch Ratings already downgraded the outlook for the Philippines to negative in July last year,” he said.
“A possible revision to the outlook by other rating agencies or an outright downgrade of the rating would drive up borrowing costs which have already risen significantly this year, amid tighter global monetary conditions. our projected recovery in domestic demand for this year,” Oxford Economics warned.
The outgoing Duterte administration will hand over to the new government led by Marcos Jr. a comprehensive fiscal consolidation and resource mobilization plan to the next administration to pay off record debts and reduce gaping budget deficits caused by COVID-19.
Various economic officials have said fiscal consolidation could include new or higher taxes, spending cuts in non-priority sectors, as well as drivers of robust GDP growth.
Oxford Economics predicts the debt-to-GDP ratio will peak at 63.8% this year, remaining above and well above the 60% threshold deemed manageable by debt watchers among emerging markets like the Philippines.
“The authorities are betting on a recovery in economic activity to help contain this [debt] metric to 61% by the end of the year,” said Oxford Economics.
“But while we expect growth and revenue collection to improve, we still expect the deficit and overall debt levels to remain at dangerously high levels,” he added.
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