The Philippines’ lower debt-to-GDP ratio compared to the previous years places it in “better shape” to borrow funds that would bankroll its accelerated spending on infrastructure, human capital and social protection programs under the Duterte administration’s budget proposal for 2017, Finance Secretary Carlos Dominguez III has told senators.

Dominguez pointed out, however, in a Senate finance committee hearing that the government would borrow more from the domestic debt market than from foreign sources.

A borrowing mix that favors foreign sources is usually subject to foreign exchange fluctuations and overly strengthens the value of the peso against the dollar, which adversely affects OFWs and Filipino exporters, he said.

Dominguez likewise said that even with increased public borrowings from domestic sources, the government would not be crowding out private investments needing local capital owing to the excess liquidity in the market.

“We are in a ‘Goldilocks moment’ in the world economy,” Dominguez told senators duringWednesday’s resumption of the two-day presentation by the Development Budget Coordination Center (DBCC) on the 2017 Budget for Real Change before the Senate Committee on Finance.

“The past two administrations have left this new administration in very good financial shape. In fact one of the first questions when I was asked when I came in, ‘Do you have any money in the treasury?’ I said ‘yes, we have sufficient funds.’ And that’s because the last two administrations managed the economy in an excellent way.”

Dominguez said, “We are in a situation where interest rates are low worldwide, and our interest spreads are also at record low due to our past reforms. We also have less risk from foreign exchange borrowings. Our debt has dropped to below 50% of our GDP, and in fact is still falling, so we are in a good position to borrow and spend wisely for our people.”

He said that, if “we don’t take advantage of that, we will be missing out on providing goods and services, public goods and services to our people. It was brought up yesterday, that our borrowing strategy is to borrow more domestically than from foreign sources. There are two problems when you borrow from foreign sources. One is that you are subject to changes in the exchange rate which are not under our control. For instance, if the dollars strengthens against all currencies in the world, as it has been wont to do in the last few years, we will suffer and we have no control over that.”

“Secondly, when we have too much dollars, our pesos strengthens,” he said. “And when your pesos strengthens, two sectors in our society get disadvantaged. One, is the export sector, because our goods become more expensive, and two the sector of the OFWs because when our pesos strengthens they get less pesos for the foreign exchange that they earn.”

The DOF secretary said that as the Central Bank has explained, “our situation is we are awash with pesos. We a have very high liquidity. In fact, the Central Bank keeps on mopping up the excess liquidities, but they would much rather that that excess liquidity be invested in productive activities. So although there is a tendency to crowd out local borrowings, at the moment the risks of doing that are very low. In fact, you can get local loans now at historically low rates.”

“When the Treasury Department floats its treasury bills and bonds, we only pay 1.8% per annum interest,” he added.

A “Goldilocks” event refers to the state of the economy characterized by moderate, stable growth with low interest rates and low inflation, which allows a market-friendly monetary policy.

Dominguez cited the country’s improving debt-to-GDP ratio, which has reduced the outstanding national debt to 44.7% of the GDP by the end of 2015.

“Today, only a third of the national debt is from foreign borrowing compared to almost half in 2009. The foreign debt component of the national debt declined from 15.6% of GDP in end-2015 to 15.3% of GDP in end-June 2016,” Dominguez said.

The government’s policy, he said, “is to source as much of our financing needs from domestic sources.”

He added that the downward trend of debt-interest payments will continue, noting that the end-2015 interest payments for the outstanding national debt declined to 14.7% of revenues.

The lower debt service would help offset the budget deficit target of 3 percent of the GDP, which is only marginally higher than the previous years, Dominguez said.

Dominguez said this slightly higher budget deficit “will translate into substantial infrastructure programs and human capital expenditures next year” and enable our economy to expand programs that would upgrade the skills profile of the country’s labor force.

He stressed during the committee hearing that the “main infrastructure agencies” of the government, such as the Departments of Transportation and of Public Works and Highways, would have to “step up their performance” to improve absorptive capacity and avoid the underspending of the past.

On top of borrowings, the government would also have to institute tax reforms to help fund the accelerated spending on infrastructure, human capital and social protection for the poorest of the poor, Dominguez said.

He said the government’s tax reform program is designed not just to raise revenues but support inclusive growth.

“It must be a revenue package that coheres with the goals of maintaining the sustainability of our debt program, and more importantly, attracting investments, creating meaningful jobs and eradicating poverty,” Dominguez said.

The country, Dominguez pointed out, “is at a critical juncture. The next six years can either continue along the path of high economic growth but high socioeconomic inequality, or chart a different path towards shared prosperity that will uplift all. This is why it is so important to fund the 10-Point Socioeconomic Agenda.”

“The 10-Point Socioeconomic Agenda revolves around the need to maintain sound macroeconomic and fiscal policies, invest in the people, and address the binding constraints to investment and job creation. This is why we need tax reform,” he said.

The revenue erosion from the lowering of income tax rates, Dominguez said, would be offset by reform initiatives that include broadening the tax base, reviewing fiscal incentives, adjusting the fuel excise tax rates that have not been indexed to inflation, imposing taxes on unhealthy food items and eliminating some VAT exemptions.

“Tax reform is needed to achieve the larger goals of the administration and to make sure that everybody feels the country’s growth,” he said.