Purisima: By virtually any sensible measure, we are much better off today than we were 6, or even 18 years ago

Using nominal figures to talk about debt is as misguided as it is disingenuously detrimental to the quality of public discourse on public finance.

The operative term in talking about debt is sustainability—or the ability to pay back the borrowed money. Thus, the important measurement is debt as a percentage of GDP. During the Aquino administration, fiscal consolidation has led to a well-managed deficit which eased financing requirements, translating to lower growth in national government liabilities compared with the size of the economy.

In this regard, let me give you the facts that matter: debt as a percentage of GDP is at 44.8% as of end-2015, the lowest since at least 1996—the earliest year with comparable data—and significantly narrower than the 54.8% recorded in 2009. In fact, for the first time since the early 80s, the debt-to-GDP ratio fell below 50.0% in 2013–a far cry from the year 2004, when the ratio was at a high of 74.4%.

To give some context, debt-to-GDP ratio of the United States stood at 96.1% in 2013, and 196.0% for Japan last 2012. Germany, widely renowned as a champion of austerity, has 55.1% as of 2012.

Should national debt include those held by the social security institutions and local government units, general government debt to GDP ratio stood at 36.4% in 2014 (latest available full year data)—a 7.9 percentage point (ppt) drop from the 44.3% in 2009 and likewise the lowest since earliest comparable data in 1998.

Should debt include government owned and controlled corporations and financial institutions (GOCCs and GFIs), Outstanding Public Sector Debt stands at 55.8% as of end-September 2015, the lowest ratio ever for the earliest comparable period of 1998. This is a 15.1 ppt improvement from the 70.9% posted in 2009, and is worlds apart from when it was at its peak in 2003, at 111.6%.

Prudent liability management has caused interest payments as a percentage of expenditures to fall to 14.5% for January-November 2015, compared with the 19.3% being spent in 2009. As a percentage of the total budget, the ratio was at 11.1% for 2015, in contrast with 19.1% in 2010. These savings imply that we have more fiscal room to spend on more productive investments in our land and people, such as infrastructure, health, education, and social services expenditures.

A heavy, healthy bias towards domestic borrowing has a double-edged effect: deepening domestic bond markets while boosting our resiliency against external volatility. In 2015, domestic debt as a percentage of the total debt stock was at 65.2% while foreign debt’s share stood at 34.8%–a marked comparison to 2010 when it the mix was at 57.6%-42.4%. In terms of sustainability, total foreign debt as of 2015 only amounted to 15.6% of GDP, compared to 24.0% in 2009. The ratio posted in 2014, at 15.1%, was the lowest in comparable history.

By virtually any sensible measure–that is to say, on indicators that matter–we are much better off today than we were 6, or even 18 years ago with the earliest comparable annual debt data.

It is important to understand that the concept of “debt” for an individual person is vastly different for those of governments or corporations. Governments and private corporations alike maintain a healthy level of debt not only to help develop the capital markets, but to finance future growth. Both the private and public sectors fund operations in two ways: revenues earned or through borrowings including the issuance of debt securities such bonds (i.e., negotiable instruments that are simply promises to pay).

In our case, our budget provides for education, health, social services, and investment in infrastructure, among others, which, not only provides for the current needs of the people but also enhances the productive capacity and long term potential growth of the economy. Relying solely on the current level of revenue generation to finance the budget creates a dangerous restraint to growth, is uncommon (there are only 5 countries in the world without debt), and ultimately unwise for most. This provides the impetus for maintaining a sustainable deficit and manageable growth in debt. Debt, when managed strategically, actually creates a form of savings, allowing the country or corporation to expand and do more beyond the limits of its revenue stream.

Furthermore, government spending, if channeled productively, creates a feedback mechanism to growth. The IMF projected that government expenditures’ fiscal multiplier is at 1.6, meaning the government gets back 1.6x of what it spends. In this context, especially when the cost of borrowing is lower than the cost of raising revenues through raising taxes, it is counterintuitively imperative for countries to maintain a good level of debt to profit from borrowed money.

For example, private companies can find that their investments in capital expenditures for future growth is of more value than the cost of the debt incurred. In the case of the government—investing in future growth through a healthy mix of both revenues and debt is even infinitely more profitable—when the funds are invested in the sectors that generate jobs or improve human development on an intergenerational capacity.

Not incurring good debt as a means to augment funding capacity would mean only either one of two things: a severe cut-back of critical public goods and services our people need, or a severe increase in taxes. Neither of them is an option for the Philippines, or any country for that matter. This is simpler than economics: common sense that critics have perhaps conveniently chosen to ignore.

The government is fully committed to our proactive liability management strategy to fund the Republic in the most cost-effective way possible. Just last 18 February 2016, the Treasury completed its global bonds issuance—fetching a rate of 3.70%–the lowest coupon ever issued by the Republic of the Philippines to date on a global bond.

Through the Treasury, we have now institutionalized debt and risk management systems, including the use of debt sustainability analysis as well as watchfulness of debt capacity and vulnerability ratios as we formulate our borrowing program. The significant gains we have achieved in the management of our debt position have been clearly recognized by all major credit rating agencies which have elevated the country’s credit rating to investment grade—24 positive credit ratings actions in fact—making the Philippines the world’s most upgraded sovereign in the past 5 years.

Aside from managing the growth of its liabilities, the Government has also been proactively shifting the profile of its outstanding debt to better mitigate risks emanating from its portfolio:
The interest structure of the NG debt portfolio ensures minimal exposure to adverse swings in the interest rate environment. Only 8.03% of the total debt portfolio pays floating-interest rate, limiting the scope for possible interest payment escalation in the event of tighter borrowing conditions in the financial markets.
Average residual maturity remains at a very comfortable level. The average maturity of the debt portfolio was maintained at 10.04 years, residing on the upper bound of the country’s medium-term debt target of 7 to 10 years. Broken down, domestic and external debt have remaining maturities of 9.16 and 11.86 years, respectively.
The distribution of principal obligations is also smooth across the life of the portfolio, with no bunching up in any given year. Only 11.1% of the total outstanding debt will be redeemed within the next 12 months, while the rest are spread out such that no year will have a redemption requirement exceeding P500 billion.
At the same time, the percentage of the budget spending allocated for interest payments has decreased from 29% in 2004 to just 16% in 2014 (2015 data yet to be released), echoing the reduction in the WAIR and proving the effectiveness of liability management transactions that target interest service reduction such as bond exchange deals.
This election season, an empowered citizenry must be more vigilant than ever against politicized red herrings. Blurring facts and misappropriating the implications of figures will not get us moving forward.