The Philippines has maintained its strong fiscal position under the Duterte administration by ensuring that the government can always afford to pay its foreign borrowings, which have proven to be an effective tool for productive spending to drive economic growth and ensure immediate funding for emergencies, such as the current COVID-19 crisis, Finance Secretary Carlos Dominguez III has said.
Dominguez said government borrowings used for such productive investments as infrastructure projects that spur growth and create jobs instead of for debt servicing, are beneficial, rather than a burden, to economic development.
Foreign borrowings to help fund the country’s unplanned expenditures for its COVID-19 response were also well spent to provide emergency assistance to vulnerable families and other pandemic-hit sectors of the economy; boost the country’s healthcare capacity; keep the economy afloat and support its quick recovery, Dominguez said.
Through prudent fiscal management, Dominguez said the country was able to pull down its borrowing costs during the Duterte administration, as shown by the ratio of debt interest payments to expenditures, which dropped to 9.5 percent in 2019 from 13.9 percent before President Duterte assumed office in 2016.
The ratio of debt interest payments to revenue also significantly dropped to only 11.5 percent in 2019 from 14.7 percent in 2015, he added.
According to the International Finance Group (IFG) of the Department of Finance (DOF), the Philippines’ outstanding external debt is only 25.2 percent of the country’s Gross National Income or GNI (this covers all income earned by a country’s people and businesses), which means that it is in a strong position to service foreign borrowings in the medium- to long-term.
Optimal level of GIR can easily cover external repayments
Compared with its regional peers, the Philippines’ gross international reserves (GIR) as a percentage of its total external debt has historically performed relatively at par with the region’s average, excluding high-income countries, Dominguez said.
As of end-2020, the Philippines’ GIR stood at US$110.12 billion, an amount that can easily cover its short-term debt 7.8 times over.
“Moreover, external repayments can be easily met, given the sustained healthy level of GIR at 15.6 times the country’s debt service burden in 2020,” Dominguez said.
Dominguez said this sound and prudent management of the country’s GIR ensures that the government can service its external debt obligations and absorb shocks during any crisis.
“Sound and prudent reserve management also creates a level of confidence in markets that the Philippines can meet its external obligations. This high level of confidence is reflected in the Philippines’ high credit ratings, which has remained unchanged amid the series of rating downgrades and negative rating outlooks in 2020 as a result of the global economic upheaval triggered by the COVID-19 pandemic,” Dominguez said.
The Japan-based Rating and Investment Information Inc. (R&I) has recently kept its “BBB+” credit rating with a stable outlook for the Philippines, citing the country’s robust post-pandemic growth prospects.
In January this year, Fitch Ratings affirmed the Philippines’ “BBB” rating and stable outlook on the back of its modest government debt levels, robust external buffers and strong medium-term growth prospects at the height of the COVID-19-induced crisis.
Moody’s Investors Service kept its “Baa2” rating with a stable outlook for the Philippines on July 16, 2020, while the Japan Credit Rating Agency upgraded the country’s credit rating by a notch in June 11 last year from BBB+ to A-, citing the country’s resilience amid the COVID-19 pandemic.
“These credit rating upgrades and affirmations are a testament of the administration’s solid reforms and prudent public financial management amidst the pandemic.” Dominguez said.
PHL’s reserve adequacy at par with Thailand
He noted that the Philippines’ GIR has steadily risen since President Duterte took office, from US$80.69 billion in 2o16 to US$110.12 billion in 2020.
As a percentage of its gross domestic product (GDP), the Philippines’ GIR is far better than Indonesia’s and next to Thailand’s, according to the DOF-IFG.
Based on an evaluation tool developed by the International Monetary Fund (IMF) to assess the reserve adequacy of countries, Thailand had the highest GIR as a percentage of GDP at 47.86 percent in 2020, followed by the Philippines’ at 28.88 percent. Indonesia came last among its regional peers, with a GIR-to-GDP ratio of only 12.27 percent.
This evaluation tool considers several factors specific to a country’s economy, such as financial maturity, economic flexibility, and market access.
Another IMF tool—the Assessment Reserve Adequacy (ARA) Emerging Markets (EM) Metric—shows that the Philippines and Thailand are almost at par in terms of reserve adequacy.
The ARA EM Metric covers the potential loss of export income, the risk of resident outflows (broad money), rollover risks (short-term debt), and the risk of non-resident equity and other liabilities.
Thailand’s reserves as percentage of the ARA EM Metric was 252 percent, while the Philippines was at 237 percent in 2020.
The country’s outstanding external debt stood at US$98.5 billion as of end-2020, of which US$51.9 billion were National Government (NG) borrowings while US$6.3 billion were loans of government-owned and -controlled corporations (GOCCs), government financial institutions (GFIs) and the Bangko Sentral ng Pilipinas (BSP).
Private sector external debt amounting to US$40.4 billion accounted for the remaining 41 percent of the total external debt.
In terms of maturity, foreign currency requirements for debt payments continued to be manageable, with the weighted average maturity for all medium- to long-term (MLT) accounts at 16.6 years, with public sector borrowings having a longer average term of 20.4 years compared to 7.3 years for the private sector, the DOF-IFG said.
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