The Philippines’ external debt is rising on account of the expanding list of foreign loans and bond issuances – and there’s more lined up – to finance the response to the COVID-19 pandemic, but the central bank chief said no worries, this is controllable.
Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno has assured the public that the increase in the country’s outstanding foreign debt is reasonable and the government has enough foreign currency to pay for it. He has said that “the impact of these borrowings on key metrics is manageable and sustainable” because with the country’s stable credit rating outlook, the creditors have given “favorable terms.”
“Prior to the COVID-19 pandemic our external debt to GDP ratio was on a downward trajectory. But as of the end of the first quarter 2020, our external debt to GDP ratio was 21.4 percent, one of the lowest among Asian countries,” said
Diokno. Including all public debt – both domestic and foreign – before the health crisis the debt to GDP ratio was less than 40 percent. The internationally recommended debt to GDP threshold of emerging markets is around 60 percent.
Diokno is not worried that more foreign borrowings will translate to a debt dilemma.
“International rating agencies affirm that the Philippines is likely to come out of the pandemic with little economic damage,” he said.
He often cites The Economist’s acknowledgement that the country has “relatively strong financial strength” and this assessment was based on four metrics: Public debt, foreign debt, cost of borrowing, and reserve cover. “It assessed the Philippines as the sixth best among 66 emerging economies, and the first among its Southeast Asian peers,” the BSP chief said.
In a statement last August 13, Diokno said: “Despite foreign borrowings done in the past seven months, the economy continues to have the capability to service its maturing foreign obligations. This is in view of the country’s markedly improved external debt manageability achieved through 20 years of critical structural reforms.”
Diokno also noted that “along with sound economic management, reforms involving industry and foreign exchange liberalization, tax and debt management, and the financial sector have helped strengthen the regulatory environment and the economy’s capacity to absorb shocks.”
As of end-second quarter, the central bank’s Monetary Board has reviewed and approved $6.84 billion or ₱332.69 billion worth of government foreign borrowings to finance its anti-pandemic programs. The foreign borrowings were up 125 percent compared in the previous quarter of $3.8 billion, and also higher than same time in 2019 of $3.04 billion.
“The country’s favorable external debt profile supports the external payments position,” said Diokno. As of end-March 2020, the country’s external debt was at $81.4 billion, about $2.2 billion lower compared to end-December 2019 because of mostly banks’ net repayments.
“It is worth noting that the Philippines’ external debt metrics have steadily improved with the significant decline in the external debt-to-GDP ratio from 59.7 percent in 2005 to 22.2 percent in 2019 and further to 21.4 percent as of end-March 2020,” he said.
As of end-July, the BSP approved $5.6 billion worth of government foreign borrowings that are mostly for the public health crisis. The two biggest was the $2.6-billion loan from the Asian Development Bank and the $1.5-billion loan from the World Bank-International Bank for Reconstruction and Development.
Philippine laws require both the public and private sector to inform the BSP of their foreign borrowing requirements and plans for any given year, for the management of the country’s foreign debt.
The National Government, government agencies and government financial institutions in particular, have to submit all foreign loan proposals for the Monetary Board’s approval-in-principle.
“We are thankful to our development partners for their quick response to our request for concessional financing to meet the urgent needs of the government in containing the spread of COVID-19 and in
extending help to families most affected by the pandemic,” said Diokno.
He said that the BSP “remains steadfast in supporting the National Government’s efforts to ease the impact of the pandemic.”