PH external debt sustainability is strong – BSP

Published January 4, 2021, 6:30 AM

by Lee C. Chipongian

Debt service burden down 8%

The Philippines will continue to have a strong debt sustainability position and will remain comfortably way below what the Bangko Sentral ng Pilipinas (BSP) considers a danger threshold even as the country borrow more from foreign sources to fund COVID-19 vaccine purchases, other anti-pandemic and health programs.

To date, the government has raised $9.97 billion in budgetary support financing from the Asian Development Bank, the World Bank and the Asian Infrastructure Investment Bank, among others.

Photographer: Paul Yeung/Bloomberg file

About two percent of the $92 billion outstanding external debt as of end-September 2020 is accounted for by National Government (NG) borrowings. In the third quarter alone, the NG borrowed $2.4 billion for COVID-19 pandemic response and to fund various infrastructure development projects.

“We’d like to emphasize that despite the increase in foreign obligations, key external debt ratios remain at comfortable levels,” said BSP Deputy Governor Francisco G. Dakila Jr. The external debt to GDP ratio is at 25.3 percent and NG external debt to GDP ratio is at 13.2 percent as of end-third quarter last year.

“The country remains in a strong position to service foreign obligations in the medium to long term. Moreover the level of NG foreign borrowings goes through the DBCC (Development Budget Coordination Committee) process and is determined based on the approved fiscal program,” said Dakila.

Dakila said the government’s goal is to “land our fiscal deficit to GDP ratio in the middle of our ASEAN neighbors and credit rating peers”. Last December 3, the DBCC approved the revised deficit program for 2020 at 7.6 percent of GDP, narrower than the 9.6 percent of GDP approved in July.

“The DBCC is confident that with more targeted fiscal stimulus program, the debt will be kept at a sustainable and responsible level within the 60 percent international recommended debt threshold by 2022,” said Dakila.

Current and projected ratios point to debt sustainability

Based on BSP data, the country’s debt service ratio and the external debt ratio  — both measures the adequacy of foreign exchange earnings to pay for maturing foreign loans — continue to be on the healthy side and are far from breaking the BSP Early Warning System or EWS on debt sustainability.

The debt service ratio as of end-September 2020 was up at seven percent from same time in 2019 of 6.4 percent with more loans due to pandemic-induced borrowings. The BSP remains confident that the debt service ratio will continue to be well below the 17.46 percent danger threshold based on its EWS on debt sustainability. The current EWS threshold is much lower than the BSP’s threshold 10 years ago of 25.04 percent and the international benchmark’s 20-25 percent limit.

The debt service ratio relates principal and interest payments or the debt service burden to exports of goods and receipts from services and primary income.

As of end-September 2020, the debt service burden fell by 8.14 percent to $5.65 billion from $6.15 billion same time in 2019. Principal payments increased to $3.88 billion from $3.69 billion while interest payments has decreased from $2.46 billion to $1.77 billion.

In the meantime, the solvency indicator which was the external debt ratio or total outstanding debt versus the GDP while it has risen to 25.3 percent from 23.7 percent end-June previous quarter, it was still way below the danger level as per the EWS.

The economy was in a recession as an impact of the health crisis with a GDP that had contracted by 11.5 percent in the third quarter while external debt increased by 5.2 percent quarter-on-quarter to $92 billion as of end-September 2020.

The ratio was far from the BSP’s 68.25 percent threshold under the EWS model for assessing debt sustainability, and this continue to indicate the country’s strong position to service foreign obligations in the medium to long-term. This level also remains one of the lowest as compared to other ASEAN member countries. A decade earlier, the central bank’s EWS threshold for external debt to GDP ratio was 72.45 percent.

On a year-on-year basis, the country’s $92 billion external debt went up by 11.25 as of end-September 2020 from $82.67 billion, mainly because of NG net availments of $5 billion and $2.8 billion transfer of Philippine debt papers from residents to non-residents. The public sector external debt stood at $54.4 billion while private sector debt was at $37.6 billion.

Dakila said the government borrowing program “could be conditioned by the need to address the pandemic in particular, as balanced with the need to keep the country’s good track record of fiscal discipline.”

“We’ve seen the NG debt to GDP ratio has continued to be on the downtrend from over 70 percent (this is full NG debt not just external debt) in 2004 to about 40 percent in 2019, and this came about on the back of prudent cash and debt management supported by steady economic growth,” said the BSP official.

“Now, with the challenging economic environment because of the weakening of fiscal revenue position, and again coupled with the urgent need for funds to respond and recover from the pandemic, the government had to borrow more so that as of end-September, the NG debt to GDP ratio has risen to 51.2 percent (entire Philippine debt, both domestic and external),” said Dakila.