OF SUBSTANCE AND SPIRIT

Last Monday, some broadsheets reported the Philippines’ external debt hitting a record $118.8 billion at the end of the first quarter 2023. This news must have sent some jitters across the market because the preliminary report on the country’s level of gross international reserves (GIR) placed it at only $100.2 billion. In the past, it was one source of comfort that our foreign exchange reserves exceeded our aggregate external indebtedness. We have gone a long way in establishing external debt sustainability. The level of external debt should not necessarily bother us. Borrowing from external capital markets is one way of financing the budget deficit on the part of government; for the private sector, foreign debt funds infrastructure and manufacturing, among others. In both cases, foreign debt helps produce and sustain economic growth within the broad parameter of fiscal discipline and responsibility. We recall our early days with the then Central Bank of the Philippines under the old man Gregorio S. Licaros. He used to conclude his Central Bank anniversary and Christmas speeches with the story of how he managed to convince the country’s bank creditors to extend the term of our maturing short-term public sector external obligations in 1970 with some new money. At the time, the external debt to GNP ratio climbed from 10 percent in 1965 to 22 percent in 1969. This had to happen because of the extremely expansionary policy during the first term of President Ferdinand E. Marcos supported by short-term foreign borrowings. “Papaano kaming makababayad kung hindi ninyo kami tutulungan?” Licaros would translate in Filipino for more punch his key argument to the banks. That new lease of life came at a great cost. We had to enter into a stabilization program with the International Monetary Fund (IMF). This involved a package of measures including monetary tightening, fiscal restraint, floating of the Philippine peso, FX borrowing from both the Fund and bank creditors to infuse new money for adjustment and growth, and FX debt restructuring including the establishment of a dedicated external debt management office at the central bank. The Foreign Borrowings Act was amended leading to the establishment of the foreign currency deposit system which permitted banks to support FX loans between residents and non-residents. Working out the maturities towards medium- and long-term (MLT) tenors continued to be a challenge through the 1980s and 1990s. By the 1980s, public sector short-term (ST) debt accounted for over half of the total external debt of the Philippines on account of higher oil import bill exacerbated by the accelerated payments schedule by the international oil companies. With a balance of payments crisis, worsening trade balance and dwindling external credit lines, we had to declare a 90-day moratorium in October 1983. No way could we settle the maturing $25 billion external debt. We had no option but to restructure our debt from 1983-92. As in all adjustments, the level and profile of our external debt did not improve overnight. Only by the end of the adjustment period in 1992 that we began to see the maturity structure shaping up. By end-1993, MLT loans accounted for 87 percent compared to only 62 percent at end-1984. The risk of bunching maturities was minimized while growth started to get entrenched following a series of policy and structural reforms to achieve higher growth. The Asian Financial Crisis was a difficult transition to a more resilient growth path and external debt sustainability. The Philippines was relatively served well by its previous external debt restructuring and economic adjustment programs. External debt profile continued to be more resilient. While debt to GDP ratios remained high, various debt ratios exhibited sustained improvements. At the backdrop of this increasing improvement of debt dynamics in the Philippines must be the external debt management framework instituted since the 1970s and the succeeding policy and structural reforms starting 1992 that produced more durable economic growth. Despite the Global Financial Crisis of 2007-2009 and the European debt crisis, the country’s debt ratios continued to improve. Relatively stable interest rates helped a great deal in keeping debt sustainability. In 2006, the BSP prepaid in full all its outstanding obligations with the IMF amounting to over SDR 146 million, two years ahead of schedule. The Philippines shed off its status as a prolonged user of IMF resources, resulting in substantial interest saving. Both the government and some private sector debtors also started to prepay their external obligations. The long journey of the Philippines towards external debt sustainability reached a milestone in 2010. Many of its debt ratios have improved remarkably. Judged with a strong external payments dynamics in 2010, the Philippines began to provide credit to the IMF to help fund the requirements of developing countries in Asia and Africa. This was through the Fund’s Financial Transactions Plan (FTP) and the New Arrangements to Borrow (NAB). Two years later, the BSP pledged $1 billion to the European firewall fund to help stave off the debt crisis from spilling over to emerging markets including the Philippines. This was not lost on the credit rating agencies which began to upgrade our credit rating resulting in tight debt spreads for both the sovereign and private borrowers from the Philippines. Make no mistake, but the country’s level of external debt continues to rise. However, our ability to repay has been multiplied many times over. More important, our ability to make use of borrowed funds to promote growth has stepped up significantly. In 1985, our external debt stood at only $26.4 billion but relative to GDP, it was mind-boggling at 75.5 percent. Our GIR level of $1.1 billion was 38.4 percent of our debt service burden (DSB).  Our DSB to current account (CA) receipt was 34.1 percent. In 1996, before the Asian Financial Crisis, our external debt rose to $40.1 billion or  42.3 percent of GDP. GIR of $11.8 billion to DSB came out to 234.2 percent. DSB to CA declined to 12.3 percent. Last year, our external debt ballooned to $111.3 billion, but only 27.5 percent of our GDP. GIR of $96.1 billion to DSB was up to 1119.7 percent. DSB to CA further declined to 6 percent. The numbers are there to see. The level of our external obligations since 1985 has sustained its rise consistent with the funding requirements of an emerging country with fiscal challenges. However, relative to output, our indebtedness has shrunk considerably. There were periods when indeed our external debt level exceeded our GIR. Yet, our GIR level is many times over our debt service payments. Relative to our CA receipts, our debt service burden has also dropped over the years. But by no means should this be an excuse to go back to the bad old days.