The Department of Finance (DOF) announced that the national government's interest payments are expected to surge by double digits next year due to refinancing of loans obtained during the pandemic.
Finance Secretary Ralph G. Recto said on Monday, Aug. 5, that the government expects an 11 percent increase in interest payments under the proposed 2025 national budget, from P763.44 billion this year to P848 billion.
Recto attributed this surge in financing costs primarily to the acceleration in outstanding debt, which surged from P7.7 trillion pre-Covid-19 in 2019 to P13.4 trillion post-pandemic.
Moreover, Recto said that borrowing expenses have risen after Covid-19, as central banks globally have hiked interest rates to counteract inflation stemming from various geopolitical tensions abroad.
Despite the increase in interest rates, the finance chief said that government borrowing costs were still reasonable and significantly below the country’s gross domestic product (GDP) expansion.
“In fact, our effective interest rate for next year is only 5.3 percent, which is very cheap considering that the average term of our debt is 7.5 years,” Recto said.
“Moreover, if we remove inflation, our real interest rate is only 2.3 percent, far lower than our expected real GDP growth of 6.5 percent—which means we are on track to outgrow our debt,” he added.
As of June 2024, the national debt had climbed to P15.48 trillion, a seven percent increase from P14.52 trillion in the same period the previous year.
Additionally, it was a marginal rise of 0.8 percent compared to the P15.35 trillion recorded in the prior month.
As central banks begin lowering policy rates, Recto said they are hopeful that starting in the third quarter of 2024, the growth of interest payments would moderate.
“The continuous decline in our debt-to-GDP ratio since the pandemic is one of the reasons why our credit ratings remain high,” Recto said.
He said they are working towards the "Road to A Roadmap" goal, saying “we will try to achieve that status.”
Under the plan, the Philippines should secure an investor-grade sovereign credit rating of "A" from one of the major rating agencies, including Moody’s, Fitch Ratings, S&P Global Ratings, Japan Credit Rating Agency, and Rating and Investment Information.
“And having a high credit rating is a major win for all because this means that we not only have the capacity to pay our debts but can have more access to cheaper financing,” Recto said.
He added, “Not just for us in the government, but also for private businesses that require access to credit to increase their capital, grow operations, and create more jobs."