The Bangko Sentral ng Pilipinas (BSP) remains confident that the country’s external debt numbers and ratios are still at prudent and at comfortable levels despite more borrowings in the past seven months for the COVID-19 pandemic war chest.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno. (Bloomberg) — Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno. (Bloomberg file photo)

Some $6 billion worth of external debt were added to the current debt stock but BSP Governor Benjamin E. Diokno said the recovering economy has the capacity to absorb shocks.

The BSP -- which has a mandate to keep external debt management conducive to economic development and to protect the country’s attractiveness as an investment destination -- is making sure that external debt level will continue to be manageable and not a threat to an already depressed economy. With two quarters of negative GDP, the economy is suffering a pandemic-induced technical recession.

BSP’s job

First of all, all governments must maintain sufficient foreign exchange or other external assets to pay for imports and foreign debts. These foreign exchange or other external assets, also called international reserves, are marketable and could be easily converted from the foreign currency to peso. This is why when the BSP reports gross international reserves (GIR) every month, there is emphasis on import cover which refers to how many months of imports of goods and payment of services and income that the GIR could sustain. The rule-of-thumb is it should be at least three months import cover.

“The BSP is also responsible for maintaining adequate international reserves to help meet the country’s foreign exchange liquidity requirements needed to service external obligations,” said the BSP in its latest annual report for the layman. “It monitors not just the timetable of the maturity of existing foreign exchange obligations, but also the impact of new debt on such timetable. The level of foreign debt is a sensitive issue to some sectors of society. But what is more important is that debts should be used for worthwhile and intended purposes and that they are paid when they fall due.”

The BSP has mechanisms to ensure debt sustainability. This means both the government or public sector, and the corporate or private sector, could not borrow from off-shore sources whenever they want to.

For the central bank, managing external debt goes with the territory of price and financial stability, as well as maintaining monetary stability and convertibility of the peso.

The public and private sectors borrow for funding requirements. The Philippines also has a budget deficit which in August has run up to P40.1 billion with revenues falling by 36.5 percent. Year-to-date, the budget shortfall has ballooned to P740.7 billion. Since with the lockdown and Bayanihan Act which delayed tax collections, the government has more requirement to borrow offshore.

The public sector foreign borrowings are transacted as program loans for general financing while project loans finance specific projects. Bonds and notes in peso or foreign currencies are issued overseas. The latest data from the BSP showed the country’s major creditors as Japan with $15.3 billion, followed by the US with $3.2 billion, The Netherlands with $3.1 billion and the United Kingdom with $2.6 billion. About 34.9 percent are loans from official sources such as multilateral and bilateral creditors, while 33.6 percent are foreign holders of bonds and notes. Another 26.3 percent are owed to foreign banks and other financial institutions.

All external borrowings have to go through the central bank’s Monetary Board for assessment and approval. The BSP review includes how a new foreign loan will affect liquidity and overall external accounts. In other words, the BSP would like to be prepared for the possible impact on economic, monetary and financial system. “Policies on external debt management are aimed at keeping debt service requirements at a level that is within the country’s repayment capacity (for both short-term and long-term) and also includes rendering an opinion on the monetary implications of foreign borrowings,” said the BSP in explaining external debt management.

Under the law (Republic Act No. 4860 or The Foreign Borrowings Act), foreign borrowings will have to be submitted as “foreign borrowings plan” to the BSP for assessment, as well as monitoring. It is part of its analysis on the size of the country’s external debt and its “implications on key economic variables” such as foreign exchange reserves.

The purpose of these safety nets is for the BSP to determine the “possible magnitude of foreign funding requirements”.

These loans will only be detrimental to the economy if there are not enough foreign exchange to service these loans. The Philippines – even with the pandemic – has no problem servicing past loans because the country’s external debt and external debt ratio is one of the lowest compared to other Asian countries. And these are rival countries in terms of credit rating.

“The country’s external debt ratio remains one of the lowest among Asian countries. In fact, credit rating agencies affirmed their confidence in the Philippine economy,” said Diokno.

In February, the International Monetary Fund (IMF), releasing its latest country assessment before the COVID-19 outbreak went global from its origin in Wuhan province, China, noted in the report (2019 Article IV Consultation-Staff Report) that the Philippines’ general government gross debt was still “moderate and sustainable” at 38.9 percent of GDP as of end-2018.

The IMF has projected that the debt-to-GDP ratio will drop to 37.5 percent in 2024 and it is “most vulnerable to a growth shock, followed by real interest rate and primary balance shocks.” As for external debt, it is projected to further decline to 19.1 percent in 2024 but it it could face potential risks from “large depreciation or current account balance deterioration.”

Good credit rating

All of the three big global credit rating agencies S&P Global, Moody’s Investors Service and Fitch Ratings, have retained their stable outlook scores for the Philippines while downgrading 39 countries and 101 countries were rated with negative outlook as of the end of the first semester 2020.

Diokno said the credit watchers’ stable outlook is a “vote of confidence for the country, enabling the Philippines to access funding at favorable rates, even during this challenging time.”

It’s not only the manageable debt, but also the relatively financeable external accounts, benign inflation and a resilient banking system that makes the Philippines receive favorable credit ratings.

In July, Moody’s affirmed the country’s “Baa2” ratings and stable outlook. A stable outlook means an “absence of factors that could trigger rating adjustment in the near term”. One of the reasons for the stable outlook is the government’s buffer against an increasing public indebtedness and shocks such as the health crisis.

Earlier in May, Fitch and S&P each likewise affirmed its “BBB” and “BBB+” and both also have stable outlook for the Philippines.

In June, in the middle of the pandemic, the country received its first “A-” rating from Japan Credit Rating Agency (JCR), telling Japanese investors it’s alright to invest in the Philippines. JCR noted the country’s manageable external debt balance and the healthy stock of foreign assets as reserves.

What all these favorable credit rating implies is that the government has access to funds that have low interest rates that not all sovereigns enjoy during the pandemic. A low borrowing rate frees up more funds for the government to spend for other things, such as its anti-pandemic programs.

Moody’s have cited the improving fiscal metrics and the government’s debt as a percent of GDP which has fallen from 50.2 percent in 2010 to 39.6 percent in 2019, and these are all outstanding debt, not just external. External debt to GDP in 2019 was kept low at 22.2 percent.

According to Moody’s, the country’s “reserve coverage of external debt and external debt servicing will remain ample and continue to be much stronger than similarly rated emerging market peers, while providing insulation from sudden shifts in global liquidity conditions and capital flow volatility. Combined with a robust banking system, this results in low government liquidity risks, reflected in stable access to funding at moderate cost.”

Manageable external debt

BSP is not alone in its job of watching out for external debt numbers, it’s a duty shared with other agencies. “We share this responsibility of managing public sector debt with the Department of Finance, the Development Budget and Coordination Committee and the Investment Coordination Committee,” said Diokno.

Diokno said that even with more foreign borrowings, the economy “continues to have the capability to service its maturing foreign obligations” and he credits this improved external debt manageability from the “20 years of critical structural reforms” that includes foreign exchange liberalization, tax and debt management.

As of end-June, total outstanding external debt – which are all borrowings by Philippine residents from non-residents -- increased to $87.5 billion, higher by $6 billion compared to end-March, and up by $6.2 billion than same time in 2019.

Diokno said that despite the higher debt level, mostly because of additional borrowings to fund the COVID-19 pandemic response, key external debt indicators were still at prudent levels. Plus, with the country’s foreign assets nearing $100 billion by end-August, there are sufficient reserves and foreign exchange earnings to pay for foreign debts when they become due, about nine months’ worth of imports of goods and payments of services and primary income.

As of end-June, the debt service ratio was slightly up at 7.8 percent from 7.7 percent same period in 2019 but the good news is that the ratio has been kept at single-digit levels. In the meantime, external debt to GDP went up to 23.7 percent from 21.4 percent end-March.

According to the BSP, this debt to GDP ratio “indicates the country’s sustained strong position to service foreign borrowings in the medium to long-term” and at this GDP ratio the Philippines “remains one of the lowest as compared to other ASEAN member countries.”

Simply put, current debt ratios showed the Philippines’ comfortable position to meet maturing obligations. Before the pandemic, the country was in a strong position to pay for its foreign debts while sustaining the economic growth path.

Also, the BSP has liberalized foreign exchange regulation and it has become easier to transact in foreign currencies. These changes to the foreign exchange rules “boost resilience against external shocks,” said the BSP. The streamlining of how foreign exchange enters and leave the country has also helped the central bank improve how it records external debt database.

To improve coverage, the BSP revised the way it compile and assess external debt data in 2015. The new reporting aligned the country’s debt statistics with the changes in the BSP foreign exchange transactions. The revisions also increased the debt levels and debt ratios.

The IMF said earlier this year that external debt is “deemed sustainable”. Even its predicted external debt-to-GDP ratio which it said will fall to 19.1 percent in 2024 from 23.9 percent in 2018 is “conservative” since “debt dynamics appear resilient to various shocks including to interest rates, growth, and the current account.”

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