The Philippines’ capability to service its debts has significantly improved, with the government’s outstanding obligations falling below the international benchmark—set at 50 percent of gross domestic product (GDP)—for the first time since the Asian financial crisis.
This was reported by National Treasurer Rosalia de Leon, who said that updated figures showed the government’s outstanding debt, estimated at P5.4 trillion, stood at only 40 percent of GDP at the end of 2012.
It was the first time since the Asian financial crisis in the late 1990s that the Philippine government’s debt-to-GDP ratio fell below 50 percent, which is a known benchmark for manageability.
The figure peaked at 74.4 percent in 2004, when the country was believed to have almost officially hit a fiscal crisis due to revenue collection problems and bloated spending.
Tax reforms, including the increase in the value-added tax rate, were credited for helping reverse the trend of a ballooning debt burden.
“Speaking of government finances, it is indeed a source of strength today,” De Leon said.
She added that another encouraging fact was that the government’s foreign currency-denominated debt stood at only 23.6 percent of GDP, which was lower than those of other emerging markets and advanced economies.
She said the manageability of the Philippine government’s debt has made the country less susceptible to external shocks.
“This relatively low level of foreign currency debt has reduced the impact of the volatile peso, which saw a deprecation of 5.6 percent in just a few weeks,” she said.
The peso started the year at the 41-to-a-dollar territory, but now hovers in the 43 level following the recent flight of foreign portfolio funds from emerging markets. The capital flight, which pushed emerging market currencies and stocks down, was blamed on speculation that the US Federal Reserve will soon conclude its stimulus program, thus ending the era of easy money.
Currency depreciation tends to increase a government’s debt in local-currency terms. But in the case of the Philippines, De Leon said, any adverse impact of the peso’s depreciation on government finances was not expected to be significant because foreign debt was less than the domestic obligations and the relatively low foreign currency-denominated debt-to-GDP ratio.
Debt ratios are closely watched economic indicators.
The Philippine government’s much improved fiscal situation compared with how it was in the early 2000s is credited for helping the country obtain investment ratings.
Earlier this year, Fitch Ratings and Standard & Poor’s upgraded their ratings for the Philippines by a notch from BB+ to the minimum investment grade of BBB-.