Gov’t may expect continuing decline in debt payments

The decline in the amount of money that the government has earmarked for debt servicing will continue in 2014 despite the adverse effects of a weakening peso, according to the head of the budget department.

Budget Secretary Florencio Abad told reporters that strategies initiated over the past few years to better manage the government’s liabilities would help temper the impact of the peso’s depreciation on debt servicing.

“The liability management strategies the government implemented in the past would prove to be an advantage now [when the peso has weakened],” Abad said.

He cited the government’s move to prepay some of its foreign obligations, when the peso was stronger, and its decision to borrow more from domestic, rather than foreign, creditors in order to reduce the country’s exposure to foreign exchange risks.

Under this year’s national budget, the government has set aside P352.65 billion to pay for interest on the state’s outstanding debt.

That amount represents 15.6 percent of the P2.265-trillion national budget for 2014, marking a decline in the proportion of the budget set aside for debt servicing.

Since 2010, the proportion of the national budget allotted for interest payments has been declining. When President Aquino took over the reins of the country that year, interest payments accounted for 22 percent of the national budget. The share continued to fall until it hit only 16.6 percent of the budget in 2013.

Economic officials aim to further trim the figure, which they hope will settle at 12 percent by the end of the Aquino administration in 2016.

A declining share of resources set aside for interest payments means that more resources may be channeled to infrastructure, social services and other vital expenditures.

But some critics are saying that the government may not be able to sustain the decline in the amount earmarked for debt servicing because of the weakening peso, which now hovers at 45:$1.

A depreciation of the peso increases the value, in local currency terms, of the government’s dollar-denominated debt. This means, without other intervening factors, the government may have to spend more on interest payments this year than it originally programmed.

Based on government estimates, the cost of interest payments rises by about P2 billion for every peso unit appreciation against the US dollar.

The peso’s movement to the 45-to-a-dollar territory was weaker than the exchange rate assumption the government used in setting its expenditure programs for this year. It originally set the range between 41 and 44 to a dollar.

But Abad said liability management strategies initiated previously would help offset the adverse impact of a weakening peso on debt servicing.

His claim was backed by National Treasurer Rosalia de Leon, who said certain factors could ease the impact of the peso’s weakness on debt servicing.

Interest payments are part of the government’s national budget. Principal debts are paid using proceeds from fresh loans.