Public debt seen peaking at 58% of GDP

The country’s public debt stock may further balloon and peak at 57.7 percent of total economic output by 2022, but this is justified by the need for massive stimulus during this prolonged coronavirus pandemic, think tank Fitch Solutions said.

In a June 10 research note, the UK-based research firm said disruptions from the pandemic would likely drag down government revenues in 2021 and jack up expenditures over the coming quarters.

As such, it expects the government’s fiscal deficit to remain high at 7.7 percent of gross domestic product (GDP) this year from 7.6 percent last year with higher spending on COVID-19 support measures. By 2022, the deficit is expected to ease to 6.5 percent of GDP.

Prepandemic fiscal deficit stood at only 3.4 percent of GDP in 2019.

To cover its budget shortfall, the government turns to more borrowings, which will likely widen public debt.

“That said, we do not view such stimulus as a risk to the near-term public debt outlook and anticipate fiscal consolidation over the coming years,” Fitch Solutions said.

Rising headwinds in the longer term will likely prompt policymakers to start narrowing the fiscal deficit over the medium term and containing further growth in public debt, the research said.

Before the pandemic, the government had been able to trim the public debt ratio from 52.4 percent of GDP in 2010 to 39.6 percent by 2019. Fitch Solutions expects the public debt ratio to decline albeit on a gradual pace due to three long-term challenges confronting the Philippines economy: meeting domestic energy needs; creating employment opportunities for the growing population, and addressing the country’s infrastructure deficit.

The think tank believes that the rise in public indebtedness in the near term would be warranted given the weak economic backdrop. This is in turn seen to pose limited risks to the Philippines’ public debt profile which Fitch Solutions said remained “well-managed.”

Alongside the increase in public debt to GDP given the wider fiscal deficit and sharp economic recession, Fitch Solutions noted that the share of Philippine short-term public debt had risen during the pandemic, from 6.4 percent in 2019 to 9.8 percent in 2020. The share of externally held and foreign-denominated debt, meanwhile, has fallen from 33.7 percent and 32.3 percent in 2019 to 31.7 percent and 30.6 percent in 2020. “The pandemic has led to a sharp drop in domestic demand and investments, thus the need for fiscal stimulus has been significant. Given that we have yet to see any demand-side inflationary pressures occurring as a result of existing stimulus, stimulus spending can and will still continue,” the research said.

Fitch Solutions noted that the real GDP contraction of 9.6 percent last year reflected the magnitude of the effect of lockdown measures and pandemic-related uncertainty on the economy.

“With the Philippines still facing waves of outbreaks and its relatively slow pace of vaccinations—1.4 percent of the population has been fully vaccinated as of June 6, compared to the global average of 5.9 percent—we believe the economy will continue to need fiscal support through 2021 and 2022,” the research said.

Fitch Solutions expects revenues to rebound in 2021 and expenditure to pick up pace over the coming quarters as the government looks to support the economic recovery. As the economy rebounds more strongly with real GDP growing by 6.5 percent in 2022, it said revenue growth would strengthen as well, expanding by 16 percent. —Doris Dumlao-Abadilla INQ