Rising debt, return of ‘twin deficits’ complicate PH journey to recovery

MANILA, Philippines — Dutch financial giant ING sees a “challenging and complicated” path to economic recovery for the Philippines due to the less optimistic outlook of credit-rating agencies on the country’s ballooning debt, wider fiscal deficit and the return to a current-account deficit.

In a July 13 report, ING Philippines senior economist Nicholas Mapa estimated the debt-to-gross domestic product (GDP) ratio—which reflected an economy’s capacity to pay its obligations—to have further risen to 62.1 percent as of May, alongside the climb in the national government’s outstanding debt stock to P11.07 trillion.

The latest official government data placed debt-to-GDP at a 16-year high of 60.4 percent as of end-March, breaching what debt watchers considered as the manageable public debt threshold of 60 percent. But Finance Secretary Carlos Dominguez III last month said the end-2021 ratio would settle at 58.7 percent of GDP, higher than the 54.6 percent last year and the record-low 39.6 percent in 2019.

Cut in growth forecast

On top of rising debt-to-GDP, Mapa said the return of “twin deficits”—the bigger budget deficit and the revert to a current-account deficit will slow economic growth this year to a dismal 4.7 percent, below the government’s downscaled 6-7 percent target range.

“The economic recovery remains challenging and could be further complicated by the return of twin deficits as we move into the second half of the year,” Mapa said.

In the case of the current-account deficit, Mapa said this might be blamed on “the spirited push by authorities to reopen the economy.”

Mapa noted that the 19.5-percent imports decline posted last year when GDP fell by a record 9.6 percent showed a “stark” drop in capital goods and raw materials needed for capital formation and investments.

As the domestic economy gradually reopened and global trade ramped up, imports surged faster than exports—the latest government data showed goods from abroad jumped 47.7 percent year-on-year to $8.6 billion in May, outpacing the 29.8-percent climb in sales of Philippine-made products worth $5.9 billion.

Peso weakening

The wider trade-in-goods deficit caused by surging imports was expected to also widen the current account and weaken the peso, which happened last week when it breached the 50:$1 level.

“The reopening of the economy and the pickup in import demand may have already begun to exert pressure on the peso, with the currency reeling by 1.98 percent in July. A combination of corporate demand and financial outflows triggered by the recent ruling by the global money-laundering watchdog Financial Action Task Force’s has sparked the recent peso swoon, and a sustained pickup in import demand in the coming months will translate to a wider current-account deficit and further pressure on the peso,” Mapa said.

For Mapa, the larger budget deficit programmed at 9.4 percent of GDP this year, from 7.5 percent last year, could also raise alarm bells from credit-rating agencies.

“Wider monthly budget deficits pushed the overall debt-to-GDP ratio to 62 percent as of May 2021, with authorities banking on a pickup in economic activity to help bring down this metric under 60 percent by year-end. With the fiscal position challenged, it’s no surprise that authorities have been actively curtailing expenditures to limit the impact on the 2021 budget deficit to lower the debt ratio ultimately,” he said.

“One example of this spartan strategy was the modest 9.5-percent increase in the 2021 national budget with finance officials preaching the importance of prudence to ensure long-term fiscal viability. Secondly, the budget allocated for the two 2020 stimulus packages was not fully utilized, with unspent funds returning to government coffers to augment the current budget deficit of 9 percent of GDP recorded last March. Lastly, officials have not supported numerous legislative bills filed by Congress for a third stimulus package, citing a lack of funding sources. Overall, government spending is up by a modest 8.8 percent for the year (as of May), with authorities indicating spending will likely decelerate in the second half of the year,” he added.

Mapa noted that “authorities have been quick to downplay the current elevated levels of both the country’s deficit and total debt,” citing a statement of Dominguez, who heads President Duterte’s economic team, that “fiscal metrics will improve in the near term as soon as revenue streams normalize and the economy begins to recover.”

“However, since we forecast growth and revenue collections to stay modest in the near term, we expect both the deficit and overall debt levels to remain at dangerously elevated levels. Lackluster growth and a widening deficit could result in the overall debt-to-GDP ratio staying above 60 percent by end-2021 — a development that has undoubtedly caught the attention of at least one major rating agency, with Fitch [Ratings] downgrading the Philippines’ outlook to negative,” Mapa said.

“A possible credit outlook revision or an outright downgrade will be detrimental to the country’s recovery fortunes with borrowing costs for the already cash-strapped economy moving higher,” Mapa added.