Diokno: PH won’t go the Sri Lanka way

Despite a borrowing spree to buy vaccines and booster as well as fund programs and projects to rise from the pandemic, the Philippines won’t go the same route as Sri Lanka, which defaulted on its debt, President Marcos’ chief economic manager said Tuesday.

Finance officials also told senators that the profile of the national government’s outstanding debt was manageable as it was mostly composed of long-term obligations, such that the Philippines’ investment-grade credit ratings won’t be affected by the record-high debt pile.

“I can assure you that we will not go the Sri Lanka way,” Finance Secretary Benjamin Diokno said.
Diokno said his predecessor, former finance secretary Carlos Dominguez III, was “very good at making sure that we borrow at the lowest possible rate.”

The share of the Philippines’ public debt to the economy eased to 62.1 percent at the end of the first half as the government borrowed less at the start of this year. The debt-to-gross domestic product (GDP) ratio — said to be the better measure in determining an economy’s capability to repay debts — as of end-June was below the 63.5 percent in the first quarter.

The national government’s outstanding debt, meanwhile, stood at a record P12.79 trillion in June, up 14.6 percent from P11.17 trillion a year ago. However, the national government’s borrowings were nearly halved to P1.07 trillion in the first half, amid a recovering economy which yielded more tax and non-tax revenues.

The Marcos administration plans to gradually lower the public debt ratio to 52.5 percent by 2028. Pre-pandemic, the Philippines’ debt-to-GDP fell to a record-low 39.6 percent in 2019, but massive borrowings to finance assistance to vulnerable households as well as purchases of COVID-19 shots for the free mass vaccination program amid the prolonged pandemic bloated its debts.

This year’s borrowings amounting to P2.2 trillion will further hike the national government’s outstanding debt to a new high of P13.4 trillion in end-2022, with a 17-year-high annual debt-to-GDP ratio of 62 percent.

National Treasurer Rosalia de Leon told senators that of the national government’s first-half borrowings, 69 percent were sourced locally through the issuance of treasury bills and bonds, to mitigate foreign exchange risks as well as take advantage of a liquid domestic financial system.

For the second half, the Bureau of Treasury (BTr) will borrow 80 percent of the financing requirements from the local debt market, De Leon said. By yearend, 75 percent of borrowings should have come from domestic sources, she added.

“Our debt remains eminently sustainable and resilient to external shocks” given “our heavy reliance on domestic financing,” De Leon said, citing that nearly 70 percent of the outstanding obligations were denominated in the Philippine peso. “This has allowed our debt servicing to be less vulnerable to foreign exchange volatilities.”

“Because of our conscious practice of stretching our maturities, our debt portfolio provides sufficient time to expand our revenue base and our economy before principal payments fall due,” De Leon added, citing that the tenors of outstanding debts were mostly medium- (one to 10 years) to long-term (10 years or longer).

“Only 11.1 percent of our debt are on variable interest rate terms, minimizing our exposure to interest-rate resetting in light of the interest rate normalizations observed locally and abroad.”

De Leon said annual borrowings would decline to P2.1 trillion by 2025, with 75 percent sourced locally.

Also, she said the general government (GG) debt — the metric which credit rating agencies monitor for their ratings actions as it netted out intragovernment debt holdings — was expected to remain manageable.

“Our [GG] debt remains below the median of our Asean neighbors and credit rating peers, and can be expected to remain fairly stable at 54.5 percent this year, 54.1 percent in 2023, 54 percent in 2024, and 53.4 percent in 2025.

Last June, the DOF reported that the Philippines’ GG debt rose to 53.5 percent of GDP in 2021, the highest since available historical data starting 2013.

DOF data showed that the GG debt ratio climbed from 34.1 percent of GDP in 2019 pre-pandemic to 48.1 percent in 2020, and then further jumped last year. In terms of actual value, GG debt rose from P6.65 trillion in 2019 to P8.63 trillion in 2020, and increased to a record P10.37 trillion in 2021.

Despite a historic-high GG debt in terms of both value and its share to GDP, analysts at credit rating agencies Moody’s Investors Service, Fitch Ratings, as well as S&P Global Ratings had said they weren’t worried given the Marcos administration’s plan to pursue fiscal consolidation.

Credit ratings are a measure of a government’s creditworthiness. As the stability of state finances was also related to a country’s performance, credit scores serve as a proxy grade for the economy.

Improved ratings would allow the government to demand lower rates when it borrows from lenders, which could translate to lower interest rates for consumers and businesses borrowing from banks using government-issued debt paper as benchmarks for their loans.

The Philippines’ credit rating status remained investment grade despite the prolonged pandemic, although some downgraded their outlook — or the timing of possible upgrades — to “negative” or a short-term deferral. The country currently enjoys investment-grade credit ratings from the top three debt watchers Fitch Ratings, Moody’s, and S&P.