PH debt level to remain sustainable — World Bank

The Philippines’ debt levels are expected to remain sustainable in the medium term, the World Bank said.

“The National Government debt ratio is projected to decline over the forecast horizon, reaching around 60% of GDP by 2025, although financing needs remain elevated compared to pre-pandemic levels,” the bank said in its latest Philippine Economic Update.

“However, debt is set to remain sustainable, as the debt-to-GDP ratio is expected to revert to a downward trajectory beginning in 2023 due to fiscal consolidation and robust growth,” it added.

The National Government (NG) debt as a share of gross domestic product (GDP) stood at 60.2% at the end of the third quarter, data from the Treasury showed.

This was lower than 61% at the end of the second quarter and the 63.6% posted a year ago.

However, it is still slightly above the 60% threshold considered by multilateral lenders to be manageable for developing economies.

The Philippine government is targeting to bring down its debt-to-GDP ratio to below 60% by 2025.

“Currently, the country’s financial system may still be relatively deep enough to accommodate the large financing needs, although excess liquidity may diminish over the medium term,” the World Bank said.

“Moreover, the composition of debt is expected to remain stable, with low shares of short-term debt and foreign currency-denominated debt, in line with the government’s debt management strategy,” it added.

NG debt reached a record PHP 14.48 trillion as of end-October, rising 6.16% from PHP 13.64 trillion a year ago.

As of end-October, the bulk or 68.38% of the NG’s debt portfolio came from domestic sources.

Meanwhile, the ASEAN+3 Macroeconomic Research Office (AMRO) said that an increase in the debt-to-GDP ratio in ASEAN+3 countries may raise the likelihood of a fiscal crisis.

“Overall, the result reveals that the higher the debt ratio, the higher the probability of a crisis, with that experience less likely in developed economies than emerging market economies,” it said in a recent report.

“At their respective debt levels as of 2022, the average probability of a fiscal crisis is estimated to be 37% for an average emerging market economy and 7% for an average developed economy,” it added.

AMRO said that excessively high debt levels may also threaten a government’s fiscal sustainability.

“This raises the risk of fiscal crisis, which can, in turn, erode investor confidence. Moreover, if the value of debt falls due to concerns about the government’s debt repayment capacity, financial sectors including banks, would incur valuation losses in their holdings of government debt,” it said.

“Foreign investors may take fright and pull out from the market, leading to capital outflows. The heightened volatility in exchange rates and increased capital flight would compound the difficulties,” it added. 

Estimates from AMRO show that the average probability of a fiscal crisis for the region’s emerging markets increased to 26% in 2022 from 15% in 2008. However, it noted this was lower than the average in global emerging markets.

The think tank recommended that governments in the region should establish a “sound debt structure” with an appropriate maturity profile and proper currency distribution.

It also recommended diversifying the investor base to mitigate impact from shocks, enhance market liquidity, utilize emergency liquidity facilities, and maintain a sustainable debt level and growth rate. — Luisa Maria Jacinta C. Jocson