Philippine economy

EXPLAINER: As Philippine debt soars during the pandemic, should we worry?

Ralf Rivas
Philippine government debt hits P9.615 trillion as of end-August 2020. Understand how government debt works in this explainer.

The Philippine government’s outstanding debt stood at P9.615 trillion as of end-August 2020 amid the coronavirus crisis, the Bureau of the Treasury (BTr) said on Wednesday, September 30.

Total debt stock in August grew by P450.9 billion or 4.9% from end-July 2020, primarily due to domestic securities issuances. From the end-December 2019 level, debt increased by 24.4% – equivalent to P1.88 trillion.

Of the total outstanding debt stock, 30.2% were sourced externally, while 69.8% are domestic debt.

Total domestic debt amounted to P6.7 trillion, 7.3% higher compared to the end-July level, while overall external debt amounted to P2.9 trillion or lower by 0.2%.

Understanding debt

While the country’s debt may sound alarming at first, it is important to look at several indicators to appreciate the latest figures disclosed by the BTr.

Can the Philippines pay off its loans? Total loans of any country are better appreciated when viewed alongside the size of the economy, represented by the debt-to-gross domestic product (GDP) ratio.

A low number means that the size of a country’s economy is bigger than its obligations.

Department of Finance data showed that at the end of the 1st half of 2020, the debt-to-GDP ratio climbed to 48.1%. This is much higher than the 39.6% recorded as of end-2019.

The figure, according to state economists and credit rating agencies, reflects that the Philippines can pay off its debts.

In short, the country still has plenty of space to borrow.

In fact, economists and experts even argue that the Philippines is not borrowing and spending enough for the pandemic.

The issue of where the money should go, however, is a different debate altogether. (READ: Philippines plans to build its way out of pandemic)

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Is the debt-to-GDP ratio an indicator that a country will default? Not always. 

For instance, Japan’s debt-to-GDP ratio is at around 228%, but it is not in danger of a default. This is because Japan’s debt is almost entirely domestically held.

But in the case of countries like Greece, which suffered a debt crisis and had a debt-to-GDP ratio of around 182% in 2018, debt was sourced mainly from foreign governments.

As Greece’s debts became due, credit rating agencies downgraded its ratings, which then resulted in higher interest rates. Greece had to raise more revenues, trim spending, and raise taxes, which eventually led to an economic slowdown.

Did President Rodrigo Duterte borrow all the P9.615 trillion? No. The figure includes debt of previous administrations.

Moreover, the entire P9.615 trillion is not due just in 2020. This enormous amount will be paid off over many years, and succeeding administrations will continue borrowing. Debt and debt servicing will always be part of governance. (READ: MISLEADING: PNoy left P6.4-T debt to the Duterte administration)

Why do we need to borrow? Aren’t our taxes enough? Taxes won’t suffice if we want to fund the government’s budget.

For instance, disbursements for 2020 are at P4.3 trillion, yet revenues are only projected to hit around P2.52 trillion. This means that there is a fiscal balance of P1.8 trillion, which is 9.6% of the country’s GDP.

Where will the government source the P1.8 trillion? Loans, both from domestic and external sources.

The proposed 2021 budget is at P4.467 trillion, while projected revenues are at P2.717 trillion. The deficit amounting to P1.749 trillion, which is 8.5% of GDP, will come from borrowings. (READ: In Duterte’s 2021 budget, Filipinos are on their own)

If the government, or its citizens, insist on borrowing less, they have to find other sources of revenue or raise taxes.

If we divide P9.615 trillion by 107 million Filipinos, does this mean that we each owe around P90,000? Dividing the amount is quite inaccurate, because state debt does not work like a regular person’s loans.

The Philippines, unlike individuals, has a central bank, which has the ability to “print” money or adjust interest rates.

Moreover, a big majority of the country’s debt is domestically sourced, which means it is owed to the population.

When the government pays back debt, the money goes back to Filipinos in the form of social services, infrastructure, and other programs. – Rappler.com

Ralf Rivas

A sociologist by heart, a journalist by profession. Ralf is Rappler's business reporter, covering macroeconomy, government finance, companies, and agriculture.