Deeper and deeper into debt

The prospect of sinking deeper into debt sounds scary even for an ordinary household. More so for a country, as excessive debt can force the government to cut back on social expenditures meant to benefit the people just to service its financial obligations. The COVID-19 pandemic has forced nearly all countries to borrow to finance the unprogrammed expenditures arising from the social impact of the health crisis, specifically health-related costs for those who contracted the disease and financial assistance to the millions who lost their jobs as economies reeled from a global business slowdown. At the end of 2020, global debt was estimated to have reached $277 trillion, or 365 percent of the world’s gross domestic product (GDP).

The Philippines is no exception. The Department of Finance reported that it secured $13.36 billion in loans and grants from external sources for the government’s COVID-19 response programs in 2020. For 2021, the country would need at least $1.3 billion in foreign loans from the World Bank, the Asian Development Bank, and the Beijing-based Asian Infrastructure Investment Bank to finance a Department of Health plan to vaccinate 100 million Filipinos by 2023—25.35 million Filipinos this year, 44.63 million in 2022, and 41.77 million in 2023.

The borrowings became inevitable because government revenues declined as the economy plunged into a recession while expenses shot up due to the cost of addressing the pandemic. Tax and nontax revenues collected by the government last year amounted to P2.84 trillion, which was slightly lower than target and below the record-high P3.14 trillion in collections in 2019. Total spending, on the other hand, swelled to P4.2 trillion last year, up from P3.8 trillion in 2019. The resulting budget deficit of P1.36 trillion was more than double the P660-billion shortfall in 2019. The resulting fiscal deficit had to be covered by borrowings.

Is the country’s debt situation that bad? A measure of a nation’s capacity to manage its obligations is the debt-to-GDP ratio. A high ratio is not desirable because it indicates a higher risk of default. The World Bank had previously noted that a ratio that exceeded 77 percent for an extended period of time could cause an adverse impact on economic growth. Last year, the increased debt burden due to the pandemic-induced recession jacked up the share of Philippine debt to GDP to a 14-year high of 54.5 percent. It was the highest since the 58.8 percent posted in 2006, according to Bureau of the Treasury data. High—but manageable by World Bank standards. Also, international credit watcher Moody’s Investors Service recently recognized the country’s economic stability despite the pandemic by affirming its Baa2 stable outlook for the Philippines. Moody’s noted that the Philippines’ credit profile was characterized by a strengthening fiscal position and limited vulnerability to external shocks.

Still, no matter how viable or sustainable the debt is as measured by economic ratios, the fact remains that the government has and will continue to allocate a big portion of its funds to settle debts with local and foreign creditors. In 2019, the national government shelled out P842.45 billion to settle P594.77 billion in domestic debts and P247.68 billion in foreign debts, both principal and interest due. This increased to P1 trillion last year, consisting of P740.87 billion in domestic debts and P264.41 billion in foreign debt payments. For 2021, the Duterte administration’s debt service burden (principal and interest) will balloon to P1.79 trillion, of which P1.39 trillion will be for domestic obligations and P402.04 billion going to foreign lenders. That amount is more than enough to build the needed hospitals, hire the necessary frontliners to address the pandemic, and shore up the country’s rickety health care infrastructure. Or build more schools and employ the required teaching staff to improve the country’s education system.

Contracting more debt has become unavoidable given the government’s declining revenues and rising expenditures. How to manage that debt to avoid bankrupting the public coffers, crippling social services, and adding more suffering to an already prone country—the lessons of the Marcos-era debt nightmare come to mind — will be a daunting, immensely consequential challenge, for this administration and the next one.