"There is a job to be done during a time of crisis."
The ratio of a country’s debt to its gross domestic product is one of the figures upon which international financial institutions and credit rating agencies base the credit rating that they award to that country.
The lower the debt-to-GDP ratio, the greater a country’s capacity to service its external financial obligations – pay its external debts as they become due. Accordingly, a low-ratio country gets a higher credit rating, assuming that its other macroeconomic fundamentals are likewise favorable.
Over the years, successive administrations have sought, through sounder spending and borrowing policies, to bring down the debt-to-GDP ratio from the comparatively higher levels of the pre-2000 era. The administration of President Rodrigo Duterte inherited from its predecessor a debt-to-GDP ratio of close to 42 percent. By 2019, the Duterte administration had brought the ratio down to 39.6 percent.
Understandably, Secretary Carlos Dominguez III and his Department of Finance team have been reluctant to agree to any government moves likely to have an adverse impact on the debt-to-GDP ratio. This, though they realize the importance of a government program to mitigate the damage done to the Philippine economy by the coronavirus pandemic. They have been fighting hard to limit the magnitude of the benefits dispensed by the two Bayanihan Acts approved by Congress.
To finance its economic-support efforts, the Duterte administration has had to incur an enormous amount of borrowing. The Bureau of the Treasury has reported that by September 30, 2020, the government had borrowed P2.56 trillion – P2.01 trillion from domestic sources and P550 billion from foreign sources – out of the P3.0 trillion worth of borrowings that it had programmed for the entire year.
If fully borrowed, the P3.0 trillion will bring the government’s debt to P10.1 trillion: At that level, the debt-to-GDP ratio would be 53.9 percent.
A debt-to-GDP ratio of 53.9 percent will come as a disappointment to the officials and current and past fiscal policymakers who have labored hard to progressively reduce this key ratio. But a 53.9-percent ratio will be tolerated by the international financial community, given the state of the world economy and the viciousness of the COVID-19 virus. Such a ratio will not bring the Philippines way out of line vis-a-vis the majority of countries, including a number of developed countries. It certainly will not isolate the Philippines from the Third World, most of whose component countries bear public debt loads that are very heavy in relation to their GDP capabilities.
Of course, a prudent debt-to-GDP ratio is very important to a country like the Philippines that is aspiring for recognition as a country that has good economic management and sound finances. Secretary Dominguez and his people are perfectly right in being concerned about this country’s all-important debt-to-GDP ratio.
But there is a job, an urgent job, to be done. Filipino families must be kept from hunger, and businesses must be restored. At this point, that job is more important than anything, even a high sovereign credit rating from Standard and Poor’s or Moody.
Forget the debt-to-GDP ratio for now, fiscal policymakers. Focus on the job that is expected of you in a time of crisis.
