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Fiscal-sector macro fundamentals bear watching

"The administration's borrowing for its ambitious infrastructure program has greatly increased."


When they are asked nowadays about the state of the Philippine economy’s health, the stock answer of Philippine government officials and private-sector analysts is this: “The Philippine economy’s macro-economic fundamentals are sound.” Three of the macro-economic fundamentals relate to the Philippine government’s finances, especially its debt. Both are determinative of the level of the nation’s creditworthiness.

One of the macro-economic fundamentals relating to the public finances is the ratio of total national-government debt to the GDP (gross domestic product). This ratio is a telling indicator of the quality of management of the national finances; in all of the post-World War II economic crises this ratio has been heavy on the debt side. In its most recent report, the Bureau of the Treasury—a component of the Department of Finance—reported that the debt-to-GDP ratio was 43.7 percent—a figure lower than the 44 percent of 2019’s first quarter but higher than the 41.8 percent of end-2018. A figure of 40 percent is regarded by economic analysts of a country’s capacity to honor its obligations as they become due. The Cabinet-level DBCC (Development Budget Coordination Committee) has set a debt-to-GDP ratio of 38.6 percent for 2022, the end of President Rodrigo Duterte’s term. Given the financing requirement of the Duterte administration’s Build Build Build infrastructure program, the DBCC is going to be very difficult to attain.

The other macro-economic fundamental relating to the fiscal sector is the ratio of the domestic debt (the portion of the national debt that is owed to Filipino creditors) to the external debt (the portion that is owed to foreign creditors).  In the wake of the economic crisis of 1969-1970, the government, with the encouragement of the IMF (International Monetary Fund), set an indicative target for the share of external debt in the total national debt, the purpose being prevention of the recurrence of another foreign exchange crisis. Through the ensuing years, the monetary authorities have sought to prevent the external debt from exceeding around 35 percent of the total national debt. BSP (Bangko Sentral ng Pilipinas) and DBCC are watching very closely the movement of the external debt at a time when the Duterte administration is engaging in increasingly heavy external borrowing to finance its infrastructure program.

The third macro-economic fundamental relating to the fiscal sector is the ratio of short-term obligations—those falling due within a year—to medium-term and long-term obligations. Again, in the wake of the 1969-1970 economic crisis, indicative limits were set by the monetary authorities for foreign borrowings with short maturities. This ratio has been zealously maintained by the monetary authorities, and approvals of requests for short-term foreign borrowings are granted only under exceptional conditions. If, God forbid, this country is going to experience another foreign exchange crisis, it will almost certainly not be due to a bunching of short-term maturities.

 The macro-economic fundamentals relating to the public finances have remained sound thus far in the Duterte era, but they bear close monitoring in the face of the administration’s increasingly heavy borrowing for its ambitious infrastructure program.

Topics: Economy , Development Budget Coordination Committee , Macro-economic , International Monetary Fund
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