The country’s outstanding debt as a share of the gross domestic product (GDP) will remain high in the medium term, easing only after 2024, according to a study by the Philippine Institute for Development Studies (PIDS).
The PIDS study showed the debt-to-GDP ratio might peak at 66.8% this year until 2024, before easing to 66.4% in 2025, 66% in 2026, and 65.7% in 2027.
“So long as the National Government does not acquire substantial new debt, it will gradually decline over the succeeding years as the GDP growth rate increases. If these hold true, the baseline scenario shows that the level of debt is still manageable and sustainable,” PIDS added.
The Philippines sharply accumulated public debt during the coronavirus pandemic, bringing its debt-to-GDP ratio to 60.9% as of end-2022. This is slightly above the 60% threshold considered manageable by multilateral lenders for developing economies, but much higher than the pre-pandemic level of 39.6% in 2019.
The government aims to bring down the debt-to-GDP ratio to less than 60% by 2025, and to 51.5% by 2028.
“The reasons for the high debt precipitated by the COVID-19 pandemic are not as deep-rooted (or self-inflicted) as in past debt episodes. It is instead the result of a large exogenous shock to growth and revenues and of the government’s accumulation of cash reserves as a precautionary move in the event of a long-haul public health crisis,” PIDS said.
At the end of 2022, the National Government’s outstanding debt stood at P13.42 trillion, higher by 14.4% from P11.73 trillion at the end of 2021. The think tank identified several shocks that may increase Philippine debt, such as slower GDP growth and a weaker peso.
“The results show that the government is most vulnerable to a real GDP growth shock. If COVID-19 cases surge, there might be cause for the government to continue implementing social assistance/interventions for those affected while still spending to stimulate the economy,” it said.
Economic managers are targeting 6.0%-7.0% GDP growth this year, slower than the 7.6% expansion in 2022.
Another risk, PIDS said, is a sudden increase in spending due to natural disasters and “realized contingent liabilities from social security institutions, public-private partnerships, or underfunded pension plans of uniformed personnel.”
Despite the elevated debt, the think tank said the government should continue spending to jumpstart the economy.
“Fiscal stimulus is especially needed on items with large multiplier effects (i.e., infrastructure) and to address the risks of scarring (i.e., human capital investments),” PIDS said.
To bring down debt, PIDS said there should be “no policy reversals that compromise the revenue-raising capacity, unnecessarily increase the spending burden on the National Government or negatively impact existing measures that led to the improvement of debt before the pandemic.”
It added: “There needs to be a consideration that debt recently increased because of the pandemic crisis and not because of any fundamental issues or problems with policies and institutions.”
