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Debt growth should not be alarming

July 11, 2019

PUBLIC sector loans last year more than doubled from the amount of loans taken by the government in 2017, data released this week by the Bangko Sentral ng Pilipinas (BSP) revealed. While this may be alarming to some and is, in fact, a historically high increase in debt on a year-on-year basis, there is no serious cause for concern.

Public sector loans are debts that are either incurred or guaranteed by the government, and come in the form of bonds sold by the Treasury, loans for specific projects, or loans for programs. In 2018, the government took on $7.355 billion in public sector loans, a 111-percent increase from $3.486 billion in 2017.

The public sector loans for 2018 consisted of $3.602 billion in bonds, 12 project loans totaling $2.583 billion, and three program loans worth $900 million. The borrowed funds are intended for use in transportation infrastructure projects, irrigation and agriculture development, flood control projects, and the rehabilitation of Marawi City.

The increase in public sector loans helped to drive the country’s outstanding external debt to $79.0 billion by the end of 2018. Additional borrowings so far this year have raised the total external debt to $80.4 billion as of the end of the first quarter of this year, about 10 percent higher than in the same quarter in 2018.

Growing debt is considered by most economic experts to be the greatest current risk to the global economy, so naturally a rapid increase in the Philippines’ debt burden causes some concern. In particular, some worry that the country may fall into a “debt trap,” especially with China, in which control of some assets like infrastructure might be have to be surrendered to settle loans that cannot be repaid.

There is no sign that such a situation is occurring, or that there is a real risk that it may occur. Likewise, other indicators of potential problems have not yet been seen, such as a lowering of the country’s credit ratings, or a substantial increase in the interest to be paid on government bonds.

The reason for this is creditable to the conservative management of public sector debt and foreign reserves by the BSP. All proposed public sector debts, whether a bond issue or a loan agreement, must have the prior approval of the BSP’s policy-making Monetary Board (MB). The MB is in the best position to assess what impact a debt instrument will have on the country’s ability to pay its bills, and can control the pace at which new debt is taken on.

There are several different ways to measure the scope of public sector debt within the economy, and without exception, every indicator shows that debt is well within the Philippines’ capacity.

For example, the debt service ratio, which is the total amount of loan (or bond) principal and interest payments made by the country on current payable obligations expressed as a percentage of the country’s primary income, was just 5.1 percent at the end of March in spite of the increase in debt. As a benchmark, any percentage below 20 to 25 percent is considered low-risk, meaning that the government could actually take on up to four times as much debt without compromising the country’s financial stability.

As with most economic factors, it takes a look at the details behind the headlines to see that higher public sector debt poses absolutely no risk to the economy at this point.

Of course, vigilance is needed to ensure that the borrowed funds are used wisely, but the excellent oversight of debt by the BSP should assure everyone that the economy continues to be in good hands.

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