Front-loading of borrowings pushes up state debt-GDP ratio

By December 7, 2018Property News

By Elijah Joseph C. Tubayan, Reporter
GOVERNMENT DEBT in proportion to economic output settled at 42.3% in the nine months to September, bigger than the 41.7% recorded in the same period last year, the Department of Finance (DoF) said in an economic bulletin on Friday.
The DoF attributed the higher state debt-to-gross domestic product (GDP) ratio — which reflects the capability of the economy to settle obligations — to front-loading by the Bureau of the Treasury of sale of government securities to avoid higher interest rates.
“The Treasury advanced some borrowing because interest rates are rising and increased deposits with BSP (Bangko Sentral ng Pilipinas) to help in liquidity management,” Finance Undersecretary and chief economist Gil S. Beltran said in a mobile phone message.
The debt-to-GDP ratio is a tad less than the 42.4% posted in the second quarter.
State debt to local lenders was equivalent to 27.1% of the country’s GDP and accounted for about 65% of total government debt.
The government’s external debt was equivalent to 15.2% of the economy.
The DoF said that the country’s ability to pay off its debt has been improving for over a decade due to a “prudent debt strategy” and faster economic growth.
“Over the period 2004-2018, the country’s capacity to pay has actually improved, despite the rise in the stock of debt. That is because the economy has been outgrowing the accumulation of both domestic and external debt. By 2017, nominal GDP was P15.8 trillion, more than three times the 2004 nominal GDP of P5.1 trillion,” said Mr. Beltran in the bulletin.
The DoF official noted that the government has been keeping the fiscal deficit within the targeted level, settling at 2.2% in 2017, and three percent as of the first three quarters this year despite an increased focus on spending.
He also said that borrowed funds have been invested in “productive capital expenditures” to ensure that “future servicing streams can be financed by revenues collected from a growing economy.”
“In formulating the Public Investment Program (PIP), the economic internal rate of return (EIRR) of each project should at least be equal to 15%. Almost all projects approved have EIRRs exceeding 20% since most of these projects will be operating at full capacity once they are finished. Even with the rise in interest rates arising from the Fed normalization, the projects will still be economically viable,” said Mr. Beltran.
He also said that the government negotiates external borrowings that carry low-interest and longer maturities. Mr. Beltran noted that the average interest rate on external borrowing is 4.3% and the average maturity of those loans is at 22.6 years, which is longer than the economic life of most projects.
The government targets its debt-to-GDP ratio to settle at 38.6% in 2022, from the actual 42.1% recorded in 2017. The government has set a borrowing mix of 75:25 in favor of domestic lenders from 2019 to 2022.