We wrote before that while the total outstanding debt of the National Government (NG) continued to increase, as long as our national output would remain resilient, we should be able to pay back our debt obligations.
From 2019’s NG debt level of P7.73 trillion, the pandemic mostly contributed to its steep rise to P9.79 trillion in 2020, an addition of a whopping P2.06 trillion.
For better appreciation, this increase was more than half of the Philippine national budget of P4.1 trillion that year. The increments in the annual debt levels tapered off to P1.73 trillion in 2021 and P1.69 trillion in 2022. For the first five months of 2023, some P578 billion brought the NG debt level to P14.09 trillion, the highest in history.
From the pre-pandemic debt level of P7.73 trillion, the NG incurred a total of P6.37 trillion, representing an increase in the NG debt to GDP ratio from 39.6% in 2019 to 61% by the end of March 2023, still manageable by the usual debt sustainability standards.
But the situation looks precarious.
We have a budget of P5.768 trillion for 2024, nearly 10% higher than this year’s P5.268 trillion. This is anchored on a growth forecast of 6-7% in 2023 and 6.5-8% for 2024 until 2028, something that some international financial institutions have reconsidered for possible downgrading. Inflation is expected at 5-6% and 2-4% in 2023 and 2024, respectively, even as the threats of higher wages and El Niño on domestic inflation become more real. NG also projects oil prices at $70-90 and peso-dollar exchange rate at P54-57 and P53-57 for the next two years. It’s surprising that NG should program significant gains in both exports and imports for next year when global recession looms large.
As to the fiscal deficit, from a peak of P1.67 trillion in 2021, or 8.6% of GDP, it came down to P1.61 trillion or 7.3% of GDP. As of March 2023, we have incurred a budget shortfall of P326 billion or 4.8% of GDP. Based on our last reading, NG is programming a lower deficit to GDP ratio of 6.1% this year and 5.1% next year. By the time the Bongbong Marcos presidency ends in 2028, NG takes pride in its goal to restore fiscal sustainability at 3.0%.
The National Government is also optimistic, and rightly to be so, about its ability to attain fiscal sustainability based on the various structural reforms established recently including the amendments to the Public Service Act, Foreign Investments Act, Retail Liberalization Act and the Corporate Recovery and Tax Incentives for Enterprises, all essential in enhancing the investment environment in the Philippines. If the strategies in the Philippine Development Plan for 2023-2028 are followed and executed, that should further help in improving public finance.
In the People’s Proposed Budget for 2023, the Department of Budget and Management planned to finance the budget through borrowings amounting to P2.2 trillion, of which P1.65 trillion would be sourced from the domestic markets and the rest of more than P550 billion from bonds, program and project loans from external creditors.
So far for the first five months of 2023, NG has already incurred P1.168 trillion in borrowings — P880 billion in domestic borrowings and P287 billion in foreign borrowings, or more than 50% of programmed amounts. Thus, with seven more months to go, NG is left with only 47% of its total programmed borrowing.
What is bothersome is the spate of borrowings we have seen in the first six months of 2023. The Bangko Sentral ng Pilipinas (BSP), for instance, reported that in the first quarter 2023 alone, some P5.56 billion or, at P55 to a dollar, P305.8 billion was approved. These are earmarked for general budget financing including those for sustainable finance, COVID-19 response, infrastructure and education projects.
The other weekend, we saw in the broadsheets that the World Bank approved a $600-million loan “to build on the momentum of the Philippine Rural Development Project” launched as early as 2014 by the Department of Agriculture. This money is supposed to increase market access and incomes for about half a million farmers and fisherfolk. This easily translates into P33 billion.
The Davao Public Transport Modernization Project secured $1-billion loan from the Asian Development Bank to help transform the quality of Davao City’s public transport and support low-carbon usage. This project involves the purchase of some 1,100 buses but will be operated by the private sector under a so-called performance-based contracts. How this would avoid aggravating both fiscal and debt sustainability should be a big challenge. The cost in peso terms is P55 billion.
Early this week, the National Treasury announced that it is planning to sell retail dollar bonds by September this year amounting to some $2 billion. The last time retail dollar bonds were offered was in 2021 with sales reaching $1.6 billion. This is one of the purposes for the non-deal roadshow in Canada this week. In pesos, this means an additional borrowing of P110 billion.
If we simply go by the headline debt number — some may have been approved but the actual execution may take time, distribution between domestic and foreign debt will depend not on the currency denomination but on the residency of the creditor — NG may find itself indeed in a precarious position as we complete the last two quarters of 2023. It was good for NG to have considered the possible surge in the pandemic and the El Niño phenomenon as well as the required subsidies and cash transfers to marginalized sectors, food supply augmentation and energy security to address inflation.
However, it looks like El Niño is evolving into a more serious dry spell than originally expected by PAGASA. That would require more budget allocation as we begin to experience it this month. While economists and observers have rightly argued that we have a long list of local government water projects under the framework of public private partnership, people are looking at the possible use of the larger allocation of LGUs under the Mandanas law. Whether this is feasible in the context of local politics remains a big challenge from a budgetary standpoint.
If the Maharlika Investment Fund is finally launched this year as it is being rushed, that could also make a big dent in the national budget as far as sourcing the seed fund from NG is concerned. As of the second quarter of this year, some 82% of the budget has been released. Therefore, compensatory budget could only be sourced from additional borrowings. In the first place, nowhere did we find that the Maharlika was considered in the budget preparation.
Herein lies the irony.
We are literally scrounging for funds to finance the national budget, but only the heavens know why we have been so intentional in launching this investment vehicle called Maharlika. We borrow, and borrow heavily, because our budget is short. In addition, NG has also initiated discussion in Congress about the imposition of new taxes, new burdens to both business and households. Notwithstanding this basic reservation, our economic managers continue to believe it is critical in the country’s long-term economic strategy when one of the biggest hurdles in the next few years is the restoration of both fiscal and debt sustainability that is most watched by creditors, investors and credit rating agencies.
Dismissing obvious economic and financial challenges that stare us in the face should not puzzle us anymore. For some now believe that it is only today that we have a story to tell to our prospective investors.
Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.