The Philippines could need ten years to reduce the debt-to-GDP ratio to 40%

PHILIPPINE STAR/EDD GUMBAN

THE PHILIPPINES could need at least 10 years before their debt-to-gross domestic product (GDP) ratio returns to its pre-pandemic level of 40%, said Finance Secretary Carlos G. Dominguez III.

“Assuming a 40% debt-to-GDP ratio is ideal health… It could take us at least 10 years to recover [on track]. This is the effect of COVID-19 (coronavirus disease 2019),” he said during a brieIfng on Wednesday.

The Philippines’ debt pile hit a record 12.76 trillion pesos at the end of April, reflecting the surge in borrowing to finance its response to the pandemic.

The country’s debt-to-GDP ratio stood at 63.5% at the end of the first quarter, which exceeds the 60% threshold considered manageable by multilateral lenders for developing economies.

It’s also much higher than the 39.6% debt-to-GDP ratio seen at the end of 2019 or before the pandemic.

The Philippine Institute of Development Studies (PIDS) has estimated that the debt-to-GDP ratio will reach 66.8% by 2023 and 2024, before falling to 65.7% by 2026.

The PIDS presented Wednesday to the Ministry of Finance its report on the Ifladderffeffect of COVID-19 on the country.

PIDS research specialist John Paul C. Corpus outlined three scenarios and dates by which the government could achieve the ideal debt-to-GDP ratio of 40%.

To reach this ratio by 2031, a median increase in the annual primary balance (revenue less non-interest expenditure) of 2.42% of GDP would be needed, based on the most optimistic scenario which assumes a GDP growth rate of 7% and real GDP growth. 2% interest rate.

To reach the debt-to-GDP ratio of 40% by 2041 and 2051, a median annual increase in the primary balance of 0.86% of GDP and 0.35% of GDP respectively is needed, under optimistic conditions.

“So the longer the terminal date, the easier it gets. So the long COVID could be 20 years,” Dominguez said.

PIDS colleague Justine Diokno-Sicat, co-author of the report, told reporters that returning to the pre-pandemic debt-to-GDP ratio would not be easy.

If the government does not immediately revert to a pre-pandemic debt-to-GDP ratio, she said the only real risk is a credit rating downgrade.

Fitch Ratings in February afIfaffirmed the Philippines’ investment rating, but also maintained the “negative” outlook amid “possible difficulties in unraveling the policy response to the health crisis and returning public debt to a firm downward path.”

A negative outlook means Fitch could downgrade the Philippines’ credit rating over the next 12 to 18 months.

“We have discussed with multilaterals; the World Bank was one of them. There is a kind of consensus that the main objective is really to revive the economy, and that will naturally correct the debt,” Ms. Diokno-Sicat said.

Economic managers are targeting GDP growth of 7-8% this year.

Dominguez said earlier that the Philippines needed to grow an average of 6% a year over the next six years to reduce the country’s debt. — T. J. Tomas