ANZ sees slow reduction in Philippine debt

MANILA, Philippines — Bringing the Philippines’ debt to the pre-pandemic level of around 40 percent of gross domestic product from a peak of 63.5 percent of GDP as of end-March will be challenging, according to ANZ Research.

In a report, ANZ said the increase in the Philippines’ debt level was justifiable given the current expansionary fiscal stance due to the impact of the pandemic.

“Although fiscal policy is becoming more conservative, bringing debt back to the pre-pandemic level of around 40 percent will be challenging,” the research unit said.

Although the Philippines aims to reduce the debt-to-GDP ratio to 60.8 percent by the end of 2022, ANZ said a lower nominal GDP could make the debt curve steeper.

According to ANZ, the latest official estimate of 2022 nominal GDP is 1.8 percent lower than the P22.1 trillion target.

“All else equal, this alone could raise the year-end debt-to-GDP ratio by around 1.1 percentage points. We also note the steep rise in the debt-servicing burden since 2020,” it said.

The research firm said the interest-payment-to-revenue ratio may hit 15.5 percent this year, up from 11.5 percent in 2019, and could rise further considering the steady climb in interest rates.

Estimates suggest that for every percent increase in interest rate, debt servicing costs rise by around 0.5 percent.

“Meanwhile, the growth to interest rate differential, an important determiner of debt sustainability, is also likely to narrow as economic growth stabilizes amid rising borrowing costs,” ANZ said.

The Marcos administration is likely to stick to the previous administration’s proposed budget spending of around P5.3 trillion for 2023 or 22.2 percent of GDP.

The 2023 budget projects a modest 2.6 percent growth in disbursements, down from increases of 11.5 percent in 2022 and 9.9 percent in 2021 amid the reduction in COVID-related allocations.

ANZ said Finance Secretary Benjamin Diokno has also hinted that the government may not extend the existing fuel support measures next year.

“The 2023 budget framework captures the shift in focus from post-pandemic support towards structural drivers of growth, and even includes provisions for sustainable environment goals,” ANZ said.

It said the Build Build Build program would likely remain high on the agenda, with a projected allocation for infrastructure programs of 5.4 percent of GDP, marginally lower than the 5.5 percent earmarked in 2022.

Revenue next year is projected to rise by 10 percent, slightly higher than the expected nominal GDP growth of 9.6 percent, translating to a revenue to GDP ratio of 15.3 percent.

In all, the government is targeting a budget deficit of 6.1 percent of GDP, a significant reduction from the 7.6 percent projected in 2022.

“Going by the latest Development Budget Coordination Committee projections, budget deficit will return to its pre-pandemic of below four percent trajectory by 2026,” ANZ said.