Debt-to-GDP ratio remains above int’l threshold at 60.2%

MANILA, Philippines — The country’s outstanding debt as a share to the overall economy slightly eased in the first quarter, but remained above the internationally accepted threshold, with the government urged to be on a serious lookout for more revenue sources.

Following the 5.7 percent gross domestic product (GDP) print in the first quarter, the share of national debt to the country’s output eased to 60.2 percent from 61 percent in the same period last year.

However, this was slightly above the end-2023 debt-to-GDP ratio of 60.1 percent.

As of end-March, the national debt had eased to P14.93 trillion.

Nonetheless, the current debt-to-GDP ratio still settled above the internationally accepted threshold of 60 percent, which still puts the Philippines at a vulnerable spot in terms of its capacity to pay off its financial obligations.

Reducing the debt-to-GDP ratio would mean that economic growth should outpace the level of borrowings of the Philippines.

ING Bank senior economist Nicholas Mapa argued that the government has largely sidestepped the issue of elevated debt-to-GDP ratio because economic growth has been quite solid in the past quarters.

However, with the first quarter print disappointing and falling below market consensus of 5.9 percent, Mapa said focus would likely be back on the debt metric.

“Fiscal authorities appear to be in consolidation mode with government spending quite subdued, but we will need to find more sources of revenue to bring debt levels down,” Mapa said in a Viber message.

However, Finance Secretary Ralph Recto has been firm in his stance of no new taxes over the medium-term.

“Given this directive, they will have to intensify tax compliance. But the ratio will likely stay around 60 percent for the rest of the year,” Mapa said.

In a separate exchange, Leonardo Lanzona, economist and professor at the Ateneo de Manila University, maintained that the sustainability of the debt-to-GDP ratio is dependent on growth prospects.

Amid the slowdown, Lanzona said there may now be inherent risks that the ratio could increase even further, with persistent budget deficits making the level unsustainable over time.

“The cost of borrowing also plays a significant role in debt sustainability. Higher interest rates due to the central bank policy can increase the debt servicing burden, making the debt more difficult to sustain,” Lanzona said.

Unless the government can continue to increase tax revenues, Lanzona argued that sustainability concerns can reduce investor confidence, making it more difficult for the government to maintain its financial standing.

He added that pending tax proposals may not bring enough revenues to address the risks coming from higher debts.

Meanwhile, think tank Oxford Economics noted that high public debt ratios have become a significant concern as they threaten fiscal sustainability and impose higher costs on the broader economy

Oxford lead economist Sunny Liu said fiscal consolidation does not necessarily result in a reduction in the debt-to-GDP ratio, at least in the short term.

“It is important to get the balance right between reducing spending or increasing revenues,” Liu said.

“Successful consolidations tend to be those that strike a balance between spending cuts and tax or revenue increases, whereas those that are unsuccessful tend to be those that are biased toward revenue and involve fewer spending cuts,” she said.