World Bank says Philippines' debt still manageable, recommends fiscal consolidation

The Philippines’ debt level is still manageable despite breaching an internationally comfortable ratio, the World Bank said Wednesday.

As of the first quarter of 2022, the country’s debt-to-gross domestic product (GDP) ratio — the size of the state’s debt relative to the size of the economy — bloated to 63.5%, the highest in 17 years and well over the internationally recommended threshold of 60%.

Meanwhile, as of end-April 2022, the government’s outstanding debt hit a new record-high of P12.763 trillion.

Despite the ballooning debt levels, World Bank senior economist Kevin Chua still believes that the country’s liabilities are manageable.

“We think the debt is still manageable. Most of our debts are long-term, domestic, and peso-denominated and these should shield us from risks,” Chua said at a virtual press briefing for the lender’s June 2022 Philippine Economic Update.

Of the total P12.76-trillion government debt, 70% were borrowed locally and 30% came from external sources.

The outgoing Duterte administration is projected to incur P3.2 trillion in additional debt following the COVID-19 pandemic which could bring the debt level to reach over P13 trillion by the end of 2022, above the original plan of only around P9.9 trillion.

Despite stating that the country’s debt levels are manageable, World Bank’s Chua said that “debt will be a drag to growth.”

“This is the reason [why] we are recommending a fiscal consolidation,” he said.

Similarly, the Department of Finance (DOF) unveiled a fiscal consolidation plan aimed at raising an average P284 billion annually for the next 10 years to pay the historic P3.2 trillion additional debt incurred due to the COVID-19 pandemic.

But, the fiscal consolidation plan involves implementing new taxes, deferring personal income tax reductions, and expanding the value added tax base.

Incoming Finance chief Benjamin Diokno said that he is fine with the last two tax reform packages to be left by the Duterte administration, namely the tax packages on real property valuation and passive income and financial taxes.

“Other than that, we should stop first looking at tax reform… we are happy with the present tax structure,” Diokno said.

The task of managing the country’s fiscal position will be in the hands of incoming President-elect Ferdinand Marcos Jr. and his economic team to be lead by incumbent Bangko Sentral ng Pilipinas Governor Diokno.

“Announcing a fiscal consolidation plan will signal fiscal discipline and seriousness to address the narrowing policy space,” Chua said.

Apart from fiscal consolidation, the World Bank economist said the high debt level can be addressed with higher economic growth.

“Whenever we see an increase in our growth rate that would definitely help in lowering the debt ratio,” Chua said.

Diokno also said the country’s debt level is “easily manageable” as long as the economy can grow by 6% to 7%.

“But beyond fast economic growth we should also pursue fiscal consolidation, that way we can return the debt ratio back to pre-pandemic levels,” Chua said.

Before the COVID-19 pandemic, the country’s debt-to-GDP ratio was at a record-low of 39.6% in 2019.—AOL, GMA News