With the Duterte Administration pursuing an expansionary fiscal policy in the medium-term, DBM Secretary Benjamin Diokno assures investors and stakeholders that the fiscal plan remains to be prudent, appropriate, and sustainable.
Early into the term of President Duterte, the economic managers decided to increase the planned deficit from 2 to 3 percent of GDP to be financed with borrowings. Such a strategy was adopted to generate resources for the ambitious infrastructure and social services programs of the government, necessary investments for a young and developing country like the Philippines.
“Despite the rise in government borrowings, we have safeguards in check to ensure that the fiscal plan will support our development objectives rather than burden future taxpayers and the economy,” said Budget Secretary Diokno.
He disputed the notion that the higher deficit will plunge the Philippine economy into an imminent debt crisis. “First and foremost, economic expansion will outpace the rise in borrowings: nominal economic growth is projected to be about 10 percent (7 percent real growth plus 3 percent inflation rate), while the cost of borrowing will be less than 3 percent,” he said. “This is why the debt-to-GDP ratio is expected to decline in the medium-term,” he added.
The debt-to-GDP ratio, a gauge of an economy’s capacity to pay off its debts, shows the proportion of government debt to nominal GDP. In 2017, the Philippine economy’s debt-to-GDP ratio is estimated at 40.6 percent. The economic managers project this ratio to decline further to 37.7 percent come 2022.
“As a rule of thumb, a country with debt-to-GDP ratio at 60 percent or lower is considered fiscally responsible. The ratio is also the required level for European Union membership,” said Secretary Diokno. “Hence, in spite of our borrowings, our debt profile remains low and falling. In fact, it will earn the envy of many countries, both emerging and advanced,” he added.
What is pertinent, therefore, in the assessment of a country’s debt position is not merely the nominal amount of the debt, but its value relative to the size of the economy. Doing so will take into account an economy’s capacity to pay off its debt.
At the same time, Secretary Diokno emphasized the favorable borrowing mix that the government will follow to manage foreign exchange risks. The government will follow an 80-20 mix, in favor of domestic borrowings, to lessen its exposure to currency market volatilities. He maintained that the 20 percent mix for foreign borrowings has been adopted to take advantage of concessional borrowing rates offered by foreign governments. “We have tried to balance guarding against forex risks, and taking advantage of favorable rates in foreign borrowing – the result is this 80-20 financing mix,” said Secretary Diokno.
Furthermore, the Philippine economy has hefty gross international reserves (GIR) on top of huge dollar receipts owing to Overseas Filipino Workers (OFWs) and the Business Process Outsourcing (BPO) sector. The rule of thumb is that foreign reserves should cover at least three months’ worth of imports; ours cover over nine months’ worth of imports as of July 2017. The gross international reserves serve as a buffer to protect an economy from external crises such as severe foreign exchange depreciation. This level will remain stable through the rest of the Duterte administration, thereby hedging against external risks.
Concerns that the Duterte administration’s expansionary fiscal strategy may lead to indebtedness are therefore unsubstantiated, considering the current and expected levels of debt-to-GDP ratio, the borrowing mix to be adopted, and the hefty gross international reserves at the disposal of the monetary authorities. The Philippine economy’s fiscal position is therefore secure and sustainable, as the increased deficit will expand the capacity of the economy.
Duterte Administration compared to Marcos Administration
The ambitious infrastructure program of the Duterte Administration has also led some to draw comparisons with the public investment program of former President Ferdinand Marcos, and consequently the debt crisis that plagued the Philippine economy in the 1980’s. Prior to the crisis in 1983, capital outlays as a share of Gross Domestic Product (GDP) hovered at 5 percent. This is comparable to the projected capital investment program of the Duterte
Furthermore, in 1983, towards the end of the Marcos administration, the borrowing mix was at a ratio of 50-50, half from domestic sources and half from foreign sources. Consequently, outstanding foreign debt grew by 312.3% from 1983 to 1984. This is one of the reasons why the Philippines’ foreign debt ballooned during the said era, with the peso experiencing a series of devaluations during the Marcos Administration.
In sharp contrast with the financing strategy of the Marcos administration, the Duterte administration’s 80-20 borrowing mix would rely heavily on domestic borrowing. Yet, it would be opportunistic: it would also take advantage of favorable rates and terms offered by foreign loans.
Budget Utilization Update
Another important aspect in assessing the medium-term fiscal policy is the government’s capacity to spend given its additional resources. As of the first semester of FY 2017, the Duterte Administration has narrowed underspending – measured as the difference between program and actual disbursements – to P5.9 billion (or 0.4 percent of the program). This is a marked improvement from the underspending rates recorded in 2014 and 2015 at 13.3 and 12.8 percent, respectively. Underspending for 2016 also improved at 3.6 percent, considering that the Duterte Administration only took over in the second half of the year.
The DBM will ensure the timely and efficient utilization of publicresources for the second half of
the year, with the full-year disbursement target at P2.909 trillion.
In brief, concerns over a looming debt crisis, as a result of the Duterte administration’s expansionary fiscal policy are unwarranted. Economic conditions have changed for the better, and we have learned from the mistakes of the past.
The expansionary fiscal policy will therefore support the Administration’s objectives of pushing the economy to upper-middle income status and reducing poverty to 14 percent by 2022.