The Department of Budget and Management (DBM) on Friday said the ratio of national government debt to Philippine gross domestic product (GDP) could drop to 38.1 percent by 2022 despite the implementation of the government’s ambitious “Build, Build, Build” infrastructure program, which would require borrowing more money from domestic and foreign sources.
In a statement, the Budget department said government’s plan to spend P8 trillion to P9 trillion from 2017 to 2022 to fund what is dubbed as the “Golden Age of Infrastructure” in the Philippines would increase the planned budget deficit to 3 percent of GDP from 2 percent over the next six years.
To finance the programmed deficit, the government will borrow money at an 80-20 mix in favor of domestic sources, to mitigate against foreign exchange risks, it said.
“Despite increasing the planned deficit, the Philippine economy will outgrow its debt burden as economic expansion (GDP growth) outpaces the growth in the rate of borrowing. Hence, the fiscal strategy is manageable and sustainable,” the DBM said.
The agency said the debt-to GDP ratio—which indicates the country’s ability to pay back its debt—is projected to decline to 38.1 percent in 2022 from 40.6 percent in 2016.
“With a deficit spending of 3 percent of GDP, while growth rate is targeted to reach 6.5 percent to 7.5 percent this year and 7 percent to 8 percent from 2018 to 2022, (plus inflation of 2 percent to 4 percent), it’s clear that the ratio is bound to fall,” it explained.
The DBM also claimed that compared with its Association of Southeast Asian Nations (Asean) neighbors, the Philippines continues to post a steady debt-to-GDP ratio.
It cited Singapore whose debt-to-GDP ratio stood at 98.2 percent in 2016, although it is a developed economy. But it noted that Thailand was almost at the same level as the Philippines, with 43.1 percent.
“Concerns that the Duterte administration’s fiscal strategy may lead to indebtedness are therefore unsubstantiated, considering the current and expected levels of debt-to-GDP ratio, the hefty gross international reserves, and the low-interest-rate regime,” it said.
Latest data showed that the country’s dollar reserves reached $81.41 billion as of June this year and would be able to cover 8.7 months’ worth of imports.
“The rule of thumb is that foreign reserves should cover at least three months’ worth of imports. These foreign reserves serve as a buffer to protect an economy from external crises such as severe foreign exchange depreciation,” it said.
Thus, the Philippine economy, along with its Asean neighbors (except Vietnam), remains secure with its level of international reserves, it said, adding that reserves would remain stable through the rest of the Duterte administration, hedging against external risks and other fiscal problems.
The DBM also said lower interest rates would stimulate economic activity.
“When domestic interest rates remain low, this encourages investment within the economy due to easier access to credit. As such, lower domestic interest rates influence economic expansion,” it explained.
Moreover, the government’s fiscal strategy is manageable and sustainable, as expected gains from infrastructure development will fuel economic growth, the DBM said.
“This growth will outpace the debt burden, and suitably, the Philippines will not be plunged into unreasonable indebtedness,” it said.