The debt-to-GDP ratio is expected to peak at 66.8% by 2024

NATIONAL GOVERNMENT debt as a percentage of gross domestic product (GDP) is expected to peak at 66.8% by 2024, the Philippine Institute of Development Studies (PIDS) said in a recent working paper.

Using a method of debt sustainability analysis employed by the International Monetary Fund, the PIDS found that “the public debt-to-GDP ratio could remain high over the medium term, peaking at 66.8% in 2024 and falling to 65.7% by 2026”.

He said the recent debt spike is “less worrisome” compared to previous debt episodes.

The findings were included in the working paper titled “Fiscal Effects of the COVID-19 Pandemic: Assessing Public Debt Sustainability in the Philippines.”

“In our analysis of the immediate impact of the COVID-19 pandemic and related fiscal responses on public finances in the Philippines in a historical framework, the most recent debt spike appears less worrisome than previous debt episodes. insofar as it is not due to high interest rate shocks, excessive external debt or an accumulation of hidden (non-fiscal) deficits, nor a steady decline in the country’s fiscal effort” , according to the document.

“Instead, the debt decomposition shows that the surge was caused by an exogenous (pandemic-induced) decline in output growth and a resultant rise in primary deficits as incomes temporarily collapsed and that government relief and recovery spending has accelerated.”

Once GDP growth returns to pre-pandemic levels this year, “fiscal deficits will tend to decline and interest growth differentials will remain negative, generating favorable conditions for debt reduction in the short and medium term. term,” the PIDS said.

The Philippine economy grew 8.3% better than expected in the first quarter, surpassing the pre-pandemic output level as household spending jumped amid the easing of coronavirus curbs.

Preliminary data released by the Philippine Statistics Authority showed GDP grew 8.3% year-on-year between January and March, a reversal from the 3.8% contraction in the same period last year. latest. It was also faster than the revised growth of 7.8% in the fourth quarter of 2021.

Meanwhile, national government debt at the end of March was 12.68 trillion pesos, or 63.5% of GDP, based on data provided by the Treasury Board (BTr).

The state-run think tank’s estimated level of debt to GDP by 2024 would be the highest since the 71.6% recorded in 2004, based on historical data from BTr.

However, the nature of the debt that has accumulated during the COVID-19 pandemic bodes well for repayment prospects and the reduction in the ratio of debt to the size of the economy, the PIDS said. .

“Given that half of the debt accumulated at the height of the pandemic crisis (6.3 of the 15% increase in GDP in 2020) included government cash reserves that were built up in the event of a prolonged pandemic ( and to benefit from loose monetary policy). debt to GDP would follow a similar but much weaker trajectory.

The working paper concludes that “it may not be feasible to immediately aim for a low debt ratio to give the economy time and headroom to recover from the pandemic shock, but nonetheless underlines the importance a solid medium and long-term fiscal consolidation plan”. .”

The analysis also found that the Philippines and other ASEAN countries “are responding to rising indebtedness by improving primary balances. In the literature, such systematic behavior indicates responsible fiscal policy and already guarantees fiscal solvency.

“It is therefore crucial that fiscal policy reforms, especially hard-won ones, remain intact,” the PIDS concluded.

Written by economists Margarita Debuque-Gonzales, Charlotte Justine Diokno-Sicat, John Paul Corpus, Robert Hector Palomar, Mark Gerald Ruiz and Ramona Maria Miral, the working paper was released on May 18. Keisha B. Ta-asan

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