Conclusion
WHILE economic managers of the current administration claim that the government has enough fiscal space for more debt—especially as the current administration vows to speed up infrastructure spending—global ratings agency Moody’s International Service said the country’s debt affordability will largely depend on its capacity to ramp up revenues with new reforms in place.
International credit watcher Moody’s Vice President and Senior Credit Officer Christian de Guzman told the BusinessMirror the government’s new Comprehensive Tax Reform Program (CTRP) will be crucial to providing the government the fiscal space needed to carry on more debt to finance its infrastructure ramp-up promise.
“The capacity of this government to carry more debt will ultimately depend on revenue performance, hence the administration’s focus on passing the Comprehensive Tax Reform Package,” de Guzman said.
“At the same time, debt sustainability is aided by the high rates of nominal GDP,” the Moody’s official added.
The Philippines’s unconsolidated general government debt fell to 38.3 percent of GDP in 2016, from a recent peak of 47.8 percent in 2009, as supported by strong GDP growth and tighter fiscal policy.
Moody’s noted the Philippines’s improvement in its general government debt is bucking the trend of its similarly rated peers—whose unconsolidated general government debt has trended higher in recent years.
Government options
DE Guzman forecasts the country’s general government debt to fall to around 37 percent of GDP by 2017.
Moody’s definition of general government debt, as projected, strips out the government’s holdings of its own bonds in the Bureau of the Treasury’s (BTr) bond-sinking fund—holding an accounting difference with how the BTr computes its forecast for the national government debt.
De Guzman said the risks to their longer-term fiscal outlook still also depend on how revenue shapes up, especially with how the government intends to implement the new tax-reform package.
“In the absence of additional revenue that could be generated by [the] CTRP, the government faces a choice between curtailing expenditure to keep deficits manageable and, on the other hand, maintaining spending at the expense of wider fiscal deficits and higher debt,” de Guzman said.
The House of Representatives passed the first package of the CTRP earlier this year and is currently being tackled in the Senate. The President has also called for a speedy passage of the tax-reform program in both houses in his recent State of the Nation Address.
Moody’s has earlier expressed positive views on the tax-reform package, saying this is credit positive for the Philippines. Currently, Moody’s puts the Philippines at Baa2 with a stable outlook, noting that the country still collects less revenue than most of its similarly rated peers.
Revenue effect
THE international credit watcher also said although estimates of the tax reform’s revenue effect are still forthcoming, Moody’s expects that the country’s debt-affordability ratio will fall to less than 13 percent by 2018, from the 24.4 percent in 2010, should the bill pass into law later this year.
This is, however, still materially above the 8.5-percent median debt-affordability ratio amongst Baa2-rated sovereigns.
The borrowings made by the government, and will continue to make, will be allocated for productive expenditures, mainly in infrastructure, as what the Duterte administration is concentrating on.
“With lower debt-service burden, more and more of proceeds from borrowings are being allocated for productive expenditures, particularly infrastructure, as we ramp up spending to address infrastructure deficiencies with investments to amount to 5.3 percent of GDP in 2017,” it added.
Deciphering debt
NON-GOVERNMENTal group Freedom from Debt Coalition (FDC) said to fully understand the country’s debt ecosystem, an audit is required.
A debt audit is a process to fundamentally decipher the country’s debt, FDC President Eduardo C. Tadem told the BusinessMirror through electronic mail.
“It will look into context and circumstances surrounding the transactions, process of transactions and finalization of debt contracts, content of the contracts, purpose of the debt, how the funds were actually used, impacts of the policies and projects funded by the debt and impact of the conditionalities accompanying the debt contracts,” Tadem explained. “The debt-audit initiatives aim to develop a critical, comprehensive, participatory and transparent examination of the debt problem with the end in view of producing far-reaching and comprehensive systemic solutions and formulating immediate policy proposals and advocacy platforms based on the findings.”
Furthermore, FDC said, the debt audit is a method to evaluate the country’s debt problem, policies, existing laws and institutions that impact on the state’s borrowing tack. “It [audit] is useful in identifying relevant structural flaws and deficiencies that exacerbate, compound and perpetuate the debt problem,” Tadem said.
He added the debt audit is expected to create more fiscal space for the government and lead to reforms in public fiscal policy.
The reforms include renegotiating, canceling or repudiating, based on widely accepted principles, standards and procedures, debts proven to be illegitimate. Likewise, FDC expects the audit would lead to the institutionalization and implementation of more prudent, democratic and responsible sovereign lending and borrowing policies.
“It would also redound to the benefit of the Filipino people in terms of potentially greater revenue streams for immediate and strategic development needs,” Tadem said.
With Rea Cu
Image credits: Nonie Reyes