By Mikhail Franz E. Flores, Reporter

PHL debt lags emerging markets; consumer lending an opportunity -- McKinsey

Posted on February 16, 2015

THE PHILIPPINES has been one of the few countries that has successfully managed its debt since the financial crisis, McKinsey & Co said last week, bucking a global trend of rising debt since the 2007 recession which poses fresh risks to the economic prospects of both advanced and emerging markets.

“The Philippines is one of the few countries in the world that has seen deleveraging. The ratio of total debt-to-GDP has been flat since 2008. In fact, it has declined if we look as far back as 2000,” Suraj Moraje, McKinsey Managing Partner in the Philippines, said in an e-mail.

McKinsey Global Institute, in a report titled “Debt and (not much) Deleveraging”, warned that the failure of most economies -- both emerging and advanced -- to reduce debt as a percentage of gross domestic product (GDP) could pose a drag on growth.

“Debt will remain an essential tool for the global economy, funding needed investments in infrastructure, business expansion and urbanization. But high debt levels, whether in the public or private sector have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions,” the report noted.

For the Philippines, McKinsey said the country’s debt-to-GDP ratio -- which includes debt held by households, non-financial corporations and the government -- stood at 116% in the second quarter of 2014, up four percentage points since 2007 but lower than the 121% average in emerging markets.

Broken down, corporates have the highest share of debt as a percentage of the economy at 71%, followed by the government at 40% and households at 6%.

“There is an opportunity to expand household credit, which includes mortgages, auto loans, and other forms of consumer credit. Household debt in the Philippines is only 6% of its GDP, compared to 20% in Indonesia and an average of 25% of GDP in emerging markets,” Mr. Moraje said.

“Given the low percentage of household debt, there is definitely an opportunity for further growth in consumer borrowing. However, doing so in a manner that is sustainable will require improved risk-management capabilities in the country’s financial services sector,” he added.

The country’s debt level, Mr. Moraje said, would likely have little impact on the country’s growth prospects.

“Given the Philippines’ low level of overall debt, our research does not show that this will negatively impact the country’s future economic growth. The Philippine government has reduced its debt ratio over the last decade, and the level of corporate debt is similar to those seen in other countries,” Mr. Moraje said.

Moving forward, Mr. Moraje said the country should further develop its financial sector, particularly the banking system, equity and fixed income markets and financial services for households.

“This type of healthy ‘financial deepening’ is an important process seen in countries around the world, and is vital to enable businesses to grow and countries to develop their infrastructure, housing as well as education and health care systems as incomes rise,” Mr. Moraje said.

At the same time, he added policy makers should avoid boom-bust credit cycles.

“This includes maintaining limits on loan size and lending standards, establishing good credit rating systems, and developing efficient bankruptcy courts and other mechanisms for resolving bad debt,” Mr. Moraje said.

“They should also encourage growth of both banks and non-bank financial institutions, such as insurance companies, pensions, and other asset managers,” he added.

The national government’s debt stock totaled P5.735 trillion at the end of 2014, up from the P5.681 trillion recorded in 2013, Treasury data showed.

The end-2014 tally brought the country’s debt as a percentage of the economy to 45.4%, lower than the 49.2% in the previous year.

McKinsey said global debt last year hit $199 trillion or 286% of the world economy, up $57 trillion since the $142 trillion recorded in 2007, which was 269% of GDP.

The study looked into the debt levels of 47 countries: 22 advanced economies and 25 emerging markets.