THE Philippines and India are “most at risk” of having to refinance debt in an environment of rising interest rates because of the short-term debt they are carrying in their financing mix, ANZ Research said in a report on Wednesday.

“The maturity profile of government debt is an important consideration. The greater the proportion of short-dated debt, the faster it takes for the budget squeeze to materialize. In this context, India and the Philippines appear to be most at risk of a quicker jump in debt servicing costs,” it said.

The Philippines and India had “the highest share of debt maturing in the next one to three years that may need to be refinanced at higher rates.”

The Philippines’ debt maturity profile indicates that largest slice of its debt is due to mature in three to five years. The next-largest component is debt maturing in one to three years.

The report came to this conclusion after analyzing India, Indonesia, Malaysia, Thailand, and the Philippines.

Relative to pre-pandemic levels, end-2021 public debt was higher by an average of 14.6% of gross domestic product (GDP) in the countries studied.

“The largest increase amounted to nearly 20% of GDP in the Philippines, with that in India and Thailand only marginally lower,” the report said.

“Consequent to the adoption of these aggressive fiscal policies, mandated public debt ceilings were relaxed in India, Indonesia, Malaysia and Thailand. The Philippines does not have a mandated ceiling but nonetheless, debt has exceeded 60% of GDP, the threshold regarded by policymakers as prudent,” it added.

The National Government’s (NG) outstanding debt was down 2.1% at P12.5 trillion at the end of May.

At the end of the first quarter, the Philippines’ debt-to-GDP ratio was 63.5%, against 60.5% at the end of 2021 and 39.6% at the end of 2019.

The highest debt-to-GDP on record was 65.7% in 2005.

“In our view, the National Government debt has already peaked… Although fiscal policy is becoming more conservative, bringing debt back to the pre-pandemic level of around 40% will be challenging. The government is also looking at a gradual reduction of the pandemic-related debt of around P3.2 billion (about 14.8% of GDP),” ANZ Research said in a separate report.

The interest payments to revenue ratio could also further rise “considering the steady increase in interest rates.”

“Official estimates suggest that for a 1% increase in the interest rate, debt-servicing costs rise by around 0.5 percentage point. Meanwhile, the growth to interest rate differential, an important determiner of debt sustainability, is also likely to narrow as economic growth stabilizes amidst rising borrowing costs,” it said.

However, it is also possible that “a structural rise in public indebtedness will decrease policy space to cope with unforeseen shocks, particularly against the backdrop of rising interest rates and slower global growth,” ANZ Research said.

On the fiscal side, the NG is targeting to reduce the budget deficit from 7.6% to just 3% by 2028.

ANZ Research gave its own estimate at 7.7%, accounting for a possible incremental rise in revenue that does not offset the supplementary spending requirements.

“The pre-pandemic medium-term objective was to stabilize the budget deficit at this level. Underlying this reduction is a combination of expenditure reduction and revenue enhancement, the latter recovering to its 2019 pre-pandemic level of 16.1% of GDP,” ANZ Research said.

The NG projects to hit the 16% mark by 2025.

“While this is not a tall order, the underlying assumptions of annual real GDP growth being sustained at 6-7% will be challenging,” it added.

Economic managers recently revised their growth projections, targeting 2022 growth of 6.5-7.5%.

For 2023 to 2028, the growth target was 6.5-8%. — Diego Gabriel C. Robles