The National Government has started working on a plan to bring down its debt stock to 40% of gross domestic product (GDP) after the ratio reached a 14-year high last year because of the coronavirus pandemic.

The Department of Finance (DoF) is now crafting a debt consolidation plan, said Finance Undersecretary and Chief Economist Gil S. Beltran, which will be approved by the Development Budget Coordination Committee (DBCC).

“A consolidation program to bring back the ratio below 40% of GDP is being formulated. This would be backed up by fiscal reforms. We still have to formulate it but we have started the work,” Mr. Beltran told BusinessWorld via text message last week. 

Officials from the DoF and the Bureau of the Treasury (BTr) declined to disclose more details when asked.

The government borrows from both local and foreign lenders to fund its budget deficit as it spends more than the revenue it generates to pay for projects, especially infrastructure ones, to boost the economy.

The National Government’s outstanding debt hit P9.8 trillion at end-2020, equivalent to 54.5% of GDP, as the state borrowed more due to a pandemic-induced economic recession.

Last year’s debt-to-GDP ratio surged from the record low of 39.6% seen in 2019 and was also the highest in 14 years or since the 58.8% level logged in 2006. The country’s debt level relative to the economy had been on a steady decline since 2004’s peak of 71.6%, based on BTr data. 

The debt-to-GDP ratio measures the outstanding debt of the government relative to the size of its economy, indicating the country’s capacity to pay back its debts.

The DBCC expects the government’s debt stock to continue rising to hit 57% of GDP by yearend and around 60% next year.

Economists said it would take several years for the country to bring down its debt stock to pre-crisis levels, noting the government has to boost investments and stimulate economic growth while spending prudently to do this.

Yuanliu Hu, Institute of International Finance (IIF) economist for emerging markets in Asia, said it may take at least five years for the government to bring down its debt ratio to the levels seen before the coronavirus pandemic.

“For the plan to bring down the National Government debt ratio to 40% of GDP, we believe it will at least take five years. We expect it will rise further and peak at around 60% in 2022, and then gradual reduction. Downside risks may come from the presidential election in mid-2022, which brings some uncertainty to the debt consolidation plan,” Mr. Hu said via e-mail on Friday.

“We believe fiscal reforms that focus on the expenditure side, and especially on reducing transfers and government wages, is more likely than tax increases to succeed in lowering the debt ratio,” he added.

Meanwhile, Brady Seitz, associate economist at Moody’s Analytics, said the country’s debt level is not “at a worrying level” since it is currently in the middle of the pack in the region.

“Stronger economic growth and improvement in productivity growth will be key factors to managing debt. Government revenues declined drastically in the midst of the pandemic and unemployment jumped.  So jumpstarting the economy should still be high priority for fiscal policy this year,” Mr. Seitz said via e-mail over the weekend.

Completing big-ticket infrastructure projects will boost near-term economic growth and longer-term productivity growth, he said, adding the government should also help workers who lost their jobs rejoin the labor force.

“The recently passed CREATE is a good example of policy that the Philippines should be focused on. The reduction in corporate tax rates will prevent more business insolvencies by reducing tax burdens, and brings the Philippines into a more competitive tax situation compared to their regional peers, which will spur more FDI (foreign direct investments),” he added.

Congress last week ratified the Corporate Recovery and Tax Incentives for Enterprises or  CREATE bill that will cut corporate income tax and streamline fiscal perks. The bill is now awaiting President Rodrigo R. Duterte’s signature.

IIF’s Mr. Hu said laying out a medium-term debt consolidation plan could boost confidence in the Philippine economy as it can bring down interest rates and encourage investments and spending.

“From an empirical perspective, a debt contraction plan can lower interest rates and increase investment spending, meanwhile, expectations to reduce future tax burdens will also encourage investment and consumption,” he said.