Rise in gov’t debt stock still manageable, says AMRO

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THE GOVERNMENT’S debt stock is expected to rise on the back of stimulus spending and weaker tax collections, but the ASEAN+3 Macroeconomic Research Office (AMRO) expects a strong economic rebound could reduce this over the long term.

Based on its latest assessment, AMRO said the Philippines, Indonesia, Malaysia and Thailand will see their debt profile and financing capacity “worsening somewhat” this year through 2021 as the coronavirus pandemic weighs on their fiscal position.

“Debt levels will increase in the short term but a strong growth recovery will lower future debt to GDP levels,” AMRO said in a working paper titled “A Framework for Assessing Policy Space in ASEAN+3 Economies and the Combat against COVID-19 Pandemic” published Tuesday.

It said the Philippine government mainly relies on the local debt market to fund its ballooning deficit seen to hit 9.6% of gross domestic product (GDP) this year, while the bulk of its external financing are sourced from development lenders such as the World Bank and the Asian Development Bank (ADB).

AMRO expects the country’s GDP to shrink by 7.6% this year as the pandemic hampers economic activities, before growing by 6.6% in 2021. It said it may take until 2022 before the Philippine economy goes back to its pre-pandemic growth rate.


The government projects the country’s overall debt to hit P10.16 trillion by yearend as it borrows more to make up for the falling tax collections and higher spending during the pandemic. With this, the debt stock is estimated to rise to 53.9% of GDP this year, and further to 58.3% in 2021 and 60% in 2022. In 2019, debt stock reached a record low of 39.6% of GDP.

When the pandemic began, AMRO said the Philippines was in a good financial position after lowering its debt stock level and improving the capacity to raise more revenues through tax reforms.

The report assessed the policy space of selected emerging economies in the ASEAN+3 region in the future, including the Philippines, China, Japan, Korea, Indonesia, Malaysia, Singapore, Thailand and Hong Kong.

“Policy makers across the world have deployed unprecedented policy measures to mitigate the impact of the COVID-19 pandemic on the economy. The extraordinarily large economic stimulus packages could significantly narrow policy space in the future,” AMRO said.

The Philippines is also among the emerging Asian markets that have large fiscal buffers, and has more room for expansionary fiscal policy, based on AMRO’s assessment of debt sustainability indicators. The Philippines and Hong Kong are followed by Indonesia, Korea, Thailand, and Malaysia with “moderate room”; while China has “some room” for a bigger debt stock. Japan and Singapore are left with limited space.

Considering the other indicators, AMRO noted the Philippines and Malaysia “are less vulnerable” to external risks because non-residents hold a lower share of government securities.

Meanwhile, AMRO said none of the countries studied were showing any symptom of a buildup in credit bubbles.

“The Philippines’ fiscal position has improved quite significantly after the GFC (Global Financial Crisis of 2008) with government debt declining from more than 70% to around 40% of GDP. The government has enhanced its tax mobilization capacity and tax administration efficiency by pushing forward tax reforms,” it said.

AMRO said limitations on fiscal policy may largely depend on the funding capacity of domestic investors, while the state also moves to improve line agencies’ ability to implement programs and spend more efficiently.

Also, AMRO warned the stimulus packages launched by countries during the pandemic will have a long-term impact on the fiscal position of emerging markets. 

“When economies emerge from the current crisis, both public and private indebtedness are expected to increase significantly. The financial system is also likely to become more fragile owing to loan losses and impaired balance sheets of borrowers. In addition, a likely prolonged period of accommodative monetary policy may also lead to rising financial imbalances going forward,” AMRO said.

Macroeconomic management will also be more difficult if inflation rises.

“The reduced fiscal policy space necessitates strong commitment to fiscal discipline and a credible medium-term plan to keep debt levels in check. Once the pandemic subsides, regional economies must start rebuilding their respective policy spaces by prioritizing fiscal discipline and prudent debt management,” it added.

Finance Secretary Carlos G. Dominuez III has said the government will maintain its “fiscal stamina” when it comes to stimulus spending to ensure that it can battle a prolonged crisis. — Beatrice M. Laforga