Near-crisis debt

The Palace has resorted to “fuzzy math,” as one US President had called it, in defending the runaway debt problem, as it released a benchmark for sustainable debt of 70 percent of gross domestic product (GDP).

The figure alone is spine-tingling as it means that for every P10 worth of output by Filipinos the country owes P7.

An economist said it in simple terms — the level of the country’s debt is like having a big credit card bill.

“It’s manageable if you have a steady job, a low interest rate on the debt, and can keep earning more money over time,” he noted.

The economist said that at that level, the economy must grow 6 percent to 7 percent per year, rather than the above-5 percent economic expansion currently being experienced.

Interest rates must be low and most of the debt must be owed to domestic entities that could demand payment in dollars.

The Palace also falsely claimed that all government borrowing was being channeled to projects that enable growth, since a significant portion of the budget is being allocated to unproductive expenditures.

Outstanding debt rose to a record P16.92 trillion by the end of May, according to the Bureau of the Treasury (BTr).

Domestic debt accounts for nearly 70 percent of total borrowing, or P11.78 trillion, against P5.14 trillion in foreign loans.

In 2025, debt payments are projected to reach P2.05 trillion, including P1.2 trillion in principal and P848 billion in interest, outpacing spending on critical sectors such as education (3.6 percent of GDP) and health (1.2 percent of GDP).

The GDP growth of 5.6 percent in 2024 and 5.4 percent in the first quarter of this year fell short of the target of 6 percent to 6.5 percent, contributing to the rise of debt-to-GDP.

Thus, the 70 percent ratio could become increasingly difficult to sustain, particularly as revenue growth slows and debt accumulates.

The debt pile also limits the fiscal room to respond to crises, which are frequent in the Philippines due to its vulnerability to typhoons and to fluctuations in global trade. High debt levels reduce borrowing capacity for emergency spending.

Persistent budget deficits (financed by borrowing) drive debt growth. The Marcos administration added P3.25 trillion to the debt stock since July 2022, with deficits fueling the rise.

A 70-percent debt ratio, which exceeds the 60-percent threshold, may also raise concerns among investors and credit rating agencies, potentially increasing borrowing costs, affecting the investment-grade rating and consequently deterring foreign investment.

Loss of confidence could lead to higher yields on government securities, as seen in past emerging market crises.

Weak GDP growth reduces tax revenue, making the debt burden heavier relative to the economy’s size. If growth falls below the interest rate on debt, the ratio can spiral upward without new borrowing.

What will happen next is investors may demand higher yields if they doubt a country’s ability to repay, especially for nations with weaker institutions or external debt.

This can trigger a debt crisis, as seen in Greece in 2010 when its ratio exceeded 100 percent.

An effective antidote to the debt crisis is a steady, strong growth, but this, too is being missed as the focus has turned to political expediency rather than what was agreed upon in the medium-term development program.

Pork projects have proven to be more palatable to the budget framers than development pursuits.