Vicious debt cycle upon us

Under the current regime, the Philippines is sinking irretrievably into an unprecedented financial morass that will shackle generations of Filipinos.

The country’s external debt reached $137 billion (P7.7 trillion) in 2024, more than doubling from $65 billion in 2010 and up 38 percent from $99 billion in 2020, according to recently released World Bank data.

Such an unrestrained accumulation of foreign debt, for one, erodes financial sovereignty, narrows the policy space for future administrations and diverts resources away from essential public services, education, healthcare and infrastructure development that Filipinos desperately need.

For 2024, the external debt is equivalent to 110 percent of exports, which is moderately high and indicates a heavy reliance on export earnings to service debt.

It is also about 26 percent of gross national income (GNI), a figure that is moderate by international standards.

Debt service is about 14 percent of exports, which the World Bank considers risky.

The debt composition is multilateral, or about 42 percent, broken into the World Bank (18 percent), Asian Development Bank (19 percent) and others (5 percent); private creditors, mostly through bonds, take up 46 percent; and bilateral is 12 percent, mainly with Japan.

Total external debt grew by $38.5 billion, or 39 percent, from 2020, while publicly guaranteed debt rose from $56.5 billion to $80.5 billion, or 42 percent.

Net debt inflows averaged $15 billion a year for 2023 and 2024.

Thus, the debt service burden is rising fast as interest payments on long-term debt almost doubled from $2.9 billion in 2020 to $5.8 billion in 2024; while principal repayments are also climbing again after a dip during the Covid pandemic.

The external debt buildup is directly financing persistent large fiscal deficits.

In 2023 to 2024 alone, the country received $47 billion in gross long-term disbursements while repaying only $22 billion in principal, resulting in a net long-term borrowing of $25 billion over the two years.

Adding net short-term flows and equity, total net financial inflows were $17.5 billion in 2024 alone. These inflows essentially cover the portion of the budget deficit that cannot be financed domestically.

When the government runs a fiscal deficit larger than local banks and domestic investors are willing or able to absorb, it turns to external borrowing, such as multilateral loans, Eurobonds and bilateral loans.

The sharp increase in bondholder debt (private creditors) from $27 billion (2020) to $37 billion (2024) showed heavy use of international capital markets to plug annual budget gaps.

Rising interest payments, which were $5.8 billion in 2024, are now consuming a growing share of the budget, creating a so-called feedback loop in which larger deficits result in more borrowing and higher debt service, which in turn contributes to even larger deficits.

In short, the country is increasingly relying on external debt, particularly commercial bonds and multilateral institutions, to finance ongoing fiscal deficits that the domestic financial system cannot fully fund.

This strategy has driven the country’s external debt stock up by nearly $40 billion in just four years, making debt servicing significantly more expensive.

It is a burden that compounds silently, accruing interest with every passing day, and one that will inevitably be shouldered by the taxpayers who, incidentally, had no hand in the decisions that created it.

Unless decisive, transparent, and responsible fiscal management is restored, the country risks entrenching itself in a debt trap from which recovery may take decades.

A vicious cycle is created as the rising cost of debt repayments and the risks they entail push the government toward progressively costlier borrowing.