RP debt to remain high in next 5 yrs – IMF

The country’s debts will remain high in the next five years and make the economy vulnerable even with the gradual decline, the International Monetary Fund (IMF) said.

Excluding government financial institutions, the IMF said the public sector debt alone was equivalent to over 100 percent of the country’s gross domestic product (GDP) in 2003.

The IMF said this ratio has declined to 62.3 percent in 2007 but this was still twice the level of debt in other emerging economies that are competing with the Philippines for exports and investments.

“The sustainability of the Philippines’ public sector debt depends largely on the strength of future reforms,” said IMF resident representative Reza Baqir.

In a report, the IMF said that in the baseline scenario, recent fiscal gains were assumed to be sustained, but no new measures are introduced over the medium term apart from the planned reduction in the corporate income tax (CIT) rate in 2009.

In this scenario, the IMF said the nonfinancial public sector (NFPS) debt would decline, but will remain high at 43 percent of GDP in 2013.

“While the debt dynamics are favorable overall, they remain vulnerable to shocks, especially to the exchange rate and, to a lesser extent, growth,” the IMF said.

However, the IMF said that the currency and maturity structure of public debt was a cause for concern because the share of public debt exposed to exchange rate risk is well above the emerging market average.

The IMF said that a one-time real depreciation of 30 percent, for example, was estimated to entail a 15-percentage point jump in the external debt ratio from its 2008 level and would remain above 50 percent in the medium term.

In addition, the IMF said the maturity structure of public debt remains tilted toward the short end, almost three times the emerging market average. “This renders the debt dynamics vulnerable to a deterioration in investor sentiment,” the IMF said.

On the other hand, the IMF also said external debt has steadily declined—from nearly 80 percent of GDP in 2003 to just over 40 percent in 2007, with the strong peso and stronger growth each responsible for about half of the change.

Under the IMF’s baseline scenario, the external debt ratio would fall gradually over the medium term to just below 30 percent in 2013.

“Such a level of external indebtedness compares favorably with other emerging market economies, and past empirical work suggests that it entails limited vulnerabilities,” the IMF said.

However, the IMF said that continued vulnerability to the exchange rate is expected. Nevertheless, the IMF said the country was showing rising resilience to interest rate and growth shocks.

Given the lengthening of maturities and tilt toward domestic financing, the IMF said external debt had been essentially unaffected by world interest rate and domestic growth shocks.

The IMF said external debt was only moderately affected by non-interest shocks to the current account, ending up five percentage points higher by 2013.