Diokno: Rising debt sustainable as economy gains strength

MANILA, Philippines — The country’s debt level, which is now at a record high of P13.52 trillion, will remain sustainable as long as the overall economy is growing at a strong pace, according to Finance Secretary Benjamin Diokno.

In a message to reporters, Diokno reiterated that the country’s debt level, when measured against the gross domestic product (GDP), is more important than its absolute level.

“What matters is the sustainability of debt, which depends on two things: the cost and the ability to pay it off,” Diokno said.

“The country’s ability to pay off its debts is expressed in its debt-to-GDP ratio. While the absolute level of debt may increase, the economy’s ability to pay also increases from the economic gains and investments it pursued, including where the debt is used for,” he said.

The country’s debt stock is currently at a record P13.52 trillion as of end-September, overshooting the expected obligations of the government by yearend at P13.43 trillion.

Likewise, the country’s debt-to-GDP ratio increased to 63.7 percent in the third quarter. This is above the 61.8 percent target for the year.

Nonetheless, Diokno argued that as long as the economy is growing faster than the growth of public debt, then the level of debt becomes sustainable.

The economy grew by 7.6 percent in the third quarter, effectively bringing the year-to-date average expansion to 7.7 percent. Such a rate now falls above the 6.5 to 7.5 percent full-year assumption set by the economic team.

“The debt-to-GDP ratio was below 40 percent before the pandemic and went up to 62 percent this year as revenues fell while pandemic-related spending rose. With sustained and strong growth, we expect the debt ratio to fall to about 50 percent by 2028,” Diokno said.

Further, the finance chief argued that the government’s prudent strategy over the years enabled it to meet its financing needs at the lowest possible cost, consistent with a prudent degree of risk.

The government considers all risks when it borrows such foreign exchange, liquidity and interest rate, Diokno said.

He said the government targets a mix that is heavily skewed toward local financing as heavier reliance on domestic broadens the domestic bond market.

On liquidity, he noted that a more stretched out and well distributed repayment schedule is preferred, even though coupons on short-term debt instruments are lower.

“Most of our debts are either medium or long-term,” Diokno said.

He added that the government also considers interest rate risks or that of abrupt spikes that cause rates to balloon, thereby limiting fiscal space for productive spending.

“Debt with floating interest rates appears cheap but is subject to immediate repricing when interest rates rise. Hence, given the present elevated fiscal uncertainty, we prefer to incur debt on fixed interest rates term,” Diokno said.