Foreign debt hits record high in Q1 but remains manageable

CEBU, Philippines — The Philippines’ foreign debt hit a record high of $128.7 billion by the end of March, marking a $3.3 billion increase from the $125.4 billion as of end-December 2023, however, the government reassures the public that the debt remains at manageable levels, according to a report from Bangko Sentral ng Pilipinas (BSP) on June 14, 2024.

One of the key metrics used to gauge debt sustainability to indicate the country’s ability to handle its debt burden effectively is the debt-to-gross domestic product ratio, which currently stands at 29% for the Philippines.

This ratio is considered prudent and indicates that the country’s debt burden, relative to its economic output, is at a moderate level compared to many other nations.

Additionally, the debt service ratio (DSR), which measures the amount allocated to debt payments for export earnings, improved to 8.9% from 13% in early 2024. This positive trend suggests that the Philippines has sufficient income from exports to comfortably meet its debt obligations.

Moreover, the rise in external debt can be attributed to heightened borrowing activities in both the private and public sectors within the Philippines.

Private banks sought funds primarily for business purposes such as corporate expenses and debt repayments, while the government secured loans to finance various projects, including tax enhancements and digital technology initiatives.

Foreign investors displayed confidence in the Philippine economy by increasing their investments in Philippine debts, contributing to the overall escalation in external debt. Fluctuations in exchange rates also played a role in influencing the debt amount, albeit not significantly enough to offset the overall increase.

Reflecting on the past year, the country’s debt has expanded by $9.9 billion, representing an 8.3% growth rate from the $118.8 billion level recorded on end-March 2023. This surge predominantly stemmed from heightened borrowing by private enterprises and increased investments in Philippine debt securities by foreign entities.

The composition of the debt portfolio varies in terms of repayment timelines, with the majority (86.7%) classified as long-term debt, due in over a year. Long-term debt is generally considered less risky due to the extended repayment period, while the remaining portion comprises short-term debts necessitating repayment within a year.

Regarding the creditors, a substantial portion of the Philippines’ debt is owed to official sources, including multilateral institutions and bilateral creditors. Notably, the United States and Japan emerged as key lenders to the Philippines, underscoring the country’s global financial relationships.

Despite the escalating external debt, both the government and experts maintain confidence in the country’s ability to manage and repay the debt responsibly. This balance is crucial for upholding stability and ensuring that borrowed funds are channeled towards fostering the Philippines’ growth and development. — Renee Ross Villariasa, CNU Intern (FREEMAN)