External debt of the Philippines

The external debt of the Philippines is the amount owed by the government of the Philippines to foreign creditors.

Philippine external debt

Type of debt

The external debt remained predominantly medium to long-term (MLT) in nature, with these accounts representing 90.6 percent of the total external debt. MLT accounts are those which are paid more than a year and is distributed over a longer peiod of time.[1]

Borrower

The Bangko Sentral ng Pilipinas (BSP) is a financial institution that regulates and approves the amount of external debt of the Philippines. It also controls and makes sure that there is enough money to be paid and there is sustainability in the country’s external debt.

Institutional creditors

Country creditors

The Philippines does not only borrow from financial institutions but also to foreign countries with high supply of money. Some of these countries are the United States of America, Japan, United Kingdom, France, and Germany.

External debt ratios

Debt-to-GDP ratio

The Debt-to-GDP ratio is the proportion of a country’s federal debt in relation to its total output or GDP.[2] According to the Bangko Sentral ng Pilipinas (BSP), the ratio of what the Philippines owes from foreign creditors (external debt) to what it has been producing (GDP) has gone through a significant decline from 67.17% in 1999 to 32.61% in 2008. It rose again to 34.03% the following year, but eventually fell down to 31.82% in 2010.[3] Figures have been generally been fluctuating (in terms of public and private external debt). Governments basically aim for low debt-to-GDP ratios because such is an indicator that the economy is producing high enough output to pay off its borrowings.

Debt service ratio

Republic Act 6142 of 1970 defined the debt service ratio as the proportion of the Philippines’ principal and interest payments on medium- and long-term debt to total external receipts or export earnings.[4] Since the past ten years, the Philippines’ debt service burden (DSB) to exports on goods and receipts from services and income noticeably fell nearly by half from 14.64% in 1999 to 7.67% last year 2010. In 2009, however, it increased for the first time since 2001.[3] This is preferred since low debt service ratio characterize better international finances.

Government debt to current fiscal revenue ratio

This refers to the ratio of the external debt of the national government to its total revenues. In the medium run, it has a vacillating trend: 1.73 in 2006, down to 1.33 in 2007, increased to 1.50 in 2007, and further up in 2009 (1.60) and 2010 (1.66).[5][6] Since this ratio actually represents the proportion of what is owed (from foreign creditors) to what was collected, a lower government external debt to revenue ratio is preferred since the Philippines usually have a fiscal deficit (i.e. expenditures is greater than revenues).

Assessment of government performances on external debt

Ferdinand Marcos (Dec 1965 – Feb 1986)

During the years 1966 to 1969, Marcos borrowed a great amount of money to finance his domestic expansion and reforms. This expansion in the government budget led to increases in the current account deficit and crisis in the balance of payments. During the early 1970s, the government aimed at reviving growth and established an economic stabilization plan and a standby credit arrangement with the IMF.[7][8]

Under Republic Act 6142 of 1970, all external borrowing by the public and the private sector with the exception of commercial bank sector must be approved by the Monetary Board. The Management of External Debts and Investment Accounts Department (MEDIAD) within the BSP screened application for all external borrowings and maintained statistics on the country’s external debt; this then was a limitation on debt service and on total external indebtedness. The Foreign Currency Deposit System (FCDS), on the other hand, was in charge of permitting the external borrowing of banking sector—both domestic and foreign owned.[4]

In September 21, 1972, Marcos declared martial law, and in 1973, the current account was improved as the country’s GNP. The next few years was also characterized by strong economic performance with the rise of exports and booming of investment alongside with rise of capital flight and crony capitalism.[8] The end of the 1970s was of high levels of foreign debt and external debt from the public sector. With the second oil price shock during the 1980s, interest rates rose and the government implemented countercyclical policy to increase public investment to maintain domestic incomes.[4]

In 1981, credit grew and in 1982, the Philippines turned to the IMF once again due to BOP difficulties and increase in outstanding oil import credit (85%).[4][9] During 1983, the debt-to-GDP ratio grew to 56% (compared to 35% during 1980) as well as the debt service ratio with 38% (versus 21% during 1980).[4] The government also called for emergency loans from the World Bank and transactional commercial banks. By December 1984, the country chose to abide to certain conditions (such as the peso, etc.) to receive some additional funds. BOP targets were met during 1985 as current account turned positive.[9]

Corazon Aquino (Feb 1986 – Jun 1992)

When Corazon Aquino won the February 1986 presidential elections. External debt increased to some $ 28 billion. She aimed to meet debt-service payments and reduce debt size in the long run. The National Economic and Development Authority (NEDA) recommended a two-year moratorium on debt servicing as well repudiation on “fraudulent” loans. Business-oriented groups and cabinet member objected to this and ultimately, Aquino and the BSP resisted moratorium, opting to maintain a cooperative approach with its creditors.[9][10]

Through the IMF and commercial banks agreements, the Philippines was allowed to enter the Brady Plan, a “3-pronged program” which allowed the government to use funds to repurchase $ 1.31 billion at a 50% discount, to reschedule of its debt due (from 1990 to 1994) and for 80 banks to subscribe to $ 700 million worth of new loans.[9] A multination initiative (1989–1991) called Philippine Assistance Plan (or Multi Aid Initiative) agreed to provide a total of $ 6.7 billion assistance to the country.[10]

Ultimately, the Aquino administration negotiated with various creditor groups to lower interest rates, reschedule the country’s debt and to reduce total debt size itself.[9] “The Aquino administration appeared to be unable to work with the Congress to enact an economic package to overcome the country's economic difficulties.”.[10] Moreover, although debt service payments only undergone slight changes (with BoP pressures still existent), overall growth caused the debt-to-GDP ratio to fall as well as the debt service-to-exports ratio.[9]

Fidel V. Ramos (Jun 1992 – Jun 1998)

The 12th president of the Philippines, President Fidel Ramos was able to uplift the economy of the country through focusing on “people empowerment” and “global competitiveness.”[11] During his time, the Philippines was considered as one of the “Tiger Cub Economies” in Asia with its continuous growth and prosperity.

Under his administration, the Republic Act 7653, more commonly known as the New Central Bank Act was enacted on June 14, 1993. It took effect on July 3 of the same year.[12] This act serves as the governing body of the Bangko Sentral ng Pilipinas (BSP) and its responsibilities, governance, and operations. President Ramos had also boosted foreign trade and investments that increased capital flow into the country. With the reestablishment of the access to debt market, issuance of government bonds in foreign currencies was able to finance the recovery of the country,[13] until the Asian financial crisis of 1997.

In the external sector, the volatility of peso-dollar exchange rates had caused the widening of debt spreads.[14] However, through reforms on debt service payments and reasonable fiscal policy, this accumulated external debt was reduced to more controllable levels. Foreign exchange control was also implemented by reducing the supply of foreign exchange, while increasing the demand.[15]

Joseph Ejercito Estrada (Jun 1998 – Jan 2001)

Estrada administration was not able to follow through on the achievements of the previous administration. Plagued with rumors on corrupt and inept actions of the government, the country lost some of the trust of foreign entrepreneurs and investors, thus reducing the source of finances of the administration. This had further caused the country to borrow from banks and financing institutions in national and international levels, which in turn caused the Philippines to be more in debt.

Faced with a high foreign debt even just after he assumed his office, President Estrada in his first State of the Nation Address (SONA) said that contractionary policies will be employed by cutting back on government expenditures with the help of a budget framework.[16] At the end of 2000, total external debt had decreased from US$52.2 billion to US$52.1 billion. This decline was mainly due to gains from foreign exchange revalution, which was brought about by the strengthening of Japanese yen against US dollar, and to the decline in foreign debt burdens of the commercial banks.[17]

Gloria Macapagal-Arroyo (Jan 2001 – June 2010)

During Arroyo administration, foreign debt of the country had reached its peak in 2003 with an outstanding of US$ 57.6 billion, which is more than the combined borrowings of the last two governments. This has eventually led to a state of fiscal crisis with huge amount of deficit,[18] as admitted by President Arroyo in 2004. As a response to this crisis, the option of an automatic appropriation policy that would allocate funds for debt service payments was questioned.[19]

Appropriation policy means that a portion of government budget for social services is cut to accommodate the fulfillment of external debt burden. From 39% in 2001 to 68% in 2004 of national budget had been allotted to interest and principal payments of debt.[20] The downside however of this policy is that it has greatly compromised the education, health and infrastructure of the country.

The government had also implemented new tax measures to increase government budget, thus lessening the budget deficit. This includes increased excise and corporate taxes, and the most controversial being the increase in value-added tax.[20]

Following this fiscal crisis, the external sector policy for 2005–2006 of the Bangko Sentral ng Pilipinas was focused on the following: (a) to maintain appropriate levels of reserve deposits to ensure liquidity of the economy, (b) to retain market-determined exchange rate, with limited intervention during extreme cases, and (c) control foreign loans, particularly from the public sector.[21] Moreover, less borrowings, improved pre-payment schemes, lower foreign exchange rate and increased government revenue[18] led to a continuous decline of external debt until the last year of Arroyo administration, with an outstanding external debt of US$ 54.9 billion in 2009.[22]

Risks of external debt to Philippine economy

High external debts are believed to have harmful effects to the economy. By having a big external debt, the country might focus too much and allot a big part of its budget to the payment of the debt and forget the other aspects of the country that it has to work on. Also, the reputation of a country is also at stake when external debt is looked at and may discourage investments to enter into the country.

High external debt also tends to precipitate crises - if, at some point, investors lose faith in the Philippines' ability to service its external debt or its ability to roll the debt over, they would be expected to pull capital out of the country. That would lead to a decline in the Peso, making the debt burden (which is largely denominated in dollars) more onerous. This could further undermine the confidence of investors in the Philippines, leading to further capital flight and further Peso declines, creating a self-fulfilling prophecy of eventual default.

Appendix

External debt for selected years

Fiscal year Total debt
[23][24]		 Total debt
as % of GDP		 GDP
($ billions)
2000 $ 51.9 - -
2001 52 - -
2002 50 - -
2003 60.3 - -
2004 57.96 - -
2005 55.6 - -
2006 65.71 - -
2007 54.06 - -
2008 61.78 - -
2009 61.41 - -
2010 $ 62.97 - -
2011 59.77 - -
2012 72.27 51.5% -
2013 72.81 50.2% -

References

  1. ↑ "Publications and Research - Media Releases". Bangko Sentral ng Pilipinas. 29 June 2010. Retrieved May 16, 2011.
  2. ↑ "Debt-to-GDP Ratio". Investopedia. Retrieved 16 May 2011.
  3. ↑ 3.0 3.1 "Selected External Debt Ratios". Bangko Sentral ng Pilipinas. Retrieved 16 May 2011.
  4. ↑ 4.0 4.1 4.2 4.3 4.4 Dohner, Robert; Ponciano Intal. "External Debt and Debt Management" (PDF). Developing Country Debt and Economic Performance, Volume 3: Country Studies - Indonesia, Korea, Philippines, Turkey. University of Chicago Press. Retrieved 16 May 2011.
  5. ↑ "Revenue Performance". Department of Finance. Archived from the original on March 24, 2009. Retrieved 17 May 2011.
  6. ↑ "National Government Debt Indicators" (PDF). Bureau of the Treasury. Retrieved 17 May 2011.
  7. ↑ Roland Dolan, ed. (1991). Philippines: A Country Study. Washington: US Library of Congress.
  8. ↑ 8.0 8.1 Sachs, Jeffrey; Susan Collins. "Debt, Policy, and Performance: An Introduction" (PDF). Developing Country Debt and Economic Performance, Volume 3: Country Studies - Indonesia, Korea, Philippines, Turkey. University of Chicago Press. Retrieved 16 May 2011.
  9. ↑ 9.0 9.1 9.2 9.3 9.4 9.5 Coutsoukis, Photius. "Philippines External Debt". Retrieved 17 May 2011.
  10. ↑ 10.0 10.1 10.2 Roland Dolan, ed. (1991). Philippines: A Country Study. Washington: US Library of Congress.
  11. ↑ "About Fidel V. Ramos". Ramos Peace and Development Foundation Inc. Retrieved May 17, 2011.
  12. ↑ "About the Bank". Bangko Sentral ng Pilipinas. Retrieved May 17, 2011.
  13. ↑ Beja, Jr., Edsel. "The Philippines on debt row" (PDF). Munich Personal RePEc Archive. Retrieved May 17, 2011.
  14. ↑ Gonzalez, Celia (July 7, 2004). "External Debt Management in the Philippines" (PDF). Regional Workshop on Capacity Building for External Debt Management in the Era of Rapid Globalization (Bangkok, Thailand). United Nations Economic and Social Commission for Asia and the Pacific. Retrieved May 16, 2011.
  15. ↑ Yap, Josef (2008). "Managing Capital Flows: The Case of the Philippines". ADB Institute Discussion Paper No. 91: 18–22. Retrieved May 17, 2011.
  16. ↑ "Joseph Ejercito Estrada, First State of the Nation Address". Republic of the Philippines – Official Gazette. July 27, 1998. Retrieved May 17, 2011.
  17. ↑ "Publications and Research - Annual Report 2000". Bangko Sentral ng Pilipinas. Retrieved May 16, 2011.
  18. ↑ 18.0 18.1 "Downloads - Overview of the Philippine Debt Situation". Freedom from Debt Coalition. Retrieved May 17, 2011.
  19. ↑ Remollino, Alexander Martin (2004). "Foreign Debt: The NDFP View". Bulatlat IV (31). Retrieved May 17, 2011.
  20. ↑ 20.0 20.1 Gundzik, Jephraim (June 16, 2005). "Blind debt in the Philippines". Asia Times Online. Retrieved May 17, 2011.
  21. ↑ Tetangco, Jr., Amando (June 29, 2005). "The Monerary Policy of the BSP" (PDF). One year and Counting - How much has been achieved by the government? (Manila, Philippines). Corporate Network Forum.
  22. ↑ "Total External Debt". Bangko Sentral ng Pilipinas. Retrieved May 16, 2011.
  23. ↑ http://www.indexmundi.com/g/g.aspx?c=rp&v=94
  24. ↑ https://www.cia.gov/library/publications/the-world-factbook/fields/2079.html