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October 06, 2022

Emerging markets tread perilous waters with substantially higher government debt

The International Monetary Fund has published a note citing the risks emerging market economies as the Philippines are exposed to by contracting larger-than-normal government debt, saying such economies are treading “perilous waters.”

In its most recent blog on the subject, the IMF acknowledged the accumulation of such debt as owed to the necessity of responding to the pandemic as swiftly and effectively as countries can.

Nevertheless, the IMF expressed its apprehension: “Emerging market and developing economies are facing complex challenges, with weaker growth prospects, limited fiscal space, and higher refinancing risks due to the shorter maturity of public debt, according to the IMF’s October 2021 Fiscal Monitor. Many are debt intolerant because, among other factors, of their credit history and greater macroeconomic volatility.

In the Philippines, fiscal and monetary authorities have downplayed the risks attendant to government sector debt reaching P11.729 trillion as at end-December 2021 which at 60.5 percent of local output measured as the gross domestic product (GDP) is already above the globally accepted threshold of 60 percent.

Various economists have noted that in 2020 this metric stood at only 54.6 percent of GDP and likewise prompted the IMF to note that many countries reported debt crises in the past “at lower debt levels than those prevailing in 2021.”

Higher government debt levels across emerging markets are of special interest to the IMF given that tighter monetary policies in advanced economies should soon push global interest rates higher, a development that tends to put pressure on local currencies such as the Philippine peso and raising the odds of debt defaults.

This metric is used by foreign investors to measure a country’s ability to make future payments on its debts and thus have bearing on a country’s borrowing costs and bond yields.

Government debt averaged 55.1 percent of GDP from 1990 to 2020 and was highest at 74.9 percent of GDP in 1993.

Its most favorable moment was when the metric equaled only 39.6 percent of GDP in 2019, its lowest on record.

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