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October 06, 2022

Manila is capable of outgrowing its high public sector debt

The highest monetary official of the land, the governor of the Bangko Sentral ng Pilipinas, on Sunday dismissed reports on the supposed dangers of rather high public sector debt, saying the worries are unjustified.

In a viber message to the Bankero.com.ph, BSP Governor Benjamin E. Diokno dismissed the reports out of hand and insisted that the current level of public debt is sustainable.

He said on the basis of the twin metrics used on countries intending to join the European Union (EU), the country’s public sector debt as percent of local output measured as the gross domestic product (GDP) and its budget deficit also as percent of GDP are both manageable.

“At its current ratio, the public debt is quite manageable. The country can easily outgrow its debt since we expect the Philippine economy to grow much faster than its debt. Put differently, the denominator (nominal GDP) is going to grow much faster than the numerator (nominal level of debt),” Diokno said.

The economic managers have reported the debt-to-GDP ratio of 61 percent as at end-December 2021 versus the pre-pandemic ratio of only 39.6 percent of GDP and a budgetrary shortfall equal to 7.5 percent of GDP. Both have sent analysts and observers alike worrying if the numbers are sustainable.

“The short answer is yes,” Diokno said emphatically.

According to him, even as 61 percent, the country’s debt-toGDP ratio is much lower than that of other countries who show ratios higher that 100 percent or even 200 percent of GDP.

Public debt has ballooned because first, the country undertook a massive infrastructure builup dubbed the Build, Build, Bild program and when the pandemic struck, purchased massive amounts of vaccines, built more health facilities and cushioned the vulnerable via cash transfers that quickly inflated government spending.

“Think of the counterfactual: had we not done what we did as a nation and invested in the vaccine, we would still be languishing from COVID-19 and the economy would still be in deep slump,” Diokno said.

“The common misconception is that the absolute level of the public debt matters. It should’nt be. What matters is the level of public debt as percent of the size of the economy, whether public debt is sustainable, and whether public borrowings were justified,” he said in summary.

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