Philippine Markets Newsletter

MONDAY MACRO: Are the effects of the pandemic borrowing finally upsetting the improving Philippine debt quality trends?

February 21, 2022

With lockdowns easing across the Philippines, the borrowing of $5 billion from foreign creditors to combat the pandemic seems like a memory of yesterday. However, debts must be repaid and questions over the country’s credit are being raised following the elevated levels of borrowing over the past two years.

The debt-to-GDP is a popular metric to assess the country’s credit quality. Today, we highlight a more accurate indicator in determining the true credit quality of the country.

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In the middle of 2021, the Philippines saw daily COVID cases halve as the number of people with full vaccination or booster shots rose. With this in the backdrop, Moody’s affirmed the country’s Baa2 rating with a stable outlook for the country, together with a 5.8% GDP growth forecast..

However, just two months after this announcement, the country saw its daily case count triple with the Omicron variant, and Moody’s revised its GDP growth estimate down to 4.8%. Despite this, the country’s credit rating was unchanged.

Although rating agencies are widely criticized for issuing ratings that do not necessarily reflect the subject’s true credit status, global institutions still largely rely on these ratings when they think about where to invest. 

Moody’s increased confidence in the Philippines helps the country to keep good credit standing in the international community. Foreign investors and creditors have an easier time assessing the risk of investing or lending money in the country.

With conditions improving in the country, Moody’s once again raised its GDP growth estimate for 2022 to 6.2% from 5.6% with fellow rating agency S&P seeing 7.4% with no estimate below 7% for the year.

Vaccination rollouts, quarantine measures, and other pandemic efforts are to thank for this improvement. The focus then turns to the debt borrowed by the government to fund these efforts—the country is continuing to see its debt-to-GDP ratio rise out of its long downward trend from over a decade ago.

In 2004, the debt-to-GDP ratio was 72%, going as low as 40% in 2019 before bouncing back to 54.6% in 2020 and 60.5% in 2021. 

Prior to the new data, we discussed flaws in the debt-to-GDP ratio such as how much debt is owned by local creditors. With 70% of the Philippine government’s debt being peso-denominated, the government can print money in dire circumstances to pay off the debt, trading inflation tomorrow for stability today.

We also raised the issue that debt-to-GDP implies that sovereign debt is settled within a year with the truth being that sovereign debt lasts for years and even decades. Therefore, by the time the debt is paid, its proceeds would have already generated economic growth whose tax revenues should have offset the debt’s borrowing costs.

Therefore, it’s more important to look at the principal and interest payments of the loan, to get a clearer picture of a government’s annual obligations. This is commonly known as the Debt Service Burden (DSB).

In our previous update, the only available data was that of 2020, which meant that debts to be serviced in 2020 were those in prior years. With a full year of data behind us as the second year of the country’s fight against the pandemic starts, we now see the ability of the country to service the more important components of debt.

In 2020, the DSB-to-GDP ratio was at 2.0%, which reflects low borrowing costs against the backdrop of a 10% contraction in GDP. For just the first three quarters of 2021, however, the DSB-to-GDP ratio is already at 2.6%, which is just shy of 2013’s 2.7% and is higher than all of the years in between the nine-year span. 

This indicates borrowing costs that have grown faster than that of the country’s GDP. It seems that the cost of debt incurred for the pandemic is finally catching up. However, at current low levels, the country is still able to comfortably service the principal and interest payments on its loans.

So while the debt-to-GDP did jump at a faster rate during the pandemic, DSB-to-GDP remains below the 10-year high. This means the Philippines is unlikely to default on these loans as it is still able to pay for principal and interest due. In this case, optimistic forecasts by rating agencies may be warranted.

About the Philippine Markets Newsletter
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available. 

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data. 

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms. 

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful. 

Stay tuned for next week’s Monday Macro report! 


Angelica Lim 
Research Director
Philippine Markets Newsletter
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