Philippine Markets Newsletter

MONDAY MACRO: Uniform Accounting and this economic ratio prove that the Philippines’ debt is still manageable despite a 5-year high national debt

August 3, 2020

As the Philippine economy struggles during this pandemic, the Bangko Sentral ng Pilipinas (BSP) continues to push for policies that will help boost the economic performance of the country.

This involves borrowing money, either locally or internationally, in order to finance government projects and support businesses amidst the pandemic. As a priority, the government is focused on making sure that the Philippines can make a V shape recovery.

This metric gives insight into the other factors that the BSP monitors when formulating strategies to support the economy.

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According to the International Monetary Fund, the global economy is expected to record -4.9% growth this year before recovering to 5.4% growth the following year.

Growth expectations this year are no different for the Philippines. In our June 15th Monday Macro report, we noted that median estimates are for -1% GDP growth this year, though -4% growth is still possible.

Moreover, the two-week Modified Enhanced Community Quarantine (MECQ) beginning tomorrow, August 4, could add further strain to the local economy. It could also prove to be the respite that the Philippines’ medical system might need.

With the current measures that countries around the world are taking, the coronavirus pandemic is unlikely to die down in the next few months. The Philippine government has expressly stated that a vaccine will be the key to move forward and to be able to fully open the economy once again.

While no such vaccine exists yet, the government will need to continue supporting the ailing economy and stimulate economic activity where they can. This is done through financial assistance to citizens, and through incentivizing banks to provide more accommodative credit standards to ease businesses’ financial burden, particularly Small and Medium Enterprises (SMEs).

To allow various agencies the flexibility to give financial aid, the Philippine government has been ramping up its borrowing activities. External debt has already breached its five-year high in April 2020, as we have mentioned in our June 29th Monday Macro Report.

As this debt number continues to grow, investors are becoming increasingly concerned about the country’s ability to meet its financial obligations. Can the Philippines pay off its debts on time?

If the Philippines is unable to meet its debt obligations, one of the immediate and likely repercussions is the reassessment of our investment grade sovereign credit rating to a lower one.

A lower sovereign credit rating would lead to more costly borrowings for the country. It could also signal to foreign funds investing exclusively in investment-grade-rated countries to pull out its investment in the country.

Despite the looming concern of a potentially ballooning public debt, the BSP reassures that the ar 21.4% in Q1 2020, the Philippines’ external debt-to-GDP ratio is still lower than the average in the ASEAN region. The low ratio indicates that the country has the capacity to service maturing foreign obligations from medium-to-long term (MLT).

Other ASEAN countries’ external debt-to-GDP ratios are 5.9% (Myanmar), 14.3% (Indonesia), 18.1% (Vietnam), 35.6% (Thailand), 43.3% (Malaysia), and 74.8% (Singapore).

One of the BSP’s key external debt indicators is the debt service ratio (DSR), which measures the adequacy of FX earnings in settling maturing obligations. Typically, the lower the DSR, the better it is for the country, meaning its FX earnings (denominator) can cover its financial obligations (principal and interest on the numerator).

Another indicator that the country can still pay its debts is our comfortable level of gross international reserves (GIR), due to FX operations and investment inflows. As discussed in our July 13th report, this exchange buffer for the Philippines is equivalent to more than four times the country’s external debt obligations in the next 12 months.

Currently, the Philippines’ debt profile remains predominantly MLT at 83.6%, meaning most of the country’s debt is not due for at least another year. This also means that at least in the short-term, the country does not have to be too concerned about FX requirements to service this debt.

The country’s ability to manage its debt will depend on the economy’s fundamentals. As we have mentioned in our previous report on Uniform earnings, Uniform earnings is expected to recover in 2021.

As long as the government is able to help in “cushioning the blow” to businesses, the country will be able to make a swift recovery. As we continue to reiterate, the current recession is not credit-driven and an economic recovery will likely be faster than previous recessions.

About the Philippine Market Daily
“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 Daily
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