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Economic conditions

Philippines on Debt Crisis Brink as Presidential Election Heats Up

Strategic Insights

— 1 min read

Fernando Poe Jr.'s populist campaign promises have sparked fears of a debt crisis in the Philippines, a former Spanish colony struggling with a high level of public debt. Economists warn that the country is on a "knife-edge" and could face a default similar to Argentina's notorious 2001 debt crisis. Despite government efforts to smooth and extend the debt profile, the country's skilled debt managers are working with limited support from politicians and Congress, who are wary of imposing higher taxes.

Key Takeaways:

  • The Philippines' public debt has grown steadily due to a persistent budget deficit financed with local and foreign borrowing, with tax revenues as a proportion of GDP falling from 17% in 1997 to just over 12% last year.
  • The government's narrowly defined deficit declined slightly last year, but the overall public sector borrowing requirement rose to more than 7% of GDP, contributing to a growing debt burden.
  • Economists and government officials agree that increasing tax revenue, curbing government spending, and privatizing state companies like Napocor are necessary to avert a debt crisis, but none of these solutions is easy in an election year.
  • The country's economy is remarkably resilient to shocks, with sufficient foreign exchange to pay off obligations for the next 12 months, but a prolonged lack of action could lead to a debt crisis.

Statistics:

  • Public debt as a proportion of GDP in the Philippines is officially 70%, but the real figure is 115% of GDP if contingent liabilities like Napocor's debts are included.
  • The country's tax revenues as a proportion of GDP fell from 17% in 1997 to just over 12% last year.
  • The overall public sector borrowing requirement rose to more than 7% of GDP last year.
  • The country has enough foreign exchange to pay off obligations for the next 12 months.

Sources:

  • The Financial Times article by ROEL LANDINGIN and VICTOR MALLET
  • Standard Chartered Bank's report comparing the Philippines and Argentina
  • An interview with Luz Lorenzo, group economist for ATR-Kim Eng Capital Partners in Manila
  • An interview with Sergio Edeza, Philippines treasurer
  • An interview with Richard Ondrik, chief country officer for the Philippines at the Asian Development Bank

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