National government debt rises 9.6% in 2018

NATIONAL government debt rose by nearly a tenth in 2018 driven by increased borrowings and a weaker peso, with the Asian Infrastructure Investment Bank (AIIB) projecting financing costs to rise in the year ahead.

Debt was P7.293 trillion at the end of 2018, up 9.6%. The Bureau of the Treasury, however, noted that debt made up a smaller share of the economy.

Month-on-month, obligations at the end of December rose 1.35%.

Two-thirds or P4.777 trillion of the total was provided by domestic lenders. The Treasury also issued more debt paper, while the weaker peso raised the value of dollar bonds.

The peso averaged P52.7691 against the dollar during the month, against the P50.3947 year-earlier rate.

Funds raised from foreign sources accounted for P2.516 trillion. Currency fluctuations raised the amount by P22.59 billion, alongside additional borrowings worth P6.02 billion.

The Philippines owes P1.568 trillion to foreign investors who availed of debt paper in other currencies. There were P1.306 trillion worth of outstanding dollar bonds, P129.679 billion of peso global bonds, P121.75 billion yen notes and P11.166 billion worth of yuan notes.

The Philippines sought to diversify its funding sources last year by tapping new markets via so-called samurai and panda bonds.

Despite aggressive fund-raising activities, the share of debt relative to gross domestic product (GDP) declined to 41.9% from 42.1% in 2017.

“The lower debt-to-GDP ratio is due to the moderate increment in debt as a result of prudent cash and debt management and steady economic growth,” the Treasury said in a statement.

The economy expanded by 6.2% in 2018, slower than 2017’s 6.7% and settling well below the adjusted 6.5-6.9% target set by the government.

On the other hand, guaranteed obligations stood at P487.59 billion in December, 2% higher mainly to cover foreign currency adjustments.

The government relies on a mix of domestic and foreign borrowings as it operates on a budget deficit to support a growing economy.

LOANS TO RISE FURTHER
In a separate report, China’s AIIB said borrowing costs, particularly for infrastructure projects, will likely rise in the Philippines and in the rest of the region.

The development lender said construction costs are rising here, driven by expectations of a weak peso and strong demand for raw materials as the government goes deeper in its infrastructure drive.

“Construction materials need to be imported, making costs vulnerable to peso’s depreciation, which The EIU projects will continue in 2019 – driving input prices up and increasing inflationary pressure,” the bank said in its Asian Infrastructure Finance 2019 report published yesterday.

“At the same time, structural factors such as high capacity utilization and a relatively tight labor market will continue to push up domestic prices.”

This will follow a trend across Asia, although the Philippines is expected to be somewhat cushioned from the rising yields in developed nations.

“[E]merging economies in Asia are likely to find that debt will be more expensive in the coming years, particularly with the reliance on dollar financing for larger infrastructure projects,” the AIIB said.

“Where the financing space is primarily dominated by domestic banks, such as in the Philippines or Thailand, the impact will be more indirect.”

However, AIIB pointed out that majority of infrastructure financing in the country is expressed in pesos, supported by the “high liquidity” of the local banking sector.

“An increase in long-term debt financing costs is expected in the next 12 months due to high/rising inflation rates, as well as uncertainly surrounding tax reforms in the Philippines,” it added. —