Fitch Predicts Decrease in PH Debt to GDP Ratio

The Philippine government’s debt will shrink over the next few years if economic growth is maintained above 6 percent and the tax base is expanded, Fitch Ratings, which monitors the debt, said.

The Fitch report said that current statements, such as those made by Treasury Secretary Benjamin Diokno, seem to indicate a desire to improve tax administration in order to increase government revenue, suggesting some upside risk to his revenue estimates.

It says the credit profile will benefit from a sustained expansion in the government revenue stream, which will strengthen fiscal balance sheets and put the government debt-to-gross domestic product (GDP) ratio on a sustainable downward trajectory.

“According to our baseline, the Philippine government debt-to-GDP ratio peaked in 2021 at 54.1 percent and will decline over the next few years, with the general government deficit narrowing to 3.9 percent by 2024,” stressed by the rating agency.

It says the projections are based on economic growth averaging 6.4 percent between 2022 and 2024.

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Fitch forecasts GDP growth of 6.5 percent in 2022 and 6.3 percent in 2023, which it says will support the credit outlook, while industrial and service sector economic activity and infrastructure development in the Philippines will still high during the following quarters.

Its growth forecast is above actual GDP growth of 5.7 percent last year and is within the government’s recently lowered target of 6.5 to 7.5 percent for 2022. However, the estimate for 2023 falls short of the desired range of 6.5–8 percent.

Diokno said the government will ensure that its debt-to-GDP ratio normalizes from this year’s level of 61.8 percent to 61.3 percent by 2023; to 60.6 percent by 2024; 59.3 percent by 2025; 55.7 percent by 2026; and 52.5 percent by 2027.

“In other words, by the end of the Marcos administration, we expect the public debt-to-GDP ratio to be below 60 percent, which is the holding threshold,” he explained.

As of the end of May this year, the outstanding debt of the national government amounted to 12.50 trillion pesos. Most of the bonds were borrowed locally (69.3 percent), while the remainder was obtained from other sources.

Credit rating

Meanwhile, Fitch said that the implementation of the policy agenda will determine the impact of the new administration under President Ferdinand “Bongbong” Marcos Jr. on the Philippine Investment Grade Credit Rating of ‘BBB’.

“Our view of the negative outlook will be determined by the extent to which the policy agenda reduces uncertainty, in particular with regard to medium-term growth prospects and public debt,” it added.

The debt assessor said that while the government is still developing the direction of its economic policy, it expects the new administration to be broadly in line with current policies based on some early indications.

He suggests, in particular, that the government will continue to focus on infrastructure spending, which is the main driver of the country’s favorable medium-term development prospects and supports the sovereign rating.

“We also assume that macroeconomic policy will generally remain the same. Key appointments in the economic group, including finance minister, central bank governor and [the] The National Economic and Development Authority are technocrats with significant experience in their institutions,” Fitch notes.