The Philippines: Debt Sustainability Analysis

Sharon P. Almanza

Deputy Treasurer of the Philippines

Debt-to-GDP continues to be sustainable...

NG Debt-to-GDP sustained its downward trajectory, underpinned by strong growth and prudent

fiscal and debt management.

The steep decline recorded in 2014 (3.8 ppts) was driven mainly by reduced borrowings due to

lower than program spending, as well as a shift in Bond Sinking Fund contribution strategy.

Over the medium term, debt levels are expected to contract further following the 2% of GDP deficit

ceiling.

53.9% 54.7% 54.8%52.4%

51.0% 51.5%49.2%

45.4%43.9%

41.2%39.3%46.1% 46.7% 47.1%

45.0%43.0% 42.6% 41.9%

39.0%37.0%

35.4% 34.1%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

NG Debt/GDP NG Debt/GDP (net of BSF)

Improving Capacity to bear debt....

Underlying Fiscal Framework...

Fiscal Consolidation towards Debt Sustainability...

3.70%

3.80%

5.00%

4.40%

3.70%

2.60%

1.00%

0.20%

0.90%

3.70%

3.50%

2.00%

2.30%

1.40%

0.60%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

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Deficit-to-GDP

Passage of

EVAT

GFC

Stimulus2% Deficit

Program

Primary Balance/GDP

1.44%

2.70%

3.91%

3.70%

2.64%

-0.25% -0.22%

0.83%

0.66%

1.38%

1.96%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Fiscal Consolidation towards Debt Sustainability...

Ability to service debt...

31.70%

23.60% 22.60%24.80% 24.40%

20.50% 20.40% 18.80% 16.80% 16.00% 14.60% 13.50%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Interest Payments/Revenue

Projection

Revenues allocated for interest service have declined steadily....

More funds are being channelled to productive spending.....

29.70%23.30% 21.40% 19.60% 19.30% 17.90% 17.60% 17.20% 16.20% 14.20% 13.10% 12.10%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Interest Payments/Expenditure

Projection

14.5%

13.4%

14.5%

4.4% 4.7%

4.8% 4.5% 4.3%

2.4%3.2%

2.8%

7.1%

9.6% 9.7%

6.4%5.7%

7.4% 7.4% 7.2%

5.2% 5.3%

4.3%

0.00

10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

60,000.00

70,000.00

80,000.00

90,000.00

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

NIR (USD, millions) NG External Debt Maturing in 1yr (USD, millions)

NG External Debt (USD, millions) Public Sector External Debt (USD, millions)

NG Externa debt maturing in 1yr/GIR NG External Debt Service/Exports

(USD, millions)

Improving external debt dynamics…

Strong build of foreign exchange reserves and robust exports…

Note: Exports refer goods and receipts from services and primary income

Debt Sustainability Analysis

Debt sustainability analysis is a tool to inform

debt managers of the possible and probable

future paths of debt metrics

Involves macroeconomic and market projections

as well as stochastic simulations of shocks to

these projections

Assessing Debt Sustainability

• Scope or coverage (Central Government, GG or public sector)

• Medium term fiscal projections and macroeconomic assumptions

• Contingent liabilities

• Government assets

• Method for the analysis

Key Considerations for DSA

Debt-to-GDP Baseline Projection

Assumes that borrowing does not deviate from

the strategy

Macroeconomic assumptions and market

variables remain unchanged

Produces a future path for debt metrics given no

adverse events

Baseline Shocks: Effects of Typhoon

An average of 8.9 typhoons cross or land in the Philippines yearly. This is around 45% of the actual number of typhoons that enter the Philippine Area of Responsibility.

This is the most common form of disaster suffered by the Philippines.

Historically, these typically impact the agriculture sector, which contributes only 0.2 percentage points to Philippine GDP growth

However, household consumption, which contributes 3.7 percentage points to GDP growth, is also heavily affected

Household consumption becomes low the year after a disaster, although this is offset by an increase in government spending.

Baseline Shocks: Constructing the Model

Disaster (i.e., typhoon) likelihood was modelled as a

Poisson random variable with a parameter of 0.5 HIGH

DAMAGE typhoons yearly.

Its effect on GDP was modelled as a Lognormal random

variable, producing a considerable effect in the year of

the disaster and a subsequent but softened effect in the

year following the disaster.

The simulation was run through 500 iterations

Baseline Projection

Baseline projection of Debt-to-GDP sees the metric declining from 48% to around 31% in ten years

NG debt includes the government’s holdings of its own securities (Bond Sinking Fund)

Declining Debt-to-GDP ratio (2014-2024)

Debt/GDP: Disaster Shocks

The median level of debt-to-GDP is at 38% at 2022

The confidence that debt-to-GDP will reach 44% in 7 years is at 95%

Debt Service/Revenue: Disaster Shocks

Debt servicing to revenue is more volatile due to maturities in 2019 and 2021

Nonetheless, debt servicing is expected to remain between 15-25% of revenue in ten years

Conclusion

DSA is a fiscal policy tool that looks into the fiscal deficit, debt stock

and their evolution in the medium-term.

Stochastic simulation better assess debt sustainability because it

reflects the co-movement of various shocks and their impact to debt

ratio

Fan charts provide a range of possible or probabilistic outcomes

making it a useful tool for monitoring fiscal risks and take into

consideration risk-mitigation policies/actions

Scenario analysis is also important to measure the impacts of

different shocks and/or events that could adversely affect the

trajectory of the debt ratio.

The Philippines: Debt Sustainability Analysis

Sharon P. Almanza

Deputy Treasurer of the Philippines