The external debt of the Philippines is the amount of public and private debt owed by the government of the Philippines.Public debt is the National Government’s money or credit owed, while private debt is the money or credit owed by individuals and private companies. These foreign loans refer to all obligations (regardless of currency of denomination and form, i.e., cash or in kind) owed by Philippine residents to non-resident entities, including advances from foreign parent companies, shareholders and affiliates and peso-denominated loans from non-residents.^[1]

Debt Process[edit]

Developing countries use external borrowing as a mechanism to address the gap between domestic savings and desired investment and the export-import gap.

In practice, debt management involves coordinating several major aspects of economic decision-making that have a bearing on loan contracting, utilization and the debt servicing needs and capabilities.^[2]

Institutional Creditors[edit]

A creditor is a party (e.g. person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed.^[3]

The International Monetary Fund (IMF)[edit]

Since its establishment in 1947, the IMF has been the primary institution responsible for the maintenance of a smoothly operating international monetary system.^[4]

According to the IMF, the lending process should follow the following procedures: Upon request by a member country, IMF resources are usually made available under a lending “arrangement,” which may, depending on the lending instrument used, stipulate specific economic policies and measures a country has agreed to implement to resolve its balance of payments problem. The economic policy program underlying an arrangement is formulated by the country in consultation with the IMF and is in most cases presented to the Fund’s Executive Board in a “Letter of Intent” and is further detailed in the annexed “Memorandum of Understanding”. Once an arrangement is approved by the Board, IMF resources are usually released in phased installments as the program is implemented. Some arrangements provide strong-performing countries with a one-time up-front access to IMF resources and thus not subject to policy understandings.^[5]

International Bank for Reconstruction and Development (IBRD)[edit]

The International Bank for Reconstruction and Development was created in 1944 to help Europe rebuild after World War II. Today, IBRD provides loans and other assistance primarily to middle income countries. IBRD is the original World Bank institution. It works closely with the rest of the World Bank Group to help developing countries reduce poverty, promote economic growth, and build prosperity. Unlike commercial lending, IBRD’s financing not only supplies borrowing countries with needed financing, but also serves as a vehicle for global knowledge transfer and technical assistance.^[6]

The Bank Procedures, according to the World Bank Operations Manual,^[7] follow the cycle: identification, preparation, appraisal, approval, implementation, and completion. The documentation requirements and decision points differ depending on whether a Bank Loan or a Bank Guarantee is proposed, and on Project risk and special considerations. Additional financing and restructurings of Investment Project Financing during implementation also have differing documentation requirements and decision points as set out by the manual.

Debt Indicators[edit]

Public Debt^[8][edit]

Due to the large amount of debt that the National Government (NG) has incurred, the Bureau of Treasury publishes data of the allocation and grouping by categories regularly. Divided generally into two categories, these are

1. National Government Debt, which includes both outstanding debt and guaranteed debt of domestic and external origin; and
2. National Government Debt Service, which includes both principal payments and interest payments of debt payed domestically and externally.

Under each category, other types of data are also included. For domestic debt, these data are as follows:

• By maturity (short-term, medium-term, long-term)
• By type of borrowing (Treasury Bills, Treasury Bonds/Notes, Loans, others)
• By type of liability (Direct Liabilities, Assumed Liabilities)

For external debt, these data are as follows:

• By maturity (medium-term, long-term)
• By creditor type (multilateral, bilateral, commercial, foreign debt securities)
• By type of securities (Loans, US Dollar bonds/notes, Eurobonds, Yen bonds, Peso denominated bonds)
• By type of currency (US dollar, Japanese Yen, Euro, French Franc, Deutsche Mark, PhP, other currencies)
• By type of Liabilities (Direct Liabilities such as Loans and foreign debt securities, Assumed Liabilities)

Balance Of Payments[edit]

The Balance of Payments (BOP) is included within the Bangko Sentral ng Pilipinas (BSP) Annual Report which shows the difference of the total value of payments into (credit) and out of (debit) the country. Also known as the Balance of International Payments, the yearly published BOP contains all transactions between the residents and non-residents, including the trade of goods and services, income, investment, debt services and financial instruments.^[9] Having recorded the monetary credit and debit, the total asset and liabilities should zero out. But, in practice, the BOP shows the deficit or surplus and from where it is coming from.^[10]

Since 1999, the Philippines fluctuates between deficit and surplus. What is most ideal is a high surplus since this indicates more money coming into the country. In 2008, despite the Global Financial Crisis, the country still received a surplus of 89 Million Dollars.^[11] This was followed by a growth of surplus in the years 2009 (5.3 Billion dollars)^[12] and 2010 (14.4 Billion Dollars).^[13] In 2014, the country experienced its first deficit in years, with a 2.9 Billion Dollars deficit.^[14]

External debt ratios[edit]

Debt-to-GDP ratio[edit]

The Debt-to-GDP ratio is the proportion of a country’s Federal debt in relation to its total output or GDP.^[15] According to the Bangko Sentral ng Pilipinas (BSP), the ratio of what the Philippines owes from foreign creditors (external debt) to what it has been producing (GDP) has gone through a significant growth from 61.6% in 1999 to 68.2% in 2001. The ratio fluctuates until 2004 where it started a steady decline up to 2008. It rose again to 38.4% in 2009, but eventually fell down to 36.9% in 2010.^[16] Up until last year, the trend is declining, with a 27.3% ratio at the end of 2014. Figures have generally been fluctuating (in terms of public and private external debt). Governments basically aim for low debt-to-GDP ratios because such is an indicator that the economy is producing high enough output to pay off its borrowings.

Debt-to-Revenue Ratio[edit]

The debt-to-revenue, according to the NTRC, is an important calculation in evaluating the government’s ability to manage its debt. It measures the percentage of total revenue that is allocated to debt principal and interest payments. With the constant increase in the debt to revenue ratio, it becomes more difficult for the government to handle its national debt.^[17]

From almost a steady ratio of 420% in 2000-2001, the country’s debt-to-revenue ratio went down to 364% and 354% in 2011 and 2012, respectively. However, ratio started to soar as high as 539% in 2004. Between 2005-2007, the ratio slipped to as low as 327% then rose again to 391% in 2010.^[18]

Debt service ratio[edit]

Republic Act 6142 of 1970 defined the debt-service ratio as the proportion of the Philippines’ principal and interest payments on medium- and long-term debt to total external receipts or export earnings.^[19] For the past 15 years, the Philippines’ debt service burden (DSB) to exports on goods and receipts from services and income noticeably fell over half from 14.6% in 1999 to 6.2% in 2014. From 2001 to 2009, the figures have been fluctuating. However, the ratios for 2009 until 2014 maintained a trend of decline. This is preferred since low debt service ratio characterize better international finances.

Assessment of government performances on external debt[edit]

Ferdinand Marcos (Dec 1965 – Feb 1986)[edit]

During the years 1966 to 1969, then president Marcos borrowed a great amount of money to finance his domestic expansion and reforms. This expansion in the government budget led to increases in the current account deficit and crisis in the balance of payments (BOP). According to the Political Economy of Growth and Impoverishment in the Marcos Era, the Philippines' foreign debt rose from $360 million in 1962 to $28.3 billion in 1986. Hence, a large portion of today's $77 billion external debt was contributed by Marcos. During the early 1970s, the government aimed at reviving growth and establishing an economic stabilization plan as well as a standby credit arrangement with the International Monetary Fund (IMF).^[20][21]

Under Republic Act 6142 of 1970, all external borrowing by the public and the private sector, with the exception of commercial bank sector, must be approved by the Monetary Board. The Management of External Debts and Investment Accounts Department (MEDIAD) within the BSP screened application for all external borrowings and maintained statistics on the country’s external debt; this then was a limitation on debt service and on total external indebtedness.^[22] The Foreign Currency Deposit System (FCDS), on the other hand, was in charge of permitting the external borrowing of banking sector—both domestic and foreign owned.

When Ferdinand Marcos became president in 1965, he continued Macapagal's economic liberalization policies, in turn causing debt to rise from 277.7 million dollars to 840.2 million by the end of his term. In September 21, 1972, Marcos declared martial law, and in the next five years real GNP grew at an average of 7% per year. The next few years was also characterized by strong economic performance with the rise of exports and booming of investment, alongside the rise of capital flight and crony capitalism. The end of the 1970s was of high levels of foreign debt and external debt from the public sector. With the second oil price shock during the 1980s, interest rates rose and the government implemented countercyclical policy to increase public investment to maintain domestic incomes.^[23]

In 1982, the Philippines turned to the IMF once again due to BOP difficulties and increase in outstanding oil import credit (85%). During 1983, the debt-to-GDP ratio grew to 56% (compared to 35% during 1980) as well as the debt service ratio with 38% (versus 21% during 1980).^[23] The government also called for emergency loans from the World Bank and transactional commercial banks. By December 1984, the country chose to abide by the IMF conditions (such as those on the peso, etc.) to receive additional funds. BOP targets were met in 1985 as the current account turned positive.^[24]

Corazon Aquino (Feb 1986 – Jun 1992)[edit]

When Corazon Aquino won the February 1986 presidential elections. External debt increased to some $28 billion. She aimed to meet debt-service payments and reduce debt size in the long run. The National Economic and Development Authority (NEDA) recommended a two-year moratorium on debt servicing as well repudiation on “fraudulent” loans. Business-oriented groups and cabinet member objected to this and ultimately, Aquino and the BSP resisted moratorium, opting to maintain a cooperative approach with its creditors.^[24][25]

Through the IMF and commercial banks agreements, the Philippines was allowed to enter the Brady Plan, a “3-pronged program” which allowed the government to use funds to repurchase $1.31 billion at a 50% discount, to reschedule of its debt due (from 1990 to 1994) and for 80 banks to subscribe to $700 million worth of new loans.^[24] A multination initiative (1989–1991) called Philippine Assistance Plan (or Multi Aid Initiative) agreed to provide a total of $6.7 billion assistance to the country.^[25]

Ultimately, the Aquino administration negotiated with various creditor groups to lower interest rates, reschedule the country’s debt and to reduce total debt size itself.^[24] “The Aquino administration appeared to be unable to work with the Congress to enact an economic package to overcome the country's economic difficulties.”.^[25] Moreover, although debt service payments only underwent slight changes (with BoP pressures still existent), overall growth caused the debt-to-GDP ratio to fall as well as the debt service-to-exports ratio.^[24]

Fidel V. Ramos (Jun 1992 – Jun 1998)[edit]

The 12th president of the Philippines, President Fidel Ramos was able to uplift the economy of the country through focusing on “people empowerment” and “global competitiveness.”^[26] During his time, the Philippines was considered as one of the “Tiger Cub Economies” in Asia with its continuous growth and prosperity.

Under his administration, the Republic Act 7653, more commonly known as the New Central Bank Act was enacted on June 14, 1993. It took effect on July 3 of the same year.^[27] This act serves as the governing body of the Bangko Sentral ng Pilipinas (BSP) and its responsibilities, governance, and operations. President Ramos had also boosted foreign trade and investments that increased capital flow into the country. With the reestablishment of the access to debt market, issuance of government bonds in foreign currencies was able to finance the recovery of the country,^[28] until the Asian financial crisis of 1997.

In the external sector, the volatility of peso-dollar exchange rates had caused the widening of debt spreads.^[29] However, through reforms on debt service payments and reasonable fiscal policy, this accumulated external debt was reduced to more controllable levels. Foreign exchange control was also implemented by reducing the supply of foreign exchange, while increasing the demand.^[30]

Joseph Ejercito Estrada (Jun 1998 – Jan 2001)[edit]

The Estrada administration was plagued with political and economic problems. Domestically, the fight against the MILF in Mindanao and questionable public governance reduced the trust of foreign entrepreneurs and investors. Internationally, the country was greatly affected by the world oil price hike and the tightened monetary policy of the United States Federal Reserve Board.^[31]

Faced with a high foreign debt even just after he assumed his office, President Estrada in his first State of the Nation Address (SONA) said that contractionary policies will be employed by cutting back on government expenditures with the help of a budget framework.^[32] At the end of 2000, total external debt had increased from year 1999 US$51.157 billion to US$51.358 billion. This rise was mainly due to the overspending of the National Government which resulted in a Php 136.1 deficit of cash operations. Also, the weakening of the Peso against the US Dollars (average of Php 44.19/US$1; record average low of Php 51.68/US$1 on October 31, 2000) resulted from the rise of US interest rates and greatly affected the borrowing of both the private and public sectors.^[31]

Gloria Macapagal-Arroyo (Jan 2001 – June 2010)[edit]

During the Arroyo administration, the foreign debt of the country reached its peak in 2003 with an outstanding US$57.6 billion, which is more than the combined borrowings of the last two governments.^[33] According to the Freedom from Debt Coalition (FDC) In a span of 14 years, the Aquino, Ramos, and Estrada administrations contracted a total of Php1.51 trillion in debts, Php2.03 trillion less than what Arroyo has borrowed in her first six years in office. Under Arroyo, the FDC estimates that based on 2007 interest and principal payments, taxpayers carry a debt servicing burden of Php1.2 million every minute. Today, the FDC adds, every Filipino man, woman, and child owes creditors Php42,819.42.^[34] This eventually led to a state of fiscal crisis due to the huge amount of the deficit,^[33] as admitted by President Arroyo in 2004. As a response to this crisis, the option of an automatic appropriation policy that would allocate funds for debt service payments was questioned.^[35]

Appropriation policy means that a portion of government budget for social services is cut to accommodate the payment of the external debt. From 39% in 2001 to 68% in 2004 of the national budget was allotted to interest and principal payments of debt.^[36] The downside however of this policy is that it has greatly compromised the education, health and infrastructure of the country.

The government implemented new tax measures to increase the government budget, thus lessening the budget deficit. This included increased excise and corporate taxes, and the most controversial being the increase in value-added tax.^[36]

Following the fiscal crisis, the external sector policy for 2005–2006 of the Bangko Sentral ng Pilipinas was focused on the following: (a) to maintain appropriate levels of reserve deposits to ensure liquidity of the economy, (b) to retain market-determined exchange rate, with limited intervention during extreme cases, and (c) control foreign loans, particularly from the public sector.^[37] Moreover, less borrowings, improved pre-payment schemes, lower foreign exchange rate and increased government revenue^[33] led to a continuous decline of external debt until the last year of the Arroyo administration, with an outstanding external debt of US$64.738 billion in 2009.^[38]

Benigno "Noynoy" Aquino III (Jun 2010 – Present)[edit]

During the Aquino administration, debt service and the public debt stock have continued to rise. It paid Php634 billion in debt service between July 2010 and April 2011 which is Php8 billion more than in the equivalent previous period under the previous administration. These payments over its first ten months also already exceed payments for the whole year of 2007, 2008 and 2009 respectively (and of the first two years combined of the previous administration). Yet the national government debt stock has continued to rise from Php4,582 billion in end-June 2010 to Php4,706 billion in March 2011.^[39]

However, according to the Bangko Sentral ng Pilipinas, the Philippines became a creditor nation in 2010 when it joined the International Monetary Fund (IMF) Financial Transactions Plan (FTP) through which emerging market economies took part in international cooperation efforts to lessen the impact of the euro debt crisis on the rest of the global economy. Among the gains the Philippines got from joining the FTP was access to the New Arrangements to Borrow (NAB) facility, which the IMF established to help its members cope with serious international financial crises.^[40]

The government reported 4.9% growth in real gross domestic product (GDP) in the first quarter of 2011 which was markedly slower than the 8.4% rate in the first quarter of 2010. Consecutive quarters are not strictly comparable but it can still be noted that the first three quarters of the Aquino administration has seen progressively slower growth year-on-year – from 8.9% in the second quarter of 2010, 7.3% in the third quarter, and 6.1% in the fourth quarter, followed by the 4.9% in the first quarter of this year.^[39]

In addition to this, at the start of 2011 - and for the first time in the country's independent history - gross international reserves eclipsed external debt. Foreign reserves increased by 20.5% last year to $75 billion, up from $63 billion at the end of 2010. The Philippines' debt-to-GDP (gross domestic product) ratio is among the lowest in Asia at under 50%.^[41]

By June 2013, it was announced by BSP Governor Amando M. Tetangco, Jr that the country's outstanding external debt registered by the BSP has declined by US$1.0 billion (or 1.8%) to US$58.0 billion from US$59.0 billion in March. According to him, this was largely a result of net loan repayments, mostly by the public sector, as well as negative foreign exchange revaluation adjustments as the US dollar strengthened, particularly against the Japanese Yen. This decrease supported the yearly trend with debt stock reflecting a reduction of US$3.2 billion (or 5.3%) from US$61.2 billion in June 2012.

The trend observed for the external debt-GDP-ratio was also the same for the said year, with the ratio down to 21.8% in the second quarter from 22.8% in March and 26.1% in June 2012.^[42] Generally, the country's economy between 2012 and 2013 grew at an average rate of 7.0%.

Moreover, the country sustained its growth momentum in 2014 at a rate of 6.1%, as what the national government targeted to be 6.0-7.0% growth rate for 2014.^[43] By the end of March 2014, it was reported that the country's outstanding external debt registered by BSP stood at US$58.3 billion. The debt-GDP-ratio for this year, from 22.8% in 2013, declined to 21.5%.^[42]

During the first nine months of 2014, the country's BOP position recorded a US$3.4 billion deficit, a reversal from the US$3.8 billion surplus recorded in 2013. According to BSP, the deficit was attributed to the significant increase in net outflows in the financial account brought about by large net outflows in portfolio investments and in other investments.

Positive developments in the US economy and anticipations of interest rate adjustments by the US Fed have led to capital outflows in emerging markets like the Philippines. Meanwhile, the current account remained in surplus at US$6.8 billion supported by strong remittance flows and receipts from the BPO industries and the export sector. As of December 2014, the country's gross international reserves (GIR) stood at US$79.8 billion.^[44]

By the end of March 2015, it was reported by Tetangco that the outstanding Philippine external debt stood at US$75.3 billion. The debt service ratio (DSR), or total principal and interest payments as a percentage of exports of goods, receipts from services and primary income, is a measure of the adequacy of the country's FX earnings to meet maturing obligations. The ratio declined from 7.3% in March 2014 to 6.3% due to higher receipts and lower payments during the year.^[42]

Philippine Debt Sustainability[edit]

According to NTRC, the country’s debt sustainability assessment for 2012-2017 shows that investors have a positive outlook on the country’s economy.^[45]

It is said that a high debt level could be perceived as sustainable by investors if it is decreasing.^[46] The country’s projected debt sustainability from 2012 to 2017 depicts downward trends in debt-to-GDP and debt-to-revenue that lead to further improvement in market perceptions. The ratio indicates that for every PhP100 worth of goods and services the country produces in the economy between the years 2012-2017, the country must use around PhP42 to PhP55 for debt repayment.^[47]

However, it is still fundamental for the government to practice proper debt management to avoid payment defaults and/or debt service eating up much of the revenues of the government (debt overhang).^[48]

Risks of external debt to Philippine economy[edit]

According to Bangko Sentral ng Pilipinas:

Debt sustainability is a major issue, particularly for countries facing higher public debts, such as what most advanced economies are currently experiencing. These countries are vulnerable to rollover risks as maturing debt obligations could become more expensive to refinance considering that investors will demand significant premium to compensate for the greater risks that they will be assuming. The punitive action of the market through higher borrowing costs will make it more difficult for these countries to service their obligations, creating a vicious cycle of debt trap. This could be aggravated when governments planning to undertake unpopular measures that will increase revenues and/or reduce public expenditures face political backlash that render them not politically feasible.^[49]

Appendix[edit]

External Debt For Selected Years[edit]

Fiscal Year	Total External Debt in Million of US Dollars ($)[50]	Total Debt Service in Million of US Dollars ($)[50]	External Debt to GDP Ratio (%)[50]	Debt Service Ratio (%)[50]
1999	51 157	6 583	61.6	14.6
2000	51 358	6 268	63.4	13.0
2001	52 047	6 536	68.2	15.7
2002	53 802	7 765	66.1	17.1
2003	57 567	7 951	68.6	16.9
2004	55 027	7 220	60.2	13.8
2005	61 555	7 499	59.7	16.2
2006	61 372	7 530	50.2	13.0
2007	66 508	6 993	44.5	10.7
2008	65 228	7 042	37.6	10.5
2009	64 738	6 880	38.4	11.0
2010	73 594	7 402	36.9	9.9
2011	75 569	7 793	33.7	9.9
2012	79 949	6 604	32.0	7.3
2013	78 489	7 535	28.9	8.2
2014	77 674	6 318	27.3	6.2

National Government External Debt and Debt Service For Selected Years[edit]

Fiscal Year	Total NG External Debt in Million of Pesos (PhP) [8]	Total NG External Debt Service in Million of Pesos (PhP)[8]
2000	1 568 157	88 839
2001	1 609 844	107 809
2002	1 914 939	157 030
2003	2 337 231	175 103
2004	2 611 307	209 270
2005	2 262 105	235 107
2006	2 195 242	276 172
2007	1 930 536	172 832
2008	2 279 147	182 257
2009	2 461 213	213 052
2010	2 449 329	242 880
2011	2 493 616	251 679
2012	2 326 611	198 158
2013	2 287 109	218 705
2014	2 222 774	191 057

Balance of Payments For Selected Years[edit]

Fiscal Year	Deficit Or Surplus[51]	Total Amount of BOP in US Dollars ($)[51]
1999	Surplus	3.8 Billion
2000	Deficit	513 Million
2001	Deficit	192 Million
2002	Surplus	663 Million
2003	Surplus	115 Million
2004	Deficit	280 Million
2005	Surplus	2.407 Billion
2006	Surplus	3.769 Billion
2007	Surplus	8.6 Billion
2008	Surplus	89 Million
2009	Surplus	5.3 Billion
2010	Surplus	14.3 Billion
2011	Surplus	11.4 Billion
2012	Surplus	9.2 Billion
2013	Surplus	5.1 Billion
2014	Deficit	2.9 Billion

References[edit]

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