Private firms’ debt-to-GDP ratios ease in Q2 as economy recovers

THE SHARE of the private sector’s outstanding debt in Philippine gross domestic product (GDP) eased in the second quarter, data from the Institute of International Finance (IIF) showed, amid a rebound in business activity and improved economic conditions.

The IIF’s global debt monitor released last week showed the debt-to-GDP ratios of Philippine households, nonfinancial corporations, and the financial sector went down year on year to 14.8%, 31.3%, and 10.5%, respectively, as of the second quarter from 16.4%, 32.4%, and 11.7%.

However, the Philippine government’s debt-to-GDP ratio rose to 58.3% in the second quarter from 55.2% last year, IIF’s report showed.

To compare, government data released last month showed the Philippines’ debt-to-GDP ratio stood at 62.1% in the quarter, lower than 63.5% recorded at end-March but still above the 60% threshold considered manageable by multilateral lenders for developing economies.

“The ratio of household debt, non-corporate, and financial sector debt-to-GDP all fell because of much improved business and economic conditions in the second quarter. The rise in income and revenues enabled many sectors to pay off debts and finance their activities,” University of Asia and the Pacific Senior Economist Cid L. Terosa said in an e-mail.

“Meanwhile, the ratio of government debt to GDP rose because of economic recovery programs and measures that had to be financed with debt. It is a necessary evil to borrow and spend more now to sustain economic resurrection,” Mr. Terosa said.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort attributed the improvement in economic conditions to the further reopening of the economy, which led to higher revenues for both the public and private sector.

“The further reopening towards greater normalcy, compared to some lockdowns a year ago, led to higher incomes and correspondingly reduced the need for these sectors to borrow,” Mr. Ricafort said in a Viber message.

“Many businesses, industries, and individuals experienced reduced sales, livelihood, and employment, while government expenditures ballooned on ayuda (cash aid) and other financial assistance and various coronavirus disease 2019 (COVID-19) programs,” he added.

The Philippine government implemented one of the longest and strictest lockdowns in the world to contain the COVID-19 pandemic in 2020, which caused GDP to contract by 9.6% that year.

Since March, Metro Manila and most provinces have been under the least strict quarantine measures, with the government earlier this month also allowing the voluntary wearing of face masks in outdoor areas where social distancing is possible.

Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said the private sector’s debt ratios declined last quarter on the back of an expanding economy.

“GDP growth played a large role here as we grew 7.8% in the first half, with a much higher denominator lowering the entire equation,” Mr. Neri said. “The economy’s reopening also helped improve employment and incomes, which help households lower their debt. With better business and household incomes, government revenues also improved in the process, causing the equation to fall further.”

Asian Institute of Management economist John Paolo R. Rivera said the job market’s recovery amid the resumption of business operations enabled the private sector to finance their debt despite the weakening of the local currency.

“Their debts are not affected by currency depreciation as it is mostly locally sourced, in my opinion. This is also driven by a growing GDP that is faster than debt growth,” Mr. Rivera said in a Viber message.

“Meanwhile, government debt continues to increase, likely due to currency depreciation and possibly additional debt sourcing. As such, government debt may also have been growing faster than GDP,” he added.

Philippine GDP expanded by 7.4% in the second quarter of 2022, slower than 12.1% a year earlier and 8.2% in the preceding three-month period.

INFLATION WOES
However, Ateneo de Manila University economics professor Leonardo A. Lanzona said in a Viber message that households and private firms are not borrowing as much and limiting their expenses to “maintain their financial viability” as economic conditions remain challenging, especially with inflation reaching multi-year highs.

“Higher inflation and interest rates, after record lows during the height of the pandemic, led to lower borrowings by these sectors,” Mr. Ricafort said.

In contrast, the government has been borrowing more as the country continues to recover from the impact of the coronavirus pandemic.

“The government borrowed a total of about P5 trillion since the pandemic, as the lockdowns led to wider budget deficits with sharp reduction in government tax revenue collections,” Mr. Ricafort said.

Outstanding National Government debt stood at P12.79 trillion at the end of June, reflecting ramped up borrowings to finance its response to the pandemic.

“The government seems to be moving forward with their expenditures beyond their budgetary capacity. Its debt does not seem to benefit the other sectors because otherwise its increased resources should have made easier for the other sectors to have the same debts,” Mr. Lanzona noted.

“The problem stems from this false narrative being propagated by the National Government that the state of the economy is fine, or that the recovery is moving smoothly, and so we can outgrow the debt,” he added. “Growth has been lower than expected, inflation continues to remain high, high rates of underemployment, and increasing poverty. On top of this, virus cases are still surging in certain areas.”

Headline inflation eased to 6.3% in August from a near four-year high of 6.4% in July. This brought the eight-month average to 4.9%, higher than the central bank’s 2-4% target but still below its 5.4% forecast for the year. — Diego Gabriel C. Robles

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