Philippines' debt not sustainable, says ADB working paper

New York, March 2 -The Philippines' government debt is not sustainable and even through the end of the present administration in 2010 is only weakly feasible, according to a working paper titled "Empirical Assessment of Sustainability and Feasibility of Government Debt: The Philippines Case" by the Asian Development Bank.

Furthermore, through empirical analysis and models, the paper finds that the current debt position is vulnerable to major shocks and that policies to control the budgetary deficit fall short of achieving debt sustainability or strengthening feasibility.

The Philippines carries an enormous public debt, raising concerns about the ability of the government to manage its debt obligations and the long-run sustainability of the country's fiscal policy, the bank said. The corrosion of the country's fiscal balance is mostly due to shortfalls in government revenues.

The fiscal picture is threatened by the large stock of national government debt and the accompanying costs of servicing that debt. At the end of 2003, the government's debt stood at Ps. 3.36 trillion, which is 78% of gross domestic product. The consolidated public debt was Ps. 5.9 trillion, 137% of gross domestic product.

The authors find that one reason why government debt is not sustainable is because the government enjoys lower bond rates than market lending rates.

"In other words, the Philippine government bonds are still perceived as having relatively low default risk," according to the paper.

The authors also test the country's vulnerability to shock simulation, finding that the government faces a high risk of running into a debt crisis in the wake of a major shock to the economy.

Another finding is that the simple fiscal policy of medium-term budget deficit controls does not alone reverse the unsustainable debt situation.

Any policy aimed at addressing the debt problem must take into account the impact on interest rates and overall economic growth.

Policies must be aimed at economic growth and decrease the vulnerability to external shocks, the ADB said.

"If loan provisions are not based on market perceived risk or if debt service can largely be covered by grants, aid, or debt relief, then the government will have little incentive to pursue sound macroeconomic policies and increase its capacity to pay," according to the paper.

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