External debt of the Philippines

Debt process

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.

Institutional creditors

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.

International Monetary Fund (IMF)

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

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.

International Bank for Reconstruction and Development (IBRD)

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.

The bank procedures, according to the World Bank operations manual, 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.

Public debt

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 paid domestically and externally.

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

For external debt, these data are as follows:

Balance of payments

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. 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 where it is coming from.

Since 1999, the Philippines fluctuates between deficit and surplus. What is most ideal‹See TfD› 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 US$89 million. This was followed by a growth of surplus in 2009 (US$5.3 billion) and 2010 (US$14.4 billion). In 2014, the country experienced its first deficit in a number of years, with a US$2.9 billion deficit.

Debt-to-GDP ratio

The Debt-to-GDP ratio is the proportion of a country's federal debt in relation to its total output or GDP. 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 fluctuated until 2004 when 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. Up until 2015, the trend was 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

The debt-to-revenue, according to the National Tax Research Center (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.

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 then started to soar and reached as high as 539% in 2004. Between 2005 and 2007, the ratio slipped to as low as 327% then rose again to 391% in 2010.

Debt service ratio

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. For the past 15 years, the Philippines' debt service burden (DSB) to exports on goods and receipts from services and income noticeably fell by more than a half, from 14.6% in 1999 to 6.2% in 2014. From 2001 to 2009, the figures have been fluctuating. However, the ratios from 2009 until 2014 maintained a trend of decline. This is preferred since low debt service ratio characterizes better international finances.

Philippine debt sustainability

According to NTRC, the country's debt sustainability assessment for 2012–2017 shows that investors have a positive outlook on the country's economy.

It is said that a high debt level could be perceived as sustainable by investors if it is decreasing. 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 2012 and 2017, the country must use around PhP42 to PhP55 for debt repayment.

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).