ADB warns RP of debt stress

Published by rudy Date posted on April 20, 2009

A LOWER economic growth coupled with a higher budget deficit and borrowing costs due to the global financial crisis could accelerate the vulnerability of countries like the Philippines to debt stress, the Asian Development Bank (ADB) warned.

In a recent study, the Manila-based lender said a permanent shock of higher primary deficit arising from higher public spending or lower revenue will significantly raise the debt stress for the Philippines, Korea, Singapore, Maldives and Taipei, China.

Based on the ADB’s projections, the Philippines’ debt-to-gross domestic product (GDP) ratio may rise by 15 percent by 2015 in a scenario of higher primary deficit to GDP; by 5.1 percent amid lower nominal GDP growth rate; by 3 percent on higher nominal interest rates on public debt; and by 12.7 percent on a combination of the three shocks.

At present, the Philippines’ debt-to-GDP ratio stood at 56.5 percent, the highest among Asian countries.

A proxy for economic output, GDP is the amount of goods and services produced in a country. The debt-to-GDP ratio is a key measure of how manageable is a country’s obligation relative to its annual economic output, with a declining ratio viewed favorable as this means the country would allot a smaller amount to pay off its debt.

The government has put off its original plan to balance its budget to address the economic slowdown and skyrocketing commodity prices.

For this year, Philippine economic managers expect the budget deficit to widen to P199.2 billion, or about 2.5 percent of GDP. That is higher than the previous projection of P177.2 billion, or 2.2 percent of GDP.

The deficit-to-GDP ratio is a closely watched measure of how long a government can incur revenue collection shortfalls.

For 2010, the government expects a funding gap of 2 percent of GDP or P173.306 billion. For 2011 and 2012, it sees a revenue shortfall of P143.225 billion or 1.5 percent of GDP and P52.662 billion or 0.50 percent of GDP, respectively.

The government also estimated a lower GDP growth of between 3.1 percent and 4.1 percent this year from an earlier target of 3.7 percent to 4.7 percent.

“Our simulation results reveal that the low growth scenario will particularly hit most countries hard,” the ADB said.

The ADB said there is a need for caution and avoidance of complacency, adding fiscal tightening would be necessary in all the countries to sustain the steady-state debt target.

“To address the external challenges and yet maintain sustainable deficit and manage the fiscal risks, governments will need to decide whether to simply stabilize the debt stock at a specified level [as a percentage of GDP] or target a reduction in the debt stock, and thus the interest burden, in which case tighter targets will be needed,” the lender said.

In a separate study, the ADB said while many factors drive poverty reduction, economic growth is among the most important.

“In this context, the sharp economic slowdown that is being experienced globally as well as regionally is a cause for concern,” the lender said.

The ADB estimated that a reduction in growth of GDP per capita of 3 percentage points over growth registered in 2007 would result in almost 61-million additional poor people earning $1.25 a day poor this year, and 98 million additional poor in 2010.

“The corresponding numbers for $2/day poverty are naturally higher: 26 to 76 million and 42 to 122 million in 2009 and 2010, respectively,” the ADB said.

The ADB said the data for the Philippines suggest that households that rely on foreign remittances are more likely to be those in the top half of the income distribution. “Thus, even if a cutback in foreign remittances was to take place, it is possible that recipient households would not fall into poverty,” it said.

The ADB said the ability of countries to deal with the adverse effects of the economic slowdown can be expected to mitigate the poverty. –Darwin G. Amojelar, Senior Reporter, Manila Times

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