Finance Secretary Carlos Dominguez III said Tuesday the large structural liquidity in the country’s financial system will let the government continue preferring the domestic market as a key source of its funding requirements for 2021 to mitigate the buildup of foreign exchange risks from external borrowings.
The debt-to-GDP (gross domestic product) ratio is expected this year to settle at 57 percent, which is still within a “sustainable threshold” even with the increase of the Philippines’ gross borrowings to P3.03 trillion, Dominguez said.
The head of President Duterte’s economic team expressed confidence that the government can “easily fulfill” its funding requirements for 2021, as it scales up its COVID-19 response measures to safely reopen the economy and rolls out a comprehensive program to bounce back from the global economic shock triggered by the pandemic.
“The Duterte administration is doing its utmost to avoid the costly reversal of our hard-fought gains in 2020 and the previous years,” said Dominguez during the virtual 72nd inaugural meeting and induction of the 2021 board of governors of the Management Association of the Philippines (MAP).
“We will continue to exercise discipline and prudence in managing our fiscal affairs. This, I believe, is the key to a strong and sustainable recovery,” Dominguez added.
In 2021, the government will maintain an elevated but manageable budget deficit of 8.9 percent on the back of strong government fiscal support in restarting the economy, Dominguez said.
Owing to the large structural liquidity of the financial system, the government would be able to continue prioritizing domestic financing over external sources to reduce forex risks, he said.
Dominguez said the relaxation of the reserve requirements by the Bangko Sentral ng Pilipinas (BSP) further enhanced the system’s structural liquidity.
The government also has the option of re-accessing the BSP’s emergency lending facility, which was increased under Republic Act (RA) No. 11494 or the Bayanihan To Recover as One Act (Bayanihan 2) from P540 billion to P810 billion, he said.
Moreover, he said the Philippines’ high sovereign credit ratings will provide it ready access to external commercial borrowings and official development assistance (ODA) at low rates and tight spreads.
The latest to retain the Philippines’ high investment grade credit rating was Fitch Ratings, which maintained the Philippines’ ‘BBB’ rating with a ‘stable outlook’ despite the crisis.
Fitch Ratings also affirmed the country’s ‘BBB’ grade amid several downgrades it did last year on 33 sovereigns, including countries that previously held the same rating as the Philippines such as Mexico, Colombia and Italy.
“This affirmation (by Fitch) is recognition of the soundness of our COVID-19 response measures and our strong fundamentals going into the pandemic. By keeping our credit rating, the Philippines continues to stand out in the international financial community amid a wave of negative credit rating actions,” Dominguez said.
2020: Pandemic response and its fiscal impact
Dominguez said that over the past 10 months, the government’s direct response to the COVID-19 pandemic amounted to P2.66 trillion, which is 14.7 percent of the country’s GDP.
Deficit spending was set at P1.38 trillion or 7.6 percent of GDP as a result of the massive budget needed for pandemic response and the expected lower revenue collections, he said.
As of end-2020, collected revenues amounted to P2.84 trillion, with total expenditures reaching P4.2 trillion, Dominguez said.
This means an emerging deficit spending of P1.36 trillion or 7.5 percent, which is only slightly below the target, he added.
Collected revenues of P2.84 trillion is just 0.4 percent short of the total collection goal for 2020, but understandably lower by 9 percent from the 2019 level and 19 percent from the original pre-pandemic target.
Dominguez said the debt-to-GDP ratio is projected to reach 53.5 percent in 2020, up from the pre-pandemic goal of 40.2 percent and 2019’s historic low of 39.6 percent.
The 2020 debt-to-GDP ratio is “well within the prescribed bounds of fiscal viability,” he said, with gross borrowings for last year programmed to increase to P3 trillion, which is double the pre-pandemic requirement of P1.4 trillion and triple the 2019 level of P1.02 trillion.
Domestic borrowings were prioritized over external sources of financing in 2020, he said.
As a result of the Philippines’ historically high credit ratings, emergency financing for COVID-19 fetched low interest rates, averaging 4.7 percent in November 2020, down from 5.5 percent in 2019 for domestic debt; and 3.2 percent, from 4 percent for external debt, he said.
He said the total gross financing raised by the government last year amounted to P2.63 trillion, excluding the P540 billion peso-emergency short-term loan from the BSP that was already repaid in full last December and re-availed this month.
Of the total borrowings, he bared that P1.91 trillion or 73 percent was raised from the domestic market, including the P488 billion obtained from the country’s largest ever retail treasury bond issuance in August.
The remaining P721.1 billion in financing or 27 percent was sourced from development partners and the global bond markets at low coupon rates and tight spreads.
Program loans for budgetary support from multilateral and bilateral lending institutions, including emergency funding for the COVID-19 response, amounted to P369.7 billion, he said, while project loans secured for the continuation of the President’s centerpiece infrastructure program “Build, Build, Build” and other priority initiatives reached P33.3 billion.
He said that the government’s pandemic response in 2020 included the largest social protection program in history that provided emergency cash grants to low-income families and wage subsidies to workers in small businesses; the expansion of medical resources to fight COVID-19 and ensure the safety of frontliners; and fiscal and monetary actions to keep the economy afloat and support recovery initiatives.
A stimulus package of P140 billion within the framework of Bayanihan 2 was made available to strengthen the health sector; provide appropriate cash-for-work programs and assist affected industries; and infuse additional capital into government financial institutions (GFIs) for them to lend more money to productive sectors of the economy, he said.
The Philippine Guarantee Corp. (PhilGuarantee) also provided coverage against credit losses to home lending and provided tax incentives to lenders to encourage mobilization of private sector funds for housing.
In 2019, the outstanding guarantee of PhilGuarantee to 48 banks was P201 billion covering housing loans to 125,000 borrowers. These lending banks also enjoyed fiscal incentives amounting to P3 billion.
With a housing backlog of 1.2 million units, Dominguez urged banks to share the incentives granted to them by providing more loans to home buyers at lower rates as more houses built means more jobs created in the construction sector.
2021: Road to recovery
For this year, Dominguez said the government is banking on reopening the economy as safely as possible, and on a slew of pump-priming measures buttressed by the Philippines’ strong fiscal position.
He recalled that last year, strict community quarantine measures cost the National Capital Region (NCR) and its adjacent regions P2.1 billion in wages daily, while the gradual easing restrictions to general community quarantine still led to wage losses of P700 million every day.
With NCR and nearby provinces under general community quarantine (GCQ), the GDP contraction of 16.9 percent and the unemployment rate of 17.7 percent in the second quarter eased to 11.5 percent and 8.7 percent, respectively.
“We expect to see additional improvements in the last quarter of 2020 as we have been progressively reopening businesses and accessibility to mass transportation,” Dominguez said.
“To be completely honest, some of the jobs lost may never return. The pandemic, however, provided us with the opportunity to accelerate our shift to digitalization in order to meet the demands of the emerging New Economy. This will create new jobs that will require new skills,” he added.
This year, the enactment of the P4.506 trillion General Appropriations Act (GAA) for 2021, complemented by the extension of the validity of Bayanihan 2 and the 2020 national budget, will provide the government sufficient means to hasten the recovery of the economy, he said.
Dominguez said several legislative measures will also power the country’s economic recovery this year, including the Financial Institutions Strategic Transfer (FIST) bill and the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) bill.
He explained that FIST will allow banks to offload their souring loans and assets through asset management companies so they can extend more credit to pandemic-hit businesses in need of assistance; while (CREATE) will provide enterprises with the largest economic stimulus package in the country’s history by way of significant corporate income tax (CIT) cuts and better fiscal incentives.
The FIST bill is awaiting the President’s signatures, while CREATE is expected to be swiftly approved by the Congress when it resumes session next week.
“We appreciate the MAP’s consistent support for CREATE. The association’s voice holds weight among policymakers and the general public. It is an independent and enlightened voice that validates the timeliness and relevance of our policy measures,” Dominguez told MAP members led by its newly inducted president Aurelio Montinola III.
Dominguez sought the business sector’s support for another economic stimulus measure, namely the Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery (GUIDE) bill.
GUIDE aims to form a special holding company to enable government financial institutions to infuse equity, under strict conditions, to strategically important companies facing solvency issues.
The Finance chief projected a quick rebound for the economy beginning this year, given the country’s historic high international reserves of $104 billion as of end-November; a strong peso that has appreciated by 5.4 percent against the US dollar last year; a low inflation rate of 2.6 percent in 2020, to name a few.
He also pointed to the moderate number of COVID-19 cases in the country that is far from the surges now being experienced by other countries, and the procurement and rollout of COVID-19 vaccines as among the factors that will lead to a quick economic recovery starting 2021.
“A safe and effective vaccine will no doubt be a game-changer when it becomes available to us. Until then, we will continue in our evidence-based approach towards reopening the economy as safely as possible. It also remains essential for everyone to cooperate with government regulations and comply with the minimum health standards,” Dominguez said.
He said the depth of the pandemic’s economic impact must be matched with bold initiatives on the part of enterprises and the government.
“We need to reinvent ourselves in order to recover. Be assured that we will continue to consult and engage with you as we move to boldly reopen the economy as safely as we can,” Dominguez said.