MANILA – Rising interest rates could have a negative impact on the Philippine government’s ability to repay its pandemic-related debts. Moody’s Analytics warns that the government’s debt servicing costs will increase due to higher borrowing costs. This could put a strain on the country’s fiscal health, as most of the debts have short payment terms and are due soon.
Sarah Tan, an economist at Moody’s Analytics, expressed concern about the government’s tenuous fiscal position. Higher interest rates will increase the repayment burden and make it more difficult for the government to manage its debts.
The government had to rely on borrowing heavily to fund its pandemic response, resulting in a debt stock of P14.35 trillion as of August. To avoid paying high interest rates on longer-dated debts, the government opted for shorter payment terms. As a result, existing debts have an average maturity of 7.57 years as of end-2020.
The government may also need to borrow from creditors to refinance its debts. However, the problem lies in the current high interest rate environment created by the aggressive rate hikes by the Bangko Sentral ng Pilipinas (BSP) to control inflation. The government is facing a projected budget gap of P1.5 trillion this year, and the high interest rates make it challenging to bridge this gap.
The recent Treasury bill auction saw investors demanding higher yields, indicating the increasing interest rates. BSP Governor Eli Remolona Jr. hinted at further monetary policy tightening, which is expected to push rates even higher in the coming months. This poses challenges for the government’s borrowing plans.
Despite these challenges, the government was able to fully borrow the planned amount of P30 billion via Treasury bonds, showing a preference for longer-dated debt paper. This allows more resources to be allocated to social programs instead of debt repayment.
Moody’s Analytics believes that the government’s efforts to reduce debts, albeit slow, will contribute to improving the country’s fiscal health in the next few years.
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Looking ahead, Moody’s Analytics expects the government’s fiscal position to improve in the next few years as it implements efforts to reduce debts. Despite the challenges posed by the current high interest rate environment, the government’s medium-term fiscal framework is expected to gain traction and contribute to a healthier fiscal health for the country.