Manila Should be Wary of Asset Bubbles

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ONCE heavily indebted, the Philippines is finally getting its financial house in order. On March 24, Fitch Ratings awarded the country the coveted investment grade rating on government bonds, citing recent political and economic reforms as among the main reasons.

Debt is being repaid at an unprecedented rate, the fiscal deficit is falling, and revenues are rising faster than gross domestic product growth. Meanwhile, record low interest rates and strong investment inflows bode well for future economic growth. 

Getting out of the debt trap has been an important goal for the Philippines. Debt servicing (repayments of interest and principal) ate up 53 per cent of government revenues in 2011, severely limiting the extent to which Manila was able to spend on education, health and much-needed infrastructure improvements. But although high, this proportion was far better than in previous years. At one point debt servicing took up almost three-quarters of revenue.

The nation’s debt woes date back to the presidency of Ferdinand Marcos, when large loans were taken out to finance projects whose economic viability was often dubious. One of the most controversial was the US$2.3 billion loan for the now abandoned Bataan Nuclear Power Plant.

The situation became worse during the presidency of Corazon Aquino, as the government struggled to absorb the losses of the National Power Corp. and the old Central Bank of the Philippines. By 2004, the debt to GDP ratio had reached 74.4 per cent.

Last year’s debt to GDP ratio was a more moderate 51.4 per cent.

Recent improvements are generally credited to Mrs Corazon Aquino’s son, President Benigno Aquino. Since taking office in June 2010, he has made reducing both the national debt and the fiscal deficit a priority. A debt management exercise last November, for example, involved retiring US$1.46 billion (S$1.8 billion) in expensive, short-term, foreign- currency denominated debt. It was swapped with cheaper, long- term peso-denominated bonds.

Reducing the national debt, however, has a much longer history. Many important steps were taken during the presidency of Mr Aquino’s predecessor, Gloria Arroyo (2001-2010). In December 2006, her administration prepaid all of the Philippines’ obligations to the International Monetary Fund. In April 2007, it also completed payments for the Bataan Nuclear Power Plant. Like the current Aquino presidency, such moves involved taking advantage of favourable exchange rates and improvements in revenue.

An investment grade rating lowers the cost of government borrowing and makes it easier for private companies to raise loans. All this should eventually result in more jobs, better social services and infrastructure.

Two international rating agencies – Moody’s Investors Service and Standard & Poors – upgraded the Philippines to one notch below an investment grade rating last year. Government officials, however, wanted more, and continued to focus on finding ways of raising government revenue and paying down debt.

“I believe we are now the most underrated country in the world. Our external debt-to-GDP is lower than most developed Asian countries,” Finance Secretary Cesar Purisima told an investment forum on March 12.

Now that the country has achieved investment grade status from Fitsch, however, it is time to consider whether continued efforts to lower government debt to encourage Moody’s and Standard & Poors to follow suit could produce unintended side effects.

International optimism over the country’s economic growth prospects in the light of recent reforms, both in administration and tax collection, have encouraged strong capital inflows. Remittances from overseas Filipinos also remain strong.

The result is a banking system flush with cash. If this situation remains unchecked, such an overabundance of liquidity could encourage reckless lending, leading to asset bubbles that threaten the stability of the financial system.

The government has responded by increasing domestic borrowing in order to soak up the excess money. But while such a move makes sense, the continued emphasis on keeping total borrowings down could limit the policy’s effectiveness.

After all, the approval of other rating agencies is not really needed. Even before it obtained the formal moniker from Fitch, the country already enjoyed many of the benefits of investment grade status, including cheaper loans. According to Bloomberg data, Philippine debt due in 2037 yielded 3.97 per cent last month, 91 basis points lower than investment grade Indonesian securities.

Investment grade status is understandably a great source of national pride for a country that has endured decades of opprobrium from foreigners. But policymakers need to maintain a broader perspective. Obsessively pursued, even laudable policy goals can do more harm than good.

(C) Singapore Press Holdings Limited 

Key Political Risks

President Benigno Aquino has stepped up efforts to lure foreign investors into the country, so far without much success. The country continues to be hobbled by widespread corruption and several long-running insurgencies. 

However, the government has had some success in reducing the budget deficit. The president also remains popular with voters. 


  • Extent to which foreign and domestic investors show interest in big ticket infrastructure projects.
  • Increased spending on the air force and navy to counter Beijing's territorial claims in the disputed Spratly Islands. The issue could become an important point of contention at the East Asia forum in Indonesia in November.
  • The implementation of the "framework agreement" between Manila and the insurgent Moro Islamic Liberation Front announced in early October. If all goes well, a final peace deal may be signed by 2016. 

About Me

My name is Dr Bruce Gale and I am a senior writer with the Singapore Straits Times. I studied at  LaTrobe University (BA Hons) in Melbourne and later at the Centre for Southeast Asian Studies at Monash University (MA). My PhD thesis, which focussed on Malaysian political economy, was completed at the Malaysian National University (Universiti Kebangsaan Malaysia) in 1987.

From 1988 to 2003 I was Singapore Regional Manager for the Hong Kong based Political and Economic Risk Consultancy (PERC). 

I have written several books and articles on Southeast Asian affairs, including Political Risk and International Business: Case Studies in Southeast Asia (Pelanduk Publications, 2007). Books on language include Mastering Indonesian: a guide to reading Indonesian language newspapers (Pelanduk Publications, 2008)

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