An issue has arisen on what exactly are the Philippines’ debt service obligations. Contending parties from the government and the media have issued contradictory statements on how to define the debt service: The government claims it is manageable; some in the media are raising alarm bells.
Last Aug. 24, Budget Secretary Amenah Pangandaman was quoted by the Philippine Daily Inquirer as saying that the debt service was “well-managed” given that “the fiscal year 2023 National Expenditure Program (NEP) only allocates 11%—or P582 billion—for interest payments of the nation’s debt, while almost 90% are allotted for government services.”
The budget proposal for 2023 submitted by the Department of Budget and Management (DBM) to Congress amounts to P5.268 trillion.
But the rosy picture was disputed in the report by the Inquirer’s Ben O. de Vera and Jeannette I. Andrade, stating that the debt service for 2023 would actually take up 29.8% of the proposed budget. This would amount to P1.6 trillion, “the highest yearly debt servicing on record” and bigger than the 2022 debt service of P1.26 trillion. De Vera and Andrade pointed out that in 2023, P1.35 trillion in domestic debts and P253.8 billion in foreign borrowings would have to be settled.
Finance Secretary Benjamin Diokno was quick to respond, as stated in an Inquirer report last Aug. 25. While he revised Pangandaman’s estimate, he argued that “only 11.6% or P611 billion” of the 2023 budget “is allocated for debt burden.” This is divided into P582.3 billion for interest payments and P28.7 billion for net lending. He said the Inquirer “erroneously included the principal amortization of P1.020 trillion as part of the expenditures.” He pointed out that “the principal amortization of debt is not included as an expense item under any accounting standard, whether in the private or public sector, being merely the settlement of debt obligations incurred from expenses already recorded in the past.”
Earlier, on Aug. 23, National Treasurer Rosalia V. De Leon said “the principal debt payment earmarked by the DBM for next year is not part of President Marcos’ proposed national budget, … only the interest payment is.” She said the “budget for principal payment, amounting to P1.2 trillion, is on top of the P5.268-trillion” NEP since it is considered an “off-budget” item.
In a forum held on the same day, Marikina Rep. Stella Quimbo, senior vice chair of the House committee on appropriations, backed the government’s position. She called on the public not to be “too worried” about the debt payments for 2023, saying these were “within range” as “only 11 percent of the P5.268 trillion proposal will go to debt servicing.”
The Manila Times, in a caustic editorial on Aug. 28, also took the government’s side as articulated by Diokno. It criticized the Inquirer for “misinforming” the public about the Philippine debt and accused its writers of “ignoring someone with solid credentials in finance and with a long history of serving many past presidents.” It called on the Inquirer to “correct the error, preferably as prominently as it was made.”
‘Debt service’ defined
The question now stands: Who is misinforming the public on the debt service payments of the Philippine government? And what exactly is referred to by the term “debt service,” as understood internationally?
The Organization for Economic Cooperation and Development (OECD), composed of governments of 38 of the world’s most developed societies, defines “debt service” as: “payments in respect of both principal and interest. Actual debt service is the set of payments actually made to satisfy a debt obligation, including principal, interest, and any late payment fees. Scheduled debt service is the set of payments, including principal and interest, that is required to be made through the life of the debt.”
The OECD’s basis for its definition is “A Report by an International Working Group on External Debt Statistics of the World Bank, IMF, BIS, and OECD (1988).” Reference was also made to a 2003 IMF document: “External Debt Statistics: Guide for Compilers and Users.”
The fact is, the OECD-World Bank-IMF definition of the debt service as consisting of both interest and principal payments (among others) has been used by the Philippine government for many years now. In the Department of Finance’s (DOF) “Statistical Bulletin” under the section “Debt Service of the National Government,” Table 11V2 covering the years 1986 to June 2021, both interest and principal payments are included as the two components of the debt service, and the sum of these two is reported as “Total Debt Service.” For 2020, the DOF reported total debt service of P962.466 billion from P582.054 billion in principal payments and P380.412 billion in interest payments.
The Bureau of Treasury (BOTr), an agency under the DOF, also monitors and reports the government’s debt service in a way consistent with the OECD-IMF-World Bank definition. For 2021, the BOTr reported a total debt service outlay of P1.204 trillion, consisting of P429.432 billion in interest and P774.725 billion in principal amounts, which was 26.72% of the government budget. For 2022, total debt service of P1.35 trillion was 26.8% of the total budget of P5.024 trillion.
Finally, as a “smoking gun,” the figures below, as published in the government’s Official Gazette, show that the principal amortization of the debt service is clearly included as part of the General Appropriations Act (or the government budget). It is identified as “Current Operating Expenditures.” For 2021, principal amortization was reported at P1.262 trillion, and for 2022, P785.21 billion.These figures are an upward count from the BOTr report. This results in revised ratios of the debt service relative to the government budget—higher for 2021 and lower for 2022.
This brings us to the final presentation of the Philippines’ debt service obligations from 2020 to 2023, as culled from official records. It is clear that it is government officials who have been misinforming the public on the debt service and its relation to the national budget. The question, however, can be posed: “If it is the case that government does not consider principal payments as part of the national budget, how are they going to pay for them? And where will they secure the needed funds?”
The misinformation, unfortunately, does not end with the underdeclaration of the debt service. Apart from interest and principal payments, there are “hidden costs” accruing to the government in accessing foreign loans. There are “commitment fees” that are paid on a particular loan’s “undrawn amounts.” “Front-end fees” are also charged one-time by donors. There are “service charges” or “management fees” that are added as well.
Substantial additional costs are also charged to “local counterpart funds.” Delays in project implementation can result in “cost overruns” over and above the projected project cost. Big-ticket infrastructure projects invariably result in the payment of right of way, land acquisition, and relocation costs. “Sovereign guarantees” by the government for loans contracted by government-owned or -controlled corporations and private firms become “contingent liabilities” that are assumed by the government when contracting parties are unable to service the loan.
The practice of “tied aid” wraps up the whole picture of government borrowing costs. This refers to loans and grants that are tied to the procurement of goods and services from the aid donor. The OECD estimates that, in general, tied aid increases the cost of foreign-funded projects by 15% to 30%.
For those additional costs, little detailed information is divulged by the government as its functionaries are content to harp on the criteria of interest payments and debt-to-GDP ratios that camouflage the true picture of the country’s debt situation.