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The Philippines' External Debt Remains Manageable in Second Quarter 2018

09.14.2018

Bangko Sentral ng Pilipinas Governor Nestor A. Espenilla, Jr. announced that the Philippines’ outstanding external debt stood at US$72.2 billion as of end-June 2018, down by US$997 million (or 1.4 percent) from the end-March 2018 level of US$73.2 billion.

The reduction in the debt stock during the second quarter was mainly driven by negative foreign exchange (FX) revaluation adjustments (US$720 million) as the US Dollar strengthened against third currencies, particularly the Japanese Yen (US$454 million). The decline in non-resident investments (US$309 million) in Philippine debt papers and net principal repayments (US$246 million) further contributed to the decline in the external debt stock.

Year-on-year, the debt stock declined by US$294 million (or 0.4 percent) from US$72.5 billion in June 2017, which was brought about by offsetting factors: (a) net principal repayments (US$2.4 billion), primarily on private sector’s short-term (ST) bank liabilities; vis-à-vis (b) prior periods’ adjustments (US$1.8 billion) due to late reporting; and (c) transfer of Philippine debt papers from residents to non-residents (US$419 million).

The country’s level of external debt has continued to decline in recent years (from US$77.7 billion as of end-2014 to US$72.2 billion in end-June 2018) which may be attributed to prudent debt management and Philippine corporate borrowers’ deleveraging from foreign borrowings in order to minimize FX risk.

External debt refers to all types of borrowings by Philippine residents from non-residents, following the residency criterion for international statistics.

Debt Profile

As of end-June 2018, the maturity profile of the country’s external debt remained   medium- to long-term (MLT) [i.e., those with maturities longer than one year], with its share to total external debt at 83.2 percent. ST loans [or those with maturities of up to one year] accounted for 16.8 percent balance of the debt stock and consisted of bank liabilities, trade credits and others. The weighted average maturity of MLT accounts stood at 17.1 years, with public sector borrowings having a longer average term of 22.6 years compared to 7.9 years for the private sector. This means that FX requirements for debt payments are well spread out and, thus, more manageable.

Public sector external debt decreased to US$38.0 billion (or by US$1.2 billion) in end-June from US$39.2 billion as of end-March 2018, accounting for 52.6 percent of total external debt. This was due to: (a) negative FX revaluation adjustments (US$647 million); (b) increase in residents’ investments (US$338 million) in debt papers issued offshore by the public sector; and (c) net principal repayments (US$245 million). About US$31.7 billion (83.5 percent of public sector obligations) were NG borrowings.

Private sector external debt, on the other hand, increased slightly to US$34.2 billion in end-June from US$34.0 billion resulting from adjustments in prior periods (US$278 million) due to late reporting. Private sector foreign borrowings have been declining in recent years which may be attributed to Philippine corporate borrowers’ deleveraging from foreign borrowings in order to minimize FX risk, among others.

Loans from official sources (multilateral and bilateral creditors – US$23.9 billion) had the largest share (33.1 percent) of total outstanding debt, followed by foreign holders of bonds and notes (30.7 percent), and obligations to foreign banks and other financial institutions (29.3 percent); the rest (7.0 percent) were owed to other creditor types (mainly suppliers/exporters).The creditor mix continues to be well diversified, demonstrating the country’s ability to tap varied sources of financing (both official and commercial sources), which gives the country sufficient flexibility to choose from a broad range of fund sources.

In terms of currency mix, the country’s debt stock remained largely denominated in US Dollar (61.5 percent) and Japanese Yen (12.9 percent). US dollar-denominated multi-currency loans from the World Bank and ADB had a 14.6 percent share to total, while the remaining 11.0 percent balance pertained to 17 other currencies, including the Philippine Peso (6.0 percent), Euro (2.0 percent) and SDR (2.0 percent).

External Debt Ratios

The Governor further stated that key external debt indicators continued to improve in the second quarter of 2018. Gross international reserves (GIR) stood at US$77.5 billion as of end-June 2018 and represented 6.4 times cover for ST debt under the original maturity concept.

The debt service ratio (DSR), which relates principal and interest payments (debt service burden or DSB) to exports of goods and receipts from services and primary income, is a measure of adequacy of the country’s FX earnings to meet maturing debt obligations. As of end-June 2018, the ratio improved to 6.1 percent compared to 7.8 percent in end-March 2018, and 6.7 percent in end-June 2017 due to higher receipts and lower payments during the 12-month period (July 2017 – June 2018). The DSR has consistently remained at single digit levels, and well below the international benchmark range of 20.0 to 25.0 percent.

The external debt ratio (a solvency indicator), or total outstanding debt expressed as a percentage of Gross National Income (GNI), continued to improve, declining to 18.7 percent from 19.1 percent in end-March 2018 and 19.5 percent in end-June 2017. The same improving trend was observed using Gross Domestic Product (GDP). The ratio indicates the country’s sustained strong position to service foreign borrowings in the medium to long-term.

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