The Philippines’ External Debt Ratios Remain at Prudent Levels even as External Debt Rises in the Fourth Quarter 2018

Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno, announced that the Philippines' outstanding external debt stood at US$79.0 billion as of end-2018, up by US$2.5 billion (or 3.3 percent) from the end-September 2018 level of US$76.4 billion.

The growth in the debt level during the quarter was due largely to net availments of US$1.6 billion as private banks borrowed offshore to fund purchases of: a) high-quality liquid assets in preparation for the increase in the Liquidity Coverage Ratio (LCR) threshold as part of the Basel 3 reform package issued by the Basel Committee on Banking Supervision; and b) Republic of the Philippines (RP) bills, among others. Positive foreign exchange (FX) revaluation adjustments amounting to US$1.0 billion further contributed to the increase in the debt stock as the Philippine Peso appreciated against the US Dollar during the reference period due mainly to improving domestic inflation data and strong remittance inflow. The rise in the debt stock was partially offset by US$139 million increase in residents' investments in Philippine debt papers issued offshore.

Year-on-year, the debt stock grew by 8.0 percent from the end-2017 level of US$73.1 billion due largely to net availments by both public (US$3.5 billion) and private sectors (US$3.2 billion). Specifically, this is attributed to the National Government (NG)'s increased financing for its infrastructure development and social spending programs, private banks' preparation for the increase in the LCR threshold under the Basel 3 liquidity rule and to source funding for purchases of RP bills while other private firms decided to increase working capital, expand funding base, and extend term liabilities. Prior periods' adjustments (US$594 million) further increased the debt levels. However, the increase in resident holdings of Philippine debt papers issued offshore (US$1.2 billion) and negative FX revaluation adjustments (US$125 million) partially tempered the sharp increase in the debt stock during the year.

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 year-end, the maturity profile of the country's external debt remained predominantly medium- to long-term (MLT) in nature [i.e., those with original maturities longer than one (1) year], with share to total at 79.7 percent (US$62.9 billion). Short term (ST) accounts [or those with original maturities of up to one (1) year], on the other hand, comprised the 20.3 percent balance of debt stock and consisted of bank liabilities, trade credits and others. The weighted average maturity for all MLT accounts remained at

17.0 years in December 2018, with public sector borrowings having a longer average term of 21.3 years compared to 7.7 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 increased to US$39.7 billion from US$39.5 billion in the previous quarter, although the share to total declined from 51.8 percent to 50.3 percent. The increase in the debt level was due largely to upward FX revaluation adjustments amounting to US$255 million and net availments of US$44 million which was partially offset by the increase in residents' investment in debt papers issued abroad (US$141 million).

Private sector debt substantially increased from US$36.9 billion in September 2018 to US$39.3 billion, with share to total increasing from 48.2 percent to 49.7 percent. The rise was due largely to net availments of US$1.6 billion as domestic bank borrowings and Due to Head Office/Branches Abroad of foreign bank branches increased during the reference quarter.

Major creditor countries are: Japan (US$14.4 billion), United States of America (US$4.0 billion), Netherlands (US$3.6 billion) and United Kingdom (US$3.2 billion).

Obligations to foreign banks and other financial institutions had the largest share (33.6 percent) of total outstanding debt, followed by loans from official sources [multilateral (17.4 percent) and bilateral creditors (13.8 percent)]. Bilateral sources (amounting to US$10.9 billion) comprised of Japan � US$7.9 billion; China � US$772 million; and Germany � US$426 million, among others. Meanwhile, foreign holders of bonds and notes partake 28.7 percent; and the rest (6.4 percent) were owed to other creditor types (mainly suppliers/exporters).

In terms of currency mix, the country's debt stock remained largely denominated in US Dollar (61.1 percent) and Japanese Yen (13.2 percent). US dollar-denominated multi-currency loans from the World Bank and ADB represented 14.5 percent. The 11.2 percent balance pertained to 15 other currencies, including the Philippine Peso, Euro and SDR.

External Debt Ratios

The Governor further stated that key external debt indicators remained at prudent levels despite the rise in external debt. Gross International Reserves stood at US$79.2 billion as of end-2018 and represented 4.9 times cover for ST debt under the original maturity concept.

The debt service ratio (DSR), which relates principal and interest payments (debt service burden) 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. For the period January to December 2018, the ratio increased to 6.3 percent from6.2 percent recorded for the same period a year ago due to larger payments made from January 2018 to December 2018. However, the ratio improved compared with

6.8 percent for the period January to September 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, slightly increased to 19.9 percent from 19.6 percent a quarter ago. The same trend was observed using Gross Domestic Product. The ratio indicates the country's sustained strong position to service foreign borrowings in the medium to long-term.

Source: Bangko Sentral ng Pilipinas (BSP)