Philippines Long Term Fiscal Outlook

• The Marcos government is slowly reducing its large fiscal deficit. It’s doing just enough to put the debt on a more sustainable path, but there’s no clear plan to return to the budget discipline seen before COVID.

• This limits the government’s room to respond to future shocks. If it wants to keep debt below 60% of GDP – the usual benchmark for emerging markets, there won’t be much space to ramp up spending in a downturn.

• Government debt stood at 57.1% of GDP in 2024. It’s expected to fall slightly to around 56% in 2025 and 2026. If the economy grows steadily and interest rates don’t rise too much, debt could fall to around 50% by 2030.

Primary Surpluses Not Coming Back Anytime Soon

• The Philippines is slowly reducing both its overall and primary fiscal deficits after a sharp rise in spending during the pandemic.

• The government is aiming for smaller deficits over time, but we don’t expect a return to primary surpluses before 2029 at the earliest, and even that might be optimistic.

• More spending is needed on defence, and climate change is bringing stronger, more frequent storms that strain infrastructure.

• Before COVID, the Philippines averaged a 1.8% primary surplus over 20 years. We don’t think that level of fiscal discipline is likely to return before 2050.

Stimulus Withdrawal Will Stay Gradual

• The government plans to slowly unwind its pandemic-era stimulus. That means fiscal tightening will drag on growth, but not in an extreme way.

• The fiscal impulse peaked at 3.8% of GDP in 2020. It dropped to 0.7% in 2021 as revenues began to recover, and since then the impact has mostly come from rising revenues rather than spending cuts.

• We expect a small drag of 0.2% on growth from fiscal consolidation in 2025, with policy turning broadly neutral from 2030 onwards.

Debt Looks Contained, But Not Cheap

• Government debt, which hovered around 57% of GDP in 2022 and 2024, seems to have peaked.

• The current consolidation plan should be enough to bring debt down to 50% by 2030. If deficits stay under 3% of GDP after that, debt could reach just above 40% by 2050 – still higher than the pre-pandemic level of 37%.

• These forecasts assume average nominal GDP growth of 8.6% and an effective interest rate of 6.5% between 2025 and 2050. If growth slows or rates rise, more “belt-tightening” will be needed to stay on track.

Interest Payments Still Rising

• The cost of servicing debt is likely to keep rising over the medium term. Based on current market expectations for interest rates and the government’s own plans, we don’t see interest payments peaking before 2030.

• By then, they could hit 3.1% of GDP, up from 2.6% in 2024 and nearly double the pre-pandemic level of 1.6%.

• Even so, this is not unprecedented, it’s close to the 3.2% average seen between 2000 and 2019. After 2030, interest payments should start to fall again, reaching about 2.5% by 2050, though still above pre-COVID levels.

The Cordoba View

• The Philippines is reducing its debt slowly. The current plans are enough to keep debt from rising, but there is not much extra space in the budget. If there is a major shock, it may be hard to respond without risking higher debt levels.

• From an investment view, we are neutral. We do not see major risks in the near term, but there is no strong reason to add exposure either. Growth is holding up, but without clearer improvements in fiscal strength, it is hard to make a strong case.

• We will continue to monitor how fiscal plans develop and how interest costs move over time. If the government can keep debt stable while supporting growth, the outlook may improve. We will provide updates as the data comes in.

Source

• Bloomberg Economics