EMERGING economies need to look beyond the numbers when it comes to debts, according to the Asian Development Bank (ADB).
In an Asian Development Blog, ADB Economic Research and Regional Cooperation Department Principal Economist Jong Woo Kang said there is no perfect answer to questions that focus on the optimal debt level of countries.
Debt has increased in 2020 mainly due to the pandemic. Debt to GDP ratio among emerging market economies increased to 63.5 percent by the fourth quarter of 2020 from 52.4 percent in the same period in 2019.
“Asian economies need to look beyond the simple numbers and look for ways to wisely use debt financing opportunities while safeguarding their economies from the risks of runaway debt accumulations and poor debt management,” Kang said.
Kang noted that economists Carmen M. Reinhart and Kenneth Rogoff earlier suggested that median growth rates for countries with public debt over roughly 90 percent of GDP are about 1 percent lower than otherwise.
He also said the Joint World Bank-IMF Debt Sustainability Framework for low-income countries as of March 2021 set the present value of total public debt at 70 percent of GDP as the threshold for strong debt-carrying capacity.
The European Union’s Stability and Growth Pact, Kang said, recommended that countries should not allow their public debt to exceed 60 percent of GDP.
“Although most of the emerging Asian economies maintain relatively lower debt-to-GDP ratios—emerging Asia’s average debt-to-GDP ratio is 63.5 percent in the fourth quarter, 2020, much lower than the global average of 105.4 percent according to IMF data—they may not be complacent for the following reasons,” Kang said.
He said the first of these reasons is that based on history, a country’s debt-to-GDP ratio usually increase as economies mature. This takes into consideration aging populations and social entitlement requirements.
Kang said these factors will only add to the medium-to-long term debt burdens in emerging Asian economies.
Another reason is that developing countries lack capacities as opposed to advanced economies. If developing countries have high debt levels, this would lead to credit rating downgrades.
Kang also said that while low interest rates can prompt cheap borrowing, increasing borrowings can strain debt-to-GDP ratios, especially if growth rates are not high.
“In terms of the pandemic, we are not out of the woods yet. Now is not the time to withdraw proactive fiscal expansions. Many countries have to continue to strengthen fiscal responses and beyond, to bounce back from the economic downfall and ensure sustainable and resilient economic recovery,” Kang said.
This week, data from the Department of Finance (DOF) showed the country’s debt-to-GDP ratio at 54.5 percent last year is “slightly higher” compared to the average debt ratio of Asean-5 at 51.5 percent.
Based on the 2017-2020 data provided in the economic bulletin of Finance Undersecretary and Chief Economist Gil Beltran, it was only last year that the Philippines’s debt ratio exceeded the Asean-5 average.
Aside from the Philippines, countries included in the Asean-5 are Indonesia, Malaysia, Singapore and Thailand.
Despite the Philippines’s debt-to-GDP ratio rising to a 14-year high last year from a record low of 39.6 percent in 2019, Beltran said the Philippines is “at the middle of the scale” within Asean.
Beltran noted, though, that lower interest rates “helped cushion” the fiscal impact of the country’s higher debt-to-GDP ratio.
He noted that interest payments rose only by 5.4 percent to P380.4 billion in 2020 from P360.9 billion in 2019.