Public Borrowing

and Debt
Management

Engr. Mario L. Rance

Master of Technology Management (earned units)
Contents
1. What is Public borrowing/debt?
2. Classification of Public Debt
3. Rationale of Public Debt
4. Public Debt and Macroeconomy
5. The Structure of Philippine Public Debt
6. What is Debt Management and why is it
important?
7. Debt Management in the Philippines
8. The Philippine Debt Profile as of June 2019
9. Key Takeaways
What is Public
Borrowing or
Debt
Public borrowing refers to the legal
obligation of the state to pay back the
principal and interest to the holders of the
predetermined rights in accordance with a
certain schedule.
Classification of
Public Debts
Public debt has been classified in many
ways. The differences arise on account of
many factors, such as to the market in
which the loans are floated, conditions of
repayment, purpose of borrowing for which
they are raised, etc.
Classification of
Public Debts
According to debt According to
issuances currency composition

According to According to
maturity structure securitized public
sector debts
 According to debt
issuances
● The national government (NG) issues
debts to finance a portion of its
operations, apart from revenues raised
from tax collection.

● Local government units also have the

power to borrow, as well as
government-owned-and-controlled
corporations (GOCC) and government
financial institutions.
 According to debt
issuances

● The national government (NG) may opt

to explicitly guarantee their
borrowings. Taken together, public
sector debts are accounted in the
consolidated public sector fiscal
position (CPSFP), which refers to the
net deficit or surplus calculated after
summing-up the budget balances of all
government entities.
 According to
maturity structure
● Public sector entities could decide to
borrow either short-term or long-term,
consistent with their borrowing
guidelines and debt management
thrust.

● The NG typically conducts its short-

term borrowings through the issuance
of Treasury bills (T-bills) that carry
maturities of three months to one year.
 According to
maturity structure
● Long-term borrowings are financed by
issuing longer-dated Treasury bonds,
foreign-currency sovereign debt
issuances and such other debentures.
 According to
currency composition

● Public sector debts can be contracted

in local currency or in foreign
currencies (which are collectively
known as ROPs in market parlance)
 According to
securitized public
sector debts
● The public sector may also securitize
its future cash flow streams to finance
current expenditures.

For example, the government may

issue “revenue bonds,” which will be
financed by revenues collected from
specific user fees such as highway tolls.
Rationale of Public
Borrowing
1. The proceeds undertaken are
used to spur economic
development.
Example: Government to provide public goods
and services that offer little profit incentives
but have significant social returns).
2. To finance relatively expensive
but socially responsive programs
which are essential to enhance the
productive capacity of the country.
Example: The government may opt to finance
infrastructure projects such as the construction of
farm-to-market roads to assists the farmers in
efficiently transporting their products to their
intended destination. Alternatively, it could
embark on constructing public schools and health
centers that could lift the human capital resources
of the country.
3. To spur economic activities,
particularly when the private sector
activities are constrained by weak
economic conditions.
Example: The external shocks emanating from the
recent global financial crisis necessitated the
government to implement stimulus measures to
counteract the slack in private sector activities.
4. There are instances that the
government borrows not because it
needs financing but to set
benchmarks for borrowings
undertaken by the private sector.
In this case, the government’s objective is more of
local capital market deepening rather than
financial affairs.
Public Debt
and
Macroeconomy
Ricardian Equivalence
Ricardian equivalence is an economic theory that
argues that attempts to stimulate an economy by
increasing debt-financed government spending are
doomed to failure because demand remains
unchanged. The theory argues that consumers will
save any money they receive in order to pay for
the future tax increases they expect to be levied in
order to pay off the debt.

This theory was developed by David Ricardo in the

early 19th century and later was elaborated upon
by Harvard professor Robert Barro. For this
reason, Ricardian equivalence is also known as the
Barro-Ricardo equivalence proposition.
…
Proponents of the Radian equivalence
argues that increased government
borrowing may have no impact on
consumer spending because consumers,
by being rational, will expect tax cuts or
higher spending that will lead to future tax
increases to pay back the resulting
increase in debts.
Arguments against
Ricardian equivalence
1. Consumers may not be as rational as
initially thought. Some consumers may
not anticipate that tax cuts will lead to
tax hikes in the future. Thus, tax rebates
are usually included in fiscal stimulus
packages during an economic downturn.
Arguments against
Ricardian equivalence
2. Tax cuts can boost growth and diminish
borrowing requirements. Tax revenues fall
in periods of slower economic growth, while
government spending may increase through
providing heightened social services such as
higher spending on unemployment benefits.
Some argue that decreasing taxes in periods
of soft economic activity could encourage
spending and heightened economic activity,
which could improve the fiscal position and
reduce the need for future borrowings to
offset the tax cuts.
Arguments against
Ricardian equivalence
3. Public debts could pump-prime the
economy without crowding-out the private
sector. During periods of weaker economic
activity and uncertain conditions, the
private sector may choose to remain in the
sidelines. The government’s task, therefore,
is to stimulate aggregate demand by
spurring economic activity.
Arguments against
Ricardian equivalence
4. Pump priming activity could generate
multiplier effect. The increase in output
associated with pump-priming activity of the
government could be higher relative to
government spending.
What is
Public Debt
Management
and why is it
important?
What is public debt
management?
Public debt management is the process of
establishing and executing a strategy for
managing the government’s debt in order
to raise the required amount of funding
and achieve its risk and cost objectives.
Why is it important?
• By reducing the risk that the
government’s own portfolio management
will become a source for instability for the
private sector, careful government
department management can make
countries less susceptible to contagion
and financial risk. The guidelines are
designed to assist considerations about
reforms to strengthen the quality of
public debt management and reduce the
vulnerability of countries to international
financial shock.
Why is it important?
• Sound debt structures help
governments reduce their exposure
to interest rate, currency and other
risks.

• The main objective of public debt

management is to ensure that the
government’s financing needs and its
payment obligations are met at the
lowest possible cost, consistent with
a prudent degree of risk.
Four stages of Public Debt

1 Borrowing the
Funds 2
Spending the
Funds

3 Raising revenue
for repayments 4 Actual debt
repayment
Public Debt
Management in
the Philippines
The Development Budget
Coordination Committee
(DBCC)

The Development Budget Coordination

Committee (DBCC) was created on May 14,
1970 through the Executive Order No. 232
creating the Presidential Development Budget
Committee (PDBC) and enumerating its
functions and objectives.
The Development Budget
Coordination Committee
(DBCC)
Later, on March 1, 1972, the Integrated
Reorganization Plan renamed the PDBC to its
current appellation and attached it to the
NEDA. In the same year on September 22,
Presidential Decree (PD) No. 136 was issued,
amending the Integrated Reorganization Plan
to include the Executive Secretary in the
Membership of the DBCC. In July 25, 1987,
Executive Order No. 292 was issued to
reorganize the NEDA including the DBCC to
its composition today.
The Development Budget
Coordination Committee
(DBCC)
The role of the DBCC is primarily to review
and approve the macroeconomic targets,
revenue projections, borrowing level,
aggregate budget level and expenditure
priorities and recommend to the Cabinet and
the President of the consolidated public sector
financial position and the national
government fiscal program.
Functions of DBCC
1. Assessment of reliability of revenue
estimates.

2. Recommendations of appropriate tax,

revenue measures and type of borrowings.

3. Conduct of periodic review and

examination of costs.
Metrics used to
determine the country’s
debt sustainability
Forranda (2005) reiterated the
International Monetary Fund (IMF) and
World Bank’s stance that debt
sustainability should be assessed on the
basis of indicators of the debt stock or
debt service relative to the various
measures of repayment capacity.
Metrics used to
determine the country’s
debt sustainability
The most commonly used is public
debt-to-GDP ratio to measure the
financial leverage of an economy.

Other indicators include ratios of

foreign debt-to-exports or
international reserves, public
debt-to-revenue and revenue-to-
GDP.
Metrics used to
determine the country’s
debt sustainability
Another set of indicators focuses
on the country’s ability to service
its short-term obligations, and are
used to gauge the country’s
liquidity conditions. These include
ratios such as
• debt service-to-GDP
• foreign debt service-to-exports
• gov’t debt service-to-current
fiscal revenue
The Philippine
Debt Profile as
of June 2019
As of end-March 2019, the maturity profile of the
country’s external debt remained predominantly
medium- and long-term (MLT) in nature [i.e., those
with original maturities longer than one (1) year], with
share to total at 79.1 percent. Short term (ST) accounts
[or those with original maturities of up to one (1) year],
on the other hand, comprised the 20.9 percent balance
of debt stock and consisted of bank liabilities, trade
credits and others. The weighted average maturity for
all MLT accounts slightly decreased to 16.8 years from
17.0 years during the previous quarter, with public
sector borrowings having a longer average term of
21.0 years compared to 7.6 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
Public sector external debt increased
to US$40.2 billion from US$39.7
billion in the previous quarter,
although the share to total declined
from 50.3 percent to 49.9 percent.
About US$33.9 billion (84.5 percent)
of public sector obligations were NG
borrowings while the remaining
US$6.2 billion pertained to other
government agencies’ loans.
Private sector debt
Private sector debt increased from
US$39.3 billion as of end-December
2018 to US$40.3 billion as of end-
March 2019, with share to total
increasing from 49.7 percent to 50.1
percent. The recorded rise in private
sector borrowings was due largely to
prior periods’ adjustments of US$1.0
billion.
Obligations to foreign
banks
Obligations to foreign banks and other financial
institutions had the largest share (33.2 percent) of
total outstanding debt, followed by loans from
official sources [multilateral (18.0 percent) and
bilateral creditors (13.8 percent)]. Bilateral
sources (amounting to US$11.1 billion) comprised
of Japan – US$8.0 billion; China – US$650 million;
and Korea – US$584 million, among others.
Meanwhile, foreign holders of bonds and notes
partake 27.7 percent; and the rest (7.3 percent)
were owed to other creditor types (mainly
suppliers/exporters).
Debt stock (currency mix)
In terms of currency mix, the country’s
debt stock remained largely
denominated in US Dollar (61.2
percent) and Japanese Yen (12.7
percent). US dollar-denominated
multi-currency loans from the World
Bank and ADB represented 15.6
percent. The 10.5 percent balance
pertained to 17 other currencies,
including the Philippine Peso, Euro
and SDR.
Major creditor countries
Major creditor countries are: Japan
(US$14.4 billion), United States of
America (US$3.7 billion), Netherlands
(US$3.7 billion) and United Kingdom
(US$3.4 billion).
Metrics used to
determine the country’s
debt sustainability
Another set of indicators focuses
on the country’s ability to service
its short-term obligations, and are
used to gauge the country’s
liquidity conditions. These include
ratios such as
• debt service-to-GDP
• foreign debt service-to-exports
• gov’t debt service-to-current
fiscal revenue
Another set of indicators focuses
on the country’s ability to service
its short-term obligations, and are
used to gauge the country’s
liquidity conditions. These include
ratios such as
• debt service-to-GDP
• foreign debt service-to-exports
• gov’t debt service-to-current
fiscal revenue
Key Takeaways
֍ Public borrowing is significant for it can help a
country to spur economic developments.

֍ Public borrowings – like any other debts – carry

costs, particularly the interest expense of the funds
borrowed. The debt servicing burden (principal plus
interest, which are spread throughout the life of the
debt) could compromise a large chunk of national
budget. Debt management therefore, should ensure
that public debt programs are not bunced up.
References
Structure of Philippine Public Debt
https://www.slideshare.net/fayeetouch/structure-of-philippine-public-debt

The Philippines' External Debt Ratios Remain at Prudent Levels even as

External Debt Rises in the First Quarter 2019
http://www.bsp.gov.ph/publications/media.asp?id=5039&yr=2019

Duterte’s Borrowing Binge

https://www.ibon.org/dutertes-borrowing-binge/

Guidelines for Public Debt Management

https://www.imf.org/external/np/mae/pdebt/2000/eng/index.htm#I

Public Debt Management

https://www.coa.gov.ph/wgpd/phocadownloadpap/userupload/meetings/2017/00-Keyno
te%20Address_Debt_Management_Presentation.pdf

Public Debt and Fiscal Consolidation

http://www.bsp.gov.ph/downloads/EcoNews/EN11-04.pdf
Thank you.
Mario L. Rance
mlrance@up.edu.ph