Activity 14

1. Describe the current macroeconomic policies or conditions of public debt and fiscal policy of Philippines.

Fiscal and monetary policy are two key instruments used by our government and the Federal Reserve to steer our
economy in the right direction. Fiscal policy is the use of our government's spending and taxing authorities to
influence the economy. The connection between government expenditure and tax collection is a delicate balancing
act that actually requires timing and a dash of luck to achieve. Fiscal policy's direct and indirect consequences can
affect personal spending, capital expenditure, exchange rates, deficit levels, and even interest rates, which are often
linked with monetary policy.

Over the last decade, the Philippines' budgetary condition has significantly improved. Despite the benefits of
reform, the Philippines continues to face budgetary issues. Econometric results indicate that the BSP and the
national government have coordinated their policy efforts in order to prevent policy sterilizing. While the
combination of monetary and fiscal policy has been beneficial throughout the financial crisis and its sequel, the
BSP has expressed worry about the national government's reduced issuance of government securities as well as
probable interest rate suppression. Concerning the transition of public debt from international to local financial
markets, it should be underlined that there is enough liquidity in the domestic economy to alleviate concerns about
crowding out of private offers. The central bank has even urged the government to get more of its funding from
local markets.

The increased liquidity in domestic markets also allows for the extension of the maturity of national debt.
However, the national government must also guarantee that its cash flows cover future responsibilities as they
arise, and it must avoid maturities bunching together. Because this problem has an impact on financial stability
and, in particular, the attractiveness of public debt to foreign investors, it is worth noting that the majority of public
debt has historically been owned by citizens. Similarly, the country's vulnerability to the impacts of a sudden and
abrupt outflow of foreign money has been restricted.

However, the dearth of liquidity for short-term Treasury bills has negative implications for capital market
development and long-term financial and macroeconomic stability. The BSP's role in public debt management has
been to investigate the impact of public debt issuance on the important macroeconomic indicators that fall within
its purview. Under Philippine law, any government debt, whether in pesos or foreign money, requires the Monetary
Board's permission. Representatives of the BSP sit on two of the five seats on the Bureau of the Treasury's auction
committee.

On the history side, by 2005, there was widespread recognition that the fiscal position of the national
government had become untenable. Fiscal caution was then observed, and additional taxes were introduced. As a
result, by 2007, the fiscal status had nearly restored to balance. As a result, the total outstanding government debt
was reduced from a peak of 74.4 percent of GDP in 2004 to a more manageable 52.4 percent of GDP by 2010.
Along with improving fiscal balance figures and relatively strong economic performance, the Philippines has
received credit rating upgrades and expects to get more shortly. Debt spreads have decreased to levels better than
those of higher-rated sovereign bond issuers in acknowledgement of the country's solid budgetary situation.
Despite the benefits of reform, the Philippines continues to face budgetary issues. Weak income production, the
implementation of revenue-eroding measures by the Philippine Congress, and recent underspending have caused
fiscal officials to be concerned. While income shortages have been managed thus far, they may contribute to future
deficit growth. If the fiscal position becomes unsustainable, public spending may be restricted again, resulting in a
negative impact on economic growth. The debt servicing expense has become less of a budgetary drag as the size
of government debt has decreased. The debt ratio declined from 85 percent of total government income in 2004 to
57 percent in 2010. While the budgetary situation is now under control, the risk of missed chances for enhanced
economic performance or future volatility necessitates additional consideration.

REFERENCES:

[1] A Look at Fiscal and Monetary Policy. (2021, October 27). Investopedia.

https://www.investopedia.com/articles/economics/12/fiscal-or-monetary-policy.asp

[2] Guinigundo, D., 2021. Fiscal policy, public debt management and government bond markets: the case for the
Philippines. [online] Bis.org. Available at: <https://www.bis.org/publ/bppdf/bispap67s.pdf> [Accessed 30 November
2021].