Pasig Catholic College

SENIOR HIGH SCHOOL

School Year 2018 – 2019

The National Debt and Ways to Manage it

A Research Paper

Presented to the teachers of

BUSINESS FINANCE

PASIG CATHOLIC COLLEGE

SENIOR HIGH SCHOOL

Ramon Jabson Street Malinao Pasig City

In Partial Fulfillment of the Requirements for the track

Accountancy, Business and Management

By:

Maryrose V. Sumulong

Grade 12 – Pope Gregory I

October 2018
I. Introduction

 What is ‘national debt’?

The national debt is the public and intragovernmental debt owed by the
federal government. It’s also called sovereign debt, country debt, or government
debt. It consists of two types of debt. The first is debt held by the public. The
government owes this to buyers of its bonds. Those buyers are the country’s citizens,
international investors, and foreign governments. The second type is intragovernmental
debt. The federal government owes this to other government departments. It often
funds government and citizens’ pensions.

It is also known as the total outstanding borrowings of a central government

comprising internal (owing to national creditors) and external (owing to foreign creditors)
debt incurred in financing its expenditure. National debt is divided generally into three
categories: (1) Floating debt, short term borrowings such as treasury bills, various
ways-and-means advances, and borrowings from the central bank. (2) Funded debt,
short-term debt converted into long-term debt. (3) Unfunded debt, national savings
certificates, savings bonds, premium bonds, and securities repayable in foreign
exchange (payment of which affects the country’s balance of payments).

 How does it affects one’s Economy?

Moderate increases in the debt will boost economic growth. But too much debt
increases growth too fast. If growth is faster than the ideal range of 2-3 percent, it will
create a boom, which leads to a bust. An ever-increasing national debt slowly dampens
growth over the long term.

Debt holders know in the back of their minds that it must be repaid one day. They
demand larger interest payments. They want compensation for an increasing risk that
they won’t be repaid. That increases interest rates and slows the economy. Businesses
borrow less. They don’t have the funds to expand and hire new workers. As people
shop less, firms slash prices. As they make less money, they lay off workers. If interest
rates continue to rise, it can cause a recession.

The national debt becomes a sovereign debt crisis when the country is unable to
pay its bills. The first sign is when the country finds it can no longer get a low-interest
rate from lenders. Banks worry that the country cannot afford to pay the bonds. They
fear that it will go into debt default. They require higher yields to offset their risk. That
costs the country more to refinance its debt.

Investors compare the debt to the nation’s ability to pay it off. The debt-to-GDP
ratio does just that. It divides the debt by the nation’s gross domestic product. That’s
everything the country produces in a year. Investors worry about default when the debt-
to-GDP ratio is greater than 77 percent. That’s the tipping point, according to a study by
the World Bank. It found that if the debt-to-GDP ratio exceeds 77 percent for an
extended period of time, it slows economic growth. Every percentage point of debt
above this level costs the country 1.7 percent in economic growth. The tipping point for
emerging market countries is 64 percent. If the debt-to-GDP ratio is higher, it will slow
growth by 2 percent each year. At some point, the country can’t afford to keep rolling
over debt. When it threatens to default, it creates a crisis.

 How does it affects you as an individual?

When the national debt is below the tipping point, it improves your life.
Government spending contributes to a growing economy. When the debt is moderate, it
can boosts GDP enough to reduce the debt-to-GDP ratio. When the debt exceeds the
tipping point, your standard of living will slowly deteriorate. It’s like driving with the
emergency brake on. Debt holders demand larger interest payments. They want
compensation for an increasing risk they won’t be repaid. That increases interest rates
and slows the economy.
 It puts downward pressure on a country’s currency. Its value is tied to the value
of the country’s bonds. As the currency’s value declines, foreign holders’ repayments
are worth less. That further decreases demand and drives up interest rates. As the
currency declines, imports become more expensive. That contributes to inflation.

II. Body

According to the World Bank Group (2012). The first debt and debt service
reduction operation the World Bank financed was the Debt Management Program Loan
to the Philippines, approved in 1990. Its main objective was to help restore the
Philippines' creditworthiness by reducing the destabilizing pressures exerted by an
excessive debt-service burden. The government, having inherited a huge debt service
obligation, formulated a debt restructuring program for the country and a request for
debt-relief from creditors, with assistance from the Bank and the IMF.

Several events helped improve the Philippines' creditworthiness. Three of them

are particularly relevant to the operation. First, the government adopted a program of
deep structural and macroeconomic reform. Second, it reduced the debt stock by about
$650 million equivalent, or about 2.3 percent of its outstanding debt at the time, using
Bank and IMF financing to buy back $1.46 billion of debt from commercial banks at 50
percent discount. And finally, by signaling confidence in the Philippines' commitment to
sound macroeconomic reform, the Debt Management Loan opened up international
financial markets for the country.

Comparison of the last year’s Government Debt to the present time

2017
 (De Vera, 2018). The national government’s outstanding debt hit a record-high
P6.652 trillion in 2017 due to a weaker peso as well as an increase in domestic
borrowings last year. In a statement Monday, the Bureau of the Treasury said
outstanding obligations rose 9.2 percent from P6.09 trillion at end-2016. Last year,
domestic debt, which accounted for two-thirds of the total, climbed 12.9 percent to
P4.441 trillion from P3.934 trillion in 2016. The amount of government securities sold
last year, which comprised the bulk of local debt, jumped also by 12.9 percent to P4.441
trillion from 2016’s P3.934 trillion.

In April last year, the government also raised P181.9 billion from RTBs. During
its first 18 months in office, the Duterte administration already embarked on three RTB
issuances. Meanwhile, external debt inched up 2.6 percent to P2.211 trillion in 2017
from P2.156 trillion in 2016 partly as the peso weakened last year. The Treasury
attributed the year-on-year increase in foreign debt to “P25.2-billion net issuance for the
year and the effect of currency adjustments (P8.2 billion for local currency depreciation
and P20.9 billion for third-currency depreciation).” The Philippine peso slid to 11-year
low levels last year. The peso mostly weakened against the US dollar partly due to
concerns on the current account deficit as a result of a surge in imports.

Based on the Bangko Sentral ng Pilipinas’ updated balance of payments (BOP)

projections for 2017 released last month, it expects the current account to post a $100-
million deficit, smaller than the previous projection of a $600-million deficit announced in
June. “The better-than-initially expected current account draws supports from the
continued expansion in overseas Filipino remittances as well as business process
outsourcing and tourism receipts,” the BSP had said. Exports are expected to have had
jumped 11 percent last year, up from the previous projection of 5-percent growth due to
“the firm recovery in the global economy that has led to increased trade momentum
since the second half of 2016 carrying on to 2017,” according to the BSP.

Imports, meanwhile, are seen to have had grown 10 percent in 2017.

Economic managers had said that as the Duterte administration implements its
ambitious “Build, Build, Build” infrastructure program alongside expectations of
sustained strong economic growth, demand for imports will remain strong in the near
term. Before 2017 ended, economic managers also raised the share of foreign
borrowings in this year’s financing program on the back of the government’s upcoming
foray in the Chinese and Japanese debt markets.

2018

(Padin, 2018). The national government’s debt pile reached P6.821 trillion as of
end-February, hitting a new record high due to higher external borrowings and currency
fluctuations during the period, the Bureau of the Treasury (BTr) reported. According to
latest data from the Treasury, the national government’s outstanding debt as of Feb. 28
rose 1.4 percent to P6.821 trillion from the end-January level of P6.726 trillion. The BTr
said 64.95 percent of the debt came in the form of domestic borrowings, while the
remaining 35.05 percent were from foreign lenders. Domestic liabilities, for its part,
inched down 0.02 percent, or P920 million to P4.429 trillion from its end-January level.
The Treasury attributed the slight decrease to the net redemption of government
securities — amounting to P1.28 billion — which was partially tempered by the peso
depreciation — increasing the value of onshore dollar bonds by P360 million.

On the other hand, external borrowings as of end-February amounted to P2.39

trillion, 4.2 percent or P95.49 billion higher than the end-January level of P2.3 trillion.
The BTr attributed this to the net availment of foreign loans and bond issuances, as well
as foreign exchange fluctuations. According to the BTr, peso depreciation and third
currency appreciation raised the value of US dollar and third-currency denominated
debt by P32.59 billion and P4.76 billion, respectively. Net availments of foreign loans
and bond issuance also increased the amount of external debt by P58.14 billion.
Meanwhile, the national government’s guaranteed obligations as of end-February hit
P503.68 billion, 2.9 percent higher than the P489.45 billion recorded as of end-January.
The Treasury said this is mainly due to the effect US dollar and third currency
fluctuations, which increased the value of external guarantees by P4.15 billion and
P3.11 billion, respectively.
 In addition, the BTr said there was a net availment of domestic guarantees
amounting to P290 million, while the Land Bank of the Philippines, extended P7 billion
in guarantees to the Power Sector Assets and Liabilities Management Corp. The
Philippine government borrows from both domestic and external lenders to plug the
expected deficit in its budget, as well as to pay maturing debt. According to data from
the BTr, the national government’s debt pile hit P6.652 trillion as of end-December
2017. This is equivalent to 42.1 percent of the country’s gross domestic product (GDP),
which remained unchanged from the end-2016 level. Going forward, the country’s
economic managers expect the country’s debt-to-GDP ratio to further shrink to 36.7
percent by 2022. For 2018, the national government is also programmed to borrow
P889.51 billion from local and foreign lenders. Of this amount, P176.26 billion will come
from foreign financing, while the bulk or P711.8 billion will be borrowed domestically to
minimize any foreign exchange risk for the government.

III. Conclusion

Different countries have different sources of income. It is from these various

sources of income that countries are able to finance the many activities that
governments are involved in. The activities that need government spending are in such
areas as, social, economic and political fields. If a country is self-sufficient, there will be
no significant problem in terms of incurring National debt because this country will be
able to meet its expenditure from its resources. However, the problem arises for those
countries who are not self-sufficient. Such countries are not in a position to meet all the
needs of its citizens from its own resources and hence it will look to other sources of
extra income to meet its obligations, hence incurring National debt. National debt is a
real problem because once this debt is incurred, it has to be serviced. The servicing of
most debts do not only require that the principal debt is serviced but in addition to
servicing the principal debt, interest has also to be paid. This means therefore that
instead of meeting other social needs of the people of a country, the money will go to
the payment of interest because of the complexities that go with National Debt, it
therefore calls for proper management.

INCOME RECEIPTS IN THE BUDGET

It is important to understand the relationship between national debt and income

receipts in the budget. Of course if income receipts are more than the outlays, then
there will be a budget surplus. However, if the outlays are more than the receipts, then,
there will be a budget deficit, hence the nation resorts to borrowing and thereby
incurring national debt.

MANAGING NATIONAL DEBT

The staffs of the International Monetary Fund and the World Bank, (2001) P.1
pointed out that "sovereign debt management is the process of establishing and
executing a strategy for managing the governments debt in order to raise the required
amount of funding, achieve its risk and cost objectives, and to meet any other sovereign
debt management goals the government may have set, such as developing and
maintaining an efficient market for government securities".

As will be demonstrated shortly, debt management requires a combined effort

from all stake holders to ensure that all risky areas are addressed in order to remain
within manageable debt levels. The staff of the International Monetary Fund and the
world Bank, (2001) P.4 have argued that "pubic debt management problems often find
their origins in the lack of attention paid by policy markers to the benefits of having a
prudent debt management strategy and the cost of weak macroeconomic management.
In the first case, authorities should pay greater attention to the benefits of having a
prudent debt management strategy, framework and policies that are coordinated with a
sound macro policy framework. In the second, inappropriate fiscal, monetary or
exchange rate policies generate uncertainty in financial markets regarding the future
returns available on local currency - denominated investments, thereby inducing
investors to demand higher risk premiums".

OBJECTIVES OF NATIONAL DEBT MANAGEMENT

 We know that once a debt is incurred, it has to be repaid. Hence therefore, the
first objective of national debt management is to see to it that the financing and payment
obligations of government are carried out at the lowest possible cost; that is by taking
care of the risks that are involved in borrowing and repayment. It is important at this
point to look at the risks that may be encountered in public debt management. Some of
these risks are; market, rollover, liquidity, credit, settlement and operational risks. Let us
look at these risks individually. According to the staffs of the International Monetary
Fund and the world Bank, (2001) P. 8 "Market risk refers to the risks associated with
changes in market prices, such as interest rates, exchange rates, commodity prices on
the cost of the governments debt servicing.
 References

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