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External debt service soars to $8.9 billion as of end-August

Euro, Hong Kong dollar, US dollar, Japanese yen, UK pound and Chinese 100 yuan banknotes are seen in this picture illustration in Beijing, China, Jan. 21, 2016. — REUTERS/JASON LEE

THE PHILIPPINES’ external debt service burden more than doubled to $8.89 billion as of end-August, preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed.

Based on data posted on the BSP’ website, the Philippines’ external debt service burden surged by 125% from $3.95 billion a year earlier.

The debt service burden refers to the amount of money a country needs to pay back its foreign creditors. This includes both principal and interest payments on its external debt.

BSP data showed principal payments soared by 92.7% to $4.47 billion in January to August from $2.32 billion a year ago.

Interest payments surged by 171% to $4.43 billion in the first eight months of the year from $1.63 billion a year earlier.

Principal external debt service is mostly fixed medium- to long-term credits, while interest payments are for fixed and revolving short-term credits of banks and nonbanks.

“The country’s debt service burden experienced an uptick this year due to higher interest rates. This was largely expected,” China Banking Corp. Chief Economist Domini S. Velasquez said in a Viber message.

Globally, central banks have tightened monetary policy to curb inflation. This includes the BSP, which was regarded as one of the most aggressive central banks in the region after it hiked key rates by 450 basis points to 6.5% from May 2022 to October 2023.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort attributed the higher external debt service burden to high borrowing costs, which “bloated interest payments.”

Larger maturities of government debt and a weaker peso against the dollar may have also led to higher debt service costs, he added.

Latest data showed outstanding external debt reached $117.918 billion as of end-June, 9.5% up from $107.692 billion a year ago.

External debt refers to all types of borrowings by Philippine residents from nonresidents, following the residency criterion for international statistics.

The debt service ratio, or principal and interest payments as a fraction of export receipts and primary income, rose to 11% at the end of June from 4.6% a year earlier.

“For the coming months, debt servicing could be somewhat tempered by the recent downward correction in US/global/local bond yields and possible policy rate cuts by the Fed and other global central banks that could reduce financing/borrowing costs,” Mr. Ricafort said. 

A stronger peso exchange rate and narrower budget deficit in the coming months would also reduce the need for new borrowings and cut debt service costs, he added.

“The country’s external debt position will benefit from expected policy rate cuts in the second half of 2024,” Ms. Velasquez said.

BSP Governor Eli M. Remolona, Jr. earlier said the Monetary Board intends to keep policy settings “sufficiently tight” until the downward trend in inflation becomes more evident next year.

He also ruled out any rate cuts in the first half of 2024, as inflation may still go above the 2-4% target range until July next year.

“Moving forward, we may see a bit higher debt before slowing down as disinflation continues. Anticipation of less hawkish global central banks may eventually help,” Union Bank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said.

Inflation slowed to 4.9% in October from 6.1% in September, the slowest in three months. However, it still marked the 19th straight month that inflation breached the 2-4% central bank target.

This brought average inflation in the first 10 months to 6.4%, still above the BSP’s 6% full-year forecast. — Keisha B. Ta-asan


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