January 19, 2022
MANILA – Total global debt in 2020 stood at $226 trillion, exceeding total annual global income by 2.56 times, the International Monetary Fund (IMF) tells us. Countries around the world have borrowed heavily in the face of heavy financial demands from the still raging COVID-19 crisis. The IMF’s Global Debt Database reveals that 2020 saw the largest one-year increase in global debt since World War II. Governments borrowed most (just over half) of the increase, with global public debt jumping 20% during the year, while private debt rose 10%.
Fortunately, our country was in a good position to take on more debt when we entered the pandemic, thanks to past and current government financial managers who have reduced the level of public debt to less than 40% of GDP. About 15 years ago, we were in a fiscal crisis with a debt-to-GDP ratio of 75%, well above the 60% considered the rule of thumb for the safe harbor. But it took us less than two years to breach that again, with the last reported debt level already at around 63% of our assumed GDP for the year 2021, and growing.
Yet advanced economies actually had much worse debt figures. According to the IMF, the total debt of advanced economies stood at 302% of their overall GDP, compared to 234% in 2007. Of this amount, public debt had jumped from 70 to 124% of GDP during the same period, while the rise in private sector debt was more moderate but from a much higher base, from 164% to 178%. The global financial crisis of 2008-2009 and the current pandemic crisis are mainly responsible for this surge. But the current crisis has been more telling, particularly for the private sector, where debt has jumped by 14 percentage points of GDP, double the jump that occurred during the financial crisis. An additional boost came when governments and central banks lent to the private sector to help them out of the pandemic recession. Debt levels in emerging markets and developing economies like the Philippines have also increased, but advanced economies and China together accounted for more than 90% of the global debt increase in 2020.
So what can we expect on the line? All eyes are now on the United States, where the economy is experiencing the fastest rising prices since the 1980s, with a long-unheard-of inflation rate of 7% year-on-year (compare ours at 4 .5%). Their inflation problem stems from the combined effects of too much money pumped into the economy through COVID government subsidies ultimately funded by printing more money; wage increases in a tight labor market stressed by the pandemic and rising consumer demand; supply chain disruptions, including shipping industry backlogs; and oil prices rise again. Ours have been fueled mainly by food supply issues, especially pork (due to African swine fever) and fish, for which the easing of imports is helping.
The problem is that when the US economy sneezes, everyone catches a cold, especially small economies like ours. Analysts are keeping a close eye on the inevitable moves by the US Federal Reserve to tighten the money supply, thus raising interest rates, now made imperative by their galloping inflation. This would strengthen the US dollar and depreciate currencies like ours as funds flow back into the US to take advantage of higher returns. To avoid this, central banks around the world, including our Bangko Sentral, will be pressured to follow suit to tighten money and raise interest rates, with the undesirable effect of stifling growth at a time when she needs it most. At the same time, higher interest and exchange rates would make our already large debts even more expensive and our vital imports more expensive, negating the possible boost that a depreciated peso could give our exports.
Our authorities express confidence that our high inflation will come down this year in the hope that the food supply problems will be resolved. But we also have to factor in more expensive imports due to a weaker peso, rising oil prices and possible upward pressure on wages. With so many moving parts and a critical election looming, economists’ crystal balls are murkier than ever.