High bond yields complicate Philippine government’s push to boost spending

By Justine Irish D. Tabile, Senior Reporter

ELEVATED BOND YIELDS could put further pressure on the national budget by raising government borrowing costs and interest payments just as the administration seeks to ramp up spending to support the Philippine economy.

“The Philippines is quite exposed to interest rate movements in advanced economies,” Marco Antonio C. Agonia, an economist at the University of Asia and the Pacific, said in an e-mail.

“Local bond yields have already trended higher due to upside inflation risks from the Middle East war and potential agricultural damage moving forward. Adding in elevated advanced economy yields to the mix adds more upside pressure on local bonds,” he added.

Yields on mid- to long-term Philippine government securities remained above 7% in the secondary market on Friday, compared with around 5.4%-6.5% on Feb. 27, a day before the Iran war broke out.

Meanwhile, the benchmark 10-year US Treasury yield climbed to around 4.97% on Friday from 3.97% on Feb. 27.

Mr. Agonia’s comments come after International Monetary Fund (IMF) Managing Director Kristalina Georgieva warned that rising bond yields and ballooning debt in advanced economies could undo progress made by developing and low-income countries in managing their debt burdens.

Ms. Georgieva said higher borrowing costs in advanced economies could spill over to developing countries and make it more expensive for them to service their debt.

Mr. Agonia said Philippine financial market participants would seek to maintain a spread between US Treasuries and domestic bonds, putting upward pressure on yields for both foreign-denominated and peso-denominated government debt.

“This framework applies to both foreign-denominated bonds and local currency ones, threatening to enlarge interest payments on NG’s (National Government) budget,” he said.

The government has proposed a P7.2-trillion national budget for 2027, equivalent to 21.7% of gross domestic product (GDP). If approved, next year’s budget would be 6% higher than this year’s P6.79-trillion spending plan.

To finance its spending requirements, the NG plans to borrow P3.3 trillion in 2027, of which 72% will come from domestic sources and 28% from foreign creditors. This is 20.9% higher than this year’s P2.734-trillion program.

The government programmed P1.11 trillion for interest payments in 2027, up 11.9% from P995.6 billion this year. This would account for around 15.5% of the proposed P7.2-trillion budget.

China Banking Corp. Chief Economist Domini S. Velasquez said rising global bond yields reflect concerns over higher debt burdens, while risk-off sentiment following the war in Iran has added pressure through higher risk premiums and inflation.

“In the Philippines, higher inflation and the BSP’s (Bangko Sentral ng Pilipinas) higher policy rate, together with the possibility of further hikes if needed, have also kept yields elevated,” she said in a Viber message.

Ms. Velasquez said fiscal consolidation remains on track, although at a slower pace than initially planned, resulting in higher borrowing requirements and interest payments.

“That said, the Philippines remains well below the debt service burden seen in the early 2000s, when interest payments accounted for roughly a quarter to a third of the national budget,” she said.

She said the share fell steadily to below 10% in the late 2010s but has risen again in recent years.

“This is something we need to watch, particularly if borrowing costs remain elevated,” Ms. Velasquez said.

Mr. Agonia said higher yields in the secondary market could also push up rates sought by investors at government securities auctions.

“NG may have to accept higher debt yields, especially as it looks to pump-prime the economy through infrastructure spending in the coming quarters,” he said.

“We usually see a string of partially awarded auctions and/or no winning bids for some tenors when debt market participants’ yield expectations rise.”

Persistently elevated borrowing costs could also make it more difficult for the government to refinance maturing obligations at cheaper rates, he added.

“Persistently elevated yields may also raise rollover risks, with NG potentially unable to retire higher-yielding debt for lower-yielding ones when market conditions are expected to improve,” Mr. Agonia said.

The Philippines’ transition to upper-middle income country (UMIC) status could likewise affect its access to cheaper financing.

“The country’s ascension to UMIC status may also limit the availability of lower-yielding, concessional financing agreements moving forward,” he said.

FISCAL CHALLENGE
At the same time, Mr. Agonia said elevated borrowing costs could complicate the government’s efforts to improve its fiscal position while supporting economic growth.

“NG is caught between a rock and a hard place in improving its fiscal position. It needs healthy economic growth to raise tax revenues but also needs to spend more because of tepid growth figures,” he said.

Data from the Bureau of the Treasury showed that the fiscal deficit widened by 13.85% to P893.1 billion in the first seven months from P784.4 billion in the same period a year earlier. This was equivalent to 53.84% of the upwardly revised P1.659-trillion full-year ceiling.

Meanwhile, the country’s debt-to-GDP ratio rose to 66% at the end of the second quarter, the highest in 22 years or since the 71.6% recorded at end-2004. It also exceeded the government’s 64.9% debt-to-GDP target for 2026, which assumes GDP growth of 3.5% and nominal GDP of P30.45 trillion.

NG outstanding debt rose to a fresh high of P19.39 trillion at end-July, up 1.7% from P19.07 trillion at end-June.

However, Mr. Agonia said there is still room for the government to improve revenue collection efficiency, noting that the Philippines’ tax effort, or tax revenues as a share of gross domestic product, remains below Asia-Pacific standards.

He also said the government should ensure that additional spending generates stronger economic returns.

“Spending must now also be deliberate and impactful, with projects chosen to maximize fiscal multipliers, and not by how fast agencies can spend their budgets,” Mr. Agonia said.

Despite higher borrowing costs, Ms. Velasquez expects fiscal consolidation to continue over the medium term, “bringing both the fiscal deficit and debt-to-GDP ratio lower.”

For 2027, the government projects the fiscal deficit at P1.695 trillion, equivalent to 5.1% of GDP, while the debt-to-GDP ratio is projected to ease slightly to 64.8%, assuming 5% economic growth.