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Research Paper B.finance
Research Paper B.finance
A Research Paper
BUSINESS FINANCE
By:
Maryrose V. Sumulong
October 2018
I. Introduction
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.
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.
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.
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.
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.
III. Conclusion
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".
Government debt hits record P6.82 trillion. (2018, April 01). Retrieved from
https://www.philstar.com/business/2018/04/01/1801584/government-debt-hits-
record-p682-trillion
Vera, B. O. (2018, January 29). Gov't's outstanding debt in 2017 hits record-high of
P6.652 trillion. Retrieved from https://business.inquirer.net/244982/government-
outstanding-debt-weaker-peso-domestic-borrowings-economy-treasury
Amadeo, K. (n.d.). Why You Should Care About the Nation's Debt. Retrieved from
https://www.thebalance.com/what-is-the-national-debt-4031393
What is the national debt? definition and meaning. (n.d.). Retrieved from
http://www.businessdictionary.com/definition/national-debt.html