The Impact of Debt-to-GDP Ratio on the GDP Growth Rate of the Philippines

Lead Researcher(s): Edgar Detoysa, Jonecis Dayap, Joey Estorosos, Ma. Kresna Mansueto, Randy Salazar, Jesse Susada, Maria Teresa Vito and Jessica Magallon-Avenido
Status: Published

Abstract/summary:

Background: Government borrowings could play an important role in maintaining economic stability; however, it is essential to keep the indebtedness manageable to ensure that debts continue contributing to economic growth. This concern is particularly relevant for the Philippine economy, which has faced recurring economic shocks, policy transitions, and fluctuating debt trajectories over the past decades.
Methods: This study analyzed the relationship between the debt-to-GDP ratio and GDP growth in the Philippines from 1986 to 2020, employing regression and correlation analyses to determine the optimal debt ratio. A quadratic regression model, demonstrating the highest adjusted R2 and lowest MSE, revealed a U-shaped non-linear relationship. It suggests an optimal debt-to-GDP ratio of 57.64% when including extraordinary events and 60.23% excluding them.
Results: Spearman’s correlation indicated a significant negative correlation between debt and growth at lower debt levels. In comparison, the relationship at higher debt levels was inconclusive, highlighting the influence of external shocks and domestic policies. The study identified periods characterized by varying debt and growth dynamics, illustrating the complex interplay of natural disasters, financial crises, fiscal policies, and global economic conditions.
Conclusion: Ultimately, the findings emphasize the context-dependent nature of the debt-growth nexus, advocating for nuanced policy responses tailored to the Philippines’ specific economic environment. These insights inform more adaptive fiscal policymaking in the Philippine context and offer implications for other emerging economies dealing with similar debt sustainability challenges.

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