From Stability to Vulnerability: Analyzing the Philippines’ Sovereign Debt Risks and Sustainability

Introduction

Concerns regarding sovereign debt crises have resurfaced in the post-COVID period. Recent IMF estimates indicate that around 60% of low-income developing countries faced high risks of default or were already in debt distress in 2021–2022 (IMF, 2022). Recent defaults in Ghana, Sri Lanka and Zambia, and near-default episodes in Pakistan and Egypt, underscore the severe economic and social costs of unsustainable borrowing (Fischer & Storm, 2023; Hernandez, 2023). While the pandemic intensified debt accumulation through higher public spending and slower growth, many of these vulnerabilities, such as excessive borrowing, fiscal imbalances and structural weaknesses, had been developing long before the pandemic (Fischer & Storm, 2023).

The literature on sovereign debt spans economics, political science and history. Reinhart and Rogoff’s (2009) seminal work highlights the cyclical nature of debt crises, often triggered by fiscal excesses and external shocks. Subsequent studies emphasize persistent budget deficits, current account imbalances and exchange rate volatility as key macroeconomic drivers (Alesina & Perotti, 1995; Corsetti et al., 1999; Eichengreen & Hausmann, 1999), while weak institutions and political instability exacerbate default risks (Acemoglu et al., 2003). However, country-specific analyses that integrate structural, institutional and policy dynamics remain limited. Recent debt crises highlight recurring vulnerabilities, such as heavy reliance on foreign-denominated debt, persistent fiscal deficits and weak industrial bases, that make developing economies highly susceptible to fiscal distress.

Building on the theoretical foundations of sovereign debt crisis literature, which link debt distress to macroeconomic imbalances, institutional weaknesses and political constraints, this study develops an integrated framework connecting these factors to the Philippines’ debt dynamics. The analysis draws from classical and institutional theories of fiscal vulnerability (Acemoglu et al., 2003; IMF, 2022; Reinhart & Rogoff, 2009), highlighting how persistent deficits, external shocks and governance quality interact to determine debt outcomes. Empirically, the study adopts the IMF’s debt-sustainability analysis (DSA) as the primary analytical framework to translate theory into measurable indicators under baseline and stress-test scenarios (IMF, 2013b). Integrating these perspectives provides a coherent basis for assessing the Philippines’ debt position and resilience to future shocks.

This study focuses on the Philippines’ rising national debt and exposure to foreign-denominated loans. It is motivated, in part, by growing concerns over persistent deficit spending, recurring budget shortfalls and increasing risks to fiscal sustainability. Recent estimates from the Bureau of the Treasury (BTr) show national debt rising to PHP 16t (≈US$280.1b) ¹ in 2024, almost triple its level a decade prior. The debt-to-GDP ratio climbed from a multi-decade low of 39.6% in 2019 to 61% in 2024, reflecting expansionary fiscal policies and weaker-than-expected post-pandemic economic recovery. While these figures do not necessarily indicate an impending sovereign debt crisis, they underscore the growing challenges to debt sustainability amid domestic and external pressures.

This article analyses the drivers of debt accumulation, including persistent deficit spending, exposure to foreign-denominated debt and structural vulnerabilities such as premature de-industrialization and weak revenue performance. It also examines the adverse effects of sovereign debt crises, including constrained public spending, slower growth, erosion of fiscal and monetary policy space, heightened risks of disinvestment, capital flight and social unrest. Using the IMF’s DSA framework, the study provides a quantitative assessment of the Philippines’ debt trajectory under baseline and stress-test scenarios. The study further compares the Philippines with countries that have recently experienced crises and concludes with actionable policy recommendations to strengthen fiscal sustainability.

Causes of Sovereign Debt Crisis

A sovereign debt crisis occurs when a government is unable to fulfil its debt obligations to its creditors (Cohen, 1992; Felix, 1990; Sachs, 2002). In this article, a debt crisis is defined as a situation in which a country faces severe difficulties in servicing its public debt or loses affordable access to external financing, typically manifested through sharp increases in sovereign bond spreads, credit-rating downgrades or substantial capital outflows. Consistent with the IMF’s debt-sustainability framework, such episodes are treated as instances of debt distress, where debt becomes unsustainable under feasible macroeconomic policies and default or restructuring becomes necessary (IMF, 2004, 2020; Reinhart & Rogoff, 2011).

Despite the variability in and complexity of sovereign debt crises throughout history, their root cause is often excessive deficit spending over a protracted period. Empirical evidence from countries such as Argentina, Brazil and Mexico illustrates how prolonged fiscal imbalances, often driven by political pressures and weak revenue systems, culminate in unsustainable debt trajectories (Damill & Frenkel, 2024; Inter-American Development Bank, 2024; Levy Economics Institute, 2024). While debt-financed growth can generate substantial economic returns in the near and medium terms (Cohen, 1992), the experiences of many countries show that such strategies can often lead to fiscal fragility and heightened refinancing risks.

The COVID-19 pandemic exposed the fragility of public finances in developing economies. In response, many governments adopted expansionary fiscal policies, leading to a sharp rise in public debt. Lower-middle income countries issued approximately US$124b in debt in the first half of 2020 (Chowdhury & Sundaram, 2023; IMF, 2022). By 2023, this figure had surged to US$29t, increasing its proportion of the world total to 30%, up from 16% in 2010 (UNCTAD, 2024). This surge in borrowing occurred amid historically low interest rates, but as global monetary conditions tightened, the cost of servicing this debt began to rise.

Recent data from the World Bank (2024a) show that real US interest rates have increased at their fastest pace in four decades, raising the risk of debt distress in many low- and middle-income countries. Despite looming maturities, many of these countries continued to accumulate debt, reflecting financing needs and limited access to alternative revenue sources. This underscores a key structural vulnerability: limited fiscal responsiveness due to rigid expenditure commitments, weak tax bases and dependence on volatile external financing.

Persistent welfare commitments also aggravate fiscal rigidity (Brooks & Manza, 2007; Garland, 2014). Empirical studies show that once welfare programmes are institutionalized, they become politically and socially entrenched, making fiscal retrenchment highly contentious (Clayton & Pontusson, 1998; Pierson, 1996; Starke, 2006). This reflects behavioural loss aversion, wherein beneficiaries perceive the withdrawal of benefits as a loss, further constraining fiscal adjustment.

From a public finance perspective, welfare spending is closely tied to political legitimacy and electoral incentives (Sander & Giertz, 1986). Governments often face strong disincentives to reduce social expenditures, even amid mounting debt, due to the risk of public backlash and political instability. In the context of developing economies, where welfare programmes are often financed through borrowing, the fiscal risks are magnified. The Philippines, for instance, has expanded its social protection programmes, such as the Pantawid Pamilyang Pilipino Program (4Ps)—a conditional cash transfer initiative—and other targeted subsidies, many of which are funded through deficit spending. Without institutional mechanisms to reassess and recalibrate these programmes, governments risk entrenching fiscal rigidity and eroding fiscal space for development investments.

A large stock of foreign-denominated debt heightens the default risk (Chowdhury & Sundaram, 2023; Reinhart & Trebesch, 2015). Currency depreciation directly increases the local-currency cost of servicing external debt, amplifying fiscal stress. Countries with large and persistent trade or current account deficits are especially exposed when government spending outpaces revenue. Empirical studies show that import-dependent economies with weak exports are highly vulnerable to external shocks, especially when their fiscal deficits are financed through foreign borrowing (Mohammed et al., 2015). Such imbalances can trigger exchange rate pressures and heighten debt-servicing risks.

The phenomenon of ‘original sin’, where countries borrow in foreign currencies due to weak domestic financial markets, creates a structural mismatch between sovereign debt and currency crises (Eichengreen & Hausmann, 1999). Exposure to foreign-currency debt also heightens sensitivity to global shocks, such as changes in investor sentiment or interest rate hikes in advanced economies (IMF, 2013a), which can trigger capital outflows and currency depreciation, worsening debt-sustainability risks.

Economic dynamism, or the lack thereof, also matters. Rodrik (2016) characterizes premature de-industrialization as a structural shift in developing economies where manufacturing declines at lower income levels and earlier stages of development than historically observed, weakening the industrial base and constraining productivity and export competitiveness. As a result, countries become increasingly reliant on imported manufactured goods, worsening trade imbalances and exposing them to external price shocks. This structural shift is accompanied by an expansion of low-productivity service sectors, which generate limited fiscal revenues and exacerbate economic volatility.

Moreover, a lack of economic diversification, often associated with premature de-industrialization (Rodrik, 2016), can heighten vulnerability to commodity price shocks or sector-specific downturns (Baffes, 2007). Over-reliance on a few key exports or industries limits a country’s ability to absorb economic shocks and generate the consistent revenue streams needed for debt repayment. For instance, oil-dependent economies are severely impacted by declines in oil prices, hindering their ability to service their debt (Eichengreen & Hausmann, 1999; Van der Ploeg, 2011).

In the Philippine context, the erosion of the manufacturing base and growing dependence on services and remittances have weakened the country’s export potential. These structural constraints, combined with fiscal rigidities and foreign debt exposure, highlight the need for a diversified industrial policy and a long-term debt-sustainability strategy.

Effects of Sovereign Debt Crisis

The principal consequence of a sovereign debt crisis is a sharp contraction of fiscal capacity (Kose et al., 2022; Sachs, 1986, 2002). As debt servicing consumes a growing share of public revenues, governments face difficult trade-offs between honouring obligations and maintaining essential public services. This fiscal compression is particularly damaging in economies where public spending drives demands and social development. Empirical studies show that countries in debt crises often suffer from prolonged recessions, with GDP growth rates declining by 2–4 percentage points in the immediate aftermath (Kose et al., 2022). This contraction reduces productivity, wages and tax revenues, further entrenching fiscal weakness.

Borrowing options narrow as the debt overhang limits access to affordable credit. Creditors demand higher risk premiums or withdraw financing altogether, forcing countries to seek emergency assistance from multilateral institutions or resort to non-concessional, high-cost loans. Historical cases such as Sri Lanka and Ghana illustrate how surging bond yields and capital flight precede default episodes (Reinhart & Trebesch, 2015). Dependence on high-cost or geopolitically motivated financing can, in turn, introduce new vulnerabilities.

Distressed governments lose fiscal and monetary flexibility (Chowdhury & Sundaram, 2023). Elevated servicing costs reduce the scope for countercyclical policies, forcing governments into procyclical austerity that worsens contraction (Phuc Canh, 2018). Central banks also face constraints: lowering interest rates risks currency depreciation and capital flight (Egilsson, 2020; IMF, 1987). In economies with high foreign-currency debt, monetary tightening may instead be used to defend the exchange rate, stabilizing the currency at the expense of domestic growth.

Beyond macroeconomic constraints, sovereign debt crises often trigger second-order effects such as disinvestment, capital flight and brain drain. Firms anticipating prolonged instability may scale back operations or exit the market, while prospective investors redirect resources abroad. Skilled workers, facing poor job prospects and falling real incomes, may seek opportunities abroad. These dynamics not only reduce short-term output but also erode long-term growth potential by weakening the productive base and human capital stock.

Falling real wages, eroding living standards and cuts in public benefits can also fuel social and political unrest (Reinhart & Trebesch, 2015). Discontent over austerity and rising inequality can provoke protests and political turnover, as seen in Latin America and Southern Europe during major debt restructurings (Almeida, 2007; Datz, 2024). Governments under pressure may divert resources towards short-term appeasement rather than structural reform, delaying fiscal adjustment and perpetuating vulnerability.

Overall, these channels demonstrate how debt crises extend beyond fiscal metrics, undermining economic resilience, political stability and long-term development capacity. These insights situate the Philippines’ recent debt experience within the context of global fiscal vulnerabilities and provide a basis for assessing its sustainability under evolving macroeconomic conditions.

Philippine Case

Rising Sovereign Debt and Fiscal Trends

Philippine national government debt has been steadily rising in recent years. Latest data from the Bureau of the Treasury (BTr) placed the national government debt at PHP 16.05t (≈US$280.1b) in 2024, nearly triple the PHP 5.7t (≈US$128.4b) recorded a decade earlier in 2014. This continued to increase to PHP 16.68t (≈US$290.5b) by the end of March 2025. One-third, PHP 5.30t (≈US$92.3b), is external debt, while the remaining two-third is domestic. Authorities assert that the financing mix helps mitigate external risks but also poses risks of crowding out.

The debt-to-GDP ratio had been trending sharply upwards since the start of the pandemic. From 39.6% in 2019, it climbed to 54.6% in 2020, 60.4% in 2021 and 60.9% in 2022, largely due to massive pandemic spending packages (e.g., Bayanihan I, Bayanihan II, etc.). The debt-to-GDP ratio decreased slightly in 2023 to 60.1% but increased again to 61% in 2024. Although the 60% benchmark ² is not absolute, exceeding it signals elevated fiscal risks. Unlike advanced economies like the United States, Japan or Singapore, which can sustain higher ratios, emerging economies such as the Philippines face tighter financing constraints. Less-affluent countries that reached this level have experienced debt crises in recent years.

The recent surge in debt is largely driven by expanded post-pandemic national budgets. Increases in spending and borrowing have outpaced GDP growth, highlighting the need for fiscal consolidation. The key concern is whether the debt path can be stabilized through economic growth and fiscal management. Sustainability depends on the returns to deficit spending, yet growth expectations are not being met.

A key driver of the rising debt burden is the persistence of sizeable budget deficits. Data from the BTr reveal that deficit spending has remained elevated several years after the pandemic (Figure 1). Figure 2 shows that deficit spending surged from PHP 660b (≈US$12.7b) in 2019 to PHP 1.37t (≈US$27.6b) in 2020. It increased further to PHP 1.67t (≈US$33.9b) in 2021 before tapering to PHP 1.61t (≈US$29.6b) in 2022 and PHP 1.51t (≈US$26.4b) in 2024. The observed decreases in deficit spending are attributable to increases in revenue and not decreases in expenditures. These trends are expected to persist in 2026 given the immensity of the 2026 national budget, that is, PHP 6.79t (≈US$ 109.0b), which is 7.4% larger than PHP 6.32t (≈US$108.3b) in 2025, and revenue expectations in the near term. The government’s medium-term fiscal programme aims to gradually narrow the deficit (by roughly 1 percentage point of GDP per year) to around 3% of GDP by 2028, which would reduce the debt ratio below 60%. However, achieving these targets may prove challenging. In 2024, tax revenues stood at PHP 3.80t (≈ US$66.3b), slightly below the PHP 3.82t (≈US$66.7b) programme for 2024. It is unlikely that the government can reach the tax revenue growth targets set by the Development Budget Coordination Committee (DBCC) given moderated growth prospects for 2024 and 2025 and a standing moratorium on ‘new’ taxes (DOF, 2024).

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Figure 1.

Source: Bureau of Treasury (BTr) (2024).

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Figure 2.

Source: BTr (2024).

The achievement of the 2024 revenue target was aided by non-tax revenues (i.e., these include the sale of government-owned assets and BTr income). Since vendible assets are finite, this strategy is not sustainable. The reliance on such extraordinary revenue measures, like privatization, which cannot be repeated indefinitely, further underlines the structural fiscal gap. Without major tax reforms or spending adjustments, the Philippines is likely to continue running sizeable deficits, leading to continued increases in public debt.

As an aside, the imposition of new taxes that were proposed prior to the moratorium, particularly on the most productive sectors of the economy, has the outsized potential to undercut ongoing efforts by the government to maintain economic growth momentum. For example, the mining sector now faces higher royalties and windfall profit taxes under Republic Act No. 12253, or the Enhanced Fiscal Regime for Large-scale Metallic Mining Act, recently enacted. While the measure aims to improve revenue collection and promote a fairer sharing of resource rents, it may also discourage further investment and reduce export earnings, especially concerning the sector’s contribution to rural employment and foreign exchange. In the digital economy, the imposition of value-added tax on digital services has increased the cost of doing business for e-commerce platforms and tech firms, potentially stifling innovation and limiting MSMEs’ digital participation. Meanwhile, proposed excise taxes on single-use plastics and adjustments to taxes on sweetened beverages could affect the manufacturing, wholesale and retail trade, as well as restaurant and accommodations sectors, which are key drivers of Philippine GDP. Additional taxes, particularly those that dampen consumer demand or the overall propensity to invest in the Philippine economy, are likely to prove counterproductive as these measures invariably reduce economic activities.

Another indicator of growing fiscal strain is the rising debt service burden. With debt levels and interest rates on the rise, the government must devote an increasing share of its resources to servicing outstanding obligations. This is reflected in the rising debt-to-revenue ratio, as shown in Figure 3. This ratio is a key indicator of the government’s capacity to service its debt obligations using available revenue streams. After decreasing from 3.5 in 2012 to 2.5 in 2019, the ratio surged to 3.4 in 2020 and peaked at 3.9 in 2021. It remained elevated at around 3.8 in 2022 and 2023 before moderating to 3.63 in 2024. The stock of public debt is now nearly four times the government’s yearly income, which points to a markedly tighter fiscal space.

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Figure 3.

Source: BTr (2024).

Considering revenue and borrowing prospects in the near term, this ratio can be expected to increase again. Prevailing borrowing and earning trends suggest that the government will likely be forced to devote increasing amounts of its resources to debt servicing in both the short term and the medium term. This is further complicated by the recent expansion of social protection programmes such as the 4Ps, Ayuda sa Kapos ang Kita Program, Tulong Panghanapbuhay sa Ating Disadvantaged/Displaced Workers, increased discounts and benefits for Persons with Disabilities and senior citizens, the Social Pension for Indigent Senior Citizens and other initiatives aimed at supporting vulnerable sectors. Present and future administrations would almost certainly consider the prospect of rolling back these entitlements to be unpalatable, given the expected political backlash.

Although the Philippine government relies more on domestic borrowing, external debt (public and private) remains substantial. The total external debt stood at about 27.5% of GDP in 2022 and rose to roughly 29% in 2023 (IMF, 2024), reflecting increased public foreign loans as well as private sector debt accumulation. Public external debt alone was around 19% of GDP in 2024 (World Bank, 2024b). Compared to the total public debt of approximately 60% of GDP, this implies that roughly one third of the government’s debt is in foreign currency. This creates exposure to exchange rate risks.

The Philippine peso has depreciated in recent years (Figure 4), which increases the local-currency cost of servicing external obligations. After oscillating around the 50 peso per dollar mark from 2015 to 2021, the peso depreciated to 54.5 in 2022. It weakened further to 55.6 in 2023 and continued to depreciate, reaching 57.3 in 2024. This suggests that even the usual influx of remittances during the fourth quarter of 2024 failed to stabilize the currency, indicating prevailing depreciation pressures are unlikely to reverse amid seasonal remittance declines after Christmas. The widening trade deficit has further eroded competitiveness, and the continued peso weakness magnifies the burden of foreign-denominated debt and debt service obligations.

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Figure 4.

Source: Bangko Sentral ng Pilipinas (BSP) (2024).

When the peso weakens, more public resources are diverted from development projects towards debt repayment, reducing funds for infrastructure and social services (Augustine, 2019). A growing debt burden can also erode investors’ confidence, further weakening the peso and discouraging foreign investment, which is an important source of external financing that helps stabilize the exchange rate (Krugman et al., 2021). Persistent depreciation, in turn, fuels inflation, erodes consumer purchasing power and threatens overall economic stability, creating a vicious cycle of financial vulnerability (Volkan et al., 2007).

The external-debt share (≈ 30%) has remained within the IMF’s sustainability band (15%–45%), indicating moderate vulnerability to rollover and interest rate risks (Figure 5). This implies that the bulk of financing remains sourced domestically, around 70% of total obligations, which cushions the debt portfolio from external market volatility and foreign exchange shocks (BTr, 2024). Likewise, short-term debt maturities increased modestly from 0.6% in 2023 to 1.0% in 2024 (Figure 6), reaching the upper bound of the IMF’s recommended range (0.5%–1.0%). These figures indicate moderate vulnerability but warrant the vigilance to prevent refinancing pressures. The maturity profile, dominated by medium- to long-term instruments, spreads out repayment risk but may also raise local liquidity pressures.

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Figure 5.

Source: Authors’ estimates based on BTr and IMF data.

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Figure 6.

Source: Authors’ estimates based on BTr and IMF data

Debt Sustainability Under the IMF–DSA Framework

To complement the descriptive trends, this study adopts the IMF’s DSA framework, which integrates macroeconomic projections and debt dynamics to assess fiscal sustainability over the medium term (IMF 2013a, 2022). It is a formal tool implemented through a standardized template that projects the debt path under baseline and stress-test scenarios, compares outcomes with risk thresholds and classifies debt as sustainable, at risk or unsustainable. The DSA also projects the debt-stabilizing primary balance (DSPB), defined as the level of primary balance to keep debt-to-GDP ratio at a manageable level (Gottschalk, 2014; IMF 2013a, 2022).

Baseline Assumptions

Macroeconomic-fiscal assumptions for the baseline projections were drawn primarily from the DBCC and the Bureau of the Treasury (BTr), complemented by data from the Philippine Statistics Authority (PSA), Bangko Sentral ng Pilipinas (BSP) and the Department of Budget and Management (see Table A1). The projections cover the period 2025–2030. These inputs are incorporated into the IMF’s standard debt dynamic equation, expressed as:

Δ d t = ( r t − g t ) 1 + g t d t − 1 − p b t

where d_t is the debt-to-GDP ratio, r_t the effective interest rate, g_t the real GDP growth rate and pb_t the primary balance. Debt stabilizes when real growth outpaces the cost of borrowing (r < g) or when primary surpluses are achieved.

This debt dynamics equation provides the mathematical foundation for the stress tests. Taking partial derivatives with respect to each parameter reveals the directional effects: ^(Δd )/ ^r > 0 indicates that higher interest rates increase debt-servicing costs; ^(Δd )/ ^g < 0 shows that growth reduces debt by expanding the GDP denominator; and ^(Δd )/ ^pb < 0 demonstrates that primary surpluses directly offset debt accumulation.

Each stress test operationalizes these theoretical relationships by modifying specific parameters in the debt equation:

Growth shock:

Δ d t g r o w t h = ( r t − ( g t − Δ g ) ) 1 + ( g t − Δ g ) . d t − 1 − p b t

Interest rate shock:

Δ d t i n t e r e s t = ( ( r t + Δ r ) − g t ) 1 + g t . d t − 1 − p b t

Primary balance shock:

Δ d t p b = ( r t − g t ) 1 + g t . d t − 1 − ( p b t − Δ p b )

where Δg represents the growth decline, Δr the interest rate increase and Δpb the fiscal deterioration.

Scenario Design

The baseline assumptions use a standardized DSA template consistent with IMF (2013b). The baseline scenario reflects the DBCC’s macroeconomic assumptions of sustained real GDP growth (around 5%), moderate inflation and gradual fiscal consolidation.

To stress test the baseline projections, the IMF–DSA template calibrates the shocks, assesses interdependencies, sets durations of shocks and evaluates other debt-creating flows. The real GDP growth shock simulates a two-standard-deviation decline lasting 2 years, while the interest rate shock assumes a 200-basis-point increase in effective borrowing costs. The exchange rate shock applies a 15% nominal peso depreciation, and the primary balance shock introduces a 1.5% of GDP deterioration. The combined-shock scenario aggregates all four shocks simultaneously. The details of the standardized macro-fiscal shocks are shown in Table A4.

Baseline and Stress-test Results

Results from the baseline scenario in Table 1 reflect the combined effect of the effective interest rate, real GDP growth, inflation and primary balance. Under the baseline, the debt-to-GDP ratio is projected to fall from 61.1% in 2025 to 55.8% in 2030, below the 60% prudential ceiling by 2027. This decline is driven by steady growth, narrower deficits and easing interest rates. The average DSPB is –2.0% of GDP, suggesting moderate deficits remain consistent with stability. Complementary indicators, including the DSPB, gross financing needs and the interest–growth differential, are summarized in Table A3, while the macroeconomic inputs for the baseline projections are shown in Table A4.

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Table 1.

Projected Debt-to-GDP Ratio Under IMF–DSA Baseline and Stress Scenarios, 2025–2030.

Scenario	2025	2026	2027	2028	2029	2030	Peak	Remarks
Baseline	61.1	59.5	58.8	57.8	57.0	55.8	61.1 (2025)	Below 60% by 2027
Growth shock	61.1	65.9	71.3	69.2	66.4	63.7	71.3 (2027)	Most adverse
Interest rate shock	61.1	61.3	60.5	58.9	56.7	54.5	61.3 (2026)	Higher servicing cost
Primary balance shock	61.1	62.5	63.2	61.4	59.0	56.6	63.2 (2027)	Revenue loss
Combined shock	61.1	68.6	74.8	73.5	71.7	70.1	74.8 (2027)	Compounded effects

Note: Figures represent simulated public-debt-to-GDP ratios under the IMF–DSA baseline and standardized stress-test scenarios for 2025–2030. The baseline reflects DBCC macroeconomic assumptions, while shocks capture deviations in growth, interest rates and fiscal balances.

The expanded debt dynamics equation shows the mechanisms behind the decline. Figure A1 decomposes annual changes in the debt-to-GDP ratio into the effects of the primary balance, real interest payments and real GDP growth. Table A2 shows that favourable growth effects and narrowing primary deficits offset modest upward pressure from interest costs, leading to gradual debt reduction.

Stress-test outcomes, summarized in Table 1, reveal that debt dynamics are most sensitive to growth and primary balance shocks. A severe growth shock, reflecting an economic slowdown or global recession, causes the debt ratio to increase to 71.3% by 2027, before gradually stabilizing as growth recovers. The primary balance shock leads to a milder increase, peaking around 63.2%, reflecting the impact of potential revenue losses. Under the combined-shock scenario, the debt-to-GDP ratio will reach a peak of 74.8% in 2027 before declining, albeit still elevated, to 70.1% by 2030.

These results reveal three key patterns. First, growth vulnerabilities dominate financial vulnerabilities. The debt ratio rises by 10.2 percentage points under the growth shock, from 61.1% to 71.3% in 2027, compared with only a 0.2 percentage point increase under the interest rate shock. This asymmetry reflects the Philippines’ narrow fiscal space. Debt servicing already absorbs 17% of revenues, while the tax-to-GDP ratio, at 14%, lags regional peers, constraining countercyclical revenue generation. Second, the combined shock will peak at 74.8% in 2027 before declining to 70.1% by 2030, indicating self-correcting debt dynamics. Third, the modest impact of the interest rate shock reflects a favourable debt composition. About 70% of the debt is peso-denominated and domestically held, which insulates debt dynamics from external financing cost volatility. The variation in peak timing also highlights different transmission mechanisms. Interest rate shocks affect debt immediately, peaking in 2026, while growth shocks operate with a lag and will peak in 2027, implying the need for different policy responses.

Figure 7 illustrates debt dynamics and gross financing needs across all stress scenarios. Gross financing needs are calculated as the sum of the primary deficit and maturing debt principal, while debt-to-revenue ratios measure debt relative to revenues. The top panels present individual shock scenarios across three dimensions. The government is most sensitive to growth shocks. A severe growth shock will reduce economic growth from 5.7% to 1.4% in 2027 and push the debt ratio to 71.3% of GDP, the steepest trajectory among individual shocks. The middle panel in Figure 7 shows that under the growth shock, the debt-to-revenue ratio rises to around 450%, implying that public debt would be equivalent to about 4.5 times annual government revenues. Such a level severely constrains fiscal flexibility and crowds out productive spending. The baseline debt-to-revenue ratio of roughly 350% already suggests moderate fiscal stress, as debt servicing absorbs a substantial share of available revenues. The right panel indicates that gross financing needs under the growth shock increase steadily, reaching approximately 40%–45% of GDP by 2030, indicating sustained financing pressure.

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Figure 7.

Note: The figure presents macro-fiscal stress tests based on the IMF–DSA framework. The top panels show debt-to-GDP, debt-to-revenue and gross financing–need ratios under baseline and individual shocks (growth, interest rate, exchange rate and primary balance). The lower panels show combined shocks. The baseline path (blue) depicts debt stabilizing below 60% of GDP by 2027, while the combined shock (black dashed line) peaks near 70%–72% before easing by 2030.

The bottom panels focus on the combined-shock scenario. Three adverse forces occur simultaneously. The GDP growth falls to 1.4%, the effective interest rate increases to 5.6% and the primary deficit widens to 3.3% of GDP. As a result, the debt ratio will increase to 74.8% of GDP in 2027 and the debt-to-revenue ratio will increase to about 470%. At the same time, gross financing needs will expand to roughly 45%–50% of GDP by 2030, placing severe pressure on domestic capital market absorption capacity, and could require multilateral financing. However, after 2027, the debt ratio will begin to decline, reaching 70.1% by 2030. This pattern demonstrates the economy’s ability to self-correct once the shocks dissipate, despite elevated debt-to-revenue ratios and financing needs.

The baseline path shows debt stabilizing below 60% of GDP by 2027, with the debt-to-revenue ratio declining to around 330% and gross financing needs remaining stable at about 10% of GDP. The relatively moderate impact of the exchange rate shock reflects the predominantly domestic composition of public debt.

Overall, the results indicate that the Philippines’ public debt remains sustainable under the baseline scenario, declining below the prudential ceiling by 2030. Stress tests reveal asymmetric vulnerabilities. Debt dynamics are highly sensitive to growth shocks but relatively insulated from interest rate and exchange rate shocks, reflecting the predominantly domestic composition of government debt. Even under the most severe combined-shock scenario, debt will peak in 2027 before self-correcting by 2030. These findings suggest that growth resilience and revenue mobilization, rather than access to external financing, constitute the primary constraints on fiscal sustainability.

Comparative Perspective: Lessons from Emerging Debt Crises

While domestic indicators remain manageable, external pressures and fiscal rigidities warrant comparison with recent emerging-market crises. Examining the experience of other emerging economies that have recently faced debt distress provides valuable perspectives on the potential vulnerabilities that may emerge if current fiscal and external trends persist.

Table 2 presents public debt indicators for the Philippines and selected emerging economies that have encountered fiscal issues. Ghana, Sri Lanka and Zambia, in particular, have experienced debt crises in recent years. Pakistan and Egypt, on the other hand, are presently facing elevated default risks. The indicators include the debt-to-GDP ratio, fiscal deficit, debt-to-revenue ratio, interest payments relative to both revenue and expenditure, and external debt as a share of GDP.

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Table 2.

Key Fiscal and Debt Indicators: Philippines Versus Selected Crisis-affected Economies.

Country	Debt-to-GDP Ratio (%)	Fiscal Deficit (% of GDP)	Ratio of Debt to Revenues (%)	Interest Payments to Revenue Ratio (%)	Interest Payments to Expenditure Ratio (%)	External Debt % of GDP
Philippines	60.7 (2024)	5.7 (2024)	3.9 (2024)	17.27 (2024)	13.0 (2024)	29.8 (2024)
Ghana	85.7 (2022)	11.8 (2022)	5.5 (2022)	47.27 (2022)	32.8 (2022)	62.8 (2022)
Sri Lanka	114.2 (2022)	10.2 (2022)	13.9 (2022)	77.8 (2022)	77.8 (2022)	79.4 (2022)
Zambia	140 (2020)	7.8 (2022)	7.2 (2020)	38.79 (2020)	38.8 (2020)	163.8 (2020)
Pakistan	78.2 (2023)	7.7 (2023)	6.8 (2023)	61.0 (2024)	65.3 (2023)	37.4 (2023)
Egypt	95.9 (2023)	6.1 (2023)	5.7 (2023)	70.0 (2023)	60.3 (2023)	41.8 (2023)

Sources: Focus Economics (2024); Bureau of the Treasury (Philippines) (2024); World Bank (2023); IMF (2024); ADB (2025); Department of Finance (2024); Statista (2023); Credendo (2023); Ahram Online (2023).

Note: Bold figures pertain to the Philippines’ most recent available data, presented for comparative emphasis.

The Philippines’ debt profile remains moderately positioned compared with recent defaulters. Its debt-to-GDP ratio is lower, and its interest burden (17% of revenue) is far below that of Ghana or Sri Lanka, suggesting short-term sustainability. However, its fiscal deficit (about 5.7% of GDP) is comparable to those in pre-crisis Egypt and Pakistan, countries that later faced external liquidity pressures. The debt-to-revenue ratio is just below 4%. The Philippines runs the risk of pushing this figure to 5% and its fiscal deficit past 6% if it insists on expanding spending without commensurate improvements in revenue generation. Alternatively, weaker-than-anticipated GDP growth can raise these indicators to worrisome levels. Thus, while short-term solvency appears stable, emerging risks such as rising domestic interest rates, peso depreciation and global volatility could heighten the vulnerability if left unaddressed.

Conclusion and Recommendations

This study’s findings highlight implications for the Philippines’ fiscal sustainability. While the evidence does not suggest an imminent sovereign debt crisis, rising vulnerabilities require sustained policy discipline. The results of the IMF DSA show that debt remains broadly sustainable under baseline conditions but is highly sensitive to growth, primary balance and fiscal shocks, with growth vulnerabilities dominating financial vulnerabilities. The analysis reveals that the Philippines benefits from a largely domestic debt structure, favourable maturity profile and credible institutions, yet remains exposed to persistent fiscal deficits and limited revenue space.

Given these findings, fiscal consolidation should proceed gradually but decisively, focusing on both expenditure rationalization and enhanced revenue mobilization. The government should prioritize efficient spending through rightsizing, procurement reform and digitalization of public financial management systems. On the revenue side, reforms should continue to broaden the tax base, strengthen compliance and enforcement, and improve progressivity in value-added and income taxation. These measures will not only stabilize the fiscal position but also create the space for priority investments in infrastructure, education and health.

Institutional credibility remains central to maintaining investor confidence and safeguarding debt sustainability. A shift towards rule-based budgeting anchored on realistic revenue targets, fiscal deficit ceilings and debt thresholds will help institutionalize discipline and reduce political discretion in fiscal policies. Enhanced transparency and accountability mechanisms, such as regular fiscal risk statements and public expenditure reviews, can further improve governance and credibility.

Finally, maintaining policy consistency between fiscal and monetary authorities is essential to sustaining macroeconomic stability. The BSP and the DBCC should continue ensuring that their respective policy actions remain mutually supportive in managing inflation, maintaining debt affordability and promoting inclusive growth. In the medium term, adopting a forward-looking debt management strategy, balancing domestic and external borrowing, extending maturities prudently and optimizing interest costs will further reinforce long-term debt sustainability.