Showing posts with label monetary policies. Show all posts
Showing posts with label monetary policies. Show all posts

Sunday, December 03, 2023

Why the BSP will be Slashing its Policy Interest Rates Soon

 

Every inflation must eventually be ended by government or it must "self‑destruct"—but not until after it has done untold harm—Henry Hazlitt 

 

In this short issue 


Why the BSP will be Slashing its Policy Interest Rates Soon 

I. Led by T-Bills, Yields of Treasury Curve Crashed: "Bullish Steepener" 

II. BVAL Treasure Rates Below the BSP’s Policy Rates; The Erosion of Inflation Tax 

III. BSP’s Asymmetric Monetary Policies 

IV. BSP’s Possible Rationalizations: Expected US Fed Rate Cuts and Escalating Streak of Global Central Bank Easing 

V. BSP’s Zero Bound Policies and the PSEi 30’s Diminishing Returns 

 

Why the BSP will be Slashing its Policy Interest Rates Soon 

 

The recent crash in the yields of the Philippine treasury curve has strongly signaled the BSP’s coming rate cuts.  

 

I. Led by T-Bills, Yields of Treasury Curve Crashed: "Bullish Steepener" 

 

Will the streak of BSP rate cuts start this December or early 2024?  Why? Because these have been communicated to the public by the local treasury market.  

  


Figure 1 

 

The reliable but unheralded treasury traders—via demonstrated preference (action speaks louder than words)—have been on a Treasury panic buying spree that sent yields collapsing across the curve. (Figure 1, upper window) 

  

Treasury traders appear to be expecting a (possibly a "surprise") sharp decline in inflation. If so, a disinflationary environment entails a weaker private sector economic performance this Q4.  

  

Since its peak last November 16th, the recent tailspin of the 1-month T-bill yield hallmarked the performance of various Treasury maturities across the curve.  

 

Yet, the scale of the decline (1- and 3-month T-bills) has been substantially deeper compared to the Q2 2019 episode when the BSP began its credit easing campaign. (Figure 1, lower graph)   

 

And this may be pressing enough to force the BSP to act. 

 


Figure 2 

 

Furthermore, since yields of short-term or T-bills have plunged the most, this reshaped the slope into a "Bullish Steepener"—frequently pointing to rate cuts. 

 

Treasury curve abruptly steepened from a relatively "flat" slope last September and October. (Figure 2, upper chart) 

 

II. BVAL Treasure Rates Below the BSP’s Policy Rates; The Erosion of Inflation Tax 

 

What’s more, the across-the-curve plunge in treasury yields has resulted in a sharp tightening—BSP overnight interbank rates have become HIGHER than treasuries! (Figure 2, lower graph)  

 

Figure 3 

 

On top of this, BSP rates have been higher than the CPI and the headline GDP, reinforcing this financial "tightening" phase on an economy heavily dependent on leverage and liquidity. 

 

Crucially, higher BSP rates than the CPI—theoretically—translate to positive "real" rates, which implies that this has eroded the government's seignorage fee or the inflation tax.  

 

The BSP embarked on rate cuts when "real" rates turned positive in Q2 2019.    (Figure 3, upper graph) 

 

III. BSP’s Asymmetric Monetary Policies 

 

But, of course, monetary authorities have recently engaged in asymmetric policies.   

  

Sure enough, it has raised headline rates to multi-decade highs, which reduced credit transaction growth mainly to the supply side.  

  

But its interest rate cap on credit cards or subsidies to consumer credit has also resulted in a textbook response of fueling excess demand for consumer credit.  (Figure 3, lower chart)   

  

Such extensive build-up of leverage in the consumer's balance sheets has driven the indulgent demand for vehicles, luxury-related spending activities, and magnified property speculations. 

  

The other ramification is the transformation of bank lending operations towards consumers at the expense of industry. 

 

Other behind-the-scene operations have marked the BSP's liquidity operations.  

  

Banks and non-bank financials have been directly financing the National Government’s deficit spending via Net claims on the Central Government (NCoCG) or indirect QE—injecting liquidity into the government and the financial system.  

  

These off-kilter operations afforded the BSP to raise headline rates and paint an impression of a "sound" macro-environment. 

 

IV. BSP’s Possible Rationalizations: Expected US Fed Rate Cuts and Escalating Streak of Global Central Bank Easing 

Figure 4 

 

Aside from inflation, the BSP could rationalize its actions with the widely expected rate cuts by the US Federal Reserve in early 2024 and use the appeal to the majority—the growing streak of rate cuts by global central banks. (Figure 4, upper chart) 

 

 

Figure 5 

 

Previously, changes in the BSP policy rates have coincided with the gyrations in the yield differentials of the Philippines and the US (proxied by the 10-year).   BSP rate cuts in 2019 narrowed the spread between the 10-year Philippines and the US. (Figure 4, lower diagram) 

 

Today, since the US Fed has adopted a more hawkish stance than the dithering BSP, this broke the previous correlations—the rate spread has compressed even as the BSP held on its rates at multi-decade highs.  

 

Put this way, domestic developments determine the BSP policies.  

  

Of course, since current developments in the treasury markets have anchored our anticipation of the possible changes in the BSP's policy stance, this is also conditional on the sustainment of this unfolding trend. 

 

V. BSP’s Zero Bound Policies and the PSEi 30’s Diminishing Returns 

 

Finally, the establishment experts have been whetting the speculative impulses of the disenchanted public starved of easy money gains with the prospects of a stock market boom from "rate cuts."    

 

True, "rate cuts" have had ephemeral amplifying effects on the YoY returns from 2009-2018, but this relationship broke in 2019 (pre-pandemic).  (Figure 5, top chart) 

 

But "rate cuts" had to be bolstered with the BSP's historic Php 2 trillion liquidity injections to spur a momentary rally in 2H 2020 to 1H 2021. 

  

Worst, the BSP’s zero bound (ZIRP) policies have been associated with the PSEi 30’s diminishing monthly long-term returns. 

  

It is no coincidence that the rate cuts have fueled spikes in the CPI and contributed to the attenuation of the Philippine peso, which are all interrelated with the PSEi 30’s return. (Figure 5, lower graph) 

  

Artificial speculative booms from free-lunch monetary policies only induce capital consumption and a lower standard of living. 

Tuesday, November 29, 2022

The Paradox of Q3 Philippine Banking Conditions: Record Peso Profits as Liquidity Corrodes Dramatically!

…a country does not choose its banking system: rather it gets a banking system consistent with the institutions that govern its distribution of political power—Charles Calomiris and Stephen Haber 

 

In this issue 


The Paradox of Q3 Philippine Banking Conditions: Record Peso Profits as Liquidity Corrodes Dramatically! 

I. Record Peso Income Boosted by Opaque Segments of Non-Interest Incomes 

II. Record Financial Assets Equals Record Losses and Held-to Maturity Assets, Cash Deflation and Slowing Deposit Growth! 

III. Accounting Profits in the Face of Deteriorating Liquidity! 

IV. Peddling the "Pivot" to Justify Asset Inflation, Cheap Money as the Foundation of Inequality 

 

The Paradox of Q3 Philippine Banking Conditions: Record Peso Profits as Liquidity Corrodes Dramatically! 

 

Profits of the Philippine banking industry soared by 43% in Q3 from its lending and non-interest operations.   

 

Ironically, the industry's liquidity conditions continue to deteriorate. 

 

I. Record Peso Income Boosted by Opaque Segments of Non-Interest Income 

 

Figure 1 

 

Both engines of the banking system operated at full throttle in Q3.   The surge in bank lending boosted net income.  Helped by unconventional sources, non-interest also contributed to the bottom line.  

 

Q3's 43% profit growth represents the second-highest since Q4 2021, where the latter reached a 9-year rate.  

 

In peso, Q3’s profit of Php 243.1 billion signified a record high! (Figure 1, highest window) 

 

As a caveat, various relief measures from the BSP, as part of the pandemic rescue measures remain in place, thereby contributing to the statistical distortions. Or, comparing pre-pandemic and pandemic-era statistics represents apples-to-oranges. 

 

Interest income from lending operations grew by 10.3%, while non-interest earnings jumped by 24.9% in Q3.    

 

With non-interest outperforming, its share of the operating income increased to 27.7% from 24.8% in Q2.   On the other hand, the % share of interest income fell to 72.3% from 75.2%.   

 

It is the non-interest income segment that caught our attention.  

 

First, the Other Income subcomponent of "Other Income" segment skyrocketed by 515%!   At Php 70.5 billion, it comprised a massive 34% share of the non-interest earnings and 9.4% of the industry’s operating income! (Figure 1, middle window) 

 

The BSP categorizes two segments of Other Income: One. Rental from safety deposit box, bank premises and equipment, and ROPA. Two. Miscellaneous income which it "refers to the income which cannot be appropriately classified under any of the foregoing income accounts." (BSP, 2019) 

 

So at a glance, this unusual bloat from an opaque corner of the system helped boosted Q3 income. 

 

Second, fees and commission income grew by 13.06%.  But this was primarily a function of the low base effect.  The rate of change in the Fees and Commissions has undulated with the PSEi 30.  (Figure 1, lowest pane) 

 

Of course, brokering, fiduciary, underwriting & dealership, and securitization services represent the equity-related classifications.  There are other non-equity sources, such as payment services, intermediation, custodianship, and others.  

 

Third, trading income spiked by 177.6% to Php 17.1 billion. 

 

But the numbers in the balance sheet depict a different scenario. 

 

II. Record Financial Assets Equals Record Losses and Held-to Maturity Assets, Cash Deflation and Slowing Deposit Growth! 

 

Ideally, the enormous gains should have increased the liquidity of banks.  

 

But that is hardly the case.  

 

Figure 2 

First, the banking system reported a sizzling 19.8% growth in Financial Assets to a record Php 6.23 trillion in September 2022! (Figure 2, topmost window) 

 

Ironically, accumulated market losses hit another milestone of Php 126 billion to reinforce its 11-month streak! 

 

So as banks try to boost income via investments, higher rates continue to hound their balance sheets.   Record investments (speculations) mirror the record losses! 

 

But remember, banks declared a spike in trading income! 

 

Furthermore, banks camouflaged their mark-to-market losses through Held-to-maturity assets (HTM).   

 

HTM assets rocketed by 57.24% in September, its seventh straight month of over 50% advance!  The streaking gains of HTM assets constituted 57.8% of total investments and 17.05% of the industry’s total assets! (Figure 2, middle window) 

  

More than that, the HTM share of total assets expanded to 17.05% to eclipse cash reserves, which at Php 2.72 trillion, represented a 12% share. 

 

But cash reserve conditions are tied to HTMs. The higher the HTMs, the lower the cash.  Or, the inability of banks to monetize HTM restrains bank liquidity. 

 

Aside from HTMs, the growth of bank deposits continues to flounder, posting 6.78% in September despite the considerable loan portfolio and foreign deposits expansion. (Figure 2, lowest pane) 

 

Accelerating FX deposit growth (14.7%) could be a symptom of capital flight.  

 

That is to say, other factors in the balance sheet have vacuumed and offset the liquidity from bank credit expansion.  

 

III. Accounting Profits in the Face of Deteriorating Liquidity! 

Figure 3 

 

Supported by emergency relief measures, easing NPLs has not helped either. 

 

Paradoxically, though NPLs have cascaded, bank loan-loss provisions have not kept pace with the former's decline.   Or it has declined less than the NPLs.  Why do banks keep such buffers elevated? (Figure 3, upmost pane) 


How substantial is the disparity between actual and statistical credit impairments? Or is this a sign that banks are expecting more? 

 

Perhaps, loan loss provisions could be a more accurate gauge of compromised or delinquent loans.  

 

Likewise, diminishing BSP bank reserves from RRR cuts, which should have boosted liquidity, have barely helped. (Figure 3, middle window)  

 

As part of its "supply-side containment," the BSP has been scaling down its net claims on the central government.   Or the BSP has been reducing its public debt monetization program.   

 

But this has yet to be reflected in its assets (as of June).   

 

On the contrary, the banking system's net claims on the central government continue to expand but have decelerated. (Figure 3, lowest window) 

  

Said differently, on the surface, the BSP has engaged in tightening while banks continue to finance the record fiscal deficits. 

  

The BSP embraces contrasting positions like sustaining easing financial conditions via credit card interest caps while tightening via rate hikes 

 

Figure 4 

 

And to bridge the liquidity and (perhaps collateral) gap, banks have suddenly turned to short-term T-bills borrowing! (Figure 4, highest pane) 

 

T-bill borrowings spiked by 77.44% YoY last September. 

  

Interestingly, despite the massive operations by the BSP through its securities, T-Bill rates have been raging!   (Figure 4, middle window) 


So, the non-financial listed members of PSEi 30 have not only been on a borrowing spree but banks too. 

 

The takeaway, the contrasting conditions between liquidity and earnings exhibit a bottom line based on accounting wizardry. 

 

IV. Peddling the "Pivot" to Justify Asset Inflation, Cheap Money as the Foundation of Inequality 

 

Considering that rising rates should slow bank credit expansion (law of demand), this leaves investments as the remaining organic source of liquidity and earnings. Bank lending has responded with a slowdown from the BSP rate hikes of 2011, 2014, and 2018. (Figure 4, lowest window) 

 

And the 2022 hikes have been the most aggressive in history!  

 

Yet, once the skeletons in the closet of the sector re-surface, the BSP will come to the rescue. 

  

And perhaps for such reasons, banks and financial institutions may have been ramping up asset prices (FX, PSE and Treasuries), rationalizing a forthcoming US Fed-led central bank "PIVOT" 

  

The BSP chief has signaled that their rate hikes should slow 

  

Ironically, rising asset prices should signal easing conditions that go against the essence of the BSP tightening.  

 

Financial institutions may be resorting to extensive gearing to push asset prices higher.  In turn, this should amplify the demand, specifically centering on the financial sector, which should have a spillover effect on others.  The subsequent feedback should be on the prices of the real economy.   

 

But aside from the interest cycle, the mainstream seems to have forgotten that there are second-order effects through solvency/insolvency conditions. 

 

So there you have it.    

 

The BSP gambles with asset inflation (bubbles), hoping it will save the day for the banks and financial institutions. 

 

Before closing, here is a revealing observation of the interest rate distribution from an elite. 

 

Inquirer.net, November 17: He added that most MSMEs borrow from thrift and rural banks under micro-financing programs that offer fixed interest rates, adding that these entrepreneurs who have locked-in rates will be unaffected. “Most MSMEs pay higher rates, unless they are prime borrowers, like us. For MSMEs, the loan rates are in the double digits,” he said, specifying these can range from 2 percent to 3 percent a month. (bold added) 

 

Through the banking system, the "zero-bound" policy rates of the BSP act as a protective moat of "prime borrowers" against the competition to secure economic dominance.   

 

And as the primary recipient and beneficiary of money supply expansion (Cantillon Effect), it is also a source of redistribution in favor of the government and the "prime borrowers" at the expense of society 

 

Cheap money represents part of the implicit "trickle-down" dogma of the BSP. 

  

And why do you think the Philippines has one of the highest inequality rates in the world? 

  

As a parting note, do you recall the effects of the 2018 7-month 175 bps rate hikes? 

 

From the late BSP Governor, Nestor Espenilla Jr.:  

 

While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner (Espenilla, 2018)   

 

What could be different this time? 

___

References

 

BSP, FINANCIAL REPORTING PACKAGE FOR BANKS May 31, 2019, bsp.gov.ph 

 

Espenilla Jr. Nestor, 2017 FINANCIAL STABILITY REPORT, p.27 June 2018, bsp.gov.ph