Fitch Credit Upgrade: Phisix Mania Phase in Full Throttle

(no stock market commentary this weekend)

Contrary to mainstream expectations, the US credit rating agency Fitch Ratings’ upgrade of the Philippines to “investment status” only reveals of the deepening of the manic phase of  Philippine asset bubbles.

Financial markets are supposed to function as discounting mechanisms. This means that when expectations have been heavily anchored on a specific factor to influence the market, usually when such event occurs, markets do the opposite. Such serves as the typical force behind the axiom “buy the rumor, sell the news”

But local markets seem to be saying “this time is different”.

The local market has been expecting such an upgrade. As I wrote during at the end of the year:

Many factors have been rationalized for Phisix 6,000 and beyond for 2013; among them, strong economic growth, election spending, strong corporate earnings, reforms by the PSE to become Sharia compliant or open to Muslim investors, potential credit upgrades, bulging interests from residents, potential capital flows from foreign investors due to the above and etc…

The domestic financial market became delirious when the news broke out. The Philippine equity benchmark, the Phisix zoomed by 2.74% Wednesday, while the Peso reversed losses and advanced from yesterday’s 41.07 to 40.8 or a .6% gain.

Yesterday’s move, plus the gains from the last two days add up to 5.04% returns for the holiday abbreviated week. The Phisix essentially erased two weeks of profit taking and has swiftly recovered its latest highs. This extrapolates to the Phisix 10,000 for 2013 is back in play.

I anticipated that the recent correction would likely be short-lived, a week back I wrote,

This week’s correction mode in the Phisix may possibly continue, perhaps headed towards a 5-10% level from the recent peak. However, such retrenchment phase is likely to be one of a short duration.

The upgrade report from Bloomberg

An exit from so-called junk status bolsters Aquino’s drive to transform the nation into one of the region’s fastest-growing economies 15 years after the Asian financial crisis of 1997-98. The upgrade may also boost capital inflows and complicate the job of the central bank as it tries to rein in an appreciating peso and curb asset bubbles.

Curb asset bubbles?

I also noted that the lowering of interest rate of special deposit accounts (SDA) will help fuel this rebound.

And the manic phase will be accompanied by an intensive accumulation of systemic credit which will most likely be supplemented by last week’s easing of the 1.86 trillion peso Special Deposit Accounts (SDA) by the BSP.

Remember, the BSP explicitly desires that the banking system’s money deposited at the BSP be “withdrawn” and “circulated” in the economy, since according to them SDA money will hardly extrapolate to inflation risks.

In other words, the BSP’s recent SDA policies will account for as providing implicit support to the domestic asset markets, in addition to its current record low interest rates.

This doesn't seem to be "reining" asset bubbles. Instead the BSP has been providing fuel to the combustion.

 

And since mania, for me, signifies as the yield chasing phenomenon that have been rationalized by voguish themes or by popular but flawed perception of reality, enabled and facilitated by credit expansion

Well the so-called upgrade on local debt only means MORE debt and MORE yield chasing.

Here is the latest debt figures from the Bangko Sentral ng Pilipinas (BSP):

Loans for production activities—which comprised more than four-fifths of banks’ aggregate loan portfolio—grew at a slower pace of 15.2 percent in February from 16.0 percent (revised) in January. Similarly, the growth in consumer loans eased slightly to 12.0 percent in February from 12.4 percent (revised) in January due mainly to the slowdown in credit card receivables and other household loans.

The expansion in production loans was driven primarily by increased lending to the following sectors: real estate, renting, and business services (25.1 percent); financial intermediation (27.2 percent); wholesale and retail trade (14.2 percent); manufacturing        (7.3 percent); and, electricity, gas and water (12.7 percent). Meanwhile, declines were observed in lending to agriculture, hunting, and forestry (-13.3 percent) and in other community, social and personal services (-3.9 percent).

Putting it in perspective:

The BSP omitted (purposely or accidentally) in their press release the construction debt data, which skyrocketed by 57% year on year. 

But both financial intermediary and real estate loans are above 25%, which has been more than 3x statistical economic growth. 

Household leverage (demand) has also been ballooning but at a much slower pace than the supply side. But again growth in household debt essentially is double the rate of economic growth.

And the jump in debt figures has translated to a substantial growth in money supply, again from the BSP (bold mine)

Domestic liquidity (M3) grew by 9.9 percent year-on-year (y-o-y) in February to reach P5.0 trillion. This growth was slightly slower than the 10.2 percent (revised) expansion recorded in the previous month. On a monthly basis, seasonally-adjusted M3 expanded at a slower pace of 0.6 percent compared to the 0.8 percent (revised) month-on-month growth in January.

The growth in money supply was driven largely by the expansion in net domestic assets (NDA). NDA grew by 19.7 percent y-o-y in February from 21.9 percent (revised) in the previous month following the sustained increase in credits to the private sector, buoyed by the robust lending activity of commercial banks. Claims on the private sector increased by 14.9 percent in February. By contrast, claims on the public sector contracted at a slower pace of 4.3 percent in February compared to the decline of 4.6 percent (revised) in the previous month, as the growth of National Government deposits continued to slow down.

Move along, nothing to see here. No asset bubbles according to the government and their apologists.

 

Of course the upgrade will also inspire more debt, not only from the private sector but also from the government. As I recently pointed out

I may add that credit rating upgrades by international credit rating agencies will further whet on the appetite of domestic political authorities to wantonly engage in more public spending that may indeed help propel an artificial boom but at the bigger cost to the society in the future through an economic bust, higher taxes and higher costs of living.

So you have debt growing a lot faster than the economy. Also supply side debt has been outpacing the demand side.

The Philippine credit bubble has likewise been reflected on the Philippine Stock Exchange via sectoral performance.

This week’s action reveals that the main beneficiary of sharp bounce has been the property sector.

On a year to date basis, the property-financial-holding sectors remain as the biggest winners.

One must be reminded that the troika of US credit rating agencies (Fitch, Moody’s and S&P) not only failed to see the US crisis, but were part of the problem; they played a significant role in advancing economic and financial imbalances that led to the crisis.

The credit rating upgrade just shows how the mania phase of Philippine asset bubbles has been running on full throttle. 

It also suggests of more miseries ahead. As I previously wrote,

Remember massive government spending means more debt or higher taxes or higher consumer prices in the future. And credit upgrades only add to this incentive to borrow rather than to institute real reforms.

Instead of a blessing, such development represents a blight. It is a Trojan horse.