Phisix: BSP Under Pressure: Raises SDA Rates and Invokes Banking Stress Test

As with a crumbling sand pile, it would be foolish to attribute the collapse of a fragile bridge to the last truck that crossed it, and even more foolish to try to predict in advance which truck might bring it down. The system is responsible, not the components. –Nassim Nicholas Taleb and Mark Blyth

In this issue

Phisix: BSP Under Pressure: Raises SDA Rates and Invokes Banking Stress Test

-Understanding the Entwined Relationship between Public Debt and Private Debt

-More Policy Gimmickry via BSP Stress Test

-The Consumer Growth Model Debunked: Price Inflation Shrinks Domestic Demand

-Desperate BSP Plays the SDA Interest Rate Card

-As Predicted, San Miguel Corp’s DEBT IN-DEBT OUT Hits Php 1 Trillion Mark! [Updated to rectify currency symbol from $ to Php]

Phisix: BSP Under Pressure: Raises SDA Rates and Invokes Banking Stress Test

Last week I wrote[1],

BSP officials have chosen instead to ignore self imposed rules (e.g. BSP’s circular 600), would rather massage the financial markets, and resort to policy gimmickry (e.g. raise reserve requirements) and on publicity hype via statistical smokescreens such as calling the 1q 2014 GDP slump as a one-off effects from Typhoon Yolanda (even when the coconut industry have been the only direct link) or could even be likely understating that Banking system’s loan portfolio exposure on the real estate industry which they say grew by only 4.5% in 2013 even when their other figures covering the supply and demand side (for banking loans on the property sector) have posted an astounding annualized 23.64% and 21.34% growth rates!

The above will undergird this week’s treatise on how current monetary policies will likely impact the Philippine statistical and real economy as well as the domestic financial markets.

Despite the seeming copacetic landscape portrayed by the media, the much complacent public hardly notices that the Philippine central bank, the Bangko Sentral ng Pilipinas (BSP) looks very much under political and financial strain. 

In barely a span of a quarter, specifically from April-June, the BSP has not only raised reserve requirements TWICE in a month’s gap, but over the past two weeks, the central bank undertook TWO more alleged “macro prudential” measures to combat growing consumer price inflation, as well as, ‘financial stability’ risks. Particularly a week back, the BSP required the banking system to submit to a “stress” test. And last week, the BSP raised interest rates marginally on Special Deposit Accounts (SDA)

Such closely interlinked series of policy actions seems as an interesting twist which comes in the light of the BSP’s ex-cathedra declaration that adjustments in the banking system’s reserve requirements has allegedly “siphoned some $2.7 billion from the system”[2]. So whatever happened to the “siphoning”? Even more ironic is that the BSP claims that supposed inflation rates remains within the BSP’s inflation target; then yet why all these actions?

If inflation and financial stability risks have indeed been operating within the ambit of the BSP’s policy parameters as so promulgated, then WHY has the BSP shoehorned (four) macro prudential measures in less than three months???

Understanding the Entwined Relationship between Public Debt and Private Debt

While not directly indicating a lower risk, the BSP also reported last week “that the country’s outstanding external debt approved/registered by the BSP stood at US$58.3 billion at end-March 2014, down by US$165 million (or 0.3 percent) from the US$58.5 billion level at the close of 2013.[3]”

The slew of statistics that has anchored the statistical external debt conditions appear to emit the impression that Philippine debt conditions have been benign.

Yet, it would be misguided to see external debt conditions as a standalone metric to sufficiently ascertain or assess of a nation’s credit worthiness or risk conditions.

External debt is a constituent of overall public debt that includes domestic debt and contingent liabilities/ guaranteed debt. Even more important is to understand that debt is one of the three ways how government fundamentally finances their requirements, aside from taxes and inflation.

And public debt extrapolates to future financing via taxes or inflation. And because government’s fiscal balance is determined by the variance of tax revenues relative to expenditures, sources of tax revenues plays a very important role in determining the debt or financial stability conditions. In other words, private sector debt conditions are deeply intertwined with public sector debt.

Let me cite some fresh related statistics.

Based on the Philippine Bureau of Treasury’s data for 2014, year on year, National Government Outstanding Debt grew by 6.6% and 6.2% in March and April respectively. Although April 2014’s nominal level of outstanding debt has been slightly lower than the December 2013 level by .72% or by Php 40.93 billion. From the public debt perspective alone, this indeed looks like a welcome development.

From the perspective of the distribution of outstanding debt, the ratio between foreign and domestic (or peso denominated) debt has been 34.64%: 65.36% in April as against 34.28%: and 65.7% in December. So the little change in outstanding debt levels during the first quarter shifted marginally debt ratio in favor of external debt.

However based on another Bureau of Treasury’s data, first quarter 2014 deficit has grown by 26.54%. And with the flurry of proposed infrastructure spending in the pipeline[4], which if not supported by equivalent growth in tax revenues would mean more debt financed deficits.

As I have pointed out in the past, the Philippine government has astutely been resorting to policies that invisibly corral more resources from residents through financial repression policies of negative real rates (see chart here) by expanding public debt exposure based on local currency denominated indentures[5]:

And here is the beauty: the Philippine government has shifted the share of debt burden in 2009 which was at 44:56 in favor of domestic debt to 2013’s 34:66 share, again in favor of domestic debt. While public debt continued to grow modestly, the Philippine government deftly transferred the weightings significantly towards domestic debt (again from 56% in 2009 to 66% 2013) in order to optimize the capture of the subsidies provided by the Philippine society to the government from negative real rates—financial repression policies.

These transfers are not without costs…

…or social policies are hardly ever neutral.

What the public hasn’t noticed is that the obverse side of the supposed temperance in government debt has been intensifying growth rates of debt levels in the private sector. 

One might say that the above represents an “apples to oranges” comparison because of the varying time frames I used for comparison: particularly the entire 2013 and 1Q 2014.

Nonetheless my intent is to exhibit the growth differentials in the context of the share of contribution to statistical gdp (at constant prices; left window as seen by the yellow fill) and BSP banking loans (orange fill).

I also show the official GDP and banking loans growth rates (right window), based on the combined data from National Statistical Coordination Board (at constant 2000 prices) and the BSP.

Based on the 5.71% 1Q 2014 growth figures, there has been a reduced contribution to the GDP by what I call as the bubble sectors (trade, finance, real estate, construction and hotel), even as loans to these sectors continue to BALLOON—now constituting MORE than 50% of overall loan portfolio of the Philippine banking sector.

In short, this serves as more evidences of diminishing returns of debt (credit intensity) in the face of the growing concentration of risks. So no bubble eh?

Again as I have been saying, costs are not benefits[6].

First, the principal cost to attain lower public debt has been to inflate a massive bubble.

The second major cost from inflating a bubble has been to diminish the purchasing power of citizenry, which have apparently become more evident by the day.

The third major cost has been the illicit and immoral transfer of resources not only to the government but also to politically connected firms who has and continues to benefit from the BSP sponsored redistribution.

 

The fourth major cost is that such bubbles have heightened risks of “financial stability” as revealed by outrageously overpriced financial assets which also implies the fast expanding externality effects from the intensification of such risks.

The IMF’s Global Housing Watch reveals how the Philippines has grabbed the top spot in the context of rank speculation in properties (aside from stocks, and bonds) that has been fueled and abetted by the 30%+ money supply growth in the second semester of last year.

The fifth major cost represents the crowding out effect or the deadweight losses from resources channeled to the bubble sectors that should have been used by the market for real productive growth.

The sixth major cost is that once the bubble implodes, government revenues will dramatically fall in the face of sustained growth rate of public expenditures. Add to this the possibility that public spending will even soar as the government applies the so-called “automatic stabilizers” (euphemism for bailouts). This would also extrapolate to a phenomenal surge in debt levels. All these will unmask today’s Potemkin’s village seen in the fiscal and debt space. And the most likely ramification will be massive increases in taxes such as the EVAT

The seventh major costs would translate to the imposition of more economic repression via institution of political controls in prices, trade, capital movements, social mobility, and wages and labor. The assault against informal economy will likely intensify but more politicization of the economy would lead to an increase in the informal economy.

The last major cost is that a finance and economic bust would have a spillover to the political front via possible expansion in the curtailment of civil liberties via social mandates, regulations and restrictions.

And the above shows that debts are NOT just about statistics. Since every debt incurred postulates to money allotment in the economic stream—whether this has been in properties, stocks, bonds, grandiose political projects, welfare or warfare state or a combination of—such extrapolates to the commitment of resources in the direction of money allocation. And the imbalances accrued from misdirected resources in response to interventionist policies fertilize the roots of depression.

More Policy Gimmickry via BSP Stress Test

About a week back, the BSP recently called on banks to conduct stress tests “under the new prudential guideline to determine whether the capital level of a bank is sufficient to absorb the credit risk to real estate”

Paradoxically, in the opening statement said of the stress tests, the BSP noted that the “new measure does not reflect any imminent vulnerability among banks with exposures to the real estate sector”[7]

Huh? Why the official communique “does not reflect any imminent vulnerability” at all?

Given the bullish outlook of the vast majority of industry insiders, media and the markets, why has the BSP suddenly turned defensive? Which interest groups has been applying pressure on the BSP? [hold on to this as the SDA disclosure exhibits the same strains]

The BSP’s sphere of influence has primarily been the government and her agents, the banking and financial institutions. Other possible circles of influence would be the central bank of central banks, the Bank of International Settlements, the US Federal Reserve, or to a lesser degree, multilateral institutions like the IMF, ADB and etc...

The executive branch of the Philippine government is unlikely the source of such pressures as they have been the primary beneficiary of the invisible transfers in terms of finance and politics (via popularity ratings). And given that both are government institutions, the likely recourse would be to conduct a political resolution without having to signal to the public seeming signs of anxiety.

I find it peculiar for the BSP to even ask banks for a stress test just when less than a month ago, they have vindicated or even extolled the banking system saying that “These ratios remain driven by Tier 1 capital, the highest quality among instruments eligible as bank capital.”[8] Has recent development radically altered financial conditions? Or has the change in intonation been meant to mollify the unseen pressure groups?

I have long contended that the BSP will unlikely know in accuracy which debts are at risk, the levels and or the conditions of which such debt may be considered risk prone, the degree of risks for every loan portfolio, the possible spillover effects, the amount of capital needed to cushion against different levels of risks and its potential contagion across different industries, and importantly, the human response to a radical change or reversal in confidence levels.

As I wrote last year[9],

More importantly, once the real estate sector gets slammed by the entwined factors of financial losses and deleveraging, such will likewise impact all sectors that have exposure on them, and so with the banks.

And affected secondary sectors will also hit firms from different industries connected to them, and so forth.

Thus the complex latticework of commercial networks means that the feedback mechanisms from the bubble busts will have a domino effect and thus spawn a crisis.

So models will not be able to capture the contagion effects from a real-estate-stock market bust for the simple reason that models tend to mathematically oversimplify what truly is a complex reality.

The fundamental flaw with BSP’s implied defence of the risks of asset bubbles has been to interpret statistics as economics.

Isn’t it odd that the BSP can’t seem to even reconcile on her statistics covering the real estate exposure by the banking sector, whose rate of growth has been at ONLY 4.5% even when the BSP’s other property related loan statistics reveals that demand and supply side growth rate has been raging at 21.34% and 23.64%, respectively[10]??? How about those loans made by the shadow banks?

I have pointed out in the past that the banking system of Cyprus passed with flying colors in 2011 to a stress test, which media noted that her banking system had a “strong capital base, fluidity, increase solvency and satisfactory profitability”. Ironically Cyprus succumbed to a crisis in 2012-2013.

Banking stress tests seems more like a communication signaling medium meant to assure the public rather than a reliable measure against risk

Also it would seem a very self-contradictory position for the BSP to allege that they have been “cognizant of the social agenda of providing shelter as a basic need. It also recognizes the continuing growth of the real estate industry in line with national demographic factors”

When has rampaging property inflation, which reduces household affordability to acquire or rent properties, been consistent with providing shelter as a basic need?

And given that the real estate industry has proclaimed that supply side growth for condominium units, for instance, has averaged 30% annually since 2005[11], how has this growth rate tallied with the demographic data where Philippine fertility rate has been in a decline—3.08% as of 2012 from the 7.15% in 1960. Or how has such feverish growth rate leveled with US dollar based Philippine GDP per capita growth of 3.16% in 2009-2012 or 2.83% in 2004-2012?

Even from NSCB’s peso denominated data, per capita GDP growth rate in 2012-2013 has been at 7.5% current prices and 5.4% in constant 2000 prices which is very, very, very, very far from the 30% growth rate.

Has politics vanquished simple arithmetic to oblivion?

The Consumer Growth Model Debunked: Price Inflation Shrinks Domestic Demand

And speaking of the adverse impact of consumer price inflation on consumers, the Wall Street Journal interactive recently interviewed a small sample supposedly representing the average Philippine residents to get some discernment[12].

To the question of “How do you offset rising prices?”, here is the answer of the 5 respondents (bold mine)

-We cut off our family Sunday dinners in restaurants. I seldom spend on clothes, since I get these from my relatives abroad. I stopped buying accessories and pieces of jewelry. We now skip buying treats like pizza and ice cream.

-We changed our shopping habits. Before [prices rose], we would go out on pay day. Now, we stay at home during the weekends and cook two kilos of fried chicken every pay day.

-I reduce my costs by not shopping for women’s luxuries, like accessories.

-I concentrate on basic needs. Traveling is no longer a necessity but a privilege. In the 1990’s when I was studying, the jeepney fare was 1.50 pesos. Then, while I was in college, I spent 6 pesos daily. In the past, price increases were not drastic. Today, we are experiencing price fluctuations.

-Buying new clothes and accessories are costly and unnecessary. I decided to stop buying those.

Allow me to use a hypothetical: 

At 20 pesos apiece; a fixed 100 pesos budget buys me 5 items of Product Y. At 25 pesos or at an inflation rate of 25% for Product Y reduces my purchasing power to only 4 items. If I insist of buying the same genre of product at the original quantity (5), then I would probably have to search for a lower quality alternative that has a price tag of 20 pesos or less (substitution effect). But what if product Y is a ‘want’ good rather than a ‘needs’ good? I might as well totally cutback from buying Product Y and redirect my purchases to essentials (income effect)

Instead of the consensus opinion where price inflation (whether property, consumer prices) drives up consumer demand, the respondents have shown the opposite: demand has been elastic or highly sensitive to higher consumer prices. Such comments seem to validate what I wrote about last March[13].

This means in the Philippine setting, a reduction in disposable income via higher consumer price inflation, redirects consumption or demand to mostly essentials (income effect—“stop buying”, “concentrate on basic needs”) and secondarily to lower quality alternatives (substitution effect—instead of eating out eating at home)

As one would realize, price changes affect people’s incentives to act or as the great Austrian economist Ludwig von Mises would once wrote, “The ultimate source of the determination of prices is the value judgments of the consumers.[14]” And because prices are determined by value judgments of consumers, they embody decentralized or localized information or what another great Austrian economist F. A. Hayek calls “the knowledge of the particular circumstances of time and place”[15]. Thus prices are set by the spontaneous exchange interactions between consumers and entrepreneurs which manifests on their preferences in terms of the most valued as against less valued items/services, based on the economic balance of a given locality. And in response to mostly market forces, the advancement of technology in terms of transportation and communications infrastructures which has lowered transaction costs and facilitated market signaling has expanded the reach of markets

The pricing system, which is an indispensable element of the market process, represents a bottom up phenomenon that ultimately determines economic coordination, particularly patterns of production, trade, consumption, investment and savings.

And because prices are defined by the ratio of currency units per unit good or service, half of every transaction involves money.

So when the government intervenes with the pricing process, especially through the manipulation of money via Financial repression policies of Negative real rates and or QE or monetize deficit spending and or through other price and market controls or obstacles, this nudges people away from what they would have done outside such interventions.

And because interventions in the pricing process, especially through money (inflationism), incite disruptions in the market process, the accrual of dislocations infects and spreads from one locality to the others which eventually morph into systemic maladjustments or imbalances that would necessitate a natural market clearing process (which has mostly been disorderly). Booms turn into busts.

The anecdotes from the Wall Street Journal interview provide insightful and significant poignant clues to the emergent divergence between activities of Filipino consumers and the expectations by the participants in the bubble industries. The collision course comes in the form of significant downscaling of demand by domestic consumers as against the race by the bubble industries (shopping mall, real estate, construction, hotel-casino, and finance) to provide supply in the mistaken belief that consumer growth have signified a one way street. The unfortunate part is that such fallacious beliefs, brought about by the massive distortions in market signals from a manipulated yield curve from BSP’s inflationist policies combined with the reinforcement of groupthink or the herding effect, comes with substantial resources committed to these ventures financed by debt.

As I have been saying take too much booze, one gets a hangover. Overestimate demand, one gets over supply or excess capacity. Overestimate demand financed by debt, one gets both over supply (or excess capacity) PLUS debt problems which may likely include insolvency and illiquidity issues.

What is unsustainable will not last.

Desperate BSP Plays the SDA Interest Rate Card

The BSP finally has decided “to raise the interest rate on the Special Deposit Account (SDA) facility by 25 basis points from 2.0 percent to 2.25 percent across all tenors effective immediately[16]”. (bold added)

And germane to the “does not reflect any imminent vulnerability” from the Stress Test disclosure, the BSP once again revealed traces of uneasiness in rationalizing why the SDA interest rate card had been played—“the Monetary Board decided to adjust the SDA rate to counter risks to price and financial stability that could emanate from ample liquidity, noting that a modest upward adjustment in interest rates would be prudent amid robust credit growth”. (bold emphasis added)

Again the BSP appears to be responding to calls from an unobserved influential group for the authorities to make the rate increase in the SDA implementable “immediately”. And this has been backed by the cautious words of “to counter risks to price and financial stability”.

Again four policy actions implemented in barely 3 months, two of which came during the past two weeks, where the latest two actions has been accompanied by statements seemingly shrouded by evocative signs of antsy or apprehension!

I have learned of the importance of relying on what people do rather than what they say or the revealed or demonstrated preference especially when reading or interpreting politics or the political economy.

Yet these could be indicators that the BSP may know something which it refuses to disclose to the public.

Let me first make a technical correction when I noted that the BSP’s Special Deposit Account (SDA) was introduced in 2006[17].

The SDA originated in 1998 and the 2006 disclosure only expanded the access of the SDA facility to include “trust entities of financial institutions under BSP supervision to deposit in the facility” which got implemented in April 2007[18]

The intriguing part of the SDA option has been the stern refusal by the BSP to raise official policy interest rates and or to deal with Property loan curbs on the banking sector.

The BSP has opted to first to employ the reserve requirements and now the BSP’s facility for banking deposits. These policies attempts to influence only the banking sector’s credit flows indirectly. Reserve requirements are sham, since modern central banks supply them.

The BSP evades from influencing banking credit activities that would have a direct impact on the government and on the current sectors wallowing in credit activities.

The problem with the raising of the SDA interest rates seems twofold. 

First if the banking system believes that the low interest rate regime can still be maintained that should buttress the inflationary boom, and that credit risks still remains contained, then the 25 basis point increase will hardly motivate banks who still can arbitrage the steep yield curve, as shown by the chart from Asianbondsonline.adb.org.

The second, which is pertinent to the first, is that previously the reason why the BSP cut interest rates on the SDA was to minimize further losses on the BSP’s financial conditions.

From ABS-CBN in May 2013[19]: “To minimize further losses, the central bank has resorted to cutting the rate it pays on its short-term special deposit account (SDA), which has attracted a huge volume of funds after the Philippines emerged as a the new emerging market darling following fiscal reforms and strong economic growth last year. The central bank has lowered the SDA rate three times in as many policy meetings this year, with the total cuts now at more than 200 basis points since July 2012. But placements in SDAs have not declined substantially despite the cuts, with total placements at P1.93 trillion  as of April 26, just a shade lower from the record P1.98 trillion posted last month.”

The SDA’s interest rate has been in a steady decline since 2007 which came from a high of 8% to 2% in 2013.

This means that if the BSP really thinks that the quarter basis point hike will draw in deposits from the banking system then the BSP’s financial losses will most likely climb again.

Based on the statement of income and expenses, the BSP’s losses in 2013 was at Php 24.26 billion compared to Php 95.38 billion in 2012. That’s mainly because interest expenses of Php 90.76 billion in 2012, which constituted 82% of the central bank’s overall expenditures dropped by 35% to Php 58.68 billion in 2013. Interest expenses accounted for 69.8% of the central bank’s expenditures in 2013.

The BSP’s seem to be hoping that the SDA option will defuse whatever inflation and financial stability pressures being exerted upon them. But again if the banking system should ignore this and continues with its unwavering pace of credit expansion, then this would merely account for as buying time.

And the other option which as noted above, is if SDA deposits in the BSP from the banking system does grow, then this will cause the poorly capitalized central bank to hemorrhage financially. The BSP has a capital of only Php 40 billion pesos supporting assets worth Php 4.202 trillion in assets as of December 2013 or a puny .9% equity relative to the asset base. Of course the BSP can count on the Philippine government to bail them out since the BSP is a creation of the Philippine congress via THE NEW CENTRAL BANK ACT or REPUBLIC ACT No. 7653

The BSP’s predicament is that the Philippine financial system may have already hit the maximum threshold for the system’s debt accumulation. The surging and percolating consumer price inflation has already been manifesting this. The USD-Peso hit the 44.12 last Wednesday before rallying based on the pre-SDA disclosure. The USD Peso closed the week almost unchanged.

And the diminishing returns of debt which will possibly be manifested by a steep fall in money supply growth rates by the second semester of this year, will most likely compound on the BSP’s pressures

As I warned in April[20], (bold original)

The refusal to curtail the credit boom exposes on the chronic addiction by the Philippine government on easy money stimulus. Yet the government has been boxed into a corner. Tighten money supply, credit shrinks and so will the economic sectors who breathes in the oxygen of credit that has played a vital role in the sprucing up of the pantomime of the pseudo economic growth boom.

Tolerate more negative real rates, debt accumulation intensifies, price inflation will rise, the peso will fall and such credit inflation will be reflected on interest rates, where the outcome will be market based tightening regardless of the actions of authorities.

Hangover time soon?

As Predicted, San Miguel Corp’s DEBT IN-DEBT OUT Hits Php 1 Trillion Mark! [Updated to rectify currency symbol from $ to Php]

 

San Miguel Corporation’s [PSE: SMC] big jump in 2013 profits has regaled the public desperately seeking optimistic stories in order to justify the senseless chasing of yields.

Media’s biased reporting supported by populist talking heads, who only sees one way trade for Philippine assets, have opined that rising stocks and the 2013 spike in SMC’s profits have alleviated if not erased the company’s credit woes.

In reality, rising stock prices doesn’t expunge the risks from structural impairments. Instead the broad based yield chasing of outlandishly overvalued stocks has just been signs of a manic blow off top—most likely in a terminal phase.

Based on SMC’s year end presentation for 2013[21], profits expanded by 42% to Php 38.1 billion. This has mostly been from a one-off non-recurring income based on the sales of Meralco to JG Summit. Part of the gains from the sales of Meralco was recognized in SMCs 2013 annual report[22] at Php 30.717 billion that has been included in the “Gain on sale of investments and property and equipment” account

The balance from the Meralco sales of Php 31.437 has reportedly been paid by JG Summit on March 25, 2014. So a carryover from the Meralco sales may temporarily boost SMC’s profits perhaps in the second quarter as 1Q 2014 net profits amounted to only Php 2.2 billion[23]

Yet year on year changes in 2013 on net sales and on income from business operations has grown by only 7%.

So if we are to exclude the Php 30.717 billion gains from the Meralco sales, income before tax at Php 23.711 billion in 2013 would be 48% lower than the Php 46.04 billion equivalent in 2012 and 36.7% down from Php 37.433 billion in 2011. (page 58)

Ok let me cut the chase and show you SMC’s debt profile.

Here are the interest bearing debt numbers of SMC

At the end of 2012 Php 375.5 billion

At the end of 2013 Php 450.7 billion

In 1Q 2014 Php 463.6 billion

As noted above SMC posted a growth rate of 7% in terms of income from operations. Yet interest bearing debt ballooned by 20%. In nominal terms, SMC’s debt swelled by Php 75.2 billion in 2013. That’s nearly double the one time spike in profits of Php 38.1 billion! In short, the one-time sale of a prominent political economic asset failed to improve SMCs core finances!

In 1Q 2014 while income from regular operations grew by only 1%, debt bulged anew by 2.8% or a nominal growth of Php 12.9 billion! On an annualized basis, this would mean another additional Php 51.6 billion by the close of 2014!

Interestingly despite the huge expansion of interest bearing debt, the company’s cost of debt at Php 30.97 billion in 2013 grew by a measly 3.9% from 2012’s Php 29.8 billion. And interest rate payments comprise 26.67% of the company’s gross profits in 2013.

That’s the BSP’s interest rate subsidy at work in favor of SMC. 

Even more interesting has been the data from SMC’s cash flow from financing activities

Early this year I wrote that “SMC’s short term debt churning approaches the proximity of 10% of the Philippine banking resource system. And if we add the long term debt this will pass the 10% mark if SMC’s total annual borrowing will exceed Php 1 trillion in 2013.”[24]

In 2013, proceeds from SMC’s long and short term debt have accrued to Php 1.000138 trillion. Total banking assets as of March 2014 according to the BSP has been at Php 10.098 trillion. So SMC’s debt rollover annualized has now approximated nearly 10% of the Philippine banking resources as predicted.

On a per quarter basis, this amounts to about Php 250 billion and growing. Just think about which the banks and financial institutions have been involved in SMC’s game of debt musical chairs.

And to consider net proceeds from borrowing in 2013 amounted to Php 54.137 billion. Again this is 42% more than the Php 38.1 billion in one time profits.

The right window reveals how SMC has become deeply reliant on DEBT IN DEBT OUT or debt rollovers in financing her operations and or from asset sales—all of which fits to a tee Hyman Minsky’s description of Ponzi Financing scheme[25]. The red line represents the net proceeds while the blue line accounts for the gross borrowing.

No Philippine bubble eh?

Without BSP subsidies, SMC’s debt rollovers will not survive for long. 

Yet unless some Deus ex machina appears, even with a presumed continuation of BSP’s subsidies SMC’s business model will hit a critical point sooner rather than later. How much more of debt in debt out can SMC absorb, 1.25 trillion, 1.5 trillion, 2 trillion or more?

Even from the interest rate bearing debt alone, the 2013 debt of Php 450.7 billion would account for 38% of SMC’s bloated asset valuations. 

When the market begins to lose confidence on either the sustainability of company’s credit standings or on the Philippine economy’s hyped up growth, those asset or collateral values will falter swiftly.

Again as I wrote this March[26],

SMC appears as hardly earning enough to support the amount she owes in interest and principal. In a credit event, all liabilities (short term and long term) will surface.

---

[1] See Daddy’s Day [Abridged] Edition: Phisix: The Climaxing Philippine Property Bubble! June 15, 2014

[2] See Phisix: 30+% Money Supply Growth Rate Now Seen in Official CPI Data June 9, 2014

[3] Bangko Sentral ng Pilipinas Outstanding External Debt Drops Further in Q1 2014, June 20, 2014

[4] See Phisix: The Showbiz Political Economy and the Showbiz Financial Markets April 28, 2014

[5] See Phisix: In 2009, the BSP Engineered a Crucial Pivot to a Bubble Economy April 14, 2014

[6] Ibid

[7] Bangko ng Pilipinas MB Issues Macro-Prudential Measures for Banks' Real Estate Exposure June 11, 2014

[8] Bangko ng Pilipinas U/KBs Remain Well-Capitalized Against Risks May 14, 2014

[9] Bangko Sentral ng Pilipinas MB Issues Macro-Prudential Measures for Banks' Real Estate Exposure June 11, 2014

[10] See Phisix: Watch Out, Money Supply Growth Will Fall Sharply by July! May 25, 2014

[11] See Cracks in the Philippine Property Bubble? October 7, 2013

[12] See Street Talk: Reactions of Philippine Residents to the current surge in consumer price Inflation rates June 17, 2014

[13] See Phisix: Have You Been Aware of This Week’s Peso Meltdown? March 24, 2014

[14] Ludwig von Mises XVI. PRICES 2. Valuation and Appraisement Human Action

[15] Friedrich August von Hayek The Use of Knowledge in Society Library of Economics and Liberty

[16] Bangko Sentral ng Pilipinas Monetary Board Keeps Policy Rates Steady, Raises SDA Rate June 19, 2014

[17] See Phisix: Escalating Risks from the Region and from Internal Bubbles December 9, 2013

[18] Bangko Sentral ng Pilipinas Special Deposit Accounts Metadata This dataset contains the interest rates on the special deposit account facility of the BSP. Special Deposit Accounts are fixed-term deposits by banks and trust entities of BSP-supervised financial institutions with the BSP. These deposits were introduced in November 1998 to expand the BSP's toolkit for liquidity management. In April 2007, the BSP expanded the access to the SDA facility to allow trust entities of financial institutions under BSP supervision to deposit in the facility.

[19] ABS-CBNNews.com BSP seeks higher capital after record P95B net loss May 17, 2013

[20] See Phisix Melts Up as Money Supply Growth Sizzles for the Eight Month April 7, 2014

[21] San Miguel Corporation Investors’ Briefing 2013 Full-Year Results

[22] San Miguel Corporation Financial Statements 2013 annual report p.114

[23] San Miguel Corporation Investors’ Briefing First Quarter 2014

[24] See Will San Miguel’s Minsky Moment Occur in 2014? January 13 2014

[25] See Why San Miguel Corporation Looks Vulnerable September 13, 2013

[26] See Phisix: A Deeper Look at the Philippine and Indonesian Stock Market Mania March 17, 2014