The BSP Launched a Silent Stimulus: More Evidence; A Derivative Inflated GIRs

I have recently suggested that the some entity must have launched a “silent stimulus” such as to forcibly steepen the yield curve. Such silent stimulus coursed through the interest rate channeled impelled for a reversal in the recent trend (July 2014-September 2015) of declining bank credit growth.

Moreover, the reversal of the decline in bank credit conditions subsequently became apparent, or has likewise been reflected on the domestic liquidity trend.

I proposed three motivations for such actions. 1) The masquerade of falling price levels (as measured by the government) which has inflated GDP is unsustainable, 2) election spending and 3) sustained crash in PSE.

In that note, I presented charts of the PSEi, the BSP’s measure of banking loans and M1 growth.

Now I provide further evidence as shown in charts below.

What used to be general curves that seem headed for an intense flattening and inversion suddenly bounced back! Spreads from ADB’s 2 year, my own 1,3 and 5 year versus 10 year revealed of a V-shape bounce! They look like the vertical-parabolic climb by the PSEi!

ADB’s data showed that in December 15 2015, the spread between the 2 and 10 year narrowed to just 4 basis points! Spreads were mostly below 100 bps from September 2015 to early February 2016.

These concerted “steepening of the yield” actions on different curves occurred almost at the same time window particularly from 4Q 2015 to 1Q 2016.

Coincidentally, during the same time frame, growth in the BSP’s balance sheet (top, nominal php) appears to have accelerated.

From a year on year % basis, asset growth in the BSP’s balance sheet jumped by over 5% during the 4Q 2015 and picked up speed in the 1Q 2016!

Asset growth of the BSP hit a low on January 2015 from where it began its ascent. All these were happening even as the yield curve seriously flattened!

Moreover, the banking system’s balance sheet (lowest window, nominal php) headed down from mid 2014 through July 2015. So when the BSP stepped up to increase their assets, the banking system’s balance sheet likewise responded with a SPIKE in the 1Q 2016!

We can match the upsurge in the banking system’s balance sheets with the surge in M1! And we can do the same with BSP’s CPI data! BSP’s May CPI data posted a significant 1.6% increase! 

 

The BSP’s measure of CPI hit a low of .4% in two consecutive months (September and October 2015) from where it sharply bounced back.

For whatever reasons, the BSP has forcibly opened the monetary spigot!

Just awesome!

And here is the most important insight, if the Philippines has been resilient as publicly stated, then why the stimulus at all????????????

 

And here is more.

BSP’s “loans and advances” skyrocketed by a staggering 92% in March and 81% in February!

Although from March data, the share of loans and advances to the BSP balance sheet accounted for only 3.7%, the BSP dished out Php 163.5 billion and Php 154 billion over the said period!

Exactly to whom has these loans been extended to? And more importantly, why has these loans been made?

Could a bank have been in trouble to borrow from the BSP? Or could the BSP have lent to the banking system for the latter to acquire bonds in the secondary market in order to “fix” the yield curve? Or could the BSP have lent peso to the banking system in exchange for dollars in order to shore up the GIR?

It’s hard to pinpoint where these had been made.

But GIRs could have been one of the likely options

Growth rates of the BSP’s International Reserve and the Gross International Reserves seem to have gone in opposite directions!

International reserves accounted for 86.3% share of the BSP’s assets as of March 2016.

What’s truly intriguing has been the spike in the forex holding of the BSP’s GIR. Those forex holdings ballooned in February and March of 2016 almost exactly when the BSP issued those loans!

Additionally, if we consider the amount involved in the swelling of GIRs seem to partly coincide with the BSP loan*.

*The difference of GIR was US 1.392 billion, based from January’s USD 826 million to March’s USD 2.22 billion. This is against the amount of BSP’s nominal loan growth over the same period which posted an increase of Php 78 billion which stemmed from the Php 163.5 billion in March relative to January’s Php 85.6 billion. At php 47 to a USD, the additional forex segment of GIR totaled Php 65.3 billion. The BSP’s excess loans of 12.7 billion may have been distributed elsewhere.

Even more, those GIRs now incorporate a part (US 495 billion) of the government’s $2 billion global bond issuance last February.

As I pointed out in the past, previous episodes where the Philippine government raised bonds hardly ended up in the GIRs. Well if they did, the BSP hardly reported on them.

Moreover, I have suspected that the BSP has been engaged in window dressing of its GIR position by borrowing USD through the use of derivatives.

As I wrote last April: Phisix 7,250: Philippine Peso Tumbled by 1.3%! Why?; The Perspective from the Stock Market Cycle (April 25, 2016)

Yet I posit another angle for last week’s fall of the peso. Two weeks back I have noted that the BSP’s forex holdings under its GIR has skyrocketed to milestone highs. I then asked, “Could it be that derivative forward cover contracts could soon be expiring that would lead to a hefty decline in GIRs for the BSP to have borrowed from the national government in order to cushion on the coming drop?”

The BSP’s May GIRs declined to US$83.51 billion. The BSP blamed it on “the decrease in the price of gold in the international market and payments made by the National Government (NG) for its maturing foreign exchange obligations”.

Gold prices has indeed contributed to the chipping of the GIRs (USD -480 million), but this was mostly negated by an increase in foreign investments (USD +441 million). The difference (USD -226 million) being made up by the (USD -182 million) decline in forex holdings. The decline in forex holdings, as dragging the overall conditions of Philippine GIR, comes as I have predicted.

Yet more signs that the Philippine USD surpluses have signified nothing more than a derivatives based Potemkin Village.

Regardless the BSP’s forex holdings under its GIRs remain at record highs.

Forex reserves have almost been equivalent to social status (or as stated in economic jugular “macroeconomic stability”) thus the motivation which leads to the efforts to shore up on such status symbol.

In sum, the recent surge in BSP and the banking system’s balance sheets in the face of the abrupt widening of the interest rate spreads or the yield curve, which has been reflected by significant escalation in domestic liquidity, as well as an upturn in CPI, combine and corroborate to reveal that the BSP has engaged in a stealth easing program. Such program have become pronounced in 4Q 2015 to 1Q 2016.

Add to this the big jump in “loans and advances” by the BSP in 1Q, which may have been used as an “emergency loan” to a financial institution, or as lending to the banking system to price manage the yield curve and or to boost the USD stock in the GIRs.

Nonetheless, the recent surge CPI simply suggests that these massive balance sheet expansions by the banking system and in the BSP were mostly likely unsterilized. This seemingly had designed been to amplify the headline numbers. And headline numbers means to support the GDP and of the intensifying PSEi’s bubble. And or, it may have also been used to for election financing.

As for stimulus, as defined by dictionary.com such noun represents “something that incites to action, or exertion or quickens action, feeling, thought, etc.” In short, stimulus is artificial. Besides, the Philippines have been in a stimulus ever since 2009. So current weakness reveals that artificial stimulus has been experiencing diminishing returns. And diminishing returns will be punctuated by mounting balance sheet woes and on growing restrains on the currency or the pesos’ purchasing power.

Yet politicians, bureaucrats and the establishment have been addicted to this. And any form of addiction predicated on artificial substances will suffer from the long term consequences from its very essence—unnaturalness. Kicking the proverbial can down the road only translates to the worsening of the disease.

As for GIRs, even as the Philippine government reported a big current account surplus, growing foreign debt, add to this 1Q FDI 2016 that have been from mainly “Non-residents’ investments in debt instruments (consisting mainly of loans extended by parent companies abroad to their local affiliates”), mounting trade deficits, diminishing returns of OFW remittances and larger budget gaps means that demand for hard currency “dollars” will grow more than its supply of existing “dollars”.

Even more, the recent attempts to re-stimulate the economy means supply or money stock of peso will grow faster than the USD counterpart. This should mean pressure on the peso which should heighten demand for “dollars”

Additionally, if I am right that derivatives have made up a big segment of GIRs, derivatives only mean “borrowing” dollars to puff up outward conditions. This alternatively also implies that borrowed “dollars” would have to be repaid or rolled over. And repayment should mean more peso for every “dollar” liabilities.