In this Issue
3Q RGDP 7.1%, Really? Government Revenues Increased by Only 3.01% as Spending and Deficits Surged!
-Analyzing GDP: Political Motivations for a Politically Constructed Statistic Exist in a Vacuum
-3Q RGDP 7.1%, Really? Why Has Government Revenues Increased by Only 3.01%????
-3Q Spending and Deficit Soars! But That’s Just The Appetizer!
-Higher Interest Rates Will Puncture GDP Inflation
-More Signs of USD Shorts: BSP’s Forex Segment of GIR Skyrockets!
-Amazing String of Records: Breakthrough History in the Making!
3Q RGDP 7.1%, Really? Government Revenues Increased by Only 3.01% as Spending and Deficits Surged!
Asia’s strongest economy. So goes the uncontested claim which has been perceived as incontrovertible fact.
So mainstream discussions revolve around describing the numbers behind the claim.
Analyzing GDP: Political Motivations for a Politically Constructed Statistic Exist in a Vacuum
For the mainstream, because the government says G-R-O-W-T-H, the conditioning has been to for the public to intuitively borrow, spend and speculate because of G-R-O-W-T-H. Period.
None ask the WHY and the HOW those numbers were arrived at.
Also, given that GDP signifies a POLITICAL construct, the worship of GDP has redounded to the worship of politics. Much of media has induced the public to fixate on such POLITICAL numbers which have been treated as GOSPEL truth. Political motivations be DAMNED!
Since there is NO way to authenticate the methodology used by the government, the only possible alternative is to use other measures to cross check such claims.
I have pointed out earlier the jobs openings have hardly backed these claims. Even more, the Philippine government’s own wages and compensation index in 2015 hardly even match the GDP claims over the same period.
For instance, it is widely held that the Philippines represent a consumption economy. Yet if wages and job growth has been inadequate, and where remittances (with the exception of the last two months) have been stagnating, then the only potential sources of consumer spending would be from credit or reduction of savings.
YET it has been a supreme irony for the government to actually DREAD a shortfall in OFW remittances, when grassroots economic growth, by itself, would REDUCE the incentive for residents to work overseas. That’s IF economic opportunities indeed abound as a result of grassroots productivity growth.
But such contradictions constitutes mainstream (statistics equals) economics.
Spending cannot grow out of a vacuum and needs to be financed. While demand is infinite, it is the wherewithal (productive income from productive investments) that is key to consumption spending. And based on BSP’s data, consumer credit has soared to a record high 20.85% in 3Q, that’s more than double the NGDP! And this has been backed by a spectacular 57.7% surge in payroll loans! So unless, wages will grow enough to cover the increased leveraging of household balance sheets, present GDP, assuming its accuracy, merely reveals of an unsustainable redistribution of spending from future to the present.
Of course, the inclusion of more people in the formal banking system can increase credit financed consumption growth. But then again this only means increased leveraging of the balance sheet for more people—which is again UNSUSTAINABLE.
3Q RGDP 7.1%, Really? Why Has Government Revenues Increased by Only 3.01%????
This brings us now to a critical measure of spending and income growth in the form of government claims on its citizenry.
Last July, I pointed out that the Duterte regime’s first month in office entailed that government revenues fell by 4.6%. The following month or in September government revenues rocketed by 18.63%, this caused the Philippine budget to swing to a surplus.
Well, for the last month of the 3Q or in September, based on the Bureau of Treasury’s report, government revenues grew by another lackluster 1.13% year on year. So for the quarter, cumulative revenue growth tallied ONLY 5.11%!
NGDP was at 9.3% but government revenue growth was only at 5.11%. The 4.2% gap accounted for 45% of NGDP! Where has the 45% been?
[Or based on 3Q real gdp at 7.1%, the deflator adjusted tax revenues would only account for a real revenue collections at 3.01% growth1]
The missing 45% in NGDP represents either a massive tax collections leakage or of an immense overstatement of the GDP.
As I have been pointing out here, since peaking in 2013, government revenue growth trends by quarter have been in a material decline, as shown in the upper window.
The 18% August boost hardly lifted the 3Q government revenue growth rate past the 3Q of 2015.
This decaying topline can also be seen based on monthly nominal collections data. The upper trend line which constitutes seasonal post tax collection month of May failed to break new highs in 2016. As such, the growth channel looks likely to have either been interrupted or broken.
So despite the shrill shouting of venerations on G-R-O-W-T-H, government’s actual numbers have been telling us a different story—one of decadence.
Of course, to look at a quarter’s period could signify an anomaly or an accounting quirk. So perhaps a better perspective will be to look at the difference between NGDP and government revenue collections performance over a period of time.
Tada! Except for the deviant first quarter of 2013, growth in government revenues outperformed NGDP in EIGHT out of 11 quarters from 2Q 2013 to 4Q 2015 (above window)!
And when NGDP surpassed government revenue growth, the biggest difference was 2.2% in the 4Q of 2014.
This massively changed in 2016.
In ALL three quarters, the variance favoring NGDPs has blown out of proportions relative to government revenues! There has been a galactic hole between what government claims as growth and its actual performance.
Said differently, while the government yells G-R-O-W-T-H (!!!) in the public, in reality, it’s very own income statement tells a different story: Yes, the government has been having a difficult time increasing its revenues!
Don’t you see now why tax increases, instead of tax cuts, are in the offing???
The balance sheet can project political directions, more than media!
This has been happening even while it is supposed to be BOOM BOOM BOOM time! How much more when the slowdown can’t be statistically denied anymore??
And government revenues numbers are not limited to economic performance in terms of merely public spending (EVAT—accounted for 31.9% in 2011 based on IMF 2013 report), but also manifest income (corporate 28.1% and income taxes 16.1%). Government revenues already provide us clues to overall eps conditions of the PSE.
3Q Spending and Deficit Soars! But That’s Just The Appetizer!
I don’t need to vet on the government’s GDP data to tell me where the so-called GOSPEL growth numbers emanate from. All one needs to do is to look at the government’s income statement.
Last September, government spending, which raced by 29.6%, accounted for the second fastest clip since 2013. June 2014’s 44.14% was the fastest.
Since spending outclassed revenues, what would be considered as losses in the private sector, has now accounted for a massive growth in financing gap on the government’s balance sheet.
By quarter, 3Q 2016’s 14.4% accounted for the third biggest spending growth in 15 quarters. That’s after 19.25% in 3Q 2015 and 14.9% in 2Q 2013.
This tells us that the much ballyhooed gospel 3Q GDP numbers have been anchored on government expansion than the output from the productive economy, thus the government collection shortfalls. This serves as an implicit proof or evidence of the crowding out effect in action.
Yes, one can attain statistical growth WITHOUT real economic growth. Understand that the USSR never had a recession. It just collapsed.
And yes I don’t even need statistics to tell me that government spending and deficits will continue to soar.
Elementary understanding of political science should demonstrate the logic that a shift to a leftist/socialist government system—via expansionary bureaucracy state, welfare and warfare state, as well as, public works—should deduce to a significant transfer of economic activities away from the private sector into the government. And private sector participation would be limited to those compliant to, and or, blessed by the administration (economic fascism)
Reports of more proposed political free lunch spending predicated on “build, build, build” (US $1 billion Clark Air Base project, Php 450 million sea port at Pagasa Island) continues to pour. As I have previously noted, such “build, build, build” projects will only magnify present imbalances.
Hence, spending and deficits will disproportionately swell at the cost of the private sector. And since government spending through deficits will have to be financed, this entails higher taxes, more debt and bigger inflation (lower peso)
In perspective, the new government’s spending and deficit numbers, while significant, has yet to breeze past spending and deficit levels incurred by the previous administration. Present debt numbers have yet to outstrip the previous administration.
But don’t worry, it’s just the first quarter for the new administration. Or that’s just the appetizer. The main course has yet to be served.
Higher Interest Rates Will Puncture GDP Inflation
And more, if US treasury yields continue to climb to mark the end of the 30 year bull market in bonds as predicted by some notable bond market gurus such as Bridgewater’s Ray Dalio and DoubleLine Capital Jeff Gundlach, which should also highlight the end of zero interest rate policies, or which implies HIGHER interest rates for the world, then debt finance projects will not only be imperiled, as liquidity conditions tighten, systemic leverage will also come under meticulous or microscopic scrutiny.
Higher rates will only magnify balance sheet pressures that would amplify on the global US dollar shortages currently being experienced by the world financial system.
It will also bring to the surface zombie firms that have relied on Ponzi finance: debt in, debt out.
Yet applied to the Philippines, the big deficits accrued by the previous and the present regimes had been significantly financed through a buildup in external debt. This entails of increased exposure to US dollar shorts by the Philippine government (add the BSP to this—see below).
Another important factor on the prospects of rising rates: This should translate to rising cost of financing that would effectively reduce credit activities in the economy.
And this should portentous for the puffed up Philippine statistical GDP which fundamentally has been reflecting on credit expansion via monetary growth (upper window below) as with BSP assets—but with a time lag (bottom window below)
The three quarters of 30%+++ money supply growth has diluted current rate of money supply growth. Nevertheless the arcs and undulations of GDP and money supply reveals of its tight correlation.
GDP essentially represents nothing more than money supply growth.
As Goldmoney’s analyst Alasdair Macleod accurately pointed out*,
The truth is that an increase in annual GDP is simply a record of the increase in the amount of money added to the economy between one year and the next. That increase must come from either a rise in the quantity of money in circulation originating from the central bank, or from a rise in the level of bank credit created by the commercial banks, and is most likely a combination of the two. For economic growth, read growth in the quantity of money and credit. The false logic, the concept that a rise in the general level of prices is economically beneficial, is now laid bare, because rising prices only reflect monetary debasement, not increased demand.
A further error creeps in. The method of adjusting GDP to render it “real” is to adjust it by a figure representing price inflation. But GDP is the money-sum of all transactions recorded over the period, and already includes monetary inflation. Adjusting it for an estimate of price inflation as well is a superfluous attempt to apply a delayed price effect from earlier monetary inflation onto a later GDP number to make it look real. The cause and effect are separated by an indeterminate period of time, and cannot be identified and attributed to each other. Subjectivity of prices is also ignored. Use of deflators is the ultimate confirmation of ignorance as to what GDP actually represents.
*Alasdair Macleod Perilous government finances Goldmoney.com November 10, 2016
The second paragraph is similar to what I’ve been saying as the flawed debt to gdp ratio. In the case of the Philippines, since much of the GDP has been driven or inflated by DEBT, then taking the ratio of debt to gdp merely deflates debt’s real contribution to systemic risks. Hence, analysis based on sheer citation of said statistic will tend to understate real risk conditions. Even more important is to ignore the distribution of debt. Since less than 40% of the population have bank accounts, where half or less of them have engaged in borrowing from banks then it would be natural to see low level of debt to gdp. The better measure for debt would be when debt will be appraised based on the population of people only with formal bank accounts. Here Philippine debt levels can be expected to zoom.
San Miguel Corp alone for instance has Php 504 billion of debt in 3Q 2016. That’s 164x market cap as of Friday and signifies 3.9% of the Philippine banking system’s resources as of September 2016. SMC alone can lift the average credit per capita of the banked population.
More Signs of USD Shorts: BSP’s Forex Segment of GIR Skyrockets!
I mentioned above that the Philippine government has been increasing its exposure on the US dollar shorts.
The BSP presented its GIR data a week back, where it declared US$85.75 billion reserves for the end October.
Although they noted of the “inclusion of the Chinese Renminbi in the official international reserves of the BSP”, what has been striking has been the skyrocketing of forex positions!
The inclusion of the depreciating yuan could imply of additions to both forex and foreign investment category. But I really doubt if the huge leap in BSP’s forex position has all been about the yuan. The BSP’s forex positions soared by 304% last October.
It would be best to understand that even PRIOR to this month’s announcement, the BSP’s forex positions, which I have noted elsewhere here before, has been experiencing upside spirals that have coincided with the pesos’ weakness, or whenever the peso undergoes significant selling pressure.
The intensity of the buildup of forex position can be seen not only in nominal US dollar figures (upper window) but also on year to year changes (lower left window).
Yes, RECORD buildup!
Forex positions have topped the November 2013 highs last March. From then, the BSP continued to pile on more. I believe that the BSP’s GIR position has been substantially window dressed. The GIR has been bolstered by forward book or derivatives (swap, options or forward hedges). The BSP has been borrowing pages from the China and other central banks who have used the forward book strategies to aggressively shore up their domestic currency.
And the accelerating buildup of the BSP assets could have also been through this.
Another interesting aspect has been that the Philippine government has joined others in selling US treasuries for the second straight month according to the US Treasury (lower right window). Why sell? To generate USD liquidity to support the peso?
Sustained pressure on global US dollar shorts means continued bid for US dollars. But unlike in 2013 taper tantrum, which then signified an incipient symptom of a slomo progression of USD shorts, which affected mostly emerging markets, this time around US dollar shorts encompasses developed economies.
The Bank for International Settlement recently conceded that the US dollar has replaced the VIX index “as the variable most associated with the appetite for leverage” where “When the dollar is strong, risk appetite is weak.”*
*Hyun Song Shin Dollar replaces VIX as gauge of banks' appetite for leverage November 15, 2016. Bis.org
The BIS cited the prolonged aberrations in covered interest parity (CIP) as having represented a “breakdown of rules of thumb for well functioning markets, like the equalisation of interest rates across different market segments”. That’s because CIP deviations “showed that incipient deleveraging pressures have been building in recent months”. (italics mine)
Most theories forget about or ignore balance sheets.
And each time the USD got stronger, such translated to “deviations from CIP - signalling the higher cost of borrowing dollars in foreign exchange markets - as well as a pullback in cross-border bank lending in dollars”
Through balance sheet pressures, a wider bid on US dollars translates to a higher cost for maintaining these currency hedges (CIP) and borrowed forex positions that may force central banks to eventually scale back—like China.
And doing so would accelerate declines of their currencies and accentuate on domestic liquidity pressures that would likewise aggravate on global liquidity conditions. In short, one thing leads to another.
If my suspicions are accurate, then the BSP’s GIRs which has been designed to present sufficient stocks of USD are in reality artificial props—Potemkin Villages
And if the streak of USD strength will be maintained that should reflect on an accelerated tightening of the global liquidity—as consequence of balance sheet induced US dollar shorts—then the much touted “soundness” of the Philippine banking system and the corresponding “sound” macroeconomic conditions will be put to an actual—not math modeled—stress test.
This should be very interesting as almost everyone carries with them deeply held conviction that the Philippines have been immune to any forms of risk. When everyone thinks the same, no one is thinking
As a side note, no trend goes on a straight line, so expect some profit taking on the USD.
Yet if there would be any bet on the Philippines, like the Asian crisis, the much ignored and harassed informal economy would once again become country’s major saving grace. The small will save the big.
Amazing String of Records: Breakthrough History in the Making!
Oh by the way, the US dollar index was last traded at a 12-13 year high.
Inflows/panic bid on US financials hit ALL time record highs! Global debt sales have been running at the highest level ever!
Meanwhile, Yields of 10-year treasury notes posted largest 2-week rise since 2001 (read differently—bond prices of 10-year notes crashed at the biggest 2-week pace since 2001)!
As I keep saying here, we are at a critical and decisive turning point in history!
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