The US dollar index was down by .7% for the week. Asian currencies mostly rallied, with the exception of the Thai baht and Indonesia’s rupiah which closed slightly lower.
The JP Morgan Bloomberg Asian dollar index (ADXY) was up by .3%. The Philippine peso was higher by .38% at Php/USD .2014 or at USD/Php 49.65.
Malaysia imposed capital or currency controls last week. Malaysia’s central bank, the Bank Negara Malaysia (BNM) said that it would limit exporters to hold just 25% of export proceeds in foreign currency, while forcea conversion of ringgit for the rest. This new mandate will take effect next week. This adds to the earlier restrictions on offshore trade via the Non Deliverable Forwards (Jakarta Globe December 2)
Meanwhile, Indonesia’s central bank, Bank Indonesia (BI) conducted its own version of QE. The BI announced last week that it bought 6.5 IDR trillion worth of 24 the trillion rupiah Indonesian government bonds sold by foreign investors in the wake of the US presidential election (The Star November 29)
I’d like to brief comments on the disclosures by the BSP and the Bureau of Treasury
Bank lending grew robustly by 17.43% in October. The average credit growth during the past 10 months has been 16.9%. That’s around 19% up from last year’s average growth credit rate at 14.19%. But that’s around 9.3% lower from 2014’s 18.62% and 26.21% higher than 2013’s 13.4%.
Meanwhile, domestic liquidity M3 growth for October was at 12.8%. It’s been 10 consecutive months fordouble digit growth with an average monthly growth of 12.37%.
With the present pace of bank lending growth, it can’t be discounted that M3 can power back to the 30% growth rate, last seen in 2H 2013 to 1H 2014.
In short, bank credit expansion, as well as, domestic money supply has been on FIRE!!!
This is what makes the Philippine GDP!
With bank credit growing at one of the fastest rate in history, it would be an irony to see the Phisix tumble.
Like GDP, the Phisix has been highly correlated with bank credit growth, but with a time lag.
For instance, bank credit growth peaked in Q3 2014, while the PSEi’s growth climaxed in Q1 2015. Thisshows a quarter’s gap for the inflection of credit conditions to be manifested in the change of price values at the Phisix.
Bank credit troughed in Q3 2015, while the Phisix bottomed in Q1 2016. Another one quarter of gap before credit’s turning point reflected on the PSEi.
On a monthly basis, credit growth soared until May 2016 from where it hovered at 17-17.5% growth rate. In the meantime, the PSEi’s meltup pinnacled in July 2016 or about a two months when credit growth crested.
In 2014, while the rate of credit expansion peaked in July, it hovered around 18-19% through the yearend. Then, the PSEi rampaged higher. It was only in January 2015 when credit growth fell below 18% where the PSEi topped in the next two months.
Growth rates of 17-18% appear to serve as a boundary between the boom and bust for the PSEi.
The bottom line: credit expansion, NOT G-R-O-W-T-H, drives the PSEi! Thus, the credit driven equity binge has translated to the most expensive bourse in Asia!
Yet the reason the PSEi has been recently falling has been because the rate of credit growth has failed to accelerate higher.
So to keep the PSEi from submerging, the establishment has used massive price fixing instead.
Credit needs to build upon credit to jack up not just PSEi but likewise GDP, corporate profits and nominal income.
As Professor Lawrence White explained: [Why are Interest Rates so Low? Alt-A.org July 6, 2016]
In Wicksell’s famous and now-standard analysis, a central bank can drive (or hold) the market rate of interest below the natural rate by injecting money, which shifts the supply of loanable funds curve to the right, increasing the quantity of loanable funds and lowering the interest rate (the “liquidity effect”). As the new money circulates it drives up prices and nominal incomes, however, which shifts the nominal demand for loanable funds curve to the right, raising the market interest rate (the “nominal income effect”). If the central bank wants to keep the market rate low in the face of the nominal income effect, it must accelerate the money injection.
And this is why sustained acceleration of credit expansion will also translate to the destruction of the peso.
The great Austrian economist Ludwig von Mises explained further: [Ludwig von Mises 5. Credit ExpansionXXXI. CURRENCY AND CREDIT MANIPULATION]
The policy of devaluation has to some extent altered this typical sequence of events. Menaced by an external drain, the monetary authorities do not always resort to credit restriction and to raising the rate of interest charged by the central banking system. They devalue. Yetdevaluation does not solve the problem. If the government does not care how far foreign exchange rates may rise, it can for some time continue to cling to credit expansion. But one day the crack-up boom will annihilate its monetary system. On the other hand, if the authoritywants to avoid the necessity of devaluing again and again at an accelerated pace, it mustarrange its domestic credit policy in such a way as not to outrun in credit expansion the other countries against which it wants to keep its domestic currency at par.
In other words, the BSP has been faced with a devil or the deep blue sea choice: temper the Philippine rate of credit growth to align them with her peers as not to incite a crack-up boom or to devalue! But either choice would lead to what mainstream fails or refuses to see.
As for the sustained simmering rate of growth of money being printed from thin air, the fall of the peso and the recent spike in oil prices, or such trifecta will likely prompt for higher consumer prices (whether this will be captured by government statisticians or not).
For October, the Duterte regime turned out to be more fiscally prudent than I expected. That’s based on the latest Bureau of Treasury report which came out earlier than scheduled even ahead of the debt numbers.
Revenues grew by 7.13%, expenditures fell by 6.87% so deficit shrunk to just to Php 2.34 billion.
Present numbers haven’t really materially changed the direction of trends whether seen as nominal (see left window) or as yoy % change (right window). The present numbers have likely manifested seasonal variances than directional changing numbers.
Yet if incumbent administration persists with its ambitious plan to expand the government at an implied rate faster than the economy, then whatever present statistics show will likely be adjusted to represent such dynamic in the future, or that market prices will account for such structural changes over time.
Whether the attempt to subsidize government expansion through private sector credit growth via inflation oftaxes, or through artificially lowered rates on government debt, the peso will serve as the unfortunate sacrificial lamb at the altar of the false glory of politics.
Two tail pieces.
One. Newton’s Law in Motion.
7 PSEi issues have, as of last Friday, traded lower than their respective January 2016 levels. The list has been led by GTCAP, which ironically set a record high in October, a clear dynamic of Newton’s Law in motion. The others have been URC, TEL, MER, AGI, EDC and GLO. EMP was traded last at around January lows. The main reason the PSEi remains elevated has been mainly due to implicit support on SM and AEV affiliated issues. Gokongwei and Ty family, who sold shares at the top, are looking very much a genius. Perhaps, the other counterparts can’t accept or afford to lose their Forbes wealthiest ranking.
Two. Duterte’s Sudden Embrace of Trump.
Unless Europe’s vote will become an issue, it is likely to expect another buying frenzy on the Phisix this Monday out of the reported phone conversation between US president-elect Trump’s and his local counterpart, Mr. Duterte.
Ironically, Mr. Duterte once called Mr. Trump a “bigot”. Mr. Duterte also said he favored Clinton over Trumpbecause he got “more class” than Mr. Trump. Mr. Duterte even reportedly challenged Mr. Trump into a fistfightbecause the latter called Filipinos “animals”.
Now it appears that Mr. Duterte has had a bizarre shift of mind. Like a teenager, Mr. Duterte appears to have even blushed over a phone call with Mr. Trump. Media appears to gush all over with Mr. Duterte’s claim that Mr. Trump invited him. That’s bizarre since the administration’s spokesperson said that Mr. Trump didn’t specifically invite Mr. Duterte.
Has Mr. Duterte been so desperate to get invited by Mr. Trump as to preempt the latter?
Apparently, all takes for a change in Mr. Duterte’s stance is recognition. Perhaps, a bridging task arranged by Mr. Trump’s local business partner here—Joey Antonio owner of listed Century Properties whom have been designated as new US envoy.
So just what happened to these numerous invective laced fulminations against US government’s historicalatrocities? Has it all just been a personality issue camouflaged with non sequiturs?
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