The Bureau of Treasury finally came through with the much-belated publishing of government’s budget balance in 2016.
And the result was a WOW! A record BLOWOUT in deficit!
Remember this?
The Duterte regime has very ambitious spending programs covering all aspects of government (bureaucracy, welfare, warfare and public works). This will compound on the financing needs by the government, which will be funded partly through the raising of taxes, and mostly through credit expansion and the monetization of spending by the BSP.
Such actions essentially underwrite the coming dramatic fall of the peso (regardless of what the FED does—or even if the FED embarks on another QE).
See As USD Peso Touched 50, a November 2008 Low and My Yearend Target, Pandemonium and Confusion Engulfed the Mainstream! November 27 2016
Or how about a rewind…my pre-elections forecast?
Given that government will assume a bigger role, then this means that the rate of growth of government spending should rise faster than the economy. Therefore, fiscal deficits will only balloon.
Even more, the cost of financing a bigger government should translate to lower economic performance…
And finally, since deficits will bulge, the government will have to raise taxes and or fund itself with more debt. Again, higher taxes in itself will not automatically weaken the peso. For as long as it can be paid for by taxes, more debt will also not contribute to the attenuation of the peso. The debilitation of the peso will occur when government increases money supply to directly monetize its spending, or, beyond the ability for taxes, employ bank credit expansion to fill the spending gap by purchasing government debt
See Phisix 7,150: Prospects of a Strong Man Rule Sends Peso Tumbling, Why A Shift to the Political Left Will Mean A Weaker Peso May 1, 2016
Figure 1: Record Deficit, Revenue and Expenditure Growth
And the deficit explosion came with the worst mix: the shrinkage in revenues PLUS a blast off in expenditures!
Because government revenues grew by only 1.1% last December, 2016 revenue growth clocked in at 4.12%. This accounted for the lowest growth rate since 2010!!! (see lower window figure 1)
And notice that government revenue growth rate peaked in 2012, decelerated through 2015 before last year’s meltdown.
On the other hand, because government expenditures ripped by a stunning 18.8% in the last month of 2016, the year’s growth outlays accrued to an incredible 14.3%; this was the highest growth clip since 2007!!! 2016’s growth rate 14.3% edged out 2012’s 14.13%.
Record fiscal deficit wasn’t just a single month rendition though.
In the second semester, aside from December, government spending boomed by a staggering rate of 29.5% and 33.2% in September and November, respectively!!!
In perspective, 65% share of 2016’s Php 353.4 billion record deficits was acquired by the Duterte regime while the residual 35% was incurred by the previous Aquino administration!
The Php 353.4 billion record deficits accounted for 2.45% of the government’s 2016 GDP (NGDP 8.6%, RGDP 6.8%). Yet the latter number, I believe had been inflated.
And December 2016’s deficit of Php 118.229 billion was the largest monthly funding shortage since 2008, or the earliest date available in the current Bureau of Treasury’s monthly data
The record bulge in funding requirements only validates my expectations that there would be NO tax cuts (or tax reform). Instead, the Philippine government will most likely impose a series of tax hikes and expand financial repression measures (including the inflation tax).
And if collections remain insufficient to finance aggressive spending, then expect the war on mining to reverse.
Figure 2: Revenue Composition, Debt Performance
The plunge in 2016’s top line was mostly due to the collapse in non-tax revenues (-26.55%). Non-tax revenues accounted for 10% of overall collections.
Collections from the Bureau of Internal Revenue (BIR) posted a 9.34% growth rate in 2016. Although this was an improvement from 2015’s 7.38%, such number came significantly below the 2010-2014 levels. The BIR’s tax collection rate, which accounted for 71.3% share of 2016’s revenues, has been in a downtrend since 2012.
Collections from Bureau of Customs (BoC) jumped 7.84% compared to 2015’s -.472%. BoC collections have been quite volatile. Yet the share of collections from BoC accounted for 18.1% of 2016 intake.
Nevertheless, the collection rates of BIR and the BoC has been insufficient to cover the void generated by non-tax revenues.
Fiscal deficits mean greater government spending relative to collections covering a given period. Because collections have been insufficient to cover spending, thus the government will have to source its funding through other means. They do this either through debt (future taxes) or through central bank monetization (inflation tax).
Total debt rose by Php 135.7 billion or 2.28% with most of the gains emanating from external debt which went up by 4.15%. The latter may signify the currency effect of the present debt stock. Based on BSP’s data, the average USD peso rose by 4.4% to Php 47.4925 in 2016 from 45.5028 a year back or in 2015.
The 2016 debt figure translates to the financing of 38.4% of deficit requirements. But since this most likely includes the effect of changes in exchange rates to the external debt stock, this means debt has contributed to much less than the indicated numbers.
Clearly, by avoiding the debt channel, the government intended to embellish their debt profile to project the image of a “strong macro”
But there is no such thing as a free lunch. The government’s spending spree has to be financed.
Figure 3: Net Claim on Central Government, Banking Loans, Liquidity and CPI
With debt out, this leaves the stealth inflation tax.
In 2016, net claim on central government as reported by the Bangko Sentral ng Pilipinas or the Philippine central bank, rocketed by a staggering 239% to Php 344.45 billion from 2015’s Php 144 billion. (upper pane figure 2)
The Php 344.45 billion suggests that the BSP financed 97% of 2016’s acquired deficits!
And December’s phenomenal record Php 118.23 billion funding shortage was also 92.4% covered by the BSP’s net claim on central government which chalked in at Php 109.23 (month on month nominal)!!!
As a side note, because the net claim on central government went down by Php 28.18 billion, perhaps the government registered a surplus in January 2017.
BSP’s actions were not just aimed to finance deficit, it most likely targeted monetization as means to “stimulate” the economy. Two birds with a single stone.
Again, since the BSP went into a bond buying spree (Quantitative Easing Philippine version), growth rates of the banking system’s loans, domestic liquidity (M3) and CPI suddenly and simultaneously perked up! (lower pane figure 2)
As I previously noted, the non-political sensitive government inflation measures as General Retail Price Index (survey based on price paid by consumers at retail outlets) which for January 2017 continued to climb past 2014 high (!), General Wholesale Price index (December 2016), Construction Materials Wholesale Price Index (January 2017) and Construction Materials Retail Price Index (January 2017). All four price indices have soared to three or four years highs!!!
Hence, a substantial degree of nominal growth attained through (gross) sales, taxes paid and corporate profits were mainly due to the huge doleout by the BSP to select firms (who were the biggest bank borrowers), and most importantly, to the government.
Yet the difference in the impact of BSP chief’s “trickle down” or negative real rates policies with developed economies has come down to aggregate balance sheets of the private sector.
Credit easing policies employed by central banks in the developed economies has signified attempts to administer previous overleveraging through lower rates—implemented through unconventional means—Negative interest rates (NIRP) and Large Scale Asset Purchases (QE).
On the other hand, credit easing policies employed by the BSP has revved up a credit cycle in relatively less leveraged balance sheets. Because such stimulus has been in place since 2009, the effect of additional stimulus has been immediate: increased credit uptake, spikes in domestic liquidity, upside pressures in nominal prices and the weakening of the currency, the peso.
But again, upside pressures in the real economy prices, as well as, the corrosion of the peso will either force the BSP to reverse its credit easing methods or the markets will.
In a working paper, Mr. Claudio Borio, head of the monetary and economic department in the Bank for International Settlements, together with Ms. Anna Zabai recently warned
Unconventional monetary policy measures, in our view, are likely to be subject to diminishing returns. The balance between benefits and costs tends to worsen the longer they stay in place. Exit difficulties and political economy problems loom large. Short-term gain may well give way to longer-term pain. As the central bank’s policy room formanoeuvre narrows, so does its ability to deal with the next recession, which will inevitably come. The overall pressure to rely on increasingly experimental, at best highly unpredictable, at worst dangerous, measures may at some point become too strong. Ultimately, central banks’ credibility and legitimacy could come into question.
And with further plans to expand the government’s activities, such as the proposed recruitment of 14,000 new soldier to augment the Armed Forces, which means not only a boost in manpower spending, but as well as, required logistics to back them, deficits will continue to balloon. And the process of “crowding out” of private sector activities will only escalate.
Hence, last week’s technical rounded bottom breakout by the USD peso which targets 59.50 has been solidly backed by present policies. The BSP has been purposely weakening the peso in order to finance the government! [See My Major Homerun: Philippine Peso Dives to RECORD 10 Year Low! Don’t Tell the Public That The BSP Has Pursued a Weak Peso Policy! February 26, 2017]
As one would note, a historic process is in the making!
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