More on the Crucifixion of the Philippine Peso Via The Inflation Tax

In this issue

More on the Crucifixion of the Philippine Peso Via The Inflation Tax

-The Inflation Tax

-Utilizing Crisis Measure in a Boom? Why?

-The BSP’s Inflation Tax Ravages People’s Purchasing Power!

-Bullish Formula: Greater Leverage, Higher Real Economy Prices, and Rising Rates?

More on the Crucifixion of the Philippine Peso Via The Inflation Tax

The Inflation Tax

Like the Phisix the USD peso has been locked in a tight trading range ever since it broke the 50 level last February 20.

The USD peso was down .33% this week to Php 50.16 from the other week’s 50.325.

The rally by the peso reflected on the general weakness of the USD in Asia. It’s only the yuan that declined.

In early March I wrote [Another Bullseye!!! Record BLOWOUT in 2016 Fiscal Deficit Mainly Financed by the BSP! March 5, 2017]

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.

It turned out that the government indeed posted a slight Php 2.2 billion budget surplus last January, according to the Department of Treasury

 

December’s colossal deficit naturally had to have a recess. So January’s surplus should be intuitive. January’s surplus arose from government revenues, which increased 9.93%, based on Tax revenues (+13.87%) Bureau of Customs (+15.64%) non tax revenues (-21.45%), while expenditures grew at a slower (+6.67%).

However, with the BSP’s data on domestic liquidity released last week, where net claims on central government bulged again to Php 39.729 billion, this likely means the return of ever increasing deficits.

That’s because monetization of government liabilities has become the preferred route by the government to finance deficit spending. The BSP hides its actions via the inflation tax.

Thus, the peso represents the sacrificial lamb on the altar of popular politics.

As a side note, the BSP has interestingly overhauled the entire data set of Depository Corporations Survey (SRF based) but ironically historical growth figures remained the same.

The upper chart reveals that the government’s deficits were matched with the BSP’s monetization of the government’s debt. Such monetization was channeled through the banking system in 2015-17.

Utilizing Crisis Measure in a Boom? Why?

The last time the BSP resorted to the Pandora’s Box of debt monetization was in 2008-9, obviously in response to the Great Recession. Then, because GDP plunged to less than 1% (upper left), tax collections likewise declined and thus the explosion in the deficit (upper right).

However, the BSP actions signified a quick one (lower chart). It reduced the monetization program in 2008 and reversed it 2012.

And in response to the taper tantrum, the BSP did another quickie in 2013. It ceased adding into it in 2014 where the BSP holdings of government liabilities flat lined until the latter half of 2015.

Today, however, with no Great Recession and with an alleged boom in the Philippines, the BSP has resorted to an emergency measure.

To repeat, a crisis measure amidst a supposed boom! War is peace? Freedom is slavery? Ignorance is strength?

Wow! This is truly spectacular!

And today’s actions have truly been dramatic compared to the Great Recession in terms of scale, the length of use and swiftness!

The BSP’s Inflation Tax Ravages People’s Purchasing Power!

And because the banking system has been flooded with liquidity, production (lower window) and consumer loans spiked. And this was reflected on M3.

Despite the forced easing on the banking system, curiously, both production and M3 growth appear to have plateaued.February M3 rate was at 12.6%, the fifth month of 12%+ growth rate. The present rate is down from the May 2016 high of 13.5%

Meanwhile, February’s bank issued production loans was at 17.6%. This marks 9 out of the last 10 months above the 17% growth rate. The highest growth clip was at 18.08% which occurred last November.

And while industry loans appear to have hit a wall, consumer loans at 24.65% zoomed to its highest level (beyond my data which starts at 2007); perhaps since the pre-Asian crisis or a fresh record (this is a guess)

And with too much money in the system, real economy prices have been palpably soaring. Or, too much money chasing too few goods.

The General Retail Price Index (GRPI) which is defined by the government’s Philippine Statistics Authority (PSA) as “a statistical measure of the changes in the prices at which retailers dispose of their goods to consumers or end-users relative to a base year”, rocketed to 5.1% in February!

On the other hand, the Consumer Price Index (CPI) again defined by the PSA as “an indicator of the change in the average retail prices of a fixed basket of goods and services commonly purchased by households relative to a base year” have likewise swelled to 3.3% over the same period. (upper window)

So GRPI has raced past 4 year highs while the CPI which signifies “a major statistical series used for economic analysis and as a monitoring indicator of government economic policy” still remains below 2014

The difference between the measures of consumer prices based on retail declaration of prices sold compared to the estimated prices paid for or bought by consumers have significantly widened!

In my view, the reason for this is to justify the BSP’s present policy rates.

Bullish Formula: Greater Leverage, Higher Real Economy Prices, and Rising Rates?

So let me hypothesize: spiraling prices have been substantially diminishing disposable income thus prompting for a shift in consumer spending pattern. This likely means the recourse to MORE debt (via credit card +12.77% Feb versus +11.49% Jan and payroll +53.49% Feb versus +55.16% Jan) to cover the perceived loss in life’s conveniences.

So income crimped households have increasingly leveraged their balance sheets as interest rates rise!

And from the supply side, spiraling prices should entail higher operating costs and limited room for price increases that might impact gross revenues. The short of it is that corporate profits or earnings will most likely be eroded. And income shortfalls will likely lead to more borrowings.

  

So profit strained enterprises would likely increase balance sheet gearing as interest rates rise!

And if household spending power is reduced while the race to build supply remains at the current rate, then just what happens to the demand for shopping malls, hotels and casinos, condos and other property projects???????????

And if the economic activities of both households and enterprises slow, then just what happens to the government’s financial conditions? How will a broadening of deficits be financed?

And if real economy prices continue to rampage then just what happens to all cost estimates for political projects in the pipeline?

And will the BSP exacerbate the crucifixion of the peso and risk a currency crisis through the intensified utilization of monetization of government spending just to finance the present huge appetite for boondoggles???

Also as the inventory of Philippine debt has been siphoned off from the markets by the BSP, will the Philippine government begin to use more of the debt markets to finance her lust for political binges?

So the revenue pressured government will likely increase leverage as interest rates rise!

Most yields of domestic treasuries continue to climb (left). Based on ADB’s Asian Bond Online, the Philippines has registered the highest yield increase in bps year to date.

Wouldn’t all these be zealously bullish for the economy and for Philippine assets??????????