Oh My, Has the BSP Commenced on Tightening???

2016 was a year of records. There were many unprecedented actions that were largely unreported.

At Php 353.422 billion, fiscal deficits (nominal peso) swelled to its highest level ever.

The Bangko Sentral ng Pilipinas (BSP) bought a landmark Php 341.55 billion worth of the National Government’s Debt. Or the BSP engaged in the most aggressive quantitative easing ever.

The official interest rate was forced down by the BSP to historic lows.

Nominal peso based bank credit zoomed to phenomenal heights.

In gist, a historic degree of monetary and fiscal stimulus buttressed the Philippine economy!

Because there is no such thing as a free lunch, such stimulus carries with it costs.

The sharp rise in real economy prices, sustained pressure on the peso, exceptionally volatile prices of financial assets and much more… were among the key impact or costs that emerged with it.

 

Because of such costs, now the BSP appears to have second thoughts on pursuing their side of the stimulus.

The consensus thinking is that because the BSP knows what it is doing, it can only have a beneficial effect.

No one seems to ask what role does the central bank take? How have their actions affected commercial activities?

There seems little interest to understand the roots or origins of aggregate revenues and earnings. Monetary policies play a crucial role in shaping them.

Last week the BSP reported its depository survey corporations for April. To my surprise, the BSP’s net claim on NG debt posted a gargantuan Php 149.3 billion plunge for the said month! (upper window)

The lower window above illustrates that the BSP went into a panic mode in mid-2015 where it mounted an aggressive program to inject liquidity into the financial system by drastically buying NG debt from financial institutions.

Aside from impelling for private sector spending financed by bank lending spree, the BSP’s actions provided liquidity for banks to finance the government insatiable appetite to spend. The resultant spending actions spurred money supply growth in the financial system. Yes, the PSEi’s 6.8% revenue and 12.1% earnings growth in 2016 was a consequence of such historic stimulus. (April 2017 PSE report)

By the end of the 1Q in 2016, the BSP’s rate of NG debt monetization slowed but still increased nominally. The slowing rate of NG debt monetization reflected on M3 even as bank credit expansion continues to bulge. Over the last few months or since the advent of 2017, the BSP’s subsidy of NG expenditures dramatically dropped to less than 10%. M3 continues to follow such trajectory.

At the same time, the slowing M3 appears to have percolated into government’s CPI. At 3.4%, April CPI, which was similar to the other month, appears to have peaked.

 

The PSA’s General Retail Price Index has sharply dropped for two successive months. April’s 3.9% has signified a 120 bps retrenchment from February 5.1%!

With the BSP backing off from providing further subsidies to the NG, the stimulative effects of such monumental subsidies appears to be losing traction.

With the BSP’s implied tightening, this leaves all the onus of weightlifting the eps and the GDP to the banking system.

 

What prompted the BSP’s actions?

My initial impression was that government’s revenue collection in April was a smashing success such that it could have broken the lethargic trend

Since the deadline for tax filing for the previous year is on April, the month generates the most revenues. Yet government revenues (BIR, BoC, and Non-Tax) slumped by 4.36% yoy mostly due to non-tax revenues which plummeted 54.16%. Government revenues (in millions of pesos) continue to exhibit what appears to be a critical inflection point (lowest window).

Bureau of Treasury data here.

Meanwhile, April tax revenues (BIR + BoC) grew by only 3.83% - a snail pace (upper window). That’s LESS than half the Nominal GDP rate of 9.0% (NGDP) in the 1Q!!!

Yet the monthly BIR + BOC growth rates continue to shrink (middle window)!

April’s budget surplus was the second smallest in the last four years after 2015!

No wonder the government is after a tax reform. That’s because the tax reform represents a general tax INCREASE!

 

So given that the BSP will now sit on the sideline, just how will the national government finance its ambitious overall spending program especially the enormous Php 8.4 trillion infrastructure projects?

Well, the answer is by debt!

Domestic debt soared 10.37% in April. Foreign debt growth decelerated to 4.53%. Total debt swelled by a hefty 8.27% in the same month. Month on month government debt grew Php 180.6 billion!

Bureaus of Treasury data debt data here.

Debt financing (PLUS Php 180.6 billion) has taken over the BSP’s debt monetization (MINUS Php 149.3 billion).

So the public sector will now compete with the private sector for the public’s savings (both in domestic and international markets)! Yes, the crowding out effect has come into motion!

Remember, one major indirect provider of monetary liquidity in 2015-2016 has been the BSP. By retrenching subsidies to the government and to the banking sector, the BSP effectively engaged in partial tightening.

And again, the government will now again compete with the private sector for access to savings. Such crowding out will likely drive up interest rates and siphon liquidity in the system. Monetary tightening will, thus, put pressure on the USD PHP (could be happening now) and on risk assets. And risk assets have been acutely dependent on the sustenance of loose money.

And just what will happen to the continuing frantic race to build shopping malls, condo office and residential and horizontal housing projects and hotels??????????? Will vacancies explode???

And given the developing weakness in the government’s revenues and where deflation signifies an ideological taboo, it won’t take long where the BSP will most likely intervene by providing subsidies again!