Monday, June 19, 2017

The Impact of the BSP’s Stealth Tightening Spreads, Exogenous Events Compound on Brewing Economic Stress

During the first week of June, I pointed out that the BSP have begun to tighten.  See Oh My, Has the BSP Commenced on Tightening??? June 4, 2017

While the BSP kept current policy rates intact, a reversal in the stealth stimulus of monetizing of the national government’s debt has taken place.

First, a brief background.

Spooked by the risk of deflation, the BSP embarked on an aggressive stealth stimulus in the 2H of 2015. Such stimulus had been mainly responsible for the boost that GDP and PSE earnings generated in 2016. This issomething you won’t hear from the mainstream.

But there are costs from such political undertaking; the tsunami of free money created by the BSP spiked real economy prices.

Now in the realization of the rising risks of price instability, the BSP has substantially slowed its subsidies to the National Government (NG).  And in lieu of the BSP’s monetization, the alternative source of the NG’s present deficit financing have moved to the debt markets

With the slowdown in such subsidies, the BSP now relies on the banking system to carry the weight of greasing the wheels of the economy principally through credit expansion.

The backpedaling of stimulus has first been manifested through the domestic liquidity, particularly the favored metric, M3. Since domestic liquidity represents the circulation of money from mainly credit expansion and secondarily from the BSP, the blazing pace of liquidity expansion has translated to “too much money chasing too few goods”.

The result has not only been to send higher real economy prices but likewise a fantastic surge in the asset markets. And this has been interpreted as the G-R-O-W-T-H.

In reality, such perceived boom economic activity represents nothing more than credit inflationism.

Now actions have consequences…

 
With M3 in a seeming inflection, the government’s measure of consumer prices through the General Retail Price Index and General Wholesale Price Index has significantly dropped! The PSA reported that April’s Wholesale Price Index growth rate plunged to 5.1% from March’s 6.0% and from its apex last February at 7.5%.

Growth rates of the General Retail Price Index also plummeted in April, down to 3.9% from 4.4% in March and from the peak at 5.1% in February.

The implication is that demand has substantially been reduced or that there has been an overload of inventories or both.

Policy sensitive Consumer Price Index which reported May data at 3.1% was slightly down from March and April which tallied both at 3.4%.

The advanced CPI numbers suggest that May Wholesale and Retail data would drop again!

The BSP’s squeezing of liquidity appears to have possibly taken a toll on the construction industry.


Prices of construction materials in retail and wholesale outlets have suffered big retrenchments!

The growth rate of the government’s construction materials retail price index tanked to 1% in May, down from its peak last February at 2.23%!

The growth rate of the government’s construction materials wholesale price index cratered to 2.37% in May, down from its peak last February at 3.98!

To consider, the top three cement producers were already staggering from huge sales deficits in the 1Q even when construction material prices were on the uptrend.

What happens if the data indicated by the government is accurate? Will this translate to even more pressure not only on the construction industry but also to the upstream-downstream and ancillary sectors? [See PSEi 30 1Q 2017 EPS Suffered Massive Underperformance! More Signs of Construction Weakness May 17, 2017]

Even more, just where are the construction jobs??? Online posting of Jobstreet’s construction job openings continues to plumb lower after a short uptick. Has this signified a case of productivity boom or demand slowdown?


 
And there is more.

The BSP reported that OFW remittances tumbled sharply last May. Personal remittances cratered 5.2% the largest since July 2016, which dragged year to date growth down to 4.7% from 8.1% (wow a 58% crash in growth rates!). Cash remittances fell by even more. May’s data showed a sizable decline of 5.9% the biggest since November 2015, while year to date growth receded considerably to 4.2% from 7.7% a month ago (wow another 54.5% crash in growth rates!)! Remittances, as I have been pointing out, are being affected by diminishing returns. 

Let us see, consumer prices appear to be sending a red flag on consumer spending as a result of diminishing liquidity. In addition, growth OFW remittances have materially stumbled in the face of elevated inflation rates even as the peso strengthened slightly

So what happens now to the revenues and earnings of retail outlets? Will there be more store closures to compound on the quandary of rising number of shopping mall vacancies, as well as increased pressure on the race to build supply in the home-dwelling and in the hotel industries?

By the way, the government’s tourism data showed an 18.92% collapse in tourism spending for the first two months of the year! I will wait for the March data to see whether this has not been an aberration or not.

Moreover, imports growth crashed to negative .1% in April from 18% in March and 15.2% in February. It’s the first contraction since February 2016. Again, 15%, 18% to -.1%! (statistical fat tail)

Industrial production growth likewise plunged to 3.7% in April from 12.7% in March, 8.7% in February, and 15.9% in January.  Again, +15.9%, +8.7%, 12.7% to 3.7% (Another tail event?)

Has the above signified a case of indigestion from excess capacity in the face of slowing demand???

And two government agencies comes up with different foreign direct investments numbers: the BSP says the 1Q numbers increased by 16.6% mostly in debt instruments. On the other hand, the PSA said that total approved foreign investments dropped by 12.8% over the same period. A curious contrast in numbers.

So mounting systemic fragility hasn’t just been about diminishing domestic liquidity but likewise, has emanated from exogenous factors.

And these have been the factors for the massive pumping of domestic stocks????

Misperceptions are about to meet a rude awakening.

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