Confirmed: May 2017 Fiscal Deficit was Monetized by the BSP; Softening Tax Revenues and The Phisix Casino

May Fiscal Deficit Monetized by the BSP

Last weekend I wrote (See USD-PHP Hits Eleven Year High! The Government’s Ambitious Infrastructure Projects Should Aggravate on the Peso’s Predicaments, July 3, 2017)

Nevertheless, the BSP seemed to have used QE (Php 31.783 billion) anew this May to finance the National Government May’s fiscal deficit (Php 33.421 billion). The doubling of growth rate has similarly reflected on M3.

The Philippine Treasury debt data released today confirmed my thesis.

Though total government debt rose 7.81% y-o-y (domestic debt +8.96%, foreign debt +5.72%), this was down from 8.27% in April. In nominal terms, month-on-month government debt was down Php 25.06 billion.

 

This means that for the government’s main source of deficit financing, the BSP substituted debt issuance for debt monetization.

Let me repeat: DEBT MONETIZATION TRANSLATES TO A POLICY OF DEVALUATION!

While external forces such as policies of the FED and the other major central banks may have some influence, it is the government’s policies that have MAINLY been responsible for the dilemma of the peso.

The likely purpose for such substitution is cosmetic: to portray macro stability by keeping debt levels low, but impose a stealth inflation tax on the public.

Since there is no free lunch, the costs from such artifices will bear on the peso. The USD-peso, which was up .25% for the day, closed to a new 11 year high at 50.6!

Despite GDP Boom, Tax Revenues Have Been Under Pressure!

Here is an interesting take on the Philippine government’s May fiscal balance.

Thanks to the substantial jump in revenues (14.26% y-o-y), the month’s deficit had been “moderated” largely from the +20.36% surge in spending. But the surge in revenues had mostly emanated from custom’s collections (+23.45%) and from non-tax income which almost doubled (+85.9%). Customs and Non-tax revenues accounted for 17.4% and 12% of overall collections respectively

Meanwhile, BIR collections rose by only 4.74% in May, another lackadaisical month following April’s 5.64%. BIR collections, which include VAT, Corporate and Individual taxes account for 69.6% of the government’s revenues.

Since 2012, BIR and BIR+BOC tax collection growth rates have been hobbled by a declining trend!!! (see charts above)

And such diminishing trend comes in the face of supposed “BOOM BOOM BOOM” or when credit growth has been sizzling at near record rates! And just what would happen to the government’s revenues once credit growth significantly decelerates???

Wonder why the government has been in a hurry to pass the tax reform (Tax Reform Acceleration and Inclusion Act -TRAIN) which are really general tax increases???

And to consider, expenditures will likely balloon when most of the massive infrastructure projects go online!

The supply-side is the focus of the tax reform.

It is a curiosity if the DOF have comprehensively thought through the phasing of the financing requirements from the asymmetric impact of the reform.

Chopping personal income taxes will have immediate consequence (great stuff especially for foreign investors who won’t spend their incomes). But additional revenue streams - from the likely stringent imposition of the lifting of many VAT exemptions - should come later.

So will the government continue to rely mostly on the BSP, and thus see a freefall of the peso???

The BIR will now breathe down on the necks of the self-employed and of professionals whom will be charged 8% tax if gross revenues exceed Php 250,000.

The Phisix Casino

Today, a lay observer concluded that the stock market is a casino.

My reply: the stock market serves an ECONOMIC PURPOSE. The economic function is for the efficient use of capital to enhance society’s standard of living. In particular, the channeling of savings for capital use is through the market’s pricing system. That’s the theory.

 

Here’s the reality. In desperate moves to bolster the index, during the last two of the three trading days, the Phisix jumped from red to green in the market intervention phase which spans 6 minutes! Monday’s 37.21 and Wednesday’s 26.86 points from end session PUMPS translates to more than 100% of the day’s advance! Price fixing has replaced the market pricing system!

The commentator’s observation was accurate.