Last week, I expounded on the marginal changes occurring in the government’s GDP.
Because of the combined main issues of liberalization (a wonderful thing) and the BSP’s first emergency measures in 2008-2009, the bubble sectors, namely, trade, real estate and construction continues to absorb immense amount of resources (measured by industry GDP) and finances (measured by share of bank credit) at the expense of the others.
By the end of 2016, these sectors accrued a significant 38.62% share of the GDP and 38.31% share of the BSP’s banking credit portfolio.
Yet to include the financials and the hotel sectors, these sectors would account for about half of the share of GDP and banking system’s credit
The gravitation of resources and finances into these sectors, which are symptoms of the frantic race to build supply, has only increased concentration risks. Such are manifestations of malinvestments which have been nurtured by artificially low policy rates.
Bubble’s Crowding Out Effect on GDP; Record Trade Deficit in 2016
Naturally, the GDP share gained by these sectors translates to an equivalent GDP share lost by other sectors.
It’s interesting to note that manufacturing, agriculture, and electricity have been trending down prior to 2008. However, since the BSP’s first emergency measure, the scale of the declines have only accelerated.
Meanwhile, the share of transportation has risen from 1998 until 2005. From then, transportation has joined the rest downwards.
The share of mining has steadily risen from 1998 until 2011. Apparently, commodity bear markets, the previous regime’s war on mining plus shifting interests to the popular sectors caused the industry’s share to tumble too.
The hotel industry, which is part of the other sector category, has been revitalized with the BSP’s actions.
Gains in the share of the bubble sectors imply of OVERINVESTMENTS. On the other hand, reduction in the share of ex-bubble sector translates to UNDERINVESTMENTS.
For instance, the underinvestment in agriculture translates to increased sensitivity to price changes given the limited supply. Demand and supply shocks may easily incite price spikes in food products. From the government’s data, food accounts for the largest share of the consumer spending basket.
UNDERINVESTMENTS translate to investment opportunities too.
But don’t expect any significant changes in the present environment given the yield-chasing and trend-following dynamic on such popular sectors.
The public’s psychology on such bubble sectors has developed into a religion. The belief is that there is a SINGLE path to paradise.
And ex-bubble sectors have linkages with the popular sector. Demand from these underinvested industries partly depends on such popular sectors
These sectors are not entirely impervious to any drastic market clearing process which the bubble sector may endure. But once the rebalancing process begins, the same sectors will incur or take much less damage compared to its popular contemporaries
Besides, given the lengthy period of underinvestments, these sectors are the likely beneficiaries of such rebalancing process. But this won’t happen overnight but through a longer cycle. And these would be conditional to the political environment too. Will investments in these sectors be considered palatable politically?
Well, international merchandise trade has been affected too. Since the new millennium, exports have played a diminishing role in the GDP.
With manufacturing as its main input, the decline in the share of manufacturing to GDP has resonated with the health of exports
Because demand has to be filled by supply, imports have largely substituted for the gap in supply caused by manufacturing deficiencies (partly through politics, e.g. increased regulations due to Kentex Slipper fire)
Like the record fiscal deficit in 2016, trade deficit turned to a RECORD Php 1.3 trillion! The share of the trade deficit to GDP has reached an astounding 9% - higher than 2002’s 8.94%.
Exports are used to pay for imports. But the Philippines remain lucky enough to have remittances and BPOs to cover such vacuum.
Nevertheless, the Philippines posted TWIN RECORD DEFICITs in 2016.
The Philippine economy has been spending FAR MORE than it has been earning. Worst, such spending binge has INCREASINGLY been financed by credit and by national government debt monetization by the BSP predicated on increased fiscal expenditures.
And the government’s proposed aggressive infrastructure programs will only exacerbate the current conditions.
At the rate the current dynamics have evolved, not even BPOs and remittances will be enough to cover them.
Moreover, as the GDP dynamic has shown, the rise of the bubble sectors (shopping malls, real estate and hotels) has crowded out the other sectors.
With aggressive government infrastructure spending plans, the same crowding out dynamic will occur most likely at the expense of the private sector in the real economy.
And the same crowding out dynamic will impact financing which will be ventilated primarily through the exchange rate values and through interest rates.
Don’t forget, such twin deficits will eventually force the government to borrow USD in order to finance, not only its spending but for domestic USD liquidity purposes.
When I was still on the side of bulls I wrote this: [Philippine Government Applies Keynesian Remedies, Boom Bust Cycle Ahead January 20,2012]
So the Philippine government via the BSP will push real interest rates deeper into negative territory (left window) that will punish the saving public and the average fixed income investors. This represents a policy which redistributes resources from creditors (again savers) to borrowers (I would guess would be mostly cronies), that benefits the politically privileged banking system (as intermediaries), aside from encouraging the public to take on speculative activities (stock market boom as previously predicted) and a misdirection of capital towards long range investments. Such policies also will promote consumption activities which will likely lead to trade deficits.
These are composite ingredients to the business cycle or boom bust cycle.
I should have written record trade deficits
Oh, a bonus quote on the predicament of Indonesia’s 7-11 franchise.
From Nikkei Asia Review (July 15, 2017) [bold added]
On June 22, Modern Internasional announced the closure of more than 100 7-Eleven shops in Indonesia run by its subsidiary, Modern Sevel Indonesia. At a news conference, Donny Sutanto, a commissioner with Modern Internasional, said the company had been "too aggressive" in expanding the business in the early years. For example, it built a central kitchen that can supply food for up to 500 stores.
"In 2009 and 2010, the performance of our stores was so good, that it became the subject of discussion everywhere. ... After that, we opened more stores quite quickly and aggressively," Sutanto said.
But competition was intensifying, with many new players coming into Indonesia's convenience store industry. Sales began dropping following the government's ban on alcohol sales at convenience stores in April 2015, and as the economy slowed. That affected people's purchasing power, he said.
Modern Internasional posted a net loss of 58 billion rupiah ($3.75 million) in 2015, a figure that ballooned to 636 billion rupiah last year. In the first quarter of 2017 alone, the publicly listed company reported 447 billion rupiah in net losses. Sutanto said the 7-Eleven business has been the main contributor to the losses. "This is a good lesson for us," he said.
The company said it will sell land and buildings that it owns to pay off its remaining debt. For the bulk of its 7-Eleven stores that are run under lease contracts, Modern Sevel will end the leases or negotiate with parties that assume control of them.
Rings a bell?
June GIR Skids 4.54%
Finally, the audacious infrastructure program has hardly taken off, yet the government’s stock of foreign currency reserve remains under pressure.
Last June, Gross International Reserves (GIR) fell by US$764 million to US $81.41 billion, mainly due to sales of the BSP’s foreign investments (US$ 683 million) in support of the peso. Part of the decline has been the slide in gold’s USD price. Nevertheless, the BSP continues to use FX derivatives to bolster its GIR.
The rate of the decline of the June GIRs at -4.54% has reached 2014 levels or the year of the taper tantrum.
It would be interesting to see how GIRs will continue to fare as the USD-PHP weakens.
I suspect that the BSP intervened aggressively in the USD-PHP market at the close of the two sessions last Tuesday and Wednesday. The USD PHP was nearly at 50.9 when a big seller of USD brought the USD Peso to 50.53 precipitately. Such interventions, which was timed with the close, happened in the course of about 3 minutes.
The BSP has been airing their intentions that they “will intervene if they detect excessive volatility”. But the public doesn’t know how the BSP defines “excessive”. My guess is that “excessive” is when it goes against the expectations of the BSP leaders.
Interventions may work over the short term. However, when the BSP is engaged in NG debt monetization, it’s like the right hand doesn’t know what the left hand is doing. Such blatant self-contradiction on their policies extrapolates to the needless squandering of the public’s resources
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