Since the BSP released its June data on domestic liquidity and the banking system’s lending condition, then this would just be an extension of the previous discussion. [See 2Q and 1H Fiscal Deficit Surges to 2010 Levels! The Risks and Possible Consequences of the Current Fiscal Trend July 30, 2017]
BREAKTHROUGH HISTORY IS IN THE MAKING!
We are on a cusp of history. The unfolding of an unparalleled process in the Philippine financial system has been happening real time!
The Philippine political economy now faces a TWIN Deficit!
MILESTONE fiscal deficit has now been accompanied by nearly a RECORD trade deficit. The latter represents an offshoot of the former. But since both require financing, the government has dealt these through UNPRECEDENTED monetary policies!
To bridge the ballooning financing gaps, the BSP has resorted to HISTORIC low-interest rates and the awesome MONUMENTAL program of National Government (NG) debt monetization!
And both these factors have now spurred credit expansion beyond the banking system to include the government. Borrowing for both sectors, namely the banking system and the government which again based on nominal terms are at UNPARALLELED levels!
Yes, BREAKTHROUGH HISTORY is happening, right here, right now!
The BSP absorbed some Php 66.9 billion in NG debt last June. The BSP’s actions practically erased the 5 month slack. Year to date, the BSP acquired some Php 9.8 billion of NG claims. These numbers, which are published by the BSP, is accessible to the public (you and everyone else): June data here and complete data from BSP’s financial system’s accounts.
Because the BSP’s depository survey data have hardly been discussed in the public, this would seem esoteric. But such activities signify a critical segment of the BSP’s activities.
Current process seems to be the following: NG issues debt to the public (mostly banks and financial institutions) to finance growing fiscal deficit, but such activities drain on the system’s liquidity. At the same time, the BSP buys some of the previously issued papers from the public which offsets the previous liquidity depletion.
At the end of the day, the BSP maneuvered to maintain the incumbent easy money policy IN SPITE of the ongoing crowding out process.
Again, despite the establishment’s overwhelming rhetoric that the Philippines is in good shape, still why the accelerated use of these emergency measures?
Why has the BSP been playing with an inflationary fire?
M3 growth, which spiked to 13.2% in June from 11.3% in May seem as a jump-start response to the BSP’s debt buying in the same month. And perhaps, part of the BSP’s implicit funding of the government may have arrested the recent fall in real economy prices. July’s CPI rose to 2.8% from June’s 2.7%. I am merely using government’s statistics for interpretation and not assuming its accuracy.
The BSP’s reacceleration of the domestic version of Quantitative Easing (QE) appears to have juiced up industry loans which at +17.88% in June was marginally higher from 17.57% in May.
However, growth in consumer loans lurched lower to register 22.54% in June compared to 23.56% in May.
While credit card loans have been in a turbocharged mode (June +16.97% versus May’s +15.63%), car loans dropped (+28.52% in June as against in 30.37% in May). The slowdown in car loans has resonated with car sales over the same period.
Meanwhile, payroll loan growth crashed to 24.51% in June from 40.3% in May. After a reaching a zenith at 63.06%, payroll loan growth continues to fall. So June’s downturn was hardly an anomaly.
Has the lower income spectrum been tapped out? Have financial inclusion or the migration from the informal economy to the formal economy reached a tipping point? Or could part of the payroll loan market have been diverted to the use of credit card? Or has the previous payroll borrowers opted to withhold spending thereby increase savings rate? Savings rate have been reported at all-time highs. Or could it have been a combination of the above?
For credit card, double digit growth rates begun in October. With higher consumer prices, the huge increase in credit card usage could mean that spending at present income levels may have reached its climax for them to resort to credit to augment spending.
Nevertheless, the ramifications of government’s actions have been incrementally percolating into the real economy.
These are truly interesting times!
The Economic Aftermath of Free Tuition Fees
And here’s more.
In defiance of his economic ministers, Philippine President Duterte signed a bill which puts into law the granting of tuition-free education in all state universities and colleges (SUCs).
Since I said that I would refrain from talking politics*, I can only make a prediction: this will blow a gargantuan hole in the government’s budget.
The article notes of budget estimates at Php 20 billion to Php 43 billion to Php 100 billion. I’d say that these numbers will be surmounted over time.
Reason? Basic Economics!
AT ZERO PRICE, DEMAND WILL OVERWHELM SUPPLY SUCH THAT SHORTAGES WILL OCCUR!
From the Revision Guru: (see chart in the lower pane above)
Zero pricing is an extreme form of maximum pricing; the maximum price is zero! This means that goods and services are provided free of charge. This shows that, at a price of zero, there will be a shortage (excess demand) equal to QD QS. This shortage will remain unless the price is raised to the equilibrium of Pe.
*I wrote about these before: I Am Not Alone: Economic Cabinet Members REJECT the Free Tuition Program! February 12,2007 and Wow, BSP Chief Sees The Rise of Populist Politics/Retreat from Multilateralism as Scary Developments, Scary Stuff for 2017! December 18, 2016
Let me just give a hint that the impact from free tuition will diffuse not only into fiscal balances but likewise to sociology to the government’s bureaucratic structures to other forms of social welfare.
And pray that free education won’t transform into an education crisis ala Venezuela.
Since one thing leads to another, expect more free lunch policies to be advanced.
Yet free lunch policies only assure the strangulation of the economy!
Finally, the Philippine peso posted its biggest (+.81%) rally since the week of April 14 (+1.3%). The USD peso closed at 50.16 from the other week’s 50.57.
However, such rally would not assume away the deleterious effects of the BSP’s inflationary policies as well as the expanding the free lunch populist politics.
To my mind, the peso merely responded to the US dollar’s general weakness. In short, a countercyclical rally. The peso has already been weak even as the US dollar has fumbled globally.
What happens more once the USD regains part of its legs even for just a bounce?
Use the current US dollar weakness to take a long USD-Php.
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