Did the BSP Drain December Domestic Liquidity To Neutralize TRAIN’s Price Hikes???

Latest government data sheds light on the incumbent policy directions

The Bangko Sentral ng Pilipinas (BSP) withdrew Php 17.4 billion from its Net Claims from the National Government account.

Though the account remains at a record high, the rate of growth has been steeply dropping.

In 2017, the QE account grew by only Php 35.73 billion compared to 2016’s explosive Php 341.355 billion. The record budget deficit of Php 353.4 billion was financed mainly by the BSP’s stealth QE.

M3 significantly decelerated last December, posting a growth rate of only 11.95% compared to November’s 13.95% or a drop of 200 basis points.

Aside from the BSP’s reduction of NG claims, M3’s reduced rate had been a product of the dwindling speed the banking system’s consumer loan portfolio as the production loan portfolio remained the same. Consumer loans expanded by 17.17% in December compared to 20.63% in November, the slowest growth rate since May 2016. Production loans were at the same 18.50%

 

 

The awesome decline in the growth momentum of 17.52% in December compared to 26.39% in November and 32.58% in October, revealed by the banking system’s consumer loan portfolio, exhibits the eroding conditions of consumers

The contrasting pictures presented between sales and its financing accounts for the bizarre angle from the data

Or, the sharp deceleration in December auto loans came with December auto sales, which spiked 33.4%, largely in response to price increases from the new tax regime.

The gaping chasm in growth rate data either must have been filled by cash sales or that one of those numbers must have been inaccurate.

Back to consumer loans. And while credit card growth accelerated (20.37% in December, 19.83% in November), the payroll loan portfolio trend continued its southbound trek (+8.87% in December, 9.44% in November).

The quickening credit card growth has been inadequate to offset the slack in the rate of change of banking system’s auto loan portfolio.  Credit card and auto loans have an equal 42% share of the total consumer loan portfolio.

Interestingly, M1 (currency and peso demand deposits) dropped substantially (15.88%) in December (compared to November’s 17.23%).

Applied to retail finance, the M1 data suggests that cash sales have been considerably down. And only part of the slack in cash sales may have been substituted by credit card sales.

Could these be signs of consumer woes in December?

 

The National Government Debt data of the Bureau of Treasury has been the most revealing

It is unusual that the updated government debt numbers have been published ahead while the fiscal balance remains dated November.

Moreover, the publication of the fiscal balance has usually been in the third or fourth of week of every month. December’s data has been substantially delayed. The question is why???

As one would note, domestic debt soared by a whopping 12.89% in December pushing total debt growth to 9.23%. On a month-to-month basis, the NG issued an astounding Php 233 billion worth of debt, which constituted 41.5% of total debt growth in 2017 (Php 562.17 billion)!!

These numbers indicate of the likely scale of the budget deficit in 2017. Since November’s deficit was at a record Php 243.5 billion, a Php 200 billion deficit in December would tally to Php 443 billion or Php 90 billion higher than 2016’s record Php 353 billion!

Yet, exploding deficits reinforces the transition of the nation’s political-economic structure.

Here’s the rub. The reduction of BSP’s claims on NG, the slowdown consumer loans and the explosion in debt issuance by the National Government has been interlinked.

These factors had a role in the diminishing rate of change in domestic liquidity

The “crowding out” effect comes into the picture. Bank lending had been crowded out or displaced by the surge in government debt.

Consumers bore the yoke of the transition.

HB 10963 (Tax Reform for Acceleration and Inclusion) is the other key factor.

I suspect that the BSP has anticipated the price dislocations from the new tax regime.

To counteract these, it reduced its claims on NG liability and allowed the National Government to raise funding from the marketplace, knowing that these would contribute to the siphoning of liquidity from the system.

In this way, the reduced “demand” from diminished liquidity would partly neutralize price disruptions from the new tax regime

And if my suspicion is accurate, the BSP action comes at the cost of earnings of the private sector, mostly in the retail industry.

In that context, December’s fall in M3 fueled the rally of the peso.

Alternatively, I suspect that the BSP may have reactivated its QE in January to have recharged the USD-Php.

Since every action has consequences, expect the intensifying interventions in the economy to have unintended consequences.