PhiSYx Rescued by the Largest Mark-the-Close Pump Ever! BSP Hikes Rates by 50 bps to 2012 Levels

The PhiSYx registered its largest-ever mark-the-close ‘rescue’ pump today, September 27, 2018

But first this.

On August 13, 2014, in a speech before the Bloomberg Foreign Exchange Forum, the erstwhile BSP Governor Amando Tetangco Jr. warned against chasing the market: (bold added)

It is a fundamental truth - in everything we face, there are two circles of concern that confront us: 1) those concerns that are within your control, and 2) those outside of your control. Quite often, the latter circle is larger than the former. As market practitioners, you need to be mindful of these two circles. What can you control? Certainly your risk appetite. Controlling this when greed gets the better of you is very difficult. So in a period of low volatility such as what we have been experiencing, practice the discipline of setting limits.

This discipline will not only help you to avoid the pitfalls of "chasing the market". More importantly, this discipline will help you take advantage of the obvious opportunities, as well as unearth those that are hidden. Discipline set during the sober low volatility period will guide you when you are confronted with factors that are not within your control, especially during a frenzied high volatility period.

The headline index closed at 6,986.24

A month later or on September 23, 2014, in a speech before the ACI Phils-FMAP-IHAP-MART-TOAP Joint General Assembly, Mr. Tetangco repeated his warning:

To help manage the financial stability risks of the over-all low interest rate environment. While we have not seen broad-based asset mis-valuations, the BSP remains cognizant that keeping rates low for too long could result in mis-appreciation of risks in certain segments of the market, including the real estate sector and the stock market as markets search for yield. So far, coupled with changes in reportorial requirements and macroprudential measures, the monetary policy actions appear to have achieved some success in moderating the buildup of "irrational exuberance" in certain market segments.;

The PhiSYx was traded last at 7,271.64.

The BSP chief admonished the public when the national benchmark was testing the May 2013 high of 7,392.2.

It was also during the late 3Q of 2014 were the massive mark-the-close pumping began.

Special interest groups ignored the cautionary guidance from the BSP chief.

Helped by the frequent use of such intensified pumps, the benchmark was “forced” to hit a milestone of 9,058.62 on January 29, 2018

Echoing Mr. Tetangco on the stock market in 2014 was the recent Financial Stability Report published by Financial Stability Coordinating Council (FSCC) 

Stock market price-to-earnings ratios, on the other hand, have been persistently well past their textbook warning thresholds but there seems no evidence that investors believe the stock market to be overvalued. Whether this is a Minsky moment waiting to happen is certainly an important thought but the absence of clear-cut valuation measures for the market as a whole leaves the issue without an empirical resolution. (P.46)

The FSCC is chaired by the incumbent BSP Nestor Espenilla Jr.

The PhiSYx is presently at the level where Mr. Tetangco began his irrational exuberance spiel.

And by attributing the Minsky cycle, the FSR implies that the PhiSYx is an accident waiting to happen, once sentiment changes.

Why shouldn’t it be?

 

Today’s 1.16% mark-the-close should hold the crown as the largest since such operations began in the 3Q of 2014! And the two-day rescue pumps (totaling 1.96%) would also account for a record!

As noted before, six issues have skewed the distribution of the market cap weights of the headline index. Today’s actions only reinforced this. The biggest beneficiaries have once again been the SY group of companies. Also favored were two of the Ayala firms

73.94% of SM’s gains today were from mark-the-close! SMPH which was in the red suddenly ended up 1.09% from an end session 1.78% pump!

For issues that closed in the red, 95.03% of MBT's loss was erased suddenly at day's end.  Meralco’s deficit was mitigated by a 78% pump.

End session trades of many of these issues showed the same brokers. Even the sequence of trades had uncannily been similar. Such exude clues to the likely collusion of parties in the rigging of closing prices.

And since there is no free lunch, engineered pumps have brought about in a significant part “Stock market price-to-earnings ratios, on the other hand, have been persistently well past their textbook warning thresholds”, “mis-appreciation of risks” and the pitfalls of "chasing the market".

That’s because prices aren’t being allowed to clear or to reflect on the balance of demand and supply of capital.

Of course, this is interesting because the BSP has just raised interest rates by 50 points today. Policy rates have been raised by 150 bps in four meetings in the past 5 months.

However, the 150 bps hike has reached 2012 levels and still is a low historically

Policy rates remain significantly below the average. Interest Rate, notes the tradingeconomics.com, averaged 7.92 percent from 1985 until 2018, reaching an all time high of 31 percent in January of 1985 and a record low of 3 percent in June of 2016.

So if there should be a mean reversion, interest rates will likely zoom past the average of 7.92%.

And as rates continue to rise, the FSCC’s 3Rs or repricing, refinancing and repayment risks should only escalate:

What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner (p.22)

Policy rates were raised by the BSP not just to appease the market, but because it uses the nuclear option to provide liquidity to the system

Besides, from the perspective of the consensus, with policy rates still below the GDP, the easy money environs remain.

However, in witnessing the fall in bank assets and money supply, money must be getting tighter. And this seems to have begun affecting some of the government’s reports on prices and even BIR’s revenues

Later today, the BSP will publish August’s banking loans and domestic liquidity.

The rigged market is about to meet Minsky.

Attachments area

Will Holiday OFW remittances Boost the Philippine Peso? Forecasting the Fall of the Peso

Will Holiday OFW remittances Boost the Philippine Peso? Forecasting the Fall of the Peso

With the peso falling to a 13-year low, there have been attempts by the establishment to paint the peso in a positive light.

The peso, they assert, should benefit from the expected deluge of OFW remittances in the coming holidays.   

 

But what does empirical evidence reveal?

The turnaround of the USD-Php begun in 2013 when the domestic money supply growth soared by over 30% for 10 straight months.

From 2013 to 2017, in three out of the five years or in 60% of the time, the USD-Php has gained in the 4Q irrespective of the performance of the 4Q OFW personal remittances.

For instance, 4Q personal remittances boomed in 2013 (averaging 8.3% a month), yet the USD Php surged (+2.5%).

Last year, the USD Php fell (-2.25%) in the face of a remittance growth rate (averaging 5.2% per month) which was lower significantly than the growth rates of the pre-2013 years.

When OFW remittances registered their lowest growth rate in 2015 (averaging 4.07% a month), the USD-Php climbed by only .51%.

And a boom in OFW remittances hasn’t been in the cards.  4Q remittance growth rates have underperformed significantly its pre-2013 levels in 3 straight years

 

And general remittance trends have in a downtrend since 2014 as the USD peso soared.

Along with 2016, the 7-month growth trend for both personal and cash remittances have been the lowest since 2016.

The lesson is: USD Php price changes and 4Q OFW performance barely has any established statistical correlations. 

And the assumptions to arrive at such conclusions have been utterly misguided.

The focus on remittances assumes the price of USD-Php determined solely by USD flows or by USD supplies. But exchange rates are defined as a price of a nation’s currency in terms of another currency. Or, exchange rates operate in a pair.

From this perspective, whatever happened to the supply of the peso? Are changes in the supply of the peso neutral or irrelevant to the price of the USD-Php?

And what of the role of demand for the USD vis-à-vis the peso and vice versa?

Incidentally, London based Capital Economics predicted that the USD-Php would hit Php 58 at the close of 2019 due to the widening of the trade gap and elevated consumer price inflation.

“Totally unfounded” asserted a government official who ironically hasn’t seen the inflation rates explode and the peso wilt.

I offer an improvement to the forecast of Capital Economics.

For as long as the BSP keeps printing money, the Peso will fall.

The BSP will keep printing money to finance the grand political spending boondoggles, to prop up fiscal conditions, the welfare, and warfare state, the bubble economy and to rescue the banking system.

The pace of the downfall of the peso will depend on many factors, such as the rate of money printing, street inflation, BSP’s currency interventions, fx borrowings by the government, economic performance and etc.

There will be another factor which had been eluded by the consensus: capital flight. Once it has been recognized money printing has become a deeply embedded political imperative, capital flight should accelerate

For now…

The first rule of the Inflation Club is: You do not talk about the BSP’s contribution. The second rule of the Inflation Club is: Remember the First rule.

 

From a technical perspective, once the 2004 high of the USD-Php 56.45 breaks, the upside momentum of the USD should only accelerate.

For a chart reader, the breadth of the lows and the breakout point would be proportionate to the uptrend until its peak. Unfortunately, I am a not a chart reader.

Nevertheless, this wisdom from Ludwig von Mises should serve as my guide….

If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely. The purchasing power of the monetary unit will decline more and more, until finally it disappears completely. To be sure, one could conceive of the possibility that the process of monetary depreciation could go on forever. The purchasing power of the monetary unit could become increasingly smaller without ever disappearing entirely. Prices would then rise more and more. It would still continue to be possible to exchange notes for commodities. Finally, the situation would reach such a state that people would be operating with billions and trillions and then even higher sums for small transactions. The monetary system would still continue to function. However, this prospect scarcely resembles reality (p.60)

While I don’t see hyperinflation as an imminent and inevitable risk, the path towards it has been rolling forward. It will take political will to stop this political addiction to free money.

Will it take a recession or a crisis for this to happen?

This means that I see USD Php 60 as a very conservative target.

Stay tuned.

The Crowding-Out: Wave of Announcements for Another Round of Massive Bank Financing! The Minsky Cycle to the Minsky Moment

Instead of loving truth, most people try to make true that which they love, which is a self-delusive practice that virtually guarantees frustration and failure.  Thus, most people live in an unreal world, a world they create in their own minds based on the way they would like it to be rather than the way it actually is.  They seem to have adopted the philosophy of Ashleigh Brilliant, who once remarked, “I have abandoned my search for truth and am now looking for a good fantasy.” — Robert Ringer

In this issue

The Crowding-Out: Wave of Announcements for Another Round of Massive Bank Financing! The Minsky Cycle to the Minsky Moment

-A Flurry of Announcements for Financing Banks!

-To Diversify Funding?

-Because of Insufficient Loanable Capital For Big-Ticket Projects?

-Bank Financing in Perspective; The Crowding-Out Effect in Motion

-The Minsky Cycle and Falling Deposit Growth Rates

-Conclusion: From The Minsky Cycle to the Minsky Moment

The Crowding-Out: Wave of Announcements for Another Round of Massive Bank Financing! The Minsky Cycle to the Minsky Moment

A Flurry of Announcements for Financing Banks!

In another sign of “dislocations of crisis proportions have come as a surprise”, a flurry of financing requirements has been announced by major banks this month.

Media, backed by officials of the banks, rationalizes this with the industry’s planned capital expenditures. From the Inquirer(September 21): “The country’s largest banks have set up large debt offering programs to diversify funding sources amid rising demand for long-term loans for big-ticket projects such as infrastructure.”

The article mentioned the financing programs, through bond and commercial paper issuance, of three of the largest banks, in particular, BDO Unibank (Php 100 billion), Bank of the Philippine Islands (Php 50 billion) and Metrobank (Php 100 billion).

The big three is slated to raise a total of Php 250 billion.

To Diversify Funding?

But the borrowing spree hasn’t just been for the top 3 banks.

Here are the announcements for this week alone. Security Bank published its latest exercise of raising USD 300 million from its USD 1 Billion Medium Term Note Program (MTN). And smaller peers like the Philippine Savings Bank (PSB) and the Philippine Bank of Communications (PBCOM) also announced new rounds of capital market peso financing this week.

The banking system has been diversifying funding sources for quite some time.

Bonds. Union Bank will raise Php 10 billion through a commercial and bond offering. Philippine National Bank also has Php 20 billion in the pipeline.

Stock rights.  BDO and China Bank raised Php 60 billion in January 2017 and Php 15 billion in June 2017 respectively. BPI Php 50 billion in May 2018 and Metrobank Php 60 billion in April 2018. East West Bank raised Php 10 billion last April 2018. Rizal Commercial Bank acquired Php 15 billion from the June 2018 offering. Union Bank concluded its Php 10 billion offering this month.

Long-Term Negotiable Certificate of Deposits (LTNCD). LTNCDs represent the traditional instrument.

Metrobank also announced an LTNCD program with an unspecified amount this week. Aside from this week’s announcement, PSBreceived Php 5.0845 billion from LTNCD issuance last August. BDO received Php 8.2 billion from LTNCD issuance in April. RCBC has a Php 20 billion LTNCD offering this September. There were many more at the start of the year.

Medium Term Notes. Aside from Security Bank which got funded by USD 300 million this month, Bank of the Philippine Islandsacquired $600 million out of its target USD 2 billion programme in late August. Both RCBC and PNB raised USD 300 million each last April.

Mixed offering. China Banking raised Php 50 billion through a combination of Retail Bonds, LTNCDs and commercial papers last March.

Astonishing isn’t it? The rate of publications and announcements resonate with the hysteric coverage of inflation by media.

Because of Insufficient Loanable Capital For Big-Ticket Projects?

Figure 1

With bank lending growing at a pulsating pace of 18% to 20% a month, there hasn’t been enough for loans for “big-ticket projects such as infrastructures”? Really? (lower window, Figure 1)

If 18% to 20% hasn’t given them their profit objectives, would doubling down do the trick? Won’t credit growth rates of 30%, 40% or 50% not implode the banking system?

Banking loans to the construction sector zoomed to 37.62% in July 2018, the highest since August 2014! (upper window, Figure 1) And in my supposition loans acquired by many sectors may have been diverted to real estate, construction, and infrastructure related spending.

Haven’t been banks been putting too much faith in infrastructure spending?

The build, build and build theme will now mesh with repair, repair, and repair. Typhoon Ompong damaged infrastructure estimated at Php 2.7 billion, will these repair and reconstruction projects be added to the deficits? I know. Php 2.7 billion is just a drop in the bucket in a Php 279.4 billion 7-month deficit.

And with an estimated Php 17 billion in agricultural damages, will the policy of easing of credit lending standards by government banks to farmers not spur a swelling of non-performing loans? If so, will these not add to the current banking liquidity dilemma?

And if we take the explanations of bank officials at face value, then this means that banks, as intermediaries, are asking the public to help them finance the National Government.

That is, with more money (and resources) reallocated and redistributed to the government (and their cronies), lesser money (and resources) will be available for access by the market economy.

Some developmental economic growth story ain’t it? 

Bank Financing in Perspective; The Crowding-Out Effect in Motion

Let us put into perspective the significance of bank funding by the use of the proposed bond issuance of the three largest banks with a cumulative amount of Php 250 billion as an example. 

First, let us compare this with the industry’s business activities.

The proposed capital raising by the 3 leading banks would account for 49% of Php 510 billion of loans issued by the banking system to the production and household class during the first seven months of 2018!

So the capital raising exercise by the big three banks will offset close to half of the liquidity the banking industry has injected into the economy in seven months of the year.

In reality, the impact on the banking system’s lending activities and financial liquidity conditions will occur at the time these behemoth banks implement their capital raising programs.

Differently put, we are yet to see the ramifications of these activities on the financial markets and on the real economy.  

Yes, banks will intensify the competition for access for funds plus raging inflation!

Then, let us see this in the prism of the government’s financing.

The Bureau of Treasury borrowed Php 159 billion over the same period to finance the record Php 279.4 billion fiscal deficit.

The size of borrowing requirements by the three banks will thereby signify 57% more than the government’s 7-month borrowings.

Of course, the BSP took on most of the funding needs, which is why the suppressed loan figure. Nevertheless, credit requirements of these banks would take up 89.5% of the entire 7-month record fiscal deficit.

Next, let see this from a combined picture.

The joint claim for funding of the government and the big three will accrue to a significant liquidity drain in the system. In a numerical perspective, domestic public borrowing of Php 159 billion and the Php 250 billion borrowing requirements of the big three would translate to a staggering 80.2% of total bank lending over the said period.

Eighty percent!

In that case, money supply growth will collapse!

That’s how large the big three’s bank funding requirements are! And the requirements of rest industry should compound on the financing and liquidity pressures of the economy.

Again, the point of this is to demonstrate the proportionality of bank funding requirements relative to the financial system.

And that’s not all.

The financial environment has become exceedingly fluid.

And if capital markets will be relied on to fund ALL the requirements by the National Government for the proposed 3% fiscal deficit-to-GDP target, combined with the requirements of the three banks (alone), then the degree of liquidity drainwill almost overwhelm banking system’s capacity to generate liquidity through loan issuance. 

In numbers: The record Php 530 billion of fiscal deficits PLUS Php 250 billion credit needs of the big three banks, or Php 780 billion, would take up a staggering 89.2% share of the Php 874.3 billion of 2018’s estimated 2018 annual bank credit growth!

Interest rates would spike because of this! The era of free lunch is over!

 

Figure 2

And it would not just be the size of bank financing, not only will banks be competing with each other and with the non-banking sector, the elephant in the room would be the record fiscal deficits of the National Government.

What more if record deficits soar beyond the government’s targets!

And if rising rates eventually reduce demand for bank credit, thereby lessening bank generated liquidity, then the competition for access to savings by the banking system and the National Government will only intensify.

The crowding out effect is running in full throttle!

Despite BSP interventions, yields of Philippine treasuries continue to vault higher.

With notes rising faster than bonds, the yield curve continues to flatten. As of Friday, the belly or the spread between the 10-year and 5-year yields have inverted.  The spread between the 10-year and four-year yields have almost flattened entirely. (middle and lower window figure 2)

Narrowing spreads should compress interest margins for banks thereby reducing profitability for the banks.

And because of liquidity concerns, banks have shunned the BSP’s inflation-control facility. As reported from the Inquirer (September 19, 2018): “At the same time, banks shied away from the longer-term tenors offered by the Bangko Sentral ng Pilipinas (BSP) in anticipation of a possible interest rate hike next week during the policy setting meeting of the Monetary Board.  “Liquidity is tight and funding is expensive, therefore there’s no interest to participate in the TDF market,” said one bank treasurer requesting anonymity. He explained that banks also tend to pay off expensive deposits from their maturing placements with the central bank, hence the recent lukewarm interest in the facility.” (bold added)

Liquidity is tightening and will GET TIGHTER!

The BSP, on the other hand, will keep attempting to control rates from spiking by infusing large doses of liquidity through the monetization of deficits which should keep inflation rates elevated!

And rising rates will hurt bank investments and loan portfolios as explained last week.

So the cycle of banks soliciting for public funding will only escalate.

The Minsky Cycle and Falling Deposit Growth Rates

Figure 3

The principal source for the public’s lending to the banks and the national government will come from the banking system’s deposit liabilities.  (upper window figure 3)

Thus, should it be a wonder why the banking system’s total (peso and fx) deposit growth has been dropping steeply?

Banks have been raising USD or forex loans too via Medium Term Notes. So aside from USD requirements of the real economy, drawing from fx deposits to fund banks have likewise reduced its growth!

Back to the FSCC’s Financial Stability Report citing the sharply increasing use of leveraging by banks relative to Non-Financial Corporations (NFC)

NFCs have brought down their USD borrowings but bank borrowings have pushed up overall debt. While the USD debt of NFCs has actually tapered to USD17.1 billion at the end of 2017 (Figure 3.10), the higher USD borrowings of banks effectively raise the overall debt servicing of Philippine corporates. This is not an immediate concern and depends on the deployment of the funds. However, unless the borrowers are generating USD incomes sufficient to cover debt servicing, on balance, the higher overall debt puts pressure on USD liquidity in the country. (p.26)

So how does the government solve the “pressures on USD liquidity”?

Well, the answer is by more USD borrowing.

But this time the government does the borrowing. To bolster its current account position which registered a USD 1.27 billion surplus in August, the government borrowed from the Japanese market. (upper window, figure 4)

From the Inquirer (September 19, 2018): “Inflows in August 2018 stemmed mainly from foreign currency deposits of the national government which raised $1.4 billion from a bond issue in the Japanese market that month, and income from the BSP’s investments abroad during the month.” (bold added)

Read again the FSR: “unless the borrowers are generating USD incomes sufficient to cover debt servicing, on balance, the higher overall debt puts pressure on USD liquidity in the country”

With shrinking source of USD incomes, by borrowing more, “the higher overall debt puts pressure on USD liquidity in the country”, thus the increasing exposure to the US dollar shorts!

That’s $1.4 billion reasons to be “long the USD-Php”!

You see, the mainstream’s approach has been to solve the problem of credit by gorging on MORE credit!

 

Figure 4

So it becomes a vicious cycle. A Minsky “Financial Instability Hypothesis” (FIH) cycle.

From the FSR:

The FIH argues that a stable economy experiencing a protracted period of economic growth will eventually transit to being comprised of financial relations that make for an unstable system. This is so because economic agents become (overly) optimistic about profitability being assured by the prolonged economic growth. This sense of security encourages them to engage more and more in debt financing as well as in speculative investments. Their increasing leverage eventually becomes unsustainable and affects the viability of investments, causing their optimism to turn into pessimism and loss of confidence. What follows is a vicious cycle of deleveraging, falling asset prices and drying up of the credit market. (p.25)

Savings are limited. The intensifying and accelerating demand by both banks and the government for leverage translates to the whittling down of savings. Eventually, the heated competition for the savings will lead to an unhinged spiral in interest rates that would asphyxiate the economy.

Thus, the “increasing leverage eventually becomes unsustainable and affects the viability of investments, causing their optimism to turn into pessimism and loss of confidence”. The Minsky Moment.

As interest continues to soar, the Minsky Moment fast approaches!

Conclusion: From The Minsky Cycle to the Minsky Moment

In the race to draw funds from the public, escalating credit demand from banks, NFCs, and most importantly, the National Government will vacuum liquidity from the system thus pressuring rates higher. Street inflation, which is a consequence of credit inflation, compounds on the rising rates phenomenon.

And it needs to be emphasized that tightening money conditions as a repercussion to the deepening competition for access to funds would have widespread impact. The financial markets will be its primary transmission mechanism. Rates will rise to affect the credit markets: namely, treasury and fixed income markets, bank loan issuance and the bond markets.

And not only will the stock market see heightened competition for funds with credit markets, but also extended exposure to leverage for listed firms which should amplify the risk of collateral calls and liquidations.

That said, in spite of acknowledging risks from the Minsky Cycle, policies which brought upon such risks continues to be pursued by the BSP.

Given the problems of the banking system, the BSP sees itself as assuming the principal source of liquidity.

So the BSP will gamble with short-term fixes on structural maladjustments in the hope of kicking the proverbial can down the road.

And this diminishing role of banks in contributing to liquidity is also why the National Government will ensure the passage of TRAIN 2.0 or the Trabaho Bill.

At the end of the day, mounting signs of “dislocations of crisis proportions have come as a surprise” signifies entropic stages of the Minsky Cycle that ends with the Minsky Moment