Despite January’s Fiscal Surplus, the National Government Borrowed Immense Amounts, Why?

Despite January’s Fiscal Surplus, the National Government Borrowed Immense Amounts, Why?

Fiscal Surplus in January

Wow, instead of a deficit, the National Government (NG) started 2019 with a shocking Php 44.537 billion of fiscal surplus!

The public has been programmed to see the cliché that “deficits equal growth”, so what happens to GROWTH if such trend persist?

Of course, a month does not a trend make.

In 2018, the NG magnificently overshot its 3% deficit-to-GDP target of Php 523.6 billion to hit 3.2% or Php 558.26 billion, which reflected an average monthly deficit of Php 46.5 billion.

But surpluses occurred in 3 of the 12 months, the largest in April, the ‘tax awareness’ month or the deadline for the annual filing date of tax returns, which registered a surplus of Php 46.315 billion.

The annual target for this year would be another massive deficit of Php 575.6 billion. (figure 1, upper window)

Deficits are easy to incur, especially if it is about spending other people's money. 

With last year's overshooting, wouldn't this year's target of Php 575.6 billion be a cinch?

Bureau of Customs Collections Pushes Up Revenues as BIR Collections Reflects Credit Slowdown

Enlarged deficits can also occur when revenues fall below the NG’s target.

Figure 1

Government revenues grew by a modest 7.47% in January 2019. The modest rise was mainly boosted by a surge in Bureau of Customs (BoC) collections, which surged by 18.5% even as the PSA’s US dollar import growth registered only 5.85% while export growth 2.91%. (figure 1, middle window) Either the BoC has been quite effective in cracking down on smuggling or the BoC’s data may have been puffed up.

On the other hand, despite TRAIN, Bureau of Revenue (BIR) collection grew only 5.4% only reinforcing this cycle’s downward trend that has been supported by materially slowing bank credit expansion. (figure 1, lower window)

Meanwhile, non-tax revenues generated an incremental growth of only +4.53%.

If the current growth trend of tax revenue persists, deficits may surge even with little improvements on expenditures from a shortfall of revenues.

Expenditure Slowdown from Budget Impasse and Reduced NG Disbursements

Figure 2

January’s drop -7.22% drop in expenditure could be seen partly as an anomaly. Politics has been the reason for this.  Allotment to LGUs dived to ZERO because of the budget impasse at the Congress. As per the Bureau of Treasury, “No actual releases in January due to delay in the issuance of NCA relative to pending approval of 2019 GAA”.

The average % share of LGU allotments to total expenditures was only 17.21%. The average nominal value was Php 47.97 billion. Even if January’s LGU share reported 2018’s average, the NG’s fiscal balance would register a meager Php 3.4 billion.

The real reason for the “surplus” was from the material slowdown in NG disbursements. Though the rate of NG disbursements jumped 18% from a year ago, its nominal value plunged. (figure 2 lower window)

The drop in NG spending may be due to seasonal factors, or this may have been due to a possible understatement of overspending in December.

As I wrote two weeks back on the BSP's huge pullback of its QE:

Including guarantees and foreign borrowings, public debt grew by a stunning Php 649.5 billion while the BSP added Php 268.55 billion. So the NG raised Php 918.5 billion to fund a Php 558.3 billion deficit?

Could this month’s withdrawal of Php 198.2 billion by the BSP have been about excess funding? Still, the amount raised by the NG in 2018 would be a hefty Php 719.6 billion, Php 161 billion far more than the published record fiscal gap!

Or has the excess been meant as advance financing of the January deficit?

January Quantitative Tightening: The BSP Withdraws Record Funding to the National Government, March 3, 2019

Since the BSP’s QE and NG fund-raising from the capital markets exceeded the published deficit, then this must imply unreported spending activities.

And yet, if the NG overspent last December, then it would have been natural for them to cut back on expenditures.  But this doesn't seem to be the case.

Was the NG’s Excess Borrowing and Sales of NG Securities by BSP Due to Collateral Issues?

January’s surplus, 2018’s excess funding and the 11.42% jump in NG debt in January, can’t seem to square. Domestic debt vaulted 10.81% year-on-year or by Php 132.98 billion month-on-month while foreign debt surged 12.59% (YOY) or by Php 68.7 billion (MOM). (figure 3, upper window)

Perhaps January’s domestic borrowing was intended to substitute the BSP’s pullback in NG financing. If that’s the case then, NG’s debt substituted 67.1% of the QE.

The BSP’s disengagement, I previously surmised, could be from the tacit disciplining of the financial system with a stress test, their unwavering confidence on the capital markets to provide financing and the BSP could expecting that the NG’s deficit may face a setback.

Figure 3

There may be a fourth important factor.

For collateral issues, the BSP along with the NG have intended to flood the financial system with treasurysecurities. If credit issues have caused deficiencies in collateral and bank capital assets for reserves, the BSP’s sale of NG securities plus funding from the capital markets may help alleviate such predicament. (figure 3, lower window)Perhaps, the NG-BSP has jointly worked to ease financial stress as exhibited by the (inverting) yield curve.

Other than that there seems to be a black hole in the finances of the National Government. With all the money borrowed from the capital markets and printed by the BSP, what happened to these? Where did these monies go?

Summary and Conclusion

A combination of factors has contributed to the National Government’s January surplus.

Revenue growth has been modest, but the growth has emanated mostly from Bureau of Customs collections, even as reported merchandise trade has slowed. BIR's collection trends continue to weaken in synchronicity with bank credit growth and money supply growth. 

On the other hand, the budget impasse has contributed partly to the fall in expenditures. The more important contributor to the expenditure shortfall has been the slowdown in NG disbursements.

Even with the surplus, the NG borrowed heavily in January, perhaps designed to offset the drop in the BSP’s QE.

With the ongoing liquidity drought in the financial system, perhaps collateral issues may have prompted the NG to issue debt, and the BSP to unload on NG securities during the month.

The NG’s deficit can be expected to balloon even with January’s surplus, which was likely a pause.  A downturn in the economy, which should swell the deficits, will most likely prompt the neo-socialist regime to accelerate the BSP financed deficit financing.  

Interesting times!