January Quantitative Tightening: The BSP Withdraws Record Funding to the National Government

In this issue

January Quantitative Tightening: The BSP Withdraws Record Funding to the National Government

-BSP’s QT: Reverses Funding to the National Government by the Largest Amount!

-The BSP’s Possible Intentions

-The Stress Testing of the Economy; Fiscal Deficit Understatement: Customs Collections Jumped on Import Crash?!

-Deficit Financing by Capital Markets? Will the NG-Banking Crowding Out Intensify?

-Will Intensifying Liquidity Strains Benefit the GDP and Stocks?

January Quantitative Tightening: The BSP Withdraws Record Funding to the National Government

BSP’s QT: Reverses Funding to the National Government by the Largest Amount!

The Bangko Sentral ng Pilipinas (BSP) has done the unthinkable! It has withdrawn DIRECT financing to the National Government (NG) by a staggering Php 198.153 billion in January 2019, the largest monthly amount since at least 2002! (figure 1, uppermost window)

The BSP has done the nation a great favor (at least temporarily)

Figure 1

From the BSP’s January Liquidity report: “Growth in net claims on the central government likewise slowed to 4.7 percent in January from 16.4 percent in the previous month.”

January’s stunning pullback was equivalent to 73.9% of 2018’s Php 268.214 billion financial support provided by the BSP to the NG’s aggressive public spending driven record budget deficit! The BSP financed 48.04% of the NG’s 2018s historic fiscal deficit of Php 558.26 billion!

The BSP has intensified the tightening of its monetary policy, not through the interest rate channel, but thru the monetization of the NG's spending. To put it more precisely, the financing of the NG's spend, spend and spend has been rolled back by the BSP! 

As such, the traditional measure of money supply growth, represented by M3, has plummeted to a rate of 7.75%, the lowest level since January 2015! (Figure 1, middle window)

Since 2015, the undulations of M3 and the rate of change of net claims on NG have been rhythmically similar, which are indicative of tight correlations. The tight correlation points to the increased contributions of the BSP’s financing of public spending, through the fiscal deficit, to money supply growth.

Another ramification: With the sharply reduced supply of the peso relative to the USD, naturally, the peso rallied.

The implication is that strengthening of the USD the peso has not only been driven primarily by bank credit expansion, but also by the recent use by the BSP of its emergency arsenal, the monetization of the fiscal deficit.   (see figure 1, lower window)

The BSP’s Possible Intentions

Is this a radical change of stance by the BSP?

Why has the policy of retrenching money supply growth been sustained by the BSP when CPI rates have been crashing? 

Is the BSP concerned that some banks have continued to swamp the public with fantastic rates of loan issuance, thereby amplifying systemic risks?

For instance, gross interest revenues of China Bank and BDO spiked by a breathtaking 32.7% and 29.31%, respectively, almost DOUBLE the industry’s total loan portfolio growth of 15.62% in December 2018 (year on year)! Amidst a slowing economy, such aggressive lending activities won’t result in MORE distressed debts???! Wouldn’t this be a recipe for more Hanjin debacles?

Is the BSP tacitly disciplining the financial system at the same time putting to a stress test the much-touted resiliency of domestic demand?

Is the BSP unwaveringly confident that the capital markets will sufficiently provide, as the principal source of funding, all the requirements of the targeted deficit of Php 575 billion in 2019?

Or has the BSP been operating under the implicit impression that the NG’s deficit target for 2019 (Php 575.6 billion) may face a setback?

Figure 2

Yes, three forces have now aligned to drive financial conditions.

As noted earlier, bank credit expansion has primarily been responsible for the hastening cascade of money supply growth.  That is, aside from January’s BSP’s Quantitative Tightening (QT) AND the escalating shortages of liquidity in the banking/financial system.

The repercussions from the stunning liquidity pullback:

Bank lending dived broadly in January 2019!

Production loan growth skidded from 17.17% in November and 15.83% in December to 15.49% in January.

On the other hand, the banking system’s consumer portfolio hurtled lower, from 13.82% in November and 13.62% in December to 12.74% in January, a 4Q 2015 low!

With the growth rate of cash and consumer credit considerably down, what financed the spending by consumers?  What has been the source of consumers wherewithal? Did they draw from their savings? Did they borrow from the shadow banks?

Though marginally down from 21.06% in December to 20.64% in January, the upper strata of the income class remained extravagant spenders as evidenced by the still brisk growth rate of the credit card peso volume.

According to the BSP led FSR, the more affluent households have higher exposure to more expensive debts (mostly long-term such as vehicle and real estate).  The affluent households continue to build up massive amounts of leverage on their balance sheets.

On the other hand, debt by households with low savings or with thin financial margins “suggest vulnerability to tighter financing conditions and increased likelihood of default”. For the leveraged middle and lower income class, reduced access to credit makes them more vulnerable.

A decline or lower rates of investments as exhibited by the material slowdown in the loans to the industry, most likely, extrapolates to declines in jobs and incomes for workers and reduced profits for entrepreneurs and or business owners.

The sharp fall in the M1 growth rate or cash in circulation (and transferable deposits) translates to the low turnover of cash transactions.

For an economy dependent on cash, the intensifying decrease in the rate of cash growth must herald a substantial slowdown production and consumption activities, thus the real economy.

Such analysis premised on the accuracy of the BSP’s data.

The Stress Testing of the Economy; Fiscal Deficit Understatement: Customs Collections Jumped on Import Crash?!

Election spending has been bandied popularly as providing stimulus to the 2019 GDP.

However, actions by the BSP and the Banking system appear to be countermanding the likelihood of such supposed advantage.

Figure 3

The slowdown in credit has become apparent in vehicle sales.

Backed by the almost halving of credit growth rate, auto or vehicle sales plunged 15.03% in last January. Month on month vehicle sales crashed by 15.83% Auto loans grew by 10.43% in January from 20.33% in the last month of December. With TRAIN’s first year, its impact on vehicle sales must have diminished now.

Is the BSP gambling with the NG’s ability to raise financing for its ambitious public spending programs by choking the financial system’s access to credit?

The National Government’s tax revenues have tracked tightly the conditions of banking loans.

As the growth in total banking loans slowed to 15.26% in January 2019 from 15.65% in December, and 16.89% in November,tax revenue growth slowed to 4.55% in December and 6.12% in November.

BIR collections even contracted by -.27% in December from 7.08% in November!  

January 2019’s bank lending conditions, which was even lower than the previous month, may likewise be reflected on taxes. 

I might add that the NG has understated substantially the published record Php 558.3 deficit in 2018.

The Bureau of Customs registered a sharp 21.21% jump in collections last December, even as the Philippine Statistics Authority or the PSA’s import data showed a -5.17% contraction when converted to the peso (average monthly).

Unless there had been extraneous collection activities, like fines, in December, how can the Bureau of Customs show significant improvements in revenues when imports crashed?! (see figure 3, lower window)

That said, tax revenues would have slowed more if the reported Customs collections had been lower. With the same rate of spending, lesser revenues would widen the fiscal gap. 

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?

Deficit Financing by Capital Markets? Will the NG-Banking Crowding Out Intensify?

Figure 4

If tax revenues slow by even more from the BSP’s tightening, unless public spending declines, the fiscal gap would widen beyond the NG’s target.

And if the NG will depend on the capital markets for funding, the crowding out effect will reduce further money supply growth in the system. Additionally, relying on the capital market will raise the public’s interest in the speeding rate of the NG’s debt levels.

Of the various categories of government securities, monetary policies have the most influence in the T-Bills which serve as part of the BSP open market operations.

With the steep decline in CPI, ironically, T-Bills haven’t followed the footsteps of their mid and long-end peers. As of this week’s close, 1-month bills (PDS data) raced to fresh multi-year highs!

Of course, the slowdown in bank lending, higher T-Bill rates, falling interest margins and rising NPLs should aggravate the liquidity shortfall and instability in the beleaguered banking system. Banks will continue to COMPETE with the NG for access to savings.

Proof?

From Philstar (February 27): Aboitiz-led Union Bank of the Philippines is raising another P30 billion via the issuance of bonds or commercial papers as part of its debt liability management program and at the same time augment the listed bank’s loan book.

The slowdown in bank lending and abrupt backpedaling of BSP support should have a feedback loop on the real economy.

Will Intensifying Liquidity Strains Benefit the GDP and Stocks?

Figure 5

Like Q4 2018, GDP numbers, like all statistics, can be cooked. But will the slowdown in the real economy be forceful enough for the Philippine government to admit it? (see figure 5, upper window)

On the trading floor, many were dumbfounded by the contradiction seen in published profits of banks and the renewed selloff in bank stocks.

Liquidity drains have hardly benefited the stock market over the long run. (see figure 5, lower window)

I mentioned at the start that the BSP did the nation a favor by its sharp tightening of liquidity by scaling back on QE.

The reason for this is that falling money supply growth translates to the diminishment of the redistribution or diversion of funding and resources towards bubble activities. It allows wealth generators to recover. Unfortunately, bubble sectors will shriek at the loss of funding, which should force into the open losses and credit problems and expose the true state of their unproductivity.  

Needless to say, given that the political economy has been dependent on these twin bubbles (race to build supply and the neo-socialist bubbles) politicians will pressure the monetary authorities to accommodate them.

And such is the reason that the BSP’s remarkable restraint should prove to be fleeting.

As noted above, the BSP funding may be about reducing excess funding, or it may even be about raining down collateral (Treasuries) on the collateral-short financial industry, or the ideal move, to discipline banks from over issuance of loans. 

In the year of the pig, expect the unexpected.

Buy the USD php on dips!