An insidious form of capital consumption takes place through government debt accumulation. A budget deficit means that the overall volume of national savings falls. Fewer savings imply that economic investment potential has become smaller. In the economic statistics, the expenditures — whether they are from the state or from the private side — count equally as a contribution to the national product. Yet while the spending benefits the current receivers of the government expenditures, the lower capital formation will later show up in weaker economic growth and punishes all—Antony P. Mueller
In this issue
BSP Mind Conditions the Public For Bailouts! April’s Fiscal Surplus Hits Record on Struggling Revenues and Plunging Public Spending!
-BSP Mind Conditions the Public For Bailouts!
-April’s Record Fiscal Surplus! Four-Month Deficit only Php 3.38 Billion!
-Despite Fuel Tax Hikes, National Government Revenues Struggles!
-Expenditure Shortfall: Partly Due to Budget Stalemate
-With April’s Surplus and 4-Month Balanced Budget, What’s the Massive Public Borrowing For?
-The External Risk Bogeyman…
BSP Mind Conditions the Public For Bailouts! April’s Fiscal Surplus Hits Record on Struggling Revenues and Plunging Public Spending!
BSP Mind Conditions the Public For Bailouts!
In the latest Financial Stability Coordinating Council (FSCC) meeting, the new BSP chief “assessed the impact on the Philippines of a possible global growth slowdown” and has “mapped out interventions” on such outlook.
FSCC Chairman and Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said that while the financial market remains on solid footing, he emphasized that the FSCC is deliberately forward-looking in its desire to guard the financial system against brewing systemic risks that can have negative consequences on the real economy and on the public.
“The FSCC’s mandate is to introduce timely and appropriate macroprudential policies which are meant to look after the safety and soundness of the financial system and its payments mechanism. Keeping the financial system healthy allows consumers to maximize the benefits of finance while avoiding any costs from possible disruptions,” said the Governor.
In its assessment of the local financial market for the second quarter of 2019, the FSCC specifically focused on credit, liquidity and investment risks as well as the availability of long-term funds in support of the government’s “Build, Build, Build” economic growth agenda.
“We worked against the backdrop of an anticipated global growth moderation. We agreed on a number of possible interventions, from shorter term initiatives to our longer term goals. This leaves us with a roadmap geared towards sustaining market resiliency,” Governor Diokno added.
With the policy direction clearly set by the “Build, Build, Build” program, a healthy financial system is all the more important to be able to provide diversified sources of funding as well as to be resilient relative to possible shocks. The objective ultimately is to align the needs of a growing economy with a sound and responsive financial system.
So the health of the domestic financial system stands wonderfully on a “solid footing” that only from “anticipated global growth moderation” may incite a “brewing systemic risks” that can have negative consequences on the real economy?
Really?
Whatever happened to the late BSP Governor Nestor’s Espenilla’s warnings? From the 2017 FSR: “While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. 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” (bold mine)
Have "dislocations of crisis proportions" from the escalation of "repricing, refinancing and repayment risks (3Rs)" just evaporated? How so? Via RRR and interest rate cuts?
As anticipated, the new BSP chief would spin the health conditions of the financial system.
Oh don’t worry, all the risks cited by the late BSP Governor Espenilla led Financial Stability Coordinating Council’s FSR willlikely vanish in the next FSR report.
And haven’t we been right that the centerpiece of the BSP’s policies would shift from maintaining price stability and promoting and preserving monetary stability and the convertibility of the national currency to a “policy direction clearly set by the “Build, Build, Build” program, a healthy financial system is all the more important to be able to provide diversified sources of funding”?
What happens if fiscal policy contravenes or clashes with price stability? The surging fiscal deficit has been accompanied by soaring CPI for the past two years.
Which will Mr. Diokno take as THE BSP’s priority in the case of the present conflict?
…
The appointment of Mr. Diokno had been most likely designed to ensure that the Duterte government would have unfettered access to the peso printing press!
The Diokno-Led BSP: The Weak Peso is a Net Win, Don’t Fight the BSP, Buy the USD-Php! March 10, 2019
Of course, the gist of the FSCC’s message: “We agreed on a number of possible interventions, from shorter term initiatives to our longer term goals”
Translation: Bailouts are coming!
April’s Record Fiscal Surplus! Four-Month Deficit only Php 3.38 Billion!
Now let us examine the NG-BSP’s policy direction of the ambitious “Build, Build, Build” program.
Figure 1
Of course, instead of a fiscal deficit, the National Government posted a surplus of Php 86.72 billion in April representing thelargest surplus in at least a 12-year period! (figure 1, upper window)
And because of the record-shattering April surplus, the accrued four-month deficit was only Php 3.73 billion, which represents a speck of the 3.2% deficit-to-GDP ratio target amounting to Php 631.5 billion for 2019! (figure 1, lower window)
Record surplus represents good news!
Because more resources would be left available to the use of the market economy, there should be lesser distortions, which subsequently entail diminishing pressures from the crowding out effect, reduced requirements for taxes and debt, and importantly, the easing of the NG’s use of the invisible inflation tax. In essence, capital decumulation or erosion should subside.
On the other hand, for a statistical economy that has become heavily dependent on public spending, current sources of the profit centers for the political entrepreneurs (cronies) and those industries and enterprises attached or networked to them should slow. As such, the growth deceleration would hardly be positive for their balance sheets and the GDP.
Despite Fuel Tax Hikes, National Government Revenues Struggles!
Figure 2
Such weakness has become evident in the NG’s collections.
First of all, the NG’s total collections posted a modicum growth of only .36% to Php 308.7 billion from Php 307.6 billion a year ago! Tax revenues had been up a paltry 2.83% to Php 288.9 billion from Php 280.95 billion, mainly due to the BIR’s minuscule 1.22% growth to Php 235.46 billion from Php 232.62 billion and from the Bureau of Custom’s 10.43% to Php 51.7 billion from Php 46.79 billion while Non-Tax revenues contracted 25.7% to Php 19.8 billion from 26.62 billion over the same period! (figure 2, upper window)
For April, the BIR had a share of 76.3%, BoC 16.7% and Non-Tax revenues 6.4% of the total collections.
Secondly, April’s collection woes added to 4-month performance. Tax revenues grew by scanty 7.45%, plagued by the meager 1.15% growth posted by the BIR and the modest 9.6% by the BoC. Non-Tax revenues was up by a puny 4.4%. (see figure 2, middle window)
All told, in spite of the fuel tax hike, NG’s collections sputtered significantly! How can these growth rates point to a GDP of 5-6%????
As one would note, the falling M3 (BSP made a big revision of March data) has accompanied the ongoing slack in tax revenues.
Guess why the BSP chief continues to promise of more easing?
The tight liquidity brought about by problems in the banking-financial industry, exacerbated by the aggressive public spending, has signified the unseen factor behind these.
Expenditure Shortfall: Partly Due to Budget Stalemate
The budget impasse at the Congress has been the popular side of the fiscal story that has led to the short fall in the GDP.
Figure 3
Disbursements, which accounted for 64.06%, the largest share of April’s earmark, dropped 17.8% to Php 142.09 billion from Php 172.81 billion last year.
Allotment to LGUs, the second largest segment of expenditures, also tumbled 18.47% to Php 47.97 billion in April 2019 from Php 58.84 billion a year ago. The LGU share of total budget was 21.63% in April.
The Congressional budget stalemate has indeed contributed significantly to the slowdown of public spending that led to the narrowed deficit in the four months of 2019.
But again, surpluses or balanced budgets are splendid news.
However, with the President's belated signing of the 2019 budget, such positive developments can only be fleeting.
And yet, any booster from amplified government spending should take its toll on the market economy.
The use of fiscal stimuli have typically been intended for short-term support rather than for long–term development actions.
With April’s Surplus and 4-Month Balanced Budget, What’s the Massive Public Borrowing For?
Figure 4
Finally, despite April’s fiscal surplus, public sector debt during the same month expanded 13.3% year on year to Php 7.79 trillion from Php 6.875 trillion a year ago.
Domestic debt was sharply higher by 15.7% to Php 5.21 trillion from Php 4.499 trillion last year, while foreign debt increased 8.65% to Php 2.58 trillion from Php 2.38 trillion last year.
On a month to month basis, public sector debt shrunk by .2% in April or Php 15.5 billion from March.
Year to date, public sector debt increased by Php 494.3 billion with domestic debt up by Php 428.5 billion and foreign debt higher by Php 65.8 billion for a 66:33 ratio in favor of the former.
Public debt to 2019 GDP annualized expanded to 46.27% from end of 2018’s 44.65%.
Debt service in the first 4-months jumped 21.2% to Php 274.02 billion from Php 226.05 billion a year ago. The 4-month debt service accounted for 27.41% share of the period’s public spending of Php 999.8 billion and 27.5% of the same period’s NG’s revenues of Php 996.42 billlion.
With NG borrowing Php 494.3 billion to fund a Php 3.37 billion deficit in 2019, just where has been such substantial excess of borrowed money been channeled to?
Has almost all such money meant to refinance the rollover of maturing debt?
Have the data of fiscal balance been accurate? Or has the NG been engaged in many off-balance sheets activities?
The thing is, NG continues to borrow massively even when the published deficit has barely been up in the first four months of the year.
With total banking debt up 12.62% to a record Php 8.107 trillion from Php 7.198 trillion, system leverage (public plus public sector debt) has ballooned to a whopping Php 15.893 trillion which is about 94% of the 2019 1Q annualized NGDP!
As a side note, the BSP’s consumer lending and M3 data had been revised substantially to erase March’s collapse in consumer credit and M3! No explanation has been provided by the BSP as to why Php 205 billion or 1.8% was added to March 2019 M3 data and why a massive Php 124.026 billion or 22.25% was included in Marchbank consumer lending data!
As said way back in May 2018
5) The last option would be for the NG and BSP to manipulate markets and statistics in the hope that the markets will conform and comply with their political targets.
[See Why Interest Rates Will Rise: 1Q Fiscal Deficit Blowout Financed by BSP’s Debt Monetization (QE) and Spiking Public Debt! May 6, 2018]
To emphasize, because the top and bottom line growth of the economy financed by bank credit expansion inflates tax revenues, artificially lowered interest rates subsidize the NG indirectly as well, as directly, through public sector borrowing.
Thus, the current environment is defined by the ramping up of leverage of previously the private sector only and now joined by the public sector.
The balance sheets of major companies of listed firms exhibit such intensifying buildup of leveraging, which both authorities and credit rating agencies have seemingly discounted.
And these supposedly represent sound financing?
Fundamentally, the Diokno led BSP representing the FSCC is proposing to implement even MORE bailout measures, again: “We agreed on a number of possible interventions, from shorter term initiatives to our longer term goals.”
Aside from the liquidity strain hounding the banking system, the National Government’s fiscal and debt conditions tell us why more bailouts are in the pipeline.
The External Risk Bogeyman…
So what exactly has the BSP been working on signifying a “backdrop of an anticipated global growth moderation”?
Figure 5
Each time the 10-year 3-month spread of US Treasuries turn negative or inverts, a series of rates cuts PRECEDES a US economic recession. The recession occurs during the curve steepening in response to the policy actions. (figure 5, upper window)
The US 10-year 3-month has INVERTED.
And the market has assigned an 83.6% probability of rate cuts by the US Fed during their June meeting!
The first inversion of the same maturity of domestic treasuries occurred in the Philippine treasuries last March. And this was followed by a BSP rate cut last May.
So while the US is sensitive economically to a yield curve inversion, the Philippines, which depends on the banking system for most of its credit is not? The Philippines is, thus, IMMUNE to the laws of economics?
And it’s more than the US.
Other global issues of concern:
Trump’s trade war expands to Mexico and then to India.
From the BBC (May 31): News of the Mexico tariff move comes amid a US trade war with China. Mr Trump announced in a tweet that tariffs on all goods coming from Mexico would be introduced until the country curbs illegal immigration into the US. From 10 June, a 5% tariff would be imposed and would slowly rise to 25% "until the illegal immigration problem is remedied", he said.
From the Star Online (June 2): President Donald Trump opened another potential front in his trade war on Friday, terminating india’s designation as a developing nation and thereby eliminating an exception that allowed the country to export nearly 2,000 products to the US duty-free.
The first small-big bank to fail in China.
From the Financial Times (May 29): When Baoshang Bank published its most recent annual financial statement in mid-2017, it claimed to have a non-performing loan ratio of just 1.68 per cent. Two years later, Baoshang, which has Rmb576bn ($83bn) in assets, has been taken over by the government because of its “serious credit risk”, the first such move in 18 years and a reminder of the hidden perils lurking within China’s financial system. The need for a state rescue has raised questions about financial contagion. It has also led to worries that regulators may have allowed a destabilising build-up in bad debt to go unchecked for far too long.
For those hoping that capital reserve ratios should work as a talisman against a panic, China’s experience should serve as an example.
From Bloomberg (May 28): Pressure is building in a corner of Chinese lenders’ offshore debt after the nation’s first government seizure of a bank in about two decades. Loss-absorbing bonds, known at Additional Tier 1 instruments or AT1s, plunged across several small lenders on Tuesday after a sell-off on Monday. Huishang Bank Corp.’s 5.5% AT1s sank by a record 3 cents on the dollar Tuesday, while Bank of Jinzhou Co.’s 5.5% note fell most since July and China Zheshang Bank Co.’s 5.45% bond had the steepest drop in a year.”
When a crisis of confidence occurs, prices of assets will fall far beyond stress test levels established by econometric models
And more pressure points, this time from Italy…
From the Financial Times (May 28): Italian assets were under pressure on Tuesday after a victory for the rightwing League party in the European elections, which investors said could embolden its leader and deputy prime minister Matteo Salvini to step up a budget battle with the EU, or push for early elections. The EU is likely to start disciplinary measures against Italy over its debt and deficit levels in early June, Reuters reported. Mr Salvini pledged to use “all my energies” in a confrontation with Brussels, saying the European Commission could impose a €3m fine on Italy.
Then there’s more like Brexit, geopolitical factors as the Middle East (Iran and Syria), Venezuela, North Korea, South China sea, Taiwan, Kashmir, et.al.
As the global economy weakens, geopolitical risks should amplify. How will the Diokno-led BSP know how and where, when, and how these would impact the various segments of the economy?
So wouldn’t announcing the prospects of MORE Bailouts by the BSP serve as a convenient means or an easy way out to solve a complex society?
And have we forgotten that the monetary (lowest rates and record QE) and fiscal conditions (record fiscal deficit) has been operating at emergency levels unparalleled in history?
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