In effect, debt financing allows government to spend money today while foisting the tab on future taxpayers – many of whom, literally, aren’t yet born. Politicians eager to win votes are thus prone to borrow and spend excessively because borrowing allows the current generation to free-ride on the incomes of future generations—Donald J. Boudreaux
In this issue
Lower GDP Trend Justifies Higher Stocks? Restrained 1H Public Spending: What Happened to Build, Build and Build?
-Does a Trend of Lower GDP Translate to Higher Stocks?
-Restrained Public Spending by the National Government in 1H 2019, What Happened to Build, Build and Build?
-June, 2Q and 1H Government Revenues Underperform
-In the Face of Spending Restraint, Why the National Government’s Record Cash Hoard from Record Borrowing?
-Summary
Lower GDP Trend Justifies Higher Stocks? Restrained 1H Public Spending: What Happened to Build, Build and Build?
Does a Trend of Lower GDP Translate to Higher Stocks?
PhiSYx 8,000 must a magic portal.
Such threshold and its encroachment have shaped perceptions of dimensions of a socio-economic condition operating on a linear path. By the way, July 2019’s 8,000-breach marks the fifth occurrence in 5 years and the second in 2019.
And the aging of repeated visitations of this level has only entrenched convictions that equity or asset inflation resonates with economic glory, therefore, transforms into an entitlement for the consensus.
And anything opposed to such creed, in the context of facts, theory, and reasoning, must be refused, rejected, and or ignored out of existence. For them, the shriller the screams by a crowd in unison, the greater the chance for the self-realization of utopia.
For instance, higher equity prices, as popularly held, redound to fundamental progress. Higher equity prices, the logic infers, signals better economic conditions. The higher the price levels, the greater the advancement. But how valid has such popular dogma been?
The PhiSYx closed at 8,365.29 last July 15, 2019. The previous occasion where the popular index reached the 8,300-mark was in the 4Q of 2017 or particularly, October 3, 2017 (8,312.93), or about one-year and nine-months ago. For the latter, this milestone set about a series of succeeding highs until the index broke 9,000 to reach a climax of 9,058.62, three months later or on January 29, 2018.
Measuring economic growth in the mainstream vernacular, the headline GDP, in 2017, the 2Q, 3Q, and 4Q growth numbers were 6.6%, 7.2%, and 6.6, respectively.
Concomitant with the infringement of the October 2017 8,300-level was the 4Q GDP of 6.6%.
But at what levels have GDP been today?
The announcement of the 2Q 2019 GDP will be on August 8. The initial GDP data of the 1Q 2019 was 5.6%. This month’s 8,300-breach represents the 3Q 2019, which is still in motion.
The comparable period for 1Q 2019 in 2017 would be the 2Q or two quarters before the encroachment of the 8,300-level in October 2017. 2Q 2017 GDP then was 6.6%. In the 1Q of 2019, GDP was a mere shadow of the former at 5.6% or a 100 bps deficit from 2017!
The take away: in contrast to 2017, a vastly lower GDP rate has accompanied the feat of reaching the PhiSYx 8,300-level in 2019!
Figure 1
And lower GDP on a rising PhiSYx hasn’t been an anomaly.
Quarterly GDP growth rate peaked in 2013 (2Q 2013 7.9% revised) and has had lower highs for a trend through 1Q 2019. Even on an annual basis, since culminating in 2013 at 7.1%, GDP rates have been on a visible downtrend. And 1Q 2019 GDP only reinforces such quarterly and annual trend. (figure 1, upper and middle window)
In the meantime, the nominal levels of the headline index continue to scale higher backed by a volatile year on year returns: -12.8% in 2018, +25.11% in 2017, -1.6% in 2016, -3.85% 2015, and +22.8% in 2013.
On the other hand, the PSEi 30’s aggregate net income registered 6.89% growth in 2017 and 5.61% in 2018. In balance, the two-year CAGR for net income growth was 6.24% as compared to the 4.5% returns of the PSYEi. But, as previously discussed, net income conditions have likely been inflated. Mounting debt loads in the face of falling cash conditions have been pointing to this.
Even more, net income represents aggregate data in contrast to PSEi index and its returns which are calculated based on market cap weightings. Also, because of occasional changes in the composite members, the headline index and its corresponding returns hardly represent an accurate measure of past performance.
And furthermore, the widening divergence between the nominal headline index and the GDP rates has been ongoing since 2014, almost coincidental to the institution of massive marking the closes! For instance, the intense use of mark-the-closes, totaling 1.33%, cushioned this week’s 1.04% drop. If charts have been signaling for the desire to profit-take, predicated on buying fatigue, marking the close pumps and occasional dumps ensures against the realization of such patterns. Oscillators, stochastics, rate of changes, and other technical measures are no match for price-setting actions of index managers.
And if net income conditions partly reflect on GDP, declining growth trends hardly supports the hardened consensus expectations of the generation of remarkable returns for investing in the domestic stock market unless the latter has become totally deformed.
Restrained Public Spending by the National Government in 1H 2019, What Happened to Build, Build and Build?
Despite the downtrend of the growth rate of the statistical economy, the public has been assured that the Philippines is “still expected to be among the fastest-growing economies in Asia amid slowing regional growth” and that because of reforms “the broader economy is our bright spot” and that the BSP Chief expects a growth rate of 6-7% in 2019 because the economy “firing on all cylinders”, premised on lower inflation rate that was “also encouraging more Filipinos to help boost growth through increased household spending” supported “by the ramping up of government spending in the second semester.”
Also, because there are “six million Filipinos we need to pull out from poverty”, the Philippine President proclaimed to the public in his fourth State of the Nation Address (SONA) that the ambitious Php 8 trillion build, build and build infrastructure project would help the government address poverty in the country.
Has anyone ever thought about economics? Because there is no free lunch, what the government spends on will have to be shouldered by the public?
For instance, statistical inflation has been down, but why has it been down? Have not the National Government’s (NG) “underspending” contributed to this?
Figure 2
After the Philippine President signed the 2019 budget last April 15, the NG reportedly fast-tracked the release of funds from the 2019 national budget in May, yet the Bureau of Treasury’s public spending report tallied a decline of 1% in June to Php 275.7 billion from Php 278.5 billion in 2018.
The NG’s disbursements, which accounts for 67.6% of the expenditures share, fell 2.85% to Php 186.32 billion from Php 191.8 billion a year ago! (Figure 2, upper window)
Allotment to the Local Government, the second-largest share in the expenditure pie with 18.24%, increased by a modest 8.33% in June to Php 50.3 billion from Php 46.43 billion a year ago. (figure 2, middle window)
Interest payments zoomed 222% to Php 2.4 billion from Php 744 million over the same period!
Public expenditures fell 2.33% in the 2Q 2019 to Php 812.2 billion from 831.6 billion in 2018 and had been marginally lower by .83% to Php 1.59 trillion from Php 1.604 trillion a year ago.
What happened to the quicker spending (5.9%) unleashed by the NG on infrastructure projects in May? Why was it curtailed in June?
Since the NG withheld spending, its influence on prices had waned. Said differently, the slack in public sector demand, as evidenced by the shortfall in expenditures, helped reduced domestic liquidity, and subsequently, price pressures in the general economy. So why wouldn’t the CPI fall?
And because government spending has corralled a significant part of the economic output, several foreign financial outfits downgraded Philippine GDP forecasts.
From Businessworld (May 29): MOODY’s Investors Service cut its Philippine economic growth forecast to 6% for this year from its previous projection of 6.2% due to the delayed approval of the 2019 General Appropriations Act (GAA), which dampened gross domestic product (GDP) growth in the first quarter.
From the Inquirer (July 24): The regional macroeconomic surveillance organization Asean+3 Macroeconomic and Research Office (Amro) has slashed its 2019 and 2020 growth projections for the Philippines to 6.3 percent and 6.5 percent, respectively…In its previous report, Amro projected a 6.4-percent growth for the Philippines for 2019 and 6.6 percent for 2020. The slower growth forecasts were attributed by Amro to the “unexpected growth slowdown in the country’s first quarter growth due to the delay in the approval of the national budget.”
From the Inquirer: (July 18) The Asian Development Bank (ADB) has cut to 6.2 percent its 2019 growth forecast for the Philippines mainly due to government underspending at the start of the year that dragged first-quarter economic expansion to a four-year low.
From Businessworld (July 25): THE INTERNATIONAL MONETARY FUND (IMF) has further slashed its economic growth forecast for the Philippines this year and the next due to weaker-than-expected external demand and state spending last semester.
The NG got the funds but didn’t spend. The Php 64 trillion question: why did the NG withhold public spending? Whatever happened to the "build, build and build" project, which was supposed to lick poverty?
Well, the NG’s retreat from public spending signifies GOOD news for us! Pressures from the crowding out should temporarily abate which lower inflation has been a manifestation. The private sector would have access to more resources than otherwise when in competition with the NG’s ramping up of spending. Pressures to increase taxes also should, theoretically, subside. More importantly, lower public expenditures should extrapolate to fewer distortions in the economy.
June, 2Q and 1H Government Revenues Underperform
What was the effect of lower spending on revenues?
NG June Revenue growth rate dropped to 4.32% to Php 233.89 billion from Php 224.2 billion in 2017. Possibly helped by thelate April implementation of the tax amnesty, Bureau of Revenue June collection growth increased 15.39% to Php 157.83 billion from 136.78 billion in 2018. Bureau of Customs collections barely grew in June; it was up 2.5% to Php 51.3 billion from 50.05 billion a year ago. Total tax revenues expanded 11.85% to Php 210.53 billion from Php 188.23 billion. Non-Tax revenues contracted 35.3% to Php 23.26 billion from Php 35.951 billion over the same period. (figure 3: middle window)
Figure 3
In the 2Q 2019, NG collections growth rate dropped to 8.73% to Php 859.8 billion from Php 790.8 billion in 2018. With the implementation of TRAIN in 2018, NG collections zoomed 22.8%. BIR revenues grew 10.47% in 2019 to Php 598.13 billion from 541.43 billion in 2018. BoC collections grew 7.72% to Php 161.14 billion from Php 149.6 billion. Non-Tax revenues had almost been unchanged up .16% to Php 94.81 billion from Php 94.67 billion over the same period.
In the 1H 2019, NG collections growth rate dropped to 9.71% to Php 1.548 trillion from Php 1.411 trillion in 2018. With the implementation of TRAIN in 2018, NG collections zoomed 19.91%. BIR revenues grew 10.06% in 2019 to Php 1.381 trillion from Php 1.255 trillion. BoC collections grew 10.56% to Php 1.066 trillion from Php 965 billion. Non Tax revenues had been up 6.9% to Php 166.5 billion from Php 155.8 billion over the same period. (figure 3: Upper window)
In 2017 through 2018, the oscillations of the collection growth rate of the BoC and the BIR had almost been congruent. Lower rate of bank credit expansion has also previously compounded tax collections woes. The fuel tax hike and the April’s amnesty, however, have likely put an interim floor to previously falling tax revenue growth rate. Additional SIN taxes on tobacco, signed by the Philippine President last week, may likewise provide temporary cushion to downside pressures on tax revenue growth.
Falling collections growth rate of Bureau of Customs resonates with the nation’s stagnating merchandise trade, as well as growth pressures in the global and local economy.
In spite of the tax reforms, generally speaking, government revenues have been falling.
Because NG revenues underperformed in the face of stagnant public spending in June, the National Government’s deficit swelled to Php 41.838 billion. June’s deficit showcases how shortfalls in revenues lead to deficits.
In the 2Q 2019, the NG’s fiscal balance posted a Php 47.6 billion surplus and a Php 42.65 billion deficit in the 1H. With the first half over, the 1H deficit represents a fraction (6.7%) of the National Government’s Development Budget Coordination Committee (DBCC) deficit target for 2019 at Php 631.5 billion, which is approximately 3.2% of this year’s estimated GDP. Even hitting half the 2019’s target could pose a big challenge. The NG would have to step on the spending gas at last year’s frenzied pace.
In 2018, public spending zoomed 29.6% in the 3Q and 13.53% in the 4Q to rack up deficits of 185.22 billion and 180.03 billion, respectively.
Figure 4
Here’s the thing. Not only has deficits raced to a record, but the NG’s aggressive public spending have raised the government’s role in the statistical economy. The public spending share of the economy bottomed in 2015 and rose when the incumbent leadership assumed office in 2016, where growth accelerated to hit a high of 20.97% share in the 3Q of 2018! (figure 4: Upper window)
With the GDP becoming increasingly dependent on public spending, as ventilated by record deficits, benign deficits, predicated on public spending slack, must have placed increasing pressure on the GDP. (figure 4: lower window)
The mainstream’s GDP downgrade may have been implicitly moored on this.
But here’s where we part from the consensus.
Empirical data appears to contradict the notion that deficit spending represents an elixir of the economy, as lionized by the mainstream.
First some backstory. To shield from the ripples of the Great Recession, the NG embarked on a set of automatic stabilizer known as the Economic Resiliency Plan (ERP) in 2009. The stimulus goosed up GDP in 2010.
Designed as a temporary measure, the NG allowed the ERP to fade, thus pulling down GDP in 2011. Through lower interest rates, the BSP became the centerpiece of the economy’s stimulus.
Fast forward today.
When the incumbent administration embarked on the build, build, build projects founded on record deficit spending, contrary to popular wisdom, GDP has been declining instead of rising. And instead of licking poverty, rising debt, inflation, economic maladjustments and the adverse effects of the crowding will lead to the opposite.
GDP continues to trend lower, even as public spending to GDP has sharply been rising from 2016 to 2018.
In the Face of Spending Restraint, Why the National Government’s Record Cash Hoard from Record Borrowing?
And there’s more.
The NG tries to justify its record pace of borrowing to such aggressive deficit spending target.
From the Inquirer (July 19): The Philippines’ gross borrowings will peak to a record-high P1.4 trillion next year to finance the government’s programmed wider budget-deficit cap equivalent to 3.2 percent of gross domestic product (GDP) as it jacks up spending on public goods and services while also paying more amortization for outstanding debt. During the Development Budget Coordination Committee (DBCC) meeting, the interagency body kept the borrowing program for 2019 at P1.18 trillion, of which the bulk or 73 percent will be sourced locally mainly from the sale of treasury bills and bonds amid ample domestic liquidity, National Treasurer Rosalia V. de Leon said. The bias for domestic borrowings would minimize foreign exchange risks, economic managers had explained. Foreign borrowings, meanwhile, will come from offshore bond issuances and official development assistance (ODA) loans from bilateral partners and multilateral lenders. As the DBCC also approved a wider budget-deficit ceiling equivalent to 3.2 percent of GDP for the rest of the Duterte administration’s remaining years in office until 2022, de Leon said total gross borrowings next year will jump to P1.4 trillion, with a borrowing mix of 75-percent domestic, 25-percent external. (bold mine)
Figure 5
The mainstream says that deficit spending is a splendid thing. But aggressive deficit spending has been missing in the 1H of 2019! And yet in its absence, the National Government has been borrowing at a pace never seen before (in recent history)!
The NG raised a record Php 732.7 billion in the 1H of 2019 to expand its cash hoard to an unprecedented Php 511.5 billion! (figure 5, upper window)
2Q domestic borrowing, accounting for 67% share of the total, raced to a multi-year high growth rate of 16.7%, while foreign debt, with a 33% share, climbed 8.22%. Total public borrowings jumped 13.74%, a landmark high, also in the 2Q! (figure 5, middle window)
Why has the NG been stashing so much cash???? And why the 2Q and 1H drop in public expenditures??? Or why scrimp on spending while publicly stating otherwise?
Is it because the NG is doing the job of the BSP of pushing rates down by hoarding so much liquidity?* Have the NG-BSP been driving down rates to subsidize the cash strained banking system by inflating the latter’s assets?
*Was the Massive 4-Month Public Borrowing Meant to Drive Down Rates? Banking System’s April Cash Reserves Hit 2015 Lows, June 17, 2019
Falling inflation, tight financial liquidity manifested by cascading bank credit expansion and the lower spending of the NG, and a frantic global bond rally, predicated on global policy easing, have crashed yields of domestic treasuries at an incredible pace.
Since lower yields extrapolate to higher bond prices, rallying bonds inflate the banking system's assets!
Have the NG been preparing for something substantial, like a bailout, at the expense of the GDP?
Has the BSP-led FSR’s 2018 warning of “dislocations of crisis proportions have come as a surprise” prompted the NG-BSP to prepare for “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”?
Is the NG aware that the liquidity it absorbs will come at the expense of the banking system and the general economy over time?
Popular wisdom and actions undertaken by the NG don’t seem to match.
Summary
To conclude:
1. The public bears the misleading impression that higher stocks explain the GDP. Yet, as the PSYEi race towards the 2018 record, headline GDP continues to tumble (as of the 1Q 2019).
2. The popular impression has been that public spending through build, build and build projects function as an economic elixir. However, despite the resolution of the 2019 budget, the National Government has withheld spending deliberately in the 1H of 2019.
3. Despite the fuel tax hike and tax amnesty, NG revenues underperformed in June and have decelerated materially in the 2Q and the 1H compared to 2018.
4. Tepid revenue growth and a slack in spending increased June deficits modestly. However, with a fiscal surplus, 2Q GDP may be pressured lower.
5. Both government cash hoarding and domestic borrowing have spiked to record highs! The NG has restrained spending but continues to pile up on liquidity at the expense of the banking system and the private sector. Is the NG preparing for something significant?
When everyone thinks the same, no one is thinking.
