People read less, and hold themselves to fewer and lower intellectual standards. Gullibility and susceptibility to propaganda, docudramas and myths of all kinds is a core feature of our civilizational decline. If we are to have any chance of recovery at this point, we need to start by reintroducing serious standards in our intellectual pursuits. We need to elevate again the quality of academic work, but also to reinvigorate critical thinking in the individual, to be able to fend off misinformation campaigns and to reject myths and unsubstantiated claims—Angelo M. Codevilla
In this issue
Milestones from May: Panic Public Borrowing and Cash Hoarding, M1 Growth Crash, and Despite Slowdown, Bank Credit Hits Record
-Record Cash Hoard Amidst Marginal Deficits, Record Growth in Public Debt
-Why the National Governments’ Panic Borrowing?
-Immediate Implications of the Credit Pullback
-The Crowding Out Effect from the Public Cash Hoarding
-Peso’s Temporary Strength: Domestic Liquidity Squeeze, NG’s Cash Hoard, Plus Faster Decline of Local Yields Relative to US Treasuries
Milestones from May: Panic Public Borrowing and Cash Hoarding, M1 Growth Crash, and Despite Slowdown, Bank Credit Hits Record
We love extraordinary feats, yes?
We’re actually hitting record after record in many political economic aspects.
Sadly, instead of public acknowledgment, such developments and events have been buried and rationalized as having neutral effects. Why so? Because these are not feel-good statistics.
And negativity has to be banished, regardless of its future consequences.
Oh, by the way, data shown here are from official sources, which means that these are available to the public's purview. Anyone can see and interpret them objectively, but apparently, hardly anyone or no one chooses to.
Bangko Sentral ng Pilipinas Loans Outstanding: For Production and Household Consumption (PSIC 2009) Universal and Commercial Banks (html)
Record Cash Hoard Amidst Marginal Deficits, Record Growth in Public Debt
Figure 1
Despite a Php 809 million 5-month deficit, public financing soared by a record Php 733.68 billion while the Bureau of Treasury (BoTr) cash (change-in-cash) position rocketed to a milestone Php 566.44 billion! (figure 1, upper window)
Total public debt spiked by 15.85% in May, the highest monthly growth rate since at least 2011, predicated on the swelling of domestic debt by 18.81% and by a 10.42% jump in external debt, even as the National Government’s fiscal balance closed with a Php 2.564 billion surplus! (figure 1, middle window)
Nominal month-on-month debt increased by over Php 100 billion in three of the last five months, another unprecedented feat since at least 2011. (figure 1, lower window)
And even when the National Government spent more on debt servicing and net lending (servicing of government-guaranteed debt) than on the acclaimed grand infrastructure projects and other public outlays, public debt hit a record Php 7.916 billion centered on the milepost high of Php 5.256 billion in domestic debt, and secondarily, from a record Php 2.659 billion in external debt.
See, records upon records!
Why the National Governments’ Panic Borrowing?
Since the Bangko Sentral ng Pilipinas’ net claims on the Central Government contracted by Php 216.976 billion in the 5-months of 2019 in the face of a Php 623.03 billion of debt, net public financing can be estimated to have grown by Php 406.05 billion.
From the BSP’s money supply/ liquidity report this May: “net claims on the central government contracted by 6.4 percent in May after expanding by 0.6 percent (revised) in April, due in part to the increase in deposits by the National Government with the BSP.”
Figure 2
Growth of Public Debt and BSP claims have exceeded deficits substantially for the past 3-years! Have debt rollovers signified the balance? If not, where have these excesses been channeled to? (figure 2, upper table)
With a slight deficit in 2019, why the panic borrowing by the National Government?
The fact is that with subdued spending, public borrowing has only propped up the cash stash to magnify perceptions of the ample liquidity conditions of the National Government (NG). Buttressed by the cascading CPI (statistical inflation) and aided by a "meltup" in global bond/treasury markets, the NG’s cash hoard has spurred substantial submergence of domestic Treasuries yields! June’s CPI plunged to 2.7%, according to the PSA. As such, calls for more easing from the BSP chief has reinforced falling yields. From the current standpoint, the combined actions of the BSP and the National Government looked like a work of a genius, thereby accolades of a “goldilocks economy”! (figure 2, middle window)
Have all of the NG’s cash hoarding been designed to force down interest rates*?
*Duterte Regime’s Paradigm Shift? Public Underspending, Record Debt Servicing and Record Cash Hoarding! June 30, 2019
But why so?
Because of this? “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.” From the late Espenilla BSP’s Financial Stability Report 2017, published in June 2018.
And or could it be that the NG has been stacking up cash for contingent reasons (such as possible bailouts)?
Though the supply side did somewhat contribute to lower rice prices that helped dampen CPI, the dramatic plunge in the rate of bank expansion growth which affected money supply conditions have signified the most critical factor of influence.
In this speech, cost-push factors have been attributed by the BSP chief to the recent episode of inflation.
Yet, despite the May 10th policy rate cut by the BSP, production loans growth fell to 11.49% in May, a six-year low, which pulled down the banking system’s total credit growth to 11.75%, also a six-year low.
Consumer loan growth was 14.58% in May lower than 15.03% in April and 15.14% in March. The thing is, the banking system’s overall loan portfolio continues to drag money supply growth conditions, which slumped to 6.4% in May, which together with March’s 6.09% have signified a 7-year low!
Why would the general economy pullback from the tapping of bank credit? How will such impact prices, investments, and consumption or allocation of resources in general?
Immediate Implications of the Credit Pullback
June’s CPI only points to a further growth drawdown in the banking system’s credit conditions, aside from its financials, in particular, bank deposit liabilities, and of course, money supply conditions. Bank deposit and M3 have pointed to the peak of CPI in 2014 and likewise in 2018.
The BSP has yet to publish the May update of the banking system’s financial statements.
Figure 3
And if public spending has been nearly absent in the two months of the 2Q, where will statistical growth come from? Consumers?
The most interesting money statistics from the May report has been the M1 or cash in circulation and demand deposits registered a 5.01%, a low last seen in 2008! Recall that GDP slumped to a near recession in 2009. (figure 3, upper window)
If growth in cash have retreated significantly, through what means will consumers fund their spending exactly? The obvious answer is the credit card, which grew by 25.3% in May down slightly from the record 25.73% in April. Salary loans contracted 1.43%. Auto loan growth eased further to 8.54% in May from 9.16% in April.
Put this way; leveraged consumers have been adding to their leverage to finance their spending binge, whereas cash-based consumers have backpedaled substantially.
So the pullback in credit must have affected the middle, lower middle class and lower class most relative to the high-end markets.
If consumers and public spending have meaningfully slowed in the two months of the 2Q, wouldn’t the downturn in the growth of banking loans and M3, symptomatic of these, impact adversely the GDP?
The rate of growth of bank credit and M3 has dovetailed with the undulations of the headline GDP since 2017. (figure 3, middle window)
The Crowding Out Effect from the Public Cash Hoarding
Another important factor ignored by the “statistics is economics” crowd: opportunity costs and the crowding-out effect.
Figure 4
Growth in the banking system loans surged in 2013 to 2014 while public sector debt growth slowed over the same period. When the aggressive deficit spending went online in 2016, bank credit expansion peaked in September 2017. From then, the rate of bank credit expansion slipped as public credit ballooned. (figure 4, upper window)
To put it more broadly, the significant downshift in bank credit expansion embodies the opportunity cost of the increased public spending. Or, the surge in public debt crowded out effectively bank credit expansion.
Since bank credit dominates the share of money supply growth conditions, slowing bank credit expansion have led to the latter’s downturn to signify monetary tightening.
The NG’s record cash hoarding can likewise be seen in the light of monetary tightening. With falling growth of bank loans affecting aggregate demand of mostly credit-based industries, which should spread into the economy, the drop in CPI has been faster than the yield of the 1-year Treasury. (figure 4, lower window)
In effect, since the inflation tax has been rendered impotent, the stashing of cash is one way the NG has dealt with the monetary tightening, and likewise, has used such to engineer a pull down of rates.
Moreover, the recent inversion of the domestic sovereign yield curve has likewise signified a symptom of the liquidity squeeze in the financial environment.
Peso’s Temporary Strength: Domestic Liquidity Squeeze, NG’s Cash Hoard, Plus Faster Decline of Local Yields Relative to US Treasuries
Figure 5
And because of relatively tight domestic financial conditions, aside from Philippine Treasury rates falling faster than its US, the peso has rallied strongly. (figure 5, upper window)
The spread between yields of the 10-year Philippine Treasury and its US Treasury equivalent has been trending down. (figure 5, middle window)
As a final note, total public debt hit a record Php 7.915 trillion last May while bank credit reached a record Php 8.14 trillion for a combined record system leverage of Php 16.056 trillion over the same period. In the context of 2018 Nominal GDP, public, banking and system credit has accounted for 45.23%, 46.71% and 92.14%, respectively.
As one can see, history is in the making!
Record NG cash hoard, multiyear lows in M1 and M3, inverted sovereign curve, and record high in public debt, bank credit and total system credit! That’s aside from near record low interest rates, still record BSP QE and record fiscal deficits.
How can these times not be exciting?
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