How Will Tight Money Conditions Impact 2Q GDP?

How Will Tight Money Conditions Impact 2Q GDP?

The 2Q Philippine GDP is slated to be announced next week. July CPI will also be published.

Figure 1

Will falling bank loans and money supply growth continue to weigh on the statistical economy?

Let us move on to credit.

Figure 2

The rate of bank credit growth (production and household) has been slowing since the 2H of 2018. It has dropped to multi-year lows in June. The growth rate of public debt (domestic and foreign) has also slowed in June 2018. For an economy dependent on credit, why have public and bank credit been slowing? Though 1H public spending has flatlined from last year, the National Government (NG) continued to aggressively borrow. [See Lower GDP Trend Justifies Higher Stocks?  Restrained 1H Public Spending:  What Happened to Build, Build and Build? July 28, 2019]

If the NG has pulled back on spending, which should imply a lower contribution to GDP, why has bank credit expansion been falling?  Has demand for loans been down? Or has a lack of funding by banks restrained the supply of loan issuance? Have these not signified a slowdown in private sector’s contribution to the GDP as well?

Nevertheless, with total bank credit at Php 8.16 trillion and total public debt at Php 7.87 trillion, the aggregate system leverage reached Php 16.03 trillion in the 1H or 91% of the 2018 GDP, a record.  

If the real economy slows, how can it repay its liabilities even at a lower rate of ballooning credit?

Figure 3

It’s interesting to note that the Bangko Sentral ng Pilipinas continues to withdraw funding to the NG. Reported the BSP, “Meanwhile, net claims on the central government contracted by 3.9 percent in June following a 6.4-percent decline in May, due in part to the increase in deposits by the National Government with the BSP.” (Figure 3, upper window)

The BSP removes liquidity it has earlier created when it expanded funding to the NG. For this reason, the rate of money supply growth has slowed materially. The slowing money supply growth likewise corroborates the downshift in bank credit expansion. In essence, the BSP’s curtailment of its version of Quantity Easing offsets the interest rate cut implemented last May.

Despite the BSP’s chief constant egging for easing, the Philippine central bank has taken a neutral stance. Reining liquidity appears to be their main thrust. The Php 64 trillion question is why?

A likely cut in the policy rate to ease the current domestic conditions, as well as to align with global developments might be the stance taken when the BSP meets again this week.

And an interesting proposition for the "statistics is economics" crowd has been to say that consumer spending will flourish in the place of public spending. Since the number of firms that have become dependent on government spending for their revenues has swelled, diminished public spending means reduced income and consumption for those attached to them, unless growth in margins offset this. If the contributions from the private sector have diminished, how will these boost consumption?

While credit card debt zoomed to a record 15.35% in June from 14.58% a month ago, cash growth improved slightly to 5.5% from 5.01% and auto loans grew 8.86% from 8.54% while salary loans barely expanded with a .96% growth from -1.43% over the same period.

So as GDP has turned south, increases in the consumer’s balance sheet liabilities have been supporting household consumption. Consumption pulled forward through credit financing translates to reduced consumption tomorrow.

Figure 4

And further proof of tight money despite falling rates, real rates remain at positive levels, which have been higher than in 2015. (Figure 4, upper window)

Though the NG’s intense cash hoarding has been steepening the yield curve, it reflects more on the distortions from NG’s borrowings than reflective of actual economic conditions.

The BSP’s telegraphing of rate cuts and global bond market panic has also been contributing to the lower yields. (Figure 4, middle window) The fixed income boom artificially props up profits of banks through asset (bond price) inflation.

So will the NG puff up 2Q GDP, or will it reflect on credit and liquidity conditions?

As a final note, index managers have been forcing up a down PSYEi 30 at the close! Only in the Philippines! (Figure 4, lowest window)