What Happened to July’s “Build, Build and Build”? NG’s Record Debt Issuance and Cash Hoard as Interest Rate Subsidies

The now normal practice of running enormous [budget] deficits in all economic conditions is additional evidence that American democracy is fully susceptible to the descent of democracy into looting. It is looting future generations—George Will

In this issue

What Happened to July’s “Build, Build and Build”? NG’s Record Debt Issuance and Cash Hoard as Interest Rate Subsidies

-GDP Recovery from Public ‘Build, Build, Build’ Works? Why the Pullback in Public Spending in July?

-Despite Tax Hikes, NG Revenues Underperform

-Record Debt Issuance and Record Cash Hoard as Interest Rate Subsidies For the National Government

-Another Big Week Anchored on Mark the Close Rallies as Positive Breadth Collapses!

What Happened to July’s “Build, Build and Build”? NG’s Record Debt Issuance and Cash Hoard as Interest Rate Subsidies

GDP Recovery from Public ‘Build, Build, Build’ Works? Why the Pullback in Public Spending in July?

Here are excerpts from mainstream experts mind conditioning the public for a higher GDP based on the elixir of increased government spending.

From the Inquirer (August 27): The Philippines’ ambitious plan to roll out more big-ticket infrastructure projects through the “Build, Build, Build” program will shield the domestic economy from a global slowdown partly caused by trade tensions between the US and China, UK-based Oxford Economics said.

From the Inquirer (August 27): The country’s fiscal sector remains robust and will support faster economic growth in the second half of the year, despite a disappointing first semester gross domestic product brought about by the delayed passage of the national budget.

On April 15, the 2019 Php 3.7 trillion national budget was enacted, which means that in the Bureau of Treasury’s July fiscal report, three months have elapsed since such an event. And July represents the first month of the third quarter.

Temporarily granting the popular belief of the supposed efficacies of public expenditures, how true have the assertions that the National Government (NG) has indeed been undertaking such activities?

Figure 1

In July, the National Government’s (NG) revenue growth registered at 9.25% to Php 264.1 billion, while expenditure growth recorded a 3.43% growth to Php 339.4 billion. Because of the base effect of higher expenditures and lower revenues in 2018, the NG posted a fiscal deficit of Php 75.3 billion 12.83% lower than Php 86.4 billion a year ago.

In 7-months, while the NG’s Revenues posted a 9.64% growth to Php 1.812 trillion, public outlays recorded .11% decline to Php 1.93 trillion, which lead to a Php 117.9 billion deficit, 58% lower than last year’s Php 279.4 billion.

Take note, public expenditures posted a measly increase of 3.43% in July and had been slightly lower by -.11%, or almost unchanged, in the 7-months.

Figure 2

From the expenditure perspective, the National Government (NG) disbursements barely grew at all in July! July disbursements had been up .2% to Php 201.5 billion from Php 201.13 a year ago. Aggregate 7-month NG disbursements in 2019 had been at Php 1.26 trillion from 2018’s Php 1.256 trillion for a meager .13% rate of change! NG disbursements accounted for 59.4% share of total outlays in July and 65.21% share in the 7-months of 2019. (figure 2, upper window)

Meanwhile, allotment to LGUs grew 6.03% to Php 49.152 billion in July from Php 46.4 billion a year ago. In 7-months, allotment to LGUs shriveled to Php 344.87 billion from 349.02 billion in 2018. Allotment to LGUs accounted for a 14.5% share of total outlays and 17.9% share in the 7-months of 2019. (figure 2, middle window)

That is to say that while NG officials were assuring the public that the 3Q and 2H GDP would improve because of increased public spending, in the first month of the 3Q, in reality, they continued to hold back!

The NG could, of course, increase spending in the following months. Or, they may not. Revealed or demonstrated preference tells us that NG actions have deviated from their statements.  So the NG continued to put a cap on public spending even after the resolution of the budget impasse. Bluntly put, the budget delay has little to do with the current actions, expressed empirically as little to no growth in public outlays!

Just what happened to Build, Build, and Build last July?!

Despite Tax Hikes, NG Revenues Underperform

Figure 3

At the same time, despite recent hikes in excise taxes, including sin taxes, as well as the tax amnesty, the NG’s revenue intake continues to wane.

July revenues grew 9.25% to Php 264.1 billion from Php 241.743 billion a year ago. July revenues had been significantly slower than the 20.52% rate in 2018 and 14.31% in 2017.

For 2019, the 7-month NG revenue growth registered at 9.64% to Php 1.812 trillion from Php 1.65 trillion in 2018. Although faster compared to 2017's 7.85% in 2017, 2019's growth rate signified less than half the 20.52% of 2018; the year TRAIN was instituted.

Over the same period, tax revenues expanded 9.88% compared with the 18.4% rate in 2018. While BIR’s collections growth at 10.47% outperformed 2018’s 9.98%, Bureau of Custom and non-Tax revenues collections growth slumped to 7.9% and 7.68% from 34.95% and 36.9%, respectively, a year ago.

So while freshly imposed taxes and tax amnesty helped boost current revenues, economic performance, as shown by tanking bank credit, had partly offset some of it.

Over time, the more taxes imposed, the lesser the NG collections can be expected.

Record Debt Issuance and Record Cash Hoard as Interest Rate Subsidies For the National Government

Figure 4

And here’s what you won’t hear from the mainstream.  

The NG hasn’t just been withholding from expanding NG spending. It has been amassing record amount of cash by the record issuance of debt from the capital markets. (figure 4, middle window)

Through July, the NG has raised Php 729.75 billion of cash from which a record Php 370.6 remains in its coffers following a 7-month deficit of only Php 117.943 trillion. (figure 4, upper window) That’s only 18% of the projected annual deficit of Php 631 billion with four months to go! August has just ended.

The projection of NG’s massive liquidity has been instrumental in driving down yields of Philippine Treasuries. Additionally, the flight to safety panic bids on global treasury markets have also been a material influence to the Philippine Treasury boom!

And falling yields, which represent interest rate subsidies, have encouraged the NG to borrow more. With just 7-months, NG debt servicing at Php 477 billion will exceed annual levels of 2012-2017 by August or September, and race to possibly exceed the 2018’s Php 775.6 billion. (figure 4 lowest window)

As an aside, negative yielding bonds have landed on Philippine shores! From BPI’s press release: Bank of the Philippine Islands (‘BPI’) priced a CHF 100 million ASEAN Green Bond at 100.040% with a re-offer yield of -0.020% yesterday, 29 August 2019. The bonds will carry an annual coupon of 0.00% and will have a final maturity date of 24 September 2021. Upon issuance, the bonds will comprise: - The first ever public Swiss franc-denominated benchmark out of the Philippines - The first ASEAN Green Bond benchmark for BPI and first ever rated Philippine Green Bond in the international capital markets - The first negative yielding bonds to be issued out of the Philippines in the international capital markets. (bold mine)

And spending deficiencies have resulted in the plunge of the CPI, and subsequently, transmitted to the GDP. And the toll from such spending pullback would likely to be felt on NG revenues in the coming months as diminishing returns from the current tax programs percolate. Hence, the Department of Finance’s ardent push to have the second phase of the tax reform or the Tax Reform for Attracting Better and High-Quality Opportunities (Trabaho) bill passed.

Using bait and switch, the NG’s DoF lures business with lower income taxes at the same time increasing consumption taxes, reducing most forms of incentives and expanding the tax base. At the day’s end, direct and indirect (inflation, compliance) taxes are higher!

And since the NG ultimately depends on the private sector for its revenues, the more the NG takes, the weaker its host becomes. And we should expect prosperity from the deepening of such parasitic relationship? Because the establishment says so?

Another Big Week Anchored on Mark the Close Rallies as Positive Breadth Collapses!

Figure 5

It’s truly fascinating to observe the distinction of how the world stock market operates compared with the Philippines.

The headline index depends on “tails” derivative from the coordinated and synchronized last-minute buying designed to support, inflate and manage it.

So while the PSYEi 30 vaulted 1.14% on this holiday truncated week, 87% of that increase emerged from mark-the-close pumps.

While markets are supposed to manifest on “price discovery” in the reflection of the economic balance of the listed Philippine companies, those pumps, and occasional dumps, should have materially disruptive effects as evidenced by the elevated PEs and highly skewed distribution weights.

Nevertheless, while the index reflected on broad-based gains by the 30 issues, as seen by 21 advancers and 9 decliners, the broader market had a modest margin of 75 in favor of advancers.

However, what’s striking has been that while index shed .82% this August, my radar of 196 non-PSEi 30 charts reveals a stunning deterioration of breadth. At the end of July, about 25.5% were in uptrends. By the end of August, that number shrunk almost by half to 12.8%.

Imagine, everyone talks about how the PSYEi has supposedly been riding on the coattail of a bull market, yet close to 90% of issues have been hemorrhaging or moving sideways for the longest time!

In a genuine bullmarket like in 2012-2013, the bulls owned the market breadth! Forcing the index higher makes little difference to the actual conditions of the stock market.

Aside from the headline index, mini-bubbles exist within its domain.