Rome fell because the dictators ruined the Roman economy and the institutions that had made it prosperous. Rome was falling apart before the barbarian invasions. How did the Caesars do that? They were profligate spenders. As emperors with absolute power usually do, they thought big: infrastructure (roads, temples, palaces), a huge bureaucracy, and, as the key to maintaining their power they had a very large, loyal, and well paid army. As a consequence, massive government spending far outstripped revenue. They had what today we call a deficit problem—Jeffrey Harding
In this issue
Why the Constrained Spending in August's ‘Build, Build, and Build’? NG’s Borrowing and Cash Stockpile Hits New Record High!
-What Happened to Build, Build, and Build Last August?
-Public Work Spending Remained Subdued in August, NG Spent More on Subsidies
-August Revenues Improve on BIR Collections, BoC and Non-Tax Revenues Stagnate
-Unsustainable Impact from the Crowding Out Syndrome: NG’s Record Financing and Historic Cash Hoard!
-Conclusion
Why the Constrained Spending in August's ‘Build, Build, and Build’? NG’s Borrowing and Cash Stockpile Hits New Record High!
What Happened to Build, Build, and Build Last August?
I asked this question last July, whatever happened to “build, build, and build”?
What Happened to July’s “Build, Build and Build”? NG’s Record Debt Issuance and Cash Hoard as Interest Rate Subsidies September 1, 2019
Or what happened to the commitments by the National Government (NG) to engage in massive and aggressive infrastructure spending?
Are these not supposed to function as a bulwark from the influences against adverse external forces?
Here’s a sample of the administration’s vow to use fiscal stimulus as ‘automatic stabilizer from external influences’. From the Inquirer (September 24): The Philippines can weather any disruptions that a potential global economic slowdown or a financial crisis may bring, thanks to the country’s strong fundamentals and a vigilant monetary regulator, the head of the central bank said. Speaking before Euromoney’s Philippine Investment Forum on Tuesday, Sept. 24, Bangko Sentral ng Pilipinas (BSP) Gov. Benjamin Diokno also noted that the Duterte administration’s commitment to its P9-trillion infrastructure buildup program will help fuel “high, sustainable and more inclusive economic growth.”
It’s been a quarter past the signing of the 2019 national budget by the political leadership. Nonetheless, based on the Bureau of Treasury’s data, the ambitious infrastructure projects have been nowhere to be found. Why?
Figure 1
True, in August, public outlays expanded 8.78% to Php 282.233 billion from Php 259.46 billion a year ago; however, NG revenues increased 8.9% to Php 279.75 billion from Php 256.9 billion, resulting in a deficit of ONLY Php 2.488 billion for the month. (figure 1, table)
But the spending growth in August barely compensated for the earlier miss.
In the eight months of the year, public spending grew by a measly .94% to Php 2.212 trillion from Php 2.191 trillion a year ago, in the face of total collections, which expanded by 9.54% to Php 2.091 trillion from Php 1.909 trillion over the same period. As a consequence, the aggregate deficit for the period reached Php 120.43 billion down 57.29% from Php 281.987 billion a year ago. (figure 1, table)
The NG has set a deficit-to-GDP ratio of 3.2% or Php 631.5 billion for 2019. The eight-month deficit represents ONLY 19.07% of this year’s target.
With a lot of catching up to do in the last 4-months of the year, will the NG fulfill its promise by accelerating the rate of public spending?
Thus far, the tight correlation between public expenditures and money supply growth extrapolates to financial liquidity conditions functioning as the fundamental driver of such political action. (figure 1, lowest pane)
Will this week’s RRR and policy interest rate cuts by the BSP alleviate such present financial tightness that would fire up political spending?
Public Work Spending Remained Subdued in August, NG Spent More on Subsidies
August expenditures grew alright.
Figure 2
While the allotment to the Local Government Units (LGU) spiked 16.83% to Php 53.67 billion in August from Php 45.94 billion a year ago, the biggest % gainers were to subsidies (531.5%) and tax expenditures [exemptions, deductions, credit, reduced rates, and etc. …] (82.35%), aside from equity (1,333%). (figure 2, upper window)
As an aside, the NG allotted Php 27.7 billion or 87.07% share of the Php 31.81 billion spent on overall subsidies in August to the corruption scandal stained Philippine Health Insurance Corporation (PHIC). Also, August tax expenditure came mostly from the National Food Authority’s account with the Bureau of Customs.
Disbursements, which are the primary source of funding for public works, even contracted 2.93% to Php 169.72 billion from Php 174.8 billion. Allotments to disbursements, LGUs and subsidies represent the largest three segments of overall public outlays accounting for 60.13%, 19.02%, and 11.22% share, respectively. (figure 2, middle window)
While the data reveals that public work spending on a national level remained subdued last August, perhaps infrastructure spending may have picked up on the local level or through the LGUs.
However, when viewed from a different dimension, the NG’s construction wholesale prices jumped 3.5% in August year-on-year from 3% a month ago.(figure 2, lower window) Since the construction wholesale price index attempts to measure the cost of construction of government projects, the August price hike points to improvements in public works. That’s if changes in the index align with reality.
So has the likely enhancement of construction material wholesale prices been a ramification of the bottoming signs of NG/BSP’s M2 (money supply growth)?
In the eight months of August, NG disbursements fell -.24% to Php 1.428 trillion from Php 1.431 trillion while allotments to LGU eked out a .91% increase to Php 398.5 billion from Php 394.95 billion. Lethargic public spending that has resulted in the underperformance of the 8-month deficit can hardly be blamed on the entirety to the delayed passage of the budget due to Congressional tiff.
So despite constant utterances of hitting an ambitious 3.2% deficit-to-GDP principally through aggressive public works, the Bureau of Treasury’s cash operations data reveals the current demonstrated preference, viz. the NG’s seeming embrace of parsimony, for undeclared reasons.
Importantly, how will such meager growth in public spending impact the 3Q GDP?
August Revenues Improve on BIR Collections, BoC and Non-Tax Revenues Stagnate
And despite 2018’s tax overhaul through TRAIN and 2019’s fuel tax hike, the NG’s revenue growth has been wobbling. Total Revenues expanded 8.9% YoY in August to Php 279.75 billion from Php 256.9 billion a year ago. Total Revenues expanded 9.25% in July 2019, and 11.49% in August 2018. (figure 3, upper window)
Figure 3
BIR’s August 2019’s 11.09% growth to Php 205.6 billion from Php 185.1 billion was instrumental in covering for the lackluster collections of Bureau of Customs, which expanded 3.04% to Php 53.6 billion from Php 52.012, and non-tax revenues which climbed 3.98% to Php 17.954 billion from Php 17.3 billion over the same period.
As a likely consequence of the law of diminishing returns, total revenue collections have been trending downhill, mainly from the slowing monthly growth rates of the BIR and BoC. (figure 3, middle window)
The revenue story of August resonated with its 8-month performance.
Tax Revenues, which grew 9.8% to Php 1.88 trillion from Php 1.712 trillion a year ago, had been boosted by the BIR. BIR collections jumped 10.56% to Php 1.452 trillion from 1.314 trillion. Bureau of collections contributed with a 7.22% growth rate to Php 411.25 billion from Php 383.544 billion. Non-tax revenues generated a 7.36% growth rate to Php 211.61 billion from Php 197.11 billion over the same period. (figure 3, lower window)
The recently imposed excise taxes plus the tax amnesty has recently upheld revenue collections growth conditions in spite of the sharp slowdown in the banking system’s lending conditions, as well as the money supply growth. (figure 4, upper window)
And it’s why the administration has been pushing hard to implement the Corporate Income Tax and Incentive Rationalization Act (Citira), formerly TRAIN 2.0 or Trabaho Bill, a bait and switch tax regime consisting of the incremental reduction in corporate taxes in exchange for expanding the tax base. A genuine tax reform program can't happen unless the NG reduces or minimizes its spending. All deficits will have to be funded.
The political leadership has even been pursuing a gross taxation system in the name of curbing corruption!
Nonetheless, economic (TRAIN, record deficits, record debt, enhanced regulatory mandates and etc. …), financial, and monetary conditions (record QE, cuts in RRR and ON RRP and etc. …) have barely been operating free of interventions since the incumbent political leadership has assumed office in 2016. Thus, such myriad political measures have only led to massive distortions in the economy.
Unsustainable Impact from the Crowding Out Syndrome: NG’s Record Financing and Historic Cash Hoard!
Figure 4
And the manifestations of imbalances from the compounding of political interventions have been surfacing in the different dimensions.
In the context of the budget, while resisting the acceleration of public spending to meet its target, the NG has, thus far, been intensifying the scale of its borrowing from savers through the capital markets.
With the 8-month deficit at only Php 120.4 billion, the NG’s financing has zoomed by a staggering 45.6% to an unparalleled Php 803 billion from Php 551 billion in 2018. And because of the sudden penny-pinching in expenditures, the massive borrowing has ballooned the NG’s cash hoard to a historic Php 430.74 billion, 79x higher than last year’s Php 5.045 billion! (figure 4, middle and lower window)
Not content with the unrivaled rate of cash stash, the Bureau of Treasury said it would raise another Php 220 billion in Q4 reportedly to “have sufficient buffers to accommodate strong spending for the rest of the year.”
Why borrow at such scale if the public spending remains restrained? The National Government raised Php 783 billion to finance last year’s Php 558.3 billion deficit, which exceeded the 3% deficit to GDP ratio of Php 523.7 billion.
What has the national government been preparing for other than a spending surge in the last 4-months of 2019? Has the cash stash been about an undeclared contingent allocation? Is the NG expecting tax revenues to stumble, thereby, limiting outlays? Or, have these been about a potential bailout?
Figure 5
All actions have consequences.
The record cash hoard has provided an aura of a surfeit to liquidity, which has driven down treasury yields, thereby, providing interest subsidy to the NG (and the banking system) through lower debt payments. As I have said elsewhere, the steep plunge in CPI plus a frenzied bid on global treasury have also contributed to the boost in domestic treasuries. The treasury boom has likewise provided the banking system a reprieve by boosting accounting profits.
But tumbling bank liquid assets have signified one of the many opportunity costs of the government’s aggressive financing. The steep decline in the banking system’s cash and due banks have coincided with the NG’s amplified financing requirements since late 2017.
The correlation showcases the crowding-out effect of the NG’s spending in tight competition with banks for access to funding from the public’s savings.
Naturally, there are second-order effects from the possible ramp-up in NG spending and or from continuing liquidity drain on the banking system. That said, the current Treasury boom and or current subsidies to the NG and the banking is unsustainable.
Even the BSP-led FSCC’s latest Financial Stability Report (2018) admitted to mounting liquidity ‘concerns’ and to increasing pressures from funding mismatches. (to be discussed next)
Here’s a teaser: (bold added)
If there are risk issues to raise, it will have to be the prospects of managing liquidity. Aside from simply having more loans versus deposits, using liquid assets as a source for funding more earning assets needs our attention. However, the bigger issue will be that continuing on the path of being a bank-based financial market means that the provision of credit will require taking on mismatches in tenor and in liquidity. As more credit is dispensed, such mismatches will only increase.
Conclusion
While public spending remained restrained in August leading to a narrow deficit-to-GDP ratio for the last 8-months, the NG embarked on another month of record borrowing that has led to an unmatched cash hoard.
Whatever happened to the administration’s pet project, the ballyhooed “Build, Build, and Build”? With public spending barely improving, how will such provide a significant boost to 3Q GDP? Will further borrowing by the National Government in competition with the banking system amplify the crowding-out effect partly manifested by the liquidity drain in the financial system?
Moreover, why has the NG been stockpiling cash? Is the NG expecting revenues to slump, thus putting a kibosh on spending?
Or has such liquidity amassment been about contingency planning, such as a forthcoming bailout?
Lastly, how resilient has the Philippine economy and the financial system been in the face of imbalances nurtured from repeated political interventions?
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