Rebuilding a bridge doesn’t actually create any new goods and services, or increase productivity: it generates wages and consumes materials and energy. Since it doesn’t generate more consumable goods and services, the expansion of wages and demand for materials will drive prices higher. The core difficulty here is that the democratic political process is intrinsically skewed to short-term, politically expedient dynamics: politicians focus by necessity on winning re-election, and they will naturally approve new issuance of currency and new spending to placate the demands of constituents, lobbyists and campaign donors—Charles Hugh Smith
In this issue
-BSP’s Emergency Policies: 400 bps Reserve Requirement Cuts in 2019 and 75 bps Decrease in Policy Rates
-Public Spending U-Turn: Record September Spending and Deficit
-Spending Spike from Soaring PhilHealth, Irrigation and Land Bank Subsidies!
-Divergence: September Revenues Shine as Bank Lending Tumbles
-Despite Record Spending and Deficit in September, NG’s Cash Hoard Still at Highest Level
-What Has Prompted the NG’s Spending U-Turn?
Public Spending U-Turn: Record September Spending and Deficit, PhilHealth, Irrigation and Land Bank Subsidies Surge!
BSP’s Emergency Policies: 400 bps Reserve Requirement Cuts in 2019 and 75 bps Decrease in Policy Rates
The Bangko Sentral ng Pilipinas announced the 400th basis point reduction in the Reserve Requirement Ratio (RRR) slated for December last week.
To plug the drain on financial and monetary liquidity, the BSP has freed from regulatory rein a total of 600 bps or about Php 600 billion to the banking system since the tapering of RRR incepted in March 2018. The intensity and speed of such adjustments have been matched only before and during the Asian crisis.
What's more, in addressing liquidity issues, the BSP has chopped its policy rates by 75 basis points as the rate of bank credit expansion continued to decline.
Figure 1
For a financial system supposedly operating under ‘normal’ conditions, the degree of ‘stimulus’ or ‘easing’ support from the central bank has just been incredible. Antecedent to the era of central bank activism, these measures were applied only during economic or financial distress.
This time is truly different.
And when the CPI entered the deflationary zone in 2015, the BSP responded with an aggressive program that monetized public expenditures, and the one-time 100 bps cut under the cover of the BSP’s new platform the Interest Rate Corridor (IRC) on June 2016.
Back then, deficit spending was hardly a priority for the National Government.
Fast forward today, as the collapsing CPI hit .9% in September, the National Government (NG) and the BSP jointly enhanced the use of policy stabilizers, covering not just the monetary sphere but likewise in the fiscal space.
And on the monetary front, to complete the trifecta of cuts in RRRs and ON/RRPs, the BSP may likely recharge the second leg of debt monetization, which should reignite street inflation.
From the Inquirer (October 26 2019): Prices of basic goods and services may start trekking higher again next year—although most likely at a less aggressive pace than the 2018 spike—due to a confluence of international and domestic challenges, the central bank said on Friday. In a briefing, Bangko Sentral ng Pilipinas Governor Benjamin Diokno warned that inflation rate forecasts for 2020 had turned less rosy due to near term “volatility in global oil prices and the potential impact of the African Swine Fever outbreak on domestic food prices.”
While a supply shock from the AFS may incite price pressures on the food supply, a sustained elevation of the CPI won’t occur unless backed by a substantial reacceleration in money supply growth.
Think of it: zero-bound rates, RRR cuts, and QE. In what period of Philippine history has all three emergency measures been used simultaneously, and aggressively?
Public Spending U-Turn: Record September Spending and Deficit
In the eight months of 2019, a bizarre twist appears to have marred the NG’s aggressive public spending plans.
Blamed on the budget delay, the NG embarked on a record borrowing spree that allowed it to amass unprecedented amounts of cash in the face of restrained public spending.
Such an incredible cash buildup has led us to speculate that the NG might be preserving this for contingency use in the case of further deterioration of the economy and or the banking system and or has been part of the liquidity façade intended to push rates down or even both.
Such penny-pinching behavior ground to a halt last September as public expenditures zoomed 39% year on year to a record Php 415.09 billion from 8.8% in August. (figure 2 upper pane)
Except for net lending, all components boomed. Tax expenditures soared 189.7%, Subsidies rocketed 179.34%, Interest Payments spiked 31.89%, National Government Disbursements zoomed 31.35%, allotment to LGUs surged 24.95%, and Equity jumped 11%. (figure 2, middle window) NG Disbursements has the largest (61.6%) portion of total expenditures, LGUs 14.4%, Subsidies 13.18%, and Interest Payments 10.4%.
Figure 2
September was henceforth not just a revival of ‘build, build, and build’, but one of ‘spend, spend and spend’ benefiting the bureaucracy, the political class, and special interest groups.
And as a result of the one-month largesse, September’s public sector deficit vaulted to an unprecedented Php 178.6 billion to heave the 9-month deficit to the second all-time high of Php 299 billion following last year’s record Php 378.2 billion. (figure 2 lowest pane)
To be sure, the 9-month figure represents 48% of the original annual deficit target of Php 631.5 trillion or 3.2% of the GDP with less than a quarter to go. Nonetheless, political authorities promised to spend Php 1 trillion in the last quarter of 2019.
If we follow this train of logic where all that is required to boost the economy is for the government to spend like a drunken sailor, why stop at Php 1 trillion? Why not let the NG takeover all expenditures as Mao’s China, Stalin and Lenin’s USSR, and the rest of communist regimes in the twentieth century?
Spending Spike from Soaring PhilHealth, Irrigation and Land Bank Subsidies!
And while infrastructure has carried the banner of the growth elixir, September’s most significant gains came from public subsidies.
Following August’s 532%, September’s growth rate erupted by another 179.34% to Php 54.70 billion. In the three quarters of 2019, among the major expenditures, subsidies registered the most significant growth up 21.36% to Php 151.5 billion. (figure 3, upmost window)
Figure 3
Public subsidies have registered a sizzling 19.36% CAGR since 2016! The nine-month endowment to the corruption wracked Philhealth has already surpassed 2018’s annual funding by 11.24% to Php 58.9 billion. (figure 3, middle pane) The full implementation of the Universal Health Care law should send allotments to the PHIC to the galaxy soon!
Financial contributions by the NG to the National Irrigation Authority (NIA) have likewise risen 11.06% to Php 31.6 billion.
Appropriation to the Land Bank of the Philippines jumped 19% to Php 30.5 billion, following last year’s Php 25.6 billion. The political leadership threatened to abolish the state-owned bank for failing to help farmers in July 2019.
Why would LBP be requesting such a grand amount when it’s supposed to have been lending to a commercially viable market? Or has LBP’s subsidies been about the banking system’s liquidity drain?
Notwithstanding, the three agencies accounted for a whopping 79.8% share of the Php 152 billion in total subsidies in the 9-months of 2019. (Figure 3, lowest pane)
The political trend towards the enlargement of the welfare state has laid the path for explosive growth in public subsidies.
Divergence: September Revenues Shine as Bank Lending Tumbles
Despite the slowing GDP backed by the deceleration in bank credit expansion, September revenue growth improved.
NG Revenues jumped 16.9% in September to Php 236.53 billion from Php 202.35 billion a year ago. Despite this month’s outperformance, revenue growth continues to decelerate following its peak rate of 35% in December 2017. (figure 4, upper window)
Tax revenues jumped 15.2% to Php 211 billion from Php 183.23 billion a year ago. BIR collection increased 15.24% to Php 150.5 billion from Php 130.6 billion while Bureau of Customs intake swelled by 15.13% to Php 58.8 billion from Php 51.08 billion over the same period.
Has merchandise trade improved this much in September to support such collection gains for the BoC? Or has this signified another of the NG’s statistical embellishments?
Figure 4
While September’s revenues did enhance the 9-month total, this year’s collections have underperformed 2018 despite the comprehensive tax reform. Tax revenue grew 10.31% in 2019 from 15.64% last year. BIR collection recorded 10.98% from 11.16%. BoC’s collection growth tumbled to 8.15% from 34.21%, while Non-Tax revenue growth slumped to 9.7% from 33.05%. (figure 4, middle window)
It is incredible to see tax revenues holding up against a dramatic slowdown in the banking system’s credit expansion. (figure 4, lowest window)
At the end, increased tax revenues translate to lesser resources for the private sector.
Despite Record Spending and Deficit in September, NG’s Cash Hoard Still at Highest Level
The record spending binge that led to a record deficit in September was not enough to wipe out the record cash holdings in the NG’s coffers, which still stood at Php 242 billion.
The NG raised a record Php 797 billion from the capital markets in 2019 at a time when financial liquidity continues to diminish. (figure 5, table and middle window) In this way, the increasingly scarce liquidity had moved from the private sector to the NG.
That being said, the record cash holding by the NG created the impression of a plethora of liquidity in the system, which along with the plunge in CPI, helped fuel a massive bond rally that pulled down rates. The global bond rally also helped.
With this, the plummeting bond yields have artificially lowered debt servicing rates of the NG.
And in that context, plunging yields have become implicit subsidies to borrowers, which includes the government as a principal borrower.
And despite lower rates, the NG’s debt servicing continues to race towards 2018 highs as consequence from the record debt buildup. The nine-month debt servicing has reached Php 558.22 billion with a quarter to go, exceeding the annual debt servicing highs of 2014 to 2017. (figure 5 lowest pane)
In the meanwhile, the benefit from falling yields from the NG’s cash hoard should evaporate once the NG makes good its promise to spend-away a trillion through the end of 2019
From today’s Inquirer: Angara noted the Department of Budget and Management’s report that 96 percent of the P3.67-trillion budget had been released as of the end of September. Infrastructure spending has reached 92 percent of the full-year target as of September, while total disbursements have hit 98 percent of the target. “The agencies have to catch up on their spending so that we can hit our growth target. The reenactment of the budget was regrettable but as the data has shown, the targets set are still attainable so we must sustain the momentum,” Angara, who chairs the Senate’s finance committee, said in a statement.” (bold added)
If those numbers are accurate, then the NG spending targets are close to being fulfilled with a quarter to go, based on the published data.
And if the NG would go for a trillion in expenditures in the last quarter, then the 3.2% deficit to GDP goal might be met. After all, spending other people’s money is the easiest thing to do.
However, the attainment of the deficit target is no guarantee of a higher GDP.
In any event, with spending targets almost reached, as indicated by the article, the budget brouhaha has been nothing more than a smokescreen.
What Has Prompted the NG’s Spending U-Turn?
Here’s the thing.
What prompted the critical pivot in the NG’s initial reluctance to spend?
Has the economy deteriorated materially to have incited this turnaround?
What would happen to the rate subsidies from the bond boom once NG’s spending binges percolates into street inflation? Is the NG and BSP willing to sacrifice current low rates for higher GDP today?
And why the seemingly coordinated moves by the BSP and NG? Has the BSP’s easing measures been insufficient to have goaded the NG to take action?
What other courses of actions will authorities take should these become inadequate? Will the next QE be more aggressive than its forebear?
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