It doesn’t matter whether it comes in one year or four. If you don’t start preparing now, you will maybe do better while the economy continues to do okay, but whatever gain you get from that will be overwhelmed by problems with your investments in the downturn—Jeffrey Gundlach
In this Issue
The BSP’s Signals an Interest Rate U-Turn as National Government’s October Revenues and Spending Slow!
-Suddenly, The BSP’s Signals an Interest Rate U-Turn, Why?
-In Brief: the NG’s Fiscal Standings in October
-Despite Tax Hikes, Softening Revenues Reflect Economic Health
-National Government Restrained Spending in October: What Happened to Build, Build, and Build?
-Fiscal Conditions Provides Evidence of Economic Centralization (Neo Socialism) as -NG Debts and Cash Holdings Soars to Record!
The BSP’s Signals an Interest Rate U-Turn as National Government’s October Revenues and Spending Slow!
Suddenly, The BSP’s Signals an Interest Rate U-Turn, Why?
Just early this month, the BSP ruled out further easing this year or declared an end to the easing streak (Inquirer, November 14): “Diokno said the Monetary Board “believes that prevailing monetary policy settings remain appropriate.”…The shutoff of the cash valve, he said, would give previous monetary easing decisions, like a 75 basis point reduction in rates and a cut in bank reserve requirements, time to “work their way into the economy.”
Then, in the next two weeks, comes a fantastic change of heart as another easing may be at work said BSP Governor’s Diokno (BusinessWorld November 26, 2019): “The BSP will always be data-dependent so we will evaluate… every time we have a policy meeting,” he told reporters on the sidelines of the Financial Education Stakeholders Expo at SMX Convention Center in Pasay City… After this year’s 400 bp reduction, the RRR starting next month will be 14% for universal and commercial lenders as well as non-bank financial institutions with quasi-banking functions, and four percent for thrift banks, while the requirement for rural banks will remain at three percent. At the same time, Mr. Diokno said monetary authorities will avoid “drastic” policy adjustments since they do not want to be misinterpreted by the market as being “desperate”… He had also said late last week that monetary authorities would want to watch previous policy moves take root in the market, since it takes up to nine months for the impact to be evident. (italics mine)
And this comes right after, the BSP redefined deposit substitutes, which according to this BusinessWorld November 27 report, releases about Php 28 billion in liquidity since they wouldn’t be subjected to reserve requirements: Ang implication ’nun (Its implication) is I think we released about P28 billion into the financial system,” Mr. Diokno told reporters on the sidelines of the Financial Education Stakeholders’ Expo held at SMX Convention Center in Pasay on Monday. “Again, we will see how the financial market will respond to that,” he added.” (italics original)
As a data-dependent institution, what has prompted the BSP’s stunning volte-face? Have banks not been reporting impressive multi-year highs in the growth rates of its revenues and profits this year? Which particular data set has the BSP been responding to?
Could it be about the sustained sluggishness in October’s banking credit and domestic liquidity conditions? The BSP will publish the sector’s data this weekend and the banking sector's Financial Statements (FS) in the 2nd week of December. Could it be about the fiscal conditions of the National Government? Or, could it have been both?
If the BSP does not want to be misinterpreted by the market as being “desperate”, then why such "drastic policy adjustments", which they said they would want to avoid?
Until a cut in policy rates have materialized, the BSP’s signaling backslide may be construed as a trial balloon to see how the market reacts.
In Brief: the NG’s Fiscal Standings in October
It deals with the October deficit from lower revenues than from expanded spending. After a spending orgy in September, surprisingly, the NG pulled back in October, suggesting lesser activities in “build, build and build”.
Figure 1
And with 2-months left, October’s deficit of Php 348.25 billion represents a 45% shortfall from the annual target of Php 631.5 billion or 3.2% of the GDP. Either the NG will ramp up spending in the last two months of 2019, or there has been a deliberate effort to restrain it for unstated reasons.
Finally, in spite of the seeming moratorium in spending growth, the NG continues to raise substantial funding from the capital markets at historic levels. As such, the NG’s cash position continues to balloon to unprecedented levels too.
Because of the casual interdependence of the economy, the banking system, and the NG’s fiscal operations, their current conditions explain the BSP's recent U-turn.
Despite Tax Hikes, Softening Revenues Reflect Economic Health
In the first month of the last quarter, NG collections from all segments fared unremarkably to weigh on the 10-month performance.
Total revenues in October grew by only 6.0% to Php 261 billion. The growth of BIR collections, which accounted for 68% of the total revenues, was up 8.09% to Php 178.12 billion.
However, the Bureau of Customs (BoC) and Non-tax revenues endured a greater ordeal. Most likely reflecting on the continued lethargic merchandise trade, the BoC underperformed to post a meager increase of only 3.04% to Php 57.7 billion, while non-tax revenues even decreased by 1.4% to Php 25.05 billion.
To buoy the GDP to over 6% in the 4Q, the CPI would have to register less than 1%, should the subdued growth in nominal revenues be sustained through the next two months.
Figure 2
And as a consequence of the lackluster October collection performance, 10-month revenues registered a 9.8% growth to Php 2.589 trillion. Tax revenue posted a 9.93% increase to Php 2.328 trillion, consisting of the BIR’s 10.7% to Php 1.781 trillion, and the BoC’s 7.6% to Php 528 billion.
Since 2011, the growth rate of tax revenues and BIR collections have been on a downtrend. (Figure 2, upmost)
And the Duterte administration’s tax reform, TRAIN 1.0, has, so far, only juiced up NG’s top line in 2018. Unfortunately, signs of strains have surfaced, demonstrating the diminishing returns from its incipient stimulative effects.
Furthermore, the tapering growth of money supply conditions, manifesting the slowdown in bank loans, has also been correlated with changes in tax revenues. (Figure 2, middle window)
That said, aside from changes in policy and administration, tax revenues are determined mostly by real economic conditions. (figure 2, lowest window) Thereby, the moderating growth in tax revenues exhibits the deceleration of the real economy as a consequence of tightened liquidity conditions. Not only will the tax revenues be affected, but its feedback loop would aggravate the liquidity squeeze in the financial system.
The about-face by the BSP may be explained by this dynamic. Under this scenario, a weak topline, instead of a political spending binge, would incite the widening of fiscal deficits.
The BIR even admitted to the Php 150 billion collection shortfall, coming from the “failure to meet targets in collection of excise on fuel and sugary drinks”, reported the Inquirer (November 26). As the old economic saw goes, When you tax something, you get less of it, hence, the diminishing returns from higher tax rates!
Sadly, popular politics eschews the fundamental rule of economics. As the great author Professor Thomas Sowell wrote: The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.
To extend this line of thinking, has the mainstream ever ruminated or debated the crowding-out effects of taxes on productive investments on the economy? Or should the quintessence of political redistribution's 1 – 1 = 2 be accepted blindly as an incontrovertible fact? Or does political spending only have net beneficial effects?
In this world of fiat money inflationism, short-termism or immediate gratification has reoriented people’s sense of priorities.
National Government Restrained Spending in October: What Happened to Build, Build, and Build?
Figure 3
As earlier noted, as revenue growth relapsed, political spending has similarly and unexpectedly regressed. Despite the media and political blaring of “build, build, and build”, public expenditures had barely been higher, up 1.37% in October to Php 311 billion from September’s milestone of Php 415.1 billion. (Figure 3, upmost pane)
The resounding drop in October’s spending from September’s record ramp sapped the 10-month to Php 2.938 trillion.
Although allotment to the local government jumped 20.73% YoY to Php 53.85 billion, the 4.23% decrease in NG’s disbursements to Php 226.9 billion caused the slack in the Yoy % and nominal peso change. (Figure 3, middle pane)
NG disbursements accounted for 73% share of October expenditures and 65.03% of the 10-month aggregate.
Interestingly, while subsidies zoomed 367% YoY, in nominal peso, spending plunged to Php 7.24 billion from a record Php 54.7 billion in September. Subsidies to the three of the biggest recipients, namely, National Irrigation Administration, Philhealth, and Landbank, had been substantially reduced. Strikingly too, despite record borrowings, interest expenditures fell 13.7% to Php 20.724 billion in October, which also was lower by almost half from Php 43.1 billion in September.
To be sure, the budget earmarks haven’t been the issue. The National Government has deliberately withheld spending last October.
Fiscal Conditions Provides Evidence of Economic Centralization (Neo Socialism) as NG Debts and Cash Holdings Soars to Record!
Figure 4
As earlier stated, instead of spending, October’s deficit of Php 49.26 billion had been a product of soft revenues. And the accrued 10-month deficit of Php 348.25 billion or 2.35% of the GDP remains 45% shy of the Php 631.5 billion or the 3.2% deficit-to-GDP annual target.
Again, spending activities, in the last two months, would have to accelerate, otherwise, the NG will fall short of attaining its target. That is, of course, unless revenues will drop sharply.
The other aspect is that this spending slowdown is a deliberate undertaking designed to increase the government’s cash reserves.
For one thing, in spite of the spending restraint last October, what is clear has been the centralization dynamic of financing and resources. (Figure 4, upmost window) Even with a 2.35% deficit to GDP ratio, the 10-month expenditure-to-GDP rose to 19.83%, an all-time! With political projects vacuuming or corralling more and more resources and financing, which come at the expense of productive investments, the rate of capital consumption accelerates.
And expenditure-to-GDP measures the direct spending, but how about the indirect, or the PPPs or private sector spending on political projects?
And because expenditures are supposed to represent facts while GDP is an estimate, an inflated GDP translates to an even higher ratio!
The opposition’s criticism over the failure of “build, build and build” has been misplaced. The benchmark should not be the number of projects. Such assumes the NG obtains revenues from productive undertakings. Rather, the spotlight should focus on the opportunity costs from the diversion of resources to the NG through (current) taxation (aside from future taxes through debt and the inflation tax).
Or how these projects (1) divert resources to the politically connected elites that widens economic inequality, (2) may end up being white elephants, and (3) the increasing burden from the mounting carrying cost of debt over their assumed economic and financial viability.
If the poster child of infrastructure is the more than Php 6 billion SEA games, then the future certainly looks bleak. From the South China Morning Post (November 26): “A half-painted stadium with few working toilets and a “media centre” resembling a barely lit warehouse; bad roads leading to unfinished venues; teams waiting hours for transport and then being forced to sleep on hotel floors. The official theme the Philippines has chosen for the 2019 Southeast Asian Games is “We Win As One”, but in the lead-up to their November 30 start there is an unofficial one that has become all too evident: “We are not ready.” This unpreparedness is on display in everything from crudely written signs to poorly organised accommodation and strained logistics. One Filipino reporter covering the games, speaking on condition of anonymity, said from what he had gathered so far this is “the worst games – before this it was the [2017 edition] in Malaysia”.
And for those expecting a boost from the Chinese government’s promises, the South China Morning Post pours cold water on such popular impression (October 25). “Beijing in 2016 pledged to fund an array of major construction jobs for the Philippine president’s signature Build, Build, Build programme. But three years on, many projects remain on the drawing board, leaving Duterte with little to show for his much-touted policy pivot to China China and the Philippines signed six deals last week that boosted Beijing’s funding for the Southeast Asian nation to a total of US$924 million, but the amount is a long way from the US$9 billion pledged in 2016.”
So in spite of the restrained spending, the NG continues to frantically borrow money at an unprecedented scale to amass record amounts of cash in its coffers. (figure 4 lower window) Whether such intensive cash build-up is about next year’s aggressive spending or about the current attempt to influence bond yields lower, or as contingent for emergency purposes or a combination of, the future will tell.
Nevertheless, the BSP’s interest rate signaling turnabout represents an attempt to ease the financing onus of the National Government and the banking system.
