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But under inflationary conditions, people acquire the habit of looking upon the government as an institution with limitless means at its disposal: the state, the government, can do anything. If, for instance, the nation wants a new highway system, the government is expected to build it. But where will the government get the money? — Ludwig von Mises
In this issue
October Bank Loans Tumbled to 9-Year Lows in the Wake of Rate Cuts and 200 bps of RRR Cuts, BSP’s QE Hits Record, System Leverage 110% of NGDP!
-October’s Liquidity Bounced as Bank Credit Tumbled to 9-year Lows, What Happened to the BSP’s Rate Cuts?
-If Total Banking Loans Fumbled, Why the Rebound in Demand Deposits? Why the Need for Massive Bank Liquidity Injections?
-Production Bank Loan Growth Hit 2010 Lows on Broad-Based Slowdown!
-Emergent Subprime Debt: Record Consumer Borrowing in the Face of a Slowing (real) Economy!
-BSP’s Debt Monetization Hits Fresh Record as Total Bank and Public Sector Leverage Reached 110% of NGDP!
October Bank Loans Tumbled to 9-Year Lows in the Wake of Rate Cuts and 200 bps of RRR Cuts, BSP’s QE Hits Record, System Leverage 110% of NGDP!
In a survey conducted by the Bangko Sentral ng Pilipinas (BSP), no such thing as a global recession may derail the rosy outlook of the Philippines, according to the banking system.
From the Inquirer’s “BSP survey: PH banks see bright horizon amid dark global recession clouds” (November 28): The Philippine banking industry remained optimistic about the country’s economy amid signs of a global recession just lurking around the corner, according to results of a survey by the Bangko Sentral ng Pilipinas (BSP). In a statement, the BSP said majority of respondents in the semi-annual poll, “Banking Sector Outlook Survey,” saw gross domestic product to grow between 6 and 7 percent in the next two years.
With banks aggressively raising money, what would they be expected to do? Would they candidly tell the public of the existing challenges in their balance sheets that may spread or ripple to the economy, which could raise their cost of accessing the people's savings? Or would they project painting the town red to ensure their easy and cheap access to the funding?
So let us see if the recent actions by the BSP have mitigated the obstacles faced by the banking industry.
October’s Liquidity Bounced as Bank Credit Tumbled to 9-year Lows, What Happened to the BSP’s Rate Cuts?
Last week, the BSP reported a glaring contradiction between bank credit expansion and domestic liquidity growth conditions.
First, domestic liquidity bounced. From the BSP: “Preliminary data show that domestic liquidity (M3) expanded by 8.5 percent year-on-year to about ₱12.1 trillion in October 2019, faster than the 7.7-percent growth in September. On a month-on-month seasonally-adjusted basis, M3 increased by 0.9 percent. Demand for credit remained the principal driver of money supply growth. Domestic claims grew by 6.7 percent in October from 7.5 percent in the previous month due mainly to the sustained growth in credit to the private sector…Meanwhile, net claims on the central government grew by 6.5 percent in October from 6.0 percent in September, reflecting the increased borrowings by the National Government.” (bold added)
Next, despite the record surge in household credit, production loan growth stumbled to a-nine year low pulling total loans to the same nine-year lows. From the BSP: “Loans from universal and commercial banks for household consumption grew by 26.7 percent in October from 26.2 percent in September, due to faster growth in motor vehicle, credit card, and salary-based general purpose consumption loans during the month. Meanwhile, loans for production activities—which comprised 87.2 percent of banks’ aggregate loan portfolio, net of RRPs—expanded at a rate of 7.5 percent in October, lower than the reported growth in September at 9.0 percent. The sustained increase in production loans was driven primarily by lending to the following sectors: real estate activities (18.4 percent); financial and insurance activities (11.6 percent); construction (28.9 percent); electricity, gas, steam and air conditioning supply (5.2 percent); and wholesale and retail trade, repair of motor vehicles and motorcycle (3.0 percent). Bank lending to other sectors also increased during the month, except those in professional, scientific and technical activities (-28.0 percent) and other community, social and personal activities (-34.4 percent).
If the principal driver of money supply growth is credit, then why has the steepened decline of the latter caused a vigorous bounce of the former?
Figure 1
Led by production loans, which recorded a sharp deceleration to 7.45% in October from 9.03% a month ago, total bank credit expansion likewise declined to 9.03% from 10.38%.
Interestingly, as both the rate of production loans and total loans fell to a 9-year low, growth in household credit rocketed further to set a new record high at 26.72%! (Figure 1, upmost window)
And total bank credit appears to have ignored the three rate cuts totaling 75 bps by the BSP (May, June and September)!
In a stunning U-turn, the BSP recently proposed another rate this December; the question is why?*
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’s Signals an Interest Rate U-Turn as National Government’s October Revenues and Spending Slow! November 28, 2019
And there you have you it, the sharp decline of the rate of growth in bank credit expansion prompted the turnaround of BSP sentiment!
So not only has the 75 bps of interest cuts failed to arrest the downtrend in bank credit transactions, it has even accelerated it!
Even worst, consumers have been accelerating the leveraging of their respective balance sheets, most likely to augment spending, in the face of a downshift in the real economy! The BSP’s Banking Consumer Loan data includes credit cards, auto loans, payroll loans, and others, but excludes real estate loans. How can such borrowing spree, unsupported by economic strength, not represent subprime or high-risk lending?
And has liquidity been improving when cash in circulation continues to languish, and when savings deposits remain stagnant? M2’s Savings Deposits commands the largest segment of M3 with a 21.95% share, while currency in circulation comprises 10%.
If Total Banking Loans Fumbled, Why the Rebound in Demand Deposits? Why the Need for Massive Bank Liquidity Injections?
Figure 2
The BSP liquidity data reveals blatant contradictions.
If the rate of total bank credit expansion plunged to a 9-year low, how can it be that Transferable Deposits or demand deposits, including managers’ and cashiers’ checks, be strengthening?
Transferable deposits grew 11.5% in October from 10% in September and 8% in August. Aren’t demand deposits the principal source of bank credit creation that works its way as money supply growth?
Why the enormous gap between the rate of change Demand Deposits and Total Bank Credit expansion?
Or what’s been vacuuming the bank’s money creation that impedes its transformation into cash?
And there’s more.
Why the long-term downside drift in M2’s savings deposits? Could it be that savings deposits, as the BSP noted in its 2018 Financial Stability Report, have been depleted not only to finance the bank’s lending operations, but also to act as a plug to the liquidity squeeze? Why has the three-month rebound in Demand Deposits, perhaps partly emanating from the BSP’s record financing of the National Government, failed to uplift savings materially?
Recall that aside from the 75 bps policy rate cuts, the BSP’s October bank credit and liquidity reports incorporate the May to July 200 bps downside adjustments in Reserve Requirement Ratios (RRR). Bluntly put, freed liquidity has barely improved the banking system’s savings deposits conditions or even cash in circulation. And perhaps, the growth in Time Deposits may have signified deposits from borrowings by the banks and or by National Government. Time Deposits expanded 16.2% in October, an 18-month high, 15% in September, and 11.7% in August.
Because of Time Deposits, M2’s Other Deposits account grew 5.5%, the highest since January 2019’s 6.9%, but with the baseline still manifesting a downtrend, what’s to ensure that the current bounce is sustainable? A permanence of bailouts?
And after peaking in July, the simmering growth rate of Securities Other Than Shares Included in Broad Money or Deposit Substitutes have started to ease. Deposit substitutes, comprising all types of money market borrowings by banks like promissory notes, repurchase agreements, commercial papers/securities, and certificates of assignment/participation with recourse, grew by 29.7% in October, down from 34.1% in September, and 38.4% in August. The BSP recently tweaked the definition of deposit substitutes, allowing it to be exempted from the reserve requirements, thereby freeing an estimated Php 28 billion to the banking system.
Why the need to redefine Deposit Substitutes, lower Reserve Requirements Ratio, the serial cuts in overnight policy rates, and institute a countercyclical buffer** if the banking system has been healthy, and free from maladies? Oh, this question should include the regulatory relief extended by the Insurance Commission on Pre-Need Firms in November 2018***.
And has the BSP and or banking system been juggling and puffing up numbers to look good?
**Regulatory Bailout 2.0: BSP Launches Countercyclical Capital Buffer (CCyB) Intended to Ease Capital Reserves! December 16, 2018
***Insurance Commission Launches Regulatory Bailout of Pre-Need Firms, A Bailout of a Robust System? November 18, 2018
Production Bank Loan Growth Hit 2010 Lows on Broad-Based Slowdown!
Figure 3
Interestingly, bank lending has been weak across the board last October. (Figure 3, upmost pane)
Only five of the twenty categories or 25% registered improvements on a month-on-month basis. These were the Professional (7.69%), Other communities (5.34%), Information and Communication (1.85%), water supply & utilities (.34%), and real estate (.15%). Among the largest decliners were mining (-11.92%), construction (-7.32%), and financial services (-6.01%). Improvements in Professional and Other communities reflect lesser credit contraction. Meanwhile, the latter three showed incremental gains on credit growth.
Four of the five largest sectors reported a significant slowdown in bank borrowing last October on a year-on-year basis. (Figure 3, middle window)
Growth in trade loans also moderated to 3.04%, the slowest since at least 2015. Financial intermediary loans also eased to 11.6%, a 26-month low. Growth in electricity, gas, steam, & air-conditioning decelerated to 5.23%, the slowest since at least 2015. Real estate loans had been the sole gainer, climbing at 18.42%, its highest rate since December 2017.
Construction ‘build, build and build’ loans also downshifted to 28.91%, the slowest pace of increase, since March 2018. (figure 3, lowest pane)
What happened to “build, build, and build” in October? The bank credit data aligns with the drop in NG’s overall expenditures (-1.37%) from the contraction in NG’s disbursements (-4.23%). So with a pullback in government spending in the first month of the 4Q, and if sustained, how might the GDP meet the DOF’s goals, except to massage the CPI?
Also have financial intermediaries been afflicted by the diminishing returns of the great bond boom? Or have they been retrenching from lending, not only to the public but also among themselves?
If such rates of decline will be sustained through the close of 2019, regardless of what the GDP numbers, the impact on the real economy should be evident.
Emergent Subprime Debt: Record Consumer Borrowing in the Face of a Slowing (real) Economy!
But if general lending has been down, consumers are borrowing at record speed and volume.
Figure 4
For the first time, the BSP placed the zooming household credit data ahead of the general bank lending in their press release, possibly highlighting in delight that something has boomed after all.
But credit statistics don’t seem to match actual industry outcomes.
For instance, although auto loans rocketed by a blistering 30.54% in October YoY, auto sales reported a mere 3.76% YoY in the same month. The banking system’s auto loans have reported four straight months of torrid growth rate from 25% to 30%. Ironically, auto sales have yet to make a significant showing to reflect these gains, with July sales at 13.45%, August’s -2.36% and September’s 2.26% YoY. (Figure 4, upmost pane)
Where has the money been flowing to given the brazen mismatch between the borrowing rate and sales?
And while household credit has zoomed at an unparalleled clip, possibly signifying sales boom on high-end stores, credit expansion from its supply side’s counterpart, or the trade sector has been plunging. So has the trade sector been responding to the lethargic growth in cash in circulation rather than the zooming credit card debt? (figure 4, middle window)
Since the BSP’s bank consumer lending portfolio excludes real estate exposure, given the pickup of loan growth on the production side, then consumer borrowing must be also have increased.
Nevertheless, the striking divergence between consumer and production credit use puts into the spotlight the decaying credit profile of the former.
BSP’s Debt Monetization Hits Fresh Record as Total Bank and Public Sector Leverage Reached 110% of NGDP!
What’s barely noticed has that the October liquidity report showed the breakout of to record levels of the BSP’s debt monetization program. (Figure 5, upmost window)
Figure 5
Again, from the BSP: “net claims on the central government grew by 6.5 percent in October from 6.0 percent in September, reflecting the increased borrowings by the National Government.”
Despite the mild pace, the BSP’s quantitative easing program reached a record Php 1.97 trillion, or about 13% of the estimated 10-month NGDP. On a year to date basis, the BSP has financed Php 56 billion, or 10.6% of the NG’s cumulative year-to-date domestic debt of Php 528 billion. Such direct injections from the BSP should have helped increased liquidity in the system, however, current numbers show otherwise.
What this has done instead has been to add distortions to the financial system, partly expressed by the bloating the public debt to reach just off the record Php 7.906 trillion. Though the rate of public and bank credit growth has been retrenching, their respective shares to the estimated 10-month nominal GDP have risen to 53.4% and 57.22% for an aggregate of 110.6%! Total bank lending net of RRPs was Php 8.478 trillion in October. (Figure 5, middle and lowest pane)
Since there is no such thing as a free lunch forever, such rocketing debt numbers have dragged and will continue to weigh on economic performance. And unfortunately, the more indebted the entire system, the more debt will be needed to kick the proverbial can down the road.
It’s why the BSP has not only been easing via regulatory reliefs (RRRs, Countercyclical Buffer and redefining Deposit Substitutes) and policy rate cuts, but add QE into this mix.
And this may be why the NG has taken a reluctant stance in their spending programs.
And all these will serve as a springboard to economic growth???
Good luck to the believers.
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