False optimism can easily lead you astray and prevent you from making contingency plans or taking bold action. Avoid this trap by being clinically realistic and acting decisively as circumstances change—Sequoia Capital Corporation “Coronavirus: The Black Swan of 2020”
In this issue
Local COVID19 Transmissions Have Arrived! Consumer Borrowing Skyrockets: Boom or Danger Sign?
-Consumer Borrowing Skyrockets as Trade Borrowing Stagnates and Car Sales Crash!
-Consumer Boom or Danger Sign?
-More Bailouts Announced: BSP Interest Rate Cuts, Tax Relief and Subsidies; The Coming BSP Financed-Fiscal Deficit Blowout!
-The Public Spending Tradeoffs: Health Facilities and Logistics to Protect Citizens from Covid19 or Save the Tourism Industry?
-Instead of Test, Test, and Test, Has the DOH Embraced a “Don’t Test, Don’t Tell” Policy?
-Local COVID19: Is the “Case, Case, Case, Cluster, Cluster... Then Boom!” Next?
Local COVID19 Transmissions Have Arrived! Consumer Borrowing Skyrockets: Boom or Danger Sign?
Consumer Borrowing Skyrockets as Trade Borrowing Stagnates and Car Sales Crash!
From the Manila Bulletin (March 6): Consumer loans in the Philippines rose in January by the most in more than a decade, eclipsing credit growth among businesses and suggesting that households can help support an economy facing fallout from the coronavirus outbreak. Consumer lending grew 40.1% in January from a year ago, data from the central bank showed. That’s the fastest pace since at least January 2009, according to data compiled by Bloomberg. Credit-card debt and motor-vehicle loans rose 57% and 31.7%, respectively, according to the central bank’s data, while company loans grew by just 8.8% in the same period. Overall, bank loans grew 11.6% in January from a year ago, the fastest pace in eight months. Filipino households may be “more rate-sensitive, jumping at the chance to secure a loan to help fund purchases,” said Nicholas Mapa, senior economist at ING Groep NV in Manila. This could “play a part in 2020’s recovery, coronavirus notwithstanding.”
These are the popular kind of Keynesian spend your way to prosperity narratives that the public wants to hear. It’s a cost- or consequence-free story that looks at benefits that can only end in well. However, neither does it give a whit about the intertemporal flow of funds nor the impact on the borrower’s balance sheets.
Why has credit card debt gone through the roof? Why the startling divergence between production loans and consumer loans? If credit card debt grows exponentially more than income, won’t the consumer become burdened by the surge in debt servicing? Or, if future spending is pulled forward today, what will be left for consumers to spend tomorrow?
Despite 75 bps cuts in 2019, while consumer loans catapulted to the moon, production growth decelerated to 8.79% in January 2020 from 9.13% in December 2019. Of the twenty sectors, only 6-sectors posted increases in their respective month-on-month growth rate, four sectors registered deflation, and the rest reported growth decelerations.
Bluntly put, the sluggish demand for credit financing by the supply side exhibited lackluster economic activities, which must have placed expanded pressure on income growth of consumers. Hence, with lesser income to spend on, consumers resorted to the aggressive use of the plastic to their augment spending.
However, such an incredible surge in credit card usage, financed by formal institutions, translates to a massive escalation of leverage on the balance sheet of consumers. That’s unless such has been supported by a broader level of participation from the public. Citing a CFS survey in 2014, the BSP’s 2017 FSR reported that less than 14 percent of Philippine households sourced their debt from the formal sector. (p. 23)
Even if this grows to 20 percent today, it still shows the significant financial gearing by credit card-holders.
Figure 1
And the BSP’s loan statistics provide a stunning panoply of contradictions.
If consumers, supported by bank loans, were on a spending rampage, then why have bank loans to the trade sector been languishing? Growth of bank loans to the trade sector slumped to 1.03%, (at least) a four-year low! Has the trade sector refrained from restocking, or expanding in response to such spending binges? Why so? What caused the substantial discoordination between the consumers and the supply chain of the retail sector? A surge in input prices that squeezed margins? But there is no sign of this. (Figure 1, middle pane)
Furthermore, car sales plunged 11.88%, while imported vehicles registered a far larger 16.2% crash in sales in January. Stunningly yet, household bank vehicle loans soared by 31.73% over the same period! And the January data represents a second straight month of growth detachment between reported credit and sales, what has been going on? (Figure 1, lower pane)
Have banks been declaring accurate data to the BSP or not? If accurate, why the resounding dissonance? Have consumers become more sensitive to the BSP’s rate cuts? How so? Or have consumers been panic buying goods in anticipation of COVID19’s impact?
Or, has the BSP been fudging the figures? Or, have proceeds from the reported bank vehicle loans, as well as credit card debt, been diverted elsewhere, like speculation on real estate?
Consumer Boom or Danger Sign?
The staggering imbalance by the demand and supply side of consumer borrowing activities should have caused a massive spike in the CPI. January CPI’s increased to 2.9% only from December 2019’s 2.5%. (Figure 2, upper window)
And with February’s CPI at 2.6%, does this mean that spending intensity decreased because consumers borrowed significantly less?
Figure 2
Cash remains a significant medium of domestic market transactions. Though currency in circulation did rise by 13.4% in January, it was little changed from December’s 13.3%. (figure 2 middle pane)
To oversimplify, from a statistical perspective, the boom in consumer loans hardly indicated a consumer spending spree. Data on real economic activities dispute this claim.
To be sure, such insane growth numbers wouldn’t come for free.
Even the BSP warned on this in their Financial Stability Coordinating Council’s (FSCC) 2018 Financial Stability Report (p.15): “On the retail side of bank credit, the rise in consumer loans (CL) has also been accompanied by an increasing level of non-performing loans (Figure 2.10). Since residential RE loans which comprise 40.5 percent of the CL portfolio of the banking system as of end-March 2019 have a direct impact on consumers, developments in the RE sector need to be monitored.” (figure 2 lowest pane)
Well, the context of the baseline that ended on the 1Q of 2019 was the basis of the BSP's observation. That was when growth clocked in at around 14%. With the current rate of 40%, one can just imagine the proportionate magnitude of NPLs that are about to help torpedo the banking system's capital base! And 40% takes into account only credit card, auto, payroll and other loans, which excludes real estate. Will household real estate loans push up this number?
Even if consumer loans (ex-real estate) accounted for only 10.5% of total loans, credit impairments of a significant scale would ripple to the supply-side. Such adverse reactions, consequently, should generate a feedback loop.
In the end, the exponential surge in consumer loans is a sign of danger rather than support to the economy.
And not only will COVID19 expose the inherent fragilities embedded into the credit financed spend-to-prosperity model, but it should also reinforce the shift of consumers preference in conducting transactions towards the digital economy.
More Bailouts Announced: BSP Interest Rate Cuts, Tax Relief and Subsidies; The Coming BSP Financed-Fiscal Deficit Blowout!
Figure 3
Let us tune in to financial liquidity.
Aside from consumers, the BSP’s corporation’s depository survey shows improvements in savings deposit and M3. The jump in savings deposits growth to 7.2% in January from 6.2% in December contributed to M3’s advance to 11.9% from 11.3% over the same period. That’s aside from cash in circulation, which increased by a tad to 13.4% from 13.3%. (figure 3 middle pane)
Such improvements have notably been brought about by the historic rescue measures of the banking system by the BSP in 2019. The 200 bps downside adjustment of the Reserve Requirement Ratio (RRR), which has injected an estimated Php 200 billion in November and December, representing the second installment of the 400 bps cuts for the year.
Also, the unprecedented monetization by the BSP of the Philippine treasuries has resulted to an ALL-TIME high in the year-on-year increase of net claims to the central government by Php 550 billion, which clocked in at a simmering 31.94% growth rate. Aggregate net claims to the central government stood at Php 2.27 trillion in January, slightly lower than the ALL-TIME high registered last December at Php 2.366 trillion.
And the gargantuan infusion of high-powered money pushed the growth of demand deposits to 18.5% in January, representing a 27-month high, from 16.8% in December. (figure 3, lowest pane)
Yet, total loans grew by only 11.4% in January, a marginal increase from 10.63%, primarily from the explosive growth of consumer loans.
To recall, the BSP slashed policy rates by 75 bps in 2019, which apparently, have done little to increase bank lending to the supply-side.
With COVID19 and the political response to it escalating the fragilities of the domestic economic chains, aside from the regulatory bailouts*, the BSP proposes for more rate cuts.
*More Banks and Non-Banks Bailouts: BSP Grants Regulatory Relief to Portfolios Exposed to COVID-19 and the African Swine Flu! March 1, 2020
From the Inquirer: (March 3) The Bangko Sentral ng Pilipinas (BSP) is ready with measures to boost growth — specifically through another round of interest rate cuts — should the ongoing novel coronavirus outbreak last longer and threaten the domestic economy. BSP Governor Benjamin Diokno said the central bank still has room to cut rates further, thanks to its earlier success of taming inflation, which had hit its highest level in almost a decade in 2018. “The [Monetary] Board was of the view that [in] a tame inflation environment, there is room for a further preemptive reduction in the policy rate to support market confidence,” he said on Tuesday (March 3).
If the 75 bps cuts botched stimulating supply-side bank borrowing, will more rate cuts finally do the job?
And the bailouts may not be limited to monetary policies, but would cover some tax angles.
From the Inquirer: (March 3) As tax collections decline due to firms’ slower sales while shipments of imported goods from China and elsewhere fall amid the COVID-19 outbreak, the government plans to grant temporarily relief to affected companies. “What we’re doing now is evaluating what will be most affected by COVID-19. We are looking at ways to help these companies—we’re looking at who are those importing the most from China,” Finance Undersecretary Antonette C. Tionko said. In the case of the tourism sector, which had enjoyed a surge of inbound Chinese tourists in recent years, Tionko said the government also wanted to help airlines and hotels reeling from COVID-19’s economic impact. Tionko said in an interview that the government was thinking of waiving fees—for example, landing fees in the case of airlines. While the government had yet to firm up relief for affected firms, Tionko said all agencies will be involved in this initiative.
So while the government may cut taxes for some, it will subsidize others.
From the Inquirer: (March 4) The Department of Tourism (DOT) on Wednesday said it would shell out P6 billion to boost domestic tourism, following the scare caused by the coronavirus disease (COVID-19). In a press conference, Tourism Secretary Bernadette Romulo-Puyat said that DOT would spend the amount, called the tourism resiliency program, for “international and domestic promotions, infrastructure, and regional tourism development.”
But there is no free lunch. Since all these measures represent a form of political redistribution, there will be costs.
For instance, big and politically-connected tourism enterprises are likely to benefit from the proposed subsidies at the expense of the smaller ones. Also, the rest of the economy will bear the costs of such politics based reallocation.
So how would such bailouts increase general liquidity or improve the economy?
The current scenario indicates that revenues of the National Government will fall as public spending continues to expand, resulting in the bursting of the fiscal deficits to uncharted territories!
And since an economic downturn should translate to LESSER availability of funds, on account of mounting financial losses, WHO would finance those deficits?
And since bad loans can be expected to swell, banks will also be starved of liquidity. And where will the NG and the banking system get the required liquidity to sustain them?
And you must have guessed it right. As the lender/financier of last resort, the BSP can be expected to ramp up its printing and digital press.
And today’s record rescue will be dwarfed by its coming actions in response to the COVID outbreak!
The Public Spending Tradeoffs: Health Facilities and Logistics to Protect Citizens from Covid19 or Save the Tourism Industry?
And here is more.
Trade-offs exist even in political choices.
For instance, why mount a bailout of the tourism sector? How will a bailout boost the problem of excess capacity? Why should taxpayers and the peso bear the cross of business errors resulting from easy money policies?
If people are sick and suffer from revenue losses, how can they support a sector dependent on disposable incomes?
Why not use political resources instead to shield from the real menace: COVID19? Why not aggressively acquire testing kits, massively buildup or improve public health facilities, enhance surveillance and monitoring capacity and mobilize health workers, train and deploy nationwide?
Shouldn’t the welfare of the general population be a priority than the interests of a few?
Or are people just dollops of statistics and meant to be milked financially for political fetishes expressed by popular boondoggles?
Instead of Test, Test, and Test, Has the DOH Embraced a “Don’t Test, Don’t Tell” Policy?
As this thing evolves, remember: we did not hedge. We told you what we saw and what was coming if we failed to take action. Most are too busy hedging to get their head out of the sand.--@normonics
I have been stating here that the National Government may have likely been underreporting COVID19 infection data.
But while the impact from a cover-up of economic, financial and banking blemishes may show up in the long run, that can’t be said from a pandemic.
Actions of the Department of Health (DoH) has emitted such signals.
In the early February, they warned the public against attending large gatherings. But then, in about a week after, alongside the other agencies, the Department of Trade (DTI) and the Department of Tourism (DoT), the DOH took a U-turn. In promoting mall festivities, such activities have been considered safe, according to the DoT, provided the public undertake precautionary measures.
And then in a February 26 tweet, the DOH said “There have been reports of asymptomatic COVID-19 positive individuals. Pinag-aaralan pa ito. Masasbi naitn 'yan in the coming months. (This will be studied and we can comment in the coming months)” (bold mine)
Three days later, the DOH made another volte-face reinstating their warnings against large gatherings, and thereby, announcing the cancellation of the joint Tourism program.
Why so? Have there been actual cases that they haven’t declared?
Interestingly, of the 458 evacuees from the Diamond Princess, the DOH conducted tests only to those with symptoms. As I pointed out last week, based on a recent study, asymptomatic cases slightly dominated the distribution of infection cases in the cruise ship**.
So why haven’t ALL the crew members been tested? Has it been because the DOH have been scrimping on testing kits, which costs about USD 234 per 500 reactions?
The most efficient way to contain the spread and mitigate the impact of the virus could be through aggressive testing.
As the Spanish newspaper the El Pais quoted an expert (@InfectiousDZ), "If we could test all those who have symptoms, we would know the true incidence of the coronavirus, but we don't have the resources, nor the staff."
Former US FDA commissioner Scott Gottlieb recommended, “Identifying patients is key to getting them proper treatment, containing outbreaks where we can, and mitigating spread where containment isn’t fully possible. These must be our focus now.”
Aside from Singapore, which some experts call as the “gold standard” in health surveillance, the South Korean government has aggressively been ferreting out the virus through mass testing. They have even instituted an amazing drive-thru for testing.
As of March 8, since the onset of the community outbreak, the South Korean government has tested about 181,384 people (!) with 162,008 showing negative results, according to Reuters.
In contrast, the US has, so far, tested less than 6,000 samples as of this writing. And the lack of testing has become a contentious political issue.
Yet, the DOH claims that it has only 4,500 testing materials at hand, and that 19,000 will be acquired soon.
It is easy to say that there have been no infections; that is because no testing produces no incidence of infections.
Has the DOH adopted a ‘DON’T test, DON’T tell’ policy?
Local COVID19: Is the “Case, Case, Case, Cluster, Cluster... Then Boom!” Next?
Along with Indonesia and Myanmar, the Economist magazine published an article accusing the Philippines as one of the countries that have been underreporting COVID19 cases.
On the same day, the reports of positive COVID19 surfaced from Taiwan, Australia, and Japan from individuals who recently visited the Philippines. In short, the Philippines exported COVID19, even when the DOH says none existed at that time.
The following day, Cardinal Santos Hospital declared that a patient was tested positive for COVID19. The next day, Deloitte Philippines divulged that one of their employees had also been tested positive for COVID19, which St. Luke’s Hospital affirmed.
Positive COVID19 cases surfaced based on private sector declarations and not from the DOH!
While these public pronouncements may have pressured the DOH into recognizing these cases, the hospitals had been accused of not been cooperating with them. Censorship of public disclosure from private institutions may implicitly be at work here.
Instead of transparency, the next course of action may be about the DOH controlling the flow of information for political goals.
The DOH claims that two of three foreigners, who tested positive with COVID19 abroad, acquired it from their travels in other places and not the Philippines. Whether the third foreigner's COVID19 was acquired here or not has yet to be determined.
The DOH appears to be downplaying accounts of local transmission even when they mentioned the possibility of asymptomatic transmissions. Unfortunately, the World Health Organization (WHO) confirmed the first incidence of local transmission.
Last week I wrote,
To see how complacent locals will react to reports of domestic transmissions should be interesting.
Here are the initial responses:
-SM, the owner of the building, which housed the COVID19 Deloitte case, closed the building for disinfection.
-Several schools and local governments declared suspension of classes in both private and public sectors.
In response to the local transmission, the DOH asserts that it would expand contract tracing.
But that would be a little too late now.
Analogous to the appearance of COVID19 cases in New York, Ebola expert, Dr. Dona Grayson tweeted, “Unfortunately, community spread of #coronavirus in #NYC is well underway, likely starting at least 2-3 weeks ago…Broad-based testing, contact tracing and quarantines are LONG overdue.”
The surfacing of the local transmission translates to earlier and the present spread of infections.
It’s not about cases, but about clusters now!
To paraphrase Ben Hunt of the Episilon Theory said, "case, case, case, cluster, cluster... then boom!"
The tendency for authoritarian regimes has been to cover-up COVID19 incidences.
In a tweet, Dr. Kevin Purcell, Liverpool Surface Scientist and Programmer observed that (March 8): “All the states in grey on this map (showing no coronavirus) also have authoritarian governments. Perhaps they all scared SARS-CoV-2 away? Or perhaps there is a correlation. We’ll find out in 10 weeks or less when thousands of people fall sick and tens are dying.”
Oh, several politicians as the Vice President and a Senator have likewise sensed the underreporting by the DOH.
In any case, once a cluster or clusters appear, do the Philippines have sufficient public health facilities to accommodate an epidemic?
Or because of this, will the DOH adapt a Xi-style lockdown?
From a DOH Tweet: (March 7) “Duque: Once there is sustained community transmission or increasing number of local COVID-19 cases whose links cannot be established, the strategy will be shifted from contact tracing to implementation of lockdown or possible suspension of work and classes.”
Are you ready for it?
Please keep safe!
...
