The worship of the state is the worship of force. There is no more dangerous menace to civilization than a government of incompetent, corrupt, or vile men. The worst evils which mankind ever had to endure were inflicted by bad governments. The state can be and has often been in the course of history the main source of mischief and disaster—Ludwig von Mises
In this issue
Was the Shift from ECQ to MECQ Spurred by Public Finance? BSP Expects NPLs to More Than Double!
-Was Public Finance/Economics or Science the Basis for the Easing of the ECQ?
-With Public Finance Drying UP, What’s Left To Sustain an Economic Shutdown?
-The Philippine Treasury Will Compete With Liquidity Starved Banks for Funding!
-More Trouble for Public Financing: BSP Expects NPLs to More than Double! Direct Bailouts Coming!
-Bank’s Dilemma Showcased by the Banking Index; The Market Psychology Cycle
Was the Shift from ECQ to MECQ Spurred by Public Finance? BSP Expects NPLs to More Than Double!
Was Public Finance/Economics or Science the Basis for the Easing of the ECQ?
The lifting of the lockdown would depend only on the emergence of a vaccine. And so the nation had repeatedly been told. Moreover, “science” would serve as the sole basis for the continuation or release from community quarantines.
COVID cases rose by 208 to reach 12,635 nationwide last May 17th. COVID cases grew by 3,603 in the first 15 days of May for an average of 240 per day.
And yet, the National Government announced the easing of the lockdowns from Enhanced Community Quarantine (ECQ) for high-risk areas to Modified ECQ (MECQ), while low-risk areas were declared General Community Quarantine (GCQ) effective May 16th. The main difference was M-ECQ allowed more economic interactions than the earlier ECQ condition.
Figure 1
Was this change of heart been due to “science”? Or was it something else?
Instead of flattening, because the increases in the daily cases have strangely been rangebound, the aggregate numbers continue to rise in both confirmed COVID-19 cases and the death count. Part of this has been due to the belated improvement of testing capabilities, which reportedly has reached 8,000 a day as of May 11th. Charts from Our World in Data.
To recall, even before the ECQ “test, test, and test” was a battle cry here.
-Instead of Test, Test, and Test, Has the DOH Embraced a “Don’t Test, Don’t Tell” Policy? ; Local COVID19 Transmission Has Arrived! Consumer Borrowing Skyrockets: Boom or Danger Sign? March 8, 2020
Covid-19 and death cases continue to rise in Indonesia and the Philippines, as Malaysia and Thailand seem to have “bent the curve”.
Importantly, the Philippines has the highest raw case fatality rate (CFR) in the region. Death rates are the main issue as a significant majority of people recover from COVID-19. And it is not true that COVID-19 brings about Armageddon to justify lockdowns.
As of May 15th, according to Coronavirus update (in %): the Philippines 6.7, Indonesia 6.5, China 5.6, Japan 4.3, India 3.2, Afghanistan 2.4, S. Korea 2.4, Pakistan 2.2, Thailand 1.9, Malaysia 1.6, and Bangladesh 1.5. The variances in death rates are not only about the disease itself but also reflects on the state of the healthcare system.
And despite the approaching Wuhan-length of lockdown in the NCR, WHY has the national death rates been high relative to the region? And why have COVID-19 cases, representing 1 out of 8,711 people, been stubbornly high despite the two-month of medical martial law?
With the curves unable to bend, why the implicit easing of the ECQ?
Has this been an indirect admission that the experimental policy of paralyzing social and commercial interactions have failed?
With Public Finance Drying UP, What’s Left To Sustain an Economic Shutdown?
Figure 2
Tax revenues plunged 10.7% in March, the biggest since 2009, which partly was in reaction to the imposition of the ECQ. BIR collections fell 10.7% while Bureau of Customs dropped 9.43%.
Nevertheless, primarily because of the 215% surge in non-tax revenue, total collections were up 19.6%. Since peaking in 2018 due to the introduction of the TRAIN, monthly tax revenues growth rates have been in a downtrend. Like the GDP, the ECQ policy in response to COVID-19 broke the floor!
Anyway, despite March’s performance, total revenues grew 12.72%, while expenditures expanded 9.16% in the 1Q. The NG's fiscal deficit was Php 74.029 billion in the 1Q of 2020, lower than 2019’s Php 90.245 billion.
The speed of GDP downgrades by both establishment analysts, and the government has been amazing.
For the crowd that sees economics as a function of mere statistical numbers, it seems that the forced economic paralysis can hardly fit into their econometric models. But the harshness from actual events may have prompted them to rethink their numbers that spurred sharp downside adjustments.
Nonetheless, because the National Government via the DBCC now sees an economic recession that entails a 2% to 3.4% contraction of the 2020 GDP, public revenues have been expected to plummet by 17% as expenditures increase by 10%. The budgetary imbalance would, thus, translate to a deficit-to-GDP ratio hitting a multi-decade high of 8.1% to Php 1.56 trillion!
But since deficits require funding, public debt has been estimated to surge by Php 1.28 trillion or by 15.57% to Php 9.5 trillion!
The current benign liquidity conditions, these numbers have assumed, will remain INTACT!
With public finance rapidly drying up, how then can the government sustain an economy forced into suspended animation?
The Philippine Treasury Will Compete With Liquidity Starved Banks for Funding!
Like the downside adjustments, the vacillation of the availability of savings should signify the challenge for public financing.
True, the Bangko Sentral ng Pilipinas (BSP) can conjure money from its digital printing press, but inflationary financing would amplify the risks of inflation, interest rate, currency, and credit, at a time of when the economy is increasingly fragile from the shutdown.
Moreover, with many emerging markets scrambling for financing, the competition for external borrowings will likely become difficult, if not costly.
Importantly, the National Government will have to compete with the banking system for access to savings!
Aside from the countercyclical buffer and regulatory reliefs*, the BSP recently enumerated the other forms of bailouts it has extended to the financial system: “It must be noted that community quarantine and enhanced community quarantine were declared March 15 and 16, respectively. Following this, the BSP crafted measures to ensure increased credit and domestic liquidity. These measures include: a policy rate cut totaling 125 basis points since February 2020; reduction of the reserve requirement ratios of universal and commercial banks and non-bank financial institutions with quasi-banking functions by 200 basis points; conduct of asset-purchase activities in the market (i.e., repurchase agreement with national government amounting to P300 billion and purchase of government securities in the secondary market); easing of lending to micro, small and medium enterprises (MSMEs) by allowing new MSME loans to be counted as part of banks’ compliance with reserve requirements; and increase of the single borrower’s limit for loans granted by banks and quasi-banks, among others.”
*More Banks and Non-Banks Bailouts: BSP Grants Regulatory Relief to Portfolios Exposed to COVID-19 and the African Swine Flu! March 1, 2020
The BSP has yet to publish domestic liquidity conditions for March to divulge details of its QE.
The BSP has scheduled 400 bps cuts for 2020, the first half or 200 bps took effect on April 3rd. RRR cuts have totaled 600 bps from 2019 and 800 bps since 2018. As noted elsewhere, RRR cuts are measures of last resort designed to inject liquidity into the banking system. The scale of RRR cuts from 2018 to date resonate with the Asian Crisis.
And to reduce the impact of Mark-to-Market losses, the BSP has granted accounting relief measures to banks and financial institutions. That’s aside from the various schemes as “peso rediscounting loans”, “regulations pertaining to compliance reporting, calculation of penalties on required reserves, and single borrower limits”, and “timely suspension of the term deposit facility auctions for certain tenor”.
Given the deluge of regulatory and accounting compliance reliefs, published statistics from the BSP will not reveal the true conditions of the banking system. Individual banks will also engage in the puffing up of their financial statements.
Overall, such regulatory bailouts will allow the concealment of losses, as well as the inflation of assets and the so-called capital ratios.
These bailouts also signify the liquidity strains affecting the banks!
More Trouble for Public Financing: BSP Expects NPLs to More than Double! Direct Bailouts Coming!
Yet, the litany of technical, accounting, monetary, and financial support provided by the BSP has failed to materially improve liquidity conditions of the banking system as of March.
Figure 3
While banks increased lending in March (+12.95%), among the five largest industrial borrowers which account for 65% share of total loans (net of RRP), only loans to real estate (+21.84%), and trade (+6.85%) registered significant increases.
And despite the 75 bps rate cut in 2019 and 25 bps rate cut last February, the bank’s total loan portfolio (net) grew by 11.52%. The massive rate cuts have been far from boosting bank lending.
And as noted last week, the improvements in borrowings may be about raising liquidity or cash reserves in preparation for the ECQ than for operations.
Importantly, as a share of total loans, trade, construction, and real estate accounted for 36.35%, and inclusive of finance, 46.7%. The increased concentration of bank lending heightens the risks of contagion among these interrelated sectors.
Figure 4
Net NPLs broke into multi-year highs last March! That comes in the face of the recent buildup of cash mostly from BSP’s interventions.
And here’s the thing. The BSP expects gross NPLs, at 2.21% last March, to spike to 5% this year! NPLs from the BSP standpoint is about to more than double. That’s a conservative estimate.
And these are the published Non-Performing assets. Even before the ECQ, the ongoing liquidity strains tell us that there is more than meets the eye in the context of delinquent loans. Balance sheet maturity mismatches said the BSP on their 2018 FSRs.
The massive infusions from RRR cuts have done little to help liquidity. The BSP’s liquidity ratios continue to deteriorate to reinforce their downtrends.
The cash and due banks-to-deposit ratios have pulled back from the recent December 2019 and January 2020 highs. The pause in the bond rally has caused a retracement in liquid assets-to-deposits ratio.
And rallying peso deposits mostly from Demand Deposits suggesting that this has been from the BSP’s bond-buying.
Note that the record NET NPLs have emerged even before the ECQ.
With the BSP inducing banks to lend to an economy severely impaired by the government-mandated paralysis, how much of these loans are headed straight into the gutters???
Will these improve or compound on the current juncture endured by the banking system?
Moreover, arbitrary suspension of payments in violation of contractual rights has become institutionalized. With this ingrained as part of the bailout culture, why wouldn’t more people use the recent crisis as a pretext to expand this?
That said, a tsunami of defaults can be expected once the economy is allowed to operate. It's not just economics and legal aspects, politics will increasingly become a driving force in determining the sanctity of contractual obligations.
And the late BSP Governor Nestor A. Espenilla Jr. would be partially redeemed when he published the BSP’s 2017 Financial Stability Report in 2018: “While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner”
What is guaranteed is that the surge of delinquencies from the government-imposed economic shutdown will not only impair the bank’s ability to lend over time but also impel banks to liquidate on their acquired distressed assets.
What is likewise guaranteed is that not only will banks compete with the Philippine treasury for financing, but “shocks that have caused dislocations of crisis proportions” will compel the BSP to rescue banks directly!
Bank’s Dilemma Showcased by the Banking Index; The Market Psychology Cycle
Figure 5
The banking system's dilemma has resonated with its stocks.
Echoing 2019, the banking index has been an obstacle to the recent rally from the bear market low last March. The bank index has been up by only 3.52% as other sectoral indices have increased by 17% and above (as of March 15). Security Bank was last traded below the March low, while Metrobank drifts at the March level.
Ironically, the high credit ratings of the top three major banks had been affirmed by a major international credit rating agency, despite the current crisis. Witnessing how the mainstream slashed GDP expectations, we should see the same dynamic once the wave of default surfaces.
Lastly, a sudden sway of sentiment by erstwhile popular perma-bulls should be an interesting development. These could be seminal signs of the entrenchment of fear as the market segues through its different stages in time.
Yes, the shift from ECQ to MECQ was about the reprioritization of health science to the social science of the economy and finance. And such wrong policy, predicated on repression, just accelerated the bursting of the present credit financed race-to-build supply and the big government bubble.
We do live in fascinating times.
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