It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance—Murray N. Rothbard
In this issue
The Failure of the Centrally Planned ECQ Health Policy, Statistical Charades, and 1Q Real Estate Divergences
I. Positive Economics and Philippine Joblessness
II. The National Government Placed the Economy on a Lockdown Without Knowing its Consequences!
III. Statistical Mirage: NCR’s Restaurant CPI Under ECQ? More Bank Loans-Car Sales Divergences
IV. Continuing Economic Struggle: BSP Chief’s Prescription of Borrow and Spend Will Increase Risks, and Stifling Regulatory Morass
V. Real Estate Divergence: Listed Property Firms Struggled in the 1Q as BSP Real Estate Index Soared!
VI. Panic Borrowing: PSE 1Q Non-Bank Firms NET Borrowings was Nearly TWICE 2019’s Annual Data!
The Failure of the Centrally Planned ECQ Health Policy, Statistical Charades, and 1Q Real Estate Divergences
Most people talk about the economic aspect of political subjects with a bare understanding of them. We explain the use of causal realist methodology through positive economics using the Philippine job conditions as an example.
The Philippine Government gambled with a lockdown policy it didn’t understand. And now the adverse consequences have begun to surface.
Economic statistics can be flawed or manipulated.
The BSP chief proposed that people should take advantage of low-interest rates to borrow and spend to shore up the economy. More of Ayn Rand’s warnings from deepening distortions of economic allocations emerge.
Real estate could have boomed in the secondary markets in the 1Q, but not from the perspective of property developers.
Non-Bank issues of the headline index went into a panic borrowing spree even in the 2019 annual context.
I. Positive Economics and Philippine Joblessness
We mainly use Positive economics for our economic exposition. Positive economics, previously known as value-free or Wertfrei (German) economics focuses principally on the “what is”, or the facts and the cause-and-effects of human actions (praxeology) that underlies economic programs, conditions, and situations.
The value-free method investigates whether the chosen means for a given end would lead to expected outcomes or not, and requires no judgments for a chosen end.
In contrast, normative economics, which typically expresses ideologically based value judgments of its authors, focuses on the “what ought to be” of public policy.
Typically used by the mainstream, normative economics represents a popular camouflage to peddle political rhetoric. Practitioners of normative economics conventionally emphasize on specific statistics to prove their assertion or rebut an opposing claim.
A common flaw of politically colored normative claims is the inability to explain the economic relevance of the statistics it uses to establish its desired end.
For instance, in the thrust to continually downplay the impact of the various phases of Community Quarantine on the job market, only over 112,000 workers, the Department of Labor and Employment (DOLE) insisted, were displaced as of June.
The DOLE and the BSP have been disputing the Philippine Statistics Authority’s (PSA) April’s estimate that some 4.9 million jobs were lost that sent unemployment rate rocketing to 17.7% a 15-year high.
Last May, the DOLE estimated that some 10 million people may be out of work; however, they scaled this projection down to 1.9 million before the release of PSA’s April data. Then, the DOLE has been citing data of labor displacement from reported business closings at a fragment of their original estimates.
With 3.5 million jobs lost within their association, the Philippine Chamber of Commerce “belied the claim of the Department of Labor and Employment that only tens of thousands of Filipinos were unemployed due to the COVID-19 pandemic”, reported the GMA news.
Elite companies such as Aboitiz Equity, Cebu Pacific, and Bank of the Philippine Islands recently announced some layoffs.
With almost unbridled access to credit, if big companies have been affected, why shouldn’t MSMEs suffer a much direr fate? MSMEs represents the biggest pie (63.2% as of 2018) of the national labor pool, according to the Department of Trade and Industry.
What are the major causal factors influencing the resilience or fragility of the varying enterprises and industries of the country? For example, have local enterprises been rich in cash or debt? How will these impact the decision to retain or retrench workers? What will stanch the investment losses, and subsequently, the jobs hemorrhage?
Moreover, nearly 124,000 unemployed and stranded OFWs have reportedly returned home. Returning OFWs represents 5.6% of the 2.2 million deployed abroad, based on the PSA’s 2019 Survey on Overseas Filipinos. And that could be for starters. How about those OFWs, who despite the loss of jobs, prefer to stay abroad?
As one would note, yelling of statistics is not equivalent to a description of an economic phenomenon.
II. The National Government Placed the Economy on a Lockdown Without Knowing its Consequences!
And there’s more.
From the Inquirer (July 10): The Philippines is bracing for an even worse-than-expected drop in the gross domestic product (GDP) in the second quarter as the country’s chief economist on Friday said the COVID-19 lockdown inflicted more pain into the economy than earlier projected. But as the economy gradually opened up under less-restrictive quarantine, Acting Socioeconomic Planning Secretary Karl Kendrick T. Chua told a virtual press briefing that recovery was underway during this third quarter. Chua, who heads the state planning agency National Economic and Development Authority (Neda), said the latest economic data covering the months of April and May showed the impact of the enhanced community quarantine (ECQ) imposed in Luzon and other parts of the country with high COVID-19 infection since mid-March was “more severe than expected.” Earlier Neda estimates showed that the economy shed P1.1 trillion or 5.6 percent of GDP across the agriculture, industry and services sectors during the first 45 days of the ECQ—said to be one of, if not the most stringent COVID-19 lockdowns in the region. [bold added]
The National Government froze economic activities of more than half of the population for about a quarter, yet expected the damage to be minimal! Awesome thinking! Remember, the armies of statisticians, economists, accountants, and quant modelers from different agencies shape the outlook of the NG.
To further show how they think, the following are excerpts of their economic projections from late January through the end of April. [Note: All bold emphasis on them are mine.]
The Chinese government began with a lockdown on Wuhan, Hubei on January 23. By mid-February, the lockdown spread to about half of their population.
First, the supposed economic immunity from the virus…
From the Inquirer (January 30): The Duterte administration’s economic team sees a “short-term” impact on the Philippine tourism industry of the spread of the novel coronavirus (nCoV) and expects economic growth to be stronger in 2020. After the Economic Development Cluster (EDC) meeting, wherein economic managers mapped their strategies to achieve the higher gross domestic product (GDP) growth goal of 6.5-7.5 percent in 2020, Finance Secretary Carlos G. Dominguez III said besides infrastructure spending, planners expected the country’s more aggressive tourism push to “rev up the economy this year.”
From the Inquirer (February 4): While the novel coronavirus (nCoV) could reduce tourist arrivals and hurt some Philippine exports to China, the virus isn’t expected to make the Philippine economy sick and fail to achieve higher growth, according to Finance Secretary Carlos G. Dominguez III. “At this moment, it is reasonable to expect that while these developments might slightly restrain our economic expansion, these threats are not enough to force a dramatic reduction in our growth estimates,” Dominguez said on Tuesday (Feb. 4). “We are standing by our working projection of a GDP growth rate of between 6.5 percent and 7.5 percent for 2020,” Dominguez said at a Senate hearing, using the acronym for gross domestic product.
From the Inquirer (February 7): The impact of a prolonged outbreak of the deadly novel coronavirus (nCoV) could be felt most by the Philippine tourism sector and shave less than 1 percent off the country’s gross domestic product (GDP), the country’s chief economist said on Friday (Feb. 7). Socioeconomic Planning Secretary Ernesto M. Pernia noted that global travel and tourism—worth $8 trillion or 10 percent of global GDP—were already taking a big hit from the onslaught of nCoV.
Next, the toning down of economic resilience…
From the Businessworld (February 25): SOCIOECONOMIC Planning Secretary Ernesto M. Pernia remained confident that the Philippine economy will rebound and hit the low-end of the government’s 6.5-7.5% target, despite the downside risks arising from the ongoing coronavirus disease 2019 (COVID-19) outbreak and last month’s Taal Volcano eruption. “Short-end of the target range should be no problem,” he told BusinessWorld in a mobile phone message on Monday.
From the Inquirer (March 2): The Philippine economy is likely to shed up to 1 percentage point (ppt) should the COVID-19 outbreak extend for a year, the country’s chief economist said. Socioeconomic Planning Secretary Ernesto M. Pernia said the virus could put at risk the government’s growth target of 6.5 to 7.5 percent. If the virus was contained in China by June, its impact on Philippine gross domestic product (GDP) growth was likely a cut of 0.3 ppt reduction, Pernia said on the sidelines of Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno’s book launch.
Then, recession jitters emerge at the start of the Luzon wide ECQ…
From the Inquirer (March 18): The head off the country’s central bank said on Wednesday (March 18) that the Philippine economy will surely be adversely impacted by the coronavirus epidemic, but that the question of how fast the recovery will be will depend on the success of the ongoing lockdown. In a mobile phone message to the media, Bangko Sentral ng Pilipinas Governor Benjamin Diokno said the Luzon-wide community isolation “will definitely have an impact” on the economy but that this action is meant to be a temporary. “If it succeeds, the adverse impact will be minimal and we can expect a V-shaped recovery,” the central bank chief said. “If it fails, the adverse impact can be large and protracted, and the recovery can be an elongated U.”
From the Inquirer March 25: The country’s unemployment rate might shoot up should a recession occur due to the coronavirus disease 2019 (COVID-19) pandemic, the country’s chief economist said Wednesday. Socioeconomic Planning Secretary and National Economic and Development Authority (Neda) chief Ernesto Pernia said the unemployment rate might return to a double-digit figure following the COVID-19 outbreak from its “historical low” of 5.1 percent.
From ABS-CBN News (March 29): The Philippines will "do everything" to avoid an economic recession due to the COVID-19 crisis, central bank governor Benjamin Diokno said Sunday. BSP Governor Benjamin Diokno said the Monetary Board has authorized him to reduce the reserve requirement ratio for banks by 500 basis points and that he has so far cut it by 200 basis points. "We’ll do everything so we can avoid a recession in the Philippines. So, we’ll do both fiscal and monetary policy," he told ANC. "We’ll try to avoid it as much as possible. You know, we have 84 quarters of continuous growth since the Asian financial crisis. I think the Philippines is resilient enough. I think, if we do the right thing, we can avoid a recession."
After, the admission of a looming recession…
From the CNN (April 2): The COVID-19 pandemic cut growth prospects for economies across the globe, and the Philippines was not immune. Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said he expects the Philippine economy to go into a technical recession this year, which means the country will experience negative growth for at least two quarters. “Maybe in the first quarter, we’ll still be positive," Diokno said in an interview on CNN Philippines. "Then we go into negative in the second quarter and possibly the third quarter, and then we’ll pick up in the fourth quarter," he added.
From the Inquirer (April 9): The Duterte administration’s chief economic manager on Wednesday said the extension of the enhanced community quarantine in Luzon would result in “zero to possibly negative 0.8-percent” growth in 2020.“Definitely businesses are impacted, especially businesses in the tourism sector as well as retail sector. Our tax collections are definitely going to be a bit lower than our original target,” Finance Secretary Carlos Dominguez III said in a television interview with CNBC.
From the Inquirer (April 26): The Philippines’ top monetary manager expects the local economy the enter a recession over the next six months before recovering in the fourth quarter, and entering an upward growth trajectory by next year. But most other countries may not be as lucky, according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno, who said that the rest of the world economy faces a “virulent mix of monumental debt-to-GDP ratio and the deepest global economic recession in the last 100 years.” “The Philippines will likely follow a U-shaped economic recovery in 2021,” he said in a statement sent to reporters via mobile phone. “The domestic economy could slow down in the first quarter of 2020, and is projected to contract in the second and third quarters before gradually recovering in the fourth quarter of 2020.”
The point is not that they have been wrong, yes they have been consistently and flagrantly wrong, but rather, their rapidly shifting projections do not even seem to be even driven by data or by context.
The most important lesson, aside from the moving goalpost, has been that the NG subjected the population to a repressive social “health” policy when they were either clueless of its economic implications or had an unstated different agenda in mind.
With the Shift to GCQ, Has the World’s Longest and Toughest Lockdown Experiment Worked? June 1, 2020
Yet, their economic models had seemingly been unable to capture the consequences of the policies which they forced upon the people.
More Proof?
From Philstar (July 6): Malacañang on Monday said it was "saddened" by the sharp rise in novel coronavirus cases in the country but maintained that it sees reopening the country's economy as the only option for now. "We really have no alternative, because our economy has been pushed to the edge. All of us need to start working," presidential spokesperson Harry Roque said in Filipino.
and…
From the Inquirer (July 12): The Philippines is one of nine countries that are seeing a rise in coronavirus disease (COVID-19) cases despite having the world’s toughest lockdowns to stop coronavirus transmission, according to a groundbreaking University of Oxford tracker that examines governments’ responses to the pandemic worldwide.
So the NG has become so desperate to open the economy even as the COVID-19 cases surge. And to assuage the public, they have been resorting to moving goalposts; pointing to a recovery in 2021, predicated on embedding a culture of bailouts.
Again, statistics is not economics.
The lockdown or ECQ policy boomeranged.
Central planning has failed.
III. Statistical Mirage: NCR’s Restaurant CPI Under ECQ? More Bank Loans-Car Sales Divergences
Yet here are more striking evidence of the irrelevance of statistics to the economy.
But included in the inflation data is the restaurant segment of the National Capital Region, which posted a CPI of 1.8% last June, a rate carried over from April and May.
But restaurants in the NCR ceased operations in the middle of March when the ECQ was implemented!
Without any transactions, therefore, the CPI for this segment should register ZERO. Either the PSA’s models were using other sources for inputs, or it just assumed the numbers. NCR’s restaurants were allowed to reopen on June 15.
The restaurant CPI carries a significant 8.05% weighting in the PSA’s inflation basket. Even considering the deduction of NCR’s data from the national, this implies that the headline CPI numbers are invalid measures of street inflation!
CAMPI car sales data showed an 85% YOY plunge in May, much less than the 99.5% crash last April. Astoundingly, the BSP’s bank data on consumer’s motor vehicle loans continued to surge 30.16% and 30.84% over the same period. Booming loans on collapsing car sales? The car sales-BSP auto loan chart exhibits a convergent trend from 2015 to 2019, meaning that the rate of change of car sales matched the trend of the rate of change of auto loans. This trend diverged in 2020. So who fudged the numbers? Car dealers? Banks or the BSP?
Remember, as part of the emergency support measures, the BSP has eased up on regulatory controls on the banking system.
IV. Continuing Economic Struggle: BSP Chief’s Prescription of Borrow and Spend Will Increase Risks, and Stifling Regulatory Morass
And how can the economy even recover when policymakers prescribe to lenders and consumers to imbibe on unnecessary risks?
From the ABS-CBN (June 29): Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno on Monday urged consumers to spend and take advantage of record low interest rates to help revive the pandemic-hit local economy. Diokno said inflation is the “least of their worries” now, as it stands ready to use a “full range” of monetary tools as needed to support the economy. “Inflation is the least of our worry at this time. We want people to spend money, in worthwhile projects. If you want to invest in a new house do it now, because conditions really are to your favor. Interest rates are so low and it will remain low for quite some time,” Diokno said on ANC’s Market Edge.
Since the BSP chief thinks in the prism of the circular flow of money or the paradox of thrift that sees spending as the motor of the economy, he encourages the leveraging up of the balance sheets even when economic losses, and joblessness mounts.
Keynesians see factors of production and capital as homogenous, disregards the role of balance sheets and entrepreneurs, as well as, the allocative mechanism of resources.
On this note, we see why the economy will continue to struggle. The advocacy of reckless spending would only consume capital required for economic restoration.
And since the BSP chief’s Keynesian remedy would only increase the mismatches on the balance sheet of the banking system, this reveals that the authors of the 2020 and 2018 Financial Stability Report (FSR), which warned about it, were BSP insiders.
Finally, this very important poignant insight from an anonymous restaurant operator, from the Lifestyle Inquirer (July 9): [bold mine]
Because he is a friend, I asked if I could write about the situation. The restaurateur asked not to name his restaurant or himself for fear of reprisal. He laments how the industry is suffering and yet government, instead of helping business get back on its feet, is back to its old ways of intimidation. In this pandemic, the local government was given a little power, which some interpreted apparently as absolute power. Well, small minds will do that. The national government agencies (DTI, Dole) responsible for the reopening of restaurants should give the PNP and barangay the guidelines they gave business and the media. The agency should be clear about the enforcing arm—is it the PNP or is it the barangay? But violations must be cited clearly, with a copy given the restaurant, and the steps the restaurant must do to reopen.
Scale this regulatory repression to cover all the industries, and the impact should substantially be detrimental to the economy.
Again, the prescient warnings of the great Ayn Rand, in her masterpiece the Atlas Shrugged, at work:
When you see that in order to produce, you need to obtain permission from men who produce nothing - When you see that money is flowing to those who deal, not in goods, but in favors - When you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you - When you see corruption being rewarded and honesty becoming a self-sacrifice - You may know that your society is doomed.
V. Real Estate Divergence: Listed Property Firms Struggled in the 1Q as BSP Real Estate Index Soared!
Has the real estate sector boomed in the 1Q even when the GDP shrank?
Last week, I wrote about the spike in the BSP’s real estate price index even as the economy contracted.
To get a confirmation, I tabulated the financial performance of the firms comprising the PSE’s property index.
Except for HOUSE and IRC, which has requested for an extension of publication of their 1Q 17-Q report, though ten of the 16 component issues of the property index saw their real estate sales increase, the aggregate sales slipped by 11.93% or by Php 9.8 billion, while net income dropped 9.96% or by Php 9.82 billion. Meanwhile, revenues fell by 10.5% or Php 12.8 billion. Ayala Land’s sales and net income decline was a significant factor.
On the other hand, total debt swelled 13.9% or by Php 111.993 billion over the same period.
In short, property developers borrowed heavily despite a sluggish 1Q performance.
This tells us that the sales activities of property developers did not support the price boom in the secondary markets. That is, speculators have turned secondary markets into a high roller game, perhaps, similar to US retail speculators on the Robinhood platform, who have been driving up share prices of bankrupt firms like Hertz in a speculative frenzy.
And it should be interesting to see how the property sector would deal with mounting economic losses, reduction in CAPEX, surging joblessness, and changing consumer preferences in the face of burgeoning debt and escalating bank credit delinquencies. Despite the regulatory relief extended to banks, the banking system declared a surge in net NPLs to 1.26% last May.
VI. Panic Borrowing: PSE 1Q Non-Bank Firms NET Borrowings was Nearly TWICE 2019’s Annual Data!
Even before the ECQ and the COVID-19, the financial performance of the member components of the headline index had already been on a grinder.
In 2019, revenues of the non-bank issues rose by only 6.84% to Php 4.945 trillion, while net income increased by 9.36% or Php 52.7 billion to Php 615.38 billion. Meanwhile, total debt surged 6.9% or by 271.906 billion to Php 4.2 trillion.
With the BSP supported great bond boom benefiting the financials, revenues of the PSYEi 30 components grew by 7.84% to Php 5.4 trillion, while net income swelled by 11.8% or by Php 76.9 billion to Php 727.6 billion.
In 2019, net borrowings of Php 271.91 billion accounted for 253% of the published net income.
In 1Q 2020, net borrowings of Php 528.24 billion was almost stunningly TWICE 2019’s annual Php 271.91 billion.
So PSEi firms used intense leveraging to fill up the liquidity shortfall from a collapse in revenues and net income in 1Q 2020, even as the economic disruption from the lockdown affected only half of March!
The fear of monetary deflation and the subsequent response explains the BSP’s frantic and unprecedented use of its emergency toolbox.
Since there is no such thing as a free lunch, the cost of such intensive gearing will show up on their balance sheet soon.
And this debt-to-the-eyeballs paradigm in the face of severe economic challenges are supposed to represent the bullish case for the local stock market in 2021?
Good luck to the believers.
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