Like all bubbles, it ends when the money runs out—Andy Kessler
In this issue
On the July OFW Remittance Bounce, What the BSP’s Record Gross International Reserves Means, More on Unemployment Statistics
I. July’s OFW Remittance Data Translates to Global Recession Didn’t Occur
II. Lies, Damned Lies and Statistics: More on July’s Unemployment
III. Bigger FX Reserves Equals Strong Currency? Not so Fast!
IV. Record GIR? BSP’s Growing Use of Other Reserve Assets or Derivatives
V. Record GIRs? Massive Reserve Leveraging Thru Repo Securities
VI. Leveraged GIRs equals USD Shorts
On the July OFW Remittance Bounce, What the BSP’s Record Gross International Reserves Means, More on Unemployment Statistics
I. July’s OFW Remittance Data Translates to Global Recession Didn’t Occur
What is wrong with the following?
First, from the BSP (September 15): Personal remittances from Overseas Filipinos (OFs) grew for the second consecutive month, increasing by 7.6 percent year-on-year to US$3.085 billion in July 2020 from US$2.867 billion in July 2019. This brought the total remittances for the first seven months of 2020 to US$18.658 billion, 2.4 percent lower than the US$19.119 billion posted a year ago. The growth was attributed to the 12.6 percent increase in remittances from land-based workers with work contracts of one year or more to US$2.467 billion in July 2020 from US$2.192 billion in July 2019. Meanwhile, remittances from sea-based workers fell by 9.2 percent from US$613 million posted a year ago to US$557 million in July 2020 due mainly to the repatriation of sea-based workers amid the ongoing COVID-19 pandemic.
Next, an excerpt from my September 6 outlook:
From the same CNN article: “About 500,000 overseas Filipino workers have likewise been displaced by the public health crisis, which could rise to 700,000 by yearend if the global situation does not improve, Tutay added.”
From the Philippine Statistics Authority (June 4): Based on the results of the 2019 Survey on Overseas Filipinos, the number of Overseas Filipino Workers (OFWs) who worked abroad at any time during the period April to September 2019 was estimated at 2.2 million.
500K divided by 2.2 million equals an OFW unemployment rate of 22.72%!
COVID-19 Cases May Have Peaked! Health Officials Admit that Lockdowns Don’t Work, Jobless People: 4.6 Million or 27.3 Million? September 6
How did that play out?
Because OFW remittances reportedly increased by 7.6% YoY last July, the following factors could have been in motion for this number to occur.
1. 500k displaced OFWs represents fake news. It never happened.
2. 500k workers, initially retrenched, were rehired immediately and simultaneously.
3. Employers of the remaining 1.7 million OFWs increased their wages
substantially, which offset income losses of those unemployed. Or incomes of these OFWs flourished from having moonlighting jobs.
4. The remaining OFWs dug deep into their savings and sent these home.
5. The remaining OFWs borrowed money extensively to send these home.
6. The BSP has inflated the remittance numbers to paint a sound macroeconomic picture of the Philippine economy. They probably did these by declaring part of the USD borrowings of banks and or the National Government as remittances.
Essentially, the implication has been that a global recession hadn’t affected remittance flows at all, and thus, the nation’s macro picture has been immune from economic shocks. Really?
Figure 1
And such would be made to justify or rationalize the strength of the peso?
In reality, the peso has been rallying amidst a declining growth trend of remittances, a structural dynamic, which means there is little causation, or even correlation, between the two.
II. Lies, Damned Lies and Statistics: More on July’s Unemployment
And speaking of unemployment, the PSA said that last July, the unemployment rate was 10% or 4.6 million of the labor force were jobless; in contrast, the SWS estimated that some 45.5% or 27.3 million were jobless during the same period.
The ADB jumps into the bandwagon. From the Inquirer (September 16): Almost three out of every four households in the Philippines had members who lost their jobs or went underemployed as a result of the COVID-19 pandemic, according to results of a survey by the Tokyo-based think tank Asian Development Bank Institute (ADBI). The ADBI’s phone survey from May to July showed that 73.5 percent of respondents in the Philippines said their household had at least one member who a job or had reduced workload, ADBI vice chair of research Peter J. Morgan said at an online seminar on Wednesday (Sept. 16). The Philippines posted the highest rate, way above Vietnam’s 50.2 percent, Thailand’s 48.2 percent, Myanmar’s 46 percent, Malaysia’s 44.1 percent, Indonesia’s 36.7 percent, Laos’ 31.7 percent, and Cambodia’s 25.2 percent, outpacing the regional average of 44.4 percent.
There were 22.98 million households in 2015 based on the PSA’s estimates.
ADB’s 73.5% translates to at least 16.89 million displaced workers, or at the baseline 11.65 million unemployed (50.7% of households surveyed). The ADB’s unemployment rate would amount to at least 25.4% of the labor force.
ADB’s number would be in the proximity of the OFW unemployment rate of 22.75%.
So again, the unemployment rates for PSA 10%, SWS 45.5%, and ADB 25.4%.
See how survey-based statistics can have outrageously different outcomes? If tortured enough, statistics will confess to whatever statisticians want.
But since the government is a political institution, why shouldn’t their statistics reflect on the political agenda which they wish to promote?
III. Bigger FX Reserves Equals Strong Currency? Not so Fast!
All hail, the record GIR!
From the BSP (September 16): The country’s gross international reserves (GIR) level, based on preliminary data, rose by US$350 million to US$98.95 billion as of end-August 2020 from the end-July 2020 level of US$98.6 billion. The month-on-month increase in the GIR level reflected inflows mainly from the BSP’s foreign exchange operations and income from its investments abroad. These inflows were partly offset, however, by the foreign currency withdrawals made by the National Government to pay its foreign currency debt obligations and revaluation losses from the BSP’s gold holdings resulting from the decrease in the price of gold in the international market.
Figure 2
First, most Asian central banks have been drastically building up reserves over the last few years, which are on aggregate at a historic high.
The GIR of the central bank of India, the Reserve Bank of India, appears to be the fastest (about 15% year-to-date). The Bank of Thailand’s GIR seems to be rocketing higher too. (up 9% year-to-date) The Philippines climbed by 12.7% YTD in July.
Does it follow that huge FX reserves equal strong domestic currency? Not necessarily.
The USD rupee was up 2.91%, while the USD baht higher by 4.52% as of September 18. Though Asian currencies have rallied since March low, as measured by the Bloomberg JP Morgan USD Asian currency index, the ADXY, it is still way down from the 2018 highs. The ADXY, up .5% YTD, is about to challenge the 2019 resistance high of 106.6.
What we hear from media represents mostly available bias or reasoning from price changes.
IV. Record GIR? BSP’s Growing Use of Other Reserve Assets or Derivatives
Second, the composition of reserves matter.
The BSP has increasingly used Other Reserve Assets (ORA) to boost its GIRs.
“Other Reserve assets” have been defined by the IMF as financial derivatives, short-term currency loans, repo assets, long-term loans to the IMF’s Managed Trust Fund, and other financial assets not included elsewhere but that are foreign currency assets that are available for immediate use (such as nonnegotiable investment funds shares/units arising from pooled asset schemes).
INTERNATIONAL RESERVES AND FOREIGN CURRENCY LIQUIDITY INTERNATIONAL RESERVES AND FOREIGN CURRENCY LIQUIDITY Statistics Department 2013 GUIDELINES IMF INTERNATIONAL RESERVES AND FOREIGN CURRENCY LIQUIDITY IMF 2013 GUIDELINES FOR A DATA TEMPLATE p.19
From less than 2%, the share of ORA to GIRs has been surging since 4Q 2018. It reached 8.18% as of July, according to the IMF’s International Reserve and Foreign Exchange Liquidity Matrix.
Figure 3
It is no coincidence that the USD PHP peaked while the share of ORA increased, or the increased use of ORA has accompanied the fall of the USD PHP.
Meanwhile, rising gold prices have likewise boosted its share to the GIRs to 12.17% as of August. To take advantage of high prices, the BSP recently proposed to sell some of its gold holdings. If flushed with FX, why should the BSP sell an organic source of it? To pay back loans and derivatives making up its reserves?
Because derivatives and repos dollars signify borrowed dollars (or borrowed reserves) that require repayment in the future, it represents USD shorts.
If the economy doesn’t generate sufficient USD flows from organic sources (investments, remittances, tourism, and net exports from goods and services), these will only increase the central bank’s leverage, which magnifies risks to the currency or the peso.
V. Record GIRs? Massive Reserve Leveraging Thru Repo Securities
Third, a significant share of the biggest section of the GIR, the Foreign Currency Reserve (FCR), has been either lent or under repo (securities lent and on repo).
Figure 4
The share of FCR reserves has been tumbling from over 85%, before the increased use of ORA, to 77.06% last July, signifying the critical transformation in the composition of the GIRs.
In the meantime, a significant segment of the GIR’s FCR has been allocated to “securities lent and on repo”, which comprise some 20.4% of the FCR or 15.8% share of the GIR as of July.
In the Memo section of the International Reserve and Foreign Currency Liquidity: Guidelines website, the IMF describes “securities lent and on repo” as: The Reserves Data Template calls for comprehensive information on repos and security lending because of the importance of these instruments in global financial markets. Repos can be a useful asset management tool for the authorities, but repos can expose the authorities to serious risks if they are not managed appropriately. In particular, the authorities can face credit risks if they do not have effective control over the securities collateralizing the transaction and the counterparty defaults. Such credit risk can be considerable if the authorities engage in repo transactions in volume and in large amounts of foreign currency and if the creditworthiness of the counterparty is uncertain. Similarly, the authorities can use repos to acquire funds, which is a useful tool for managing liabilities. In these circumstances, the authorities would not want to provide the counterparty with excessive margins.
To simplify, the BSP has used extensive leverage on its transactions with the US banking system, its core holdings of the GIR, the FCR via repos.
Figure 5
While the GIR reached a record last July, the growth rate of official holdings of UST has been slowing, according to US Treasury’s TIC data.
In 7-months, nominal increases amounting to USD 11.895 billion in the GIR have been due mostly to national borrowings rationalized on addressing the COVID-19 pandemic, aside from the ORA.
The BSP then rechanneled these borrowed funds to the US banking system, a key counterparty.
The almost symmetrical growth of the Philippine GIR and US bank’s total liabilities to the Philippines provides proof of this. Total liabilities to foreigners are foreign holdings of short-term dollar-denominated securities, according to the US Treasury.
VI. Leveraged GIRs equals USD Shorts
That said, the BSP’s record GIR has recently been constructed based on leverage through loans, derivatives, and repos. As such, the BSP’s mounting use FX gearing doesn’t constitute a safety net from either exogenous or endogenous shocks. Rather, systemic risks are magnified by it.
Having a large short position is like building a rocket lift-off pad for the USD.
Yet, such leveraging depends on the global offshore dollar conditions, which presently is supported by massive operations expanding assets of global central bank assets.
Since policies are subject to the law of diminishing returns, once the shortages of offshore dollars rear its ugly head, it should unmask the global central bank's rampant use of derivatives to camouflage local inflationist policies, including the BSP.
In short order, under the de facto US dollar standard, to accommodate its policy of domestic monetary expansion to support the pressured banking system, the BSP has been expanding its foreign reserves through non-traditional means.
Again, there is a substantial cost in maintaining a balance sheet strategy based on leveraging.
As pointed two years ago…
5) The last option would be for the NG and BSP to manipulate markets and statistics in the hope that the markets will conform and comply with their political targets.
[See Why Interest Rates Will Rise: 1Q Fiscal Deficit Blowout Financed by BSP’s Debt Monetization (QE) and Spiking Public Debt! May 6, 2018]
