We human creatures are sufficiently intelligent to concoct stories to tell to ourselves that enable us to believe whatever it is we wish to believe. But our intelligence regularly falls short of enabling us to distinguish, amidst the many stories told, the relatively few sensible ones from the crowded swarm of stories that are wackadoodle. Most of the notions held dear and true about the operation of the economy, government, and society are not merely uninformed; they are completely preposterous—Donald J. Boudreaux
In this issue
Under Economic Reopening: BSP Declares Debt Subsidy to Borrowers as Consumer NPLs, led by Real Estate, Soars!
I. Under GCQ, The BSP Imposes Debt Moratorium, Why? Consumer NPLs Soar!
II. Rocketing Systemic Leverage in the Face of a Recession!
III. Tip of the Debt Iceberg: Consumer Motor Vehicle NPLs Surge!
IV. Tip of the Debt Iceberg: Consumer Real Estate NPLs Skyrockets!
V. Banking Debt: Amplifying Concentration Risks and a Key Source of Economic Inequality
VI. BSP to Increase Debt Monetization to Counteract Liquidity Drain From Debt Subsidy to Borrowers
VII. NG and BSP’s Wish: Print Money Away to Economic Recovery! The BSP Inflationist Façade Exposed?
Under Economic Reopening: BSP Declares Debt Subsidy to Borrowers as Consumer NPLs, led by Real Estate, Soars!
As the economy reopens, the BSP has declared a debt moratorium in favor of borrowers. Why it did so? Because consumers are under heavy pressure. Consumer NPLs, which have been rising before the pandemic, led by real estate, stormed higher in the 2Q as the Philippines endured a medical gulag. While the Bank’s revenues will take pressure from such policy of forbearance, the BSP promises to rescue them with more money printing!
Let us dive in.
I. Under GCQ, The BSP Imposes Debt Moratorium, Why? Consumer NPLs Soar!
From the Inquirer(September 20): The Bangko Sentral ng Pilipinas (BSP) ordered all banks and financial institutions under its jurisdiction to implement a 60- day moratorium on loan payments as mandated by Republic Act No. 11494, or the Bayanihan to Recover as One Act (Bayanihan 2), which President Rodrigo Duterte signed into law on Sept. 11. In a text message to reporters, Bangko Sentral ng Pilipinas Gov. Benjamin Diokno said he signed on Friday the memorandum that “requires all covered institutions to implement a mandatory, one-time, 60-day grace period to all loans that are existing, current and outstanding, falling due, or any part thereof, on or before December 31, 2020.” This grace period shall apply to each loan of individuals and entities with multiple loans, according to the memo. BSP-supervised financial institutions—which include universal and commercial banks, thrift banks, rural banks, cooperative banks, savings and loan associations, and pawnshops, among others—shall not charge or apply interest on interest, penalties, fees or other charges during the mandatory grace period to future payments or amortizations of the borrowers, Diokno said.
Since the economy has been allowed to reopen moderately from the draconian lockdown, why the need for a debt forbearance?
The 2Q report card of the BSP on the banking system’s consumer loans provides significant insights into such policy responses.
First, non-performing consumer loans spiraled upwards in the 2Q.
While consumer loans accounted for a record high of 19.25% of the banking system’s total loan portfolio (TLP), its share of NPLs likewise surged to a landmark high of 43.11%.
Figure 1
Consumer loans have been outperforming, hence its record share contribution to the TLP. Led by production loans, the growth rate of banking system’s overall lending peaked at 19.86% in September 2017 or 3 years ago and has been steadily southbound.
As stated last week,
Manufacturing and imports represent supply-side conditions of the economy that provides a gauge to the conditions of domestic demand. But the NG’s data have pointed to lingering weakness antecedent to COVID-19, which has been consistent with slowing household consumption, increasingly being supported by credit, instead of productivity or income increases.
Banking and Economic Fragility Before COVID-19, BSP’s Response: Php 400 Billion QE, and FIST! Copper Prices Breakout of 10-year Resistance! September 13, 2020
And while the share of consumer NPLs has been in decline since 2009, the trend began to U-turn in the 1Q 2019, which became pronounced in the last three quarters, and thus, the record share of total NPLs.
II. Rocketing Systemic Leverage in the Face of a Recession!
Second, the banking system’s 2Q TLP amounting to Php 10.38 trillion represents 60.33% of the 1H annualized nominal GDP of Php 17.2 trillion!
Including the total public debt of Php 9.054 trillion as of June 2020, total system leverage accounts for a stunning 99.6% of 2019’s NGDP of Php 19.52 trillion!
And given the recession, total system leverage should now exceed an unprecedented 100% by the yearend!
Severe pressures in income, earnings, and wages in the face of enormous debt levels will certainly be a considerable factor affecting the banking sector’s balance sheets and operations that would have a spill-over effect on the economy.
We shall stick with banks and their consumer loans.
Extracted from the BSP-led Financial Stability Coordinating Council’s 2020 Financial Stability Report (FSR): (p. 16-17) (bold underline and bold italics mine, bold original): The strain on the banking books will come through a further impairment in past due loans (PD). The pressure on income increases the likelihood of missed debt payments. However, even before 2020, PD were already trending upward, both in absolute amounts and as a percentage of loans… Despite the fact that the share of the impaired accounts to total loans remain minimal, there is a need to closely monitor the PD but not yet NPLs alongside the outright NPLs, and its respective proportion to outstanding loans, to determine the eventual impact of COVID-19 on the banking books especially in the event of a more protracted contraction in economic activities…For households, we cannot directly estimate the impact on debt servicing from the erosion of incomes. On paper, salaries and wages account for about 36 percent of GDP (based on 2018 data). This, however, includes professionals who are under contract and will be paid on a monthly basis regardless if a pandemic materializes. The most vulnerable are the workers who are part of the informal sector or whose wages depend on the occurrence of events, that is, those who are on no-work-no-pay arrangement in the “gig economy”. This aspect has not been assessed and would not benefit from the current relief program extended in the formal financial market.
Here, the BSP rightly admits to the shortcomings or the limitations of statistics and the presence of the bad debt malaise afflicting banks even before the pandemic, as well as the extent of unknowns that may influence the chain effects of the recession on the banking system.
How can you cure something you don’t understand?
Actions. Consequences. Reactions. Feedback loops.
III. Tip of the Debt Iceberg: Consumer Motor Vehicle NPLs Surge!
Figure 2
Third, Non-Performing real estate and motor vehicle loans have led the way.
Consumer loans are divided into five categories, namely, motor vehicle loans (auto and motorcycle), credit card receivables, salary-based consumption loans, real estate loans and other consumer loans. The BSP started publishing statistics covering the last two, (real estate loans and other consumer loans) only in 2015.
In the 2Q, Real estate loans have the largest share of 40.04%, Motor vehicles come next with 29.6%, credit card ranks third with 20.7%, with salary-based consumption loans and other consumer loans with an 8.1% and 1.6% share, respectively.
The BSP publishes what banks have declared to them, of course, subject to their audit. And published data likely represent the proverbial ‘tip of the iceberg’.
NPLs may have been understated even before the pandemic, which is the reason for the industry’s illiquidity trends. And under current conditions, where the BSP have granted banks regulatory and operational reliefs (bailouts), the underreporting of actual conditions of delinquent loans must have worsened.
Big-ticket items have hit the banks most.
For starters, motor vehicle NPLs have swelled.
NPLs as a % share of the TLP has rocketed to its highest level.
In the meantime, after slowing in 1Q 2018 through 3Q 2019, motor vehicle NPLs as a share of total NPLs have picked up speed. The surge comes mostly from auto NPLs, which has a 94.9% share of the motor vehicle category.
Interestingly, motor vehicle NPLs have been ascending from 2009 through 2016. So NPLs accompanied booming sales.
And the 2018-2019 slowdown in NPLs has likewise coincided the downdraft in sales growth. The advent of pandemic and the political response to it unhinged this correlation, where an upside spike in the NPLs has accompanied by plummeting sales.
The continuing boom on the bank’s auto credit loans in the face of collapsing sales has been an intriguing statistic. While vehicle sales in August plunged 39.5% and 35.5% in July YoY, oddly, the growth of consumer auto bank loans decelerated to 9.6% in July from a bristling rate of 28.54% in June. Auto loans have been sizzling, up by over 30% YoY from October 2019 through May 2020, even as sales have languished.
So, who benefited from the surge in borrowed money? Or, who may have been misrepresenting the presented figures?
IV. Tip of the Debt Iceberg: Consumer Real Estate NPLs Skyrockets!
Figure 3
From the BSP’s 2019 FSR: “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”. (p.15)
Like end-March 2019, real estate loans accounted for 40.04% of the Consumer loans in the 2Q 2020.
Interestingly, while consumer real estate loans signified a milepost high of 7.71% of the TLP, its share of NPLs surged to .42% share from .25% in the 2Q. Real estate NPLs now account for 5.5% of total consumer real estate lending by banks. That is, the growth of NPLs almost doubled in terms of TLP (99.55%) and Total Real Estate loans (86%).
Published real estate NPLs emerged, not in 2020 and not because of COVID, but in 2019.
Importantly, the share of real estate NPLs as a total of NPLs rocketed by an unprecedented 62.5% growth rate in 2Q to a historic high of 17%!
To put it more precisely, the fastest credit deterioration in the banking system’s balance sheet has been its real estate portfolio!
Figure 4
V. Banking Debt: Amplifying Concentration Risks and a Key Source of Economic Inequality
Fourth, while bank consumer loans provide an aggregate picture of consumer conditions, the low level of penetration level or the population's low access to formal credit conceals the degree of leverage embedded in the system.
Don’t just take it from me, here’s the BSP’s 2017 FSR (p 22-23): Data limitation prevents an accurate assessment of household debt. As a proxy, Figure 3.6 shows rising consumer loans since 2012, of which majority were residential real estate loans and motor vehicle loans. Nevertheless, beyond the increase in consumer loans, the greater concern lies with what appears to be higher household leverage. Aside from consumer loans, the 2014 BSP Consumer Finance Survey (CFS) indicates that less than 14 percent of the households were borrowing from banks to finance the purchase of a residential real estate, motor vehicle or household appliance…More affluent households, on the other hand, had higher exposures to more expensive long-term debt, such as real estate and vehicle loans. These loans make them more vulnerable to movements in interest and FX rates, and are thus, subject to higher repayment, refinancing and repricing risks. A decomposition of debt data among income quintiles showed that more affluent households (i.e., fifth quintile) had higher debt participation and, as anticipated, higher average debt compared to their counterparts. [bold added]
Applied to the general, the low penetration rate diminishes the distribution of debt from a statistical point of view. But when the scale of leverage is dispersed among the banked population the story changes.
First of all, the disproportionate distribution of credit magnifies the concentration risk.
Even the BSP acknowledges this.
From the BSP’s 2017 FSR (p.26): Concentration of credit to specific sectors amplifies credit concerns. As of end-March 2018, about 60 percent of loans were extended to five of the 21 economic activities, i.e., Real Estate Activities; Electricity, Gas, Steam and Air-Conditioning Supply; Loans for Household Consumption; Wholesale and Retail Trade; and Manufacturing (Figure 3.11). While there is recognition that outstanding balances across economic activities continue to expand, this fairly heavy concentration makes the banking system prone to risks that could influence the five economic activities. This is a concern because, already, it is noted that four of these economic sectors (except for Electricity, Gas, Steam and Air-Conditioning Supply) account for almost 70 percent of the NPLs of the banking system. (bold added)
The % share of bank credit from the same group has accrued to 65% of the total, based on July data (excluding RRPs and household real estate loans). That is, even when the BSP has identified a potential flashpoint, credit concentration has escalated from 60% to 65% in the last two-years! The BSP has barely taken any measures to control it.
In the same report, they cited concentration risks as one of the critical lessons from the Great Financial Crisis (GFC) [p.11]: Another factor that increases system-level vulnerability is the presence and concentration of common exposures among banks. For instance, if credit is commonly exposed to, and heavily concentrated in the real estate sector, shocks to this sector may result in simultaneous failures of the exposed banking institutions
And the disproportionate distribution of credit likewise exposes a socio-political malady: Economic inequality benefiting those with access to the formal banking system and from inflationist policies of the BSP.
Isn’t the recently updated Forbes list of the Philippine wealthiest, the same list of the nation’s biggest debtors?
And yet, the proposed rescue policies haven’t been directed to induce a climate that is friendly to entrepreneurs but of more political redistribution through selective bailouts, all financed by borrowings and inflationism.
VI. BSP to Increase Debt Monetization to Counteract Liquidity Drain From Debt Subsidy to Borrowers
Interestingly, bank lending growth to the real estate sector decelerated significantly to 11.5% in July from 16.8% in June.
On the other hand, while the BIS property index, constructed by a private firm, had been reported as booming, not only has revenues of developers collapsed in the 2Q, but real estate NPLs surged to record levels as well!
Property Boom amidst a Recession? 2Q Property GDP, PSE Property Firms Revenues, Sales and Income Crash! BSP Bailouts Bank-Real Estate Sector August 30, 2020
Again, such contradictions didn’t appear out of the blue, as it has been in place since 2018. Even the BSP noted of the incipient real estate problems back in March 2019 as reported in their 2018 FSR, but did virtually nothing to about it.
Instead, the BSP resorted to injections to the banking system while permitting the most interest-rate non-banking sector to balloon its leveraging.
As discussed last week, the central bank driven business cycle latches on collateral.
Since collateral represents the cornerstone of the banking system’s lending process, the real estate sector plays a principal role in it.
Surging NPLs not only contribute to the shrinking of liquidity but also magnifies the downside pressures on collateral values. And declining values may prompt banks to require borrowers to post additional collateral, or banks may call back loans or foreclose on these. And the rush to obtain liquidity may prompt intense liquidations of property that would further drive down collateral values.
And this is why the BSP has been pushing hard for the legislation of a 1997 bailout tool recently modified as the FIST, or why PNB announced the selling of their prime properties.
And it’s also why the BSP used the Bayanihan 2.0 to impose a deferment in amortizations or installments that, in their hope, may buy time for the economy to recover, thus, improving the payment capacities of borrowers.
However, the BSP recognizes the cost of its policy.
By expanding liquidity through another round of QE on National Government liabilities, the BSP announced implicit support for banks, which will take a hit from income losses on interests, surcharges, and lending-related fees.
From the BusinessWorld (September 15): Under Section 4 of Bayanihan II or Republic Act No. 11494, the BSP can provide additional direct provisional advances to the National Government “to finance expenditures authorized by law that will address and respond to the COVID-19 situation,” as long as this does not exceed 10% of the government’s average income for fiscal years 2017 to 2019. This effectively increases the cap that the central bank may directly lend to the government to 30% from 20% of its average revenue under the New Central Bank Act, Bloomberg reported. With Bayanihan II, the BSP can now lend the National Government up to P850 billion from the previous cap of P540 billion.
So while bank NPLs are about to improve statistically in the 4Q, the policy of forbearance would impose substantial losses on them. And because such losses translate to a significant drain of liquidity, the BSP’s response, thus, is to further inject liquidity to the industry through QE and possibly 200 bps RRR cuts.
VII. NG and BSP’s Wish: Print Money Away to Economic Recovery! The BSP Inflationist Façade Exposed?
Nobel Prize winner Milton Friedman was right: “Nothing is so permanent as a temporary government program”.
And so has Austrian economist Robert Higgs, who theorized of the 'ratchet effect', which says that during a crisis, the government grows in scale and size, but when the crisis recedes, such interventions barely revert to pre-crisis levels. That is, governments use such a crisis as an opportunity to become a leviathan.
Monetary policies are examples.
Aside from cuts in RRR and overnight policy rates, the BSP will be accelerating the use of QE to unprecedented levels.
But the BSP’s proposed solutions have been getting a backlash from some quarters.
Earlier, I quoted here a mainstream article warning about the BSP’s debt monetization.
This time, it’s the turn of S&P Global.
From Reuters (September 16): Emerging market central banks could risk their reputations, sovereign credit ratings and even full-blown economic crises if their bond buying is pursued beyond the coronavirus crisis, S&P Global said in a report. Top S&P analysts said in Wednesday’s report that although there was no indication that investors had lost faith in the central banks of India, Indonesia or the Philippines, risks would rise if post-pandemic sovereign debt purchases looked likely. “Pushed too far... the programmes may impair the ability of central banks to respond to future crises, with rating implications for the respective sovereigns,” the report said. “If investors begin to view government reliance on central bank funding as a long-term, structural feature of the economy, these monetary authorities could lose credibility.” S&P’s concern is also that the buying is not guided by inflation controlling objectives, but by worries a COVID-19 debt issuance surge will hit borrowing costs and currencies.
Importantly, deferment is not the same as a debt jubilee.
Since the principal of the debt outstanding remains, the lifting of the debt subsidy will increase the debt burden of borrowers over time, which should apply even when mandates require the onus of repayments dispensed through a specified period.
That’s because even at low rates, the current debt burden alone will pose a significant barrier to recovery. How much more when rates begin to rise?
And yet a critical problem remains: One cannot print away solvency issues.
So more money printing for the BSP on the escalating debt dilemma?
And it is not just debt alone; this leftist government has been inhibiting the markets from attaining its optimal levels of output. It has done so by diluting the nation’s capital base with policies of deepening economic prohibition, regulation, and political redistribution.
To that end, is the BSP’s inflationist façade unraveling?
And let us not forget: bursting bubbles (recessions/crisis) are a time-consuming process.
Actions. Consequences. Reactions. Feedback loops.
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