There are 10^11 stars in the galaxy. That used to be a huge number. But it's only a hundred billion. It's less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers—Richard Feynman
In this issue
Dismal 3Q Fiscal Performance Point to Another Substantial GDP Decline!
I. Public Spending Down in 3Q, The First in Many Years!
II. What Happened to the Ballyhooed and Promised Infrastructure Boom?
III. Falling Revenues From Economic Doldrums
IV. Burden of Public Financing Shifts from the Capital Markets to the BSP
Dismal 3Q Fiscal Performance Point to Another Substantial GDP Decline!
The statistical economy or the GDP can show whatever numbers the government wants.
Nonetheless, with its increasing role, significantly reduced public spending activities must point to diminished support for the 3Q GDP.
Moreover, frail public revenues in the 3Q expose further the sustained weakness in the private sector side of the economy.
Finally, public financing seems to be shifting from public debt, which was down in September, to the BSP.
Unrelated Post-Script on US elections: While polls have largely pointed to a triumphant blue wave, could the outcome of the 2020 Presidential elections be another surprise? I have no dog in the matchup between statists, but perhaps like in 2016, the incumbent appears to be generating substantially far more crowds than the media-supported popular challenger during their latest campaign trail.
I. Public Spending Down in 3Q, The First in Many Years!
From the CNN (October 23): The national government reported lower spending in September, data from the Bureau of Treasury showed. Public spending declined by 15.45% to ₱350.9 billion, which the agency associated to the timing of subsidy releases and the base effect of higher infrastructure spending in the same month last year.
Since the April spike, the growth rate of public spending has substantially slowed until it reached a contraction in September.
The downtrend has mostly emanated from the National Government’s disbursements, which accounted for about 60% to 65% share of the total. In the meantime, the growth of the Allotment to Local Government Units have likewise diminished over the same period.
In September, National Government disbursements posted an 8.41% decrease from August’s mediocre increase of 6.64%, while Allotment to the LGUs increased by 10.76%, this was almost half of the 19.64% from a month ago.
In the 3Q, aggregate public spending fell by 2.7%, which is in sharp contrast to the 2Q, where it soared by 43.4%.
Figure 1
In the 2Q, real public spending GDP, which soared by 22.1%, provided a cushion to the total GDP, which shrunk by 16.5%.
Figure 2
Importantly, public spending accounted for an unprecedented 20.6% of the real GDP in the 2Q.
With subdued public spending, what provides a floor or support to the 3Q GDP?
By the way, 3Q 2020’s aggregate nominal spending of Php 1.008 trillion was slightly lower than 2019’s Php 1.036 trillion, representing the first decline since at least 2009!
II. What Happened to the Ballyhooed and Promised Infrastructure Boom?
From August 21 (Inquirer): Fast-tracking the rollout of big-ticket infrastructure under the ambitious “Build, Build, Build,” or BBB—including those benefiting Northern Luzon—will be key to immediate recovery from the COVID-19-induced recession, Finance Secretary Carlos Dominguez III said on Thursday. “The cornerstone of our economic recovery is the Build, Build, Build program. Investments in infrastructure have the highest multiplier effect in the economy. We have to continue to prioritize the infrastructure program to immediately create jobs, encourage investments, and increase economic activity,” Dominguez told the Philippine Chamber of Commerce and Industry’s North Luzon area business conference.
Infrastructure plays at the PSE has been anchored on the supposed critical role of the sector’s spending on buoying the GDP. Since the BSP unleashed its Php 300 billion liquidity injections, share prices of cement producers, project managers and builders have been bid-up.
However, it is not only the dearth of spending but also the prices of materials used by the sector that confirms the dearth of activities.
Figure 3
For instance, according to the Philippine Statistics Authority, cement prices have almost reversed all the gains it generated last July and August. The growth of cement prices decelerated to 1.15% in September from 3.6% and 3.2% of the said period, respectively. Even cement producers appear to remain skeptical of the infrastructure boom as cement production registered a 30.8% decrease, the sixth month of contraction rate of at least 23%.
And it’s not just cement. The inflation of wholesale prices of most construction materials remains subdued, signifying depressed demand.
Of course, that is conditional to the accuracy of statistics issued by the PSA.
That is to say, despite pronouncements with promises to goose up the GDP with public spending, with the unstated goal to keep the deficit manageable, the National Government has put a lid on public spending, which should be a welcome development.
Nevertheless, BSP liquidity injections have amplified misperceptions in the PSE, leading to the widening gap between prices and actual conditions.
III. Falling Revenues From Economic Doldrums
And that’s just the supply side.
Figure 4
From the demand side, public revenues, which slid 10.19% in September, suffered a third straight monthly decline.
Collections from the BIR dropped by 6.6%, while the Bureau of Customs fell by 13.7%. Meanwhile, revenues from non-tax revenues skidded by 24.11%.
To be sure, the massive injections by the BSP, supposedly to support deficit spending, which recently spiked money supply growth did little to support public revenues hampered by the economic shocks.
And while public revenues contracted by 11.67% in the 3Q, lower than 2Q’s 19.7% plunge, nominal collections were lower at Php 690.115 billion in the 3Q from Php 690.246 billion in the 2Q. The soft revenues underscore economic weakness.
So, 3Q’s aggregate public and infrastructure spending, aside from revenues, suggest a GDP still in deep contraction, though partially improved relative to the 2Q.
IV. Burden of Public Financing Shifts from the Capital Markets to the BSP
Figure 5
And despite the seeming restrain in public spending, the revenue shortfall widened the national government’s 9-month budget deficit to a record high of Php 879.28 billion, but still substantially lower than the NG’s target of Php 1.8 trillion or 9.6% of the annual 2020 GDP.
Surprisingly, the public debt fell by Php 246 billion last September, mainly due to the Php 274.6 billion decrease in domestic borrowings, which pulled down the aggregate to Php 9.37 trillion in September.
The decrease in public borrowing could be an attempt to shore up the fiscal image, even as the public funding has only moved from borrowing from the capital markets to high-powered money financing through the BSP, which extended financing to them by Php 540 billion in early October.
While the BSP declared a Php 300 billion deficit financing (bank financing really) in March, as of August, the growth of its assets boomed by 31% YOY to Php 6.76 trillion or about 37% of the GDP, a multi-year high. The latest round of financing should bolster the BSP’s assets by even more.
The BSP's massive injections, intended to keep deflation at bay as part of the grand rescue scheme for the banking system, have neither boosted the economy nor improved fiscal conditions of the National Government.
The thing is, the BSP has not only been disguising solvency issues with the massive liquidity injections. The outstanding misperception is that throwing money into the system through increased leveraging should be sufficient to bring back perceived normalcy. Instead, such has only aggravated unsustainable financial and economic imbalances, which will be due for a reckoning from natural economic forces.
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