Wherever the choice has had to be made between the man of reason and the madman, the world has unhesitatingly followed the madman—Aldous Huxley
In this issue
In 1Q 2021, PSEi 30’s Debt Grew Fourfold Relative to Net Income! Déjà vu May Pumps!
I. 1Q 2021: PSYei 30’s Debt Grew by Almost Fourfold Relative to NET Income!
II. Déjà vu! End of May Pumps: Coincidence or Design?
III. Local Financial Institutions as Drivers of the PSYei 30 Surge
IV. Fighting Deflation: Three Tactical Goals
V. Vicious Mini Boom Bust Cycles: Why Price Manipulation/Controls Won’t Work
VI. BSP Partially Withdraws QE Affecting Public Spending; 4-Months Record Fiscal Performance!
In 1Q 2021, PSEi 30’s Debt Grew Fourfold Relative to Net Income! Déjà vu May Pumps!
Surprise! In the 1Q 2021, the net income of the PSYEi 30 grew substantially, perhaps with the possible massaging of Financial Statements by some firms. But without blinking an eyelash, aggregate debt zoomed by even much more!
Coincidence or design? The biggest mark-the-close pumps occurred in May 2020 and May 2021!
By the process of elimination, some domestic financial institutions may have engineered last week's pump. The objective appears to be to combat deflation.
If history repeats, artificial booms will end up with a bust.
Public spending declines on the BSP’s partial withdrawal of QE: The implications.
I. 1Q 2021: PSYei 30’s Debt Grew by Almost Fourfold Relative to NET Income!
Nota Bene: The table of the distribution by sector of the PSEi 30’s annual performance published last week contained an error. While the company and the aggregate data were accurate, the industry table included the mines even when Emperador replaced SCC in August 2020. My apologies. Shown above is the revised table.
First the good news. In the 1Q, the PSEi 30’s non-financial reported net income gains of Php 32.361 billion or 31.14% higher than a year ago.
Next, the bad news. However, total debt zoomed by Php 160.139 billion or 3.45%.
Or, simply stated, nominal aggregate debt growth signified nearly FOUR times (394%) more than declared income!
In the meantime, aggregate revenues fell by Php 43.98 billion (-3.96%).
Including banks, net income increased by Php 32.965 billion or up 25.71% on the backdrop of reduced revenues of Php 63.482 billion (-5.22%).
This revenue deficit was more significant than the -2.3% decline in Nominal or current priced GDP. The PSEi 30’s total revenues of Php 1.153 trillion represents 26.5% or a quarter of the NGDP.
That is, if viewed from the lens of the statistical economy, the 4.2% contraction in the headline GDP of the 1Q represents an understatement.
Figure 2
Some companies may have even overstated their 1Q income statements.
For instance, even when the BSP reported a contraction in bank lending in the 1Q, ironically, real estate sales boomed for some companies!
Real estate sales depend heavily on mortgages/leverage for sales. So, how were these financed? By cash? But the BSP reported a plunging rate of cash growth in the same period. The growth rate of ‘currency issued’ by the BSP slowed to 4.06%, while the growth rate of cash in circulation plummeted to 15.9% from over 24% a month ago. (Figure 2, upmost pane)
So were these financed in-house, where developers borrowed from banks or dipped from their reserves instead? Some firms showed signs of this. However, bank loans to the supply-side have been cascading. The reported growth rate was a paltry 1.49% in March. (Figure 2, middle pane)
And given the sharp contraction in consumer loans, part of this reluctance by banks has likely percolated on the direct funding of real estate purchases.
The growth rate of consumer real estate loans slipped to 8.71% in 4Q 2020, the lowest since the BSP began publishing this data. Remarkably, the pandemic only reinforcedthe downtrend in the growth rate of the bank’s consumer real estate portfolio, which culminated in September 2016. (Figure 2, lowest pane)
Or, had some developers resorted to inflating their revenues and income?
Nonetheless, in the 1Q, for the PSEi 30’s real estate firms, revenues fell 11.5%, net income slumped 23.6% or by Php 4.814 billion, while cash reserves dropped 15.6%. However, the sector’s debt ballooned by 2.32% or by Php 14.165 billion!
And if our "follow-the-money" trail analysis is correct, then these numbers have been significantly embellished.
Also, in contrast to the price pressures reported in the economy, some companies reported a steep drop in the cost of sales, which significantly improved margins, thus boosting income.
Significant one-off/non-recurrent gains (e.g. asset sales), as well as deferred taxes, likewise boosted earnings for the others.
In the meantime, as discussed last week, banks relied on the BSP’s rescue/subsidies through the monetary policy of record-low rates to minimize deposit expenses.
In this respect, instead of downsizing to reflect current realities, many companies comprising the headline index continue to embrace the unsustainable business model of amassing tremendous amounts of leverage to generate revenues and earnings, dependent primarily on the direct and indirect subsidies from BSP’s policy of Financial Repression, which continually erodes their capital base.
The current state of affairs have existed before the pandemic. No less than the BSP has previously taken note of these.
From the BSP-led Financial Stability Coordinating Council’s (FSCC) 2017 Financial Stability Report (p.22): As a matter of fact, firms listed in the PSE exhibited a rising debt-to-equity ratio, from about 45 percent in 2008 to more than 86 percent as of end-March 2018.
From the BSP-led 1H 2018-2019 Financial Stability Report (p.13): Based on the audited financial statements of the 148 Philippine Stock Exchange (PSE)-listed non-financial corporations (NFCs), the growth of interest expense (IE) has outpaced the rise of earnings before interest and taxes (EBIT). In addition to the rate of growth, the ratio of IE to EBIT shows a rise from 14.5 percent at the start of the first quarter of 2016 to 22.6 percent as of March 2019, with a high of 27.8 percent in December 2017. The same companies have also reported lower profitability with respect to return on assets.
From the BSP-led April 2020 Financial Stability Report (p.16): It should be pointed out that the debt repayment capacity of some PSE-listed non-financial corporates (NFCs) was already declining before the emergence of COVID-19. The interest coverage ratio (ICR), which is a measure of the firm’s ability to service the interest obligations of their debt, has been decreasing in recent periods as interest expense has grown by an annualized rate of 20.9 percent, while earnings before interest and taxes (EBIT) has only grown by 9.0 percent over the past three years.
I don't have enough data to produce the necessary charts. However, considering the annual 2020 and 1Q 2021 performance, the recession, increases in inflation, and rising Treasury yields should magnify the deterioration in the credit profiles of PSE-listed firms, even as debt levels continue to mount relentlessly.
So how will a meaningful balance sheet/earnings/economic recovery occur when leveraged misallocations remain the dominant and entrenched business model for these firms?
And how will a healthy convalescence emerge from the padding up of Financial Statements when it only kicks the proverbial can down the road?
II. Déjà vu! End of May Pumps: Coincidence or Design?
Déjà vu! We have seen this scenario before!
Figure 3
First, a recent background.
At the pre-closing period of May 14th or two weeks ago, having been pumped by a stunning record 149.4 points or 2.44%, the headline equity index was heaved back to the 6,200 levels after falling to an intraday low of 6,084.
See May 14th: The Biggest Ever Rescue of the PSYEi 30! May 17, 2021
But that historic rescue failed to inspire or prod follow-up buying activities such that the index lurched lower anew. Thus, the absence of any significant buying stimulus only magnified the risk of breaking below the 6,000-psychological barrier.
The seeming unacceptability of such prospects has prompted the establishment "to do whatever it takes" to defend the 6,000-level barrier.
Next, the trivia.
The previous record of forcing the index to close higher (marking the close) occurred after a 2.27% pump on May 29, 2020.
But events of May 14th eclipsed that of last year. Last week's pumps climaxed with a 1.94% mark-the-close pump that brought about a 5.11% surge on May 27th. This signified a significant improvement from the dismal outcome of the May 14 operations.
Interestingly, in the last two years, major pre-closing to runoff (mark-the-close) pumps occurred in the last week of May!
Is this by design or coincidence?
III. Local Financial Institutions as Drivers of the PSYei 30 Surge
Figure 4
As if by design, the four days ramp produced a 7.67% rally for the week, the biggest for the year.
But unlike in the 1Q 2021, the rally appears to be driven primarily by local institutional accounts amidst the trend of record-breaking stocks worldwide. (Figure 3, upmost left window)
From the Inquirer (May 28): The main-share Philippine Stock Exchange index (PSEi) racked up 323.90 points or 5.11 percent to close at 6,665.14 in heavy volume, as local investors made up for sluggish foreign investor appetite. This marked the PSEi’s biggest gain in a single day since November 10, 2020 when the index surged by 5.23 percent following a surprise interest rate cut by the Bangko Sentral ng Pilipinas.
Why local financial institutions?
True, while the peso volume surged, the strength in market internals was sorely missing.
First, while most of the index issues were up, the top 10 in market capitalization accrued the largest average weekly gains.
Two, despite the surge, the average daily traded issues fell.
Three, it was a lackluster bounce for the average daily trades, and
Lastly, advancers led decliners by only 100.
In short, the local retail players stayed sidelined.
Moreover, foreign money remained net sellers. Yes, the share of foreign trade continues to improve, which increased to 60% last week, but they contributed to Php 7.2 billion in net outflows.
The bottom line: possibly using spare liquidity from the BSP, domestic financial institutions were the most likely the drivers/engineers of this week’s bounce.
IV. Fighting Deflation: Three Tactical Goals
The bounce seems to have been designed by the establishment to defeat emerging deflation with three subsidiary or tactical goals.
Figure 5
One, prevent and contain the losses of the index and financial assets, which deflationary signals may affect collateral values, necessary for bank lending operations, the upkeep of financial assets and support balance sheets of the banking system.
Direct lending by the BSP to the National Government declined in the last two months through April, which depleted some of the excess liquidity in the financial system. The growth of currency issued by the BSP plunged by a steep .43% in April from 4.06% in March. (Figure 5, upmost pane)
Such changes will affect money supply conditions in April. The BSP is slated to publish the depository equivalent next week.
Perhaps, this week's equity market surge could signify fresh injections from the BSP that has yet to be announced in public.
Two, boost market "confidence" to enhance financial liquidity.
Credit drought in a system dependent on credit expansion is a recipe for fire sales. That’s why the knee-jerk response by the BSP was to infuse a whopping Php 2 trillion liquidity, hoping that this would be sufficient to disguise, if not forestall, insolvencies.
Yet, with bank lending operations in deflation, the BSP remains the only source of financial liquidity. Banks have been using these surpluses for speculation. (Figure 5, middle pane)
That is to say, abetted by the BSP subsidies or transfers, the banking industry seems to believe that the only way for it to recoup from losses acquired from its carefree ways would be to ramp up on speculation. Forget the preservation of capital and the cleansing off bad loans from their balance sheets.
This episode exhibits the moral hazard from social-monetary policies in action.
See the previous discussion. 1Q Bank Losses Ease From the Reverse Robin Hood Effect! With Deflation in Bank Lending, Banks Switch to Asset Speculation! May 23, 2021
Three, allow establishment institutions expanded access to the public’s savings.
As a consequence of tenor mismatching (borrow short-lend long), credit delinquencies emerge from bank operations. Credit impairments hamper operations and erode capital. To fill this gap, banks require fresh funds.
With falling rates of deposit growth, banks have increasingly depended on the capital markets (bills and bonds) for funding, aside from the BSP.
For the consensus, expanded access to the public’s savings requires an improved sentiment, which may improve bank funding through reinvigorated deposits and the liquefied fixed income markets.
And with the BSP’s support, the grand hope is that asset inflation will help restore such confidence.
But there’s more.
If volume improves, the bank’s non-interest income follows; as exhibited by Fees and Commission. (Figure 5, lowest pane)
Moreover, rising stocks not only enhance the perception of the financial markets and the economy but also allows the industry to offload their holdings to either the gullible local retail players and or foreign money.
Thanks to the BSP, vulnerable retail players are most likely the unfortunate bag holders from such policy-induced transfers.
V. Vicious Mini Boom Bust Cycles: Why Price Manipulation/Controls Won’t Work
But what is unsustainable won’t last.
1Q fundamentals shows why today’s orchestrated bounce may be a fleeting episode.
History provides a pattern. (Please see figure 3 anew)
-The rally at the end of May 2020 spurred two more weeks of advances before faltering.
-The 5.23% day gain of November 10, 2020 signaled the onset of the most recent buying climax, led by retail punters that started to unravel in January 2021.
-After a year, the index just regressed slightly below 6,200, which triggered this massive rescue.
As it turns out, there’s no magic in coordinated or syndicated operations to inflate asset markets.
Because temporary gains eventually evaporate, supporting a broken/artificial system requires even more intense operations.
The vicious cycle has only strengthened because such price-fixing operations deal with the symptom and not the malady.
To this end, there is little appreciation that price controls don’t work overtime.
As an aside, there could be a two-week window for short-term trades (depending on the liquidity injected).
VI. BSP Partially Withdraws QE Affecting Public Spending; 4-Months Record Fiscal Performance!
The effect of the BSP’s pullback on its direct financing to the national government was to decrease public spending in April.
From the CNN (May 26): The country’s budget deficit shrank in April as government revenues in the form of income taxes soared and COVID-19 pandemic expenditures eased during the height of strict lockdowns last year, data from the Bureau of Treasury revealed. On Tuesday, the agency reported a fiscal deficit of ₱44.4 billion for the month — an 83.78% year-on-year plunge. “This was driven by the 55.46% growth in revenue performance due to the payment of income taxes, vis-a-vis a 27.14% decline in expenditures from the substantial COVID19 spending at the height of the imposition of the enhanced community quarantines last year,” wrote the Treasury. Revenues reached ₱291.9 billion in April, mainly driven by the Bureau of Internal Revenue’s collection of income taxes. The BIR gathered ₱219 billion in taxes for the period, more than twice the ₱90.5 billion tallied last year. The Treasury noted that the BIR maintained its April 15 deadline for filing and paying income and other taxes this year, unlike in April 2020 where it was extended as the country entered its first round of enhanced community quarantine.
Figure 6
As noted in the news, public spending contracted -27.14% last April. National Government disbursements plunged 35.8%, while allotment to the LGUs slipped 5.01%, which means the much ballyhooed infrastructure spending must be lower.
Are authorities delegating to the handicapped private sector the onus of lifting the GDP (statistical economy) even when they remain partially immobilized?
Why has the BSP decreased its QE when the GDP been mostly about public spending and sectoral rescues? Are they admitting that price pressures or statistical inflation in the economy emanate not only from supply gridlocks but also from public spending-induced demand?
Interestingly, distortions on tax collection schedules last year, brought about by health protocols, appear to have boosted government revenues.
Or, there is no recession in the context of public collections. Four-month revenues climbed 3.95% YoY to Php 988.375 billion, which was off by less than 1% from 2019’s record Php 996.421 billion. That’s because BIR collections jumped 23.14% to Php 688.7 billion, the second-highest after 2019’s Php 703.7 billion.
Yet, the paradox: strong revenues in the face of a string of records (Year-to-date), namely, fiscal deficit (Php 366 billion), public financing (Php 1.456 trillion), and the Treasury’s cash position (Php 798 billion).
Authorities adamantly insist that the GDP will recover this year. Aside from public spending, the CREATE law will bring about an avalanche of investments. But they are on a borrowing spree with the pandemic used as a convenient excuse. Their actions or revealed preferences tell us that they are either preparing for something or statistics have buried the real state of the economy.
Are they looking at possible bailouts of one or more sectors?
