Being in a minority, even in a minority of one, did not make you mad. There was truth and there was untruth, and if you clung to the truth even against the whole world, you were not mad.― 1984
In this issue
The PSEi 30’s 2Q Low-Base Effect Revenue and Earnings Boom; Without Productive Investments, Genuine Recovery Remains Elusive
I. The Avalanche of GDP Downgrades: National Government and Credit Rating Agencies Joins the Bandwagon
II. PSEi 30: 2Q’s Growth Spurt Pushed Up 1H’s Revenues and Earnings
III. PSEi 30’s Addiction to Debt
IV. Biggest 2Q and 1H Nominal Net Income Growth: San Miguel, SM Investments and Jollibee
V. Despite 2Q 2021 Bonanza: Food and Retail Spending Severely Impaired!
VI. Exposing the Statistical Anomaly: SMIC, JFC and SMC’s Faltering Revenues, Booming Debt
VII. Conclusion: Without Productive Investments, Genuine Recovery Will Remain Elusive
The PSEi 30’s 2Q Low-Base Effect Revenue and Earnings Boom; Without Productive Investments, Genuine Recovery Remains Elusive
I. The Avalanche of GDP Downgrades: National Government and Credit Rating Agencies Joins the Bandwagon
Before anything, let us start with the GDP downgrades.
Following the eye-popping 11.8% GDP surge in 2Q 2021, the present ECQ has spurred a torrent of lower 2021 GDP projections. It started with establishment institutions, similar to an outbreak, it then spread to the credit rating agencies.
From the CNN (August 11): Fitch Solutions has once again trimmed its growth projection for the Philippines this 2021 as economic output continues to be hampered by the COVID-19 pandemic. The American research firm said in its recent commentary that it forecasts the Philippine economy will only grow by 4.2% this year down from its previous 5.3% expectation. The latest projection is much farther from the economic team's revised 6-7% growth target band for 2021.
From the Businessworld (August 16): MOODY’S ANALYTICS lowered its growth forecast for the Philippine economy to 4% this year, citing the impact of prolonged restriction measures that were paired with “limited” government support.
From the Businessworld (August 20): S&P GLOBAL RATINGS downgraded its Philippine growth outlook to 4.3% for 2021, warning that the ongoing coronavirus pandemic and stringent lockdown measures will likely stifle its economic growth potential in the next four years. This latest estimate is sharply lower than the 6% gross domestic product (GDP) growth projection it gave in June, the debt watcher said in a note on Thursday.
The National Government finally relented, threw in the towel, and joined the bandwagon.
From the Inquirer (August 18) With the health challenges posed by more contagious variants of SARS Cov2, the virus that causes COVID-19, and their impact on the economy, President Rodrigo Duterte’s economic team has further slashed projected gross domestic product (GDP) growth in 2021 to 4 to 5 percent. Following average GDP expansion of 3.95 percent in the first six months of 2021, the economy needed to grow by between 4.05 percent and 6.05 percent during the second half to hit the full-year target, even as the Delta and Lambda variants may keep parts of the country on stricter quarantine restrictions, which, in turn, will reduce economic output and shed jobs. The updated growth goal was another downgrade from 6 to 7 percent set in May, as the pandemic-induced recession spilled over to the first quarter of 2021.
Two factors of note.
One. Authorities imposed a lighter version of ECQ in August 2020. As previously noted, the current or the 2021 version, supposedly with a 39% increase in mobility (ABS-CBN, August 18) relative to the original, validates my prediction signifying "ECQ in name only."
Second. With 1H GDP at 3.7%, the consensus projects a second semester GDP likely ranging from about 4.3% to 6.3%.
Like 2020, the year started with strong GDP projections, then a spate of downgrades followed.
Good luck on the believers.
II. PSEi 30: 2Q’s Growth Spurt Pushed Up 1H’s Revenues and Earnings
Has the 2Q GDP boom been resonant with reality?
This outlook examines the performance of listed companies in the same period.
As a proxy, we use the 2Q financial performance of members of the PSEi 30.
There is no question 2Q 2020 enjoyed a boom—a statistical one.
But this growth spurt emerged from anomalous conditions—comparing a closed economy with a partially opened one.
Figure/Table 1
Because of the low-base effect, 2Q aggregate revenues of the PSEi-30 jumped 27.4%. This powered net income growth by a phenomenal 316.2%.
The Php 104.19 billion income generated in that period contributed 77% to the 1H income growth of Php 136.08, which signified an 84.42% spike from last year.
The explosive earnings gains were from the growth spikes of the holding firms (+1,888%), industrials (+286%), and financials (+243%).
In the 1H, the industrials led net income growth of all representative sectors, up 155.3%. Holdings and bank/financials followed with 145.1% and 55.1%, respectively.
Meanwhile, the property, holding firms, and industrials registered a % upsurge in 2Q revenue growth rates of 50.7%, 46.3%, and 21.5%, respectively.
Ironically, despite the income surge, banks suffered a 17.41% and 17.9% contraction in revenues in the 2Q and 1H, respectively. The BSP's bailout produced the industry's 'unearned' income. As explained last week,
The gist: banks were on a lifeline mode from the BSP.
-Rate cuts delivered a sharp drop in deposit expenses.
-Liquidity injections widened the interest rate spreads.
-Various relief measures led to lower provisions for loan losses.
A Bounce is Not a Recovery: 2Q GDP 11.8% Boom: Low-Base Effect and Government Spending Boom! August 15, 2021
III. PSEi 30’s Addiction to Debt
But here is the thing. Debt accumulation continues to dominate the financial dynamics of the elite members of the PSEi-30.
While the Non-Financial Corporations (NFC) debt grew by only 3.07%, its nominal growth tallied Php 144.63 billion, or 6.2% larger than the net earnings (Php 136 billion) in the 1H.
Cumulative debt growth was lower by 69% from the historic Php 471 billion in the same period last year, and 47% down from the pre-pandemic record high of Php 273 billion in 2019.
As a side note, because parent firms report the income and debt of subsidiaries, the aggregate numbers are thus "double-counted."
And as the figures reveal, there was no low-base effect on debt. Debt continues to rise in good times as in bad times.
Strikingly, the debt numbers tell a contrasting scenario with bank conditions.
In essence, though the public’s participation levels are low, banks provide funding for most of the credit requirements of the economy.
In June, the total outstanding banking loans of Php 9.75 trillion accounted for 53.5% of the annualized statistical economic growth for 2021.
While the PSEi racked up Php 144 billion in additional debt, universal and commercial bank lending reportedly fell by 1.39% or Php 124.8 billion over the same period. These numbers suggest a broader credit contraction in non-PSEi firms and the broader economy that offset NFC credit growth. But again, the limited participation rate indicates a concentration of credit transactions towards the higher income spectrum of businesses and the population.
Or, the elite firms might have used alternative channels, like the bond markets, for most of their credit financing. Or, the numbers reported by either PSEi firms or banks haven’t been accurate.
Despite the suppression of interest rates by the BSP, the continued amassment of debt should raise its carrying costs that should serve as a crucial barrier to the bottom line of these elite firms.
The strengthening of the balance sheet should be a natural response to an economic downturn. Instead, many firms are increasing leverage that only magnifies systemic risks. The same concept applies to public debt.
IV. Biggest 2Q and 1H Nominal Net Income Growth: San Miguel, SM Investments and Jollibee
Figure/Table 2
In nominal terms involving both revenues and earnings, San Miguel led the 2Q and 1H boom. Its net income growth of Php 17.5 billion and Php 33.6 billion accounted for 16.8% and 24.7% share of the aggregate covering both periods. Among the NFCs, SM Investments and Jollibee ranked second and third in 2Q and 1H.
On the other hand, BDO’s net income of Php 15.55 billion and Php 17.2 billion accounted for a whopping 93.87% and 100% share of the cumulative net income growth of the banks in the Q2 and 1H of 2021!
Meanwhile, the five biggest borrowers were Meralco Php 50.85 billion, SM Prime Php 45.9 billion, SM Investments Php 42.64 billion, JG Summit Php 37.7 billion, and Globe Telecoms Php 34.2 billion, which accrued to Php 211.2 billion or 146% share of the Php 144.63 aggregate.
Of the 26 NFCs, debt exposures increased in 15 firms while 11 registered decreases.
San Miguel (Php 41.25), Ayala Land (Php 13.53 billion), Metro Pacific (Php 13.8 billion), URC (Php 11.9 billion), and the LT Group (Php 10.52 billion) pared down their respective debt levels.
The short-term framework of statistical presentation magnifies the mirage of this boom.
Nota Bene. The reconfiguration of the PSEi 30 to include Converge and AC Energy started only in August, so the above tables include the outed DMC and EMP.
V. Despite 2Q 2021 Bonanza: Food and Retail Spending Severely Impaired!
A resurgent retail sector was one of the secondary features of the 2Q bonanza. Recall, value-added contribution to the 2Q GDP came mostly from government consumption and infrastructure spending.
Figure/Table 3
Food and non-food retail revenues surged 9.81%, led by retail food sales, which soared by 13.05%. Non-food retail rose 8.94%.
Nevertheless, these 2Q growth spurts failed to lift the first semester performances, which all posted contractions as indicated on the table.
How did the corresponding GDP fare?
The current Food and retail GDP reported sharply higher increases of 10.7% and 84.4% in Q2 and 18.6% and 4.4% in 1H. The numbers are significantly higher than reported by sales or revenues of the market leaders.
But the broader numbers reveal that these sectors are in a pickle.
Even if we should accept the official numbers as a valid estimate of actual conditions, for the retail sector, the current priced 2Q GDP has dropped to Q2 2018 levels (excluding 2020). In real terms, retail GDP slipped to 1Q 2019 levels!
It is even worst for the food sector, in which the current priced 2Q GDP has dropped to Q2 2016 levels (excluding 2020). In real (inflation adjusted) terms, Food GDP slumped to 2Q 2011 levels! That's a ten-year low in food spending!
So, the statistical boom obscures the fact that the constrictions in retail and food spending signified a consequence of the massive impairments of income, wages, and jobs!
VI. Exposing the Statistical Anomaly: SMIC, JFC and SMC’s Faltering Revenues, Booming Debt
Let us put the low-base boom effect in the perspective of revenues and debt of the leading performers of the PSEi in the 2Q and 1H.
Figure 4
From the Manila Bulletin (August 4) SM Investments Corporation (SMIC) reported a 183 percent jump in consolidated net income to P20.1 billion in the first half of 2021 from the P7.1 billion earned in the same period last year. In a disclosure to the Philippine Stock Exchange, the firm said consolidated revenues rose 4 percent to P193.5 billion in the first half of 2021 from P185.5 billion in the same period last year.
SM revenues grew by 29.9% to Php 96.6 billion in the 2Q.
From the Businessworld (August 12): JOLLIBEE Foods Corp. (JFC) and its subsidiaries swung to profit in the second quarter, the listed restaurant operator reported on Tuesday, when it also announced plans to fully own the Tim Ho Wan brand to further expand its business in serving Chinese cuisine… Meanwhile, the company’s revenues grew by 57.2% to P36.69 billion in the second quarter from P23.34 billion year on year.
From the Businessworld (August 6): SAN Miguel Corp. (SMC) returned to profitability to finish the first half with a net income of P29.57 billion, reversing last year’s P3.99-billion loss, as all of its major business units posted “robust recoveries.” … The company’s topline grew by 16% to P410.12 billion from P352.8 billion in the same period last year due to higher sales generated by Petron Corp., SMC Global Power Holdings Corp., SMC Infrastructure, and San Miguel Food and Beverage, Inc. (SMFB).
SMC’s revenues jumped 50.63% in the 2Q.
Fundamentally, the statistical boom represents the bringing back of revenues of these firms towards their 2016-2017 levels. Or, when seen from its revenue stream (in pesos), reality exposes the spuriousness of this statistical boom from aberrant conditions.
And to be sure, the debt levels of these firms are either at colossal highs or just off their recent zenith.
More pointedly, rather than revenues or income, it is debt that is experiencing a boom!
VII. Conclusion: Without Productive Investments, Genuine Recovery Will Remain Elusive
Needless to say, the continuing debilitation of economic calculation of entrepreneurs from present ‘health’ policies will most likely worsen capital consumption. And current imbalances should piggyback on the previous malinvestments.
As the great Austrian Economist Ludwig von Mises explained*
For monetary economic calculation is the intellectual basis of the market economy. The tasks set to acting within any system of the division of labor cannot be achieved without economic calculation. The market economy calculates in terms of money prices. That it is capable of such calculation was instrumental in its evolution and conditions its present-day operation. The market economy is real because it can calculate.
*Ludwig von Mises, Human Action, p. 260, Mises.org
Unless bestowed with political privileges, who would invest in a climate where "regime uncertainty" prevails? Or how would destabilizing variability, the fickleness, and the scale of political interventions, which cloud economic calculation that raises the hurdle rate of profitability, become a haven for productive investments?
Regime uncertainty, as per the distinguished Austrian economist Robert Higgs theorized**, represents "a pervasive uncertainty about the property-rights regime—about what private owners can reliably expect the government to do in its actions that affect private owners’ ability to control the use of their property, to reap the income it yields, and to transfer it to others on voluntarily acceptable terms. Will the government simply take over private property? Will it leave titles in private hands, but strip the owners of real control and profitable use of their properties? These questions fall under the rubric of regime uncertainty."
**Higgs, Robert Regime Uncertainty in 1937 and 2008, Independent Institute Blog December 6, 2018
The intensifying interventions contributing to the deepening climate of regime uncertainty, as noted last week…
The following activities manifest the collective major political interventions with crucial impacts:
-the continuing forced discoordination of the factors of production owned and controlled by the private sector,
-the centralization of the economy through mounting regulatory regime, the surge in public spending, and the record deficits funded by skyrocketing debt,
-misallocation of resources from the BSP’s zero bound rates and QE, and
-the unprecedented measures to rescue the banking system by the BSP.
That said, such redistribution will not only lead to a decline in the standards of living, but should also magnify financial and economic risks, notwithstanding the possible social, health, and political hazards that are likely to emerge and surface.
A Bounce is Not a Recovery: 2Q GDP 11.8% Boom: Low-Base Effect and Government Spending Boom! August 15, 2021
Without productive investments, genuine recovery will remain elusive.
Post Script: Not only does history rhyme, propaganda, which typically serves as a basis for the establishment narrative, eventually crumples into reality.
Echoing the fall of Saigon or the “Saigon Moment” 48 years ago, US troops in a disorderly panic fled from Afghanistan last week, supposedly concluding a 20-year war.
Writes historian Eric Margolis (August 17): After 20 years of B-52 carpet bombing of Afghanistan, murderous drone strikes, 350,000 puppet soldiers, 20,000 mercenaries, nearly two trillion dollars in US spending, destruction of countless Afghan villages, the killing up to one million Afghans, spreading the opium trade around southeast Asia and Europe, abetting wide scale torture…. after all this the US-run Afghan’s puppet `president’ and his drug-dealing cronies have fled embattled Kabul like thieves in the night. Taliban – more accurately the Islamic Movement of Afghanistan – has been slandered by almost every western news outlet and wrongly called a terrorist movement linked to the late Osama bin Laden. Heavily-propagandized Americans, Canadians and British have been inundated by this torrent of government lies against Afghanistan’s Pashtun (Pathan) people.
The late Spanish diplomat and historian Salvador de Madariaga (Anarchy or Heirarchy, 1937) presciently wrote, “No one has ever succeeded in keeping nations at war except by lies.”
Yours in liberty,
The Prudent Investor Newsletter
No comments:
Post a Comment