Sunday, December 05, 2021

Stagnation is Growth! 3Q PSEi Debt Eclipsed Revenue, Net Income Bounce! DoF Admits Financial Conditions of State-Owned Pensions Overstated!

 

Truth does not become more true by virtue of the fact that the entire world agrees with it, nor less so even if the whole world disagrees with it― Maimonides 

  

In this issue 

Stagnation is Growth! 3Q PSEi Debt Eclipsed Revenue, Net Income Bounce! DoF Admits Financial Conditions of State-Owned Pensions Overstated! 

I. A Gem of a Quote from Unexpected Sources; CPI Will “Slow” in 2022 Because the PSA Will Change the Base Year 

II. The BSP Just Confirmed Our Take on Bank Lending to the Property Sector!  

III. The Hall of Statistical Mirrors: 3Q Self-Rated Hunger versus 3Q GDP Boom 

IV. DoF Admits Overstating Financial Conditions of State Run Pension Funds! 

V. Stagnation is Growth! PSEi 30 L-Shaped Rebound in Revenues 

VI. Stagnation is Growth! PSEi 30 Debt Growth Eclipsed Rebound in Net Income, BSP is Behind the Curve, Redux 

 

Stagnation is Growth! 3Q PSEi Debt Eclipsed Revenue, Net Income Bounce! DoF Admits Financial Conditions of State-Owned Pensions Overstated! 

 

I. A Gem of a Quote from Unexpected Sources; CPI Will “Slow” in 2022 Because the PSA Will Change the Base Year 

 

First, this quote exhibits a gem of wisdom from unexpected sources. 

 

Steven T. Cua, president of the Philippine Amalgamated Supermarkets Association, said via mobile phone that the SRP recently issued by the Department of Trade of Industry (DTI) “stifles the growth of free enterprise.” 

 

Competition keeps food retailers in check; not some external inspector from the government. The buying public has the right to choose where they want to shop and at what prices. Those who can afford and shop at their convenience or heart’s delight can choose where and when to shop. Those who can’t afford can do the same with some diligence in comparing prices within neighboring stores,” Mr. Cua said.  

 

Businessworld, December 1, 2021 

 

Aye! 

 

The Nobel Prize winner and the late economist Friedrich von Hayek provides a deeper insight: 

 

Competition is essentially a process of the formation of opinion: by spreading information, it creates that unity and coherence of the economic system which we presuppose when we think of it as one market. It creates the views people have about what is best and cheapest, and it is because of it that people know at least as much about possibilities and opportunities as they in fact do. It is thus a process which involves a continuous change in the data and whose significance must therefore be completely missed by any theory which treats these data as constant.  

 

Friedrich A. von Hayek, The Meaning of Competition, Mises.org March 15, 2010 

 

Nonetheless, we must not forget how the national government’s SRPs influence the generation of the CPI or the statistical inflation.  

 

As an aside, the CPI will slow in 2022. Why? Because authorities are about to change the base year used for calculating it.  

 

Figure 1 

From the Businessworld, November 29: THE PHILIPPINE Statistics Authority (PSA) said the base year for the consumer price index (CPI) will change to 2018 starting in January, to reflect changing Filipino household consumption patterns such as the shift to e-commerce. 

 

Outside media's rationalization, the PSA alters the baseline period every six years. A lower CPI was the effect of the previous rebasing (from 2006 to 2012). (Figure 1, topmost pane) 

 

Torture statistics enough, it will confess to anything! That's the magic of statistics! 

 

II. The BSP Just Confirmed Our Take on Bank Lending to the Property Sector!  

 

The BSP just confirmed what I wrote last week.  

 

Remember this from last week? 

 

Despite the collapse in the real estate GDP in 2020, loans to the sector, both the supply and demand side, continued to post positive growth. Or, to circumvent insolvencies, banks persisted in lending to their key accounts, and thus, credit deflation did not occur.  

 

That is because central banks fret about credit deflation the most 

 

Since collateral serves as a basis for loans, consisting mainly of real estate, the historic liquidity injections by the BSP had been designed to maintain a range of tolerable asset price levels (mainly stocks, bonds, and real estate) that prevent credit deflation from affecting the solvency of banks.    

 

Stagnation is Growth! As Q3 GDP Spiked, ALI, SMPH and RLC’s 3Q Real Estate Sales Languished! Debt Massively Outpaced Revenue and Income Growth, November 28, 2021 

 

Now here is the BSP’s statement.  

 

From the ABS-CBN News, December 2: Real estate loans grew 6.1 percent year-on-year to P2.3 trillion in June 2021, while the non-performing loan ratio was "steady" as lending activities increased for the sector, the BSP said in a statement. "Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno expects real estate lending will remain a priority area for banks," the BSP said. 

 

Why even the need for this assurance? The short answer: To camouflage mounting deflationary risk. Or to ensure the public that liquidity flows into the sector will be sustained despite the brewing fragility. But concealment doesn't mean extinguishment.  Instead, the policy of kicking the down the road should mean that imbalances in banks and the sector will continue to escalate, magnifying systemic risks.   

 

III. The Hall of Statistical Mirrors: 3Q Self-Rated Hunger versus 3Q GDP Boom 

 

Next, unlike mainstream wisdom, the world is interconnected in every aspect. As the great Austrian economist Ludwig von Mises wrote, 

 

Economics does not allow of any breaking up into special branches. It invariably deals with the interconnectedness of all the phenomena of action.  

 

So it would be easy to construe that the smoldering growth exhibited by the survey-based 3Q GDP signified election-related developments due to its blatant divergence to real-world data. 

 

The aforementioned real-world data here are the samples of financial performances of listed banks, retail, and real estate previously analyzed.  

Bank Bailout: BSP Retains Policy Rate; Hello Stagflation! Fastest Plunge of Treasury Spreads (20 & 5 years) Since 2014! PSE Bank’s 3Q Performance November 21, 2021 

Q3 2021 Retail GDP Boom? Peso Sales of SM, Robinsons Retail, Puregold, 7/11, and SSI Says No! November 22, 2021 

 

But the statistical charade doesn’t stop here.  

 

This survey-based statistical data on hunger should add to the many aberrant aspects of the economic outperformance of the 3Q 2021. 

 

From SWS, November 27: The national Social Weather Survey of September 12-16, 2021, found 45% of Filipino families rating themselves as Mahirap or Poor, 34% rating themselves as Borderline Poor (by placing themselves on the horizontal line dividing Poor and Not Poor), and 21% rating themselves as Hindi Mahirap or Not Poor. This compares to June 2021when 48% felt Poor, 29% felt Borderline Poor, and 23% felt Not Poor [Charts 1-2, Table 1]. The estimated numbers of Self-Rated Poor families are 11.4 million in September 2021 and 12.0 million in June 2021 

 

How do you square an economic boom with 79% of the population rating themselves as either poor or borderline poor???  

 

The Twenty One percent, signifying the Pareto rule, delivered ALL the spending boost in Q3??? 

 

If this represents a symptom of financial repression, where the average citizenry pays for the rescue mechanism of banks, the elites, and the government thru repressed rates, inflation and fiscal deficits, how is this a boom? 

 

Most importantly, which of the surveys, the GDP or the SWS, is accurate? 

IV. DoF Admits Overstating Financial Conditions of State Run Pension Funds! 

 

And that’s not all.  

 

The government recently admitted it has been OVERSTATING the financial conditions of their social welfare agencies! 

 

From the Inquirer, December 4 “DOF: Pension fund liabilities may swell, but don’t panic”: Finance Secretary Carlos Dominguez III on Friday said a new accounting system would soon bloat the liabilities of state-run pension funds and insurance institutions, roughly the equivalent of more than half the economy’s output last year, but stressed the government only wanted to show their real financial makeup. He assured that the Government Service Insurance System (GSIS) and Social Security System (SSS) as well as the Philippine Health Insurance Corp. (PhilHealth) would continue to pay their obligations despite these changes, meant to correct their “overstated incomes.” Dominguez noted all three government social institutions still have several years before their funds get depleted: the SSS’s fund life is until 2054; the GSIS, up to 2053; and PhilHealth, in 2027. … The institutions will now have to adhere to the Philippine Financial Reporting Standards 4, which means they have to include in their liabilities book the reserves required for future claims. Before the Commission on Audit releases the audited 2020 financial reports of the GSIS, the SSS and PhilHealth, Dominguez said the public would notice their combined liabilities ballooning to P9.94 trillion. In 2019, their total liabilities were a smaller P153.6 billion, as these did not count future obligations to members and pensioners. 

 

A new accounting system serves as the convenient pretext for it.  

 

But our conjecture here is that the restatement, which should magnify the asset-liability mismatches of these firms, could prompt authorities to ask for political actions to remedy the future funding deficits.   

 

For example, in the article, the DoF proposed the creation of a sovereign wealth fund. But that is just an enticing appetizer. Wait until the main course. 

 

The elephant in the room is this: Should the expected investment rates fail to match liability growth, and should the economy underperform, deficits are likely to swell, accelerating the shortening lifespan of these funds. 

 

Also, since these firms have significant exposure to the domestic stock market, which has been plagued by overvaluations from seemingly orchestrated pumps, the re-emergence of a bear market should be devastating to their balance sheets. Based on 3Q 2020 report, the published equity exposure by the SSS signified about 15% of their assets.  

 

Consequently, the potential remedial political actions may include significantly higher premiums or cuts in benefits, or a combination of the above. 

 

Ergo, since camouflaging financial mismatches cannot be permanent, reality comes out eventually. 

 

But worry not, because the BSP, with its digital press, should ride to the rescue!  

 

Still, beneficiaries are bound to see their public welfare support immensely shrink from inflation! Though authorities may add inflation-tracking adjustments, the purchasing power from such welfare dole out will always lag real-time price changes. 

 

The inflation tax ensures that the government receives more than what it distributes! 

 

Finally, if public authorities have long overstated the financial conditions of state-owned pension funds, why wouldn’t they do the same accounting/statistics management with the CPI and the GDP? 

 

V. Stagnation is Growth! PSEi 30 L-Shaped Rebound in Revenues 

 

This issue will mark the fourth and the last series of establishing the relevance of the survey-based GDP of the 3Q against real-world benchmarks. 

  

Figure 2 

 

Not even the 3Q aggregate revenues and income of the elite members of PSEi 30 support the claim. (Figure 2 upmost pane) 

  

Yes, the low baseline effects magnified the percentage gains. 

 

So while the aggregate revenue of the PSEi 30 was 13.96% above 2020, it was still 14.05% and 9.92% below the 2019 and 2018 revenues, respectively. Or, in the context of the peso, revenues remained substantially lower than the 2018 levels!  

 

Most importantly, revenues depicted an L-shaped rebound. 

 

Here is the thing. When benchmarked to the GDP, we get incredible results. 

 

The share of PSEi revenues to the NGDP increased to 24.97% in Q3 2021 from 24.04% in 2020. The implication is that the aggregate revenues of these elite firms corralled a significant share of the economy, which should be a natural consequence of an elite-dominated political-economic hierarchy. 

 

The irony was that PSEi revenues in 3Q 2020 fell to the lowest relative to the GDP even when MSMEs were devastated by the mass economic shutdown! 

 

Further, the bounce in 3Q 2021 revenues remained substantially below the 28.7% share of the 2019 level! Again, the data suggests broader-based participation in economic performance!  

 

How valid is the logic that MSME remnants or survivors substantially outperformed the elite firms?  

 

While elite firms have had endemic access to cheap and subsidized credit, the BSP has prodded banks to lend to the MSME through various measures, including lowering reserve requirements and various relief measures.  

 

So when you subsidize something, you get more of it. Bank lending to the MSMEs zoomed to Php 200 billion as of the first week of November 2021. 

 

From the Inquirer, November 30: The Bangko Sentral ng Pilipinas (BSP) is keeping up the momentum of lending support for micro, small and medium-sized enterprises (MSMEs) as they strive to retain their client base and expand their market amid continuing disruptions from the COVID-19 pandemic. According to the BSP, the banking system has allocated an average of P202.2-billion loans to MSMEs as of the first week of November in compliance with the reserve requirement rules for lenders, approaching the limit of P300 billion. That amount is more than 23 times compared to the P8.7 billion in MSME loans reported in April 2020. In July last year, the BSP reduced the reserve requirement for thrift banks to 3 percent of their funds from 4 percent, and of rural banks to 2 percent from 3 percent. The reduction was expected to increase the lending capacity of these banks to support the financing requirements of MSMEs as rural community-based clients. To further encourage banks to lend to MSMEs, the BSP has introduced a package of regulatory relief and incentive measures. One such measure is the Credit Risk Database (CRD) project which, done in partnership with the government of Japan, is intended to help improve MSMEs’ access to finance by lessening banks’ dependence on collateral during credit evaluation. 

 

So add more fuel to the fire. Throw in more credit to a system suffering from credit problems.  

 

Nota bene: We shall do away with problems associated with the political distribution or allocation of credit here. 

 

Of course, who pays for the subsidies and the credit risks? Naturally, the savers, taxpayers, consumers, and the peso holders. And since state-owned banks are part of the MSME financing, the accrued financial shortfalls will only add to the deficits and public debt to finance the latter. 

 

As of October, while outstanding public debt reached a record Php 11.97 trillion, debt servicing, under the present historic zero-bound rates, also surged to an unprecedented Php 1.053 trillion with two months to go! (Figure 1, lower pane) 

 

Almost everyone’s kick-the-can-down-the-road bet is that credit financed spending or increased leveraging is all it takes for the economy to recover.  

 

Good luck with that, though. 

Nonetheless, though bank lending to MSME increased, it does not entail a sudden boom in the broader economy. 

 

VI. Stagnation is Growth! PSEi 30 Debt Growth Eclipsed Rebound in Net Income, BSP is Behind the Curve, Redux 

 

It is not just revenues. The net income performance of the PSEi 30 exhibits the same malaise. The percentage gains from the low baseline effect masked the peso-based fall of the net income substantially below 2018 levels! (Figure 2 middle pane) 

 

The peso-based net income also posted an L-shaped bounce. 

 

But the thing again is, corporate debt is the only thing that has steadily been growing in the balance sheets of firms belonging to the elite 30. (Figure 2, lowest pane) 

 

Firms of the non-bank/financials reported a 6.96% increase of debt or net borrowing of Php 316 billion in the 3Q YoY. The spate of borrowings remains brisk regardless of economic conditions. Although, of course, it suggests that the allocation for such borrowings may be different. 

 

Also because several firms have either declared changes in accounting treatment or packaged debt into other categories, this may have led to the understatement of published leverage. 

 

And the total borrowings of PSEi 30 are far larger than the net increase of Php 263.5 billion of total bank lending in September YoY. But this may be explained by the duplication of reports by subsidiaries and the holding companies, and also some borrowings were made through the capital markets.   

 

But then, while banks earlier declared credit deflation, the irony is that there was non-stop growth in the borrowings of non-financial PSEi 30 firms regardless of the economic conditions.  

 

And in no surprise, total non-financial borrowings signified about 122% of net income in 9M of 2021! Borrowings had even been marginally higher than total revenues!   

 

 

Figure/Table 3 

 

Also, in the 9-months of 3Q, while the service sector registered the biggest % gainer in borrowings with a net increase of Php 87.3 billion, it was only second to the holding sector’s 5.42% growth with a net Php 163.5 billion. (Table 3, upper pane) 

 

The fun part is that the mainstream seems to perceive such borrowings as costless! 

 

One can see this behavior in the stock market. Despite this week’s 3.07% decline, the PER of the PSEi 30 is still at 23.22, which is at the 1997 highs! (Table 3, lowest pane) 

 

The great paradox is that the present conditions can only thrive if the BSP maintains rates at the current historic low. 

 

Figure 4 

 

But the last time we saw this was in 2016-2018, where the BSP played a catch-up role. (Figure 4)  

 

Back then, the BSP issued a warning in August of 2018 (FSR 2017). 

 

While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner 

 

It manifested a policy error from an extended low rates regime. 

 

Here is what I noted from two weeks ago… 

  

The lesson: the mounting divergence between the BSP and treasury markets, thus, magnifies the risk of unfavorable consequences.  

Will this time be different? 

 

Figure/Table 5 

 

Please find in the above the debt, revenue, and net income breakdown of the PSEi 30 for the 3Q and 9M.  

 

Yours in liberty, 

 

The Prudent Investor Newsletters 

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