January 2024’s Seasonal Fiscal Surplus in the Shadow of DBCC’s 5.1% Deficit-to-GDP Target, What Higher for Longer International Rates Means

 

All government taxation and spending diminishes saving and consumption by genuine producers, for the benefit of a parasitic burden of consumption spending by nonproducers—Murray N. Rothbard

 

In this issue:

 

January 2024’s Seasonal Fiscal Surplus in the Shadow of DBCC’s 5.1% Deficit-to-GDP Target, What Higher for Longer International Rates Means

I. January 2024’s Seasonal Fiscal Surplus

II. January Interest Payments Soared as Government Liquidity Hits All-Time High

II. DBCC’s 5.1% 2024 Deficit-to-GDP Target

IV. Sharp Decline in January’s Trade Deficits? Capital Goods Import Fell Anew

V. 2023 Decline in FDIs Reinforces its 7-Year Downtrend

VI. Twin Deficits and BSP’s USD Standard: Philippine External Debt Soared to a Record High in 2023!

VII. The Challenge from Higher for Longer International Rates

 

January 2024’s Seasonal Fiscal Surplus in the Shadow of DBCC’s 5.1% Deficit-to-GDP Target, What Higher for Longer International Rates Means

The Philippines recorded a significant budget surplus in January, but the "twin deficits" will continue to shape the political and economic conditions, according to the DBCC's target.

 

I. January 2024’s Seasonal Fiscal Surplus

 

Manila Bulletin, March 15, 2024: The Marcos administration's budget surplus nearly doubled in the first month of the year due to strong revenues generated by the government's two main tax agencies.  The Bureau of the Treasury reported that the national government posted a fiscal surplus of P88 billion last January, a significant jump of 92 percent compared to P45.7 billion in the same month in 2023. “The fiscal outturn was brought about by a faster 21.15 percent year-over-year increase in revenue collection outpacing the 10.39 percent expansion in government spending,” the Treasury said in a statement. Total revenues rose to P421.8 billion from P348.2 billion last year, driven by higher tax collections which comprised 91.31 percent of the total…“The improvement for the period was largely driven by the shift in VAT [value added tax] remittance from monthly to quarterly, pushing the crediting of fourth-quarter 2023 collections over to January 2024,” the Treasury said.

 

News articles like this drool over the supposed accomplishment of the government, where January's budget "doubled" from "strong revenues."

 

The politically slanted article ignores the following facts:

Figure 1

 

First. Government spending exploded to a historic high last December 2023! (Figure 1, upper window)

 

Since authorities raced to fill their coffers, the unprecedented December binge extrapolated to year-end budget overspending.  Naturally, it had to reduce its expenditures in the advent of 2024.

 

No trend moves in a straight line, as they say.

 

Further, since authorities shifted towards relying on its fiscal tool to goose up the GDP, surplus months occurred in the 1H of each year since 2016 (except 2020). (Figure 1, lower chart)

 

Second.  The 2023 budget deficit was the third largest in history and was only 9% off the 2021 zenith.

 

By the same token, why the strategical drift from fiscal "stabilizer" to fiscal "dominance?"  Is the Philippine economy at risk of a massive downturn to rely on sustained stimulus?  Or, why has the economy deepened its dependence on deficit spending?

 

What tools will authorities be left with when the rainy day arrives?

 

As noted in early March,

 

If the Philippine government continues to use its fiscal tool to bolster the GDP at the present pace, it could lose its latitude to unleash policy "stabilizers" when the "sturm and drang" emerge—unless it decides to play with the Russian Roulette of hyperinflation. (Prudent Investor, March 2024)

 

Third.  The article admits that "the shift in VAT [value added tax] remittance from monthly to quarterly" contributed to the revenue spike.

 

A change in the collection schedules represents an administrative task and not a gauge of economic health.

 

II. January Interest Payments Soared as Government Liquidity Hits All-Time High

 

Lastly, the biased article crows at January's "primary surplus"...

 

"Excluding interest payments, the government recorded a P162.2 billion primary surplus for January, growing by 75 percent due to the higher revenue outturn for the period.”

 

Yet, dampening the impact of the soaring scale of debt interest payments, the article continues...

 

Interest payments rose to P74.2 billion, driven by premia from Treasury Bonds and Global Bonds issuance...interest payments (IP), which accounted for the remaining 22.23 percent, rose to P74.2 billion.

 

Figure 2

 

If authorities have been controlling debt levels and servicing costs, then primary surpluses would matter. 

 

But public debt sprinted to a historic Php 14.79 trillion in January 2024 in the backdrop of the upsurge in interest payments. (Figure 2, upper diagram)  

 

The share of interest payments to total expenditure (excluding amortizations) appears to be testing its 2019 resistance level—where a breakout seems imminent. (Figure 2 lower image)

 

In addition, monetary authorities claim that the economy has been impacted by increasing interest rates or "tightening." However, this may only be true for small and medium-sized enterprises (SMEs), but not for the government.

Figure 3

 

In reality, the Treasury's change in cash reserves surged to an all-time high in January (Php 1.08 trillion!) due to a combination of the surplus, public borrowings, and infusions from the financial industry.  (Figure 3, upper graph)

 

And so, while banks and parts of the economy scuffle for liquidity, the government has been swimming with it! 

 

Rephrasing the great George Orwell:  "War is peace.  Freedom is Slavery.  Ignorance is strength."  Tightening is abundance.

 

Simply amazing!

 

II. DBCC’s 5.1% 2024 Deficit-to-GDP Target

 

Guess what happens to the January cash surplus? 

 

In 2024, the Development Budget Coordination Committee (DBCC) predicts a Php 1.395 trillion deficit or 5.1% of the GDP, rendering surpluses insignificant in the era of deficit spending.  (Figure 3, lower table)

 

Given the government's intuition to spend other people's money bountifully, spending targets may overshoot, like in 2023.

 

Besides, the high rates of the GDP have served as the typified basis for these deficit-to-GDP projections, which means that while authorities have programmed spending for the year, revenues mainly depend on economic variability, aside from administrative efficacy.

 

Even more, a sharp downdraft in the GDP would not only spike the ratio but would be justified to accelerate spending for public "safety net" reasons.

 

Therefore, the political tendency is to embrace a higher deficit-to-GDP. Government targets are inconsequential.

 

IV. Sharp Decline in January’s Trade Deficits? Capital Goods Import Fell Anew

 

That's for the fiscal side of the "twin deficits."

 

Businessworld, March 13, 2024 THE PHILIPPINES’ trade deficit in goods narrowed sharply in January, as exports returned to positive territory while imports growth contracted, the Philippine Statistics Authority (PSA) reported on Tuesday. reliminary data from the PSA showed the country’s trade-in-goods balance — the difference between exports and imports — reached a deficit of $4.22 billion in January, 24% smaller than the $5.56-billion deficit in January last year. Month on month, the trade gap ballooned from the revised $4.18 billion in December.

 

The pivotal changes in the banking system's business model and the "era of deficit spending" alternatively translate to sustained and enlarged external merchandise deficits.

 

Since the political economy prioritizes (government and consumer) consumption over production, its adaptive framework increasingly relies on imports of goods and services and access to foreign savings.

 

As recently noted,

 

In any case, consumer and government consumption deepens the nation's dependence on external trade and financing, which galvanizes the credit-financed misallocations from the "twin deficits." (Prudent Investor, March 2024)

 

Sure, January's fiscal surplus signified a deviation.

Figure 4

 

Still, while January 2024 posted a 24% YoY improvement in the trade deficit—mainly a function of base effects—internal configurations remain almost unaltered.  (Figure 4, topmost image)

 

January's 9.1% export boom?  That's also mainly due to the low base effects.

 

Semiconductor exports, which accounted for a 45.5% share of the total, jumped 19.9% on low base effects. (Figure 4, middle graph) But nominal figures have been declining. 

 

The 7.6% contraction of imports?  Capital goods imports declined by 6.5%, while consumer goods imports increased by 15.8%.  In nominal USD terms—imports have been an uptrend for consumer goods, while capital goods have traded sideways. (Figure 4, lowest chart)

 

High GDP predictions?  Slowing imports of capital goods have barely presaged a high GDP.  Economic growth requires investments.  Aside from replacements, stagnant capital goods imports reinforce the deepening dependence on consumer imports. 

 

V. 2023 Decline in FDIs Reinforces its 7-Year Downtrend

 

How about Foreign Direct Investments (FDIs)?

 

Despite a peripatetic leadership, supposedly selling the Philippines as an investment hub, FDI investments slipped 6.6% in 2023 in the face of a weaker peso.   In short, aside from the politicized pitch towards nations belonging to the US-NATO alliance, the weak currency has hardly attracted economically significant investments.

Figure 5

 

An even more troubling sign has been the downtrend of FDI flows since 2017 (On the assumption that 2021's debt spike appears to be an anomaly). (Figure 5, upper graph)

 

Worst, debt flows, which don't guarantee productive investments, constituted the gist of FDI flows since 2012. (Figure 5, lower chart)

 

VI. Twin Deficits and BSP’s USD Standard: Philippine External Debt Soared to a Record High in 2023!

 

The thing is, this Keynesian-inspired spending splurge via the "twin deficits" requires financing. 

 

With the government and major corporations as net borrowers and the low levels of household savings, the domestic political economy increasingly depends on foreign savings to fill its FX requirements gap.

Figure 6

 

Philippine external debt was up by 12.7% YoY to hit a fresh record of USD 125.4 billion in 2023. This data excludes external liabilities of shadow banks/financial institutions.

 

The accelerated rise of the nation's external debt has been in tandem with fiscal deficits. (Figure 6, upper diagram)

 

Public sector borrowing was up 17.9% in Q4 2023 to an all-time high of USD 72.7 billion. (Figure 6, lower window)

 

Public sector borrowing accounted for 58% of the total.

Figure 7

 

Philippine external debt has exceeded the comparable BSP's December Gross International Reserves (GIR), which stood at USD 103.8 billion in December 2023. (Figure 7, topmost image)

 

External borrowings have boosted the Philippines' Balance of Payments (BoP) flow to a surplus (Q4 and 2023) via the Financial Account.

 

Financial Account. The financial account recorded net inflows (or net borrowings by residents from the rest of the world) of US$6.4 billion in Q4 2023, higher by 208.5 percent than the US$2.1 billion net inflows in Q4 2022…

 

Financial Account. The financial account registered net inflows (or net borrowing by residents from the rest of the world) of US$15.4 billion in 2023, higher by 11.0 percent than the US$13.9 billion in 2022. (BSP, March 2024)

 

Yet a part of the borrowing spree may have accounted for the buildup of the GIR.

 

Or, since 2018, the BSP has relied on "borrowed reserves" (including Other Reserve Assets--ORA) to manage its GIR/assets. [data based on IMF’s International Reserves and Foreign Currency Liquidity—IRFCL) (Figure 7, middle chart)

 

And since the BSP embarked on its aggressive QE via its balance sheet expansion to save the banking system in 2020, the mix in favor of international assets—which functioned as the de facto US Dollar anchor—has been drastically altered.

 

Since 2010, the BSP has kept its FX holdings in a tight range of 85-87% share, again, implicitly an anchor to the de facto USD standard.  (Figure 7, lower graph)

 

However, the BSP's mass acquisition of domestic assets in 2020 pulled lower the share of FX holdings. 

 

Therefore, aside from funding the FX gap from the "twin deficits" to showcase the facade of a "sound macroeconomy," perhaps a portion of this debt has been allocated for BSP assets/GIR.

 

VII. The Challenge from Higher for Longer International Rates

 

The challenge is that "borrowed reserves" or "USD shorts" depend on the sustained global easy money regime. 

 

Higher for longer international rates translate to increased cost of acquiring and maintaining "borrowed reserves."

 

Higher for longer also translates to a costlier access to FX savings. 

 

It also means a weaker peso or requiring more peso revenues to pay for extant dollar liabilities.

 

Most of all, a restrictive international monetary regime also exposes the unsustainability and the inherent fragility of credit-financed "twin deficits."

 

___

References

 

Prudent Investor Newsletters, 2023 Philippine Deficit Spending: Surging Debt and Debt Servicing and the Widening Impact of the Crowding Out Effect; December’s Unreported Historic Data! March 3, 2024, Substack

 

Department of Budget and Management, Review of the Medium-Term Macroeconomic Assumptions and Fiscal Program for FY 2023 to 2028, 186th DBCC Joint Statement, December 15, 2023

 

Prudent Investor Newsletters Stagflation Ahoy! Philippine February CPI Rebounds as January Employment Rate Fell, March 10, 2024

 

Bangko Sentral ng Pilipinas BOP Position in Q4 2023 Posts a Higher Surplus, Reverses to a Surplus in Full-Year 2023 March 15, 2024