If people really could formulate all their knowledge in algorithmic terms and calculate as economic theory assumes, there would be no need for real-life markets. The virtue of the real market is precisely that it calls forth knowledge that people cannot explain, justify, or defend intellectually—Stephan Marglin
In this Issue
Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024!
I. Are Filipinos Really Spending More On Non-Essentials?
II. How the BSP Controls the Inflation Narrative
III. Widening Wealth Gap: While May CPI Inflation Rate Climbed to 3.9%, the Bottom 30% Struggle with Higher Prices
IV. Has the May CPI Peaked? Stagnating Monthly CPI Rate Changes and the Bullish Flattening Treasury Curve
V. Peak CPI? Manufacturing and Import Weakness Signals Demand Slump
VI. Bank Credit Expansion’s Diminishing Returns as Credit Card and Salary Loans NPLs Spiked in Q1 2024!
VII. Peak CPI? Labor Conditions Worsen in April as Unemployment, Underemployment and Part-Time Jobs Swell
VIII. Peak CPI? Restrained Public Spending May Ease on Supply Constraints
IX. Stagflation Ahoy! Economic and Financial Rescue Measures to Power the USD-Philippine Peso
Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024!
May CPI reached 3.9%, but could this be the peak? Signs from various parts of the financial economy, including a spike in credit card and salary loan non-performing loans (NPLs), indicate so. Have Filipinos been unaffected by inflation?
I. Are Filipinos Really Spending More On Non-Essentials?
Inquirer.net, May 31, 2024: Filipino consumers are now spending less on essential goods and services, and consuming more of nonessential items—a shift that’s not surprising at all as the Philippines moves closer to “upper-middle income” economy status, HSBC Global Research said. (bold added)
A closer examination of the data raises questions about the validity of this claim. (Figure 1, topmost image)
First, let's ask some crucial questions:
-Is the Philippines the subject of the study?
-Has the generalization been anchored on an ideological slant of advocating spending one’s way to prosperity?
-Have vested interest groups commissioned this study?
-Or has it been designed to ingratiate with incumbent political agencies promoting their supposed "upper-middle income" agenda?
The most striking feature of that news quip is the adverb "now."
It assumes that, having been awash with savings, Philippine residents have broadly leveled up their spending patterns from the physiological needs (Maslow’s Hierarchy) towards the myriad wants (safety, social, esteem, and self-actualization). To repeat, broadly.
By inference, it should also mean that Filipinos have been spending more than enough on essentials while in the transition to an upgrade.
Ironically, the study didn’t point out how and what financed this shift to "consuming more of nonessential items."
But, as previously explained, the consumer spending share of GDP relative to the government spending peaked in 2013 and has been southbound since.
That is to say, government spending has risen at the cost of consumers. (Figure 1, middle window)
Are they saying that the current weakness in consumer spending growth will reverse with more deficit spending or more implicit transfers favoring the government and its cronies? Or how will increasing this reverse the current trend?
Importantly, as earlier elaborated, despite the historic bank consumer credit boom, revenue growth of retail (non-construction) chains, retail construction chains, and food chains have been on a downside drift through Q1 2024.
In contrast, consumer loans (including real estate) hit a historic Php 2.7 trillion pesos, while its % share of Total Loan Portfolio soared to an unprecedented 21.4% in Q1 2024. Consumers continue to gobble up a larger share of the banking industry’s loans. (Figure 1, lowest graph)
So, why has the growth of retail sales been slowing despite unprecedented consumer lending by banks?
Notwithstanding, their next assertion starkly contradicts such blissful assumptions: "While the decline in household furnishing was expected amid a high-interest rate environment that ruined Filipinos’ renovation plans, which are typically funded by credit, HSBC said the weaker demand for food and clothing was “surprising.”"
So, did this wonderful transition stop at the doorstep of household renovation? Or, has persistent real estate vacancies been the source of the slowdown in the demand for household furnishing?
And if armed with savings, why should local consumers be vulnerable to higher rates? Won’t higher rates—which increase their interest income—increase their spending capacity?
But having peaked in 2013, the bank's peso deposit growth rates continue to dwindle through April 2024. (Figure 2, topmost visual)
It didn’t take long for another article to negate this presupposed shift to "consuming more of nonessential items."
Inquirer.net, June 4, 2024: Universal Robina Corp. (URC) saw brisk sales in its low-priced food products, including snacks and instant coffee, as consumers looked for cheap alternatives to deal with inflation hurting the power of their wallets.
From this factual perspective, is the decline in spending on essentials due to reduced spending on non-essential items or diminished real income, forcing individuals to cut back on essentials?
Is this study based on a "false dichotomy?"
Needless to say, how would higher inflation or the ‘loss of purchasing power of the peso’ bring about this alleged magnificent transformation to an "upper-middle income" economy?
Has the study even incorporated the sentiments from polls showing the persistence of high levels of self-rated poverty and hunger among a high portion of the population?
Alas, is the path to an "upper-middle income" economy increasingly dependent on the buildup of leverage in the balance sheets of the government, supply-side, and consumers than a productivity-driven one?
II. How the BSP Controls the Inflation Narrative
Reuters, June 5, 2024: Philippine annual inflation quickened for a fourth straight month in May due largely to the faster pace of increases in housing, utility and transport costs, the statistics agency said on Wednesday. The consumer price index rose 3.9% in May from 3.8% the previous month, marking the fastest rise since November 2023, bringing the five-month average inflation to 3.5%, well inside the central bank's 2.0%-4.0% target for the year. Economists in a Reuters poll had forecast annual inflation at 4.0%.
Here's how the pin-the-tail-on-the-donkey inflation prediction game is played:
1. The Bangko Sentral ng Pilipinas (BSP) initially offers its inflation projection for a given month through a range (usually covering 90 basis points), typically a few days before its announcement. While the BSP has its own department to calculate this, it can also coordinate with the Philippine Statistics Authority (PSA) on the latter’s preliminary tabulation using its survey inputs.
2. Then, the mainstream experts typically choose a number from the BSP’s range to use for their individual "forecast."
3. The media then calculates the "median" from this consensus.
4. Subsequently, the PSA announces the CPI figure, and the media depicts the difference between the consensus forecast and the actual PSA result.
All of this reinforces the public’s (mis)perception about the BSP’s definition of inflation.
For instance, the BSP’s extrapolation of the May’s CPI (May 31, 2024):"The latest inflation outturn is consistent with the BSP’s projections that inflation is likely to exceed the target range temporarily due to the possible impact of adverse weather conditions on domestic agricultural output as well as positive base effects. Nonetheless, the BSP expects full-year average inflation to settle within the target range for 2024 and 2025."
For them, the attribution of inflation is always to the supply side, which leads to an inflation narrative that focuses primarily on statistics. The irony is that they use their monetary tools (rate hikes or cuts) to "anchor or un-anchor" the public's "inflation expectations"—a strategy that is fundamentally at odds with their supply-side diagnosis.
In essence, they blame the supply side for inflation, but use demand-side instruments to manage it. This disconnect is often lost on the lay public, who are unfamiliar with the technical details surrounding the mechanics of inflation.
The general idea is that distortions from the supply side are seen as representing market failure, namely greed, and that the BSP is considered immaculate, foolproof, and practices Bentham's utilitarianism (for the greater good) when it comes to its demand-side policies. Therefore, it would be easier to sell more interventions when the authorities are perceived as saints.
Ironically, the BSP has been advocating for the "trickle-down theory" in its policies: subsidize demand while controlling or restricting supply (Kling,2016)
More importantly, the public is unaware of the entrenched "principal agent syndrome" in action: the BSP regulates these mainstream institutions. As such, the BSP indirectly controls the narratives or dissemination of information on inflation.
In doing so, any institutions will run the risk of regulatory discrimination or lose commercial intercourse when dealing with it or the national government, or even their financial colleagues.
The CPI as defined by the PSA (bold added): "The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures in the calculation of the gross domestic product. Moreover, it serves as a basis to adjust the wages in labor management contracts, as well as pensions and retirement benefits. Increases in wages through collective bargaining agreements use the CPI as one of their bases." (PSA, FAQ)
To put it bluntly, the CPI is the most politically sensitive statistic, making it prone to political manipulation aimed at advancing the interests of political leaders and the bureaucracy.
In any case, the realities of human action—not statistics—eventually shape economic and financial outcomes.
III. Widening Wealth Gap: While May CPI Inflation Rate Climbed to 3.9%, the Bottom 30% Struggle with Higher Prices
The Philippine government reported that their Consumer Price Index (CPI) inched higher to 3.9% in May. In contrast, core inflation (non-food and energy) slipped to 3.1%. This divergence showcased that the increases were centered around food and energy. (Figure 2, middle chart)
While food inflation contributed significantly, it slowed down in May, decreasing from 6% in April to 5.8%. The transport CPI, however, saw the largest jump, increasing by 90 basis points, from 2.6% in April to 3.5% in May. (Figure 2, lowest diagram)
Interestingly, this surge occurred despite the decline in international prices of oil, which typically has a significant impact on it. West Texas Intermediate (WTI) prices fell by 5.2% month-on-month from USD 81.7 per barrel in April to USD 77.44 in May.
As it stands, widening wealth inequality continues to be exposed even in the government's statistical inflation or CPI.
Despite easing from the 5.8-year high last April, the gap between the headline CPI and the bottom 30% income remained barely changed. (Figure 3, topmost chart)
According to the PSA (bold added), "The CPI for the bottom 30% income households is compiled by the PSA to measure the changes of prices of commodities commonly purchased by the families that belong to the bottom 30% income decile. The process of price collection and CPI computation is the same as that of the CPI for all income households. However, there is a separate market basket and weights for the CPI for the bottom 30% income households." (PSA, FAQ)
This signifies one of the many pieces of evidence illustrating why the CPI is highly flawed: the individual is not the community, the community is not the region, and the regions are not the nation. The CPI of billionaires is not the same as that of the bottom dwellers.
This disparity is evident in the fact that people from the bottom 30% still buy goods at the same prices from the same stores, yet changes in the CPI's basket and weights lead to stark differences.
Of course, the weights are determined by assumptions made by the PSA, which do not align with individual circumstances.
The thing is, in contrast to the 2018 episode where the CPI of both the headline and the bottom 30% were synchronized to the downside, today, the downtrend in the CPI has only amplified the bottom 30% CPI.
The reality is that the bottom 30% has experienced a sharper decline in their purchasing power.
And this phenomenon is not an anomaly, but rather a 4.8-year trend, as evident from the PSA's data, representing a consistent pattern in the CPI's performance over this period.
Moreover, this trend represents a "boiling frog" phenomenon, where the erosion of the middle class is gradually but inexorably occurring. It's essential to acknowledge this reality rather than ignoring it.
On the other hand, the Cantillon effects of money/credit/liquidity expansion imply that the primary beneficiaries are those who have direct access to its creation: the government and elites (Thornton, 2022)
This is a stark reminder of the widening wealth gap from the redistributionist "trickle-down" policies embraced by the Philippine government.
IV. Has the May CPI Peaked? Stagnating Monthly CPI Rate Changes and the Bullish Flattening Treasury Curve
But May's CPI may have exhibited signs of reaching an interim "zenith."
First, from the perspective of the PSA's data, although the year-on-year CPI increased for the third consecutive month, its month-on-month (MoM) change continues to languish. Successive increases in the MoM rate have accompanied previous surges in the CPI, which have been absent in the current uptrend. (Figure 3, middle image)
Second, following a sharp bearish steepening, the Philippine treasury curve has partially shifted to a bullish flattening. Yields from last week's close have slightly dipped below those of May 31st and sharply against the end-of-April highs. Are treasury traders sensing a slowdown in inflation and GDP? (Figure 3, lowest chart)
We should observe how this evolves by month-end.
Third, despite the growth in lending, we are not yet seeing a significant impact on the broader economy or even the CPI.
Or while banking loans continue to surge higher, unfortunately, they appear to be suffering from the law of diminishing returns.
Universal commercial (UC) bank loans increased by 9.6% last April, the highest rate in a year, reaching a record Php 11.56 trillion, supported by a 7.8% increase in production loans and a scorching 25.3% growth in consumer loans. (Figure 4, topmost and middle charts)
Conversely, as evidence of slowing demand, Jollibee recently announced price reductions for their bestsellers.
V. Peak CPI? Manufacturing and Import Weakness Signals Demand Slump
Let us examine the supply side.
First, the manufacturing sector.
Following the February spike to 5.9% YoY, UC manufacturing loan growth slowed to 4% in April. Interestingly, the Producer Price Index (PPI or factory gate prices) remained in a deflationary phase, with a -0.8% decline in the last two months. (Figure 4, lowest graph)
Although the deflationary trend has been easing, the PPI's sustained decline suggests that the increase in output has not been supported by demand.
According to PSA's manufacturing data, the sector reported a value and volume growth of 5.9% and 6.7% in April, respectively. However, on a year-to-date basis, the sector has stagnated, with zero growth in both value and volume sales.
Reported value and volume sales also increased by 6.4% and 7.2%, correspondingly, but due to sharp declines in two of the last four months, year-to-date growth also slackened.
Again, the sustained decline in the PPI (factory gate prices) suggests that the increase in output has barely been supported by demand. The improvement in April’s sales has yet to translate into higher prices.
Next, let's consider imports.
Figure 5
March imports in USD plunged by 19.95%, while imports for the first quarter of 2024 decreased by 3.23%. In pesos, March imports plummeted by 18.42%, while first-quarter 2024 imports fell by 5.7%. (Figure 5, topmost diagram)
Consumer goods imports were a significant contributor to this decline, with YoY and MoM figures of -19.11% and +4.15%, respectively. Cumulatively, consumer goods imports remained unchanged year-to-date. (Figure 5, middle graph)
Consumer goods imports contributed significantly to this trend: year-on-year -19.11%, month-on-month +4.15%, with cumulative year-to-date unchanged.
In terms of percentage of total imports, consumer goods accounted for 19.6% in March and 19.5% in Q1 2024.
In summary, the notion of a supply-side driven inflation is hardly supported by PSA's manufacturing and imports data.
Instead, the evidence suggests that supply-side strains are indicative of ongoing weakness in demand.
VI. Bank Credit Expansion’s Diminishing Returns as Credit Card and Salary Loans NPLs Spiked in Q1 2024!
Furthermore, surging non-performing loans (NPLs) in banking loans represents a concern.
That record upside streak for credit card and salary loans doesn’t come for free. Unless supported by proportional income growth, the increased leveraging of balance sheets will eventually come home to roost.
In Q1 2024, credit card NPLs raced to levels last seen in Q4 2021, while salary loans hit an all-time high! (Figure 5, lowest window)
That is to say, many individuals, corporations, or institutions have been borrowing more, which has inflated the bank loan data and has been misinterpreted as "growth." However, they are likely borrowing for liquidity purposes or to refinance themselves to stay afloat.
This refinancing dynamic has been evident even among listed companies on the Philippine Stock Exchange (PSE). For instance, SM Prime Holdings recently had a Php 100 billion bond offering.
From the Inquirer.net, May 23, 2024 (bold added): Net proceeds from the offer could reach P24.72 billion, assuming the overallotment option is fully exercised. The funds will be used to refinance the listed company’s debt and expand its property portfolio.
Therefore, refinancing has been used by the banking system to conceal the mounting liquidity and solvency issues that are plaguing it.
We are oblivious to the actual numbers of "zombie" institutions, which survive by constantly rolling over debt and remaining afloat solely through the accumulation of debt.
Aside from relief measures and regulatory subsidies, the banking system continues to accumulate imbalances, exacerbated by the BSP's pseudo "tightening" policies, which are actually easy money policies.
In reality, the BSP cannot afford to "tighten" as it did in 2018, as it would risk triggering a domino effect or contagion due to the growing liquidity and solvency issues.
The Philippine economy and financial system have been gradually devolving into a Ponzi finance-economy.
VII. Peak CPI? Labor Conditions Worsen in April as Unemployment, Underemployment and Part-Time Jobs Swell
On top of the above, we find a considerable deterioration in jobs and job quality.
Inquirer.net, June 7, 2024: The widespread drought caused by the El Niño weather phenomenon since the start of the year forced many farmers out of work, raising the country’s unemployment rate in April to 4 percent from 3.9 percent the previous month, the Philippine Statistics Authority (PSA) reported on Thursday. This translated to 2.04 million unemployed Filipinos, higher than the 2 million who were jobless in March. Preliminary results of the statistics agency’s Labor Force Survey (LFS) for April showed the unemployment rate was the highest in three months, but lower than the 4.5 percent in April 2023 and January this year.
An amazing extrapolation based on a skewed version of the presented data.
Although we are a hard-core skeptic of government data, we use it to understand the mainstream and public perception.
Firstly, unemployment rates did increase in April, but so did the non-labor population or the decline of the labor force. In other words, the upturn in non-labor population camouflaged the increase in the unemployment rate. (Figure 6, topmost chart)
Secondly, the underemployment rate surged from 11% to 14.6% month-on-month. This was supported by the fact that the share of part-time jobs soared from 30.5% in March to 32.6% in April. (Figure 6, second to the topmost graph)
Sure, among the largest employers, agricultural jobs declined, but so did trade jobs (602,000 MoM). Manufacturing and Finance also shed 284,000 and 111,000 jobs respectively. (Figure 6, second to the lowest chart)
As a side note, despite the reported 684,000 month-on-month job losses in agriculture due to El Niño, fishing jobs saw an unexpected surge of 413,000. Using available bias and post-hoc logic, one might wonder if job creations signify a consequence of the mounting standoff between the Philippines and China? Ironically, the defense industry and government reportedly shed about 466,000 jobs.
Has China and the Philippines reached a deal involving the fishing industry?
The data reveals that job retrenchment affected the biggest employers. Have record heat temperatures contributed to these job losses?
But there’s the rub. Despite the record unemployment last December 2023, part-time jobs have consisted of about a third of the workforce. Instead of increased spending, this led to unprecedented growth in salary loans and credit card loans.
While escalating non-performing salary loans and credit card loans may be attributed to job decreases, credit delinquencies occur when the ability to service liabilities grows faster than income.
In summary, slower employment growth should contribute to a decline in demand, and the upsurge in credit delinquencies should accelerate it.
VIII. Peak CPI? Restrained Public Spending May Ease on Supply Constraints
Then, there’s government spending.
Rocketing public debt servicing may be stalling the government’s appetite for spending, but this reprieve may not last.
What the government spends, it takes from the private sector. This leaves little room for the latter to increase production to meet domestic consumption needs.
Reduced production, coupled with demand subsidies by the BSP, leads to economic imbalances that manifest in prices.
As such, the nominal growth in public spending has resonated with the general trend of the CPI. (Figure 6, lowest image)
Moreover, insufficient production has led to an increasing dependence on imports and subsequently, the 'twin deficits.'
The slowdown in public spending has been reflected in the net claims on the central government (NCoCG) of the banking system and the BSP. This tapering has escalated the liquidity drought in the banking system, where cash-to-deposits reached new multi-year lows in April, and liquid assets-to-deposits also declined sharply. (Figure 7, topmost chart)
The combination of disguised bank credit delinquencies and record levels of held-to-maturity (HTM) assets has worsened liquidity conditions, which will likely be exacerbated by escalating consumer non-performing loans (NPLs). (Figure 7, middle diagram)
Additionally, rising public debt servicing is expected to further exacerbate these conditions.
IX. Stagflation Ahoy! Economic and Financial Rescue Measures to Power the USD-Philippine Peso
Such conditions are the perfect recipe for a slowdown in the Consumer Price Index (CPI) and the Gross Domestic Product (GDP).
However, officials are unlikely to permit this scenario to unfold. Therefore, this would provide the impetus for officials to increase their desire for the Bangko Sentral ng Pilipinas (BSP) to cut interest rates, which the latter would eventually oblige.
And if the GDP does slow, it would prompt the government to unleash all sorts of stimulus (fiscal and monetary)—using the pandemic template.
However, this would likely fuel more energy to the US dollar (USD).
Should the $USDPHP breakout, this would partly offset the deflationary forces—leading to stagflation. (Figure 7, lowest chart)
We have been asserting that the BSP’s Gross International Reserves (GIR) have been stuffed by "borrowed reserves" such as external debt and Other Reserve Assets (ORA).
The BSP has recently confirmed our views that it is adding to its position on US shorts: "The month-on-month increase in the GIR level reflected mainly the National Government's (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds, and net income from the BSP's investments abroad. (BSP, 2024)
The national government raised USD 2 billion last May, which it deposited with the BSP and included in its GIR. However, "borrowed" means it needs to be repaid.
The ensuing USD-based "asset-liability mismatch" represents the "short position."
____
references
Philippine Statistics Authority, Frequently Asked Questions
Arnold Kling, Once Again, Subsidize Demand and Restrict Supply, September 22, 2016, Arnoldkling.com
Mark Thornton, Cantillon Effects: Why Inflation Helps Some and Hurts Others, March 11, 2022, Mises.org
Bangko Sentral ng Pilipinas, End-May 2024 GIR Level Rises to US$104.48 Billion, June 7, 2024 bsp.gov.ph
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