True, governments can
reduce the rate of interest in the short run. They can issue additional paper
money. They can open the way to credit expansion by the banks. They can thus
create an artificial boom and the appearance of prosperity. But such a boom is
bound to collapse sooner or later and to bring about a depression—Ludwig von
Mises
In this issue:
Q2 2024 6.3% GDP?
Stagnation in PSEi 30’s Q2 and 1H 2024 Performance as Debt-to-Income Ratio
Soared to an All-Time High!
I. Introduction: The Growing Disconnect Between PSEi 30 Fundamentals, Prices, and the GDP
II. 1H 2024: PSEi 30 Firms Insatiably Gorge on Debt: More Borrowing, More Trouble?
III. PSEi 30: The Mirage of Profit Gains Amidst Explosive Rise in Debt
IV. PSEi 30: Caveats in Corporate Reporting and Governance: The PLDT 4-Year Budget Overrun Example
V. BSP’s Inflationism: The Slowing Growth of PSEi 30 Revenues and Its Implications
VI. Impact of BSP’s Inflationism: PSEi 30’s Deepening Signs of Illiquidity
VII. San Miguel’s Intensifying Debt and Cash Crunch: Implications for Financial Stability
VIII. Analyzing the PSEi’s Impact on Financial Liquidity: The Surge in PSEi and Bank Borrowings Increases Financial Fragility
IX. PSEi 30 1H Analysis: A Concise Industry Overview
X. Q2 GDP Growth of 6.3% Highlights a Two Speed Economy: Stagnation in PSEi 30 Revenues and Net Income
XI. The PSEi 30 Nears 7,000: The Widening Discrepancy Between Prices and Fundamentals
Q2 2024 6.3% GDP? Stagnation in PSEi 30’s Q2 and 1H 2024 Performance as Debt-to-Income Ratio Soared to an All-Time High!
In a detailed analysis, we highlight the growing disconnect between PSEi 30 fundamentals (for Q2 and 1H 2024), PSEi 30 prices, and GDP.
I. Introduction: The Growing Disconnect Between PSEi 30 Fundamentals, Prices, and the GDP
The PSEi 30 soared by 7.03% in Q1 2024, plummeted 7.12% in Q2, or was almost flat with a slight decrease of 0.6% in the first half of the year.
However, two months into Q3, the PSEi 30 has fully recovered its Q2 losses and was up 7.94% YTD as of August 22nd.
Despite the fragile consumer conditions, owing to the "Marcos-nomics stimulus" channeled via record deficit spending, Q2 GDP rose to 6.3%.
Nevertheless, the dynamics in motion in Q1 extended through Q2 2024 and in the first half of the year.
In our conclusion last May,
In the end, the loosening of financial conditions has led to an increasing divergence between corporate share prices and fundamentals.
Furthermore, the PSEi 30’s Q1 2024 financial performance demonstrates a two-speed economy: a private sector slowdown, which has even affected the elites, translating to further hardship for the middle and lower classes, and a booming government. (Prudent Investor, May 2024)
Let's compare the debt conditions of the non-financial members of the PSEi 30 with its entire constituents.
However, there are some caveats regarding the presented statistics.
Nota bene:
-Older data, representing PSEi members of the specified Q2 end-of-period, presents an apples-to-oranges scenario. The PSEi periodically updates its constituents, which we labeled as 1A data.
-The older data also excludes data revisions.
-Current or 2023-2024 Q2 data provides a more accurate comparison as it reflects present members, labeled here as 1B data.
-The aggregates are overstated due to holding companies incorporating subsidiaries.
II. 1H 2024: PSEi 30 Firms Insatiably Gorge on Debt: More Borrowing, More Trouble?
Figure 1
The table presented is an example of 1B data. It compares the recently published first half (1H) of 2024 numbers with the first half of 2023 figures of PSEi firms. (Figure 1, top table)
The 2023 headlines and the rest of the historical data are referred to as 1A.
Despite coming from a high base, the debt of non-bank PSEi 30 members increased by 5.9% or Php 308.5 billion to Php 5.535 trillion, which is the second highest on record, following last year's Php 5.6 trillion (1A). (Figure 1, middle graph)
The net debt increase of Php 308.5 billion was the fourth highest, after 2022, 2020, and 2023 (1A).
While fifteen of the 27 non-bank PSEi 30 firms posted increases in debt (1B), San Miguel’s eye-popping PHP 147 trillion accounted for 53% of the total.
The other top borrowers were Ayala Corp (Php 46.3 billion), Ayala Energy subsidiary ACEN Corporation (Php 34.5 billion), and Aboitiz Equity (Php 26.85 billion).
It's important to note that this discussion does not include the borrowings of PSEi 30 banks.
The good news is that despite the massive debt increase, soaring bank assets have led to a reduced PSEi 30 Debt-to-Total Financial Resources ratio, which has dropped below 2019 levels. (Figure 1, lowest image)
But here's the caveat: while bank assets outgrew the PSEi 30’s non-bank debt—partly due to the non-inclusion of bank debt data—banks still represent a substantial source of lending to PSEi firms.
Furthermore, the outperformance of bank assets has been driven by the steep growth in consumer credit exposure and holdings in Philippine government debt.
Additionally, some companies may have tucked
away debt through other classifications (e.g., lease liabilities) or via
off-balance sheet arrangements, which may result in an understated actual debt
position.
Figure 2
For instance, while Wilcon Depot has no published debt, interest expenses (from lease liabilities) have been on an uptrend. (Figure 2, topmost chart)
In this way, understanding the mechanics behind the statistics can help strip away the façade of good news based on headline metrics.
III. PSEi 30: The Mirage of Profit Gains Amidst Explosive Rise in Debt
Second, media headlines captivate their audiences by focusing on the percentage gains in revenues and income of the most prominent members of this elite group.
However, they rarely mention that these gains largely stem from the illusion of the low-base effects.
In reality, these exciting profit gains represent only a small fraction of the increases in debt.
In the first semester, the published net income of the PSEi 30 rose by a modest 4.36%, or Php 20.4 billion, reaching the second-highest level of Php 487.12 billion.
Yet, this growth rate marks the slowest increase since 2021. (Figure 2, middle image)
Net income of non-financial companies grew by 2.03%, with one-third of these companies experiencing a decline in profits.
Meanwhile, the headline performance was primarily driven by the big three banks, whose profit growth of 15.4% significantly boosted the overall.
In context, the non-bank debt growth of 5.9% eclipsed the PSEi 30’s net income growth of 4.36%.
Crucially, the net debt growth of Php 308.5 billion represents a staggering 15.2 times the net profit increase of Php 20.4 billion! Fifteen times! An all-time High! (Figure 2, lowest pane)
Strikingly, as a proportion of income, the net debt growth of Php 308.5 billion accounted for 63% of the aggregate net income of Php 487 billion in the first semester!
Essentially, this demonstrates the law of diminishing returns in action: while debt used to be a significant contributor to (demand) revenue and income growth, malinvestments have resulted in corrosive effects.
Worse yet, unbeknownst to the public, this marks a substantial buildup in credit risks, channeled through balance sheet mismatches of the nation’s largest firms.
Amazing.
IV. PSEi 30: Caveats in Corporate Reporting and Governance: The PLDT 4-Year Budget Overrun Example
Another cautionary note is that elite firms may be prone to exaggerating their top and bottom lines to convincingly portray their financial viability to the public.
Furthermore, "errors" could also be a factor, reminiscent of the PLDT's 4-year "budget overrun" debacle. Local authorities drew a veil over the reporting fiasco of the largest telecommunications company and allowed them to escape unscathed, despite the company settling with plaintiffs of a class action suit for a paltry sum of USD 3 million.
In our humble opinion, the PLDT case exemplifies the decay of corporate governance, where elite companies can evade accountability for misdeclarations (whether accidental or intentional).
Instead of being transparent, they may choose to pay small fines, raising the question: what would prevent other elite companies from following suit?
V. BSP’s Inflationism: The Slowing Growth of PSEi 30 Revenues and Its Implications
Figure 3
Meanwhile, corporate revenues grew by 8.71% in the first semester (1B). Non-bank PSEi 30 expanded by 7.4% while bank revenue growth of 24.2% delivered the gist of the PSEi 30’s semestral expansion. (Figure 3, table)
Twenty-three of the 30 constituents posted positive YoY growth while seven saw a contraction. In pesos, San Miguel was the leader with an increase of Php 103.8 billion followed by JGS with Php 24.8 billion, BDO and BPI with Php 24.1 billion and Php 23.1 billion respectively.
1H revenue growth of 8.71% resonated with its equivalent in (nominal) GDP of 9.5%. If the GDP numbers are close to accurate then PSEi 30’s share of revenues amounted to 27.8% of the NGDP.
Yes, 30 firms accounted for over a quarter of the statistical economy in 2024.
And that's only the 30 firms—a hallmark of the trickle-down, plutocratic political-economic structure.
The slowing NGDP and PSEi 30’s revenue growth are symptoms and manifestations of the corrosive nature of the BSP’s inflationism, expressed through over-indebtedness and price instability, which negatively impact profits and liquidity.
Importantly, because this increases the public’s time preferences or short-term orientation, the public becomes inclined toward activities that cater to instant gratification, such as speculation and gambling.
This inclination also permeates into the political spectrum, raising the public’s desire for more interventions and resulting in the deepening politicization of the socio-economic sphere.
VI. Impact of BSP’s Inflationism: PSEi 30’s Deepening Signs of Illiquidity
This leads us to the fourth component: cash.
It is no surprise that the mounting imbalance between profits and debt has resulted in deepening signs of illiquidity, as the cash reserves of the PSEi 30 constituent firms continue to decline. (Figure 3, lower visual)
In addition to borrowing, PSEi 30 corporations have partially used their cash reserves to bridge the liquidity gap in their financing operations.
Yet, despite the massive borrowings, the aggregate cash reserves (1A) have fallen to their lowest level since 2021, with 14 of the 30 firms posting cash contractions.
Aboitiz Equity and gaming company Bloomberry recorded the largest cash decreases, while Meralco and LTG registered the most significant gains.
VII. San Miguel’s Intensifying Debt and Cash Crunch: Implications for Financial Stability
San Miguel’s situation appears to be a poster child for the entropic process leading to illiquidity and insolvency.
Despite the astonishing Php 147 billion surge in borrowing from the first semester of 2023 to 2024, and a published net income of Php 13.6 billion, SMC’s cash reserves fell by Php 8.31 billion to Php 253.9 billion—its lowest level since 2018. (And that’s assuming that the reported cash reserves are accurate)
Why wouldn’t it?
Short-term debt skyrocketed from Php 363.8 billion in 1H 2023 to Php 533.67 billion in 1H 2024, an increase of Php 169 billion! (Figure 4, topmost chart)
Both the level of short-term debt and the annual increase in short-term debt are all-time highs!
More importantly, SMC’s short-term debt now exceeds 100% of its cash reserves!
Additionally, interest payments, which amounted to Php 24.12 billion and counting, have not been included in this analysis.
In context, SMC’s Php 1.484 trillion in debt represents about 4.6% of the Php 32.33 trillion in total financial resources and 5.9% of the 2024 annualized Php 25.2 trillion NGDP! (Figure 4, middle and lowest charts)
Incredible.
In simple terms, SMC needs to generate funds to pay or refinance both its massive short-term and long-term obligations.
Rising interest payments will further erode its profits.
With vastly insufficient profits and cash flows, SMC will naturally have to draw on its most liquid reserves: cash.
The company may also need to increase its borrowing rate or resort to selling assets or dilute its equity to meet its operational liquidity requirements.
Keynesian economist Hyman Minsky theorized the transition from financing stability to instability phenomenon as "Ponzi Finance."
Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes. A unit that Ponzi finances lowers the margin of safety that it offers the holders of its debts. (Minsky 1992)
Regardless of interest rates, SMC’s debt stock has reached a fragile state, increasingly vulnerable to a bout of perilous illiquidity.
If SMC cannot raise the required amount, it may exhaust all its cash or, alternatively, embark on a selling spree of its assets or dilute its equity.
New ventures like the Bulacan-based New Manila International Airport (NMIA) project are unlikely to generate sufficient cash flows to meet its skyrocketing obligations.
However, in our humble opinion, the company must convince the public that it is viable enough to continue with its borrowing orgy.
Yet, what happens at SMC will not stay at SMC. A "tail event" for San Miguel could send shockwaves through the banking system, financial markets, and the broader economy—which relies on elite firms for GDP growth.
Of course, we would expect the BSP or the government to mount a bailout. However, doing so could accelerate other negative feedback loops in the financial system.
VIII. Analyzing the PSEi’s Impact on Financial Liquidity: The Surge in PSEi and Bank Borrowings Increases Financial Fragility
The PSEi’s mounting liquidity shortage has been mirrored in the banking system.
In the first semester, cash growth among listed banks increased by a mere 1.82% year-over-year (boosted by the big three of the PSEi 30 at 3.36%), while bills payable soared by 39.2% across all banks, driven higher by a 68.12% surge from the PSEi 30’s big three. (Figure 5, table)
Nota Bene: BPI categorizes its borrowing under "Other borrowed funds," making the time element of its debt distribution ambiguous and therefore not included in our data.
In any case, universal-commercial (UC) banks have ramped up their borrowing activities, with bills and bonds payable growing at accelerated rates of 40.62% and 11.78%, respectively, resulting in a total increase of 27.8% as of June. (Figure 5, middle graph)
UC bank borrowings in pesos reached an all-time high of Php 1.401 trillion last June!
UC banks have not only increased their borrowing but have also shifted focus to short-term debt, reflecting the industry’s deteriorating liquidity conditions.
The long-term decline in cash-to-deposits and liquid assets-to-deposits ratios continued in June. (Figure 5, lowest diagram)
Bank client issues are also reflected in the
banks' health reflecting on liquidity conditions—despite the accounting charade
surrounding Held-to-Maturity (HTM) assets and various relief measures that have
obscured the actual conditions of Non-Performing Loans (NPL).
If banks are as profitable as claimed, why is financial liquidity deteriorating and why are borrowings at record levels?
IX. PSEi 30 1H Analysis:
A Concise Industry Overview
By industry, debt grew the most in the holding sector, while the property sector came in a distant second in the first semester. (Figure 6, top table)
The holding sector accounted for the largest share representing 74%, while the property sector 11%.
Similarly, banks generated the most significant net income gains, followed by the service sector.
Banks' net income comprised 61.6% of the total or the PSEi 30’s net income, while services had a 28% share.
The holding sector dominated revenue growth, with a share of 54.7%, while banks accounted for 21.9%.
Cash increased the most in the industrial sector, with banks in second place.
X. Q2 GDP Growth of 6.3% Highlights a Two Speed Economy: Stagnation in PSEi 30 Revenues and Net Income
Moving to the second quarter, "Marcos-nomics" powered the GDP growth of 6.3%.
The poor top-line
performance of several PSE-listed firms, which have reported their Q2 2024
results, underscores this issue.
…
Fifth and finally, the PSE-GDP data indicate that there is confusion in associating a high GDP with the performance of the PSEi 30, which is currently in a bear market. (Prudent Investor 2024)
This context is further validated by examining the revenues and net income of the 30 elite companies in the PSEi 30, some of which are even involved in government projects.
Whereas Q2 NGDP grew from 9.1% in Q2 2023 to 10.1% in Q2 2024, the PSEi 30’s gross revenues climbed from 8.24% to 9.14% over the same period, despite the significant increase in debt. (Figure 6, lower graph)
Similar to the first half of the year, Q2 revenues of the elite firms, amounting to Php 1.799 trillion, signified 28% of the Q2 NGDP, which stood at Php 6.486 trillion—once more, the trickle-down, plutocratic political economy.
Revenues grew, but there is a catch.
The net income of the PSEi 30’s non-bank firms showed a slight decline of 0.13% year-over-year.
However, the bank's net income, which
expanded by 13.7%, boosted the aggregate net income growth to 2.35%. This
figure represents gross net income.
Figure 7
Alternatively, the real net income for the PSEi 30 stagnated or even contracted by -1.45% in Q2 2024! That’s right; net income shrank. (Figure 7 top and bottom tables)
Outside the banking and property sectors, there was hardly any increase in net income in real terms.
Net income for thirteen of the PSEi 30 firms (43%) decreased in Q2. Semirara, DMC Holdings, GT Capital, JG Summit, and Bloomberry led this decline.
Conversely, Ayala Corp, SM Investments, ICT, and Meralco led the gainers.
In the meantime, SMC and Meralco posted the most significant revenue gains, while DMC and Semirara experienced revenue contraction.
XI. The PSEi 30 Nears 7,000: The Widening Discrepancy Between Prices and Fundamentals
In line with global stocks, the PSEi 30’s relentless climb toward the 7,000 level has been primarily driven by the local version of the "national team" and supported by foreign funds, thanks to the "Powell Pivot" towards easier monetary conditions.
While this surge has largely been driven by price-multiple expansion or speculation, it has overlooked critical concerns that have been festering beneath the surface.
Or, stocks have departed from the ongoing stagnation in fundamentals.
However, if higher interest rates did not put a brake to the government's and the PSEi 30's insatiable debt absorption and immersion, easier money conditions will surely intensify it.
What could possibly go wrong?
___
References:
Ludwig von Mises, OMNIPOTENT GOVERNMENT THE RISE OF THE TOTAL STATE AND TOTAL WAR, p.251; 1944 & 2010, Mises Institute, Mises.org
Prudent Investor Newsletter, Despite the PSEi 30 FOMO, Q1 2024 PSEi 30 Financial Performance Unveiled a Two-Speed Economy, May 19,2024
Hyman P. Minsky, The Financial Instability Hypothesis, p.7 Levy Economics Institute, May 1992, levyinstitute.org
Prudent Investor, Philippines' Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus, June 2024 Philippine Employment Rates—A Statistical Pump August 11, 2024
