Unveiling the Reality Behind the Philippine PSEi 30’s 7,000: Market Concentration, Divergence, Manipulations, and the Overton Window

What's been lost in this frenzied competition for eyeballs and "likes" is the distinction between opinion and journalism. The post-truth cliche is that there is no distinction, that everything is mere opinion and spin, but this is not true: journalism is different from opinion and spin—Charles Hugh Smith 

In this issue

Unveiling the Reality Behind the Philippine PSEi 30’s 7,000: Market Concentration, Divergence, Manipulations, and the Overton Window

I. The PSEi 30 Closes Above 7,000: Is This a "Historic Moment?"

II. Foreign Inflows Targeted at Biggest Market Cap Issues, Historically Chasing Tops

III. PSEi 30 7,000: Primarily an ICTSI Show; Diverging PSEi 30 and Market Breadth

IV. PSEi 30 Rose to 7,000 on Depressed and Concentrated Volume

V. Why Ignore the Impact of the Flagrant Manipulations of the PSEi 30?

VI. The Unannounced "Historic Moments" 

Unveiling the Reality Behind the Philippine PSEi 30’s 7,000: Market Concentration, Divergence, Manipulations, and the Overton Window 

I. The PSEi 30 Closes Above 7,000: Is This a "Historic Moment?" 

Along with the region's sanguine performance, the Philippine PSEi 30 broke past 7,000. Could this signify the start of a bull market, as the media and consensus have suggested?

Figure 1

Businessworld, September 13: The PSEi achieved a significant milestone, closing above 7,000 for the first time in over 19 months. Strong foreign buying and expectations of a US Federal Reserve rate cut contributed to this historic moment. (Figure 1, upper picture) 

Historic. Moment. 

Sure, the PSEi 30 has traded above 7,000 for the last five days and closed above this threshold in the last two. However, how is reaching a 19-month high equivalent to a "historic moment?" 

Media is said to reflect the prevailing mood or express the public’s level of confidence. That’s according to the practitioners of ‘Socionomics.’ 

Could this headline be indicative of the market’s mood? 

Let’s examine public sentiment by analyzing the market internals. 

II. Foreign Inflows Targeted at Biggest Market Cap Issues, Historically Chasing Tops 

Foreign buying was certainly a factor. 

This week, aggregate net foreign inflows amounted to Php 2.7 billion, marking the fifth consecutive week of net buying and the second-largest inflow during this period. (Figure 1, lower diagram) 

However, foreign inflows accounted for only 41.44% of the average weekly turnover, the lowest in five weeks. 

This suggests that local investors have begun to dominate the transactions on the Philippine Stock Exchange (PSE). 

Additionally, the scale of weekly foreign investment was far from record-breaking.

As a side note, in today’s digitally connected, "globalization-financialization" world, foreign inflows could also include funds from offshore subsidiaries or affiliates of local firms.

Figure 2

Sure, expectations of the US Federal Reserve's interest rate cuts have not only fueled a strong rebound in ASEAN currencies but have also energized speculative melt-up dynamics in the region's equity markets, driven by foreign players. 

ASEAN currencies outperformed the global market from July 10 (following the US CPI release) through September 11. (Figure 2, topmost table) 

Yahoo Finance/Bloomberg, September 12: Southeast Asian equities have cemented their position as a favorite play of money managers positioning for the Federal Reserve’s policy pivot. Four of the five best-performing Asian equity benchmarks this month are from the region, with Thailand leading the pack. The buying frenzy has put foreign inflows on track for a fifth consecutive week while the MSCI Asean Index is now trading near its highest level since April 2022. [bold added] (Figure 2, lowest chart) 

Moreover, the yield-chasing phenomenon has spilled over into the worst-performing equities, or the laggards of the region. 

Yahoo Finance/Bloomberg, September 12: After being sidelined by investors for much of this year, some smaller equity markets are suddenly winning favor. The trend is particularly evident in Asia, where Thailand, Singapore and New Zealand rank as the top performers in September. Their benchmarks have risen at least 3% each so far, even as MSCI Inc.’s gauge of global stocks has fallen about 1% following a four-month winning streak. Investor focus seems to be shifting as the world’s biggest equity markets such as the US, Japan and India take a breather, and China’s slump deepens. For many of the smaller Asian markets, a limited exposure to the artificial intelligence theme means their valuations aren’t expensive, making them attractive just as the Federal Reserve’s dovish pivot helps boost their currencies and allows some central banks to embark on rate cuts. [bold added] 

The "core to the periphery" phase indicates that investors have been pursuing yields in less developed and less liquid markets, which are inherently more volatile and considered higher risk. This shift could signify a late-cycle transition. 

So yes, while there may be a semblance of increased confidence due to foreign participation, this dynamic appears to be limited to the most liquid and largest market capitalization issues—those capable of absorbing significant trading volumes.

And that’s exactly the case. Except for last week’s drop to 81%, the percentage share of the 20 most traded issues relative to the main board volume has risen in tandem with the PSEi 30 since mid-June. (Figure 2, lowest image)

That is to say, the PSEi 30’s performance was largely driven by concentrated trading volume in a select group of elite stocks.

Figure 3

Using the BSP’s portfolio flow data, July’s portfolio flows represented the largest since April 2022. (Figure 3, topmost image)

However, the larger point is that foreign money flows tend to chase the peaks of the PSEi 30.

In fact, foreign investments often surged during the culminating (exhaustion) phase of the PSEi 30’s upward momentum, a pattern observed since 2013.

Will this time be different?

It’s important to note that the BSP’s portfolio flows include foreign transactions in the fixed-income markets, but the size of these flows is relatively insignificant.

In a nutshell, the purported confidence brought about by foreign participation has been largely limited to the PSEi 30. 

III. PSEi 30 7,000: Primarily an ICTSI Show; Diverging PSEi 30 and Market Breadth

Does media sentiment resonate with the PSE’s market breadth?

In a word, hardly.

The PSEi 30 rose by 1.25%, marking its second consecutive weekly advance and its ninth increase in 12 weeks since this upside cycle began in the week ending June 28th.

This week’s rebound pushed its year-to-date returns to 8.88%.

While we have seen some substantial returns due to heightened volatility in some of the PSEi 30's underperformers, such as Converge (+10.5%), Aboitiz (+8.4%), and Bloomberry (+8.3%), it was the performance of the two largest market capitalization stocks, SM (+3.47%) and ICT (+2.75%), that drove this week’s free-float gains. (Figure 3, middle pane)

The PSEi 30’s average return was 1.03%. The difference between this figure and the index reflects distortions caused by free-float weighting.

Yet, the increasing volatility in the share prices of several PSEi 30 and non-PSEi 30 firms suggests the formation of miniature bubbles.

With a 17-13 score, decliners outnumbered gainers in the PSEi 30, indicating a divergence between market breadth and the headline index.

Despite reaching the “historic moment” of the PSEi at 7,000, market breadth continues to weaken. (Figure 3 lowest chart)

Declining issues have outpaced advancing issues for the second consecutive week, with the 69-point margin nearly double last week’s 37. Declining issues led the market in all five trading sessions.

Figure 4

Yet, the market capitalization weighting of the top five issues rose from last week’s 51.15% to 51.34%, primarily due to ICT’s increase from 10.83% to 10.99%. (Figure 4, topmost chart)

Or, 5 issues command over half the PSEi 30 price level!

This week’s pumping of the PSEi 30 pushed ICT’s share price to a record high of Php 418.6 on Thursday, September 12th. (Figure 4, middle graphs)

To put it another way, ICTSI has shouldered most of the burden in pushing the PSEi 30 to 7,000.

Additionally, ICTSI's rise has been supported by rotational bids of the largest banks, SM, SMPH, and ALI (the six largest), which is publicly shaped by media and the establishment narratives through the promotion of BSP and US FED easing as beneficial to stocks and the economy.

The public has been largely unaware of the buildup of risks associated with pumping the PSEi 30, driven by a significant concentration in trading activities and market internals

The market breadth exhibits that since only a few or a select number of issues have benefited from this liquidity-driven shindig, the invested public has likely been confused by the dismal returns of their portfolios and the cheerleading of media and the establishment.

IV. PSEi 30 Rose to 7,000 on Depressed and Concentrated Volume 

Does the market’s volume corroborate the media’s exaltation of the PSEi reaching 7,000?

Succinctly, no.

To be sure, main board volume surged by 22%, increasing from an average of Php 4.9 billion to this week’s Php 5.9 billion. (Figure 4, lowest image)

However, main board volume remains substantially lower than the levels observed when the PSEi 30 previously reached the 7,000-mark.

Figure 5

Moreover, despite a 4.2% monthly surge in August that pushed year-to-date returns (January to August) to 6.94%, the eight-month gross volume fell to its lowest level since at least 2012. (Figure 5, topmost visual)

That’s in addition to the disproportionate share weight of over 80% carried by the top 20 issues on the main board volume, as noted above.

Incredible, right?

But there’s more. 

The main board volume consists of:

-Client-order transactions

-Dealer trades (usually day trades)

-Cross-trades (trades from clients in the same broker)

-Done-through (intrabroker/broker subcontract) trades 

Last week, the top 10 brokers controlled 53.84% of the main board volume, averaging 56.75% since the end of June.

Or, concentration in trading activities has also been reflected in the concentration of broker trades.

The point is, what you see isn’t always what you get.

Main board (and gross) volume doesn’t necessarily reflect broader public participation.

The sharp decline in direct participation by the public in 2023 underscores this reality. The PSE’s active accounts comprised only 17.6% of the 1.9 million total accounts in 2023—the lowest ever. (Figure 5, middle image)

Instead, trades within the financial industry have played a significant role in the PSE’s overall turnover.

For instance, in Q1 2024, the BSP noted that claims of Other Financial Corporation (OFC) on the other sectors "grew as its investments in equity shares issued by other nonfinancial corporations," and also “claims on the depository corporations rose amid the increase in its deposits with the banks and holdings of bank-issued equity shares”

Have OFCs been a part of the national team? OFCs include bank subsidiaries, public and private insurance and pension firms, investment houses, et.al. (BSP, 2014)

Why would the PSE’s volume endure a sustained decline if there has been significant savings to support the alleged increase in public confidence?

Historic? Hyperbole. 

V. Why Ignore the Impact of the Flagrant Manipulations of the PSEi 30? 

Finally, why would everyone discount, dismiss, or ignore the brazen "pumps-and-dumps" and "pre-closing price level fixing" at the PSE?

In the last five days, managing the index level involved early ICTSI-fueled pumps, aided by frenetic rotational bids on the other top five to six market caps. (Figure 5, lowest images)

After surpassing 7,000-level intraday, the local version of the "national team" dumped their holdings—using the 5-minute pre-closing float—onto unwitting foreign and retail buyers.

Despite this, the PSEi 30 managed to close above the 7,000 level during the last two days—albeit on low volume, with negative market breadth and concentrated trading activities.

Still, does everyone believe that the mounting distortions in the prices of (titles to) capital goods will come without consequences for the financial markets and the real economy?

What happened to the army of analysts and economists? Has the fundamental law of economics escaped them?

Or does the management of the PSEi 30 levels represent part of the establishment’s manipulation of the Overton Window?

Sure, the mainstream media has been so desperate to see a "bull market" that they describe a 19-month high as a "historic moment."

However, much of today’s media reporting seems to be more than mere cheerleading: genuine journalism has been sacrificed in favor of copywriting for vested interests paraded as news. 

VI. The Unannounced "Historic Moments" 

But the so-called "Historic Moment" has manifested in many unpopular and unannounced forms.

Let us enumerate the most critical ones: 

First, systemic leverage, consisting of PUBLIC DEBT plus TOTAL bank lending, has reached Php 28.515 trillion as of July 2024, accounting for 113% of the estimated 2024 NGDP!  Public debt servicing has also reached unparalleled levels!

Second, Q2 public spending, the financial industry’s net claims on the central government (NCoCG), and the banking system’s held-to-maturity (HTM) assets have also reached all-time highs.

Third, the banking sector’s business model transformation—from production loans to consumer loans—has been unprecedented.

Fourth, the savings-investment gap has reached a significant milestone.

Fifth, PSE borrowings, led by San Miguel’s Php 1.484 trillion, have also reached historic highs.

Sixth, the money supply (M1, M2, and M3) relative to GDP remains close to its record highs in Q1 2021.

Figure 6

Seventh, the BSP’s asset base remains near the record high attained during the pandemic bailout period (as of June 2024.) (Figure 6 topmost chart)

While there are more factors to consider, have you heard any media or establishment mentions or analyses of these issues?

Don’t these factors have an impact on the "fundamentals" of the PSE or the economy?

Or are we expected to operate under a state of "blissful oblivion," or the blind belief that "this time is different?" (The four most-deadliest words in investing—John Templeton)

It not only fundamentals, the current phase of the market cycle also tells a different story than the consensus whose primary focus is on a "return to normal" phase. (Figure 6 middle and lowest graphs)

Good luck to those who believe that the PSEi 30’s 7,000 level signifies a bull market or a historic moment.

____

References

The OFCs sub-sector includes the private and public insurance companies, other financial institutions that are either affiliates or subsidiaries of the banks that are supervised by the BSP (i.e., investment houses, financing companies, credit card companies, securities dealer/broker and trust institutions), pawnshops, government financial institutions and the rest of private other financial institutions (not regulated by the BSP) that are supervised by the Securities and Exchange Commission (SEC).

Jean Christine A. Armas, Other Financial Corporations Survey (OFCS): Framework, Policy Implications and Preliminary Groundwork, BSP Economic Newsletter, July-August 2014, bsp.gov.ph

 

Weakening Consumers: Philippine August CPI fell to 3.3% as Q2 2024 Consumer Non-Performing Loans Accelerated

 At the outset, the masses misinterpreted it as nothing more than a scandalous rise in prices. Only later, under the name of inflation, the process was correctly comprehended as the downfall of money—Konrad Heiden in 1944

In this issue

Weakening Consumers: Philippine August CPI fell to 3.3% as Q2 2024 Consumer Non-Performing Loans Accelerated

I. August CPI’s 3.3% Validated the Philippine Yield Curve; Continuing Loss of the Peso’s Purchasing and Magnified Volatility

II. Utilities Overstated the CPI, Headline CPI versus Bottom 30% CPI Translates to Broadening Inequality

III. Plummeting CORE CPI Amidst Record Consumer Bank Loans

IV. Slowing CPI Despite Record Streak in Public Spending and Modest Supply-Side Growth

V. Examining the Discrepancies in Employment Data and Consumer Demand

VI. Philippine Banking System’s Seismic Transformation: The Shift Towards Consumer Lending and its Developing Risks

VII. The Dynamics Behind Record High Consumer Borrowings: Inflation, Addiction and Refinancing

VIII. Surging Consumer NPLs as Driver of Falling Inflation

IX. Expect a Systemic Bailout: Pandemic 2.0 Template; a Third Wave of Inflation 

Weakening Consumers: Philippine August CPI fell to 3.3% as Q2 2024 Consumer Non-Performing Loans Accelerated

I. August CPI’s 3.3% Validated the Philippine Yield Curve; Continuing Loss of the Peso’s Purchasing and Magnified Volatility 

The recent decline in the Philippine CPI, which fell to 3.3% in August, is a symptom of strained consumers. Overleveraging has led to an acceleration in consumer loan NPLs in Q2. 

GMANews, September 5, 2024: The Philippines’ inflation rate eased in August, after an acceleration seen in the prior month, due to slower increases in food and transportation cost during the period, the Philippines Statistics Authority (PSA) reported on Thursday. At a press conference, National Statistician and PSA chief Claire Dennis Mapa said that inflation —which measures the rate of increase in the prices of goods and services— decelerated to 3.3% last month, slower than the 4.4% rate in July. This brought the year-to-date inflation print in the first eight months of 2024 to 3.6%, a slowdown from the 5.3% rate in the same period last year and still within the government’s ceiling of 2% to 4%. 

Quotes from previous posts… 

despite the 4.4% CPI bump in July (and Q2 6.3% GDP), the Philippine treasury market continues to defy inflationary expectations by maintaining a deep inversion of the curve’s belly, which again signals slower inflation, upcoming BSP cuts, and increased financial and economic uncertainty. (Prudent Investor, August 2024)

__ 

Moreover, the curious take is that despite all the massive stimulus, the belly’s inversion in the Philippine treasury market has only deepened at the close of August. 

This does not suggest a build-up of price pressures or a strong rebound in the private sector. On the other hand, rising short-term rates indicate intensifying liquidity issues.  

In the end, while Marcos-nomics stimulus seems to have reaccelerated liquidity, a resurgence of inflation is likely to exacerbate "stagflationary" pressures and increase the likelihood of a bust in the Philippines’ credit bubble. (Prudent Investor, September 2024) 

Let us examine the data in relation to other relevant metrics.

First, the August Consumer Price Index (CPI) fundamentally confirmed the signals provided by the Philippine yield curve regarding the resumption of its downtrend. We will explore this in more detail later.

Figure 1

Second, a slowing CPI does not imply that prices are falling, as some officials have suggested. Rather, it indicates a deceleration in the rate of price increases for the average goods and services in the government’s CPI basket. That is to say, authorities continue to use the inflation channel as an indirect means of taxation. Even from the standpoint of the CPI, the Philippine peso has lost over 99% of its purchasing power since 1957. (Figure 1, topmost chart)

Third, the headline CPI has become increasingly volatile, as evidenced by its significant fluctuations: it surged from 3.7% in June to 4.4% in July, then decreased to 3.3% in August. The rate of change in the Month-on-Month (MoM) data illustrates this volatility. (Figure 1, middle image) 

Notably, with the largest weighting in the CPI basket, food is usually the culprit for this volatility. 

II. Utilities Overstated the CPI, Headline CPI versus Bottom 30% CPI Translates to Broadening Inequality 

Fourth, the upside spike in housing, water, gas, and other utilities inflated the headline CPI. Rent and utilities were the only categories that experienced an increase in August on a month-on-month (MoM) basis. (Figure 1, lowest graph) 

Without the impact of rent and utilities, the headline CPI would have been drastically lower. This category has a significant weighting in the CPI basket, with a 21.4% share.

Figure 2

Fifth, the decline in the rate of price increases, as indicated by the headline CPI of 3.3% in August, had minimal impact on the bottom 30% of households, who experienced a CPI of 4.7% (down from 5.8% in July). However, the disparity between these categories remains at 2018 levels. (Figure 2, topmost diagram) 

Even with its flawed measurement, the government’s CPI highlights the broadening inequality. 

III. Plummeting CORE CPI Amidst Record Consumer Bank Loans 

Sixth, the volatility of the headline CPI hasn’t been corroborated by the non-food, non-energy Core CPI, which continues to decline. 

Although the gap between the headline CPI and the Core CPI has narrowed, it remains substantial due to the relatively faster decline in the Core CPI. (Figure 2, middle graph) 

Seventh, the law of supply and demand dictates that if the supply of goods or services exceeds demand, prices will fall. Conversely, if demand outstrips supply, prices will rise. 

In the current context, the weakening of the Core CPI is a symptom of the sustained erosion of domestic demand. 

This is exemplified by the consistently diminishing rate of price increases in retail components such as furnishing household equipment and maintenance, clothing and footwear, and personal care and miscellaneous goods. (Figure 2, lowest chart)

Figure 3

Eighth, the growth of total universal-commercial bank loans remains on a remarkable streak, posting a 10.4% growth rate last July—its third consecutive month of 10% growth. (Figure 3, topmost window) 

Moreover, universal commercial bank household credit grew at an even faster pace of 24.3%, marking its twenty-third consecutive month of over 20% growth! (Figure 3, middle diagram) 

Given this explosive growth in consumer and overall bank credit, which should have theoretically stimulated demand, why hasn’t it boosted the CPI?

IV. Slowing CPI Despite Record Streak in Public Spending and Modest Supply-Side Growth 

Ninth, what has happened to the "Marcos-nomics stimulus" and the ramping up of Q2 record debt-financed public spending? Why have these measures not bolstered demand and the CPI? (Figure 3, lowest chart)

Figure 4

Tenth, the supply side has hardly been a factor in the CPI slowdown.

The slackening of imports, which were down 7.5% (in USD million) in June, was not an anomaly but a trend since peaking in August 2022.  (Figure 4, topmost pane) 

Domestic manufacturing has also not shown excessive growth. Manufacturing posted a 4.7% value growth and 5.25% volume growth last July, marking the third highest monthly growth since August 2023 (a year ago). (Figure 4, lower left chart) 

The headline S&P Global Philippines Manufacturing PMI reported an unchanged index of 51.2 in August, unchanged from July. (Figure 4, lower right chart) 

The PMI index has been consolidating with a downside bias, as demonstrated by the "rounding top." 

If the supply side had managed to grow at a minor to moderate rate in recent months, then demand represents the weak link behind the sliding CPI rate.  

The lack of significant supply-side expansion suggests that the primary driver of the CPI slowdown is the erosion of domestic demand. 

V. Examining the Discrepancies in Employment Data and Consumer Demand 

Why so?

The employment data is unlikely to provide a satisfactory explanation. 

Aside from the questionable nature of the statistics, the government attributed the swelling of July's employment rate to fresh graduates entering the workforce.

 

GMANews, September 6: The number of unemployed Filipinos increased in July as millions of young individuals, who graduated from college or senior high school and entered the labor force, did not land jobs during the period, the Philippines Statistics Authority (PSA) reported on Friday.

The decrease in the labor force participation rate from 66% in June to 63.5% in July likely underestimated the true number of unemployed individuals.

Figure 5

It's worth noting that a "rounding top" appears to be a persistent trend in the labor participation rate. (Figure 5, topmost diagram)

If this pattern continues, then for whatever reasons, it's likely that the labor force will shrink, which would negatively impact the employment population.

While most sectors reported decreases in employment (MoM) last July, the government (public administration and defense), finance, and IT sectors reported significant gains. The increase in government jobs is not surprising, given that they are one of the largest employers, particularly with the record high public spending in Q2. (Figure 5, middle image)

In any case, despite the second-highest employment rate in June, the rise in unemployment in July suggests that the substantial growth in bank credit has not been sufficient to create enough investments to absorb new graduates. 

The irony is that even if this data were close to accurate, the high employment rate demand story has been incongruous or inconsistent with the slowing consumer, the record high consumer bank credit levels, and the CPI. 

Another paradox is that the volatility in the labor data may be influenced by social mobility. In reality, the Philippine labor market has been beset by the byzantine nature of onerous labor regulations. 

VI. Philippine Banking System’s Seismic Transformation: The Shift Towards Consumer Lending and its Developing Risks 

Beyond that, the slope of the Philippine Treasury markets provides insights into economic conditions, inflation, and potential risks. 

Not only has it accurately predicted CPI dynamics, but it has also indicated the likelihood of increased economy-related risks. 

Consider this: Why has the CPI been on a temporary downtrend despite record levels of Universal Commercial bank consumer lending? This observation applies even to production loans, but our focus here is on consumer loans. 

The banking system’s total consumer loans, including real estate loans, surged to an all-time high of PHP 2.81 trillion in Q2 2024. This represents a record 21.75% of total bank lending, meaning that one-fifth of all Universal Commercial bank lending has been directed towards consumers.  (Figure 5, lowest graph) 

Four-fifths of these, which also demonstrates a declining share, represent lending to the supply side sector, primarily benefiting the elites.

Figure 6

This data represents evidence that Philippine banks have undergone a seismic transformation: a preference for consumers over producers. 

From a sectoral perspective, banks have also shifted their lending preferences toward high-risk, short-term lending—specifically credit cards and salary loans. 

Since 2017, the percentage share of credit cards relative to the total has surged to a milestone high, while the share of salary loans has also increased since 2021. Notably, the rapid growth of these segments has come at the expense of real estate and motor vehicle loans. (Figure 6, topmost image) 

Strikingly, the share of consumer real estate loans peaked at 45% in Q4 2021 and then nose-dived to 37% by Q2 2024. 

In a nutshell, banks have "backed up their trucks" to rapidly leverage Philippine consumers. 

VII. The Dynamics Behind Record High Consumer Borrowings: Inflation, Addiction and Refinancing 

The all-time high in consumer lending did not emerge in a vacuum. 

Primarily, consumers have turned to credit cards and salary loans to compensate for the loss of purchasing power due to inflation. 

Secondly, this trend has deepened consumers' reliance on credit cards and salary loans. 

Thirdly, the extended leveraging of consumers' balance sheets necessitates further credit to refinance or roll over existing debt. Some individuals use multiple credit cards, while others may tap into salary loans or borrow from the supply side for the refinancing of existing debt. 

It is important to note that the consumer credit data reveals an escalation in concentration risks. 

The surge in consumer lending indicates that only a small segment of the population has access to formal credit systems. 

The BSP’s Q2 2023 Financial Inclusion data reveals that consumer credit, including credit cards, salary loans, and other forms of bank credit, is limited to a minority segment of the Philippine population. (Figure 6, middle table)

Not only in finances, this group—primarily from the high-income sector—has been capturing a significant portion of the nation’s resources funded by credit. They are the primary beneficiaries of the BSP’s inflation policies. 

However, they also represent the most fragile source of a potential crisis. 

Conversely, the low level of participation in formal banking does not equate to a low level of leverage for the unbanked population. Instead, this larger segment relies on informal sources for credit. 

However, they also represent the most fragile source of a potential crisis.

Lastly, having reached their borrowing limits, some consumers have begun to default. 

VIII. Surging Consumer NPLs as Driver of Falling Inflation

Have the media or mainstream experts addressed this issue? 

Not when financial services are being marketed or deposits solicited; discussing conflicts of interest remains a taboo.

Despite subsidies and relief measures, the Non-Performing Loans (NPL) in consumer lending have been rising, driven primarily by credit cards and salary loans. (Figure 6, lowest chart)

Figure 7

Again, the all-time high in credit card and salary loans has led to a surge in NPLs. According to the BSP’s various measures, the NPLs for credit cards and salary loans relative to total NPLs in the Total Loan Portfolio (TLP) have been intensifying since 2021 (for salary loans) and 2023 (for credit card loans). (Figure 7, topmost, second to the highest and lowest-left and right graphs)

Despite the massive BSP support, the fastest-growing segments for banks are also the primary sources of their weaknesses. 

Published banking and financial data may be understated due to these relief measures and other factors. 

Why are banks significantly borrowing (focusing on short-term loans), competing with San Miguel, both listed and unlisted non-financials, financials, and the government? 

So, there you have it. The slowing inflation in the face of rampant credit growth is a symptom of the mounting balance sheet problems faced by consumers. 

Borrowings are not only used for spending but are increasingly being utilized to recycle loans—the Minsky Ponzi syndrome process is in motion. 

Extending balance sheet leveraging has not only weighed on consumer spending but has also caused a rise in credit delinquency. 

It also exposes the façade of a 6.3% Q2 GDP. 

The lesson is: current conditions reveal not only the fragile state of consumers but, more importantly, exposes the vulnerability of Philippine banks. 

The treasury markets have been signaling these concerns. 

IX. Expect a Systemic Bailout: Pandemic 2.0 Template; a Third Wave of Inflation 

But it doesn’t end here. 

Do you think the government would allow GDP to sink, which would deprive them of financing for their boondoggles? 

Naturally, no. So, authorities have embarked on a tacit "Marcos-nomics stimulus" to prevent cross-cascading defaults, initially marked by a resurgence of illiquidity. 

With the upcoming elections, public spending has surged, leading to increased monetary growth, as indicated by the most liquid measure, M1 money supply. 

Yes, this exposes the artificiality of a so-called "restrictive" or "tightening" regime.

Needless to say, this process will only foster more economic imbalances, which will manifest through the enlarged “twin deficits.”

Economic maladjustments will become evident in the growing mismatch between demand and supply, as well as between savings and investment (record savings-investment gap), leading to increased fragility in the banking system’s balance sheet. 

This, in turn, will prompt more easing policies from the BSP and accelerated interventions and liquidity injections from the tandem of financial institutions (led by banks) and the BSP. 

We should expect the BSP to expand and extend its relief measures to the banking system in an effort to buy time.

Or, the BSP’s strategy to address an escalating debt problem is to facilitate accelerated debt absorption. Amazing! 

As such, we should expect a third wave of inflation, in the fullness of time, which will exacerbate the leveraging of the economic system and worsen the current predicament. 

The political path dependency is driven primarily by perceived "free lunches" (or throwing money into the system). 

The promised bull market will not be in Philippine assets but in debt, leveraging, and its attendant risks. 

So, despite the Philippine peso floating along with its regional peers, benefiting from the perceived "Powell Pivot," the USD/PHP exchange rate should eventually reflect the developing economic and financial strains. 

Until a critical disorder surfaces, a reversal in this political direction is unlikely.

Eventually, the treasury curve will indicate when this reversal might occur. 

The point is that even when distorted by interventions, markets are reliable indicators of future events. 

___

References 

Prudent Investor, The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk August 12, 2024

Prudent Investor, Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing September 1, 2024

 

Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing

 

The global government finance Bubble dwarfs all previous Bubbles. Insatiable demand for perceived safe government debt and central bank Credit has allowed this Bubble to inflate for more than 15 years. Years of massive deficit spending ensure deeply systemic economic maladjustment. Endemic deficit spending has inflated incomes and corporate profits, in the process working to inflate historic securities, housing and other asset market Bubbles—Doug Noland

In this issue:

Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing

I. Government’s July Revenue Boost and the "Narrowed" Deficit: VAT Rescheduled Reporting from Monthly to Quarterly

II. Deficit Spending Under Control? Philippine Government Just Raised USD 2.5 Billion Plus $500 Million Climate Financing

III. The Marcos-nomics Stimulus: Infrastructure, Warfare, Welfare and the Bureaucratic State

IV. Pre-Election Spending Intensifies Liquidity Growth; Should Accelerate Twin Deficits and the Crowding-Out Effect

V. Crowding-Out Syndrome: Dwindling Savings, Deepening Reliance on Debt

VI. Debunking The Overton Window’s "Supply Side" Inflation

VII. Despite "Marcos-nomics Stimulus" Liquidity Injections, Treasury Markets Signal Stagflation, Rising Credit Risk

Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing 

The changes in VAT reporting resulted in the narrowing of the Philippine government's budget deficit in July. "Marcos-nomics" remains in action as the government's spending binge persists. Authorities raised USD 2.5 billion—what are the possible implications? 

I. Government’s July Revenue Boost and the "Narrowed" Deficit: VAT Rescheduled Reporting from Monthly to Quarterly 

The establishment media, which self-righteously pontificate on the war against disinformation and misinformation, tell us that July's "narrowed" deficit was implicitly a function of either a vigorous economy, "sound" management policies of the government, or even both. 

Although some reports mention the rescheduling of VAT payments from monthly to quarterly as a factor that caused the ballooning revenues leading to such distortions, this aspect remains mostly untouched. 

Here’s the Bureau of Treasury: The YoY growth was due to higher collections of Value Added Tax (VAT), income taxes, other domestic taxes, and percentage taxes. The growth in VAT collection was partly attributed to base effects as collections last year were lower by around two months' worth of VAT collection with the shift from monthly to quarterly filing of VAT payments as mandated by the Tax Reform for Acceleration and Inclusion (TRAIN) Law. (bold added) 

A top accounting firm explained (bold italics original, bold mine): 

One of the notable changes that will be implemented this year is the removal of the monthly filing of Value-Added Tax (VAT) returns. Section 37 of the TRAIN Law, amending provisions of Section 114(A) of the Tax Code of 1997, as amended, and as implemented under Section 4-114-1(A) of Revenue Regulations (RR) No. 13-2018, states that “beginning January 1, 2023, the filing and payment required under this subsection shall be done within twenty-five (25) days following the close of each taxable quarter”. Thus, VAT-registered taxpayers are no longer required to file the Monthly VAT Declaration (BIR Form No. 2550M) for transactions starting January 1, 2023. Instead, they will file the corresponding Quarterly VAT Return (BIR Form No. 2550Q) within twenty-five (25) days following the close of each taxable quarter. (Grant Thornton, 2023)

Figure 1

So, there you have it: The rescheduling of VAT declarations from monthly to quarterly has magnified revenues and "narrowed" deficits at the "close" of each taxable quarter. 

Since 2023, revenue spikes have led to budget surpluses in four of the seven—close of the taxable quarters of January, April, July, and October—while the remaining three quarters reported deficits of less than Php 50 billion. (Figure 1, topmost window) 

Therefore, it is reasonable to predict that deficits will swell in August and September, while easing again in October 2024. 

Additionally, because of the distortions from quarterly reporting, revenue statistics should be viewed and interpreted on an end-of-quarter basis. 

Nonetheless, irrespective of how the media depicts and interprets it, July’s public expenditures represent the sixth highest non-seasonal (ex-December) spending and the eleventh highest including the seasonal spikes of December. (Figure 1, middle image) 

Public spending over the seven-month period surged by 13.2% to a record Php 3.3 trillion, even as revenues spiked by 28% to an all-time high of Php 2.61 trillion. This resulted in a Php 642.8 billion deficit, which is 7.2% higher than in 2023.

The surge in July spending signifies a validation of our prognosis regarding the unannounced "Marcos-nomics stimulus," which has been further confirmed by the August BSP rate cut. (Prudent Investor, 2024)

II. Deficit Spending Under Control? Philippine Government Just Raised USD 2.5 Billion Plus $500 Million Climate Financing

Although authorities reported a (-6.34% YoY) slowing of July financing while its cash reserves (-21.54% YoY) fell further, the explosion of Marcos-nomics stimulus spending is bound to reverse this. (Figure 1, lowest graph)

Mainstream experts, who focus on a single statistic while ignoring the bigger picture and (political) path dependency, are likely to misread, misinterpret, and draw brazenly erroneous conclusions.

For instance, the DOF chief tells us that "the country's rising debt is not a cause for worry."

Figure 2

But the thing is, July's interest payments alone hit an all-time high as public debt reached a record Php 15.5 trillion last June.  The 7-month share of interest payment-to-total expenditures has risen to its highest level since 2009! (Figure 2, top and middle charts)  

Authorities will publish July's debt standing next week.

And it doesn’t stop there.

For the first seven months of 2024, the aggregate debt servicing reached a milestone high in peso levels with a 40.6% YoY growth spike. This increase was driven by 44.9% and 32% growth spikes in amortization and interest payments, respectively. (Figure 2, lowest diagram) 

Figure 3

As a consequence, because July's amortization and interest payments were 7% and 27% below their comparative levels last year, this year's total debt servicing accounted for 15% below last year—with 5 months to go! (Figure 3, topmost image) 

It is no coincidence that the government raised USD 2.5 billion last week, on top of the USD 2 billion last May, which authorities partially used to prop up its Gross International Reserves (GIR).

Bloomberg/Yahoo Finance, August 29, 2024: The Philippines priced $2.5 billion of dollar bonds, its second such offering this year and the largest of a flurry of deals Wednesday in Asia before a likely Federal Reserve interest rate cut…The Philippines raised $2 billion in a May dollar bond deal that Finance Secretary Ralph Recto said at the time was part of its plan to generate about $5 billion in funding from overseas markets this year. The new offering was the largest of five note sales in the US currency on Wednesday, the most Asian issuers in six weeks, according to data compiled by Bloomberg based on deals with a minimum size of $100 million

The Philippine government also secured a $500-million climate financing support from the Asian Development Bank (ADB) under its Climate Change Action Program Subprogram 2—a climate change policy-based loan. 

Regardless of whether debt is politically labeled as green (climate or sustainable) or not, it is still debt that must be repaid. Political colors don’t change the functionality of credit. 

The recent spate of external borrowings is likely to push total external debt—which was already at a historic level in Q1 2024—to even greater heights! (Figure 3, middle pane) 

Given these factors, why would the government continue raising external (and local) debt if deficit spending were under control? 

And how would such political path dependency assure us that the relentless rise in public debt (as part of systemic leverage) is 'not a cause for worry'? 

III. The Marcos-nomics Stimulus: Infrastructure, Warfare, Welfare and the Bureaucratic State 

So, what did the government spend on last July? 

Except for net lending and subsidies, government expenditures grew for Local Government Unit (LGU) allocations (12.2% YoY), interest payments (25%), equity (608%), and national government disbursements (9.44%).

Net lending represents the net advances by the National Government for the servicing of government-guaranteed corporate debt.

Meanwhile, equity refers to the National Government’s investments in the authorized stock of Government-Owned and Controlled Corporations (GOCC).

The three largest segments of public spending in terms of distribution were interest payments (16.3%), LGU allocations (17.7%), and National Government disbursements (63.1%).

While NG disbursement was lower in peso terms, as we have been pointing out, LGU spending—which likely represents funding for the forthcoming 2025 national elections—has been picking up steam.

 Figure 4 

From a seven-month perspective, NG disbursements in pesos reached an all-time high, as the growth rate nearly doubled from 6.4% in 2023 to 12.9% in 2024. (Figure 4, middle graph) 

Meanwhile, LGU outlays have played catch-up, with a growth spike from 2.7% in 2023 to 13.2% in 2024, reaching the second-highest level. (Figure 4, topmost chart) 

Aside from other programs, the authorities plan to acquire 40 multi-role fighters to supposedly boost the nation’s defense.

According to Interakyson/Reuters: "President Ferdinand Marcos Jr has approved “Re-Horizon 3”, an acquisition plan for new military weaponry and equipment worth 1.89 trillion pesos ($33.64 billion) to boost defenses."

The Marcos-nomics stimulus has been directed at pre-elections, the transition to a war economy and infrastructure, as well as the administrative/bureaucratic state. For example, there are over 200,000 vacancies in government jobs.

IV. Pre-Election Spending Intensifies Liquidity Growth; Should Accelerate Twin Deficits and the Crowding-Out Effect

On the other hand, the boost in LGU allotments has also manifested through a three-month growth surge in cash in circulation, which increased from 6.1% in May to 6.9% in June and 8.1% in July. (Figure 4, lowest visual)

The peso level of cash in circulation reached its fourth-highest level last July (including the seasonal peak in December).

The upside bump in liquidity translates to a relative increase in demand—where LGUs spend—and percolates into the national level.

The spillover effect of the stimulus is further amplified by the spending boost from the National Government.

Such expenditures, once again, benefit the recipients of credit-financed public spending first, creating ripples across the political economy through various stages, primarily affecting entities connected with the government before reaching the general economy.

This swelling of government expenditures via resource consumption crowds out or limits its availability to the private sector—a phenomenon known as the "crowding out effect."

Figure 5

As a result, the surge in public revenues reflects the initial reactions to the intensified public expenditures. Bank lending and inflation also help support public revenues.  (Figure 5, top and middle windows)

The distortive effects—boosting aggregate demand without a proportional increase in production—exert pressure on the overall price level.

The intensifying mismatch between demand and supply (limited by the crowding-out syndrome) likewise translates to increased pressure for higher imports, magnifying the "twin deficits," which explains part of the USD 5 billion overseas issuance. (Figure 5, lowest chart)

V. Crowding-Out Syndrome: Dwindling Savings, Deepening Reliance on Debt

Furthermore, as the biggest borrowers, the government will increasingly draw from the public’s dwindling savings, competing with the massive credit requirements of San Miguel, the PSE’s non-financials, unlisted non-financials, banks, the financial industry, and households.

The crowding out effect, also evidenced by the record widening of the saving-investment gap, further explains the acceleration in external borrowings.

Of course, due to decaying productivity and the deepening drawdown in savings, households have intensified their reliance on credit to sustain their lifestyles. This dynamic is demonstrated by the structural shift in Philippine bank lending toward consumer loans, coming at the expense of producers.

Figure 6 

Part of this drawdown in savings is exhibited by slowing deposit growth. (Figure 6, topmost graph) 

Last July, universal-commercial bank supply-side loans increased by 8.8%, while consumer loans grew at a slower rate of 24.3%. (Figure 6, middle image) 

However, the gap between the share of consumer loans and production loans reached an all-time high. (Figure 6, lowest chart) 

Yet, the supply-side loan growth was primarily driven by a 438% spike in borrowing by the professional, scientific, and technical sector—a majority of which is constituted by activities of head offices. Bank lending would have been stifled were it not for this development.

Figure 7

Such are the reasons behind the intertwined trajectories of public expenditures and the Consumer Price Index (CPI). The causal relationship is reflected by the accelerating trend of public spending fueling the nation's inflation cycle. (Figure 7, topmost image)

VI. Debunking The Overton Window’s "Supply Side" Inflation

Have you ever heard the media and their favorite establishment experts talk about how demand, driven by government policies, is the primary source of inflation? 

Of course, not.

Like the nasty and deleterious side-effects of the pandemic lockdown and the COVID vaccines as well as the NATO’s proxy war playing out in Ukraine (where establishment media unilaterally demonizes Russia), the BSP-government driven inflation represents a taboo.

There is hardly any balance in mainstream’s reporting or analysis. The government determines the Overton Window—alternative opinions are either censored or suffer from the cancel culture.

Ironically, that inflation is caused by the government is apparent on their reports.

For instance, in the BSP’s July 2024 report on domestic liquidity, "Net claims on the central government expanded by 14.0 percent, up from 12.1 percent partly due to sustained borrowings by the National Government."

Sustained borrowings by the National Government from the banking system. 

But what are net claims on the central government (NCoCG)? 

Again, from the BSP, "Net Claims on CG include domestic securities issued by and loans and advances extended to the CG, net of liabilities to the CG such as deposits" (BSP, 2024)

In essence, banks and financial institutions fund the government’s boondoggles through credit expansion (printing money).

Unfortunately, hardly anyone bothers to explain this phenomenon to the public: except for one instance, the pandemic.

To highlight its rescue efforts, the BSP discussed its historic PHP 2.3 trillion liquidity injections from 2020 to 2022, but a code of silence has surrounded this topic prior to and after.

In contrast, the public has been bombarded or hardwired with the brazen tomfoolery of the "supply side" aspect of inflation. 

This narrative effectively absolves the government of accountability and attributes inflation to "greedflation" or "greedy" entrepreneurs or "market failure."

Yet the fundamental law of economics (demand and supply)—where prices basically coordinate the balance of demand and supply—debunks this popularly held belief.

Aside from the balancing role of prices, supply side disruptions cause RELATIVE inflation on prices and services (directly and indirectly affected). To wit, price increases in several areas will result in DECREASES in others—given the scarcity of the (supply) of the medium of the exchange (Philippine peso).

Or, supply disruptions do not cause a generalized and prolonged loss of purchasing power.

But little of this economic truth seems to matter.

VII. Despite "Marcos-nomics Stimulus" Liquidity Injections, Treasury Markets Signal Stagflation, Rising Credit Risk

This brings us to "Marcos-nomics Stimulus." Because of the Overton Window, the public has limited understanding of public financing, which they believe is an exclusive domain of direct taxation and government borrowing.

Still, neither have authorities told the public that the BSP has yet to scale down its massive holdings of Philippine treasuries (NCoCG) nor the back-to-back All-time highs in the banking system’s NCoCG. (Figure 7, middle and lower charts)

Figure 8

Furthermore, following the PHP 3 trillion spike in 2020-2021 (not PHP 2.3 trillion as declared), the BSP’s asset base of PHP 7.51 trillion (as of February 2024) remains only 6.3% lower than its historic high of PHP 8.013 trillion in October 2021. (Figure 8, topmost chart)

Briefly, the BSP has hardly wound down on its QE as reflected by its near-record share of holdings of domestic treasuries, even as the BSP has replaced some of this with a buildup in FX borrowings. (Figure 8, middle graph) 

Again, this represents another reason for the government’s recent external borrowing.

Moreover, the curious take is that despite all the massive stimulus, the belly’s inversion in the Philippine treasury market has only deepened at the close of August. (Figure 8, lowest window) 

This does not suggest a build-up of price pressures or a strong rebound in the private sector. On the other hand, rising short-term rates indicate intensifying liquidity issues.

In the end, while Marcos-nomics stimulus seems to have reaccelerated liquidity, a resurgence of inflation is likely to exacerbate "stagflationary" pressures and increase the likelihood of a bust in the Philippines’ credit bubble.

____

References

 

Doug Noland, Weekly Commentary: Money Machines, August 31, 2024, CreditBubbleBulletin.blogspot.com

 

P&A Grant Thornton, A closer look at quarterly VAT filing, February 7, 2023, grantthornton.com.ph

 

Prudent Investor, Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll! PSE’s Q2 Retail Activities Validates Ongoing Consumer Weakness, August 18, 2024

 

Bloomberg, Yahoo Finance, Philippines Sells $2.5 Billion of Dollar Bonds in Asia Deal Rush, August 29, 2024

 

Bangko Sentral ng Pilipinas, Central Bank Survey and Depository Corporations Survey July 2024, bsp.gov.ph