…we suggest that as a rule a recession emerges in response to a decline in the growth rate of money supply. Usually this takes place in response to a tighter stance of the central bank. Various activities that sprang up on the back of the previous strong money growth rate (usually because of previous loose central bank monetary policy) come under pressure—Dr. Frank Shostak
In this issue
Shocking Paradox: As S&P Upgrades Philippine Credit Rating, Consumer Loans Crash (-6%), Money Supply Growth Falls to 2008 Levels!
-The Late BSP Governor Espenilla versus The S&P
-The Nasty Repercussions of the Inverted Yield Curve: Consumer Loans Collapsed! Total Loans Plunge!
-Plunging Growth in Credit and Money Supply is a Harbinger of a Sharp Economic Downturn/Recession
-Despite Ballooning 1Q Deficit, BSP has Slowed its QE!
-How will March M3 and Bank Lending Plunge Affect Balance Sheets of the Banking System and non-Bank PhySYx Firms?
Shocking Paradox: As S&P Upgrades Philippine Credit Rating, Consumer Loans Crash (-6%), Money Supply Growth Falls to 2008 Levels!
The Late BSP Governor Espenilla versus The S&P
The S&P latest credit rating upgrade had been acclaimed by media, which echoes the establishment’s sentiment.
Echoing the establishment’s sentiment, the mainstream media has cheered the S&P's latest credit rating upgrade of the Philippines.
From the Inquirer: May 1 (bold mine) The Philippines earned an upgrade to ‘BBB+’ — its highest credit rating in history — from global debt watcher Standard & Poor’s, which cited the country’s strong growth trajectory, healthy external position and sustainable public finances. Now standing two notches above the coveted investment grade rating, this development will likely translate to lower borrowing costs from the international market for both the government and private corporations. This, in turn, translates to cheaper financing options for the domestic market that could help boost the economy further.
Has the S&P ever read the late BSP-Governor Nestor Espenilla’s warning published less than a year ago? (Financial Stability Report 2017, published June 14, 2018)
While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner.
Or has the S&P dismissed or chose to ignore the BSP’s forewarning?
Or could the S&P’s actions have signified other behind-the-scenes politics?
And who would be right: The late BSP Governor Espenilla or the S&P?
The Nasty Repercussions of the Inverted Yield Curve: Consumer Loans Collapsed! Total Loans Plunge!
And what of the backward sloping or inverted yield curve? Should this be overlooked?
What caused such inversion? What should be their ramifications? Does the S&P know?
Despite emerging signs of bearish steepener, 44% of the 10-year benchmarked spreads remain negative! (see figure 1, upper window)
Figure 1
Both the official BVAL benchmark and its predecessor continue to exhibit very tight monetary conditions.
And the collapsing curve, as noted above, has been broad-based whether benchmarked against the 10-year or the 20-year bonds. (see figure 1, lower window)
Back in March I wrote: See Philippine 10-year 3-month Spread Inverts! More Trouble for the Banking System (and the Economy)! March 27, 2019
The escalating inversion should signal big trouble ahead for the already embattled banks first, then the credit dependent firms that should ripple or percolate throughout the economy.
Production loans have been falling notes the Bangko Sentral ng Pilipinas (BSP): [bold mine] “Loans for production activities—which comprised 89.5 percent of banks’ aggregate loan portfolio, net of RRP — increased at a slower pace of 11.4 percent in March from 13.6 percent in the previous month.”
Production loans have dropped in 5 consecutive months. And since peaking at 20.7% in loan growth to the industry has been in an accelerating downtrend.
Figure 2
Worst, consumer credit collapsed for the first time in at least 2003!!!! (figure 2, middle window)
From the BSP: (bold mine) Meanwhile, loans for household consumption declined by 5.8 percent in March from a growth of 14.9-percent in February amid the deceleration in credit card loans and contraction in motor vehicle loans, salary-based general purpose consumption loans and other types of household loans during the month.
Please digest this: from a positive growth rate of 14.9% to a NEGATIVE or contraction of 5.8%. That’s a 2,070 basis points decline: a crash!!!
Because bank credit expansion has accounted for the dominant share, money supply growth also manifested the collapse in bank lending! (figure 2, lower window)
From the BSP: “Preliminary data show that domestic liquidity (M3) grew by 4.2 percent year-on-year to about ₱11.4 trillion in March 2019. This was slower than the 7.1 percent expansion in February 2019. On a month-on-month seasonally-adjusted basis, M3 decreased by 1.0 percent. Demand for credit eased but remained the principal driver of money supply growth. Domestic claims grew by 7.3 percent in March from 11.7 percent in the previous month due mainly to the sustained growth in credit to the private sector. Loans for production activities continued to be driven by lending to key sectors such as financial and insurance activities; wholesale and retail trade, repair of motor vehicles and motorcycles; real estate activities; manufacturing; construction; and electricity, gas, steam and airconditioning supply. By contrast, the growth of loans for household consumption decreased amid the deceleration in credit card loans and the contraction in motor vehicle loans, salary-based general purpose consumption loans, and other types of household loans.
M3 has plunged below the lows of 2011, has reached 2010 levels and appears to be fast approaching the depths of April 2008.
Plunging Growth in Credit and Money Supply is a Harbinger of a Sharp Economic Downturn/Recession
Figure 3
While at it, the collapse in consumer credit has been strikingly broad-based. (figure 3, upper window)
Credit card debt growth almost halved to 12.55% in March from 24.5% in February! Even with election season, cash in circulation growth dropped sizably by 44% to 3.87% in March from 6.92% a month ago! Payrolls shrunk by (-) 8.48% from + 1.86% over the same period.
Unless incomes have been increasing, how would falling growth in credit and cash translate to gross revenues for the bubble industries, as well as, to nominal GDP?
And where will companies fund such income growth when liquidity continues to drain in an economy breathing on the oxygen of credit?
Another incredible paradox, auto sales supposedly jumped 14.02% in March even as the banking system’s loan portfolio to the industry crashed by 20.2%! (figure 3, middle window)
How was such sales growth financed? By cash? Has the improvement in car sales been from channel stuffing on dealers with auto producers extending loans to the latter? Or have these been about the massaging of statistics by CAMPI or previously by banks (which has been adjusted to reflect on reality)?
The slowdown in industry loans has been broad-based too. Acceleration in the downdraft of credit portfolio has become apparent in four of the five largest borrowers. Loan growth to the real estate industry slowed to 8.73% in March from 12.05% in February and from 10.69% in January. The trade (11.61% March, 14.6% February and 16.2% January), the manufacturing (10.6%, 13.74%, and 15.34%) and, the utility sector (9.36%, 9.45% and 11.86%) posted similar slackening of growth. (figure 3, lower window)
Only the financial and insurance sector outperformed (32.73%, 22.23% and 26.53% over the same period).
In any event, recessionary forces have become evident in the stunning first ever collapse in consumer credit, the accelerating plunge in the rate of production loan growth and M3 plumbing to the lows of 2008!
In the aftermath of crashing M3, don’t forget that GDP almost dropped to recession levels and was cushioned by both the easing policies of the BSP and by the National Government’s fiscal stimulus amounting to Php 330 billion Economic Resiliency Plan (ERP) mainly on infrastructure spending.
And do notice that while the BSP's banking credit data has barely been covered, the credit rating upgrade has been bannered all over media!
Despite Ballooning 1Q Deficit, BSP has Slowed its QE!
Figure 4
Another source of money supply growth comes from the BSP’s direct financing of the NG’s expenditures through the fiscal deficits.
Though public expenditures slid 8.22% in March, mainly from NG’s disbursements (down 4%), the modest increase in tax revenues, supported by a fuel tax hike, generated Php 58.41 billion in the NG's budget deficit.(figure 4, upper window)
And with March’s deficit, 1Q deficit tallied at Php 90.245 billion, 40.7% lower than last year’s Php 152.2 billion. (figure 4, middle right window)
Have 'build, build and build' slowed? Or has other parts of NG’s expenditures been diverted to 'build, build and build'?
Even in the face of the sharp drop in bank credit expansion, tax revenue growth held up well +11.59% in March due to NG’s recent fuel tax hike. (figure 4, middle left window)
In spite of this, 1Q 2019 tax revenues growth was steeply slower than last year’s 12.06%. In the face of the apparent slowdown, how long will the beneficial effect from such fuel tax hike last?
One may blame this on the budget stalemate, but it remains to be seen whether the recently ratified budget will have the sufficient oomph to counterbalance the sharp slowdown in the banking system’s liquidity conditions. If they do so then street inflation should blast off.
So far in 2019, the NG has relied on debt to finance its deficits. This March the BSP announced a decline in direct financing of the NG: “net claims on the central government contracted by 2.2 percent after expanding by 8.3 percent in the previous month”.
The BSP reduced its QE by Php 71.9 billion in March and by Php 167.8 billion in 1Q. (figure 4, lower window)
To that end, both the banking sector and the BSP have been sharply reducing credit expansion, thereby affecting liquidity conditions.
And despite this, the BSP continues to bifurcate. Some BSP officials are still concerned about the resurgence of inflation, while the BSP Governor Diokno has been aching to cut rates and RRRs.
And has such tug-of-war been a sign of bullishness or indecisiveness?
How will March M3 and Bank Lending Plunge Affect Balance Sheets of the Banking System and non-Bank PhySYx Firms?
Figure 5
The Philippine banking system has yet to report on its financial conditions for March. As of February, deposit liabilities growth has been sharply falling (+6.25% February, +6.91% in January, and 8.82% in December 2018) resonant of the steep decline of M3 and the collapsing spread of the 10-year/1-month. The likelihood is that March’s loan and M3 collapse may reflect on the balance sheet conditions of the banking system. (figure 5, upper window)
Though such increases can’t sufficiently explain the astounding crash in bank lending conditions, this tells us that policy rates can’t ever normalize from the overdependence on easy money policies.
Even more, it shows how the system has increasingly become fragile to easy money policies’ diminishing marginal returns.
Aside from the banking system’s balance sheet here is more proof.
Let us look at the PSYEi composite members. (figure 5 lower window)
In 2018, non-bank PhiSYx issues generated a total of Php 38 billion in net income as against Php 606.8 billion in debt. Or, Php 15.98 of debt had been acquired, for every marginal peso net income generated in 2018.
In aggregate, the 26 non-bank firms tabulated a net income growth of Php 580.652 billion as against Php 4.16 trillion of debt.
That’s a credit intensity of 7.16. Or, Php 7.2 had been borrowed, for every peso of income generated through the years including 2018.
Nota bene a double counting of revenues and debt has been embedded on the table from the numbers of the holding parent firms and their subsidiaries.
To consider, the net income component of 2018 had a significant boost from non-recurring transactions. Example, sales of a subsidiary, Voyager and a substantial reduction in depreciation comprised a large segment of PLDT’s Php 5.5 billion of net income.
As an aside, in 2018, the PhiSYx generated 7% of net income growth. With 2018’s CPI at 5.2%, that’s a paltry 1.8% of real net income growth.
Up to what point can the system sustain the imbalance of leverage outgrowing geometrically net income in the face of the mounting buildup of malinvestments?
And such maladjustments, excessive leveraging and ignoring risk buildup have signified what such a credit upgrade ignores.
So who’ll be right, Mr. Espenilla or the S&P?
Oh by the way, in view of such tightening, the peso may rally temporarily anew
