Showing posts with label Philippine Economy. Show all posts
Showing posts with label Philippine Economy. Show all posts

Sunday, August 25, 2024

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!

 

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?

Figure 4

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.

Figure 5

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

Figure 6

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 

 

Sunday, August 18, 2024

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

 

The lesson of history, then, is that even as institutions and policy makers improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be― Carmen M. Reinhart

In this issue 

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

I. Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll!

II. Slowing Retail GDP Validated by Topline Performance of PSE’s Retail Chains

III. Marcos-nomics Rate Cut(s) Designed to Rescue the Banking System; Banks Bolstered the PSEi 30’s Stagnant Q2 Net Income

IV. Marcos-nomics Rate Cut(s): Reduce Debt Servicing Costs to Accommodate MORE Debt!

V. BSP Rate Cut Validates the Price Signals of the Philippine Treasury Market

VI. Summary and Conclusion: Watch for the Third and Fourth Phase of the Marcos-Stimulus (Pandemic Rescue Template 2.0) 

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

The BSP opened its series of monetary easing with a rate cut last week validating our thesis that the unannounced "Marcos-nomics stimulus" is on a roll!

I. Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll!

Bullseye!

In its second phase of the unannounced Marcos-nomics stimulus, the BSP (Bangko Sentral ng Pilipinas) began its campaign to formally ease financial conditions with its first rate cut.

The fact that the "Marcos-nomics stimulus" is on a roll means that widening fiscal deficits, which should also reverberate into "trade deficits" and expand the "twin deficits," should escalate public debt levels and, correspondingly, increase the debt burden. 

With fiscal deficits likely to bulge ahead, prompting more borrowings, the logical sequence would be for the BSP to cut rates to ease the onus of debt servicing.

And that’s only the argument for Philippine government debt. 

The BSP’s case for rate cuts will also involve private sector’s mounting debt burden or systemic debt in general. And that excludes shadow banking or informal finance. 

Therefore, BSP rate cuts represent the next phase of the "Marcos-nomics stimulus." (Prudent Investor, July 2024; bold original) 

GMA News, August, 15, 2024: The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) on Thursday decided to reduce policy rates by 25 basis points, the first cut in nearly four years and the first adjustment since the off-cycle hike in October 2023. 

Why would the BSP start a series of rate cuts with a Q2 headline GDP of 6.3% (6% for the 1H GDP)? 

Yet, the BSP continues to confuse the public by hedging its position with a "rinse and repeat" stance: We will cut, we will not cut, we will cut, we will not cut... to thy kingdom come. 

Just a day before, a business media outlet even cited the BSP as having ""more room to stay tight" after better-than-expected gross domestic product (GDP) growth in the second quarter." 

Stay tight, then cut rates? Incredible. 

For a supposedly data-driven institution, why fixate on interest rates while ignoring the financial and monetary developments despite their actions?

Figure 1

For instance, the BSP’s report on total financial resources (TFR) rocketed by 10.54% to a record Php 32.332 trillion last June, with the banking system, led by the Universal and Commercial banks, surging by 12.3%. (Figure 1, upper window)

Aggregate TFR and bank FR amounted to 128% and 107% of GDP, respectively. 

That is to say, not only have growth rates been accelerating, but banks have also been deepening their stranglehold over the nation’s financial resources—which alternatively translates to an escalation of concentration risk. (Figure 1, middle graph) 

Needless to ask, why would TFR and bank assets skyrocket if rates have been "tight?" Or, why the crescendo of systemic leverage? 

Amazing. 

II. Slowing Retail GDP Validated by Topline Performance of PSE’s Retail Chains 

Getting back to the essence of the Marcos-nomics, despite the Orwellian language, why the cut rates? 

To gauge the heartbeat of consumers, we use the PSE’s Quarterly Report (17Q) to analyze the quarterly activities of the major non-construction retail chains listed on the stock exchange (SM Retail, Puregold, Robinsons Retail, Philippine Seven, SSI Group, and Metro Retail Group). 

The growth rate of BIG 6 retail chains bounced marginally from the Q1 low of 5.13% to 7.22% in Q2.  However, since peaking in Q3 2022, its growth rate has been slowing—exhibited by the downtrend. (Figure 1, lowest image) 

On the other hand, since hitting a low of 10.6% in Q3 2023, the nominal retail GDP has improved in the last three quarters—with Q2 posting a 12.8% growth.  The revenues of the BIG 6 accounted for an estimated 24.6% share of the Philippine retail market, based on the retail GDP. 

The huge variance in growth rates between the revenues of the BIG 6 tell us that either the NON-listed retail chains OUTPERFORMED, or that the retail GDP has been exaggerated. 

The thing is, the growth rate may differ, but the trends resonated. 

Real consumer GDP also corroborated the slowdown. 

In the first two quarters of 2024, real consumer spending grew by 4.6%. 

The slowdown in consumer spending is just one aspect of the complex chain of people’s actions.

Figure 2

While consumer spending has slowed, loans of the BIG 5 retail chains (excluding SM Retail) hit an all-time high in Q2. (Figure 2, topmost graph) 

As banks continue to shift their portfolios toward consumers—with the gap in favor of consumer lending reaching its highest-level last June—credit card and salary loan non-performing loans (NPLs) have accelerated in Q1 2024. (Figure 2, middle and lowest charts)

Figure 3 

This represents a breathtaking structural transformation anchored on Keynesian ideology that the consumer drives the economy. (Figure 3, topmost graph)

Unfortunately, despite the unprecedented metamorphosis, increased leveraging has only resulted in the material slackening of consumer spending.

Essentially, the consensus comprised of media, experts and officials has overlooked the importance of balance sheet conditions and productivity!

III. Marcos-nomics Rate Cut(s) Designed to Rescue the Banking System; Banks Bolstered the PSEi 30’s Stagnant Q2 Net Income

But there’s more.

The BSP wasn’t transparent enough to reveal that despite the seismic transformation of its business model and the all-time highs in credit expansion within the Philippine banking system, the industry has experienced an erosion of profit growth since Q2 2022—coinciding with rising rates. (Figure 3, middle diagram)

From a low of 2.95% in Q1, bank profits increased by 4.1% in Q2 2024. The data exhibit the sustained corrosion of bank liquidity despite the three-year streak in profit growth.  Bank’s cash-to-deposit and liquid asset-to-deposits on an 11-year downtrend.  (Figure 3, lowest chart)

In my humble opinion, these bank profits represent accounting profits because they conceal massive losses through Held-to-Maturity (HTM) holdings, opaqueness in capital conditions, and unpublished NPLs due to subsidies and various relief measures.

Figure 4

In any case, the big three PSEi banks saved the PSEi 30's Q2 net income activities from outright stagnation.

Net income by the non-financial members of the PSEi slightly contracted by 0.13%. However, the 13.71% net income growth of the PSEi 30 banks boosted the aggregate net income growth to 2.35%. (Figure 4, upper table)

Meanwhile, despite disinflationary forces, revenue growth increased by 9.14% in Q2, pushing the first semester’s topline up by 8.71% (to be discussed in another post).

In brief, it’s not just consumers; the overall slowing of the economy has been evident in the topline and bottom-line performance of the PSEi 30. We will omit the debt conditions of the PSEi 30’s non-financials from this discussion.

As a side note, why then the PSEi 30 pump?

Think of it this way: why the slowdown in the PSE’s performance despite record bank lending and the soaring expansion of systemic leverage (exhibited by members of the PSEi 30)?

Consumer spending per capita GDP peaked in Q1 2021 and has turned south in the face of historic levels of systemic leverage—comprising the formal credit (bank credit plus public debt) system, which accounted for 112% of the annualized 2024 GDP! (Figure 4, lower graph)

Figure 5

As it stands, this monumental build-up in systemic leverage translates to escalating hidden financial skeletons in the form of balance sheet mismatches—which have yet to be revealed. UC bank and public debt accounted for 108% of the annualized 2024 GDP. (Figure 5, topmost chart)

Incredible.

In a nutshell, the Marcos-nomics stimulus via the BSP’s rate cut also represents the RESCUE of the banking system (Pandemic Bailout Template 2.0).

IV. Marcos-nomics Rate Cut(s): Reduce Debt Servicing Costs to Accommodate MORE Debt! 

With the slowing of the real economy, the government has stepped up the tempo of its spending to boost the statistical economy, GDP.

This represents the opening salvo of Marcos-nomics. Besides, the torrent of spending is all about politics: pre-election funding, the subtle pivot to a war economy, the deepening administrative (infrastructure and bureaucracy) and the welfare state.

Record Q2 spending bolstered the Q2 budget deficit and accounted for a direct 27.4% share of the Q2 GDP, the second largest in GDP’s history (as previously explained). (Figure 5, middle chart)

Since debt has financed the Marcos-nomics stimulus, the rising but flawed debt-to-GDP metrics should increase further. With it, the debt servicing-to-GDP ratio should also rise.

If anything, both debt-to-GDP and debt-servicing-to-GDP ratios have now exceeded pre-Asian crisis levels. (Figure 5, lowest image)

This signifies the primary reason why the BSP cut rates.

Its recourse to deficit spending means more debt, so the BSP must reduce its cost of servicing to allow for or accommodate more debt!

Anyway, according to the government officials, there is "Nothing to worry about PH debt." Debt won’t matter until it does. Alternatively, this could also mean "never believe anything in politics until it has been officially denied." 

Furthermore, as with the pandemic template, liquidity injections should represent the third phase of the Marcos-nomics stimulus. 

Figure 6

The BSP's net claims on the Central Government (NCoCG) remain adrift at near record levels— indicating near-record holdings of government debt by the BSP. What tightening? Where? (Figure 6, topmost chart)

The all-time highs in public spending and bank lending should translate into HIGHER liquidity growth. The growth of BSP’s currency issuance has been accelerating since April 2024, rising by 7.4%—its highest since December 2022!

Should public spending, bank lending, and bank (NCoCG) fail to deliver the various government headline targets, expect the BSP's NCoCG to explode higher.

The fourth and final phase of the Marcos stimulus would involve expanding subsidies and widening the coverage of various relief measures for the banking system. 

Again, this would mirror the Pandemic Bailout Template 2.0. 

All these said, the rebound in liquidity growth should manifest in higher inflation and reinforce the uptrend of the USD-Philippine peso exchange rate. (Figure 6, middle and lowest graphs) 

Moreover, the Fed has long been used by the BSP as a pretext for keeping its stance, unfortunately, waiting for the FED seemed like "Waiting for Godot," so the BSP relented and eased ahead of the Fed.  This should provide further fuel to the bull market of the USDPHP over time. 

V. BSP Rate Cut Validates the Price Signals of the Philippine Treasury Market

Lastly, the BSP rate cuts validated the Philippine treasury markets.  

The curve’s transition from a steepening to a bullish flattening to an inversion in the belly (2-7 years yield) highlights disinflation, rising uncertainties and the growing slack in the real economy (rising risk of recession). 

Figure 7

The belly’s inversion only deepened right after the BSP’s rate cut (as of August 16th) 

And don’t just take it from me, a chart from the BSP’s 2023 Financial Stability Report expresses this. (p.13) 

VI. Summary and Conclusion: Watch for the Third and Fourth Phase of the Marcos-Stimulus (Pandemic Rescue Template 2.0) 

So, there you have it. 

Last week’s BSP rate cut validated our thesis of a "Marcos-nomics stimulus."

It represents the second phase of the tacit bailout of the deficit-spending-driven GDP, the banking system, and the firms of elites. The other objectives are the financing of the growing domain of various political agendas—mostly pre-election spending, the warfare state, infrastructure, and the bureaucratic state. 

One can expect the liquidity injections via the BSP and the banking system to account for the third phase of the stimulus program. 

To complete the fourth and final phase of the Pandemic Bailout Template 2.0, various subsidies and relief measures will be implemented to support the banking system

Despite the interim disinflation phase, the sustained bailout means the re-emergence of the third wave of inflation and the strengthening of the USD-Philippine peso bull market

The real tightening is about to come. 

Good luck to those who believe in the illusion that manipulated stock market pumps will translate into economic prosperity. 

___

References:

Prudent Investor, Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 2024 Public Spending Hits All-Time High! BSP Rate Cuts Next? July 28,2024 

Other post on Marcos-nomics: 

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 

Prudent Investor, Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth July 14, 2024 

Prudent Investor, Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending? June 30, 2024

 

Sunday, July 14, 2024

Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth

 

The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance— Taylor Caldwell, (often misattributed to Marcus Tullius Cicero) 

In this issue

Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth  

I. The Radio Silence on Last Week’s Collapse of the Philippine Treasury Yield Curve

II. What a Bullish Flattener Implies

III. How Rate Cuts Could Affect the Health of the Philippine Banking System

IV. Mounting Economic Fragility: Higher May Unemployment Rate and the Rising Dependence on Government Jobs

V. Mounting Economic Fragility: Elevated Trade Deficit, Softened FDI Flows in April, and Stagnant Manufacturing Sales

VI. "Marcos-nomics stimulus:" The Turbocharging of Pre-Election Liquidity Growth  

Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth

The collapse in the yields of the Philippine Treasury Markets highlights the BSP's upcoming rate cuts, which, along with May's spending and liquidity growth spike, represents the "Marcos-nomics stimulus."

I. The Radio Silence on Last Week’s Collapse of the Philippine Treasury Yield Curve

Last week, significant developments in the Philippine treasury markets went largely unreported by the media and the echo chamber. Despite this, the implications of these changes are significant for the country's economy.

Figure 1

One. T-bill rates remained steady, while yields on Philippine notes and bonds plunged, deepening the "bullish flattening" process that we have been pointing out. (Figure 1, topmost window)

Two.  The entire Philippine treasury curve has traded below the Bangko Sentral ng Pilipinas' (BSP) overnight reverse repurchase rate (ON-RRP). (Figure 1, middle image) 

Figure 2

Three.  The steep drop in 10-year Philippine treasury notes last week was the most pronounced in the (ASEAN) region, even surpassing the recent declines seen in US Treasury counterparts. (Figure 1, lowest diagram, Figure 2, upper graph)

In essence, treasury traders have reinforced indications that the BSP is preparing to lower rates.

You heard this first here.

II. What a Bullish Flattener Implies

Yet, a bullish flattener can be seen as a sign of different things depending on the context.

In the BSP’s latest Financial Stability Report (FSR), a bullish flattening curve represents "Longer-term outlook is improving and investors price-in lower rates. This gives the central bank room to lower the policy rate" (BSP, 2023)

For Wellspring Financial Advisors, "We have historically seen bull flattening leading into a recession. This can often happen because of a flight to safety trade and/or a lowering of inflation expectations " (Bruss, 2023)

Last we noted that "T-bill rates have been coming off their recent highs, and the narrowing of the treasury curve or a "bullish flattening" has highlighted weaker inflation and slower GDP growth, supporting the BSP's desired rate cuts" (Prudent Investor, 2024)

The point is, while not a direct indicator of economic conditions or inflation, the treasury yield curve provides a crucial insight depending on prevailing economic and financial circumstances.

Nonetheless, the following factors may be relevant to the present conditions:

First, the fact that rates have been tumbling translates to the treasury markets expecting an easing of monetary policy. Rate cuts can only be justified by diminishing inflation rates.

Second, lower inflation expectations increase the demand for longer-term securities. (ceteris paribus)

Third, it could also signify slowing economic growth or increasing risk aversion (even flight to safety).

Fourth, it may imply accruing imbalances in the supply and demand for Philippine treasuries.

III. How Rate Cuts Could Affect the Health of the Philippine Banking System

How will this affect the banking system?

One. The illusion of debt-financed spending utopia.

While lower rates could boost the GDP in the immediate term through increased credit expansion, allowing for expanded financing of Keynesian desired spending, this is contingent upon the capacity of balance sheets to absorb higher leverage.

For instance, unlike in 2008-2017, the serial BSP rate cuts in pre-pandemic 2019 haven’t exactly bolstered bank lending, which in contrast, declined due to the scourge of hidden NPLs. (Figure 2, lower pane)

Only the BSP’s historic Php 2.3 trillion liquidity injections backed by the unprecedented relief measures reversed it in 2021.  

Powered mostly by consumer loans, universal commercial bank lending soared by 10.2% in May 2024—the strongest growth since March 2023.

Much of the current strength in bank lending is due to 'refinancing' or debt 'rollovers,' which is why the Consumer Price Index (CPI) remains subdued.

Ironically, the establishment brands this debt expansion as 'restrictive.' Incredible.

In the absence of this vigorous credit expansion, think of what would happen to inflation and GDP.

The thing is, spending will be determined by balance sheet conditions over time, rather than just rates alone.

Two. A temporary boost on investments.

With surging fixed-income prices, it may also boost the banking industry’s investment side of the balance sheets.

Figure 3

It may also temporarily lower the industry’s camouflaged mark-to-market losses in the context of held-to-maturity (HTM) assets. (Figure 3, topmost chart)

However, HTMs showed minimal improvement when 10-year yields plummeted in 2022-2023, confirming the trend observed from 2019 to 2022, where a crash in rates resulted in negligible progress for the bank’s HTM assets.

Three. An adverse impact on the bank’s interest margins.

Furthermore, the narrowing bond spreads should also lead to tighter interest margins for banks as the 2019-2020 experience showed, which means lesser incentive to lend. (Figure 3, middle graph)

Lastly, falling rates expose disguised credit risks.

During 2019-2020, the BSP rate cuts were in response to mounting pressures from credit delinquencies in the banking system. While the pandemic recession exacerbated the situation, BSP's comprehensive measures—combining rate cuts, liquidity injections, and various relief efforts—masked the true extent of NPLs. (Figure 3, lowest pane)

Despite some of these relief measures and subsidies in place, the recent resurgence of NPLs have been pressuring the BSP to consider such rate cuts.

Figure 4

In short, the BSP rate cuts would whet the speculative appetite of banks and financial institutions for "investments," while reducing their core "lending" operations (similar to the rate cuts of 2019-2020) (Figure 4, topmost image)

Most importantly, higher interest rates have exacerbated the servicing costs associated with record-high levels of public debt, indicating a potential reduction in GDP growth driven by lower public spending over time.

IV. Mounting Economic Fragility: Higher May Unemployment Rate and the Rising Dependence on Government Jobs

Despite its ever-shifting or ambivalent stance, the BSP has been advocating for lower rates. Several economic data released last week help explain this push.

Firstly, despite the recent record-high employment rates, labor markets continue to face challenges.

While the unemployment rate rose from 4% in April to 4.1% in May, this increase was primarily due to a rise in the labor force participation rate. The employed population actually increased by 510,000 month-over-month (MoM), but a larger increase in the labor force by 576,000 led to an uptick in the unemployment rate. (Figure 4, middle visual)

However, a broader analysis reveals emerging tensions in labor participation rates. 

It seems odd to see a job boost in the investment-starved agricultural sector reportedly suffering substantial losses from El Nino. Yet, the government bannered Php 9.6 billion in investment gains this month (mostly from the elites). 

Furthermore, the government was the largest contributor to job gains. Aside from construction jobs stemming partly from government infrastructure projects (including PPPs), the government and defense sectors saw significant gains in both May and March. (Figure 4, lowest chart) 

Even assuming its accuracy, this data provides clues as to why consumers have been struggling, contradicting the headline trend of "full employment." 

V. Mounting Economic Fragility: Elevated Trade Deficit, Softened FDI Flows in April, and Stagnant Manufacturing Sales 

Next, external trade retraced much of its April advances in May.

Figure 5

Import growth fell from a 13.01% increase in April to a negative 0.03% in May, primarily due to an 11.5% plunge in capital goods imports, while consumer goods imports only rose by a meager 0.42%. Capital and consumer goods accounted for 25.6% and 19.6% of the total share, respectively. (Figure 5, topmost pane)

Export growth also dived from a 27.9% growth spike in April to a 3.08% contraction in May. 

While Artificial Intelligence (AI) has boosted global semiconductor trade, with exports increasing by 19.3% year-over-year (YoY) and 4.1% month-over-month (MoM) in May, Philippine semiconductor exports saw an incredible collapse from a 30.7% YoY growth spike in April to a 13.3% contraction in the same month! Microchip exports accounted for 43.4% of the total share. (Figure 5, middle graph) 

Thirdly, despite periodic junkets by the leadership, which reportedly led to significant investment pledges from key geopolitical partners like the US and NATO, April's Foreign Direct Investments (FDI) fell by 36.9%, but overall YTD growth was up still 18.7%. Debt made up significant proportions of both April's and YTD FDIs: 73.2% and 63.5%, respectively. What happened to these investment promises? (Figure 5, lowest chart) 

Also, debt-driven FDI flows do not automatically translate into 'investments' and could serve other purposes. Some might declare it as such to the government to avail of incentives

Lastly, FDI flows exhibit a downtrend.

Figure 6

Finally, domestic manufacturing remains stagnant, with production values and volumes increasing by 2.2% and 3.2% respectively in May (YTD: -0.1% and +0.9%). However, these gains may be offset by declining sales values and volumes, which saw decreases of -1.5% and -0.3% in May (YTD: -1.4% and -0.3%). (Figure 6, topmost graph) 

Imports have partially filled the slack in domestic production, which is the essence of the trade deficit. 

Overall, weak imports and a manufacturing stupor manifest a fragile domestic demand

In a nutshell, despite optimistic projections by the echo chamber, even government data suggests a critical shortage of investments and an increasing dependence on debt supporting the real (not statistical) economy.  

Moreover, deepening dependence on the government to stimulate GDP growth, evidenced by near-record "twin deficits," could lead to heightened inflation, higher future taxes, and magnified reliance on external debt. (Figure 6, middle chart)

It is not helpful when the establishment confuses the GDP with the overall economy, for the simple reason that the GDP has been skewed to reflect the growth of the government and the elites—the "trickle-down syndrome." 

VI. "Marcos-nomics stimulus:" The Turbocharging of Pre-Election Liquidity Growth

Could the public spending spike observed in May 2024 signify a potential precursor to a "Marcos-nomics stimulus" program? 

Meanwhile, infrastructure, public defense-related projects, pre-election expenditures, and bureaucratic spending were likely funded by the national government, which saw a 22.3% spike in disbursements in May. 

This contributed to a 14.8% surge in national government spending over the first 5 months, reaching an all-time high nominal level of Php 1.443 trillion! 

So if we are not mistaken, "Marcosnomics" will be heavy on political expenditures but sold to the public as a "stimulus." (Prudent Investor, 2024)

May 2024 marked the fourth highest spending on record, which significantly boosted the BSP’s principal measure of liquidity, M3, to 6.5%, a six-month high.

Figure 7

A substantial portion of this liquidity growth stemmed from cash in circulation, which surged to its second-highest level on record, surpassing the zenith of December 2022. (Figure 7, topmost image) 

Traditionally, December has been the peak for M3 annually. However, this time could be different. If May’s spending trend continues, nominal cash levels may surpass the historic highs of December 2023 even before year-end! 

May’s cash growth rate of 6.1% YoY was the highest since December 2022’s 7.6%. 

For want of doubt, the administration has begun injecting large amounts of cash into the financial system. 

Together with the accelerating growth in the banking system’s loans, the BSP’s net claims on the central government (NCoCG) surged by 89.21% in May, while the bank's NCoCG slowed to 12.2%. (Figure 7, middle graph) 

This combined financing of government deficit spending and private sector borrowing or formal credit expanded by 9.44% to a record Php 27.02 trillion in May! 

And yet, all we can hear from the consensus is that this represents a “restrictive environment!” 

The thing is, if May’s deficit spending-driven liquidity growth will be sustained, it should put a floor on the present private sector-powered disinflationary impulses—with a time lag

The Philippine treasury markets have signaled that the BSP may be about to confirm the unannounced "Marcos-nomics stimulus" with upcoming rate cuts

However, such stimulus could also reinvigorate the third wave of the incumbent inflation cycle. (Figure 7, lowest chart) 

Stay tuned.

___ 

References

FINANCIAL STABILITY COORDINATION COUNCIL, 2023 FINANCIAL STABILITY REPORT December 2023, p.35 bsp.gov.ph

Kevin Bruss Steepening and Flattening of the Yield Curve, Wellspring Financial Advisors, August 10, 2023; wellspringadvisorsllc.com

Prudent Investor, June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'? July 7, 2024

Prudent Investor, Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending? Substack.com June 30, 2024