Has the Philippine Government Won Its Battle Against Inflation? SWS Self-Poverty Survey Disagrees, Unveiling Its Hidden Messages

There is no escape from debt. Paying for the government’s fictitious promises in paper money will result in a constantly depreciating currency, thereby impoverishing those who earn a wage or have savings. Inflation is the hidden tax, and it is very convenient for governments because they always blame shops or businesses and present themselves as the solution by printing even more currency. Governments want more inflation to reduce the impact of the enormous debt and unfunded liabilities in real terms. They know they can’t tax you more, so they will tax you indirectly by destroying the purchasing power of the currency they issue—Daniel Lacalle

 In this issue

Has the Philippine Government Won Its Battle Against Inflation? SWS Self-Poverty Survey Disagrees, Unveiling Its Hidden Messages

I. Unveiling the Likely Hidden Messages Behind the Declaration of Victory Over Inflation

II. Treasury Curve was Spot On about Inflation, Short-Term Treasury Yields Plunge! Will the BSP Cut by 50 bps?

III. Supply-Side Disinflation? Despite Strong Credit Growth, Manufacturing Remains in the Doldrums, as Reflected by PPI Deflation and Output Sluggishness

IV. Supply-Side Disinflation? Lethargic Consumer Imports and July FDI Reflect Frail Capital Goods Imports

V. Demand-Side Disinflation? September CPI Plunged Despite Vigorous August Consumer Bank Lending, Liquidity Growth Dived

VI. Disinflation with Employment at Near Historic Highs Backed by a Credit Boom? Slower Deficit Spending Puts Pressure on Liquidity Strains

VII. SWS’s Self-Rated Poverty Survey versus the Government’s CPI 

Has the Philippine Government Won Its Battle Against Inflation? SWS Self-Poverty Survey Disagrees: Unveiling Its Hidden Messages

A Philippine media outlet proclaimed that the Philippine government won its battle against inflation, while a private survey contradicted this view. Who's right?

I. Unveiling the Likely Hidden Messages Behind the Declaration of Victory Over Inflation

Figure 1 

Two interesting headlines that hallmark this week’s conflicting message on inflation. 

Inquirer.net, October 7, 2024: The Philippines may now declare victory in its long and painful fight against inflation after price growth last month eased to a four-year low, helping create the perfect economic condition for gradual interest rate cuts…The BSP is now at a point where it has to undo its most forceful tightening actions in two decades, which had sent the benchmark rate to its highest level in 17 years to tame stubbornly high inflation. Cutting borrowing costs is necessary amid market predictions that the economy may grow below the government’s target for this year after consumption showed signs of weakening…Moving forward, Governor Eli Remolona Jr. said the central bank would take “baby steps” until the key rate falls to 4.5 percent by the end of 2025, suggesting that monetary authorities would unlikely resort to jumbo cuts that may stir up market fears that the economy is headed for a hard landing. (bold mine)

SWS.org.ph, October 9, 2024: The national Social Weather Survey of September 14-23, 2024, found 59% of Filipino families rating themselves as Mahirap or Poor, 13% rating themselves as Borderline (by placing themselves on a line dividing Poor and Not Poor), and 28% rating themselves as Hindi Mahirap or Not Poor. The September 2024 percentage of Self-Rated Poor families rose by 1 point from 58% in June 2024, following a significant 12-point rise from 46% in March 2024. This was the highest percentage of Self-Rated Poor families since June 2008. The estimated numbers of Self-Rated Poor families were 16.3 million in September 2024 and 16.0 million in June 2024. The percentage of respondent households rating themselves as poor was applied to the Philippine Statistics Authority medium-population projections for 2024 to arrive at the estimated numbers of Self-Rated Poor families… The September 2024 survey found the percentage of Borderline families at 13%, up by 1 point from the record low 12% in June 2024 following an 18-point decline from 30% in March 2024… As of September 2024, the percentage of Not Poor families was at 28%, 2 points below the record high 30% in June 2024. (bold mine)

First and foremost, what does "declare victory in its long and painful fight against inflation" mean? (Figure 1, upper tweet)

The Philippine CPI posted two straight months of DEFLATION (statistical price decreases) in September (-0.37%) and October (-0.19%) 2015; yet, the media and establishment experts barely made such a brazen pronouncement until now.

Yes, Q3 2024 statistical inflation of 3.2% has dropped to its 9-year support level, but this doesn’t mean that the inflation cycle has been broken.

Figure 2 

In Q3 2015, the CPI slipped into deflation at -0.1%, which prompted banks to accelerate their net claims on central government (NCoCG) or indirect QE. Ironically, this germinated the current inflation cycle, which is now on its ninth-year.  (Figure 2 upper image)

Despite its recent decline, given that the CPI has remained on an uptrend since 2015 and appears to have settled at the support levels, what assurances does the establishment hold that it won’t be subject to a third wave?

Second, the September CPI of 1.9% doesn’t translate to the evisceration of inflation; it only means that GENERAL prices have risen at REDUCED rates (or have dropped to within the BSP’s target), but they are still RISING!

In fact, BSP data tell us that even in the context of the understated inflation rate, over 99% of the purchasing power of the peso has been eroded since 1957! How is that for "declaring victory over inflation"? (Figure 2, lower chart)

On the other hand, while authorities and media bask in this pretentious statistical feat, a private sector survey tell us a different story: slower inflation has exposed the persistent and growing burden of a lower standard of living! (More on this below.) (Figure 1, lower tweet)

Third, "declaring victory over inflation" was NEVER a goal of the BSP’s monetary policy anchored on inflation targeting.

From the BSP: The primary objective of the BSP's monetary policy is “to promote price stability conducive to a balanced and sustainable growth of the economy” (Republic Act 7653). The adoption of inflation targeting framework of monetary policy in January 2002 is aimed at achieving this objective. Inflation targeting is focused mainly on achieving a low and stable inflation, supportive of the economy’s growth objective. This approach entails the announcement of an explicit inflation target that the BSP promises to achieve over a given time period. (bold mine)

There is no defined quantification or qualification of "low and stable inflation" because statistical inflation has always been a subjective measure, arbitrarily defined by the BSP.

That said, the goal of the politics behind inflation targeting has been to keep the inflation "genie" confined within the boundaries of the BSP’s proverbial "lamp."

That’s because inflation, as a hidden tax, benefits the government most.

However, the inflation genie has been set loose, or has gone beyond its bounds, marking the difference between the previous era and today.

In this way, the BSP can be conservatively said to have been "asleep at the wheel."

At worst, and unbeknownst to the public, the BSP’s policies have unleashed the inflation genie!

Or, although authorities continue to push the narrative of supply-side-driven inflation to shift the blame onto the private sector, the current inflation cycle signify an unintended consequence of their policies!

Yet, has anyone among the array of establishment experts, including those in government, been correct in predicting the incumbent inflation cycle? 

Fourth, the CPI is just a statistic. While its intent is to approximate changes in general prices, it neither reveals the full accuracy nor explains the causes of those changes. 

The fact is that inflation statistics are misleading.

My inflation rate and yours are different.  This is because of dynamic individual spending habits and ever-changing preferences that vary not only over time but also differs across individuals. 

Is it not the averaging a Netflix subscription and rice an exercise of apples-to-oranges comparison?  If so, would this not be applied to the CPI? 

Or, not only is the weighted averaging of goods and services across different groups of people a flawed metric, but people’s spending preferences are constantly changing! 

How accurate is an inflation rate derived from averaging the spending patterns of billionaires with those of the bottom 30%? 

Even on a personal level, my preferences are always changing. If I prefer sautéed prawns with bread this moment, adobo with rice later, and only sinigang for tomorrow, how could the inputs used to create these meals be accurately averaged? How would this apply to a population of 110 million people? 

Furthermore, because the CPI is a politically sensitive statistic—created and calculated by politically sensitive institutions—it is prone not only to errors (in assumptions, inputs, etc.) but also to political biases. 

For instance, changing the base year of the CPI can lead to different outcomes. If I’m not mistaken, using the now-defunct 2006 base would produce a much higher CPI today than the current 2018 base. 

Since the CPI is used as a primary benchmark for the market’s pricing of interest rates, wouldn’t the government—as the biggest borrowers—have the incentive or motivation to suppress it to influence the cost of borrowing? 

Fifth, what happened to journalism? 

Isn’t journalism about "seeking truth and providing a fair and comprehensive account of events and issues"? 

When media outlets use ambiguous qualifications like " declare victory against inflation" to describe the "perfect economic condition for gradual interest rate cuts" intended to support "consumption (which) showed signs of weakening," could this not signify cheerleading or an advocacy for a biased policy stance? For whose benefit? 

Might this be seen as advancing the interests of vested groups, particularly the primary beneficiary, the government and the politically connected elites? How is this different from propaganda, misinformation, or disinformation? 

Importantly, if an alleged news article makes an economic generalization, why would it lack narratives supported by economic logic? 

Or, are low rates a GUARANTEE of an INCREASE in consumption? How so, and based on what theory and evidence? 

Why cite partisan and non-sequitur explanations from "establishment experts" whose principal-agent problems have hardly been laid bare to the public? 

Have media outlets distilled such insights or selected statements for print that only promote their biases? I’ve seen this happen (personally) before, which is why I refuse interviews. 

Sixth, if media pronouncements reflect exuded marketplace confidence, could such article/s signify a manifestation of the magazine/headline cover indicator or express an extreme state of sentiment? 

Or have the media’s declarations echoed the "overconfidence" stemming from recent euphoria over the price spikes in Philippine assets (stocks, bonds, and the peso)? 

Seventh and lastly, could this be related to the upcoming elections? 

Will declaring 'victory in its long and painful fight against inflation' be part of the campaign to promote the electoral chances of the administration’s national slate in the 2025 midterm elections? 

Ultimately, the establishment's obsession has been to promote a regime of easy money, using the declaration of triumph over inflation as justification. 

As the great Austrian economist Ludwig von Mises once explained 

The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last (Mises, 2019)  

II. Treasury Curve was Spot On about Inflation, Short-Term Treasury Yields Plunge! Will the BSP Cut by 50 bps? 

While the headline CPI plummeted from 3.3% in August to 1.9% in September—its lowest monthly rate since May 2020—excluding food and energy, the core CPI slipped to 2.4%, signifying 17 of 18 months of decline (one unchanged) since peaking at 8% in March 2023. 

Before that, we showed how changes in the Philippine yield curve have accurately predicted the CPI slump. 

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) 

Volatility has crescendoed in the Philippine treasury curve.

Figure 3

The present slope exhibits an astounding collapse in short-term rates (STIR), manifesting institutional market expectations of substantial cuts in BSP rates. Will the BSP cut by 50 bps this October? (Figure 3, upper graph) 

Yet, the curve’s magnified volatility has been incredible: following the gradual transition from flat to an inverted curve, then swiftly to a bullish steepening, and next to the current abrupt regression to a partial belly inversion—even with the plunge in STIR—how could this not be conducive to the rising risks of stagflation?

III. Supply-Side Disinflation? Despite Strong Credit Growth, Manufacturing Remains in the Doldrums, as Reflected by PPI Deflation and Output Sluggishness 

While we perceive government statistics with cynicism, we still use them because almost every financial market participant does.

Instead of focusing on the potential factors for the drop, the mainstream fixates on the prospective policy easing by the BSP.

Could the plunge in inflation have been a supply-side phenomenon marked by a glut?

In a word: Barely.

Manufacturing value grew by 2.9% in June, 6.45% in July, and 1.78% in August, while volume was up by 3.2%, 6.9%, and 2.8% over the same period.

Meanwhile, despite strong Universal Commercial Bank (UCB) loan growth to this sector—rising by 8.9%, 9.5%, and 9.8%—the Producer Price Index (PPI) deflated by -0.2%, -0.4%, and -1%. (Figure 3, lower chart)

Here’s the question: Why has robust credit growth not been reflected in output performance?

Worse yet, why is the deflation in the PPI escalating? PPI defined by the Philippine Statistics Authority, "measures the average change over time in the prices of products or commodities produced by domestic manufactures and sold at factory gate prices."

Where has all the credit money generated gone?

Has it been diverted to real estate or other undeclared allocations? Or has it been used for refinancing existing liabilities?

IV. Supply-Side Disinflation? Lethargic Consumer Imports and July FDI Reflect Frail Capital Goods Imports

If manufacturing growth has been unimpressive or sluggish, the situation is even worse for imports.

Imports in USD posted a 7.3% YoY contraction in June, then rose by 7.3% in July and 1.8% in August.

Converted to average pesos, imports were down by 2.63% YoY in June, surged by 14.3% in July, and grew by 4.6% in August, with the last month’s growth reflecting revaluation effects from a strong peso.

Figure 4

Here’s the thing: Consumer goods USD imports contracted by 7.3% in June, increased by 3.1% in July, and remained unchanged in August. (Figure 4, topmost pane)

Meanwhile, capital goods imports shrank by 8.8% in June but surged by 9.5% and 9.6% in the next two months. A substantial segment of the YoY changes reflects base effects. (Figure 4, middle diagram)

Nonetheless, the growth in capital goods imports partly reflected foreign direct investment (FDI).

The prosaic July FDI growth of 5.5% YoY (7.5% year-to-date) resonated with mediocre import growth. (Figure 4, lowest graph)

Yet, debt accounted for 74.3% of total FDI inflows and 63.5% of year-to-date FDI inflows. How much of this represent actual investments?

Still, why is the growth rate of FDIs declining?

Importantly, where are the investment pledges from the US-NATO allies?

V. Demand-Side Disinflation? September CPI Plunged Despite Vigorous August Consumer Bank Lending, Liquidity Growth Dived

Was the CPI slump a function of demand?

In short, yes!

We should put into context the seismic transformation of the Philippine banking system, with its recent focus on consumer loans coming at the expense of the supply side.

Figure 5

Universal Commercial (UC) bank consumer lending slowed from 24.3% year-over-year (YoY) in July to 23.7% in August, marking its slowest pace since November 2023. (Figure 5, topmost chart)

Consumer loan growth was strong across all segments in August: credit cards +27.44%, auto loans +19.3%, salary loans +16.4%, and others +26.8%.

Meanwhile, production loans continue to accelerate, expanding from 8.8% in July to 9.4% YoY in August, primarily in the real estate and trade sectors.

Overall, UC bank lending grew from 10.4% to 10.9% in August (Figure 4, second to the highest graph)

Despite mainstream claims of "restrictiveness" or "tightness" due to elevated rates, UC Bank's loan growth has been on an uptrend. Still, the CPI continues its downward trajectory!

Worse yet, despite this, financial liquidity plummeted in August.

M3 growth, which was 7.3% in July, dived to 5.5% in August. Incredible.

Incidentally, the yield curve inversion reflected this!

Once again, what happened to all the record money creation by the banking system and the BSP? Why the black hole?

VI. Disinflation with Employment at Near Historic Highs Backed by a Credit Boom? Slower Deficit Spending Puts Pressure on Liquidity Strains

Why could this be happening when employment rates are near all-time highs?

It was 96% last August, only a smidgen lower than the 96.9% record set last December 2023. (Figure 5, second to the lowest window)

Could it be that, aside from trade, government jobs were the primary source of growth in August? (Figure 5, lowest image)

Or could it also have been that employment growth has been mostly about low-quality labor? Alternatively, could the employment data also have been embellished?

Figure 6

Moreover, as we previously noted, because Philippine public spending has slowed, the fiscal deficit slightly "narrowed" year-to-date (YTD) as of August. Public spending has tracked the CPI over the long-term. (Figure 6, topmost diagram) 

As a result, aided by the strong peso, public debt marginally weakened in August.

Moreover, has the stalling growth in system leverage (UC bank credit + public debt) contributed to the demand pressures reflected in the CPI? (Figure 6, second to the highest graph)

Consequently, net claims on the central government (NCoCG) by banks and the BSP plateaued or consolidated. (Figure 6, second to the lowest chart)

Or, aside from the BSP, liquidity injections channeled through banks have slowed slightly.

This, combined with a stealth rise in bank non-performing loans (NPLs) and elevated levels of held-to-maturity assets (HTMs), has contributed to the liquidity squeeze.

And this has occurred despite the record nominal bank credit expansion and historically high employment rates. The plunge in September’s CPI might reflect a downturn in public and private demand, possibly worsened by mounting signs of a liquidity shortfall.

VII. SWS’s Self-Rated Poverty Survey versus the Government’s CPI 

Things don’t happen in a vacuum.

The BSP suddenly announced a massive reduction of the banking system’s reserve requirement ratio (RRR) on September 20th, obviously in response to such developments. The adjustment takes effect on October 25.

The PSA’s September CPI data exhibits a broad-based decline in price growth. While food prices had the biggest influence on the CPI’s significant downside volatility, slowing aggregate demand reflected the diminishing pace of price increases across most sectors. (Figure 6, lowest image)

All these factors point to the SWS Q3 data indicating an increase in self-rated poverty, which not only highlights the decline in living standards for a significant majority of families but also emphasizes the widening gap between the haves and the have-nots.

As a caveat, survey-based statistics are vulnerable to errors and biases; the SWS is no exception.

Though the proclivity to massage data for political goals is higher for the government, we can’t discount its influence on private sector pollsters either.

In any case, we suspect that a phone call from the office of the political higher-ups may compel conflicting surveys to align as one.

____

References 

Ludwig von Mises, The Boom Is Worse than the Bust, November 30, 2018 Mises.org 

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

  

BSP Reduces Banks' Reserve Requirement Ratio (RRR), Fed's 50-bps Rate Cut Sends Philippine Yield Curve into Full Inversion!

 

The short end of the UST curve is highly influenced by the Federal Reserve’s monetary policies while the long end clarifies those policies through the prism of risk/return. A steep yield curve…is one that suggests a low rate, accommodative monetary policy that is likely to work over time. This accounts for the curve’s steepness. A flat and inverted curve is the opposite. Whatever monetary policy is being conducted, the long end is interpreting that policy as well as other conditions as being highly suspect—Jeffrey P Snider 

In this issue:

BSP Reduces Banks' Reserve Requirement Ratio (RRR), Fed's 50-bps Rate Cut Sends Philippine Yield Curve into Full Inversion!

I. 2024 Reserve Requirement Ratio Cuts to Designed to Plug the Banking System’s Worsening Illiquidity

II. Bank Liquidity Drain from Held to Maturity (HTM) and Growing Non-Performing Loans (NPL)

III. Philippine Yield Curve Shifts from an Inverted Belly to a Full Inversion!

IV. Was San Miguel’s September 20th Pre-Closing Dump Related to the Liquidity Strained Yield-Curve Inversion? 

BSP Reduces Banks' Reserve Requirement Ratio (RRR), Fed's 50-bps Rate Cut Sends Philippine Yield Curve into Full Inversion! 

The Philippine yield curve inverts as the BSP significantly reduces the Bank RRR, while the US Fed embarks on a "Not in Crisis" 50-bps rate cut. 

The BSP has been telegraphing cuts to the banking system’s Reserve Requirement Ratio (RRR) since its last reduction in June 2023. 

For instance, Philstar.com, May 18, 2024: The Bangko Sentral ng Pilipinas (BSP) is looking at a significant reduction in the level of deposits banks are required to keep with the central bank after it starts cutting interest rates this year, its top official said. BSP Governor Eli Remolona Jr. said the Monetary Board is planning to cut the reserve requirement ratio (RRR) of universal and commercial banks by 450 basis points to five percent from the existing 9.5 percent, the highest in the region. 

Four months later. 

GMANews.com, September 18, 2024: The Bangko Sentral ng Pilipinas (BSP) is looking to cut the reserve requirement ratio, the amount of cash a bank must hold in its reserves against deposits, “substantially” this year and reduce it further in 2025. BSP Governor Eli Remolona Jr. said on Wednesday that the cut in the reserve requirement is being considered, with the timing being discussed. He earlier said this can be reduced to 5% from the present 9.5% for big banks. 

Two days after. 

ABSCBNNews.com, September 20, 2024: The Bangko Sentral ng Pilipinas is reducing the reserve requirement ratio (RRR) for universal and commercial banks by 250 basis points (bps).  This RRR reduction will also apply to non-bank financial institutions with quasi-banking functions, the BSP said… The reduction shall bring the RRRs of universal and commercial banks to 7 percent; digital banks to 4 percent; thrift banks to 1 percent; and rural and cooperative banks to zero percent, the central bank said. The new ratios take effect on October 25 and shall apply to the local currency deposits and deposit substitute liabilities of banks and NBQBs. (bold mine) 

I. 2024 Reserve Requirement Ratio Cuts to Designed to Plug the Banking System’s Worsening Illiquidity 

Bank lending growth has been accelerating, while broad economic liquidity measures have been rising, so why would the BSP opt to inject more liquidity through Reserve Requirement Ratio (RRR) cuts? 

The following data set may provide some answers.

Figure 1

Although lending by Universal and Commercial Banks is at a record high in nominal peso terms, the growth rate remains far below pre-pandemic levels. (Figure 1, topmost image) 

The RRR cuts from 2018 to 2020 appeared to have worked, as the loans-to-deposit ratio rose to an all-time high in February 2020 but the pandemic-induced recession eroded these gains. (Figure 1, middle graph) 

It took a combination of historic BSP policies—record rate cuts, an unprecedented Php 2.3 trillion liquidity injection, and extraordinary relief measures—to reignite the loans-to-deposits ratio. Nonetheless, it still falls short of the 2020 highs. 

A likely, though unpublished, explanation is that bank liquidity continues to decline. 

As of July, the cash and due-to-bank deposits ratio was at its lowest level since at least 2013. The BSP policies of 2020 and subsequent RRR cuts bumped up this ratio from 2020-21, but it resumed its downtrend, which has recently worsened. (Figure 1, lowest chart)

Figure 2

After a brief recovery from the RRR cuts of 2018-2020—further aided by the BSP’s historic rescue measures in 2020—the liquid assets-to-deposits ratio has started to deteriorate again. (Figure 2, topmost pane) 

Additionally, Q2 2024 total bank profit growth has receded to its second-lowest level since Q2 2021. (Figure 2, middle diagram) 

From this perspective, liquidity boost from increased bank lending, RRR cuts, and reported profit growth has been inadequate to stem the cascading trend of cash and liquid assets. 

Furthermore, despite subsidies, relief measures, and a slowing CPI, Non-Performing Loans (NPLs) and distressed assets appear to have bottomed out in the current cycle. (Figure 3, lowest visual) 

Increasing NPLs in the face of a slowing CPI is indicative of demand. Refinancing has taken a greater role in the latest bank credit expansion. 

To wit, rising NPLs contribute significantly to the ongoing drain on the banking system’s liquidity. 

II. Bank Liquidity Drain from Held to Maturity (HTM) and Growing Non-Performing Loans (NPL)

Figure 3

A primary source of the downtrend in the cash-to-deposits ratio has been the banking system's Held-to-Maturity (HTM) securities. (Figure 3 upper image)

Once again, the BSP has acknowledged this. 

Banks face marked-to-market (MtM) losses from rising interest rates. Higher market rates affect trading since existing holders of tradable securities are taking MtM losses as a result. While some banks have resorted to reclassifying their available-for-sale (AFS) securities into held-to-maturity (HTM), some PHP845.8 billion in AFS (as of end-March 2018) are still subject to MtM losses. Furthermore, the shift to HTM would take away market liquidity since these securities could no longer be traded prior to their maturity. [BSP, 2018] (bold mine) 

Even though rates have dropped, HTM (Held-to-Maturity) assets remain at record levels but appear to be plateauing. Falling rates in 2019-2020 barely made a dent in the elevated HTM levels at the time. 

Yet, a principal source of HTMs continues to be the bank's net claims on central government (NCoCG). (Figure 3, lower graph) 

That is, banks continue to finance a substantial portion of the government's deficit spending, which has represented an elementary and major contributor to the deterioration in bank liquidity. 

Why has the BSP been doing the same thing over and over again, expecting different results? Some call this "insanity." 

If the goal is to remove distortions—however ambiguously defined—why not eliminate the RRR entirely? 

It seems the BSP is merely buying time, hoping for a magical transformation of unproductive loans into productive lending. Besides, a complete phase-out of the RRR would leave the BSP with fewer "tools," or bluntly speaking, strip them of excuses. 

Thus, they’d rather have banks continue to accumulate unproductive loans in their portfolios and gradually subsidize them with relief from RRR cuts, rate cuts, various subsidies, and later direct injections—a palliative/band-aid treatment. 

III. Philippine Yield Curve Shifts from an Inverted Belly to a Full Inversion! 

Figure 4

Rather than steepening, the Fed's "not in a crisis" panic 50-basis-point cut also helped push the Philippine Treasury yield curve from an "inverted belly" to a "full inversion" on September 20! (Figure 4, tweet)

Figure 5

While yields across the entire curve plunged over the week, T-bill yields declined by a lesser degree relative to medium- and long-term Treasuries. (Figure 5, topmost window)

As a result, yields on Philippine notes and bonds have now fallen below T-bills!

Although one day doesn’t make a trend, this current inversion is the culmination of a process that began with a steep slope, then an inverted belly, and now a full inversion since June 2024. (Figure 5, middle chart)

The spreads between the 10-year bonds and their short-term counterparts are at the lowest level since March 2019! (Figure 5, lowest graph) 

And an inverted curve could serve as a warning signal/alarm bell for the economy.

From Investopedia: 

>An inverted yield curve forms when short-term debt instruments have higher yields than long-term instruments of the same credit risk profile.

>The inverted curve reflects bond investors’ expectations for a decline in longer-term interest rates, a view typically associated with recessions.

Further, it is a sign of tight liquidity: short-term borrowing costs rise or remain elevated, leading to higher yields on short-term debt instruments compared to long-term yields.

Moreover, expectations of slowing growth or economic recessions can also lead to decreased demand for riskier assets and increased demand for safer long-term bonds.

Again, the inverted curve must have resulted from the BSP’s announcement of a sharp reduction in the RRR in October, along with the Fed’s 50-basis point rate cuts.

Bottom line: cuts in the banks’ RRR were meant to address the banking system’s liquidity challenges as manifested in the Philippine treasury markets. The Fed’s 50-bps rate cut has exacerbated these distortions.

IV. Was San Miguel’s September 20th Pre-Closing Dump Related to the Liquidity Strained Yield-Curve Inversion?

Figure 6

Finally, it is interesting to observe that following the PSEi 30's intraday push above 7,300 last Friday, September 20, foreigners sold off or "dumped" SMC’s shares by 5% during the pre-closing five-minute float, contributing to the sharp decline in SMC’s share price and diminishing gains for the PSEi 30. (Figure 6, tweet) 

While we can’t directly attribute this to the inversion of the Philippine term structure of interest rates (yield curve), SMC’s intensifying liquidity challenges—evidenced by deteriorating cash reserves relative to soaring short-term debt in Q2 2024—should eventually influence its slope. (Figure 6, lower chart) 

In sum, as a "too big to fail" institution, SMC’s difficulties will inevitably reflect on the government’s fiscal and monetary health as well as the banks and the economy. 

____

references

FINANCIAL STABILITY COORDINATION COUNCIL, 2017 FINANCIAL STABILITY REPORT, p. 24 June 2018, bsp.gov.ph

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