PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression

 

Inflation was created by the wrong monetary policy, and incorrect central bank measures may have lasting negative impacts on the economy. The first effect is evident: governments continue to crowd out the real economy, and families and businesses suffer the entire burden of rate hikes. Maybe the objective was always to increase the size of the public sector at any cost and implement a gradual nationalization of the economy—Daniel Lacalle 

In this issue

PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression

I. Clarifying Our Analytics of the PSEi 30 Data

II. 9-Month 2024 PSEi 30 Performance: Broad-based Slowdown, Sustained Dependence on Borrowing to Generate Growth

III. Dissecting the PSEi 30’s Performance by Category: Debt, Income, Revenues and Cash

IV. Analysis by Sector: Financials and Holding Firms Dominate Growth

V. Analysis by PSEi 30 Member Firms (9-Month)

VI. Conclusion: Underwhelming Performance as Symptoms of Crowding-Out Syndrome, Financial Repression, and Statist Policies

PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression 

The PSEi 30’s lackluster fundamental performance validated the mainstream’s unexpected decline in Q3 GDP, highlighting the persistent effects of crowding out and financial repression. 

I. Clarifying Our Analytics of the PSEi 30 Data 

Two factors must be explained before delving into the 9-month and third-quarter analysis of the performance of PSEi 30 constituent firms. 

First, the definition of data is crucial.  

-Data from the same reporting coverage provides a more accurate comparison, as it reflects the PSEi members during the relevant period. This is referred to here as 1A data.

-Data from a different reporting coverage/period results in an apples-to-oranges comparison due to two factors: periodic updates to PSEi constituents and the exclusion of past data revisions. This is referred to as 1B data.

-Aggregates may be overstated, as they include not only holding companies but also their subsidiaries.

Q3 PSEi 30’s Financial Activities: Defining the Operating Conditions

Next, it is essential to define the operating conditions of the third quarter.

Figure 1

The Philippine Q3 2024 GDP unexpectedly slipped to 5.2%, its lowest level since Q2 2023’s 4.3%, despite systemic leverage hitting an all-time high.  (Figure 1, upper graph)

Public debt and bank credit expansion grew by 11.4%, marking its fastest pace since Q4 2022.

The Bangko Sentral ng Pilipinas (BSP) initiated its "easing cycle" with a 25-basis point rate cut in August, which helped fuel this growth.

Despite reaching the near all-time high employment rate, both headline and core inflation rates fell to 3.2% and 2.6%, respectively, the lowest since Q1 2022. (Figure 1, lower graph)

Figure 2

Marcos-nomics stimulus, channeled through its fiscal aspect, remained vibrant, with public spending growing by 6.4% in Q3, reaching its third-highest level. (Figure 2, upper image)

Once again, despite record leverage, money supply growth, measured by M3, stumbled to its lowest level since Q3 2022.

It was an active period for fiscal and liquidity operations by the banking system and the BSP. As a ratio to GDP, banks' net claims on the central government (NCoCG) reached the third-highest level on record, while the BSP's counterpart dipped to its lowest level since Q3 2022—but still near Q4 2022 record. (Figure 2, lower diagram)

In contrast to the establishment’s "restrictive" narrative, Q3 indicated loose financial conditions, which were further bolstered by the BSP’s rate cut and sustained increases in systemic leverage, supported by BSP and bank liquidity, as well as fiscal operations.

The notion that the BSP’s easing would provide support to the economy not only failed to materialize; consumption fell, as evidenced by the declining trend in the Consumer Price Index (CPI) and the money supply—ironically occurring despite strong liquidity injections.

II. 9-Month 2024 PSEi 30 Performance: Broad-based Slowdown, Sustained Dependence on Borrowing to Generate Growth

These macroeconomic conditions were reflected in the 9-month Key Performance Indicators (KPIs) of the PSEi 30 (1A):

Figure 3

One. The aggregate non-financial debt increased by Php 208 billion, marking the lowest increase since 2020. This figure excludes borrowings of the three largest banks (Figure 3, topmost table) 

Two. The cumulative net income growth of Php 47.17 billion was also the smallest since 2021. 

Three. Revenue expansion, totaling Php 395 billion, was the second lowest since 2021. 

Four. The PSEi 30’s cash reserves shrank by Php 5.27 billion for the second consecutive year, but at a more minimal scale compared to last year. 

These figures indicate that all segments exhibited a slowdown, with net income experiencing the most pronounced decline. 

There’s more. 

Because the non-financial debt-to-net income ratio in 2024 represented the second highest level since 2022, it indicates that corporations borrowed more to generate income (Php 4.4 debt for every peso of net income). (Figure 3, middle graph)

Additionally, they borrowed to address their liquidity shortfall.

However, this data understates the full picture, as it excludes the borrowings of the three largest banks. These banks reported an increase of Php 491 billion in bills payments alone!

III. Dissecting the PSEi 30’s Performance by Category: Debt, Income, Revenues and Cash

Nota Bene: While we rely on the accuracy of these reports, it is worth noting the potential for discrepancies. Past instances, such as PLDT’s 4-year "budget overrun," demonstrate that reporting errors often go overlooked or ignored by both the PSE and government agencies.

Such regulatory lapses could create conditions that encourage misreporting, exemplifying the moral hazard syndrome.

We suspect that some companies may be understating the extent of their leverage by reclassifying it under other liability categories

Debt: In nominal terms, non-financial debt rose by 3.9%, increasing from Php 5.31 trillion to Php 5.52 trillion. This resulted in a slower debt-to-NGDP ratio, which declined from 30.8% in 2023 to 29.25% in 2024 (1B). Again, this excludes bank debt. (Figure 3, lowest window)

Net Income: Published net income expanded by 7.2%, rising from Php 691.2 billion to a record Php 740.93 billion. However, this represented the lowest growth rate since 2021.

Revenues: Despite historic increases in systemic leverage, near full employment and the third-largest public spending on record, revenue grew by an unimpressive 9.4%, reaching a record Php 5.265 trillion.

This also translates to a PSEi 30 revenue-to-NGDP share of 27.9%—the second highest after 2022—indicating that these elite firms contribute more than a quarter of the estimated Nominal GDP. If we include all 284 listed firms, this figure would likely account for approximately two-fifths of NGDP.

This manifests the trickle-down structure of the Philippine political economy, where the prevailing approach prioritizes consolidating wealth and power among politically connected entities through centralization, rather than fostering genuine "inclusiveness" via grassroots entrepreneurship (such as SMEs) or a bottom-up framework.

Lastly, the government reported a headline GDP of 5.2% based on the NGDP of 8.5%. However, revenues of the PSEi 30 grew by only 6.8% suggesting a significant overstatement of the statistical economy. 

IV. Analysis by Sector: Financials and Holding Firms Dominate Growth

Figure 4

Although the holding firms sector posted the smallest percentage growth, it experienced the largest increase in debt, amounting to Php 104.21 billion, followed by the real estate sector with Php 38.62 billion. (Figure 4, upper table)

The financials and holding firm sectors recorded the highest net income growth, with increases of Php 20.327 billion and Php 13.35 billion, respectively, accounting for 43% and 28.3% of the total.

The sector with the highest revenue growth was the holding firm sector, which generated Php 196.653 billion, followed by financials with Php 86.44 billion, representing 49.8% and 22% of the total, respectively.

Meanwhile, the services sector led in cash growth, reporting an increase of Php 21.24 billion. Conversely, the industrial sector experienced the largest cash outflows.

In Q3, holding firms and financials reported the highest net incomes of Php 16.84 billion and Php 7.8 billion, respectively. (Figure 4, lower table)

These two sectors also delivered the strongest revenue growth, with increases of Php 43.36 billion and Php 25.26 billion.

In summary, during the nine-month period and in Q3, the financials and holding sectors dominated net income and revenue growth, while other sectors struggled to keep pace.

V. Analysis by PSEi 30 Member Firms (9-Month)

Figure 5

Broken down into individual categorical activities:

The top firms contributing to non-financial debt increases were San Miguel Corporation (SMC) and Ayala Corporation with increases of Php 63.9 billion and Php 57.6 billion, respectively.

Out of the 27 firms analyzed, 15 posted debt expansion during the period, with SMC accounting for 30% of the total debt growth in pesos.

In the net income growth segment of the PSEi 30, International Container Terminal Services, Inc. (ICT) and the Bank of the Philippine Islands (BPI) were the top performers with Php 9.85 billion and Php 9.441 billion, correspondingly.

On the other hand, DMCI Holdings (DMC) posted the largest decline among the eight firms that reported a decrease in net income growth.

SMC and BPI also led the revenue growth segment. Conversely, DMC reported the largest revenue decrease among the seven firms that experienced revenue declines during the period. Notably, SMC accounted for 30% of total revenue growth in peso terms.

Finally, ICT emerged as the leader in cash reserves growth, while Aboitiz Equity Ventures (AEV) headed the minority of ten issues that saw reductions in cash flows.

Once again, even among the elite firms, only a select few tend to dominate in terms of performance.

Notably, financial giants such as BPI and BDO emerged as some of the most prominent gainers, while non-consumer sectors, including ICT and SMC, led in the net income and revenue segments, respectively.

Interestingly, the underwhelming performance of consumer-focused firms like SM Investments and Ayala Corporation—arguably the most exposed to the local consumer market—highlights the underlying fragility of the sector

VI. Conclusion: Underwhelming Performance as Symptoms of Crowding-Out Syndrome, Financial Repression, and Statist Policies

The Bottom Line: Despite the "Marcos-nomics stimulus," near-record employment levels, and loose financial conditions, the conspicuous signs of weakness among the PSEi 30 member firms not only align with the GDP slowdown observed in Q3 but may also indicate much slower overall growth.

Moreover, this underbelly has exposed the firms’ increasing vulnerability to extensive leveraging.

What is particularly notable is that many of these PSEi 30 firms are linked to political projects that should have enhanced their performance.

Instead, their underwhelming performance could be indicative of the detrimental effects of the crowding-out syndrome—a phenomenon that gradually erodes economic productivity over time—compounded by financial repression and other forms of government interventions (such as the subtle shift to a war economy, increasing centralization and more).

 

Q3 2024 5.2% GDP: Consumers Struggle Amid Financial Loosening, PSEi 30 Deviates from the GDP’s Trajectory

 

it is important to recognize that real GDP is an analytic concept. Despite the name, real GDP is not “real” in the sense that it can, even in principle, be observed or collected directly, in the same sense that current-dollar GDP cannot in principle be observed or collected as the sum of actual spending on final goods and services in the economy. Quantities of apples and oranges can in principle be collected, but they cannot be added to obtain the total quantity of ‘fruit’ output in the economy—Steven Landefeld and Robert P. Parker, Bureau of Economic Analysis, 1995

In this issue 

Q3 2024 5.2% GDP: Consumers Struggle Amid Financial Loosening, PSEi 30 Deviates from the GDP’s Trajectory

I. The PSEi 30 Deviated from GDP’s Trajectory

II. The Treasury Markets as a Harbinger of the Economic Slowdown

III. Lessons from the 2024 US Elections: Markets Overwhelm Surveys

IV. GDP: A Tool for Political Narrative

V. The GDP Trend Line in Context: Insights from SWS Self-Poverty and Hunger Surveys

VI. Q3’s GDP Story: Consumer Spending Rebounds on Declining Inflation and Lower Rates

VII. Consumers Struggle Amid Rising Employment and Vigorous Bank Credit Expansion

VIII. Lethargic Q3 2024 Sales of Wilcon and Robinsons Retail Challenge the Consumer Rebound Narrative

IX. Public Spending Segment of the Marcos-nomics Stimulus: Are Authorities Pulling Back?

Q3 2024 5.2% GDP: Consumers Struggle Amid Financial Loosening, PSEi 30 Deviates from the GDP’s Trajectory

Despite declining inflation rates and lower interest rates, Philippine consumers face tremendous obstacles, as shown by the 5.2% Q3 GDP growth. The PSEi 30 has mispriced the GDP's trajectory 

Reuters, November 7, 2024: The Philippine economy grew in the third quarter at its slowest annual pace in more than a year as severe weather disrupted government spending and dampened farm output, to strengthen the case for further policy easing. Gross Domestic Product (GDP) grew 5.2% in the July-September on the year, government data showed on Thursday, below a Reuters poll forecast of 5.7%, for the most tepid rise since expansion of 4.3% in the second quarter of 2023.

I. The PSEi 30 Deviated from GDP’s Trajectory 

Stock markets are often considered discounting mechanisms for future economic activity. But are they? 

The PSEi 30’s impressive 13.4% return in Q3 2024—the best since 2010—was largely based on expectations that low interest rates would stimulate economic activity. 

However, despite the BSP’s rate cut in August 2024 and the tacit Marcos-nomics stimulus, Q3 GDP fell to its lowest level since the 4.3% recorded in Q2 2023.

Figure 1

Viewed in the context of the 15% year-over-year returns at the end of last Q3, the PSEi 30 has moved in the opposite direction to the GDP. (Figure 1, topmost graph) 

Faced with this inconvenient reality, the PSEi plunged 2.32% this week, marking its third consecutive weekly decline and dipping below the 7,000 level—a 7.6% drop from the October 7th peak of 7,554.7. 

Interestingly, a local media outlet, still grappling with "Trump Derangement Syndrome," attributed this decline to Trump's electoral victory, suggesting that local stocks "price in the risks of a second Donald Trump presidency and an economic slowdown."  

If the "Trump trade" holds any truth, not only did US stocks soar to new records, but Asian equities also saw significant boosts this week. Among the region's 19 national benchmarks, 14 recorded positive returns with an average gain of 1.33%!

The exceptions were Indonesia, the Philippines, Vietnam, India, and Sri Lanka. How does this fit into the narrative of the "Trump trade"?

Moreover, it's not just the PSEi 30 that should raise our concerns. Given that the financial sector has been a market leader, the financial index also warrants close attention.

The financial index posted a remarkable 23.4% year-on-year return at the end of Q3 2024, despite a notable deceleration in the sector's GDP since its peak in Q4 2023. The sector recorded an 8.8% real GDP growth in Q3, up from 8% in Q2, but lower than the 12% and 10.3% growth in Q4 2023 and Q1 2024, respectively. Bank-led financials have been a critical source of gains, as evidenced by their increasing share of the sector's GDP, despite the 2022-2023 rate hikes. (Figure 1, middle and lowest images)

Led by banks, the financial sector is the most interconnected with the local economy.  Its health is contingent or dependent upon the activities of its non-financial counterparties.

Alternatively, the sector’s outgrowth relies on political subsidies and is subject to diminishing returns.

Yet ultimately, this should reflect on its core operational fundamentals of lending and investing.

This week, the financial index fell by 2.9%.  As previously mentioned, trading activities in the PSE have been heavily skewed toward this sector.

In essence, the divergence between the PSEi 30 and GDP illustrates the significant market dislocations caused by the allure and regime of easy money—a quest for something for nothing.

II. The Treasury Markets as a Harbinger of the Economic Slowdown

Figure 2

As we have repeatedly pointed out, the Philippine Treasury markets have long been signaling an economic slowdown. The steep slope observed in Q1 has shifted to a bearish flattening and, subsequently, an inversion of the "belly," suggesting a further deceleration in inflation and a downshift in economic activity. (Figure 2, topmost diagram) 

Experts have rarely discussed how the declining inflation reflects a downturn in demand. However, this scenario was evident across the entire Treasury curve in 2024, which explains the sharp plunge in T-bill rates and increased expectations that the BSP would cut rates. The BSP responded by implementing cuts in both August and October. 

III. Lessons from the 2024 US Elections: Markets Overwhelm Surveys

The 2024 U.S. elections provided a striking illustration of the comparative efficiency between markets and surveys. 

As pointed out above, markets are imperfect, but most of their vulnerabilities stem from underlying interventions that enhance them. However, when people place bets to prove their beliefs or convictions, they demonstrate "skin in the game""—a vested interest in success through real-world actions or "having a shared risk when taking a major decision."

In contrast, individuals can express opinions they do not genuinely believe. Numerous factors—such as assumptions, coverage, inputs, delivery, and measurement—contribute to errors in surveys. Worse still, surveys can be designed to achieve specific outcomes rather than accurately estimate reality.

Using the last week’s elections, the average betting odds from several prediction markets, led by the largest platform, Polymarket, indicated that Trump would win by a landslide going into the election. (Figure 2, lowest chart)

This was contrary to the average polls, which showed a razor-thin edge for Democratic candidate Kamala Harris.  Interestingly, similar to the 2016 elections, these polling discrepancies were exposed only after Trump’s victory. (Figure 2, middle table)

By sweeping all the battleground or swing states, Trump secured an electoral landslide winning 301 to 226 (according to The New York Times) and also became the first Republican to win the popular vote since George W. Bush in 2004.

This experience reaffirmed that markets have proven to be more reliable than surveys. And this reliability extends beyond elections to broader economic metrics, exposing vulnerabilities even in government data (such as inflation, labor statistics, and GDP).

Although designed to be objective and systematic—where hard and verifiable transactional records form part of the government’s comprehensive data—a significant portion still relies on self-reported or opinion-based data.

These components introduce the potential for bias and inaccuracies.

More importantly, as a political institution, government data is not only susceptible to errors but can also be engineered to advance the agenda of the incumbent government.

One way to countercheck the reliability of these data points is through the logic of entwined data—the idea that when multiple, independent data sets or sources are connected, discrepancies or patterns can be identified. By cross-referencing market data, surveys, and government statistics, we can better assess the accuracy of any single dataset. The entwinement of data from diverse sources can serve as a powerful validation tool, especially when inconsistencies or contradictions emerge. 

Thus, comprehensiveness, large scale, and systematic nature of government data collection do not make it foolproof from errors caused by either interventions or design. 

IV. GDP: A Tool for Political Narrative 

The establishment has promoted GDP as an estimation of economic well-being, but that’s only a segment of the entire spectrum.  

Unknown to the public, GDP is primarily a political tool.

In the 1660s, William Petty conceived GDP as a means to estimate war financing during the Second Anglo-Dutch War.

Under the influence of John Maynard Keynes, it was further used to promote wartime planning during World War II, which eventually evolved into—or became the foundation of—modern macroeconomic policy (Coyle, 2014).

Simon Kuznets, a pivotal figure in the development of modern GDP, famously cautioned that "economic welfare cannot be adequately measured unless the personal distribution of income is known… The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above." (bold added) [Wikipedia, GDP]

This statement underscores the limitations of GDP as a comprehensive measure of economic well-being.

In 1962, Kuznets further emphasized the need for clarity in economic growth metrics, stating: "Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what."

This highlights his belief that economic indicators should reflect not just output but also the broader implications of growth on society.

Applied to the current developments…

The Philippine Statistics Authority (PSA), citing the United Nations Department of Economic and Social Affairs as the source for their adaptation of the System of National Accounts (SNA), noted that "GDP is used to evaluate the overall performance of the economy and, hence, to judge the relative success or failure of economic policies pursued by governments." (bold added) [unstats, 2009]

The embedded assumption is that a factory GDP—or a top-down model—drives the economy.

But if that’s the case, then some questions arise: 

-Why doesn’t the Soviet Union still exist? 

-Why do black markets or informal economies emerge or thrive in heavily regulated economies? 

-Does the government dictate to Jollibee or SM who they should sell to? 

Yet, aside from gaining popular approval for election purposes, the contemporaneous implicit goal of GDP growth could be related to ease of accessing public savings to fund government expenditures.

V. The GDP Trend Line in Context: Insights from SWS Self-Poverty and Hunger Surveys

Still, there are many ways to "skin"—or analyze—the GDP "cat."

Although GDP is presented as a year-over-year (YoY) change predicated on a base effect, a very significant but largely ignored fact is its trendline. 

Figure 3

Fundamentally, despite all the media and establishment cheerleading—particularly with the emphasis on achieving an upper-middle-income economy—both nominal and real GDP have been performing below their pre-pandemic trendlines. (Figure 3, topmost diagram)

Worse, the Q3 GDP growth of 5.2% is sitting precariously on the support level of a subsidiary trendline, suggesting it may be testing this support. What happens if it breaks?

Additionally, what about the recent SWS Q3 2024 surveys exhibiting self-poverty ratings at 2008 highs, and hunger incidence reaching its second highest level since September 2020, during the pandemic recession? (see our previous discussion here)

Has the SWS survey been validated?

As a side note, the left-leaning OCTA Research group's Q3 survey results were starkly different from those of the SWS.

Have the authorities made a partial concession to the SWS findings by revising down the GDP growth estimates?

As a reminder, polls or surveys—whether conducted by the private sector or the government—are opinion-based or self-reported data and are inherently prone to errors. 

VI. Q3’s GDP Story: Consumer Spending Rebounds on Declining Inflation and Lower Rates 

GDP is not just about the numbers; it has been crafted to tell a story. 

Essentially, it follows the mainstream’s logic: slowing inflation and lower interest rates would boost consumption and, consequently, GDP. 

Well, that is how the Q3 5.2% GDP played out.  

From the expenditure side of GDP, real household consumption increased from 4.7% in Q2 to 5.1% in Q3, thereby boosting its share from 67.7% to 72.8%. (Figure 3, middle image) 

In contrast, government spending on GDP dropped significantly, from 11.9% in Q2 to 5% in Q3, reducing its share from 17% to 14.7% during the same period. 

Meanwhile, due a slump in government activities, construction GDP growth nearly halved from 16.2% to 8.9%, diminishing its share from 19.4% to 14.1%. Government construction GDP tumbled from 21.7% to 3.7%. 

Thanks to increases in machinery, transport, and miscellaneous equipment, durable equipment GDP surged from a contraction of 4.5% in Q2 to growth of 8.1% in Q3. (Figure 3, lowest visual) 

Nevertheless, exports plummeted from 4.2% in Q2 to a shrinkage of 1% in Q3, while imports increased from 5.3% to 6.4%. The widened gap in favor of imports—net exports—contributed to the slowdown of GDP. 

This summarizes the expenditure-based GDP analysis.

VII. Consumers Struggle Amid Rising Employment and Vigorous Bank Credit Expansion

Circling back to consumers: considering that the Philippine economy has allegedly reached near-record employment levels (close to full employment), why does consumer per capita growth continue to struggle?

Figure 4 

The employment rate hit 96.3% in September, yet Q3 household per capita growth increased only slightly, from 3.8% to 4.2%—the third lowest growth rate since Q2 2021. (Figure 4, topmost window)

Additionally, what explains the consumers' ongoing challenges in light of Universal-commercial bank lending, which reached a record high in nominal terms and grew by 11.33% in Q3—the highest rate since Q4 2022? This growth was notably powered by household credit, which also surged by 23.44%, although it was down from its peak of 25.4% in Q1 2024. (Figure 4, middle graph)

On a related note, even though the money supply (M3) hit a record of Php 17.58 trillion in Q3, its growth rate of 5.4% was the lowest since Q3 2022.

Despite the crescendoing systemic leverage (public debt plus bank credit expansion), which grew by 11.4%—the highest since Q4 2024—to a record Php 27.97 trillion, why has the money supply been trending downward?

Moreover, as evidence of the redistribution effects of Bangko Sentral ng Pilipinas (BSP) policies favoring banks amidst the thrust towards financialization, various money supply metrics (M1, M2, and M3) relative to GDP remain at pre-pandemic levels in Q3 2024, despite having clawed back some gains from the 2021 milestone. (Figure 4, lowest chart)

Despite all this, the persistent challenges of consumers continue.

Yet, this raises a crucial point: the GDP appears increasingly dependent on money supply growth and credit expansion.

VIII. Lethargic Q3 2024 Sales of Wilcon and Robinsons Retail Challenge the Consumer Rebound Narrative

There’s more.

Figure 5

In the face of a slow recovery in consumption, retail GDP dropped from 5.8% in Q2 to 5.2% in Q3 2024. (Figure 5, topmost image)

Oddly, bank lending to the sector has been soaring; it was up 12% in September from 9.3% last June.

Where is the money being borrowed by the sector being spent?

Meanwhile, Household GDP figures might be inflated.

Two major retail chains operating in different sectors have reported stagnation in topline performance.

Despite expanding its stores by 12% year-over-year (YoY), the largest downstream real estate consumer chain, Wilcon Depot [PSE: WLCON], experienced a 3.35% YoY contraction in sales and a 4.35% decline quarter-over-quarter (QoQ). (Figure 5, middle graph)

The company's worsening sales conditions have partially reflected the plunge in the sector’s Consumer Price Index (CPI).

Similarly, Robinsons Retail [PSE: RRHI], one of the largest multi-format retailers, reported another lethargic topline performance. (Figure 5, lowest chart)

In Q3, the firm’s sales increased by 3.13%, primarily driven by its food segment (supermarkets and convenience stores), which grew by 4.8%, along with drug stores, which increased by 9%. 

However, three of its other five segments—including department stores, DIY, and specialty—suffered sales contractions. 

Taking into account that the sales from these two retail chains constitute a portion of nominal GDP, applying the GDP deflator would indicate a deeper decline in WLCON's sales and flat sales growth for RRHI. 

Despite the slowdown in inflation and the rapid growth in consumer bank borrowings, consumer spending has gravitated toward essentials (food and drugs) while reducing purchases of non-essentials. 

This observation lends credence to the recent Social Weather Stations (SWS) self-poverty ratings. 

So far, despite loose financial conditions, the performance of these two retail chains contradicts the notion embedded in GDP that consumers have partly opened their wallets in Q3. 

For a clearer picture of consumer health, we await the financial reports of the largest retail chain, SM, and other major goods and food retail chains. 

Imagine the potential impact of real tightening conditions on consumer spending and GDP! 

IX. Public Spending Segment of the Marcos-nomics Stimulus: Are Authorities Pulling Back? 

Recent GDP data suggests a slowdown in public spending, but a closer look reveals a different narrative. 

While overall public spending growth has declined, sectors heavily influenced by the government are seeing gains. 

Specifically, public administration and defense GDP rose from 1.8% in Q2 to 3.7% in Q3. Similarly, sectors with significant government involvement, such as education and health, reported growths from 1.9% to 2.6% and 9.4% to 11.9%, respectively. 

Despite the appearance of a slowdown, the bureaucracy and government-exposed sectors continued to show growth. 

That’s not all.

Figure 6

According to the Bureau of Treasury’s cash operations report, the Q3 expenditure-to-GDP ratio remains at a pandemic-level rate of 24%. 

Additionally, although tax revenues improved, the Q3 deficit-to-GDP increased from 5.3% to 5.7%, again reflecting pandemic-level deficits. 

It’s essential to note that the treasury data and the Philippine Statistics Authority (PSA) GDP figures—which include their calculation of public spending—represent an apples-to-oranges comparison. 

However, we can still glean insights from a historical perspective of the Treasury’s activities. 

So, why do current data sets indicate sustained increases despite the perceived temperance in government spending? 

While authorities may embellish their deficit data, the consequences are likely to manifest elsewhere. 

Aside from the counterparties that provide financing via debt, it will manifest in the trade balance and eventually impact the private economy—via consumers: the crowding-out effect. 

Q3 Public debt stands at 61.3% of the sum of the last 4 quarters (Q4 2023 to Q3 2024) 

Thus, it’s not surprising that Q3’s fiscal deficit coincided with a notable spike in the trade deficit, which ranks as the fourth highest on record. 

The existence of "twin deficits" points to excessive spending and reveals a historic savings-investment gap that necessitates record borrowing through debt issuance and central bank interventions. 

Adding to this context, the massive RRR cut and BSP’s second round cut of 25 basis points all took effect this October or in the fourth quarter.

We can also expect the government to aim to accomplish its end-of-year spending targets in December, adding to this period’s fiscal activity.

This implies that the full impact of the 2024 "Marcos-nomics" stimulus implemented in Q4 could result in a short-term GDP boost but at a substantial cost to the private sector economy. 

___

references

Steven Landefeld and Robert P. Parker, Preview of the Comprehensive Revision of the National Income and Product Accounts: BEA’s New Featured Measures of Output and Prices, Bureau of Economic Analysis, 1995

Diana Coyle, Warfare and the Invention of GDP, the Globalist, April 6, 2014 

Wikipedia, Gross Domestic Product, Limitations at introduction 

United Nations Department of Economic and Social Affairs, System of National Accounts 2008, 2009, p. 4-5 https://unstats.un.org/

 

 

 

 

 

 

 

 

 

 

September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso

 

A failure to correct unsustainable fiscal trajectories poses major risks to growth, inflation and financial stability—Agustín Carstens, General Manager, Bank for International Settlements 

In this issue

September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso

I. September Deficit Highlights Three of the Five Phases of Marcos-nomics Stimulus

II. Untold Aspects of Fiscal Health: How the Shift in Monthly Revenue Reports Impact Quarterly Performance

III. Revealing Hidden Dynamics: How Quarterly Expenditures Shape Fiscal Outcomes

IV. September Debt-Servicing Costs Hits an All-Time High Relative to Historical Annualized Data!

V. How Deficit Spending Drives a WEAKER Philippine Peso; the USD-PHP V-Shape Recovery!

VI. All Time High in Interest Payment as Share of Expenditures Soar to 2009 High!

VII. Pre-Election Spending? All Time High in 9-Month Government Disbursements, Second Highest LGU spending

VIII. The Inflation Tax: BSP and Banking System’s QE

IX. Conclusion: Big Government Comes at The Expense of a Healthy Market Economy

September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso

There seems to be little recognition that September's deficit was a milestone of a kind; it actually highlights "Marcos-nomics" in action. With a quarter to go, debt servicing costs hit an all-time high as the USD-Peso mounts a ferocious recovery.

I. September Deficit Highlights Three of the Five Phases of Marcos-nomics Stimulus

Everyone has been conditioned to believe that current economic conditions are "normal."

To reinforce this notion, media narratives often highlight selective aspects of growth while ignoring other salient parts and related data.

That’s right: when the public’s dependence on "political interventions"—referred to as ‘stimulus’—becomes entrenched, this deepening addiction becomes the norm.

As the great Nobel Laureate Milton Friedman presciently stated, "Nothing is so permanent as a temporary government program."

But have you heard any expert mention this? You might read piecemeal allusions; for example, the BSP's rate-cutting cycle is expected to boost household spending and business activity.

Nonetheless, the public hardly understands the interconnectedness of what are sold as disparate policies.

As previously discussed, we identify the five phases of the "Marcos-nomics stimulus," subtly operating under the Pandemic Bailout Template (PBT).

The first phase involves record-setting public spending, contributing to a significant deficit.

The second phase highlights the BSP’s monetary policy, characterized by the latest round of interest rate cuts.

The third phase signifies the BSP and bank injections, partially fulfilled by the recent reduction in the banking system’s Reserve Requirement Ratio.

The fourth and fifth phases encompass various subsidies, such as the current credit card interest rate ceiling, along with pandemic relief measures.

The National Government and the BSP have yet to expand their coverage in this area, but it is expected to happen soon.

This step-by-step approach underlines the structure of the stimulus, which subtly mirrors the Pandemic Bailout Template.

September’s deficit highlights its first phase.

II. Untold Aspects of Fiscal Health: How the Shift in Monthly Revenue Reports Impact Quarterly Performance

Inquirer.net, October 25, 2024: The country’s budget deficit widened by 8.9 percent to P273.3 billion in September from P250.9 billion in the same month last year, as the increase in revenues was not enough to cover the hike in expenses, the Bureau of the Treasury reported on Thursday. Revenue collections increased by 17.32 percent to P299.7 billion last month, from P255.4 billion last year, while state expenditures also grew by 13.15 percent to P572.9 billion. But for the first nine months, the budget deficit narrowed by 1.35 percent to P970.2 billion from the P983.5-billion budget gap a year ago.

While the Bureau of the Treasury (BuTr) issues a monthly report, recent changes in tax revenue reporting and end-of-quarter budget compliance targets make quarterly reports far more significant.

In fact, monthly reports can be considered largely meaningless without considering the quarterly performance.

For instance, the latest BuTr report sheds light on the reasons behind recent revenue surges.

The increase in VAT collections in 2024 is partly due to the impact of the change in payment schedule introduced by the TRAIN law provision which allows the tax filers to shift from monthly to quarterly filing of VAT return [bold mine] (Bureau of Treasury, October 2024) 

Distortions brought about by changes in the BuTr’s reporting methods pose a crucial factor in analyzing the fiscal health of the Philippines. 

This brings us to September’s performance. 

Indeed, public revenue in September grew by 17.3%, but this increase is primarily due to base effects. 

Additionally, administrative policy changes and one-off charges contributed to the month’s revenue growth.         

This is attributed to higher personal income tax (PIT) particularly on withholding on wages due to the release of salary differentials of civilian government personnel pursuant to Executive Order No. 64, series of 20242 , which updated from the Salary Standardization Law (SSL) of 2019… 

Non-tax revenues surged to P46.2 billion in September, more than twice the level attained a year ago primarily due to the one-off windfall from the Public-Private Partnership (PPP) concession agreement…the higher outturn for the period was attributed to the P30.0 billion remittance from the Manila International Airport Authority (MIAA), representing the upfront payment for the MIAA-Ninoy Aquino International Airport (NAIA) PPP Project [bold added] (Bureau of Treasury, October 2024) 

Importantly, aside from the factors mentioned above, as noted by the BuTr, the shift in VAT payment timing played a crucial role in boosting 2024 revenues.

Figure 1

That is to say, since VAT payments are made at the end of each quarter but recorded in the first month of the following quarter, this quarterly revenue cycle inflates reported revenues for January, April, July and October, often resulting in a narrowed deficit or even a surplus for these months. (Figure 1, topmost chart) 

Therefore, we should anticipate either a surplus or a narrower deficit this October.

In any case, Q3 2024 revenues increased by 16.95%—the highest growth rate since Q3 2022, which was a record in nominal terms for Q3 historically. However, this was also the second-highest quarterly revenue in pesos after Q2 2024. (Figure 1, middle image)

What might collections look like if we consider only “core” operations? Would deficits be larger without these reporting distortions? Or could the government be “padding” its revenue reports? 

III. Revealing Hidden Dynamics: How Quarterly Expenditures Shape Fiscal Outcomes 

The mainstream media and their expert cohorts rarely mention the most critical segment: historic public (deficit) spending. 

Although public spending rose by only 13.2% in September due to a high base effect, it marked the largest non-December outlay on record. It was also the third-largest overall, trailing only the year-end budget expenditures of December 2023 and December 2022. (Figure 1, lowest graph) 

Notably, 2024 has already seen three months of spending exceeding Php 500 billion—even before the year-end budget allocations. This pattern isn’t an anomaly but rather a path-dependent trajectory of political decisions. 

Figure 2

In the context of quarterly performance, Q3 spending grew by 6.4% year-over-year, also constrained by high base effects. Still, this represents the third-highest quarterly outlay on record, following Q2 2024 and Q4 2023, and a milestone high when compared with previous Q3 performances. (Figure 2, topmost diagram)

Similarly, the monthly deficit resulting from September’s historic expenditure constituted the second largest non-December monthly deficit, following the pandemic recession in April 2020, which saw a deficit of Php 273.9 billion. This was the sixth largest deficit when including the year-end closing budget.

Furthermore, the pressure to meet quarterly compliance targets push the burden of expenditures to the closing month of each period; thus, the largest deficits occur at the end of each quarter (March, June, September, and December). (Figure 2, middle pane) 

Simply put, this new schedule has introduced significant distortions in the Bureau of Treasury’s (BuTr) fiscal balance reporting. 

Revenues at the start of each quarter are likely to close the gap with expenditures in October, potentially leading to a surplus or a narrowed deficit. In contrast, end-of-month spending for each quarter should boost expenditures and consequently increase deficits. 

However, for now, the alteration in BuTr reporting has artificially inflated the government’s fiscal health. 

Still, it goes without saying that the year-end expenditure target will likely push December 2024’s fiscal deficit to a fresh milestone! 

From a quarterly perspective, revenues remain above their polynomial trendline, while spending hovers slightly below it, reflecting revenue outperformance in comparison to trend-aligned spending. (Figure 2, lower graph) 

Meanwhile, the widening gap between the deficit and its trendline may signal increased volatility ahead. 

IV. September Debt-Servicing Costs Hits an All-Time High Relative to Historical Annualized Data!

Despite the potential embellishment of budget statistics through inflated revenues or understated deficits, it remains essential to recognize that this spending requires funding. 

Some mainstream experts have attributed the recent decline in Bureau of Treasury (BuTr) financing to prudent “rationalization” by budget overseers. 

However, we have consistently argued that this perspective is grotesquely misguided; it is the government’s default action to indulge in a spending binge. 

This behavior serves not only to advance its political agenda of centralizing the economy and promoting its interests in the upcoming elections but also because such fiscal transfers create a temporary illusion of economic boom. 

For a spending-based GDP, ramping up expenditures is necessary to increase tax revenue and, more importantly, to depress interest rates, which allows the government to access public savings cheaply to fund its expenditures. 

True, revenue expansion in August reduced that month’s deficit, which led to an improvement in the 9-month deficit, dropping from last year’s level. However, we suspect this improvement may be short-lived, as December 2024’s massive spending is likely to push the deficit above last year’s figures. 

Still, it is noteworthy that the 9-month deficit for 2024 remains the fourth largest since the pandemic bailout template (PBT) measures began in 2020. 

Any improvement in the deficit has been inconsequential, as the post-PBT deficits have remained in an “emergency” mode. 

It only takes a substantial downturn in GDP for this deficit to set a new high—which is likely what its polynomial trendline suggests.

Figure 3

Despite improvements in the 9-month deficit, financing reversed its downward trend, rising 12.6% year-over-year to Php 1.875 trillion. (Figure 3, topmost chart)

This trend reversal means not only an increase in the public debt stock—recently improved due to the peso’s substantial gains against the USD—but also higher costs of servicing public debt.

The BuTr will report on September’s public debt figures next week, but with the substantial V-shaped recovery of the USD, October is expected to yield interesting data.

Nevertheless, the 9-month cost of servicing public debt has reached an ALL-TIME HIGH relative to annual historical data, with a full quarter left to go! (Figure 3, middle graph)

Interestingly, amortizations have exceeded the annual 2023 data by 8.7%, while interest payments remain just 7.2% below this benchmark.

Signs of normal times?

V. How Deficit Spending Drives a WEAKER Philippine Peso; the USD-PHP V-Shape Recovery!

Although the 9-month growth rate for debt servicing slowed to 17.4% due to base effects, it set a record in peso terms.

More importantly, the share of external financing has been increasing, which not only indicates rising credit levels in the local currency but also amplifies external borrowing, effectively exacerbating "USD shorts" (implied short positions on the USD). (Figure 3, lowest window)

Borrowings ultimately need repayment. However, if organic USD revenue sources prove insufficient to meet debt obligations and refinance existing loans, the government will need to take on more debt to cover existing obligations—essentially, a recycling of debt, or what is known as Ponzi finance.

Figure 4 

Compounding these challenges, debt-financed government spending, a preference for easy-money conditions, and domestic banks’ bias toward consumer lending all contribute to a widening savings-investment gap, fueling the country’s "twin deficits." This combination of factors will likely increase reliance on external financing, leading to a structural depreciation of the peso. 

The crux of the matter is this: the widening fiscal deficit results in a weaker Philippine peso, raising external credit risks. (Figure 4, upper image) 

Oddly enough, some media outlets and pseudo-experts have recently attributed the recent V-shape recovery of the USDPHP exchange rate to a “Trump presidency!” 

Huh? Are they suggesting that a Harris administration would result in a strong peso? 

As I recently posted on x.com: During the Trump 1.0 presidency 1/20/17 (49.92) -1/20/21 (48.054), the USDPHP fell by 3.74%! How about Biden? So far, at 58.32, the USDPHP is up 21.4% (as of October 25, 2024)! 

Certainly, the recent strength of the dollar has played a role, contributing to a broad-based rebound of Asian currencies this week. While the USD Index (DXY) rose by 0.8%, the Philippine peso fell by 1.39%. 

In the context of the USD-Philippine USDPHP reclaiming its old trendline, this represents a "signal," while the peso’s recent bounce signifies "noise" or an anomaly. (Figure 4, lower chart) 

On the other hand, the DXY remains below its immediate broken trendline. 

So, is the USDPHP market suggesting a retest of 59 soon? 

This partially illustrates the "exorbitant privilege" of the US dollar standard, where global central banks rely on building up their USD reserves, to "back" or "anchor" their domestic monetary or currency operations that fund their economies and imports. 

In any case, over the long term, the relative performance of a currency against regional peers vis-à-vis the USD might signal developing vulnerabilities within that currency.

This inability to recognize causality represents the heuristic of attribution bias— giving credit to endogenous activities while attributing deficiencies to exogenous forces.

VI. All Time High in Interest Payment as Share of Expenditures Soar to 2009 High!

Circling back to debt servicing, it's important to note that amortizations are not included in the published budget. As the government defines it, this represents "a financing transaction rather than an expenditure" (Ombudsman, 2012). 

Consequently, this aspect has barely been addressed by the headlines or the experts.

Figure 5

Despite attempts to downplay discussions around interest payments, the nine-month interest payments have surged to an all-time high, with their share of disbursements climbing to 13.7%—the highest level since 2009! (Figure 5, topmost diagram)

The growing debt burden from deficit spending, amid elevated rates, translates into an even larger cost of servicing, impacting both the budget’s allocated expenditures and its mandatory cash flows.

How’s that for "prudential" debt management or "rationalizing" the budget?

VII. Pre-Election Spending? All Time High in 9-Month Government Disbursements, Second Highest LGU spending

Aside from interest payments, what might be the other major spending items? 

The nine-month central government’s disbursement growth surged by 11.64% to an all-time high of Php 2.78 trillion, which, according to the Bureau of the Treasury (BuTr), signifies "the implementation of capital outlay projects by the Department of Public Works and Highways and larger personnel services expenditures due to the implementation of the first tranche of salary adjustments." (Figure 5, middle window)

It is worth noting that, aside from aiming for GDP targets, this spending appears to be tactically timed for pre-election purposes.

Meanwhile, local government spending growth rebounded sharply from a 16.6% contraction in 2023 to 8.8% this year, reaching the second highest level in 2024. (Figure 5, lowest image)

A crucial segment of this substantial recovery may involve direct and indirect financing of local pre-election campaign activities.

The nine-month share of national disbursement was 65.24%, slightly higher than 2023’s 65.2%, while the share of local government unit (LGU) spending declined from 18.2% in 2023 to 17.72% in 2024.

In any event, given the embedded accelerated trajectory in deficit spending for socio-political (pre-elections, war economy, infrastructure-led GDP) and financing goals in the face of volatile economically sensitive revenues or collections, what could go wrong?

VIII. The Inflation Tax: BSP and Banking System’s QE

Direct taxation and debt have not only served as the primary sources of financing for the increasing scale of spending and deficits; the inflation tax has also taken on a more significant role in funding deficit spending.

It's important to remember that the Bangko Sentral ng Pilipinas (BSP) operates under an "inflation targeting" regime.

The unstated objective is not to "eliminate" inflation—since that is never the goal—but rather to contain the inflation "genie" within manageable limits.

The BSP aims to utilize the inflation tax alongside direct taxes and borrowing, while carefully controlling it to prevent social discord.

Consequently, attributing the current inflationary episode solely to supply-side factors has proven to be a convenient way to deflect blame from the BSP to the broader market economy, often framing it as “greedflation.”

Given this context, it’s hardly surprising that none of the establishment experts anticipated the surge in inflation, despite our repeated warnings about the inflation cycle.

Figure 6

When authorities began ramping up spending even before the pandemic in 2019, the BSP’s net claims on the central government (NCoCG)—essentially a local version of quantitative easing—started to escalate and has remained on an upward trajectory ever since. (Figure 6, topmost chart)

Even as mainstream narratives tout the aspiration of achieving "upper middle-income status," little has changed in the BSP’s NCoCG since their historic Php 2.3 trillion bailout of the banking system during 2020-2021.

The same holds true for the Philippine banking system’s NCoCG, which continues to be a vital source of financing for public debt. (Figure 6, middle window)

As of last August, the banking system’s holdings of government securities were just shy of the all-time high reached in July.

Although bank holdings of held-to-maturity (HTM) assets dipped in August, they remained tantalizingly close to the record high set in December 2023. Philippine NCoCG are entwined with HTMs. (Figure 6, lowest chart)

When have these been signs of "normal?"

IX. Conclusion: Big Government Comes at The Expense of a Healthy Market Economy

Figure 7

We shouldn’t overlook the fact that the accelerating surge in the nominal value of public debt has diverged from the rising trajectory of public spending, suggesting a potential understatement of the fiscal deficit. (Figure 7, topmost graph)

The establishment often emphasizes the importance of public spending, claiming it has a ‘multiplier effect.’ However, from the perspective of the banking system, the reality appears to be the opposite: instead of stimulating growth, increased public spending has led to a diminishment of savings, as evidenced by the declining growth of peso deposits. (Figure 7, middle chart)

The impact of diminishing savings is also evident in the capital markets, with trading volumes on the Philippine Stock Exchange (PSE) declining further due to the surge in pandemic-era deficits. Yes, PSEi 30 have risen on the backdrop of declining volumes. Amazing! (Figure 7, lowest diagram)

In short, the greater the centralization of the economy— through: (1) intensifying public spending, (2) increasing political control over the economy—such as Public-Private Partnerships (PPPs), which can be viewed as a neo-fascist or crony capitalist model, (3) the expansion of the bureaucratic state due to welfare and warfare sectors, and (4) the increasing reliance on the inflation tax, the lower the productivity.

Simply put, a big government comes at the expense of a healthy market economy.

Given these circumstances, could this scenario catalyze a third wave of inflation?

When has the Philippine economy truly returned to a pre-pandemic "normal?"

___

References:

Bureau of Treasury September 2024 Budget Deficit at P273.3 Billion Nine-Month Deficit Narrowed to P970.2 Billion, October 24, 2024 Treasury.gov.ph

Office of the Ombudsman, I. Basic Concepts in Budgeting, December 2012, www.ombudsman.gov.ph