Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status

 

Deficits are always a spending problem, because receipts are, by nature, cyclical and volatile, while spending becomes untouchable and increased every year—Daniel Lacalle

In this issue

Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status

I. Changes in Tax Collection Schedules Distort Philippine Treasury Data and Highlight Fiscal Cycles; Spending’s Legal Constraints

II. Stimulus Forever? The Quest for "Upper Middle-Income" Status and Credit "A" Rating, Rising Risks of a Fiscal Blowout

III. 10-Month Public Revenue Growth Deviates from PSEi 30’s Activities

IV. Q3 2024: 2nd Highest Revenue to NGDP, Headline GDP Weakens—The Crowding Out Effect?

V. Record 10-Month Expenditure: The Push for "Big Government"

VI. 10-Month Debt Servicing Costs Zoom to All-Time Highs!

VII. Rising Foreign Denominated Debt Payments!

VIII. Despite Slower Increases in Public Debt, Little Sign of the Government Weaning Off Stimulus

IX. Q3 2024: Public Debt to GDP rises to 61.3%

X. Conclusion: The Relentless Pursuit Of "Upper Middle Income" Status Resembles a Futile Obsession 

Debt-Financed Stimulus Forever? The Philippine Government’s Relentless Pursuit of "Upper Middle-Income" Status 

Improvements in the 10-month fiscal balance have fueled the Philippine government’s unrealistic fixation on achieving 'Upper Middle Income' status—here's why. 

I. Changes in Tax Collection Schedules Distort Philippine Treasury Data and Highlight Fiscal Cycles; Spending’s Legal Constraints 

Inquirer.net, November 28: A double-digit revenue growth helped swing the government’s budget position back to a surplus in October, keeping the 10-month fiscal deficit below the 2024 ceiling set by the Marcos administration. The government ran a budget surplus of P6.3 billion in October, a reversal from the P34.4- billion deficit recorded a year ago, figures from the latest cash operations report of the Bureau of the Treasury (BTr) showed. 

Most media outlets barely mention that recent changes in tax collection schedules have distorted the Bureau of the Treasury’s reporting data. 

As noted in September, these adjustments significantly impact the perception of fiscal performance. 

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. 

Therefore, we should anticipate either a surplus or a narrower deficit this October. (Prudent Investor, October 2024)

Figure 1 

For instance, October’s surplus of Php 6.34 billion underscores how the quarterly revenue cycle boosts collections at the start of every quarter, often leading to either a surplus or a narrowed deficit. Surpluses were observed in January, April, and October this year. (Figure 1, topmost chart) 

However, as the government pushes to meet its year-end 'budget execution' targets in December, a significant spike in the year-end deficit could emerge from the remaining spending balance. 

Based on the budget allocation for 2024 amounting to Php 5.768 trillion, the unspent difference from the ten-month spending of Php 4.73 trillion is Php 1.038 trillion. 

Notably, in contrast to previous years, 2024 has already experienced three months of public spending exceeding Php 500 billion, with December still underway. (Figure 1, middle image) 

On the other hand, this could indicate a potential frontloading of funds to meet year-end targets. 

While spending excesses are constrained by law, the government has consistently exceeded enacted budget allocations since 2019. (Figure 1, lowest diagram) 

Consequently, this trend, shaped by political path dependency, suggests that the remaining Php 1.038 trillion could likely be surpassed. 

According to the Department of Budget and Management (DBM), budget adjustments are permissible under specific conditions: (DBM, 2012) 

1.    Enactment of new laws,

2.    Adjustments to macroeconomic parameters, and

3.    Changes in resource availability. 

These provisions may provide political rationales to justify increases in the allocated budget.

Figure 2

Expenditures, while down from last month, remain within their growth trajectory, while revenues have so far outperformed expectations. (Figure 2, topmost graph)

Despite October’s 22.6% revenue growth contributing to a lower ten-month deficit—down from Php 1.018 trillion in 2023 to Php 963.9 billion—it remains the fourth largest on record.

II. Stimulus Forever? The Quest for "Upper Middle-Income" Status and Credit "A" Rating, Rising Risks of a Fiscal Blowout

What is seldom mentioned by mainstream media is that such deficits serve as "fiscal or automatic stabilizers," ostensibly for contingent or emergency (recession) purposes.

While authorities repeatedly propagate their intent to elevate the economy to "upper middle-income" status and attain a credit "A" rating soon, they fail to disclose that current political-economic conditions are still functioning under or reflect continued reliance on a "stimulus" framework.

In fact, as we keep pointing out, the Bangko Sentral ng Pilipinas (BSP)’s reserve requirement ratio (RRR) and interest rate cuts represent monetary measures, while authorities have ramped up fiscal measures or "Marcos-nomics stimulus" for their political agenda—namely, pre-election spending and a subtle shift toward a war economy, alongside centralization through increased public spending and an enlarged bureaucracy or "Big Government."

Finally, while expenditures adhere to programmed allocations and revenues fluctuate based on economic and financial conditions as well as administrative efforts, they remain inherently volatile.

Any steep economic slowdown or recession would likely compel the government to increase spending, potentially driving the deficit to record levels or beyond.

Unless deliberate efforts are made to curb spending growth, the government’s ongoing centralization of the economy will continue to escalate the risk of a fiscal blowout.

Despite the mainstream's Pollyannaish narrative, the current trajectory presents significant challenges to long-term fiscal stability.

III. 10-Month Public Revenue Growth Deviates from PSEi 30’s Activities

Let us now examine the details.

In October, public revenue surged by 22.6%, driven primarily by a 16.94% growth in tax revenues, with the Bureau of Internal Revenue (BIR) contributing 16.19% and the Bureau of Customs (BOC) 11.5%. Meanwhile, non-tax revenues soared by 87.7%, largely due to revenues from other offices, including "privatization proceeds, fees and charges, and grants."

These activities boosted the 10-month revenue growth from 9.4% in 2023 to 16.8% this year, largely driven by a broad-based increase, largely powered by non-tax revenues.

It is worth noting that, despite reaching a record high in pesos, the BIR’s net income and profit growth significantly softened to 8.3%, the lowest since 2021, remaining consistent with the 9-month growth rate.  This segment accounted for 50% of the BIR’s total intake. (Figure 2, middle pane)

In contrast, sales taxes jumped by 30.6% over the first 10 months, marking the highest growth rate since at least 2017, and represents 30% of the BIR’s total revenues. Sales taxes vaulted by 31.6% in the first 9 months. (Figure 2, lowest chart)

The reason for focusing on the 9-month performance is to compare its growth rate with that of the PSEi 30, allowing for a closer understanding or providing a closer approximation of the BIR's topline performance.

Figure 3

Unfortunately, when using same-year data, the PSEi 30 reported a 9-month revenue growth of 8.1%, the slowest since 2021. This pattern is echoed in its net income growth of 6.8%, which is also the most sluggish rate since 2021. (Figure 3 upper window) 

To put this in perspective, as previously discussed, the 9-month aggregate revenues of the PSEi 30 represent approximately 27.9% of the nominal gross domestic product (NGDP) for the same period. 

IV. Q3 2024: 2nd Highest Revenue to NGDP, Headline GDP Weakens—The Crowding Out Effect? 

In its September disclosure, the Bureau of the Treasury cited changes in the VAT schedule as a key factor boosting tax collections: " 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" (Bureau of Treasury, October 2024) [bold added] 

Once again, the adjustment in VAT schedules played a pivotal role in increasing revenues, helping to reduce the deficit and debt—a topic we discussed in September 2024 (Prudent Investor, September 2024). 

Or, whether by design or as an unintended consequence, a critical factor in the slower deficit has been a shift in government tax collection and accounting procedures. 

But what will happen if, under the same economic conditions or with only slight improvements, the effects of such transient changes wear off? Will the deficit soar again? 

Moreover, it is important to note that all this is occurring while bank credit expansion and public debt are at record highs. 

What will happen to credit and liquidity-fueled demand once household and corporate balance sheets become saturated with leverage? 

It’s also noteworthy that, even as the share of revenue to nominal GDP (NGDP) reached its highest level in Q2 and Q3 of 2024, real GDP continues its downward trend—a dynamic that has persisted since 2016 and reemerged in 2021. (Figure 3, below graph) 

Are these not symptoms of the "crowding-out effect," where the increasing share of government interventions, measured by expenditures, debt, and deficits, translates into diminished savings and capital available for private sector investments? 

V. Record 10-Month Expenditure: The Push for "Big Government" 

But what about expenditures? 

Local Government Unit (LGU) spending surged by 11.97%, and national disbursement growth reached 14.3%, powering an overall increase in October expenditures of 11.1%. Interest payments, on the other hand, fell by 6.1%. The former and the latter two accounted for shares of 18.1%, 66.64%, and 11.9% of the total, respectively.

For the first 10 months of the year, expenditures grew by 11.5%, reaching a record-high Php 4.73 trillion, driven by LGU spending, National disbursements, and interest payments, which posted growth rates of 9.1%, 11.9%, and 23.03%, respectively.

As noted above, these record expenditures are primarily focused on promoting political agendas: pre-elections, a subtle shift towards a war economy, and an emphasis on centralization through infrastructure, welfare, and bureaucratic outlays.

Figure 4

One notable item has played a considerable role: 10-month interest payments not only outperformed other components in terms of growth but also reached a record high in peso terms. (Figure 4, topmost graph) 

Additionally, their share of total expenditures rose to levels last seen in 2009. 

That said, the ratio of expenditures to NGDP remains at 23.98% in Q2 and Q3 and has stayed within the range of 22% to 26%—except for two occasions—since Q2 2020. (Figure 4, middle chart) 

Over the past 18 quarters, this ratio has averaged 23.4%. 

As mentioned above, despite all the hype about achieving "upper middle income" status and attaining a "Class A" credit rating, the Philippines continues to operate under a fiscal stimulus framework, which has only intensified with recent policies which I dubbed as "Marcos-nomics stimulus."

In the timeless words of the distinguished economist Milton Friedman, "Nothing is so permanent as a temporary government program."

Current conditions also validate the "Big Government" theory articulated by the economist Robert Higgs, particularly regarding what he termed "The Ratchet Effect." This concept refers to the "tendency of governments to respond to crises by implementing new policies, regulations, and laws that significantly enhance their powers. These measures are typically presented as temporary solutions to address specific problems. However, in history, these measures often outlast their intended purpose and become a permanent part of the legal landscape." (Matulef, 2023)

The push towards "Big Government" is evident, with approximately a quarter of the statistical economy deriving from direct government expenditures.

This figure does not include the indirect contributions from private sector participation in government activities, such as public-private partnerships (PPPs), suppliers, outsourcing and etc. 

As a caveat, the revenue and expenditure-to-NGDP ratio is derived from public revenue and spending data and nominal GDP—an aggregate measure where government spending is calculated differently—potentially leading to skewed interpretations of its relative size. 

In any case, as the government grows, so too does its demand for resources and finances—all at the expense of the private sector, particularly micro, small, and medium enterprises (MSMEs), as well as the purchasing power of the average Filipinos, represented here as Pedros and Marias. 

While government fiscal health may provide some insights into its size, there are numerous hidden or immeasurable costs associated with its expansion: compliance costs, public sector inefficiencies, regulatory and administrative burdens, policy uncertainty, moral hazard, opportunity costs, reduced incentives for innovation, deadweight losses, productivity costs, economic distortions, social and psychological costs, and more.

VI. 10-Month Debt Servicing Costs Zoom to All-Time Highs!

Rising interest payments represent some of the symptoms of "Big Government."

What’s remarkable is that, in just the first 10 months of 2024, the cost of servicing debt (amortization plus interest) soared to an all-time high of Php 1.86 trillion—16% higher than the previous annual record of Php 1.603 trillion set in 2023. And there are still two months to go! (Figure 4, lowest visual)

Amortization and interest payments exceeded their 2023 annual figures by 25.3% and 1.65%, respectively. 

Notably, amortization payments surged by a staggering 760% in October alone, reaching Php 161.5 billion.

As a result, amortization and interest payments have already surpassed their full-year 2023 totals. However, because the government categorizes amortizations (or principal payments) as financing rather than expenditures, they are not included in the budget.

VII. Rising Foreign Denominated Debt Payments!

There's more to consider.

Figure 5

Payments (amortization + interest) on foreign-denominated debt in the first 10 months of 2024 increased by 52%, reaching a record high. This brought their share of total payments to 21.9%, the highest since 2021. (Figure 5, topmost chart)

Unsurprisingly, the government borrowed USD 2.5 billion in the end of August, likely to refinance existing obligations. Adding to this, authorities reportedly secured another $500 million loan from the Asian Development Bank last week in the name of "climate financing."

Nonetheless, these serve as circumstantial evidence of increased borrowing to fund gaps, reflecting the "synthetic dollar short" position discussed last week.

VIII. Despite Slower Increases in Public Debt, Little Sign of the Government Weaning Off Stimulus

Here’s where mainstream narratives often place emphasis: a slower deficit translates into slower growth in public debt. (Figure 5, middle graph)

In other words, a decrease in financing requirements or a reduction in the rate of increase in public debt decreases the debt/GDP ratio.

Authorities are scheduled to announce public debt data next week.

The apparent gaslighting of fiscal health suggests that authorities are employing tactical measures to improve macroeconomic indicators temporarily. These efforts seem aimed at buying time, likely in the hope that the economy will gain sufficient traction to mask structural weaknesses.

Still, while public debt continues to rise—albeit at a slower pace—bank financing of public debt through net claims on the central government (NCoCG), which began in 2015, appears to have temporarily plateaued. At the same time, the BSP's direct financing of the national government seems to have stalled. (Figure 5, lowest image)

However, none of these emergency measures have reverted to pre-pandemic levels.

The government shows no indication of weaning itself off the stimulus teats.

IX. Q3 2024: Public Debt to GDP rises to 61.3%

Unfortunately, the record savings-investment gap underscores a troubling reality: the GDP is increasingly propped up by debt.

While mainstream narratives highlight the prospect of a lower public debt-to-GDP ratio, they often fail to mention that public debt does not exist in isolation.

In the aftermath of the Asian Financial Crisis, the Philippine economy underwent a cleansing of its balance sheet, which had been marred by years of malinvestment. When the Great Financial Crisis struck in 2007-2008, the Philippine economy rebounded, aided by the national government’s automatic stabilizers and the BSP's easing measures.

However, during that period, the BSP mirrored the Federal Reserve's policy playbook, prompting the private sector to absorb much of the increased borrowing. This reduced the economy’s reliance on deficit-financed government spending and shifted the debt burden from the public to the private sector, enabling a decline in the public debt-to-GDP ratio.

Today, however, this is no longer the case.

Figure 6

Following the pandemic-induced recession, where bank credit expansion slowed, the government stepped in to take the reins, driving public debt-to-GDP to surge. As of Q3, it remained at 61.3%—the second highest level since 2021’s peak of 62.6% and the highest since 2004. 

Currently, despite high-interest rate levels, both public borrowing and universal commercial bank lending have been in full swing—resulting in a systemic leverage ratio (public debt plus universal commercial bank credit) reaching 108.5% of nominal GDP in 2023. 

This means that the government, large corporations, and many households with access to the banking system are increasingly buried in debt.  

In any case, debt is perceived by consensus as a "free lunch," so you hardly ever hear them talk about it. 

X. Conclusion: The Relentless Pursuit Of "Upper Middle Income" Status Resembles a Futile Obsession 

In conclusion, while current fiscal metrics may appear to show surface-level improvements, the government remains addicted to various free-lunch policies characterized by easy money stimulus. 

The government and elites will likely continue to push for a credit-driven savings-investment gap to propel GDP growth, leading to further increases in debt levels and necessitating constant liquidity infusions that heighten inflation risks. 

The establishment tend to overlook the crowding-out effects stemming from government spending (and centralization of the economy), which contribute to embedding of the "twin deficits" that require more foreign financing—ultimately resulting in a structurally weaker economy. 

The relentless pursuit of "upper middle income" status resembles a futile obsession—a "wet dream" driven more by the establishment’s obsession with benchmarks manifesting social signaling than substantive progress. 

For distributional reasons (among many others), the GDP growth narrative does not reflect the true state of the economy. 

Persistent self-rated poverty and hunger, widening inequality, elevated vacancies in the real estate sector, low savings rates, and stagnating productivity are clear indicators that GDP number benefits a select few at the expense of many. This, despite debt levels soaring to historic highs with no signs of slowing. 

Even the Philippine Statistics Authority’s (PSA) per capita consumer and headline GDP trendlines contradict the notion of an imminent economic or credit rating upgrade. 

While having the U.S. as a geopolitical ally could offer some support in the pursuit of cheaper credit through a potential credit upgrade, it is important to acknowledge that actions have consequences—meaning the era of political 'free lunches' are numbered. 

And do authorities genuinely believe they can attain an economic upgrade through mere technical adjustments of tax schedules and dubious accounting practices, akin to the "afternoon delight" and 5-minute "pre-closing pumps" at the PSEi 30? 

Yet because the political elites benefit from it, trends in motion tend to stay in motion, until… 

___

References 

Prudent Investor, September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso October 28, 2024 

Department of Budget and Management, THE BUDGETING PROCESS, March 2012, dbm.gov.ph

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

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

Michael Matulef Beyond Crisis: The Ratchet Effect and the Erosion of Liberty, August 18, 2023, Mises.org

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/

 

 

 

 

 

 

 

 

 

 

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