Marcos-Nomics Stimulus Update: August Budget Deficit Narrows, Strong Peso Reduces Public Debt, and Amortization Payments Reach All-Time High!

 

Lowering rates is a tool to rescue the government, but it will also make the Treasury add more debt in the next few months. If you make it easy for governments to borrow, they will gladly do it and continue printing currency, leading to the currency’s slow decline—Daniel Lacalle 

In this issue

Marcos-Nomics Stimulus Update: August Budget Deficit Narrows, Strong Peso Reduces Public Debt, and Amortization Payments Reach All-Time High!

I. A Growing Dependence on Non-Tax Revenue Growth? Or, Padding the Government’s Top line?

II. August’s Decline in Public Spending Due to Technicalities, Robust Pre-Election LGU Spending

III. Eight-Month Amortization Payments Hit All Time, Debt Servicing Cost at Annual 2023 Levels!

IV. Mounting Neo-Corporatism/Fascism Policies: Privatize Profits, Socialize Costs

V. Strong Peso Resulted in Lower Public Debt Last August

VI. Conclusion

Marcos-Nomics Stimulus Update: August Budget Deficit Narrows, Strong Peso Reduces Public Debt, and Amortization Payments Reach All-Time High! 

The "Marcos-nomics Stimulus" remains intact. Though deficit spending "narrowed" and public debt fell in August, technicalities and political agenda like pre-election spending points to the government’s deferred actions. 

GMA News, September 25, 1965: The Philippine government yielded a narrower fiscal shortfall in August amid growth in state collections and contraction in expenditures during the period. Data released by the Bureau of the Treasury on Wednesday showed the national government’s budget deficit stood at P54.2 billon last month, lower by 59.25% than the P133-billion fiscal gap seen in August 2023. “The lower deficit was brought about by the 24.40% growth in government receipts alongside a minimal 0.68% contraction in government expenditures,” the Treasury said. August’s fiscal balance brought the year-to-date budget shortfall to P697 billion, down 4.86% from the P732.5-billion deficit in the same period last year. 

Since the government has shifted VAT collections to an end-of-quarter basis, and given that the majority of public spending is typically programmed for the end of the quarter, the essence of the government’s balance sheet scorecard will be most relevant at the end of each quarterly period. 

In any case, we’ll do a short analysis. 

I. A Growing Dependence on Non-Tax Revenue Growth? Or, Padding the Government’s Top line?

Figure 1 

Although it is true that the fiscal deficit improved in August—largely due to a combination of decreased expenditures (-0.7% YoY and -9.4% MoM) amidst a mixed performance in revenues (+24.4% YoY and -15.5% MoM)—the most significant aspect is that the year-to-August deficit dropped from the third highest to the fourth highest in the Treasury's records. 

Nonetheless, nominal figures suggest that August's performance aligns with the exponential trendline for both variables. Additionally, the general uptrends in revenues and spending remain intact. (Figure 1, topmost pane) 

As such, since peaking in 2020, 8-month financing by the Bureau of Treasury has slowed compared to last year. The Treasury remains liquid, with approximately Php 504 billion in cash, marginally lower than Php 509 billion last year. (Figure 1, second to the highest chart) 

But the thing is, non-tax revenues have anchored a substantial segment of the progress in revenue collections. Non-tax revenues rocketed 252% year-over-year last August and soared 58.9% year-to-date compared to the same period in 2023. This growth spike pushed up the segment’s share of revenue to 17.12%—its sixth consecutive month of double-digit representation. In the eight months of 2024, the non-tax revenue pie swelled to 14.53%—the highest since 2015 (Figure 1, second to the lowest and lowest graphs) 

According to the Bureau of Treasury: Income collected and generated by the Bureau of the Treasury (BTr) rose to P16.5 billion in August, more than twice its collections in the same period a year ago. The increase was primarily driven by PSALM’s P10.0 billion settlement of guarantee fee arrears, alongside increased PAGCOR income. Compared with January-August 2023’s actual collections of P150.1 billion, BTr’s YTD income for the current year has similarly improved by 33.46% (P50.2 billion) to P200.3 billion, largely due to higher dividend remittances, interest on advances from GOCCs, guarantee fee collections, and the NG share from PAGCOR income. Collections of other offices (other non-tax, including privatization proceeds, fees and charges, and grants) in August surged to P49.6 billion, nearly quadrupling last year’s outturn. (BTR, September 2024) [bold mine] 

Has the government been padding their revenue numbers partly by inflating the non-tax revenue component? Or are they becoming dependent on it? Unlike previous episodes where non-tax revenues spiked in a month or two, this marks the first time the share of this segment has been in double digits for six consecutive months 

II. August’s Decline in Public Spending Due to Technicalities, Robust Pre-Election LGU Spending 

The next item is expenditure.

Figure 2

Although decreases of .68% year-over-year (YoY) and 9.4% month-over-month (MoM) and year-over-year (YoY) were recorded in August, the expenditure for the first eight months grew by 11% YoY to a record Php 3.69 trillion. (Figure 2, topmost window)

The decline in August was primarily due to a -3.7% YoY and -4.1% MoM contraction in the National Government’s disbursement, even though spending by local government units (LGUs) remained vigorous at +9.34% YoY and -4.3% MoM.

But authorities explained the reasons behind this.

Again from the BTR: This can be partly attributed to the lower total subsidy releases to government corporations, and the sizeable outstanding checks recorded in various departments, such as the Department of Public Works and Highways (DPWH), the Department of Social Welfare and Development (DSWD), and the Department of Health (DOH), during the period. Outstanding checks represent payments made by line departments for the delivery of goods/services but are not yet presented for encashment at the banks by the concerned contractors or payees. These remain under the accounts of spending agencies in authorized government depository banks and are not yet considered as actual disbursements in the Cash Operations Report. [bold mine]

In short, the most recent uncashed disbursements from the National Government will be reflected in upcoming data.

As it stands, the brisk growth of spending by local government units (LGUs) likely signifies the pre-election (mid-term) spending.  The cumulative data for the first eight months (+9.65% YoY) reached its second highest level since the record set in 2022, which, coincidentally, was the year of the Presidential Elections. (Figure 2, lower window)

This trend is expected to be sustained as we approach the 2025 elections.

III. Eight-Month Amortization Payments Hit All Time, Debt Servicing Cost at Annual 2023 Levels!

Lower interest payments accounted for yet another reason behind the decrease in expenditures last August.

Interest payments fell by 33.6% month-over-month (MoM) but surged by 23.7% year-over-year (YoY).

Despite this, the cumulative interest outlays for the first eight months increased by 31.1% YoY, reaching an all-time high of Php 509.44 billion. Its share of allotment rose from 11.72% in 2023 to 13.81% in August, representing the highest level since 2009! (Figure 2, lowest chart)

That’s not all.

Figure 3

In peso terms, the amortization expenditures from January to August surpassed last year’s high, setting a new record! (Figure 3, topmost image) 

Strikingly, amortization expenditures for 2024 amounted to Php 1.041 trillion, which is 6.7% above the 2023 annual total of Php 975.3 billion.

While interest and amortization levels (in peso terms) reached milestone highs, the cumulative debt servicing costs for the first eight months amounted to Php 1.55 trillion—just 0.33% (Php 53.432 billion) lower than last year’s annual debt servicing cost of Php 1.604 trillion! (Figure 3, middle diagram)

Despite this data being publicly available, there has been little coverage by the mainstream media or commentary from the establishment.

More than anything else, do you see the reason driving the Bangko Sentral ng Pilipinas (BSP) to cut interest rates and reserve requirements (RRR)?

It’s all about an implicit government bailout through the provision of liquidity support and the lowering of debt servicing costs!

Net claims on the central government (NCoCG) by universal-commercial banks have risen in tandem with public debt. (Figure 3, lowest image)

Figure 4

These measures are part of the 2020 pandemic rescue template, which includes various regulatory accommodations (such as relief measures and subsidies) as well as direct interventions (liquidity injections) from the Bangko Sentral ng Pilipinas (BSP).

Even now, the BSP’s net claims on the central government (NCoCG) have mirrored the monthly oscillations in public spending. (Figure 4, upper visual)

Furthermore, considering the political economy's structure derived from trickle-down policies, these rescue efforts are not only designed to benefit the government; they also serve the interests of politically connected elites.

Fundamentally, the BSP provides elite-owned banks with benefits through favorable policies and implicit bailouts. In return, these primary financial institutions partially complying with capital requirement rules provide liquidity to the Philippine treasury markets.

Has the narrowed deficit been engineered to address this? We argue that it has not.

IV. Mounting Neo-Corporatism/Fascism Policies: Privatize Profits, Socialize Costs

Haven’t you noticed that this administration has been gradually appointing members of the elite circle to higher echelons of political power?

While the intention may be to create a "business-friendly" environment, this situation reeks of "pro-big business" rent-seeking cronyism.

How will MSMEs thrive in the face of the onslaught of inflation, taxes, and regulations being imposed?

For instance, due to mandates and new taxes, major online eCommerce platforms have required SME sellers to register with the government, comply with new regulations, and pay new taxes.

In response, an influx of aspiring online entrepreneurs has led to a significant surge in business registrations, which both the media and the government are celebrating as a boom!

But how many of these businesses will survive the sustained rise in inflation and the increase in compliance and transaction costs?

How many of these hopeful entrepreneurs—whether driven by necessity due to a lack of jobs or insufficient income—will be able to employ people, especially with recent increases in minimum wages?

Yet, who benefits from the reduction of competition? SMEs or the elites?

We read that some elites have partnered with the government to embark on initiatives to promote MSMEs.

While partnerships like these may seem ideal, how do raising barriers to entry actually promote entrepreneurship?

These initiatives, which the public perceives as beneficial political "do something" actions, are, in fact, a display (smack) of hypocrisy largely intended for election-related public relations.

Moreover, some proponents have advocated for the privatization of certain infrastructure institutions.

While this may seem beneficial in "simple" theory, without competition, tax relief, and the easing of regulatory and administrative obstacles, such privatization is likely to result in the privatization of costs while socializing losses, or could deepen the embrace of neo-fascism, corporatism, or crony capitalism.

V. Strong Peso Resulted in Lower Public Debt Last August 

Apart from inflation, the surge in debt servicing costs represents a secondary symptom of deficit spending, with the direct effect manifested through public debt.

From the Bureau of Treasury (BTR): National Government’s (NG) total outstanding debt stood at P15.55 trillion as of the end of August 2024, reflecting a 0.9% or P139.79 billion decrease from the end July 2024 level…Meanwhile, NG external debt amounted to P4.76 trillion, a decrease of 3.6% or P178.25 billion compared with the end of July 2024 level. The decline was brought about mainly by peso appreciation, which trimmed P194.90 billion, as well as net repayments of P4.17 billion, although stronger third-currencies added P20.82 billion in valuation effects (BTR, October 2024) [bold added]

As the BTR admitted, the revaluation effects stemming from a rare 3.9% appreciation spike in the Philippine peso, based on their data, contributed to a marginal reduction in Philippine debt. 

Breaking down the data: external debt decreased by 3.6% month-over-month (MoM) but rose by 4.4% year-over-year (YoY). Meanwhile, domestic debt increased by 0.4% MoM and 10.22% YoY. (Figure 4, middle image) 

As a result, the spike in the Philippine peso pulled down the percentage share of external debt relative to the total, which has been rising since its trough in March 2021. 

Although the narrowing of the budget deficit from July to August, driven by a slowdown in public spending, may alleviate some pressure to increase borrowings, it is likely that the government has merely deferred its spending pressures to the end of the quarter and the end of the year.  (Figure 4, lowest image) 

Second, the government announced that it raised USD 2.5 billion last August. 

Figure 5

This addition will contribute to the external debt stock, which reached an all-time high in Q2 2024 and is expected to increase further in Q3. (Figure 5, topmost graph)

External debt has now surpassed the Gross International Reserves (GIR), even though part of these borrowings is counted as part of the GIR. For instance, when the National Government raised USD 2 billion last May, the proceeds were incorporated into the June GIR: "The month-on-month increase in the GIR level reflected mainly the National Government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds." (bold added) (Figure 5, second to the highest chart) 

Make no mistake: borrowed reserves require payment, and treating them as retained earnings or savings misrepresents actual reserves. 

Third, it is doubtful that the recent appreciation of the Philippine peso is sustainable. 

In contrast, the rising trend of the USD-Peso exchange rate partly reflects the "twin deficits" as a consequence of the government’s deep embrace of Keynesian policies that posit spending will lead to economic prosperity. (Figure 5, second to the lowest and lowest graph) 

These deficit spending policies, which depend on an easy money regime favoring the elite, have led to a record savings-investment gap that must be funded by a domestic population constrained by low savings, making it increasingly reliant on overseas savings. 

In summary, the widening savings-investment gap—partially expressed through the BSP-Banking system's funding of historic deficit spending via record-high public debt—has contributed to the weakness of the Philippine peso.

Therefore, the current decline in public debt due to the peso appreciation represents an anomaly (a bug, not a feature) rather than a trend. 

With this context in mind, one must ask: who will bear the rising costs of ever-increasing public debt and its servicing—through higher taxes and inflation? 

Is it the elites, with their army of accountants and tax lawyers, shielding themselves from their direct obligations? Is it the elites who employ financial experts and, indirectly, the government, which allocates resources to benefit from inflationary policies? 

Or is it the average Mario and Juan, who have little means for protection? 

VI. Conclusion

The "Marcos-nomics stimulus" measures remain intact.

The recent cut in the official interest rate, along with an expected series of further cuts and adjustments to reserve requirements, indicates a sustained trend of deficit spending, point to an expansion of monetary easing aimed at jolting the private sector economy and achieving political agendas through spending on pre-election, the war economy, infrastructure, welfare, bureaucratic expansion and etc., in addition to boosting GDP for financing purposes.

____

References 

Bureau of Treasury, August 2024 NG Budget Deficit Down to P54.2 Billion, treasury.gov.ph, September 25,2024

 

Bureau of Treasury, National Government Debt Recorded at P15.55 Trillion as of End-August 2024, treasury.gov.ph, October 1, 2024

Adding to the SWS Mangahas’ Critique of Trickle-Down Economics: The Philippine Banking System’s Intrinsic Bias Against SMEs

  

The man in whose power it might be to find out the means of alleviating the sufferings of the poor would have done a far greater deed than the one who contents himself solely with knowing the exact numbers of poor and wealthy people in society—Vilfredo Pareto 

In this issue

Adding to the SWS Mangahas’ Critique of Trickle-Down Economics: The Philippine Banking System’s Intrinsic Bias Against SMEs

I. The Disconnect Between Economic Data and Public Sentiment: Adding to the SWS Mangahas’ Critique of Trickle-Down Economics

II. The Trickle-down Policy: The Philippine Banking System’s Intrinsic Bias Against SMEs

III. Banks' Preference for Government Securities Crowds Out the SMEs

IV. How Trickle-Down Policies Gutted the Magna Carta for MSMEs and Stunted Philippine Capital Market Growth

V. How Trickle-Down Policies Amplify Concentration and Contagion Risks

VI. Trickle-Down Policies: How HTMs Exacerbate Balance Sheet Mismatches

VII. Rising Non-Performing Loans: Moving from the Periphery to the Core?

VIII. More Crowding Out: Banks Magnify Borrowing from Savers Focusing on Short-Term Bills

IX. More Impact of the Trickle-Down Effect on Banks: Mark-to-Market Losses

Adding to the SWS Mangahas’ Critique of Trickle-Down Economics: The Philippine Banking System’s Intrinsic Bias Against SMEs

SWS’ Dr. Mahar Mangahas recently highlighted the failure of trickle-down economics by pointing to the disconnect between government data and public sentiment. Bank data on MSME lending reinforces his position. 

I. The Disconnect Between Economic Data and Public Sentiment: Adding to the SWS Mangahas’ Critique of Trickle-Down Economics

Figure 1 

I believe in rating economic progress by listening to what the people as a whole say about their own progress, rather than by listening to the international banks, big business, politicians, the diplomatic corps, and all others who point to how the aggregate value of production is growing. Counting the number of people who have gotten better off, and comparing it with the number who have gotten worse off, is the oldest survey question in the book. It has now been surveyed 152 times at the national level: annually in 1983-85, semi-annually in 1986-91, and then quarterly since 1992. The finding of more losers than gainers in 126 of those 152 surveys—despite persistent growth in real gross national product per person, coupled with stagnation of real wages—is the clearest proof of the failure of trickle-down economics in the last four decades. (Mangahas, 2024) [Figure 1, topmost quote]

While most don’t realize it, this quote offers a striking opposition or critique of the nation’s adaptive "trickle-down" political-economic framework. Given its dissenting nature, this theme should be unpopular among the establishment.

For starters, we are skeptical of surveys because they are susceptible to manipulation, social desirability bias, or social signaling, rather than reflecting genuine (demonstrated/revealed) preferences. Interestingly, surveys form the basis of much government data.

To illustrate why the CPI is considered the MOST politicized economic data, consider the following example—from the Philippine Statistics Authority (PSA) (bold mine).

CPI allows individuals, businesses, and policymakers to understand inflation trends, make economic decisions, and adjust financial plans accordingly. The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures in the calculation of the gross domestic product.  Moreover, it serves as a basis to adjust the wages in labor management contracts, as well as pensions and retirement benefits. Increases in wages through collective bargaining agreements use the CPI as one of their bases. (PSA, FAQ)

In short, the CPI is the basis where economic policymakers…make economic decisions…and adjust financial plans…calculate the GDP…adjust wages in labor-management contracts…in CBA (or minimum wages) …and influence the calculation of pensions (mainly SSS and GSIS) and retirement benefits (also other welfare programs as Philhealth, Pagibigm, etc).

And so, the lowering of the CPI (e.g., by rebasing it from 2006 to 2012 to 2018) bloats the GDP, minimizes payouts for pensions and retirements, and distorts labor-management contracts. Most of all, it helps the government access cheaper savings from the public.

Yet, the (quality-of-life) survey referenced by the author reflects public sentiment rather than a discourse on economic theories or statistics.

The crux of the matter is that public sentiment contradicts the landscape authorities aim to achieve, which is far from its desired state. 

Ironically, this occurs despite the daily onslaught or barrage of news promoting rosy concepts like achieving "upper middle-class status," a "sound" banking system, "reasonable" inflation, a jump in FDIs, and more. 

It demonstrates the blatant disconnect of political economic metrics such as per capita GNP and GDP from grassroots perceptions. 

Simply put, GDP does not equate to the economy. A 

The disparity between the government figures and sentiment reflects the inequality of economic outcomes. 

Or, as much as the CPI does not represent the inflation of the average Juan or Maria, neither does the GDP. Yet, who benefits from it? Cui bono? 

Though we opine a different perspective from the author, the question is, why should government spending be considered a cornerstone of prosperity when it diverts and limits the private sector from fulfilling its primary role of satisfying consumer needs and wants? 

Does historical (public and private) leveraging and near-record deficit spending, which redistributes income and wealth opportunities to the government and the politically connected, contribute to the goal of achieving "upper middle-class status?"   

Based on 2023 (annualized) data, to what extent can the economy sustain this level of debt buildup under the savings-investment gap paradigm? Won't the sheer burden of debt, beyond interest rates, stifle the real economy?  What if interest rates rise along with the debt burden? Debt servicing-to-GDP and debt-to-GDP have been way above the 1997-98 Asian Financial Crisis levels. (Figure 1, middle charts and lowest graph)

Is this economic paradigm pursued because it is driven by the "trickle-down" ideology, which posits that (indiscriminate) spending drives the economy, or because it favors the centralization of the economy, benefiting a few? 

Yes, the article confirms my priors, but it also suggests that there are others who, in their own ways, share similar perspectives. 

On the other hand, although the author's motivations are unclear, it is uncertain whether they are driven by a political bias. 

Still, given the harsh realities of the prevailing censorship and disinformation in the incumbent political environment, it is unlikely that "analytical independence" could persist. 

II. The Trickle-down Policy: The Philippine Banking System’s Intrinsic Bias Against SMEs

The dispersion of bank credit expansion serves as a prime example of the inefficiencies inherent in the 'trickle-down' economics. 

The government's bank lending data provides valuable insights into the reasons behind its flaws.

Businessworld, June 14, 2024: PHILIPPINE BANKS failed to meet the mandated quota for small business loans in the first quarter, data from the Bangko Sentral ng Pilipinas (BSP) showed. Loans extended by the banking industry to micro-, small-, and medium-sized enterprises (MSMEs) amounted to P474.922 billion as of end-March. This made up only 4.41% of their total loan portfolio of P10.77 trillion, well-below the mandated 10% quota. Under Republic Act No. 6977 or the Magna Carta for MSMEs, banks are required to allocate 10% of their total loan portfolio for small businesses. Of this, 8% of loans should be allocated for micro and small enterprises, while 2% should go to medium-sized enterprises. However, banks have long opted to incur penalties for noncompliance instead of taking on the risks associated with lending to small businesses. (bold mine)

How can the government achieve its "upper middle-class status" goal when the backbone of the economy – small and medium-sized enterprises (SMEs) – has diminished access to lower-priced formal credit?

Figure 2 

SMEs dominate the economy. 

As noted by the DTI in 2022: "The 2022 List of Establishments (LE) of the Philippine Statistics Authority (PSA) recorded a total of 1,109,684 business enterprises operating in the country. Of these, 1,105,143 (99.59%) are MSMEs and 4,541 (0.41%) are large enterprises. Micro enterprises constitute 90.49% (1,004,195) of total establishments, followed by small enterprises at 8.69% (96,464) and medium enterprises at 0.40% (4,484)." (Figure 2, topmost pane) 

SMEs also have the largest share of employment. 

Again, the DTI stated: "MSMEs generated a total of 5,607,748 jobs or 65.10% of the country’s total employment. Micro enterprises produced the biggest share (32.69%), closely followed by small enterprises (25.35%), while medium enterprises lagged behind at 7.06%. Meanwhile, large enterprises generated a total of 3,006,821 jobs or 34.90% of the country’s overall employment." (Figure 2, middle image)  

The lack of access to formal credit leads to informal or shadow lenders, such as family, friends, local money lenders, NGOs, loan sharks, or '5-6' entities, filling the void. This inefficient means of financing results in higher costs for businesses, which in turn reduces the competitiveness of SMEs compared to large firms. 

The former president initially campaigned to ban '5-6' lending, which would have further stifled SMEs. Since the policy failed to gain traction, it can be inferred an undeclared policy failure.

The uneven effects of inflation via the Cantillon Effect—that the first recipient of the new supply of money has an arbitrage opportunity of being able to spend money before prices have increased—also pose an obstacle to MSMEs.(river.com). (Figure 2, lowest diagram)

In other words, the Bangko Sentral ng Pilipinas' (BSP) inflation targeting policy benefits large firms because they have access to new money from bank credit before prices increase, while SMEs are disadvantaged (as price takers): a reverse Robin Hood syndrome.

The lack of access to formal credit and the Cantillon Effect forge a 'protective moat' that favors large firms over SMEs.

This explains the innate inequality expressed by public sentiment.

It also weighs on the BSP’s other ambition to expand financial inclusion—a politically correct goal or a euphemism for the "war on cash."

Naturally, why would the SME universe enroll, when the formal financial system constrains their access to livelihood credit?

Figure 3

Yes, there may be improvements in many metrics of financial inclusion, but they remain distant from reaching upper middle-class levels. 

Participation rates in the banking system by the general populace remain dismal (BSP, Financial Inclusion) (Figure 3, topmost table) 

See the inequality at play? 

III. Banks' Preference for Government Securities Crowds Out the SMEs

Moreover, why would the formal financial system prefer to follow the BSP's policies rather than repricing credit higher to accommodate the higher risks associated with grassroots collections?

Repricing credit would likely raise the cost of financing government debt. Banks function as intermediaries in raising funds for the government, which represents the bulk of the bond markets. 

With a higher cost base, any institutional outlier would risk losing market share in the formal credit market. 

Intuitively, the formal financial system would rather pay the penalties associated with missing the 10% government quota than invest in a system that would reflect the higher cost of risks and transactions with SMEs. 

The spread between the average bank lending rate and the BSP's overnight repo rate (ON RRP) dropped to its lowest level in February 2023 and has barely bounced back from there. (Figure 3, middle chart) 

Therefore, there is hardly any motivation by the formal financial institutions to "go outside the box" or defy the convention. 

See how this perpetuates inequality? 

IV. How Trickle-Down Policies Gutted the Magna Carta for MSMEs and Stunted Philippine Capital Market Growth

Since banks have failed to adhere to the law and have resorted to a workaround, this translates to the fiasco of the Magna Carta legislation in its entirety. 

The restricted constellation of the formal credit system can also be found in the limited exposure to the insurance industry and capital markets. Insurance premiums signify a paltry 1.7% of the GDP. (Figure 3, lowest table) 

Figure 4 

It is barely understood that it is not the trading platform (G-stocks or other touted online alternatives) that constrains the PSE's volume, but rather the lack of savings or increases in disposable income. 

The PSE’s volume woes are equally reflected in the banking system’s cascading cash-to-deposit ratio, which eroded further last April to multi-year lows. (Figure 4, topmost chart) 

Why is this the case? 

Because the inflationary "trickle-down" policies pose a financial barrier to the general public, they also drain savings and redistribute resources to cronies and the government. 

Consequently, the paucity of penetration levels in formal institutions has also been reflected in the capital markets (fixed income and stocks). The lack of volume and breadth also characterizes the Philippine bond market, which is one of the most underdeveloped in Asia. (Figure 4, middle image) 

As previously discussed, the BSP seems misguided in thinking that the exclusion of the Philippines from the global market has been due to "foreigners don’t like us." 

Everything starts organically: rather, it’s the lack of local depth, which is a function of the failure of "trickle-down" policies. 

See how it magnifies the mechanisms of inequality? 

V. How Trickle-Down Policies Amplify Concentration and Contagion Risks

But there’s more. 

If banks have jettisoned the SMEs, then this means that they’ve been amassing intensive loan exposure on economic agents at the upper hierarchy.

As a result, this has led to an unprecedented buildup of concentration risks.  

While the mainstream views the record Total Financial Resource (TFR) and its growth positively, there is little understanding that this asset growth has primarily accrued in universal banks.

Despite April’s TFR slipping from historic March levels, it remains at an all-time high, even as the BSP’s official rates stay at a 17-year high. The rapid expansion of universal bank assets, which now constitute 78.2% of the TFR, has propelled the banking system’s aggregate share to 83.4%. Both their % shares declined in April from the unparalleled levels of March. (Figure 4, lowest graph) 

The banking system's exposure to heavily leveraged non-financial firms, such as San Miguel Corporation [PSE: SMC], is concerning. SMC's debt have reached a staggering record high of Php 1.44 trillion in Q1 2024, accounting for a significant 4.6% of the TFR in the same period.

The extent of this exposure raises questions about the potential risks to the financial system. Specifically, how much of the banking system's assets are tied up in SMC's debt? What happens within SMC will affect SMC alone? Really? 

VI. Trickle-Down Policies: How HTMs Exacerbate Balance Sheet Mismatches 

Figure 5

Banks have been funding the government through net claims on central government (NCoCG), much of which has been concentrated in Held-to-Maturity (HTM) assets. 

Once again, the BSP has acknowledged the liquidity-constraining effects of HTMs. 

The HTM component continues to be significant. Financial assets classified as HTM continued to increase in 2023. From 45.6 percent of financial assets at the beginning of 2021, its share is now nearly 58.8 percent as of November 2023 data. Taken at face value, this suggests that the banks remain defensive against potential MTM losses created by the higher market yields. Invariably, however, the threat of MTM losses can be mitigated by holding the tradable security to maturity. This though comes at the expense of liquidity. (bold original, italics mine) [BSP, FSR 2023] 

HTMs accounted for 55.56% of financial assets last April and 15.7% of the banking system’s total assets. (Figure 5, topmost chart)

Strikingly, the BSP highlighted further concerns in the 2023 Financial Stability Report (FSR), citing the US banking crisis as an example where HTMs created a false illusion of profits while significantly understating risks. 

A case to be highlighted is the phenomenon during the pandemic when the sizable allocation to HTM securities buoyed profits but had a significant impact on some banks’ liquidity during the reversal of interest rates, e.g., the case of SVB. While government securities (GS) are indeed High-Quality Liquid Assets, their liquidity can be further qualified depending on the RORO regime. A Risk-Off environment – when there are significant uncertainties and/or with sharp interest rate hikes – can freeze GS trading as banks would prefer safety. Yet, the difficulties may become too acute that they have to liquidate securities, even those classified as being held to their original maturity. There must be a way to assess the market value of the HTM assets during these periods. (italics mine) [BSP, 2023]

The extent of these maladjustments, partly revealed by balance sheet mismatches, determines the level of volatility.

Although the BSP aims to address this issue, they are hindered by the "knowledge problem," which is precisely why such imbalances exist in the first place—resulting from the policies they implement. 

Simply, if the BSP can do what it wishes to do, then markets won’t be required—a haughty pipe dream. 

VII. Rising Non-Performing Loans: Moving from the Periphery to the Core? 

Next, historic credit expansion suggests that credit delinquencies may arise due to excess exposure to unproductive debt. 

As previously noted, non-performing loans (NPLs) from credit cards and salary loans have not only increased but accelerated in Q1 2024. The relatively stable performance of motor vehicle and real estate loans has slowed down the overall growth of NPLs in consumer loans. 

The total banking sector's fixation with financing unproductive consumer spending opens a Pandora's Box of credit risks. The % shares of consumer loans and production loans are at historic opposite poles! (Figure 5, middle graph) 

Yet, problems are mounting at the periphery of the banking system. 

Net NPLs have increased significantly in government and commercial banks through April 2024. (Figure 5, lowest graph) 

One possible explanation is that government bank lending has been less prudent due to political objectives, which differs from those of the private sector. 

Notably, NPLs at commercial banks, the smallest segment, have also been increasing. Foreign banks have also seen a gradual increase in NPLs. However, there was a slight decrease in NPLs at foreign banks in April. 

A presumption here is that for these sectors to stay afloat against their largest competitors, the universal banks, commercial and foreign banks lent aggressively, and now the chicken has come home to roost. 

What happens when this reaches critical mass? 

Could this indicate signs of risks transitioning from the periphery to the core? 

VIII. More Crowding Out: Banks Magnify Borrowing from Savers Focusing on Short-Term Bills

As deposit growth has been insufficient to cover the liquidity shortfall from HTMs and NPLs, the Philippine banking system has increased its borrowings from local savers. 

Figure 6

Further signs of mounting liquidity deficiency include banks increasingly borrowing from the more expensive capital markets. (Figure 6, topmost chart) 

The focus of their financing has been on short-term securities, as evidenced by significant increases in bills payables. (Figure 6, second to the highest image)

So far, though aggregate bank borrowings have risen to near-record highs, the banking system's share of liabilities remains on the lower spectrum. 

However, increasing competition among banks, the government, and non-financial firms is likely to put upward pressure on interest rates. 

As the giants scramble for financing, this crowding out comes at the expense of SMEs. 

Do you see why the inequality persists?

IX. More Impact of the Trickle-Down Effect on Banks: Mark-to-Market Losses 

Finally, HTMs, NPLs, and the crowding out are not only the growing sources of the bank's liquidity deficits; mark-to-market losses will compound their problems as well. 

In addition to dwindling cash reserves, banks have relied on investments and the revival and acceleration of lending to bolster their assets. (Figure 6, second to the lowest chart) 

However, even when 10-year bond yields have been turned sideways, banks' mark-to-market losses have escalated. (Figure 6, lowest diagram) 

Therefore, mainstream banks are likely to conserve their resources at the expense of small and medium-sized enterprises (SMEs). 

There you have it: a litany of reasons why the Magna Carta for MSMEs failed and the reasons behind the divergence between public sentiment and mainstream statistics. 

In essence, when it comes to the interests of the Philippine version of Wall Street versus Main Street, policymakers tend to favor rescuing big money.

The infamous fugitive Willie Sutton famously explained why he robbed banks, "Because that's where the money is."

In the local context, "trickle-down" policies manifest the stark realities of political-economic inequalities, perpetuating income disparities and social exclusion. 

____

References: 

Mahar Mangahas, Independence from GNP Inquirer.net, June 16, 2024

Philippine Statistics Authority, Frequently Asked Questions, PSA.gov.ph

River Learn, Cantillon Effect, river.com

Bangko Sentral ng Pilipinas, Financial Inclusion in the Philippines Dashboard As of Third Quarter 2023, bsp.gov.ph

FINANCIAL STABILITY COORDINATION COUNCIL, 2023 FINANCIAL STABILITY REPORT, December 2023, (pp. 29 and 31), bsp.gov.ph

The President and the Markets "Disagree" on the CPI; Global Financial Crisis Icebreaker: The Collapse of Sri Lanka

 

In fact, inflationary credit does have a cost. It diminishes the purchasing power of the dollar. We are being robbed year by year, and it makes no moral difference that we've all somehow gotten used to it. There are also the tremendous economic distortions that come with the practice. Inflationary credit has the effect of subsidizing some sectors beyond sustainable levels and generates waves of entrepreneurial (and consumer) errors. The business cycle itself can be laid squarely at the door of the money temple—Llewellyn H. Rockwell Jr. 

 

In this issue 

The President and the Markets "Disagree" on the CPI; Global Financial Crisis Icebreaker: The Collapse of Sri Lanka 

I. The President and the Markets "Disagree" on the CPI 

II. Global Financial Crisis Icebreaker: The Collapse of Sri Lanka 

III. USD Php and Treasury Markets Disagrees, the BSP Relents! 

IV. Not Just Cost-Push, the CPI also Manifest Demand-Pull Inflation 

V. Currency Growth Spike’s Demand Pull: The Economic Reopening and Election Spending; Understanding the BSP’s Defiant Stance 

VI. Spinning Inflation and Centralization as Strong Economic Growth? 

VII. SMEs are the True Engine for Real Economic Growth  

 

The President and the Markets "Disagree" on the CPI; Global Financial Crisis Icebreaker: The Collapse of Sri Lanka 

I. The President and the Markets "Disagree" on the CPI 

 

The recently inaugurated President shares a common denominator with us.  

 

We "disagree" with the PSA on the CPI issue.  But, our point of departure is in its direction. 

   

Without saying why, for him, the 6.1% brought him a sense of "disbelief."  It was too high! 

 

But in our humble opinion, it seems inherent for the official statistical agency to understate it.   

 

A suppressed CPI facilitates an easy money regime that promotes growth through bank credit expansion and public spending partly financed by the inflation tax. Besides, the sustained bailout of the banking system depends on loose monetary conditions. 

  

Further, officials use an array of measures, such as biased surveys, price controls, the periodic rebasing of the index, and more, to reduce the CPI. 

 

Besides, the CPI excludes prices of financial assets despite being part of consumer outlays. 

 

Yet, the thing is, the most substantial argument against the CPI comes from its essence: it is impossible to quantify or average the spending activities of individuals. Everyone has different 'inflation.' The consumption basket varies from one individual to another. And the composition of an individual's consumption basket is never static or constant because it is subjectively determined; it is dynamic or consistently changes. 

 

Therefore, because the assumption used to generate an estimated CPI is fallacious, the CPI is structurally flawed. 

 

To return to the "disagreement." So, had the 2012 base rates been used, the CPI would have registered about 6.7%, which would signify the October 2018 high! What more if the calculation of the CPI used the 2006 base rates!  

 

Of course, the President can act to lower the CPI; it is just a statistic anyway.  

  

And that is the worrying part. This event may have signaled to its subordinate agencies HOW the latter should conduct the surveys that generate CPI numbers partial to his preferences. 

  

Yet, given the path towards centralization through increased interventions, the greater the contortions, the higher the odds for policy errors. The inconvenience from one intervention leads to further actions that compound the public's discomfort.   

 

Therefore, one intervention begets a series of further interventions until the market economy breaks. 

 

Or using faulty data to intervene or impose variable controls on the economy should magnify the potential backlash. 

 

But consider this too, since governments are not wealth creators but tax consumers, juggling numbers have its limits.  

 

Ultimately, the markets decode the scale of an inflationary regime. 

 

II. Global Financial Crisis Icebreaker: The Collapse of Sri Lanka 

 

Figure 1 

 

Last week's stunning collapse of Sri Lanka, which prompted the ouster of its government, should set an example.  

 

A few days ago, Sri Lanka’s Prime Minister Ranil Wickremesinghe publicly declared: 'Sri Lanka is bankrupt.' 

 

Its government undertook centralization through an uncontrolled public spending spree in which deficits were financed by over-indebtedness.   

 

Monetary authorities consistently expanded the central bank’s balance sheet through the acceleration of money supply growth.  

 

And it was not about the public sector alone.   

 

Because authorities embraced free money via persistent low rates, the private sector likewise indulged in intense leveraging, fueling widespread malinvestments.    

 

Personal savings growth dropped, and its stock market benchmark (Colombo All Shares) and real estate reached a milestone early this year! 

 

But the global energy and food crisis exposed this underlying fragility: the CPI spiked, the rupee plunged, and FX reserves plummeted as the central bank used these to defend the rupee. Financial assets crumbled. 

 

Imagine a boom, then a sudden harrowing bust! 

 

For one thing, environmentalism may have accentuated the economic and financial meltdown of Sri Lanka. 

 

Promoted by the West, the Sri Lankan government embraced a ban on agrochemicals and fertilizers. The epic shift to organic farming led to the terrifying collapse in yield output or harvests, which increased their reliance on imports that aggravated the domestic food crisis. Worst, the catastrophic failure of the mass organic farming ESG experiment accentuated the debt loads of farmers that likewise magnified public debt, showcasing the disastrous outcome of central planning. 

 

Hunger, thus, forced the population to dethrone its government.  This incredible video shows the storming of the Presidential Palace by protestors. 

 

Sri Lanka appears to be the icebreaker that signifies the periphery to the core phenomenon or the domino effect on emerging markets, which are likely symptoms of an impending global financial crisis. 

 

The social uproar and upheaval against hunger and fuel shortages appear to be snowballing globally.  Reports indicate protests have intensified in many African nations. People have also risen against the government in Albania, a country in Southeastern Europe. The UN has warned of a 'looming catastrophe' from rising world hunger. 

 

And European farmers (Netherland, Poland, Italy, and Germans) are also in protests against 'Green' carbon emission policies. The farmers are demonstrating against policies designed not just to reduce the output but also against the purported eminent domain of agricultural lands by authorities for political redistribution.  

 

The Russo-Ukraine war represents merely a symptom of the massive backlash of the centralization of geopolitics, global economies, and finance. 

 

III. USD Php and Treasury Markets Disagrees, the BSP Relents! 

 

Figure 2 

 

Returning to the Philippines, treasury traders again "disagreed" with the CPI. For them, "it remains too low and is bound to go higher!"  

 

No one speaks for them, though. But actions at the Treasury markets reveal their perceptions. 

 

Despite the two-rate hikes, the differentials between the yield of the 10-year Treasury and the BSP rates remain at multi-year highs. (Figure 2, upmost pane) 

 

And while the CPI turned lower in Q1 2022, Treasury traders steepened curves to highlight inflation since early 2019. (Figure 2, middle window) 

  

So these traders priced treasury securities that deviated from the CPI.  

 

Again, who turned out right? 

  

Of course, the popular scapegoat by the consensus is the anticipated actions of the US Federal Reserve. That is to say, no wrong can befall the decision of our policymakers! Exogenous forces are the cause of the present defects. 

 

Yet they fail to observe that probable actions of the FED are in response to the raging inflation. Their causation runs backward.  

 

This week, the yields of the front end climbed in anticipation of the BSP's move. (Figure 2; lowest window)  

 

But the rise in the front-end implies a flattening of the treasury slope, which again are potential indicators of depletion of liquidity. 

 

Figure 3 

 

Currency traders also "disagreed" with the CPI and the BSP, so they bid up the USD to reach levels last reached in 2005! (Figure 3, topmost pane) 

 

From the alleged "stable" peso, the narrative has shifted. The Inquirer headline shows, "Peso now region’s worst performer". 

 

"Never Believe Anything Until It Is Officially Denied." Confirmed! We are vindicated!  (Prudent Investor Newsletter, 2022)  

 

Because both the Treasury spreads and the FX markets (USD-Php) have vastly surpassed 2018 levels, the 'real' inflation rate must be substantially higher than official metrics constructed by the Philippine Statistics Authority (PSA). 

 

Most importantly, contrary to the "transitory" meme, it is a long-term uptrend for the CPI.    

 

Unlike in the past, the BSP has presently limited publishing data, restricting its coverage span from only 2018. 

 

When implementing a policy, the penchant of the BSP is to justify it with global standards (e.g. bank reserves, interest corridor and more).  

 

Curiously, against this global rule, the BSP has even eliminated the CORE CPI category. They even stopped publishing the quarterly inflation report! The question is: why? Or why restrict the availability of the CPI data to the public? 

 

Nevertheless, we superimpose the shaved 2018 version with the 2012 data to exhibit the long-term climb from 2015. 

 

With the 1.5% plunge this week, the peso is now the worst-performing currency in the region YTD (ex-Japanese yen)! The Philippine peso was the second-worst performer year-on-year (YoY) after the South Korean won. (Figure 3, lowest right pane) 

 

The volatility of the peso appears to be mounting. Weekly change is at the highest level in years! (Figure 3, lowest left pane) 

 

Public pressure on the peso will force the BSP to step up on its interventions. And this should lead to more pressure on its Gross International Reserve (GIR), which fell for the fourth straight month, last June. The BSP has been offloading its Other Reserve Asset (ORA) of its GIR, reducing support for the peso. Data from the IMF’s International Reserve and Foreign Currency Liquidity (IRFCL). (Figure 3, second to the lowest pane) 

 

The sage of Omaha, Warren Buffett, presciently warned, "You don't find out who's been swimming naked until the tide goes out." 

 

Yet again, the current moves of the USD Php reinforce its 52-year uptrend. 

 

Authorities can always conjure roseate interim targets while ignoring structural forces and discarding trend cycles.  

  

Not only will they keep missing their goals, but they will have to keep adjusting these higher. 

 

Proof? 

 

ABS-CBN News (July 9):  The Bangko Sentral ng Pilipinas is prepared to raise interest rate by 50-basis points in its Aug. 18 meeting, BSP Governor Felipe Medalla said, as inflation soars and as the peso weakens further…"When we have to because of inflation, we normally raise our policy rate (the interest we pay on our overnight borrowing from banks to guide bank lending rates) by only 25 basis points in one meeting," Medalla said. "That we are going to raise by 50 in our next meeting this August means we are not as gradualist as before," he added. 

 

Because political authorities depend on their subjects for survival, economics prevails over politics, ultimately. 

 

That said, the markets have forced the hand of the BSP.  

 

The odd thing is, while a 50 bps increase is more than the 25 bps, it still looks like a 'gradualist' regime because the 'real' yield remains negative! 

 

IV. Not Just Cost-Push, the CPI also Manifest Demand-Pull Inflation 

 

The establishment consensus tells us that supply-driven/cost-push inflation is the cause of the rising CPI. 

  

In this case, the implication is that money supply growth, the 'real' measure of inflation channeled through credit expansion, has little bearing on domestic demand/demand-pull inflation. 

  

Applying the ideological Turing Test, we assimilate the mainstream jargon of demand-pull and cost-push inflation.  

  

But the supreme paradox is that when rationalizing the GDP, these experts babble about the ingredient that supposedly plays a minor role in the CPI: Domestic Demand!  

  

So which is which? 

  

What is more, if domestic demand plays a subordinate role in the CPI, why are prices rising across a broad spectrum of products and services?    

  

Let us put it this way, downplaying the credit-financed demand justifies the current loose monetary stance.  

  

And so, the public discourse on the CPI attempts to draw sentiment away from domestic factors and allude to external forces as the culprit. 

  

Perhaps, counseled by advisers, the President rationalizes the CPI as "imported inflation." 

  

But then, almost all of the experts seem obsessed with public spending. Have they forgotten that infrastructure and welfare spending impacts prices and circulates in the economy? 

 

Figure 4 

 

Can they not see that the upside trend in the CPI coincides with the ascent of public spending? (Figure 4, topmost window) 

 

And that's not all.  

 

Aside from the credit build-up on the supply side, consumers are leveraging their balance sheets to augment the loss of purchasing power. (Figure 4, middle pane) The banking system's credit card portfolio topped the January 2020 level to etch a record high (in peso)! 

 

How does the intensified use by consumers of credit cards impact retail prices?  

 

Is the supply side or manufacturers producing more to offset the demand increase?  

 

But manufacturing has also been a principal beneficiary of the latest bank expansion.  (Figure 4, lowest window) 

 

The soaring Producer's Price Index (PPI) has also corresponded with the strong demand by this sector for bank credit.    

  

Continued shortages and logistics and transport woes may have prompted producers to use bank credit to hoard raw materials for future production. By stockpiling, producers intend to protect present margins against sustained price increases. 

 

Once again, the S&P Markit provides a clue: Similarly, both pre- and post-production inventories increased at a softer pace compared to that seen in May but remained modest overall as firms noted rising business requirements. On the price front, average cost burdens rose further as companies continued to register higher energy and raw material prices. While the rate of inflation eased for the third month running, it remained sharp overall. With average cost burdens rising, firms continued to pass greater input prices on to their customers. Output prices also markedly, albeit at a softer pace compared to May. (Baluch and Vickers, 2022) 

 

Nonetheless, the S&P Markit June survey further noted a divergence between local and foreign demand for locally produced goods: "Despite a loss in growth momentum for the second month running, operating conditions have now improved for five successive months, with the headline PMI figure signalling solid overall growth in the manufacturing sector. Moreover, production levels increased at the second-fastest pace since November 2018. Anecdotal evidence noted higher customer demand prompted greater output in June. Driving the rise in production, factory orders received at goods producers also increased at an accelerated pace in June. That said, export volumes contracted again, as has been seen in each month since March. Weak international client demand and supply issues reportedly led to diminished volumes of new work from abroad." 

 

While job growth appears to have stalled:  "With activity picking up at manufacturing firms, employment levels rose for the second successive month in June. While the rate of job creation was only mild and eased from May, the rise in workforce numbers was linked to greater production requirements and increased new orders." 

 

Nonetheless, since PPI rates have risen faster than the CPI, a profit margin squeeze may have already plagued the sector's clients (wholesalers and retailers).  

 

 

Figure 5 

And manufacturing sales data likewise suggest that the rate of increase is a symptom of the money illusion: value growth has outsprinted the volume by a mile. 

 

June sales value growth of 18.8% eclipsed volume growth of 4.33% by over 4x! (Figure 5, topmost pane) 

 

Have credit financed spending activities in three sectors, namely public spending, household credit, and the manufacturing industry, been insufficient to spur demand to fuel prices higher? 

 

We exclude credit-driven demand from the banks, imports, information and communication, and the labor force. 

 

V. Currency Growth Spike’s Demand Pull: The Economic Reopening and Election Spending; Understanding the BSP’s Defiant Stance 

 

But there is more. 

 

To rescue the banking system, the BSP’s record infusion of Php 2.3 trillion prompted a growth spike in the monetary base or currency issuance in mid-2020. (Figure 5, middle window) 

 

Currency issuance growth spiked by 32.4% in May 2020 and grew by over 20% in the next 9-months.   

 

Since growth dropped to near zero in May 2021, currency issuance by the BSP resumed its sharp upside growth of 10% from January 2022 through May.  

 

Where did the cash hoard flow?    

 

True, the banks absorbed a substantial segment in 2020, but money is not static.   

 

For one thing, the belated reopening of the economy delayed its transmission to the economy, which eventually affected prices. In any case, the election spending binge signified part of its past and present dispersion of unprecedented cash issuances. 

 

Yes, supply/cost-push represents a factor, but so is demand-pull.  

 

In the last analysis, in the understanding that the previous surge in the CPI in 2018 led to increases in Non-Performing Loans (NPL), it seems that keeping rates low remains the only card the BSP can use to prevent a disorderly credit deflation in the industry.  (Figure 5, lowest pane) 

 

Recall that the banking system still operates under the lifeline of the BSP through various relief measures, thereby their defiant stance, which the markets have challenged. 

 

We are on the path toward a stagflationary environment. 

 

VI. Spinning Inflation and Centralization as Strong Economic Growth? 

 

It is incredible for authorities to predict strong growth even when they extend bailouts or 'targeted subsidies' to sectors most pained by rising fuel and commodity prices, which reached Php 6.1 billion. 

 

The crisis in the transport sector, which has spurred some shortages in public transport, prompted authorities to raise the cap on fares by Php 2 starting this July.   

 

As previously explained, these shortages represent a textbook response to price controls.  

 

Yet the capping of prices is barely about protecting the consumers but about restraining the CPI.   

 

It is not about protection when passengers are either deprived of convenience or lose access to transport services.   

 

The offshoot is the loss of productivity of workers and the companies that employ them. 

 

And it isn't growth when financial losses from the pandemic lockdowns compel a college to close doors. 

 

Inquirer, July 6: Twenty-two years after its establishment, Kalayaan College (KC), a nonsectarian private institution founded by professors from the University of the Philippines (UP), announced on Tuesday that it would cease its operations, citing the financial challenges brought about by the COVID-19 pandemic. In an advisory, KC president Ma. Oliva Domingo said they were “faced with no other options” but to shut down because of the plunge in enrollment that caused “continuing” financial losses to the institution. 

 

The school’s experience reveals the industry’s trend toward centralization and monopolization. 

  

Hurt by low investments, joblessness, forced shutdown due to the pandemic, and reduced purchasing power, the middle-class demand for private education has diminished. 

 

In turn, schools catering to this sector may be shrinking.  

 

In its place, public schooling will rise, adding to the fiscal deficits financed by debt or inflation, or both. 

 

And so, with public schools expanding to substitute for the shriveling number of private-sector schools, the education sector shifts towards increased centralization. 

   

But inflation favors some groups at the expense of the citizenry.  

 

So families that benefit from BSP policies and the regulatory, tax, and welfare regime, coming from political institutions and well-connected elite private firms, are likely to enroll in schools of the wealthy.  

 

Extending the logic above, while middle sector schools shrink, schools of the elites prosper. That should represent policy-induced monopolization. 

 

This dynamic may be growth for the beneficiaries of political policies, but how can this be reckoned as economic growth? 

 

VII. SMEs are the True Engine for Real Economic Growth  

 

Finally, the previous administration indeed passed several investment-friendly edicts.   

 

But most of these investment enticements are primarily designed for the big players. Unknown to most, trickle-down policies anchor such an investment regime, where big-ticket investors are required to associate with politicians and the bureaucracy. 

 

Most people fail to realize that in 2020, Small and Medium Enterprises (SMEs) comprised 99.5% of all businesses and 63% of the total employment, according to the Department of Trade and Industry. Ironically, the large companies delivered 64% of the economic value-added. This striking divergence reveals the implicit biases of domestic economic policies. These newly passed laws only reinforce such prejudice. 

 

And it is one thing to open select sectors for investments while imposing a barrage of regulatory hurdles on operations. Expansive public control over resources and finances crowds out the SMEs too.  

 

Real economic growth emanates from SMEs, the grassroots entrepreneurs. Unfortunately, the incumbent monetary, tax and regulatory policies skew the economic playing field favoring large companies at their expense.