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

 

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

In this issue

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

September’s deficit highlights its first phase.

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

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

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

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

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

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

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

This brings us to September’s performance. 

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

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

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

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

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

Figure 1

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

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

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

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

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

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

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

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

Figure 2

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Figure 3

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

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

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

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

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

Signs of normal times?

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

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

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

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

Figure 4 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Figure 5

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Figure 6

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

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

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

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

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

When have these been signs of "normal?"

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

Figure 7

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

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

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

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

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

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

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

___

References:

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

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

 

The USD-Philippine Peso Surges to 18-Month High: BSP Blames 'Speculators' as GIR Composition Exhibits Intervention Limits

 

Bretton Woods II served up a deflationary impulse (globalization, open trade, just-in-time supply chains, and only one supply chain [Foxconn], not many), and Bretton Woods III will serve up an inflationary impulse (de-globalization, autarky, just-in-case hoarding of commodities and duplication of supply chains, and more military spending to be able to protect whatever seaborne trade is left— Zoltan Pozsar

The USD-Philippine Peso Surges to 18-Month High: BSP Blames 'Speculators' as GIR Composition Exhibits Intervention Limits

In this issue

I. The Strong US Dollar and the Weak Philippine Peso

II. As USD/Philippine Peso Surged to 18-Month High, BSP Warns Against "Speculation"

III. The BSP’s Shift to a “Dovish" Stance; The USDPHP’s Lindy Effect

IV. Why the BSP’s Dovish Shift: Weakening GDP and Surging Interest Payments on Public Debt

V. USDPHP’s Bull Market Based on Inflationary Financing of Deficit Spending

VI. Soaring External Debt Means Surging USD "Shorts"

VII. The Philippine Peso to Benefit from a USD "Collapse?" BSP’s Assets Reveals a Different Story

VIII. The Composition of the BSP’s Gross International Reserves Exposes the Limits of the BSP’s Potential Interventions

IX. Will a Weak Peso Boost Exports While Hampering Imports?

X. The BSP Points to "Market Failure" by Shifting the Blame on "Speculators"

XI. USD Philippine Peso Signals Higher Inflation Risks, The Probable Shift to a Multipolar Currency System

The USD-Philippine Peso Surges to 18-Month High: BSP Blames 'Speculators' as GIR Composition Exhibits Intervention Limits 

As the USD Philippine peso soared to an 18-month high, the BSP points blamed "speculators" for the surge. However, this finger-pointing constitutes a smoke-screen.

I. The Strong US Dollar and the Weak Philippine Peso

Figure 1 

The US dollar index ($DXY) rose by 0.26% this week. The USD increased against most Asian currencies, with the exception of the Indian rupee ($INR), which fell by 0.29%. The INR benefited from inflows into its manic stock markets, a record $25 billion central bank payout to the government, and an all-time high in international reserves (as of May 17). (Figure 1, top and middle windows)

For the week, the USD surged the most against the Thai baht ($THB) by 1.6%, the South Korean won ($KRW) by 1.05%, and the Philippine peso ($PHP) by 0.99%.

Despite a massive $58 billion support and repeated threats to intervene by the Bank of Japan (BoJ), the Japanese yen fell by 0.9% week-on-week (WoW), with $USDJPY approaching 157, just slightly below 158, which represented a 34-year high reached at the end of April 2024.

Year to date, down by 5%, the PHP signified the region’s fifth weakest currency after the JPY (11.3%), THB (7.2%), KRW (6.1%), and the Vietnamese dong ($VND, 5.7%). 

II. As USD/Philippine Peso Surged to 18-Month High, BSP Warns Against "Speculation "

 The USDPHP reached Php 58.27, an 18-month high, on May 21st. 

Echoing the BoJ, the Philippine BSP chief implicitly chided speculators: The dollar continued to strengthen as the Federal Reserve signaled delay in cutting interest rates. The BSP continues to monitor the foreign exchange market but allows the market to function without aiming to protect a certain exchange rate. Nonetheless, the BSP will participate in the market when necessary to smoothen excessive volatility and restore order during periods of stress. (Businessworld, 2024)

In contrast to the BSP declaration, out of the 28 USD crosses, 13 were positive, and the USDPHP outperformed that day, according to Exante Data.

Further, while the BSP’s "plausible deniability" did not mention interventions, two days later, newswires reported that the monetary authority did support the peso: Mr. Remolona said that the central bank intervened by small amounts on Tuesday, when the peso sank to the P58 level for the first time in over 18 months or since Nov. 10, 2022. (Businessworld, 2024)

Even more, news also indicated that even before last week’s USDPHP’s November 22 high, the BSP had already been carrying out operations in support of the peso as early as May 7.

The BSP has been warning speculators since last April, or in June 2022, when the USDPHP was at 54.8!

Media suggests that the BSP’s shift from "hawkish" to "dovish" sentiment could have been the factor, yet the BSP remains adamant: Bangko Sentral ng Pilipinas Governor Eli Remolona Jr. remains unfazed by the hawkish signals from the US Federal Reserve, saying the BSP’s monetary policy decisions will be guided primarily by the Philippines’ own economic data rather than the Fed’s moves. (Inquirer, 2024)

III. The BSP’s Shift to a “Dovish" Stance; The USDPHP’s Lindy Effect

The BSP’s predilection in easing policy rates regardless of the US Federal Reserve’s stance is an exposition—it suggests that the Fed was a convenient pretext to justify the current monetary stance of local authorities. The BSP would readily abandon it when politics so determined.

To boost the economy, the BSP chief proposes to cut rates by 50 bps in the second half of 2024, possibly starting this August.

Nonetheless, typical of central banks, markets supposedly function as the culprits for any economic maladjustments—and not policymakers. They assume the role of Gandalf the Grey/White (in the Lord of the Rings series), setting boundaries against the adversary. 

In the Fellowship of the Ring, Gandalf commanded the demon Balrog against crossing the Bridge of Khazad-dûm, 'You shall not pass!' At least, Gandalf emerged victorious in his battle against the Balrog. 

On the other hand, the USDPHP could be considered a trend with Lindy characteristics. The Lindy effect is the "idea that the older something is, the longer it's likely to be around in the future" (Waschenfelder, 2021). In a word: time-bounded resilience. (Figure 1, lower image) 

Since gaining independence from the US, the Philippine peso has been pegged to the USD at Php 2. However, the defunct Central Bank of the Philippines (CBP) experimented with currency decontrols and reestablishment of controls until its dissolution and the establishment of the Bangko Sentral ng Pilipinas (BSP) in July 1993, which then adopted a managed float system (Wikipedia). 

In any case, from the CBP to the BSP, the USDPHP has remained on a 54-year uptrend, with periodic countercyclical movements. 

It's also no coincidence that the emergence of the USDPHP bull market has coincided with 'the Nixon Shock' in August 1971, which marked the end of the Bretton Woods system (dollar fixed to gold but gold was allowed only for international exchange—WGC) or the transition to the incumbent US dollar standard, the primary currency reserve for the global economy (CFR, 2023).

The thing is, the drivers of the USDPHP bull market from the past remain principal factors today, or even worse—meaning they should reinforce its bull market. 

IV. Why the BSP’s Dovish Shift: Weakening GDP and Surging Interest Payments on Public Debt 

Why would the BSP insist on cutting rates ahead of the Fed? 

First and foremost, the BSP may be aware that the GDP represents a mirage—it is weaker than advertised. This notion has been supported by the Q1 2024 financial performance of the PSEi 30. 

Naturally, with firms heavily reliant on credit, higher rates pose risks to both the GDP and the banking system. 

Secondly, and more importantly, public debt repayments and refinancing have been skyrocketing. 

Figure 2

Four-month public debt servicing soared by 49% to a historic Php 1.15 trillion, bolstered by interest payments (38.4%) and amortizations (52.4%). Though 82% of it accounted for local currency-denominated liabilities, it was lower than last year’s 84.9%, which means foreign obligations filled the rest. (Figure 2, topmost graph)

The four-month carrying cost of published public debt was just 28.3% off the annual or last year’s all-time high! "Higher for longer" translates to even more debt repayments and refinancing on the back of higher repricing. (Figure 2, second to the highest graph)

Though the mainstream rejoiced at April’s fiscal surplus, brought about by the record revenues of Php 537 billion as a result of the annual tax filing, non-tax revenues, which comprised 41.6% of the total, delivered the substance. 

Non-tax revenues more than doubled (114%) while BIR revenues grew 12.7%. For most years, surpluses signified a seasonal feature of April—again in response to the annual tax filing.

And yet, public spending surged 32.3% to Php 494.5 billion.

In a nutshell, due to non-tax revenues—partly from dividends of Government-Owned and Controlled Corporations and "one-off remittance of disposition proceeds from the Bases Conversion Development Authority (BCDA)"—deficit spending was moderated.

Ironically, despite this, the cumulative four-month fiscal deficit swelled by 12.7% year-over-year—the third-largest—as the Bureau of Treasury drew from its cash reserves (-20.4%) and reduced its borrowing (-23%). The drain of liquidity likely means a tsunami of borrowings going into the year-end. (Figure 2, second to the lowest chart)

Figure 3

And yet, the USDPHP has tracked the uptrend in public spending, and subsequently, the fiscal deficit. (Figure 2, lowest chart and Figure 3, topmost graph)

V. USDPHP’s Bull Market Based on Inflationary Financing of Deficit Spending

Naturally, deficit spending requires financing. How? 

Aside from taxes, the government draws from the public’s savings. Therefore, the uptrend in USDPHP also reflects the "unstoppable" bull market in public debt. (Figure 3, second to the highest image)

Due to the insufficiency of public savings, financial authorities have resorted to the "monetization " of public liabilities.  

The acceleration of the USDPHP also echoes the rise of the BSP’s net claims on the central government (NCoCG). (Figure 3, second to the lowest graph) 

For possible public relations (PR) goals, monetary authorities limit the expansion of their balance sheets. Instead, they rely on the banking and financial system to implement their objectives. 

Consequently, the USDPHP likewise manifests the inflationary credit expansion of the banking system through the monetization of public liabilities. All-time highs in bank holdings of NCoCG should eventually impact the USDPHP. (Figure 3, lowest window) 

Additionally, record bank holdings of NCoCG have also aligned with their historic Held-to-Maturity (HTM) assets, which escalates the siphoning off of liquidity in the system.

VI. Soaring External Debt Means Surging USD "Shorts " 

Hold it, because there’s more.

The government has borrowed not only to fulfill the FX requirements of the economy but also to meet the BSP’s balance sheet target.

Figure 4

Though financial authorities have relied on domestic borrowings to bridge their financial chasm, external borrowings have also been accelerating. In Q4 2023, it grew by 12.4% to a record USD 125.4 billion. (Figure 4, topmost chart) 

Historic fiscal deficits have reflected the surge in external debt. (Figure 4, second to the highest graph) 

The public sector, with a 58% share as of December 2023, has accounted for a vast majority of the total. (Figure 4, lowest window) 

Since external borrowing has grown faster than the published Gross International Reserves (GIR), the debt stock has now surpassed the purported reserves. That being said, do these appear to be 'ample reserves' to defend the peso? (Figure 4, second to the lowest image) 

Furthermore, the intensified increases in external debt have also contributed to USD "shorts."

Figure 5

While the government can inflate away its domestic debt, paid for by the loss of purchasing power of the citizenry, this would magnify the real value of FX debt—or require more pesos to finance FX operations. (Figure 5, topmost visual) 

So why shouldn’t the USDPHP be higher?

VII. The Philippine Peso to Benefit from a USD "Collapse?" BSP’s Assets Reveals a Different Story

The grapevine suggests that the Philippine peso could benefit from weakness or even a "collapse" in the US dollar.  

However, the facts tell a different story.

Presently, the world operates under a de facto US dollar standard, where US dollar reserves serve as an anchor for domestic currency and monetary operations. 

As a share of its balance sheet, the BSP have built its international reserve holdings from 31% in 1993 to 85% in 2010.  (Figure 5, second to the highest pane) 

The BSP have maintained its FX holdings in a tight range of 85% to 87% until 2019.  The BSP's local monetary operations have been closely tied to these reserves. This reliance has led to a rising share of currency issuance compared to liabilities. (Figure 5, second to the lowest graph) 

The buildup of FX reserves fueled a 9-year countercyclical rebound (2004-2012) in the Philippine peso. It hallmarked the "salad days" for the Philippine peso. 

This period also witnessed a reduction in the share of currency issuance, representing an implicit cleanup of both government and private sector balance sheets. 

However, this changed following the Great Recession in 2007-2008, when the BSP, like its global peers, lowered rates to stimulate credit expansion and mitigate economic weaknesses. This marked the beginning of the era of easy money.

Fast forward to the present, a massive injection into the financial system amounting to Php 2.2 trillion, or about 11% of the GDP, signaled an emergency monetary response to the pandemic crisis. 

This significantly inflationary operation resulted in a substantial decline in FX reserves, indicating that the government has been printing more money than its FX anchor permits. 

Given these factors, why shouldn't the USDPHP rise? 

VIII. The Composition of the BSP’s Gross International Reserves Exposes the Limits of the BSP’s Potential Interventions

Through a gradual buildup of net foreign assets, the BSP has been attempting to restore its previous range of FX reserves. However, the growth rates of BSP's GIR and banks' FX assets have been slowing significantly. In contrast, the BSP's net foreign assets continue to expand.

Figure 6

The BSP has been relying less on its FX holdings for its GIR operations, as evidenced by the declining trend. (Figure 6, topmost graph)

Since 2018, the BSP has modernized, utilizing Other Reserve Assets (ORA) such as swaps, repos, and other short-term loans to boost its reserves. From a peak of 12.5% in January 2023, ORA accounted for 5.3% of the GIR as of March. (Figure 6, second to the highest window)

Interestingly, despite record gold prices, the BSP has been selling off its gold reserves, leading to a decrease in physical metal holdings. (Figure 6, second to the lowest chart)

However, thanks to record USD gold prices, this has bolstered the headline value of the GIR.

In short, the headline GIR conceals its actual state through the use of 'borrowed reserves.' 

Even with borrowed reserves, the rising USDPHP has stalled GIR growth. (Figure 6, lowest image)

Figure 7 

In other words, through the expansion of borrowed reserves in the composition of the GIR, BSP operations ultimately depend on loose financial conditions abroad. 

Nevertheless, a tightening of access to local and foreign FX flows will limit the BSP’s capacity to intervene, as evidenced by the growth strains in the GIR relative to the USDPHP. (Figure 7, topmost graph) 

So why shouldn’t the USDPHP rise?

Furthermore, signaling a divergence between a 'genuinely hawkish' Fed and a 'dovish' BSP could lead to a wider yield spread favoring US Treasuries over domestic counterparts, similar to Q4 2020 through Q2 2021, when the USDPHP rose fastest. (Figure 7, second to the highest graph) 

So why shouldn’t the USDPHP rise? 

Here's the thing: The BSP has benefited from the rise of the USD, which has led to revaluation gains from its USD asset holdings. This is evident in its increased reliance on 'investments' while reducing its gold and FX holdings. 

Unfortunately, we don’t have data on the distribution share of the GIR or the BSP’s FX portfolio.

However, with the BSP’s FX reserves accounting for over 70% of its assets, how would a USD "collapse" favor the PHP?

To elaborate, with the BSP’s net worth and capital accounting for only 1.9% and 0.8% of its December 2023 assets, wouldn’t a substantial markdown in its USD portfolio render the BSP insolvent? So, what would the BSP do, print more?

As noted in 2021, (bold original) 

The BSP must amass sufficient FX reserves to match domestic monetary operations required to maintain the de facto US currency reserve standard. Otherwise, with inadequate FX anchor, the peso must fall.  (Prudent Investor, 2021) 

In both cases, why shouldn’t the USDPHP rise? 

All this is owed to the Keynesian policies of 'build and they will come,' predicated on 'spending drives the economy,' which has led to a record shortfall in savings and increased reliance on debt (local and foreign) to fill the funding gap. 

How is this supposed to represent "sound" macroeconomics? 

Why shouldn’t the USDPHP rise? 

IX. Will a Weak Peso Boost Exports While Hampering Imports? 

We are further told by the echo chamber that there is a bright side to the weak peso. 

Or they have been quick to rationalize: a weaker peso would boost export competitiveness and hinder imports. 

Really? 

Data from the Philippine Statistics Authority says otherwise. 

Firstly, from 2013 to the end of 2023, imports have risen alongside the increase in the USDPHP. (Figure 7, second to the lowest image)

Why? Simply put, due to the inadequacy of local production and the political preference to prioritize household consumption—evidenced by the record savings-investment gap. Additionally, interventionist and inflationary policies reduce competitiveness. 

Under such conditions, the bull market in the USDPHP has not hindered import growth. Weak imports in the face of a rising USDPHP have only begun to surface in 2024.

Moreover, while the overall trend in goods exports mirrors the rise of the USDPHP, increasing USDPHP have not necessarily translated to a surge in exports. (Figure 7, lowest chart)

Using reductio ad absurdum, if weak currencies were to deliver an export utopia, why not accelerate the devaluation? Better yet, why not embrace hyperinflation or the utter destruction of the Philippine peso?

The reality is that none of the countries that experienced the worst episodes of hyperinflation—such as Hungary, Yugoslavia, Zimbabwe, Republika Srpska, and others—became export giants during the devastation of their respective currencies. 

The essence is that heuristics do not equate to economics.

Certainly, the weak peso, primarily a result of domestic policies, will have redistribution effects on the economy, and some sectors or enterprises may benefit from it. However, the overall impact is a decline in the standard of living for the general public. 

Why is the USDPHP destined to reach new highs?

Briefly, it's due to the accumulation of economic maladjustments resulting from internal policies.

Figure 8 

X. The BSP Points to "Market Failure" by Shifting the Blame on "Speculators" 

The markets or the so-called 'speculators' understand this. Unprecedented leveraging raises manifold risks, including interest, currency, and credit risks. (Figure 8, topmost image)

As previously explained, intensified immersion in domestic debt does not serve as a talisman against the 'demon' represented by a crisis. The ventilation of economic imbalances eventually forces them to surface.

Speculators serve as easy scapegoats for a politicized agency meant to protect redistribution policies favoring the government and the elites. Authorities shift the onus onto the source of the imbalances by pointing to the supposed role of "market failure."

Still, why does the BSP not see the rocketing growth in FX deposits? Are they not speculators too? (Figure 8, middle chart) 

Since the penetration levels of the banking system remain far from the levels desired by the establishment, could this buildup in FX deposits primarily be about the elites? Will the BSP crack down on them? 

XI. USD Philippine Peso Signals Higher Inflation Risks, The Probable Shift to a Multipolar Currency System 

Unlike in 2018, when falling CPI coincided with a rally in the peso, the BSP’s ONRRP elevated rate has recently paralleled the rise of the USDPHP. (Figure 8, lowest graph)

If anything, the USDPHP tells us that the inflation genie remains lurking around the corner, yet to wave its magical wand—a third, "bigger" wave of the CPI. 

For the USDPHP, whether 'hawkish' or 'dovish' doesn't matter. 

Rather, the BSP’s inclination towards rate cuts is a response to the softening internals of the GDP and the increasing cost of carrying public and private debt, along with other forms of leverage. 

Finally, while we believe that the USD standard is in its twilight phase, this climax doesn’t necessarily translate to an imminent 'collapse' in the USD.

As illustrated by the BSP’s balance sheet, FX assets (mostly in USDs) comprise the majority.

The USD standard entails that central banks hold assets mostly in USDs.

The transition to a "war economy" implies increased socialization through deficit 'wartime' spending—signifying a global shift towards more inflationary policies in support of war and other war-related agendas. 

This also suggests a diminishing contribution from the private sector. 

That said, as the world realigns along hegemonic lines, nearly every nation would likely follow the US in embracing fiscal dominance—in which inflation becomes a feature, not a bug. 

Moreover, the expanding influence of the "war economy" signifies a transition to a "multipolar" world. 

This transition implies involvement in more aspects—social, economic, monetary, financial, technological, informational, environmental, and tourism-related—leading to increased global economic, financial, and social fragmentation, supply chain dislocations, the formation of economic or trading blocs, and more. 

All of these factors extrapolate to reduced economic efficiencies and higher risks. 

The culmination of the USD standard might also signal a transition towards a "multipolar" monetary system, where the architecture of the currency system of the emerging competitor(s) could be anchored on a basket of commodities. 

While the sequence of realignment of alliances has begun, other developments have yet to materialize. 

As the renowned Credit Suisse analyst Zoltan Pozsar has propounded,

We are witnessing the birth of Bretton Woods III – a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West. A crisis is unfolding. A crisis of commodities. Commodities are collateral, and collateral is money, and this crisis is about the rising allure of outside money over inside money. Bretton Woods II was built on inside money, and its foundations crumbled a week ago when the G7 seized Russia’s FX reserves… (Pozsar, 2022) 

____

References

Businessworld, BSP seeks to curb forex speculation, May 24,2024 

Businessworld, Peso hits 58:$1 as Fed stays hawkish, May 21, 2024 

Inquirer.net, BSP chief unfazed by U.S. Fed’s hawkish signals, May 23, 204

Thomas Waschenfelder, The Lindy Effect: Finding Signal In Noise, Wealest.com

Wikipedia, Philippine Peso

World Gold Council, The Bretton Woods System

Anshu Siripurapu and Noah Berman, The Dollar: The World’s Reserve Currency, July 19,2023 CFR.org,

Prudent Investor Newsletter, External Debt Growth Accelerates in Q3! Why This Uptrend Will Continue, December 19, 2021

Zoltan Pozsar, Bretton Woods III, Credit Suisse Economics, bullionstar.com March 7, 2022