A permanent lowering of the interest rate can only be the outcome of increased capital formation, never the result of any technical banking measures. Attempts to achieve a long-term lowering of interest rates by expanding the circulation credit of the banks ineluctably result in a temporary boom that leads to a crisis and to a depression—Ludwig von Mises
In this issue
Bank’s November Cash Reserves Soar on BSP’s QE and RRR Cuts! The Taal Volcano Eruption Scapegoat for Higher Inflation!
-BSP’s QE, November’s Php 100 Billion RRR Cuts and Bank Borrowing Spiked Bank’s Cash Holdings Last November!
-The Perils of Debt Monetization (Money Printing)
-FX Deposits Engulfed by Deflation as Peso Savings Deposit Conditions Remain Lethargic!
-Banking Loans Stagnate in the Face of Massive QE, RRR and Policy Rate Cuts as Investments and Profits Decelerate!
-In spite of BSP’s “Shock and Awe” Measures, NPLs at Multi-Year High, Treasury Yields Rise Across the Board!
-Mt. Pinatubo Eruption Experience: Sorry, but Taal Volcano Eruption Won’t Spur or Magnify Inflation!
Bank’s November Cash Reserves Soar on BSP’s QE and RRR Cuts! The Taal Volcano Eruption Scapegoat for Higher Inflation!
“If there are risk issues to raise, it will have to be the prospects of managing liquidity. Aside from simply having more loans versus deposits, using liquid assets as a source for funding more earning assets needs our attention. However, the bigger issue will be that continuing on the path of being a bank-based financial market means that the provision of credit will require taking on mismatches in tenor and in liquidity. As more credit is dispensed, such mismatches will only increase—BSP led FSCC’s 2018 Financial Stability Report
BSP’s QE, November’s Php 100 Billion RRR Cuts and Bank Borrowing Spiked Bank’s Cash Holdings Last November!
Last week, our discussion* centered on the doubling of the CPI last December, which had been powered by the BSP’s second leg of the domestic version of QE, and its connection with government finances.
*Another Bailout of Banks: The BSP Silently Re-Launches the 2nd Leg of QE with a Bang! December’s CPI Doubled! January 12, 2020
This week, aside from the updates of the balance sheet, the impact of the BSP’s massive QE to the banking system will be shown.
Figure 1
Along with a 100 bps cut in the Reserve Requirement Ratio (RRR) last November, which freed up an estimated Php 100 billion, the BSP intensified its rescue of the banking system, by unleashing a tsunami of liquidity through debt monetization, that is net claims on the central government expanded vigorously month-on-month by 7.7% (Php 150.6 billion) or year-on-year by 13.9% Php 258.2 billion.
Such deluge of liquidity swelled the banking system’s cash reserves by 8.8% (Php 216.146 billion) m-o-m or by 9.03% (Php 219.087 billion) y-o-y to Php 2.65 trillion, a 23-month high! (Figure 1 and 2 upmost window)
BSP data on the banking system’s balance sheet and domestic liquidity can be found here and here, respectively.
The U-turn of net claims on the central government, which started in May 2019, played a crucial role in the turnaround of cash and due banks from deficit to growth.
Figure 2
The banking system’s investment assets consisting of Available for Sale (AFS) and Held for Trading (HFT), which registered declines last November, must have been part of the BSP’s liquidity operations. On a month on month basis, AFS declined Php 41.97 billion, its largest since September 2018 while Held for Trading assets decreased by Php 13.02 billion. (Figure 2, middle pane)
The BSP’s QE and RRR cuts were not the only factors. Banks were busy raising funds from the capital markets. Bills payable rose Php 22.08 billion while Bonds increased Php 19.77 billion for a total of Php 41.85 billion, month-on-month. Year-on-year, Bills increased by 7.8% (Php 58.63 billion) to Php 811.7 billion, while Bonds rocketed 152.71% (Php 329.53 billion) to Php 545.33 billion for a combined growth of Php 388.166 billion or 40.07% YoY to Php 1.356 trillion. (Figure 2, lowest window)
BSP’s debt monetization supercharged the RRR cuts, which seemed to have been inadequate in flooding the system with liquidity, and the bond raising by the banks on the capital markets.
Such liquidity injecting measures will continue, another RRR cut took effect last December. There would be more in 2020.
Despite all these, banks continue to aggressively borrow from the public this 2020 as in the case of Union Bank, Bank of the Philippine Islands and Philippine Savings Bank. It never seems to end.
The Perils of Debt Monetization (Money Printing)
The BSP expects that the sheer “shock and awe” intensity of RRR cuts combined with such massive scale of debt monetization would not only normalize liquidity conditions that had been strangling the industry, but likewise spur banks to breathe new life on credit growth, which ramifications would be the attainment of CPI, GDP and revenue targets.
If everything has been so rosy, why all these?
Yet, even if the task of shoring up liquidity for the financial industry succeeds, this should be a precarious experiment.
Money printing from debt monetization AND bank credit expansion will function as a lethal smoldering cauldron that would combust real economy prices to the stratosphere!
Such an inflation outbreak would not only wreak havoc on the peso but likewise, impair the nation's division of labor, impel a discoordination of the economic process, spike interest rates and break open to the public, the banking system’s skeletons in the closet, which would likely spur a domino effect from a credit crunch!
Or have the BSP embraced the monetary sect called the Modern Monetary Theory, which sees free lunch from money printing?
FX Deposits Engulfed by Deflation as Peso Savings Deposit Conditions Remain Lethargic!
Figure 3
While the tidal wave of liquidity injected into the financial system last November did spur a surge in cash levels, the BSP’s Key Performance Indicators (KPI) for liquidity hardly reflected substantial improvements due to the sluggish conditions of deposit liabilities!
Liquid assets to deposits ratio barely increased, it grew from 47.58% in October to 47.99% in November, still lower than the September’s 48.28%. Cash and due banks to Deposits ratio jumped from 18.54% in October to 19.91% in November, reaching an 11-month high. (Figure 3, upmost pane)
That said, total deposit liabilities registered an unimpressive 6.51% last November, a 7-month high.
Growth of total deposits emanated mostly from peso deposits, which expanded by an unimpressive 7.98%, an 11-month high, coming in the face of the BSP’s widening of the QE valve PLUS the RRR cuts.
Peso demand deposits, which advanced by a hefty 13.82%, carried the weight of the segment’s gains, and most likely, absorbed part of the BSP’s QE.
Savings deposits crept out of the deflationary zone last October and had been up by a meager 2.66% in November. Growth of time deposits, meanwhile, slowed to 12.6% in November from 16.1% a month ago.
Nevertheless, November’s performance hardly pushed the banking system’s savings deposits, which had been reflected in the M2, from its 6-year downtrend! (Figure 3, middle window)
Might RRR cuts and a possible continuation of the money printing last December do the trick? Or will it require more of the same in 2020?
Didn’t some sages call doing the same things over and over again, but expecting different results as insanity?
Strikingly, while the massive injections kept peso savings afloat, Foreign Currency deposits tumbled to the deflationary domain! (Figure 3, lowest window)
Because demand and time deposits contracted in November, total fx deposits shrunk by .19%! The scanty 3.32% growth of FX’s savings deposit was insufficient to push FX deposits to growth.
So while banks have been starved out of FX, the BSP’s GIRs have reached a record high! What gives? Did the BSP use the FX deposits of the banking system to augment its statistical reserves?
Banking Loans Stagnate in the Face of Massive QE, RRR and Policy Rate Cuts as Investments and Profits Decelerate!
Figure 4
And it should be apparent that the banking system’s Total Loan Portfolio (TLP) has shadowed the trend of savings, the fundamental source of bank lending.
TLP inclusive of Interbank and Reverse Repo transactions bounced marginally from 7.35% in October to 8.13% in November, a growth rate which remains below September’s 8.91%. It is important to remember that both factors have been southbound since 2013. (Figure 4, upmost window)
And to arrest forces of deflation from engulfing a credit-dependent economy, the BSP’s massive liquidity tsunami program has implicitly been engineered to rekindle credit expansion, again, to meet its money supply, therefore the CPI, GDP, and revenue targets. That’s what inflation targeting has been all about, which is the BSP’s primary objective.
Interestingly, the BSP’s grand liquidity tsunami program has yet to reinvigorate the bank credit expansion and money supply conditions substantially.
And with the BSP acquiring National Government’s debt from the banking system, investment growth slowed considerably last November.
Total Net Investments (financial assets and equity investments in subsidiaries) decelerated to 11.31% in November from 15.19% a month ago. Because of the big bond boom, the growth of total investments zoomed to its pinnacle in April 2019 at 20%. (Figure 4, middle pane)
Curiously, even with the BSP’s direct subsidies to the banking system, registered market gains appears to be fading. Accumulated gains recorded a 228% increase in November to Php 19.29 billion, which was higher in percentage than October’s 212%, but lower in nominal terms the month’s gains Php 22.06 billion.
It appears that the beneficial impact from the subsidies from the big bond boom has been eroding too. Hence, the BSP’s rescue would seem not just aimed to provide liquidity, but likewise, maintain the bank’s profitability—another indirect means to enhance liquidity.
In spite of BSP’s “Shock and Awe” Measures, NPLs at Multi-Year High, Treasury Yields Rise Across the Board!
Figure 5
Fascinatingly, despite the avalanche of liquidity injections, part of which has filtered into M3, mostly via M2’s demand deposits, Net Non-Performing Loans (NPL) remains adrift at multi-year highs! And these represent the only banking system’s declared and published NPLs.
By reflating the system through the revving up of credit expansion, the BSP believes that higher GDP would contain the outbreak of delinquent debt, thereby bolstering financial liquidity. Unfortunately, in spite of the flooding of liquidity, Net NPLs had been steady at 1.15% in November, again slightly off the multi-year high carved last August at 1.18%. And NPLs have clung tenaciously at such levels even as Money Supply conditions have modestly improved. (Figure 5 upmost window)
More pointedly, the aggressive injection of liquidity by the BSP barely been improved the economic and financial conditions, thus the elevated published NPLs.
To emphasize, money supply expansion is mostly a product of bank credit expansion. From the BSP on November’s liquidity conditions: “Demand for credit remained the principal driver of money supply growth.”
Since bank credit conditions represent the essential causal factor to changes in money supply, its declining growth rate, thereby, leads to the diminishment of the latter. More importantly, when bank credit contracts or is defaulted upon, the money supply shrinks.
Thus, under the current environment, a combination of the declining rate of bank credit expansion AND rising debt delinquencies in the banking system fundamentally erode the money supply conditions or financial liquidity.
So with banks drudging to revitalize liquidity conditions, the BSP has thus, assumed command and control by printing money through monetization of debt, which usually has been used to finance deficits.
Since all actions have consequences, sadly, the immediate impact from this "shock and awe" policy has been to raise rates materially across the Treasury yield curve (PDS) this week and in the first 11 trading days of January. T-Bill (BVAL) rates continue to climb! (Figure 5, mid-pane)
With the draining of excess liquidity previously held by the National Government, with the massive infusion of money from the BSP, with the crowding-out effect in financing, as banks and the NG compete for public savings, and with higher street inflation due to such money printing measures, rates can be expected to rise significantly over time.
Stagflation is upon us in no time.
The late BSP Governor Nestor Espenilla Jr.’s published this concern at the 2017 Financial Stability Report, which should reverberate…
While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner.
Mt. Pinatubo Eruption Experience: Sorry, but Taal Volcano Eruption Won’t Spur or Magnify Inflation!
Finally, the search for a convenient scapegoat as the culprit for inflation has emerged.
For possibly fanning the flames of inflation, media has pointed the finger at last week’s Taal volcano eruption.
Yet, if Mount Pinatubo’s episode on June 15, 1991, should serve as a paradigm, the second-largest eruption in the twentieth century, surging CPI didn’t happen. In fact, in the aftermath of the eruption, the CPI plunged! Plummeting money supply growth preceded or caused the crash of the CPI back then. (Figure 5, lowest pane)
The CPI drifted at 18.7% to 21.1% in the first five months of 1991. In June or during the month of Mt. Pinatubo’s unrest, the CPI registered 20.6%. The CPI descended below 20%, beginning October. In 1992, except for January’s 10.9%, the CPI was below 10%.
On the other hand, after culminating in 1990 at 28.6% in October, M3’s growth trend descended sharply lower, falling below 14% by September 1991. With money supply growth tempered, the CPI followed suit.
Because imports can remedy supply shocks caused by natural disasters, such dislocations are unlikely to pressure prices upwards for long or if at all. That’s in the condition that markets are allowed to function.
The lightning rod for a higher CPI, which will be cited by media, will emerge from many irrelevant events.
But no one will point at the BSP’s money printing as the primary culprit.
