Philippine Uni-Comm Bank Lending in 2024: Why Milestone Bank Credit Expansion and Systemic Leveraging Extrapolates to Mounting Systemic Fragility

 

Credit Expansion No Substitute for Capital. These opinions are passionately rejected by the union bosses and their followers among politicians and the self-styled intellectuals. The panacea they recommend to fight unemployment is credit expansion and inflation, euphemistically called an "easy money policy"—Ludwig von Mises 

In this issue

Philippine Uni-Comm Bank Lending in 2024: Why Milestone Bank Credit Expansion and Systemic Leveraging Extrapolates to Mounting Systemic Fragility

I. Challenging the BSP’s Easing Cycle Narrative

II. How BSP’s Credit Card Subsidies Materially Transformed Banking Business Model

III. Bank Lending to Real Estate Expanded in 2024, Even as Sector’s GDP Slumped to All-Time Lows!

IV. Credit Intensity Hits Second-Highest Levels!

V. Redux: The Debt-to-GDP Myth: A Background

VI. The GDP is Mostly About Debt: 2024 Public Debt-to-GDP Reaches Second Highest Level Since 2005!

VII. The Mirage of Labor Productivity

VIII. Conclusion 

Philippine Uni-Comm Bank Lending in 2024: Why Milestone Bank Credit Expansion and Systemic Leveraging Extrapolates to Mounting Systemic Fragility 

Universal-commercial bank lending performance in 2024 provides some critical insights. Combined with public debt and GDP, these reveal rising financial and economic fragilities. 

I. Challenging the BSP’s Easing Cycle Narrative 

Inquirer.net, February 13, 2025: "Bank lending posted its fastest growth in two years to cross the P13-trillion mark in December, as the start of the interest rate-cutting cycle and the typical surge in economic activities during the holiday season boosted both consumer and business demand for loans. Latest data from the Bangko Sentral ng Pilipinas (BSP) showed that outstanding loans of big banks, excluding their lending with each other, expanded by 12.2 percent year-on-year to P13.14 trillion in the final month of 2024, beating the 11.1-percent growth in November. That was the briskest pace of credit growth since December 2022." 

While the BSP kept its policy rate unchanged this week, it has engaged in an 'easing cycle' following three rate cuts, a substantial RRR reduction, and possibly record government spending in 2024.

Figure 1

The notion that the BSP's easing cycle has driven bank lending growth is not supported by the data. While December saw the "briskest...since December 2022," the 13.54% growth rate in that earlier period occurred near the peak of a hiking cycle, suggesting that neither rate hikes nor cuts significantly influence growth rates.

Official rates peaked in October 2023, ten months after the December 2022 lending surge.

II. How BSP’s Credit Card Subsidies Materially Transformed Banking Business Model 

Unlike the BSP's 2018 interest rate cycle, where hikes coincided with falling bank lending rates, the current credit market anomalies likely reflect distortions caused by the BSP's pandemic-era policies. These included an interest rate cap on credit cards and various relief measures. (Figure 1, topmost image)

Specifically, the BSP's interest rate cap in September 2020 significantly reshaped or transformed the banking system's business model, demonstrably shifting focus from business to consumer loans. 

The consumer share of universal-commercial (UC) bank loans surged by 27.4% over four years, increasing from 9.5% in 2020 to 12.1% in 2024. (Figure 1, middle window)

The biggest segment growth came from credit cards and salary loans:

-Credit card loans grew at a 22.3% CAGR from 2020 to 2024, increasing their share from 4.6% to 7.1% of total loans. Since 2018, their share has more than doubled from 3.4% to 7.1%. (Figure 1, lowest graph)

-Salary loans grew at an 18.07% CAGR over the same period, expanding their share from 0.9% to 1.2%.

Figure 2

-December's month-on-month (MoM) growth of 3.38% marked the highest since January 2022's 3.98%. Contrary to the assumption of seasonality, the highest monthly growth rates have not been confined to the holiday season. (Figure 2, topmost diagram) 

This astronomical growth in consumer credit, further fueled by December's reacceleration, underscores the substantial leveraging of household balance sheets.  

III. Bank Lending to Real Estate Expanded in 2024, Even as Sector’s GDP Slumped to All-Time Lows! 

In 2024, real estate (Php 222.72 billion) and credit cards (Php 212.1 billion) saw the largest nominal increases in lending. Electricity and Gas, and trade, followed. (Figure 2, middle chart) 

Supply-side real estate loans accounted for 20.5% of total UC bank loans at year-end. This figure excludes consumer mortgage borrowing. 

However, while real estate's GDP share hit an all-time low of 5.4% in 2024, bank exposure to the sector reached its second-highest level. In Q3, BSP data revealed that real estate prices had entered deflationary territory. (Figure 2, lowest pane) 

The continued decline in the sector's GDP raises mounting risks for banks. 

Rising real estate loan growth does not necessarily indicate expansion but rather refinancing efforts or liquidity injections to prevent a surge in delinquencies and non-performing loans.

Figure 3

Moreover, key sectors benefiting from BSP’s rate policies—construction, trade, finance, and real estate—continue to represent a significant share of UC bank portfolios, which share of the GDP has also been rising, posing as systemic risk concerns. (Figure 3, topmost chart) 

IV. Credit Intensity Hits Second-Highest Levels!

A broader perspective reveals more concerning trends.

UC total bank loans grew by 10.8% year-on-year, from Php 11.392 trillion in 2023 to Php 12.81 trillion in 2024 (a net increase of Php 1.42 trillion). In comparison, nominal GDP grew by 8.7%, from Php 24.32 trillion to Php 26.44 trillion (a net increase of Php 2.12 trillion).

This gives a 'credit intensity' of Php 0.67—the amount of bank lending needed to generate one peso of GDP—the highest since 2019. This means UC bank lending has recovered to pre-pandemic levels, while GDP hasn't. 

Factoring in public debt (excluding guarantees), 2024 saw a sharp rise in credit dependency. Credit intensity from systemic debt (public debt + bank lending, excluding capital markets and shadow banking) reached its second-highest level ever, trailing only the peak of 2021. 

It now takes Php 1.35 of debt to generate one peso of GDP, highlighting diminishing returns of a debt-driven economy. (Figure 3, middle image) 

The mainstream thinks debt is a free lunch! 

V. Redux: The Debt-to-GDP Myth: A Background

The BSP’s trickle-down policies operate under an architectural framework called "inflation targeting."

Though its stated goal is to 'promote price stability conducive to balanced and sustainable growth of the economy,' it assumes that inflation can be contained or that the inflation genie can be kept under control.

Its easy money regime has been designed as an invisible tax or a form of financial repression—primarily to fund political boondoggles—by unleashing "animal spirits" through the stimulation of "aggregate demand" or GDP. At the same time, GDP growth is expected to increase tax collections. 

The fundamental problem is that the BSP has no control over the distribution of credit expansion within the economy. 

As it happened, while the "liberalized" consumer-related sectors were the primary beneficiaries, distortions accumulated—principally as the elites took advantage of cheap credit to pursue "build-it-and-they-will-come" projects. 

The result was the consolidation of firms within industries and the buildup of concentration risk. Soon, the cheap money landscape fueled the government’s appetite for greater control over the economy through deficit spending. 

Thus, the "debt-to-GDP" metric became the primary justification for expanding government spending and increasing economic centralization.

This race toward centralization through deficit spending intensified alongside the elite’s "build-it-and-they-will-come" projects during the pandemic.

VI. The GDP is Mostly About Debt: 2024 Public Debt-to-GDP Reaches Second Highest Level Since 2005!

Once again, the consensus has a fetish for interpreting debt-to-GDP as if it were an isolated or standalone factor. It isn’t.

In the recent past, they cited falling debt-to-GDP as a positive indicator. However, let’s clarify: since the economy is interconnected—one dynamic entwined with another, operating within a lattice of interrelated nodes—such a simplistic view is misleading.

When the BSP forced down rates to reinforce its "trickle-down" policies, the consequences extended beyond public spending, affecting overall credit conditions. This policy catalyzed a boom-bust cycle. 

As such, when the public debt-to-GDP declined between 2009 and 2019, it was primarily because bank credit-to-GDP filled most of the gap. 

The proof of the pudding is in the eating: systemic leverage-to-GDP remained range-bound throughout that decade. Debt was merely transferred or juggled from the public to the private sector. 

GDP growth, in large part, was debt-driven.

Yet, the pandemic-era bailout fueled a surge in both public debt-to-GDP and bank credit-to-GDP. Public debt-to-GDP (excluding guarantees) reached 60.72%—its second-highest level after 2022—following the BSP’s COVID-era bailout, which also marked the highest rate since 2005. 

It’s worth remembering that Thailand—the epicenter of the 1997-98 Asian Crisis—had the lowest debt-to-GDP at the time. (Figure 3, lowest table) 

More importantly, public debt has anchored government spending, which has played a crucial role in shaping Philippine GDP since 2016.

V. Systemic Leverage Soars to All-Time Highs! 

Figure 4

On a per capita basis, 2024 debt reached historic highs, increasing its share of per capita GDP (both in nominal and real terms). (Figure 4, topmost visual)

Simply put, rising debt levels have been eroding whatever residual productivity gains are left from the GDP. 

Alternatively, this serves as further proof that GDP is increasingly driven by debt at the expense of productivity. 

It also implies that the deepening exposure of output to credit is highlighting its mounting credit risk profile. 

In 2024, UC bank loans-to-GDP hit 48.5%, the second-highest since 2020 (49.7%), indicating crisis lending via easy money policies. 

Systemic leverage reached a record 109.2% of GDP, surpassing 2022 ATH. (Figure 4, middle chart) 

Despite a Q4 2024 liquidity spike (M3), consumers struggled; household GDP slowed, suggesting households are absorbing increasing leverage while enduring the erosion of purchasing power in the face of inflation. (Figure 4, lowest diagram)

Figure 5

Another point: The growth rate of systemic leverage has shown a strong correlation with the CPI since 2013. However, it appears to have deviated, as rising systemic leverage has yet to result in an accompanying increase in the CPI. Will this correlation hold? (Figure 5, topmost image) 

VI BSP’s ‘Trickle-Down Policies’ Steered a Credit Card and Salary Loans Boom (and coming Bust)

There is more to consider. The banking model's transformation toward consumers didn’t happen overnight; it was the result of cumulative easy money policies that intensified during the pandemic. 

Our central premise: while bank expansion fueled inflation, the pandemic-induced recession—marked by income loss—and, most notably, the BSP’s easy money emergency response (including historic interest rate and RRR cuts, various relief measures such as credit card subsidies, the USDPHP cap, and the unprecedented Php 2.3 billion BSP injections) sparked a consumer credit boom, which subsequently triggered the second wave of this inflation cycle. 

Though the BSP’s intent may have been to compensate for consumers' income losses in order to stabilize or protect the banking system, the economic reopening further stirred up consumers’ appetite for credit, fueling demand amid a recovering, fractured, and impaired supply chain. 

Debt-financed government spending also contributed to the surge in aggregate demand. Together, these factors spurred a rise in "too much money chasing too few goods" inflation. 

The inflation genie was unleashed—yet it was conveniently blamed by everyone on the "supply side." The underlying premise of the echo chamber was that the demand-supply curve had been broken!  Yet, they avoided addressing the question: How could a general price increase occur if the money supply remained stable? 

Ironically, the BSP calibrated its response to the inflation cycle by adjusting interest rates in line with its own interest rate cycle! In other words, they blamed supply-side issues while focusing their policies on demand. Remarkable! 

The BSP’s UC bank credit card and salary loan data provide evidence for all of this (Figure 5 middle and lowest graphs): the escalating buildup of household balance sheets in response to the loss of purchasing power, the CPI cycle, and the BSP and National Government’s free money policies.

Figure 6

It’s also no surprise that the oscillation of UC bank loan growth has mirrored fluctuations in the PSEi 30. (Figure 6, topmost window) 

Unfortunately, the law of diminishing returns has plagued the massive growth of consumer credit, leading to its divergence from consumer spending and PSEi 30 flows. 

As an aside, the upward spiral in cash in circulation last December and Q4 —reflecting both liquidity injections for the real estate industry and pre-mid-term election spending—likely points to higher inflation and the further erosion of consumer spending power. (Figure 6, middle chart) 

Is it any wonder that self-reported poverty ratings and hunger have surged to record highs? 

Does the path to 'middle-income status' for an economy translate into a population drowning in debt? 

VII. The Mirage of Labor Productivity

Businessworld, February 10, 2025: The country’s labor productivity — as measured by gross domestic product per person employed — grew by 4.5% year on year to P456,342 in 2024. This was faster than the 2.7% a year earlier and the fastest in seven years or since the 8.7% in 2017. (Figure 6, lowest image)

While this suggests improving efficiency, it fails to account for GDP’s deepening dependence on credit expansion. When growth is primarily debt-financed, productivity gains become illusory. 

Credit isn’t neutral. Its removal would cause the 'debt-driven GDP-labor productivity' 'castle in the sand' to crumble 

VIII. Conclusion  

The 2024 UC bank lending data reveals critical economic trends: 

>A structural shift in the banking business model, driven by the BSP’s inflation-targeting and pandemic rescue policies. 

>Mounting concentration risks due to industry consolidations and growing sector fragility.

>Public debt-to-GDP reaching its second-highest level since 2005, while systemic leverage has hit an all-time high.

Diminishing returns from the increasing dependence on systemic credit—bank expansion and public debt—highlighting the risks of financial and economic vulnerabilities and instability.

The Philippine political economy operates with a very thin or narrow margin for error.

In an upcoming issue, we are likely to address the banking system's 2024 income statement and balance sheets. 

Philippine PSEi 30’s Crash: Worst January Performance Since 2008 and Asia’s Laggard — A Liquidity-Driven Meltdown?

The stock market's job is to always make you feel like you are missing out on something. The stock market's job is to always make you feel like you should be doing something. The stock market's job is to get you to do the wrong thing at the wrong time—Ian Cassel

In this issue 

Philippine PSEi 30’s Crash: Worst January Performance Since 2008 and Asia’s Laggard — A Liquidity-Driven Meltdown?

I. A Lowly Voice in the Wilderness

II. January as Template for 2025 Performance

III. Double Top Pattern?

IV. Was The Selloff Driven By Escalating Liquidity Strains? San Miguel: The Canary in the Coal Mine?

V. Price Distortions from the Changes in PSE’s Membership Amplified the Market’s Volatility

VI. Summary and Conclusion

Philippine PSEi 30’s Crash: Worst January Performance Since 2008 and Asia’s Laggard — A Liquidity-Driven Meltdown?

The Philippine equity benchmark plummeted 10.2% in January, making it the worst performer in Asia. It was also the largest loss in the history of January since 2008. Could escalating liquidity strains be the driving force?

I. A Lowly Voice in the Wilderness 

First, the appetizer. 

Let’s revisit a few quotes from our previous posts when everyone was predicting a new bull market for the PSEi 30, with expectations of it reaching 7,500 in October. (bold and italics original) 

In the backdrop of lethargic volume, concentrated activities, and a rising share of foreign participation, a continuation of global de-risking and deleveraging translates to more liquidations here and abroad, which could expose many skeletons in the closet of the Philippine financial system. August 4, 2024 

...

The public has been largely unaware of the buildup of risks associated with pumping the PSEi 30, driven by a significant concentration in trading activities and market internals 

The market breadth exhibits that since only a few or a select number of issues have benefited from this liquidity-driven shindig, the invested public has likely been confused by the dismal returns of their portfolios and the cheerleading of media and the establishment. September 15, 2024

... 

Bottom line: The levels reached by the PSEi 30 and its outsized returns attained over a few months barely support general market activities, which remain heavily concentrated on the actions of the national team and volatile foreign fund flows.  

Instead, the present melt-up represents an onrush of speculative fervor driven by the BSP’s stealth liquidity easing measures, even before their rate cut. Moreover, real economic activities hardly support this melt-up. October 7, 2024 

...

Given the current global and domestic economic imbalances, the Year of the Snake may again usher in another period of heightened risk and potential volatility. January 19, 2025 

Next, the main course.

II. January as Template for 2025 Performance

The Philippines' main equity benchmark, the PSEi 30, plunged by 4.01% on the last trading day of January, dragging its weekly return to -6.9%, marking its fourth consecutive week of decline.

Figure 1

For the month, the PSEi 30 suffered a 10.2% loss Month on Month (MoM), its most significant monthly decline since the 12.8% crash in September 2022. Annually, it was down by 11.8%.

January is supposed to be the best month for the PSE, rising 9 times in 13 years, with an average return of 0.94%, including 2025.

Yet, returns have been declining both monthly and annually for the past decade and so. (Figure 1, upper window) 

True to the volatility of the Snake Year, 2025's 10.2% plunge on January 10 was the worst since 2008, during the Great Financial Crisis, which resulted in a 48% decline and the lowest PSEi 30 level since 2012. (Figure 1, lower image) 

Yet, if history were to rhyme, and if January’s performance serves as a template for 2025, it wouldn’t be surprising if the PSEi 30 faces a substantial setback.

Figure 2

As a result of this week’s thrashing, the Philippine PSEi 30 was the worst-performing Asian bourse. Ten of 19 national indices were down, one remained unchanged, with average returns at -0.41%. (Figure 2, topmost graph)

For January, with 10 of 19 national indices down and a YTD change of -0.5%, the Philippine PSEi 30 was the region's laggard. (Figure 2, middle chart)

Major ASEAN bourses, such as Thailand’s SET and Malaysia’s KLCI, were the weakest links in both weekly and monthly outcomes. (Figure 2, lowest diagram)

Could these be emerging signs of an Asian Financial Crisis 2.0?

III. Double Top Pattern? 

This week’s meltdown breached two minor support levels and now seems poised to challenge the October 2022 low.

Figure 3

From a technical analysis standpoint, the PSEi 30 is facing the potential of a 'double top' pattern, where a breakdown below the October low could lead to a retest of the March 2020 level. (Figure 3, upper image)

The panic selling suggests that a significant oversold rebound might be imminent, though the durability of this recovery could be suspect.

IV. Was The Selloff Driven By Escalating Liquidity Strains? San Miguel: The Canary in the Coal Mine?

Mainstream explanations for the selloff have often been influenced by the availability bias or "when people overweight new information or recent events" (Investopedia)

Could the recent sell-offs be attributed to the substantial shortfall in Q4 and 2024 GDP (a development we had anticipated)? 

Was it influenced by Trump's tariff threats or the Federal Reserve's pause in their easing cycle? 

Or might domestic politics play a role? Specifically, the threat by the BBM administration to shut down the government if the Supreme Court rules in favor of appellants challenging the constitutionality of their controversial budget, or the impending Food Emergency Security measure on rice, set to be implemented on February 4, 2025. 

Our best guess is that while these factors might have some influence, a more critical driver of the market turmoil could be the escalating pressures on financial liquidity. 

Unlike the 2022 episode, where inflation and rising interest rates were significant factors, the current scenario mirrors the dynamics of the pandemic recession—where the PSEi 30 declines despite monetary easing aimed at combating a recession. (Figure 3, lower graph)

Currently, the GDP growth rate has been decelerating.

Figure 4

Moreover, bank liquidity has been worsening as of November, due to investments in Held-to-Maturity (HTM) assets and undisclosed Non-Performing Loans (NPLs). The cash-to-deposits and liquid assets-to-deposits ratios have been on a long-term downtrend, with the former at its lowest level in over a decade. (Figure 4, topmost graph) 

As a reminder, the BSP cut official rates in August, October, and December. It also reduced RRR rates in October, while the aggregate fiscal spending in 11-months reached all-time highs (ATHs), signaling massive stimulus. 

Contrary to mainstream expectations, the BSP’s accommodative monetary policy has led to an increase in Treasury bond yields rather than a decrease. (Figure 4, middle image) 

This rise is influenced not only by the Federal Reserve's policies but also by domestic inflation, which has been incrementally rising. 

Additionally, the yield curve for local Treasuries has steepened significantly, indicating heightened inflation risks. (Figure 4, lowest chart) 

Lastly, San Miguel’s deviation from the recent market uptrend might have served as the canary in the coal mine, signaling potential broader market distress. 

Also from last October 7, 2024 

Finally, SMC share prices continue to move diametrically opposite to the sizzling hot PSEi 30. (Figure 7, lowest graph)  

What gives? Will SMC’s debt breach the Php 1.5 trillion barrier in Q3?    

Have SMC’s larger shareholders been pricing in developing liquidity concerns? If so, why are bank shares skyrocketing, when some of them are SMC’s biggest creditors?

Figure 5

San Miguel’s share price was one of the biggest casualties, diving below the panic levels of March 2020.  (Figure 5, upper window) 

Its market capitalization plunged to Php 155 billion while grappling with a debt of Php 1.477 trillion. Falling equity and rising debt—what could go wrong? 

Could there be domestic funds facing liquidity constraints, forced to raise cash quickly by selling at any price?  And has this liquidation exacerbated San Miguel’s financial dilemma?

V. Price Distortions from the Changes in PSE’s Membership Amplified the Market’s Volatility

Lastly, the reconstitution of the PSEi 30 has contributed to market volatility.

The inclusion of AREIT and China Banking Corporation (CBC), which will replace Wilcon (WLCON) and Nickel Asia (NIKL) effective February 4, 2025, resulted in steep declines for the outgoing stocks: WLCON fell 10.16%, and NIKL plummeted 30.2%. (Figure 5, lower graph)

Meanwhile, funds tracking the PSEi 30 rotated into CBC (+33.81%) and AREIT (+4.74%).

Figure 6

Fundamentals hardly explain the irrational share price behavior of the affected firms. 

CBC’s parabolic move has turned it into a meme stock or crypto, even as the share prices of its peers have tumbled.

In the meantime, it also doesn't explain the sharp drop in NIKL's price. Although nickel prices have been on a downtrend, they have not collapsed. (Figure 6 topmost pane)

Shares of competitors FNI and MARC were down 1.96% and 8.96%, respectively, WoW. (Figure 6, middle graph)

In short, the PSE's proclivity to chase top performers while discarding laggards has only amplified the price distortions within the PSEi 30. 

VI. Summary and Conclusion

The January 2025 meltdown has brought to light the deteriorating fundamentals underlying the Philippine financial markets and economy. 

This crisis is not isolated to the Philippine Stock Exchange (PSE) but also resonates with some ASEAN counterparts. Could this be emerging signs of Asian Crisis 2.0? 

If historical trends of January and the volatility associated with the Year of the Snake are to repeat themselves, and if the double top pattern materializes, this suggests a significant deficit or loss for the PSEi 30 by the end of 2025. 

Could the recent turmoil in the PSEi 30 be indicative of escalating liquidity pressures among domestic fund managers? 

If this is the case, future stress could manifest in the treasury market and influence the US dollar-Philippine peso exchange rate $USDPHP. 

Certainly, given that the PSEi 30 has become heavily oversold, a notable rebound might be anticipated. However, this scenario presents not an opportunity for accumulation but rather for liquidation. 

Unless one is an expert in scalping, short-term trades involve significant risks (Figure 6, lowest chart)

Remember, cash remains the best defense against a bear market—whether through foreign exchange (FX) accounts or Treasury bills (T-bills).

___ 

Disclosure: The author holds a small position in NIKL as of the time of writing.

US Dollar-Philippine Peso Retests Its All-Time High of 59, the BSP’s "Maginot Line": It’s Not About the Strong Dollar

  

interventionism destroys the purchasing power of the local currency by breaking all the rules of prudent monetary policy and financing an ever-increasing government size printing a constantly devalued currency—Daniel Lacalle

US Dollar-Philippine Peso Retests Its All-Time High of 59, the BSP’s "Maginot Line": It’s Not About the Strong Dollar 

Last week, the USD-Philippine peso retested its all-time high of 59, or the BSP's "Maginot Line," which they misleadingly attribute to the "strong USD." The historic savings-investment gaps translate into a case for a weaker peso. 

I. The USDPHP Retest the 59 ALL Time High Level; The "Strong Dollar" Strawman 

The US dollar-Philippine peso exchange rate $USDPHP hit the 59-level last Thursday, November 21st—a two-year high and the upper band of the BSP’s so-called "Maginot Line" for its quasi-soft peg. The Bangko Sentral ng Pilipinas (BSP) attributed this development to the strength of the US dollar, explaining: "The recent depreciation of the peso against the dollar reflects a strong US dollar narrative driven by rising geopolitical tensions…The peso has traded in line with the regional currencies we benchmark against."

Figure 1 

To validate this claim, we first examine the weekly performance of Asia's currencies. While the US Dollar Index $DXY surged by 0.8% this week, most of the gains were driven by the euro's weakness.  (Figure 1, upper window) 

Among Bloomberg’s quote of Asian currencies, 8 out of 10 saw declines; however, the Thai baht bucked the trend and rallied strongly, while the Malaysian ringgit also closed the week slightly higher. (Figure 1, lower graph) 

The US Dollar averaged a 0.4% increase against Asian currencies this week. 

However, the strength of the Thai baht and Malaysian ringgit contradicts or disproves the idea that all regional currencies have weakened against the USD.

Figure 2 

A second test of the claim that a "strong dollar is weighing on everyone else, therefore not a weak peso" is to exclude the US dollar and instead compare the Philippine peso against the currencies of our regional peers: the Thai baht $THBPHP, Malaysian ringgit $MYRPHP, Indonesian rupiah $IDRPHP, and Vietnamese dong $VNDPHP. (Figure 2) 

From a one-year perspective, the Philippine peso has weakened against all four of these currencies, providing clear evidence that its decline was not limited to the US dollar but extended to its ASEAN neighbors as well. 

Ironically, the same ASEAN majors have recently joined the BRICS. Have you seen any reports from the local media on this? 

The $USDPHP ascent to 59 has been accompanied by a notable decline in traded volume and volatility, suggesting that the BSP has been "pulling out all stops" to prevent further escalation. 

This includes propagating to the public the "strong US dollar" strawman. 

II. BSP’s Interventions and the Case for a Weaker Peso: Record Savings-Investment Gap 

Figure 3

Since the BSP is among the most aggressive central banks engaged in foreign exchange intervention (FXI), it can surely buy some time before the USDPHP breaks through this upper band and tests the 60-level. (Figure 3) 

We have long been bullish on the $USDPHP for the simple reason that the historic credit-financed savings-investment gap (SIG), manifested primarily through its "twin deficits" (spending more than producing), translates to diminished local savings. 

This, in turn, means more borrowing from the savings of other nations to fund excessive domestic consumption. 

Accordingly, the SIG is inherently inflationary, which results in the debasement of the purchasing power of the peso—an indirect consumption of the public's savings. 

In any case, the USD Philippine Peso exchange rate ($USDPHP) should be one of its best barometers and hedge against inflation (Prudent Investor, April 2024) 

In other words, since there is no free lunch, someone will have to pay for the nation’s extravagance.

Figure 4

The Philippine external debt's streak of record highs coincides with the pandemic-era deficit spending levels. Apparently, this stimulus suffers from diminishing returns as well. 

This is apart from the BSP’s financial repression policies or the inflation tax, which redistributes the public’s savings to the government and the elites. 

Such capital-consuming "trickle-down" policies combine to strengthen the case for a weak peso. 

Yet, the continued rise in external debt indicates that the Philippines has insufficient organic US dollar resources (revenues and holdings), despite the BSP’s claims through its Gross International Reserves (GIR). 

To keep this shorter, we will skip dealing with the BSP’s GIR and balance sheet. 

Nonetheless, rising external debt compounds the government’s predicament, as the lack of revenues necessitates repeated cycles of increased borrowing to fund gaps in the BSP-Banking system’s maturity transformation, creating a "synthetic US dollar short." (Snider, 2018) 

As a result, the country becomes more vulnerable to a dollar squeeze. 

Hence, the BSP hopes that, aside from cheap credit, loose monetary conditions will prevail, allowing them to easily access cheap external funding. 

However, by geopolitically aligning with the West against the Sino-Russian-led BRICS, the Philippines increases the risks of reduced access to the world’s savings. 

As an aside, the Philippines attempts to mimic the United States. However, because the US has the deepest capital markets and functions as the world’s de facto currency reserve, it has funded its "twin deficits" by absorbing the world’s "surpluses"—the "exorbitant privilege." 

Unfortunately, not even the US dollar standard, operating under present conditions, will last forever, as it fosters both geopolitical and trade tensions. 

III. USDPHP: Quant Models and the Lindy Effect

Figure 5

We are not fans of analytics based on exchange rate quantitative models such as the Deviation from Behavioral Equilibrium Exchange Rate (DBEER), the Fundamental Equilibrium Exchange Rate (FEER), and Purchasing Power Parity (PPP), but a chart from Deutsche Bank indicates that the Philippine peso is among the most expensive world currencies. 

Needless to say, all we need is to understand the repercussions of free-lunch policies. 

People have barely learned from past lessons. The USDPHP remains on a 54-year long-term uptrend, even after enduring episodic bouts of financial crises—such as the 1983-84 Philippine debt restructuring and the 1997-98 Asian crisis. 

The sins of the past have been resurrected under the alleged auspices of "this time is different; we are doing better." 

Following the Asian Crisis, a relatively cleansed balance sheet allowed the peso to stage a multi-year rally from 2005 to 2013. 

Unfortunately, we have since relapsed into the old ways. 

Because the elites benefit from the trickle-down policies, there is little incentive for radical reform. 

The "strong US dollar" only exposes the internal fragilities of a currency. 

Therefore, trends in motion tend to stay in motion until a crisis occurs. 

The USD-PHP seems to exemplify the Lindy effect: the longer a phenomenon has survived, the longer its remaining life expectancy. 

___

References

Prudent Investor, Navigating the Risks of the Record Philippines’ Savings-Investment Gap, February Public Debt Hits All-Time High and March CPI Reinforces the Deficit-CPI Cycle Tango April 8, 2024

Jeffrey P Snider, The Aid of TIC In Sorting Shorts and Shortages, October 17, 2018

Beware the Year of the Pig! Unblemished Record of Economic Turmoil Since 1947!

Governments and central banks never perceive risks of excess supply and even less predict a bubble. Why? Because most central planners see debt, oversupply, and bubbles as small collateral damages of a greater good: recover growth at any cost—Daniel Lacalle

In this issue:

Beware the Year of the Pig! Unblemished Record of Economic Turmoil Since 1947!

-The Portentous Year of the PIG (and RAT)

-Year of the PIG as a Harbinger of 2008 Global Recession and the 1997 Asian Financial Crisis!

-The Year of the Pig in the Throes of a 1983 Debt and 1971 Balance of Payment Crisis!

-The Year of the Pig in the Face of the 1959 Economic Slump and as Forerunner to the 1949 FX Crisis

-No, the PIG is NOT at Fault! The Culprit is the Credit or Business Cycle Shaped by Political and Monetary Policies

-Sure, This Time IS Different! Current Conditions Are Ripe for a Year of the PIG-RAT Tantrum, Long the USD Php

Beware the Year of the Pig! Unblemished Record of Economic Turmoil Since 1947!

The Portentous Year of the PIG (and RAT)

With the Phisix up 9.08% in a fiery five-week ramp, with the peso up .7% and with Philippine treasury yields falling (mostly at the longer end), resonating with the behavior of world’s financial markets, just what could go wrong?

For the Year of the PIG, a lot!

Next Tuesday, February 5, will usher in the Chinese New Year. And 2019’s assigned zodiac animal is the Year of the Pig. The Chinese zodiac, according to Wikipedia, represents a classification scheme that assigns an animal and its reputed attributes to each year in a repeating 12-year cycle, an approximation to the 11.85-year orbital period of Jupiter, the largest planet of the Solar System.

Many use the Chinese zodiac not only to establish an individual’s or commercial “social compatibility” also to design living spaces but also to foretell events.

But if history would rhyme, 2019 would be a foreboding year!

Amplified turbulence, dislocation and distress may challenge the Philippine economy, and consequently, the Philippine Stock Exchange in the year of the Pig as it has in its previous experiences.

Figure 1

The Phisix returns in the 12-year cycle of the year of the PIG from 1947: 1959 -39.87%, 1971 -58.97%, 1983 -1.83%, 1995 -6.88% and 2007 +21.43%. Only one in 5 instances (or 20%) has the Phisix registered a positive return in 60 years. (Figure 1, upper window)

How about the January effect’s influence on them? Here are the January returns: 1959 +5.23%, 1971 -9.32%, 1983 +11.95%, 1995 -13.13 and 2007 +8.61%. Only one of the three incidences of positive January (33%) returns managed to close the year with a positive return. That was in 2007. (figure 2, lower window)

The sustainability of the whopping January gains is not guaranteed.

And if history does rhyme, January gains may morph into losses.

Year of the PIG as a Harbinger of 2008 Global Recession and the 1997 Asian Financial Crisis!

But the year of the PIG cannot be seen in isolation. Previous events and events of the year shaped the next year’s activities. That’s how the economy or markets work. These signify a process.

For instance, the mania of 2007 was a precursor to the horrifying -48.24% collapse of the Phisix in 2008, the year of the rat. And that market crash was in reaction to spillover effects of the Great Recession triggered by the US housing and mortgage crisis that culminated with the Lehman bankruptcy.

The Philippines tiptoed towards a recession but was stopped short of it, as the economy, which operated under relatively clean and healthy balance sheets, responded positively to the stabilization programs launched by the National Government (NG) and the Bangko Sentral ng Pilipinas (BSP).  A Php 330 billion (4.1% of GDP) fiscal stimulus was embarked upon by the NG, under the Economic Resiliency Plan (ERP), that was supported by a series of rate cuts by the BSP. 

And 1995 shares a similar backstory.

The magnified volatility of 1995 presaged the mania in 1996 (year of the rat) where the Phisix registered a startling 22.2% return. But exactly 13 months and one day after the end of 1995, the Phisix started its descent, which accelerated into a 68.6% crash over 19 months!

The economic premise behind the crash: the Asian Financial Crisis.

The Phisix peaked a day after the month of January 1997 or in February 3rd at 3,447.6.

So in 2007 and 1995, the same backdrop prevailed: a pre-crisis environment. Year of the pig.

The Year of the Pig in the Throes of a 1983 Debt and 1971 Balance of Payment Crisis!

I will cite from economic history and reports of events that occurred in the year of the Pig in 1983, 1971, 1959 and 1947.

1983 was the year the Philippine Government declared a debt moratorium (debt default)!

From Wikipedia: The country was hit hard by the second global oil crisis of the decade, in 1979. And when the US Federal Reserve raised interest rates in the early 80s, the Philippines’ debt ballooned rapidly, pushing the Philippine economy towards an economic nosedive by 1983 (bold italics added)

From Robert S. Dohner and Ponciano Intal, Jr on a working paper “Debt Crisis and Adjustment in the Philippines” (p.174)

The cautious borrowing policy of the 1970s disappeared in the early 1980s. The most abrupt change was the increasing use of short-term borrowing. This was particularly true of the public sector, which accounted for two-thirds of the increase in short-term debt outside the monetary sector. Much of the increased borrowing was also done through the monetary sector. The Central Bank borrowed heavily between 1980 and 1982, and encouraged banks to do so by providing swap arrangement. Despite its borrowing, Central Bank reserves fell by $2 billion (two-thirds) from the end of 1980 to mid-1983.5 As a result, the monetary sector went from a net external asset position at the end of 1979, to a $2.7 billion net liability position by 1982. By 1982 the share of short-term debt, including monetary sector debt, in total debt rose to 47 percent, a much higher share than in other LDC debtors. The Philippines first considered declaring a moratorium in late 1982. When it finally did so in October 1983, its foreign exchange reserves were nearly exhausted.

The Phisix endured a harrowing 40.84% tailspin in 1984. (the year of the pig-rat!)

How about this Manila Times OP-ED in 2013 “Days of Shame: August 21, 1971 and 1983”?

The author cites the effects of the Plaza Miranda bombing on August 21, 1971, and the assassination of opposition leader Benigno Aquino, Jr. on August 21, 1983, as having influenced 2013’s political conditions.

Aside from economic woes, will a major political event occur this year?

The Philippines suffered a balance of payment crisis in 1970!

Writes James Boyce [The Political Economy of External Indebtedness, Philippine Institute for Developmental Studies]: A balance of payments crisis in 1970 foreshadowed the inevitable turning point at which debt service payments surpass the inflow of new money and the net transfer turns negative. This turning point was temporarily deferred, however, by means of fresh lending, which was unlocked by an IMF adjustment program. External borrowing accelerated greatly in the 1970s, as the country pursued a development strategy of "debt-led growth." For a time, the country - or more accurately, some of its citizens - was able to live "beyond its means," thanks to a positive net transfer of external resources.

So the massive 59% crash of the Phisix was in reaction to a Balance of Payment (BOP) crisis that occurred a year before. The markets and the economy are a process. Year of the Dog-Pig combo!

The Year of the Pig in the Face of the 1959 Economic Slump and as Forerunner to the 1949 FX Crisis

1959’s -39.59% Phisix ghastly meltdown was in response to an economic slump!

Messrs Dohner and Intal from the same NBR paper (p.180): “Philippine trade and industrial performance have been determined by a system of protection initiated in 1950. To deal with external imbalance, the Philippine government began licensing imports, in amounts determined by essentiality of the product. The incentives created for domestic production of these goods led to rapid industrialization and growth during much of the decade, but the growth rate had slowed appreciably by 1959.” (bold added)

In his January 6, 1959 State of the Nation Address (SONA), the eighth president of the Philippines Carlos P. Garcia mentioned the economic difficulties faced by his administration. (bold italics mine, bold original)

Inflationary Pressures.—However, and this is the crux of the matter, at the rate at which these investments in public and private sectors have been undertaken and because of the way they have been financed, which is by expanding credit, it is inevitable that the pressures of inflation have become more pronounced.

In 1958, this was aggravated by the economic recession among our principal trading partners—a factor beyond our control.

The immediate problem today is how to check the inflationary forces that are exerting a heavy pressure on our international reserves. At the same time, we should maintain the momentum of development at an appropriate rate so that the gains we have already achieved will not be dissipated. Thus, the country will forge ahead towards its goal of development. We cannot afford to stop. We must not stop.

Credit expansion, inflation pressures. Rings a bell?

Oh, 1958 was the year of the “earth” pig similar to 2019.

This article provides an astonishing purview of the volatilities endured by the Philippine economy.

From Germolino Bautista An Assessment of the Philippine Economy: “Whether the relationship between G and I in crisis periods is direct or inverse, a common observation during the slump or crisis years 1959-60, 1969-70, 1983-85, 1990-91, 1991-92, and 1997-98 is an increase in the current account deficit and deterioration in the balance of payments position.” Legend G-Government spending, I-private investment. (black added to emphasize on the year of the pig-rat combination)

1947 as a forebear to the 1949 Foreign Crisis

The Philippines was liberated by the Americans on July 4, 1946.

Similar to 1995 and 2007 as an antecedent to crises, two years after 1947 (year of the pig), the Philippines suffered a currency crisis in 1949.

From Facts and Details.com: (bold mine) “At the time of independence in 1946, and in the aftermath of a destructive wartime occupation by Japan, Philippine reliance on the United States was even more apparent. To gain access to reconstruction assistance from the United States, the Philippines agreed to maintain its prewar exchange rate with the United States dollar and not to restrict imports from the United States. For a while the aid inflow from the United States offset the negative balance of trade, but by 1949, the economy had entered a crisis. The Philippine government responded by instituting import and foreign-exchange controls that lasted until the early 1960s. 

More from a paper from the Arellano Law University [An Analysis of the History of Philippine Trade Policy* (1950-2004) CHRISTIAN LALUNA, ARNIL PARAS and VANESSA SOLIVA]  (bold mine)

The first big shock that would alter postwar Philippine trade (and economic) policy was a result of the foreign exchange crisis of 1949. The import-substitution policies adopted by the state were not in fact intended as a long-term development framework; rather, it was to conserve scarce foreign currency assets in the Central Bank

No, the PIG is NOT at Fault! The Culprit is the Credit or Business Cycle Shaped by Political and Monetary Policies

To recap on the 12-year cycle of the year of the pig:

1947-1949: Precursor to the Foreign Exchange crisis

1958-1960: Economic Slump (1959- year of the pig)

1969-1971: Balance of Payment crisis

1983-1985: Debt Moratorium/ Economic recession

1995-1997: Antecedent to Asian Financial Crisis

2007-2009: Forerunner to the Great Recession

Since the Philippine independence from the US, economic turmoil has shockingly encumbered the year of the pig. Its relations per year differ though.  The year of the pig heralded the crises of 1949, 1997 and 2008. The emergence of a crisis (1983) or its culmination (1971) has also shrouded the year of the pig.

The year of the PIG hasn’t been responsible for such gamut of economic dislocations. Or it hasn’t been superstitions that have plagued the Philippine financial and economic sphere since 1946.

These episodes shared some common denominators: credit expansion. Its ramifications were price inflation, economic slump, recession or a financial crisis or a combination thereof.

Some had external influences. Domestic origins were responsible for the others. 

That being the case, the appropriate prism for these would be an 11-13 year credit/business cycle.

Yes, spare the pig.

Sure, This Time IS Different! Current Conditions Are Ripe for a Year of the PIG-RAT Tantrum, Long the USD Php

Will 2019 escape the dark clouds of the Year of the Pig-Rat or 11-13 year credit cycle? Will this time be different?

I have to admit. In one sense, this time is different!

Figure 2

When it comes to the fiscal deficit, this time has truly been momentous. (figure 2, upper window)

The publication of the December and the 2018 data on the NG’s fiscal balance have oddly been delayed. Nevertheless, the public spending to GDP ratio, which I estimate at 20%, should be at a landmark high too.

Through the engineered transition to a command economy, government diversion of resources has reached unmatched levels.

This time is different!

Prior to this administration, the financing of government spending has been channeled indirectly through credit creation from the banking system.

The BSP took policy rates to unprecedented lows to fire up bank lending. Though it recently raised rates by 175 bps, policy rates remain at unparalleled lows. (figure 2, middle window) From 1985 to 2018, the average interest rate, according to the trading economics, was 7.89%. That’s 314 bps points afar.

This time is different!

The law of diminishing returns has eroded the limited efficacy of this mechanism, so the BSP used its nuclear option, debt monetization in 2015.

Since fiscal stimulus has transformed into the principal economic development tool under this administration, the BSP’s monetization of public spending has also broken to uncharted levels. (see figure 2, lowest window)

This time is different!

Figure 3

And aside from BSP monetization, the NG has revved up on borrowings from the capital markets. At the end of 2018, NG borrowing PLUS bank lending comprised 90% of the NGDP! (figure 3, upper window)

This time is different!

NG borrowed Php 335.6 billion from the capital markets in 2018. The BSP extended financing to the NG in the amount of Php 268.2 billion in 2018. The total was Php 603 billion.

Here is what I wrote last January:

However, if spending in December 2018 would be on the same level with 2017 at Php 330.24 billion, and if the revenue target of Php 222.525 billion would be achieved, then December 2018’s deficit would reach Php 107.715 billion for a year-end total of a whopping Php 584.932 billion! That’s Php 61.322 billion or 11.7% more than the target! That’s 3.5% of the 9-month annualized real GDP!

See Why Deficit-to-GDP May Reach 3.5% in 2018; November BIR and BoC Revenues Plunge on the Economic and Credit Weakness; Public and Bank Debt Hit Php 15.06 Trillion! January 13, 2019

Why raise Php 603 billion? Has the Php 584 billion deficit been reached or even breached?

The BIR has admitted that it has been short from reaching its 2018 targets.

Though the Department of Budget and Management admits that the deficit cap target has been surpassed, low figures have been cited to understate the actual deficit.

Could this be the reason why the delay in the publication of the NG report? Will the NG tamper with it? And will the Bureau of Treasury and the DBM transfer the excess of the December deficit to 2019 budget?

If budget insertions have become chic, should accounting acrobatics on the NG fiscal conditions not be possible?

And as NG debt and bank credit race to new highs, Philippine treasury yields have spurted higher. (see figure 3, lower window)

Yes, yields have come down to late-2018 levels, but they remain elevated compared to 2017.

Figure 4

Prior to the Asian Crisis, the 2-10 year spread shrunk by 106 bps in 1996 from 250 bps in 1995. The current spread at 21.6 bps has been lower than 1995-1996! (figure 4, top and middle window)

This time is different!

And this could be the first time (perhaps in decades) that the yield curve has been totally flat, if not partly inverted! (figure 4, lowest window)

This time is different!

Figure 5

And of course, in backing the banking system’s epochal credit expansion, which sent the industry’s balance sheet growth to unequaled levels, the BSP matched such a feat on their balance sheet! (figure 5, upper and middle windows)

This time is different!

Of course, to recite the Financial Stability Coordinating Council’s latest Financial Stability Report (FSR), [bold mine]

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.

This Time is different!

Tying them all up, the first cockroach emerges…

From the Inquirer (January 11) “Five of the country’s largest banks are rushing to cover a combined loan exposure of $412 million, most of it lent without the benefit of collateral protection, after the local shipbuilding unit of Korean conglomerate Hanjin declared bankruptcy earlier this week—the biggest corporate default in Philippine history.”

See? This time is different!

Of course, not every asset at risk in the year of the Pig. The USD Php has been the principal beneficiary of the tantrums in the year of the PIG (and the RAT)! (see figure 5 lower window)

The current "This time is different" climate has exactly been the conditions fertile for the Year of the PIG-RAT tantrums!

Long the USD-Php!