It is impossible to understand the history of economic thought if one does not pay attention to the fact that economics as such is a challenge to the conceit of those in power. An economist can never be a favorite of autocrats and demagogues. With them he is always the mischief-maker, and the more they are inwardly convinced that his objections are well founded, the more they hate him—Ludwig von Mises
In this issue
Reality is not Optional, BSP Extends Php 540 billion Loans to the National Government: Another Bailout of the Banking System
I. Introduction
II. The Causal Realist Framework: Reality Isn’t Optional
III. Confusing Rebound with Growth: June Vehicle Sales
IV. Confusing Slowdown with Growth: The BSP’s Foreign Direct Investments
V. More Ghost Data? Despite Downtrend: Hurrah for the OFW Remittances Boom! Why Labor Exports will Persists
VI. GIR Falls in June as the BSP Offloads Gold to Defend the Peso, Will the US Fed Policy in the End-2022?
VII. BSP Extends Php 540 billion Loans to the National Government: Another Bailout of the Banking System
Reality is not Optional, BSP Extends Php 540 billion Loans to the National Government: Another Bailout of the Banking System
I. Introduction
No matter how people deny the truth: Reality is not an option. (To borrow from Thomas Sowell)
There appears to be a media campaign to boost the animal spirits by interpreting a boom from the low-base effect with growth: From the perspective of vehicle sales, FDIs, and OFW Remittances.
June GIR drops as the BSP sold gold to defend the peso.
The bailout of the banking system continues as the BSP extends direct loans to the National Government.
II. The Causal Realist Framework: Reality Isn’t Optional
Using a causal realist framework, I have endeavored to bring reality closer or provide a better perspective of the truth to my audience.
Let us start with…
From the Businessworld (July 16): THE CENTRAL BANK approved another short-term loan worth P540 billion to the National Government to boost its coffers as the pandemic continues. “We recently extended our arrangement with them — P540 billion, we just renewed our assistance to the government,” Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said at a briefing on Thursday. This is the fourth time the National Government has received support from the central bank, which has extended a direct advance of P300 billion in March 2020, P540 billion in October 2020 and another P540 billion in December 2020. “They paid the P540 billion (last month), now they’re asking for a renewal and the Monetary Board has approved it,” Mr. Diokno said. Under Republic Act 7653 or The New Central Bank Act, the BSP is allowed to lend 20% of its average revenue to the government, which is equivalent to P540 billion. This was increased to 30% or up to P850 billion by the Republic Act 11494 or the Bayanihan to Recover as One Act which allowed direct provisional advances within two years since the law’s effectivity. (italics added)
Despite the assurance of a significant economic recovery, we shall say again, interest groups benefiting from easing policies will demand more interventions from the BSP in the face of broken promises.
More easing (interest rates cuts or QE) will spur inflation that pressures interest rates upwards that should ripple adversely through the banking system’s loan and investment portfolios.
If the BSP pursues deleveraging, while this should be long term healthy, the unintended consequence would be the oscillation of pressures on profits of the credit-dependent unproductive and maladjusted (bubble) segments of the economy, thereby vitiating their creditworthiness.
The Diokno led BSP is, thus, caged.
January Banking Woes: Cash Reserves Loss Accelerates! Loan and Deposit Liabilities Growth Plunged! FX Deposits Halve! March 11 2019
Also, the ink has barely dried from our outlook last week…
And to contain the slump, the BSP can be expected to intervene directly either by borrowing MORE/bring back the use of derivatives, or offload its USD holdings when the borrowing access becomes scarce.
…
And yes, a switch in the mainstream narrative can be expected, focusing on the supposed positives of devaluation: help exports, OFWs, and tourism, as well as reduce debt. Blah blah blah.
See Ka-Boom! USD-Php Smashes Through the Php 50 Barrier! July 11, 2021
…now comes these…
From the Philstar (July 12): In a Monday morning interview with ABS-CBN News Channel, BSP Governor Benjamin Diokno said the central bank is already intervening in the foreign exchange market to temper the local unit’s weakness by converting some of its dollar reserves into peso. But the BSP chief said monetary authorities still trust in the market-determined exchange rate. … “The BSP will continue to adopt at market-determined exchange rate policy. That’s our approach. We deal with exchange rate volatility, looking at supply and demand of foreign exchange,” he said. “At the same time, our role is smoothen the fluctuations, and to make sure market conditions are orderly rather than steering peso to a particular level, whether it’s stronger or weaker than other currencies,” he added. (italics mine)
From the Businessworld (July 12) THE PESO’S recent depreciation to P50-per-dollar rate could provide a mild boost to the pandemic-stricken exports sector still struggling with high shipping costs and additional taxes, according to an industry group. (italics mine)
The causal feedback loops have been proceeding according to our proposed directions.
Learning from the great Austrian Economist, Ludwig von Mises, (bold mine)
Cognizance of the relation between a cause and its effect is the first step toward man's orientation in the world and is the intellectual condition of any successful activity. All attempts to find a satisfactory logical, epistemological, or metaphysical foundation for the category of causality were doomed to fail. All we can say about causality is that it is a priori not only of human thought but also of human action.
Ludwig von Mises, The Ultimate Foundation of Economic Science p.20 Mises.org
We shall deal with the above issues later.
We can opt to deny the truth, but it won’t go away. Reality isn’t optional.
As the 19th century Norwegian playwright Henrik Johan Ibsen wrote in the Pillars of Society (Lona Act IV)…
The spirit of truth and the spirit of freedom — these are the pillars of society.
III. Confusing Rebound with Growth: June Vehicle Sales
Will an economic recovery be attained from the constant stretching of reality?
The mainstream thinks so.
From the Businessworld (July 14): VEHICLE SALES in June jumped 45% compared with the same month last year as the auto industry continues to grapple with the impact of the pandemic. Sales increased by 44.8% to 22,550 units in June compared with 15,578 units sold a year ago, a joint report from the Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI) and Truck Manufacturers Association (TMA) released on Tuesday showed.
Figure 1
The % growth cited by media signifies a comparison of this year’s relatively “open” economy with last year’s economic shutdown. Thus, the low-base effect magnified the % gains.
Yet, what growth?
The trend of unit sales continues to cascade ever since its zenith in December 2017 or the eve of the imposition of TRAIN. Is a downtrend equivalent to growth?
Further, bank consumer auto loans shrank by a record 13.8% in May, for its eight-straight month, suggesting that cash purchases or in-house dealer financing for auto sales instead.
Meanwhile, the growth of vehicle NPLs relative to the Total NPLs and Total Loans also soared in the 1Q 2021, a rising trend since 2018. The political response to the pandemic accelerated it.
Growth is found in the NPLs and not in sales.
Yet, the picture provided by the above points to excess supply in the face of limited demand, which, apart from an income squeeze, has been constrained by reduced credit availability.
What growth? Where?
IV. Confusing Slowdown with Growth: The BSP’s Foreign Direct Investments
Here’s more.
Figure 2
From the BSP (July 12): Foreign direct investment (FDI) net inflows continued its growth momentum in April 2021, rising by 114.4 percent year-on-year to US$679 million from US$317 million in April 2020 (Table 1). This brought the FDI net inflows for the first four months of 2021 to US$3.1 billion, a 56.3 percent increase from US$2 billion in the comparable period last year. The higher cumulative FDI net inflows was due to the improvements in all components, led by non-residents’ net investments in debt instruments, which rose by 115.2 percent to US$1.9 billion from US$897 million. Net placements of equity capital also grew by 8.1 percent to reach US$818 million from US$756 million. Reinvestment of earnings increased slightly by 2.0 percent to US$307 million from US$301 million a year ago. FDI net inflows in April 2021 rose on the back of positive foreign investor sentiment on the country’s macroeconomic fundamentals and strong growth prospects. In particular, FDI net inflows during the month increased due mainly to the 121.2 percent expansion in non-residents’ net investments in debt instruments to US$500 million from US$226 million in April 2020.3
A picture, they say, is worth a thousand words.
As it is, FDIs are another case of booming % data from the low base effects. For those who swallow headlines hook, line, and sinker, that should be a good feed.
To be sure, April’s growth represents the recent set of lower highs that only reinforces the FDI downtrend from 2016. Unfortunately, this set is what the consensus sells to the public as growth!
Furthermore, instead of equity infusion, debt has dominated FDI growth. Or, even from the prism of FDIs, leverage dominates the system.
Put this way, "positive…macroeconomic fundamentals and strong growth prospects" have been driven by incremental growth financed by debt.
War is Peace, Ignorance is Strength, Downtrend is Growth. Baghdad Bob lives!
V. More Ghost Data? Despite Downtrend: Hurrah for the OFW Remittances Boom! Why Labor Exports will Persists
Yet, more good news is needed to fire up the animal spirits of the economy.
From the BSP (July 13): Personal remittances from overseas Filipinos (OFs) increased by 13.3 percent to US$2.652 billion in May 2021 from US$2.341 billion in May 2020. This brought the cumulative remittances to US$13.68 billion in the first five months of 2021, a 6.6 percent rise year-on-year from the US$12.835 billion recorded in the comparable period in 2020…. Likewise, cash remittances from OFs coursed through banks rose by 13.1 percent to US$2.382 billion in May 2021 from US$2.106 billion in the comparable month a year ago.
Figure 3
See, as the communique implies, the falling peso has no basis.
Yet, OFW remittances appear to be the most amazing statistical paradox of them all. Why? Because it defies the other data and economic logic. Remittances continue to sizzle regardless of the sizeable number of displaced OFWs and migrant workforce. Have the 612,000 + repatriated OFWs (as of July 12 OWWA) been sent back or replaced? How about the migrant workers abroad? If not, who is sending these massive amounts of FX under the taxonomy of OFW remittances? Or has the remittance data been padded by ghost overseas labor (BSP FX Debt)?
Yes, the outsized gain of May also signified a magnified number from the low-base effect.
Strikingly, despite the inflated numbers, monthly % growth numbers of cash remittances from 2004 have trended south, reflecting the law of diminishing returns.
By extension, the monthly USD figures (in the chart) have likewise been plateauing since 2018 to suggest a rounded top.
More interestingly, if the economy is indeed progressing, then why depend on human exports at all? Why cheer on revenues emanating from policies that have failed to boost local employment and deliver sufficient income or wages for domestic labor?
Proof?
From the CNN (July 13): Export-oriented companies urged the Bureau of Internal Revenue (BIR) to revoke a new rule that charges a 12% value-added tax on export products and transactions which were previously VAT-free. In separate letters sent to the finance and trade departments and to the BIR, the Semiconductor and Electronics Industries in the Philippines Foundation (SEIPI), the Confederation of Wearable Exporters of the Philippines (CONWEP), and the Pilipino Banana Growers and Exporters Association asked the government to repeal BIR Revenue Regulation 9-2021 issued in June. Under the new policy, raw materials, packaging supplies and services rendered or sold to export firms engaged in manufacturing, processing, packing or repacking are now subject to VAT after years of exemption. Also covered are the sale of services and lease of properties for companies that produce export goods…Other business leaders warned that the new rule will scare new investors and take away thousands of jobs. Factories will likely resort to importing their supplies as it would still end up cheaper than the additional tax.
According to the law of demand, if you tax something you get less of it.
And haven’t you noticed, taxes are creeping higher even before the installation of a new administration? The education sector has been in an uproar over a tax hike from 10% to 25%.
How much MORE tax hikes will emerge in the aftermath of the 2022 national elections?
For exporters, it’s not just VAT, but the costs of shipments have soared as well. Add to their woes, the increasing scarcity of bank financing.
That is to say, at the cost of the marginal entities, the concentration of exports will be coming from elites, who can afford to shoulder higher taxes because of their armies of accountants and lawyers, have the infrastructure for shipments, and have access to cheap credit.
So there you have it, the erosion of competition or the concentration of the industry translates to lesser domestic jobs impelling MORE human exports.
Well, here is a silver lining. Because of intermarriages, the Philippines should become a powerhouse in international beauty contests!
VI. GIR Falls in June as the BSP Offloads Gold to Defend the Peso, Will the US Fed Policy in the End-2022?
The fixation by many social media outfits on the May OFW numbers instead of the June Gross International Reserve (GIR) has been astonishing.
Do they know that FX remittances of June, though yet to be published, are already incorporated into June's Gross International Reserve (Foreign Assets/Balance of Payments)? Or has editorial priority been addressed to highlight the grander growth numbers to boost the animal spirits?
Figure 4
From the BSP (July 13): The country’s gross international reserves (GIR) level, based on preliminary data, settled at US$106.08 billion as of end-June 2021 from the end-May 2021 GIR level of US$107.25 billion. The latest GIR level represents a more than adequate external liquidity buffer equivalent to 12.1 months’ worth of imports of goods and payments of services and primary income.1 Moreover, it is also about 7.8 times the country’s short-term external debt based on original maturity and 5.2 times based on residual maturity. The month-on-month decrease in the GIR level was mainly attributed to the downward adjustment in the value of the BSP’s gold holdings due to the decrease in the price of gold in the international market, foreign currency withdrawals of the National Government (NG) from its deposits with the BSP to pay its foreign currency debt obligations and various expenditures, and BSP’s foreign exchange operations. These were partly offset, however, by the inflows from the BSP’s income from its investments abroad. (italics added)
Sure, gold was mainly responsible for the drop of June’s GIR.
Month on month USD gold prices dropped by 7.02% in June. But its gold reserves fell by 10.4%, which likely means the BSP offloaded its gold holdings to defend the peso. Wow.
Based on the IMF’s International Reserve and Foreign Currency Liquidity Report, since June 2020, the BSP’s physical gold reserves have gone down. Gold’s share of the BSP’s GIR has sunk to the lows of 2015.
But the peso has been under pressure since the scaling down of the BSP’s use of Other Reserve Asset (ORA). Deposits from proceeds of borrowings by the national government replaced this. Yet, the BSP recycles part of the NG FX borrowings through US banks by holding USTs.
That said, we bring back this quote featured above.
From the Philstar (July 12): In a Monday morning interview with ABS-CBN News Channel, BSP Governor Benjamin Diokno said the central bank is already intervening in the foreign exchange market to temper the local unit’s weakness by converting some of its dollar reserves into peso. But the BSP chief said monetary authorities still trust in the market-determined exchange rate. … “The BSP will continue to adopt at market-determined exchange rate policy. That’s our approach. We deal with exchange rate volatility, looking at supply and demand of foreign exchange,” he said. “At the same time, our role is smoothen the fluctuations, and to make sure market conditions are orderly rather than steering peso to a particular level, whether it’s stronger or weaker than other currencies,” he added. (italics mine)
So, the BSP has opted to pare down its FX reserves, most likely with the offloading of more gold, than boost the peso by resuming the use of FX derivatives this July.
They will also continue to 'adopt a market-determined exchange rate policy' but insists on intervening purportedly to 'smoothen the fluctuations.'
Cutting down the winded chase, markets determine exchange rate policy ONLY when the outcome IS palatable to the monetary authorities. When it is NOT, the BSP intervenes in the hope of disciplining market forces.
Unfortunately, a pseudo market-determined exchange rate that skews the economic balance will unlikely attain its goal. As the great Austrian Economist Ludwig von Mises explained,
Interventionism means that the government not only fails to protect the smooth functioning of the market economy, but that it interferes with the various market phenomena; it interferes with prices, with wage rates, interest rates, and profits.
Ludwig von Mises, A Regulated Economy Leads to a Socialist Economy January 17, 2018 Mises.org
And as the news excerpt suggests, the feedback loop of the falling peso and declining GIRs will continue.
As a final note on the peso and GIRs, from the ABS-CBN (July 15): The spread of COVID-19’s delta variant could delay moves by the US Federal Reserve to shift monetary policy, the head of the Bangko Sentral ng Pilipinas said on Thursday.
Do you know that the so-called projected policy shift by the US FED, factored in by the markets, is at the end of 2022?
So we are supposed to believe that the Fed’s policy deferment from end-2022 to some time 2023-2024 should be a peso positive, regardless of its underlying imbalances?
The market implied Fed rate exhibit tenuous convictions that the FED will even pursue a single rate hike at the end of 2022. Delay barely seems in the cards. Falling yields of USTs have underscored this.
VII. BSP Extends Php 540 billion Loans to the National Government: Another Bailout of the Banking System
This brings us to the final topic of the day: an extension of the Php 540 billion direct loans by the BSP to the National Government, the fourth time since March 2020.
Why the need for the BSP to finance the National Government?
First, the budget deficit is running below the 9.4% deficit-to-GDP target.
As of May, the Treasury’s fiscal deficit accrued to Php 566.2 billion, which is just 31% of the target of Php 1.8 trillion, calculated from the 7% GDP goal of the NG. Or, at the current pace, the annual deficit will be below the NG’s target.
Second, the nominal increase in outstanding debt is more than double the deficit.
As of May, outstanding public debt has accrued to Php 1.27 trillion, more than double the deficit and signifying about 70% of the deficit target.
The banking system has Php 12.9 trillion in peso deposits as of May. If the easy money regime prevails, persuading some depositors to contribute should be a piece of cake. Of course, excluded from these are deposit accounts representing the public’s repository funds.
The Department of Finance projects this year’s borrowing at Php 3.03 trillion, 74% of which will originate from local sources.
With the peso on a waterfall, external borrowing will become a less conducive option.
The thing is, borrowings of Php 3 trillion to fund Php 1.8 trillion of deficit? I know; it is election time.
Perhaps their intended goal is for the BSP to fill that gap.
Well, through headlines, that’s what authorities want the public to believe: The BSP intends to support growth. That is, whatever definition of growth is for them. For instance, is growth conceptualized in the context of the size of the government? If so, they have been successful.
Here is the information withheld by authorities.
The actual goal of asset inflation is to combat deflationary pressures on the banking system. It seeks to prevent collateral values held by institutional creditors, mainly banks, from collapsing.
Figure 5
The BSP’s net claims on the central government grew by 26% YoY or Php 144 billion month-on-month to Php 699.02 billion, which was in response to the plunge in cash in circulation. After posting double-digit gains through March, currency issued by the BSP bounced 4.4% YoY in June from .98% in May.
The NG pruned their debt by Php 341 billion in March and April, or only 62% of the Php 540 billion extended last December, but the ensuing liquidity drain was powerful enough to prompt the BSP hands.
So the BSP started to increase its direct lending to the NG in June even before they declared it last week.
There are three tactical approaches by the BSP to contain deflation. As explained last June
One, prevent and contain the losses of the index and financial assets, which deflationary signals may affect collateral values, necessary for bank lending operations, the upkeep of financial assets and support balance sheets of the banking system.
Direct lending by the BSP to the National Government declined in the last two months through April, which depleted some of the excess liquidity in the financial system. The growth of currency issued by the BSP plunged by a steep .43% in April from 4.06% in March.
…
Two, boost market "confidence" to enhance financial liquidity.
Credit drought in a system dependent on credit expansion is a recipe for fire sales. That’s why the knee-jerk response by the BSP was to infuse a whopping Php 2 trillion liquidity, hoping that this would be sufficient to disguise, if not forestall, insolvencies.
…
Three, allow establishment institutions expanded access to the public’s savings.
As a consequence of tenor mismatching (borrow short-lend long), credit delinquencies emerge from bank operations. Credit impairments hamper operations and erode capital. To fill this gap, banks require fresh funds.
YoY changes in the BSP’s assets and YoY changes in the cash reserves of the banking system are closely associated. Presently, through its easing policies, the BSP determines the changes in the bank's cash reserves.
The BSP’s QE has likewise served as a recent source of bank deposits. However, bank deposit growth has stalled, hence the renewal of the QE.
Banks also acquire securities of the Philippine Treasuries, which it uses as collateral for its borrowing (repo) activities with the BSP. Or banks resell these securities to the BSP (QE secondary market).
The point is that the BSP’s actions have centered on providing support on the credit-collateral dynamic of the banking system. Simply put, the QE is a bailout of the banking system.
Again, the BSP’s latest act serves as fuel to monetary inflation and the peso's fall.
