The Diokno-Led BSP: The Weak Peso is a Net Win, Don’t Fight the BSP, Buy the USD-Php!

Religions die hard. It takes an orgy of evidence to change a person’s mind on a subject that is integral to their moral and ethical structure—Tom Luongo

In this issue

The Diokno-Led BSP: The Weak Peso is a Net Win, Don’t Fight the BSP, Buy the USD-Php!

-The Duterte Administration Embeds into the BSP

-Diokno: Weak Peso is a Net Win!

-Diokno’s Many Statistics Equals Economics Myths; Is the BSP Governor an MMTer?

-Mr. Diokno’s Penchant for the INFLATION TAX!

-The Diokno Led BSP will EASE SOON: Don’t Fight the BSP, Buy the USD-Php! The BSP Independence Myth

The Diokno-Led BSP: The Weak Peso is a Net Win, Don’t Fight the BSP, Buy the USD-Php!

The Duterte Administration Embeds into the BSP

From last week: (bold original)

Needless to say, given that the political economy has been dependent on these twin bubbles (race to build supply and the neo-socialist bubbles) politicians will pressure the monetary authorities to accommodate them.

And such is the reason that the BSP’s remarkable restraint should prove to be fleeting.

January Quantitative Tightening: The BSP Withdraws Record Funding to the National Government, March 3, 2019

The appointment of former Budget Secretary, Benjamin Diokno, as the Governor of the Bangko Sentral ng Pilipinas (BSP) came as a surprise to the public.

The BSP's capture by the administration has been anticipated by us in the above. 

While the BSP hierarchy, some business groups, and bankers welcomed the appointment, some external analysts see this development as heightening the risks of politicization and the potential loss of independence of the central bank. Naturally, theadministration denies this.  

The diametric reactions have been intuitive.  

For the banking system, with the BSP poised to exercise increased control of the industry through the new BSP law, who would dare question such an appointment?

Not content with the BSP law, the central bank even desires to expand its regulatory dragnet over the parent or holding firms of banks! So any expressed opposition from the industry would likely be met by vindictive responses by the regulator! These economic agents would not desire to lose their franchises or be taxed to extinction, or face the risks of nationalization. As such, singing hallelujahs and fawning over the actions of the administration would be the natural response. 

In contrast, with fewer risk exposure to domestic politics, some external commentators had the mettle to call a spade a spade (even benignly).   

Diokno: The Weak Peso is a Net Win!

From Finance, Banking and Money (lardbucket.org)

What exactly is central bank independence (sometimes referred to as autonomy) and why is it important? Independence means just that, independence from the dictates of government, the freedom to conduct monetary policy as central bankers (and not politicians) wish. Why does it matter whether a central bank is independent or not?

From the ABS-CBN: (March 5, 2019) "Price stability is one goal of BSP. Financial stability is the other one. But it's more than that," Diokno said in a text message reply to ABS-CBN News. "BSP’s role is to ensure steady, strong growth. In order to achieve this, monetary policy has to be in sync with fiscal policy," he said

Merriam Webster’s definition of “in sync”: “in a state in which two or more people or things agree with or match one another and work together properly”

This Nikkei Asian Review article describes fittingly what Mr. Diokno wishes to impart: “A rate cut would help reduce financing costs of Duterte's "Build, build, build" program, which aims to spend over 8 trillion pesos on roads, bridges and airports by 2022.”

The BSP’s Objective: “The BSP’s primary objective is to maintain price stability conducive to a balanced and sustainable economic growth. The BSP also aims to promote and preserve monetary stability and the convertibility of the national currency.”

Last year, the erstwhile budget secretary as a rah-rah boy for the weak peso: (Philstar July 10 2018): [bold added] The weakening of the Philippine peso, one of Asia’s worst performing currencies so far this year, is a “net win” for the country, Budget Secretary Benjamin Diokno said Tuesday amid concerns over the local currency’s slump. According to Diokno, the depreciation of the peso is expected to benefit overseas Filipino workers, the business process outsourcing industry and the country’s exports.”

The BSP Chief wants a weak peso!

Diokno’s Many Statistics Equals Economics Myths; Is the BSP Governor an MMTer?

WHERE in the BSP objectives does it state that monetary policies need to be in sync with fiscal policies?

Figure 1

What happens if fiscal policy contravenes or clashes with price stability? The surging fiscal deficit has been accompanied bysoaring CPI for the past two years. (figure 1, upper window)

Which will Mr. Diokno take as THE BSP’s priority in the case of the present conflict?

And has easy money policies reduced the debt burden supporting “build, build and build” and the record fiscal deficit?

Bureau of Treasury’s debt servicing data shows that this claim has been unfounded. It is true that reduced interest rates lower financing costs, on the surface. But there are second-order consequences. That is, lower financing costs raises the stock of debt. In this case, the government has used lower rates to expand debt financing. Total annual debt service (interest plus amortization) surged from Php 490.36 billion in 2017 to Php 776 billion in 2018 or by 58.18% to reach the second highest level over the past 23 years! (figure 1, lower window)

Figure 2

As to the claim that the weak peso boosts OFWs, service or goods exports where is the empirical proof?

Wouldn’t price instability and the consequential loss of purchasing power overwhelm the supposed advantages provided by these?

The trend of OFW remittances continues to sink as the peso fell. OFW remittance growth rate peaked in early 2014 then headed south in the succeeding years. Such downtrend as accurately predicted here, signified OFW’s diminishing marginal returns. So the weak peso hasn’t boosted OFWs as alleged. (figure 2, upper window)

The weak peso has neither boosted goods export nor services export as so claimed.  (figure 2, lower window)

Not only have these assertions been grounded on fallacious theories and assumption, but more importantly, the evidence does not support them.

The great Austrian Economist Ludwig von Mises presciently identified the ideology behind this: [The Causes of Economic Crisis, p.194] (bold added)

Credit expansion not only brings about an inextricable tendency for commodity prices and wage rates to rise it also affects the market rate of interest. As it represents an additional quantity of money offered for loans, it generates a tendency for interest rates to drop below the height they would have reached on a loan market not manipulated by credit expansion. It owes its popularity with quacks and cranks not only to the inflationary rise in prices and wage rates which itengenders, but no less to its short-run effect of lowering interest rates. It is today the main tool of policies aiming at cheap or easy money.

Yet, the new BSP chief subscribes to it.

Dyed in the wool money cranks have been reincarnated today through the Modern Monetary Theory (MMT) which believes that fiscal deficits can be funded freely by the printing press with hardly any costs. And socialist ideologues in the US have used MMTto justify their programs.

Harvard professor Kenneth Rogoff wrote recently at the Project Syndicate to push back on this: “Powell is absolutely right about the deficit idea, which is just nuts. The US is lucky that it can issue debt in dollars, but the printing press is not a panacea. If investors become more reluctant to hold a country’s debt, they probably will not be too thrilled about holding its currency, either. If that country tries to dump a lot of it on the market, inflation will result. Even moving to a centrally planned economy (perhaps the goal for some MMT supporters) would not solve this problem.” (bold mine)

Has the BSP embraced an MMTer as Governor?

Boy, do I miss Mr. Espenilla and Mr. Tetangco! Mr. Diokno’s presence makes his predecessors look like hard money (gold) bugs!

Mr. Diokno’s Penchant for the INFLATION TAX!

At the outset, Mr. Diokno’s inaugural proposition has been to raise the Reserve Requirement Ratio on the banking system. The prospect of the availability of more money triggered a buying orgy on bank stocks. The financial index zoomed by 4.6% to lift the headline index by 2.03% this week.

To fulfill the desire for a regime based on cheap money, Mr. Diokno pushed further for interest rate cuts.

But perhaps due to pressures from some groups, Mr. Diokno reportedly moderated his push for an outright easing stating that he would rather “wait for fresh data to confirm that the inflation rate is indeed on a downtrend before pushing for a reduction in interest rates or bank reserve requirements”

Figure 3

The National Government and the BSP reported February CPI at 3.8%. Statistical inflation peaked in September 2018 at 6.7% and dropped by almost half in February in 5 straight months of decline. Curiously, headline inflation has plunged below the core inflation of 3.9%. (see figure 3, upper window) The growth rate of food and energy prices have dropped faster and far more than the other items in the consumer basket. Have Filipinos been backing off consuming basic goods to spend more on other items?

Though I would doubt the accuracy of the statistical CPI, what has been telling has been that inflation is being weighed down by intensifying tightening of financial conditions. (see figure 3, lower window)

The CPI won’t be the reason for the BSP Governor’s coming action.

Mr. Diokno doesn’t say that the inflation from record public spending represents an INDIRECT TAX.

So he would want to increase such transfers to the political regime.

Hence, Mr. Diokno’s push for cheap money should expedite the financing and resource transfers to from you and me to the Mr. Duterte, his allies, cronies and to Mr. Diokno’s relatives who, reportedly, have been benefiting from the build, build and build.

It’s free lunch for him….at our costs.

The Diokno Led BSP will EASE SOON: Don’t Fight the BSP, Buy the USD-Php! The BSP Independence Myth

Figure 4

With real rates in the POSITIVE, subsidies to the NG has ceased. Money has been tightening. The yield of 1-year treasury notes (PDS) has been higher than the CPI for FOUR straight months through February! (figure 4, upper window)

And tight money wouldn’t be allowed to jeopardize or hamper this regime’s spending and centralization goals. So one can expect that the new BSP governor to undertake easing measures soon!

Free lunch MUST continue for them!

Unfortunately, profound problems in the banking sector will pose an obstacle. The humped or partial inverted curve of BVAL ratesare manifestations of the industry’s dilemma. (figure 4, middle window)

Though yields have come down across the curve, the decline has been uneven.  While inflation expectations have influenced the longer end that has resulted to bigger decreases in yields, however, the shorter end has been marginally off the recent multi-year highs. The short-end should respond to Mr. Diokno’s call for rate cuts.

But it hasn’t.

Yet.

It might not.

In fairness, the BSP has been conducting fiscal operations even prior to this administration. (figure 4, lower window)

The share of BSP monetization to the GDP has been rising since 2015. Such operations have only accelerated in the present administration. The spike in 2013 signifies the BSP’s response to Ben Bernanke’s Taper Tantrum.

Monetization of the NG’s expenditures debunks the notion of the BSP’s independence. The BSP's conduct of fiscal policy through monetization has entwined the central bank with the NG. 

To rescue the banking system, the BSP triggered this nuclear option in 2015.

The appointment of Mr. Diokno had been most likely designed to ensure that the Duterte government would have unfettered access to the peso printing press!

Given the above, the claim that the BSP independence will remain intact is a fiction.

Mr. Diokno’s helm should help the administration centralize the financial industry.

Federalism anyone?

Yet, with emergency stimulus policies all in (interest rates, QE and fiscal stimulus), what would be left for the BSP and the NG to use once the economy falters?

Mr. Diokno’s dogma provides us a clue. Print the peso away!

Says Mr. Diokno, the weak peso is a NET WIN!

Don’t fight the FED BSP!

Buy the USD-Php!

P.S. The BSP will cut the Reserve Requirements Ratio first. That’s my past and present prediction. But that’s hardly about easing. Rather, such would be about releasing regulatory constrained funds to the liquidity-starved banking system…

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The BSP in a Panic: Drastically Hikes Policy Rates and Slashes Deficit Financing To Curb Demand as M3 Growth Plunges!

The difficulty of having people understand monetary theory is very simple—the central banks are good at press relations. The central banks hire people and the central banks employ a large fraction of all economists so there is a bias to tell the case—the story—in a way that is favorable to the central banks. — Milton Friedman

In this issue:

The BSP in a Panic: Drastically Hikes Policy Rates and Slashes Deficit Financing To Curb Demand as M3 Growth Plunges!

-Rising Interest Rates Represent a Global Phenomenon

-The Inflation Club in Motion, The BSP Gambles by Curbing Demand

-What Happened to BSP’s Inflation Targeting Policy? The National Government’s Low Margin of Safety

-BSP in Panic: Drastically Hikes Policy Rates in the Face of Plunging M3 Growth!

-BSP in Panic: Slashes Deficit Monetization in August! Build, Build, Build Prices Fall!

-National Government Used External Debt to Finance Record Deficit, Peso Will Rally Temporarily on the BSP’s Dramatic Tightening

The BSP in a Panic: Drastically Hikes Policy Rates and Slashes Deficit Financing To Curb Demand as M3 Growth Plunges!

Remember this?

From the BusinessWorld (September 14, 2018): “We are not in a major crisis. It may be a serious problem for some people, but for the nation in general it’s not a major crisis,” Finance Secretary Carlos G. Dominguez III told reporters yesterday at the Senate…“It was decided that there will be no off-cycle (meeting). You really think we are panicking? You are panicking, not us. That’s why you have to have perspective,” he said.” (bold added)

Recent actions, not comments or denials, should reveal on who DID panic.

Rising Interest Rates Represent a Global Phenomenon

First, the big picture.  

The Reuters reported: “China, Taiwan and New Zealand sat tight after the Federal Reserve’s latest rate hike, but Indonesia and the Philippines pulled the trigger on Thursday to prop up their battered currencies and temper risks to inflation and financial stability.”

Led by the US Federal Reserve, the Philippines and Indonesia were among the 12 nations which central banks have increased interest rates this week

Rising interest rates represents a global phenomenon. Or, global liquidity is in the process of receding substantially.

 

Figure 1

So access to external funding will become increasingly scarce which will be reflected by rising rates.

Yields of 10-year bonds of the Philippine sovereign and its equivalent in UST Treasuries have moved in a lockstep fashion since 2016. (figure 1, upper window)

However, coupon differentials have risen faster in the Philippines (figure 1 lower window)

The reduced access to external funding which is reflected by its increased costs should lead to diminished cross-border arbitrages (carry trades) and investment flows.

And reduced cross-border transactions will be magnified by the escalation of protectionist policies.

Importantly, real servicing costs of domestic exposure on external liabilities should also balloon.

Now if access to external funding has become more prohibitive, how about domestic financing?

As noted above, this week’s 50 basis points rate hike added to the cumulative 100 bps increases during the BSP’s last three meetings (May, June and August). Or policy rates soared by 150 bps in the last 5+ months!

Compared to Indonesia’s central bank, Bank Indonesia, which increased rates by the same proportion in 5 months, the 4-four month action by the BSP reflects the degree of apprehension by monetary authorities.

Despite the Indonesian rupiah falling to 1997-98 levels, the BSP jacked up rates faster than its neighbor!

So who panicked?

The Inflation Club in Motion, The BSP Gambles by Curbing Demand

Last week’s BSP’s policy action had been characterized by mainstream media (Inquirer September 28) as follows: (emphasis mine)

Saying the country’s near decade-high inflation rate may get worse in the coming months, the central bank yesterday raised its key interest rate by 50 basis points, marking the most aggressive monetary policy tightening streak since the crisis-ridden Joseph Estrada presidency.

Bangko Sentral ng Pilipinas Deputy Governor Chuchi Fonacier said the rate hike—the second half percentage point increase in two months, and the fourth consecutive over four Monetary Board meetings since May—was necessary to “further anchor inflation expectations and to safeguard the inflation target over the policy horizon.”

“The Monetary Board recognized that a further tightening of monetary policy was warranted by persistent signs of sustained and broadening price pressures,” she said, briefing the media in lieu of BSP Governor Nestor Espenilla Jr. who is on medical leave.

The last time the BSP raised interest rates this aggressively was in May 2000 when the peso was dropping sharply during the administration of President Estrada. That month, the central bank raised interest rates by 50 basis points twice in a single week to defend the currency from speculative attacks.

Explaining the Monetary Board’s latest decision, Fonacier said that the latest baseline forecasts for inflation “have shifted higher for both 2018 and 2019, with risks to the outlook still leaning toward the upside. With supply-side forces expected to continue to drive inflation in the coining months, inflation expectations have remained elevated amidindications of second-round effects.”…

Fonacier explained that a tighter monetary policy stance would help steer inflation toward a target-consistent path over the medium term by reducing further risks to the inflation outlook, including those emanating from exchange rate volatility given the continued uncertainty in the external environment amid geopolitical tensions and the normalization of monetary policy in advanced economies.

In order not misquote, the first five paragraphs and the eighth paragraph has been excerpted in full.

Heck, just where in the six paragraphs does it show how rising rates will “further anchor inflation expectations”, curb “supply-side forces” and “help steer inflation toward a target-consistent path”???

How are interest rates transmitted to the economy to affect statistical inflation???

That inflation is all about policy levers, constructed out of abstruse econometrics, has represented the essence of BSP's programming of the public's beliefs.

The gullible laypeople have been told to accept, without question, the technical wizardry of authorities.

See what I mean by this?

The first rule of the Inflation Club is: You do not talk about the BSP’s contribution. The second rule of the Inflation Club is: Remember the First rule.

The Two Rules of the Inflation Club, BSP’s QE Hits Fresh Record in July, Government’s FSCC “Shocked” by “Dislocations of Crisis Proportions” September 2, 2018

To better understand the communique’s opaqueness, the BSP-led FSCC FSR’s report lays out the source of the country’s risk.

The low interest rate environment greatly encouraged the search for yield as greater risks were taken in exchange for higher returns. However, the change in market prices (i.e., rising interest rates and depreciating peso against the US dollar) could trigger negative outcomes which, if not properly addressed, would amplify into systemic consequences (p.24)

Cutting through the fog of technical jargon, since interest rates represent the price of time expressed in money in the loanable fund markets, higher rates should mean reduced demand for credit. And such would likewise entail a reduction in the demand for goods and services dependent on credit finance. Consequently, diminished demand should lower prices.

Yes folks, in desperation, the BSP have decided to implement policies that would WITHDRAW demand!

As I wrote back in May…

3) If the government stops from its current undertaking, it will severely slow the GDP, prompt for a fall in tax revenues which should spike deficit as well. Credit risk will surface and subsequently impact the banking system. Markets will demand more collateral or increases in credit risk premium (higher yields!). 

See Why Interest Rates Will Rise: 1Q Fiscal Deficit Blowout Financed by BSP’s Debt Monetization (QE) and Spiking Public Debt!May 6, 2018

What Happened to BSP’s Inflation Targeting Policy? The National Government’s Low Margin of Safety

But who shaped the “low-interest rate environment greatly encouraged the search for yield”?

Or, who has been responsible for the massive buildup of excess demand or consumption which had incited by the “low-interest rate environment” that has destabilized the supply chain to force up street prices?

In contrast to popular thinking, demand doesn’t exist in a vacuum.

Hasn’t the surge in street prices been a symptom of immense malinvestments?

In particular, have there not been massive overinvestments in the bubble segments (real estate, shopping mallsand hotels) of the economy, which concomitantly emerged with substantial underinvestments in the consumer goods industry, specifically, the agriculture industry?

Or has the bubble economy not crowded out the agricultural economy?

Haven’t resources and labor from the agriculture industry been drawn away to build, build and build and other political boondoggles which led to reduced output of the former?

Or has the centrally planned economy not crowded out the agricultural economy?

So haven’t price dislocations been a symptom of supply chain disruptions brought about by expanded demand from the low-interest rate regime fostered by the BSP?

The principal channel from which the BSP executes its inflation targeting policy is interest rates. 

The BSP joined the crowd of global central bankers to artificially lower rates to ward off the untoward effects of the Great Recession. But instead of using these for emergency purposes, the BSP became addicted to its balming (boom) phase and doubled down on it.

And not only has the BSP engaged in tampering with the interest rate but likewise have deployed another emergency tool: money printing.

The consensus worshipped as a sound model, the artificial incipient beneficial effects of monetary emergency tools.

The BSP had been mesmerized by the benefits, but ignored the cost. Now the chickens have come home to roost.

The gravity of misperception has spilled over to the political sphere.

The leadership, who saw a centrally planned political economy as an ideal governance template, was ushered in. In wanting to take advantage of the free money sponsored boom to execute his dream society, the regime transformed another emergency tool into a developmental model.

Deficit spending mainly on infrastructure, used in 2009 as a shield against the Great Recession (Economic Resilience Plan in 2009), essentially became a primary vehicle to divert resources in pursuit of the shift to a neo-socialist state.  

Now the unforeseen consequence from the toxic combination of stretching and converting emergency tools policy into economic growth engines has emerged.

The $64 trillion question: with monetary and fiscal emergency tools still in place, what will be left for the government and the BSP to use once “dislocations of crisis proportions have come as a surprise” becomes “evidence of a looming crisis”????

Since the government and the BSP have stretched themselves thin, they are in effect operating with a very low margin of safety making the economy susceptible to a 'black swan'.

BSP in Panic: Drastically Hikes Policy Rates in the Face of Plunging M3 Growth!

Reactive rather than preemptive signifies the BSP’s “aggressive” and drastic interest response. 

And it seems a reaction out of fear.

Figure 2

The BSP has been compelled to react to the massive selloff in domestic Treasury securities as seen in the spikes in yields.

Yields of domestic Treasuries have been rocketing across the curve! (figure 2, upper window)

With the surge in the cost of credit, demand for it should slow. 

Consumer loans have already been tumbling fast! August consumer loan growth clocked in at 15.8%, significantly lower from July’s 16.85% and June’s 17.75%. Salary loans contracted for the second month. Production loans growth retreated to 19.11% in August slightly down from 19.74% in July and 19.18% in June. Total bank loans growth in August dropped to 18.83% from July’s 19.49% and June’s 19.06% (figure 2, lower window)

And combined with narrowing interest margins, cash-starved banks will see more liquidity drought from a considerable decrease in loan volumes.

And surging rates would be detrimental to the highly fragile banking system.

 

Figure 3

Through the issuance of various loans, cash-starved banks, in heightened competition with the National Government, have been draining liquidity away from the financial system.

And it is striking to see money supply dropped to 2015 levels!

The BSP reported M3 growth at 10.4% in August down from 10.98% in July. The downdraft in the growth rate of the banking system’s peso deposits and cash and due banks has resonated with M3.

And yes, the BSP just raised rates against such a backdrop! 

And the buck doesn’t stop at interest rates.

BSP in Panic: Slashes Deficit Monetization in August! Build, Build, Build Prices Fall!

Having been so spooked morbidly by inflation, the BSP resorted to an eye-popping cutback of direct financing to the National Government!

From the BSP, “Net claims on the central government also rose at a slower pace of 8.7 percent in August from 12.3 percent in July on account of higher deposits of the National Government with the BSP”.

On a month to month basis, the BSP slashed its holdings of National Government arrears by Php 74.05, the largest since April 2017! (figure 3, middle window)

So the two critical sources of financing demand, bank credit and debt monetization will be drastically chopped so as to meet the government’s agenda on the CPI! 

And curiously, despite the slump in domestic liquidity, the BSP sees September CPI in the range of 6.3% to 7.1% which may settle at 6.8%. On the other hand, the Department of Finance expects September CPI at 6.4%

Since the BSP’s net claims on the national government and or money supply growth lead the CPI with a time lag, current declines should extrapolate to a pullback in street and statistical inflation soon.

The government’s other numbers have already been showing this!

 

Figure 4

The grand “build, build and build” projects are, what I discern, as the epicenter of street inflation.  Money from this politicized sector spreads or ripples across the economy to affect general price levels.

And that pullback by the BSP on the direct financing of the NG has also appeared in construction material wholesale prices in August (+7.86%) to possibly reinforce its rollover since its zenith in June (+8.79%).  (Figure 4, upper window)

Construction retail prices have dropped by even more. Following a peak in May (+2.61%), August prices registered a 2.05% sharply down from 2.54% in July. That’s a 19% plunge! (Figure 4, upper window)

Demand from the government, which sizably spiked wholesale construction material prices, have percolated or spilled over to retail or private sector construction prices. The wide gap between wholesale and retail prices underscores the "crowding out effect" of government projects. Hence, with “build, build and build” slowing down, the downturn in retail prices have only been magnified.

General wholesale prices have also shown a possible inflection point. In July, wholesale price inflation was marginally down at 8.97% from 9.8% in June. With M3 even lower in August, growth in wholesale prices may have also turned down more. (Figure 4, lower window)

The effects of the BSP’s drastic hikes in interest rates (in August and September for a total of 100 bps) and NG financing (in August) have yet to appear!

That’s how desperate the BSP is! They have lost control!

And it wouldn’t be a surprise if the outcome would be a 2015 template or worse (most likely outcome).

In 2015, in response to the elevation of the CPI brought about by 10 consecutive months of 30% money supply growth, the BSP raised policy rates twice then.

Real and nominal GDP fell, earnings declined, shopping mall vacancies appeared and disinflation became a chief concern of the ex-BSP governor.  The banking system was at the risk of 'disinflation' which the BSP responded with the nuclear option!

Will the BSP’s dramatic tightening strangulate the economy that would result in a shock?

National Government Used External Debt to Finance Record Deficit, Peso Will Rally Temporarily on the BSP’s Dramatic Tightening

And there’s more.

Because the BSP withdrew from financing the government’s record fiscal deficit in August (Php 74.05 billion month on month), and because the Bureau of Treasury also saw a decline in domestic debt (Php 27.6 billion month on month), the National Government utilized external sources to finance the month’s narrow deficit.

Figure 5

FX liabilities grew Php 87.9 billion (month on month) and 11.01% or Php 251 billion (year on year.) The NG was reported to have raised about Php 74.4 billion worth in yen-denominated Samurai bonds. (Figure 5, upper window)

The substitution from domestic to external financing was designed to limit the siphoning liquidity in a rapidly tightening environment.

See? More signs of having lost control of the situation!

And such represents more signs of the entrenchment of US dollar shorts. 

Meanwhile, total Public Debt reached a record Php 7.104 trillion last August, 10.45% up from a year ago!

And with higher debt levels and rising rates, the NG’s eight-month debt servicing, which reached Php 582 billion in August (30.48% of revenues), has now surpassed the annual debt service levels of the last 5 years. (Figure 5, lower window)

At the current pace, debt service may hit a fresh record at the year’s close (estimated Php 873 billion).

I have shown here how domestic financial conditions have tightened and will get tighter, as the banking system and national government are in a frantic race to secure resources. That would be aside from the coming stagflation (elevated inflation and economic stagnation).

And with interest rates also rising abroad, access to free money is drying up.

Surging rates have only been amplifying the FSCC’s 3Rs repricing, refinancing and repayment risks (3Rs) which could bring about the Minsky Moment soon.

With bank led M3 down significantly and with the BSP retreating from deficit monetization, I expect the peso to mount a modest rally.  

But it is a rally which wouldn’t last, because of capital flight and because of the BSP’s path dependency for credit expansion or money printing which will be resorted to again.

And for the same demand withdrawal factors, CPI should also fall significantly.

For a system heavily dependent on credit for demand, not only will its retrenchment choke the economy; it may also incite considerable social tensions.   

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