Weakening Consumers: Philippine August CPI fell to 3.3% as Q2 2024 Consumer Non-Performing Loans Accelerated

 At the outset, the masses misinterpreted it as nothing more than a scandalous rise in prices. Only later, under the name of inflation, the process was correctly comprehended as the downfall of money—Konrad Heiden in 1944

In this issue

Weakening Consumers: Philippine August CPI fell to 3.3% as Q2 2024 Consumer Non-Performing Loans Accelerated

I. August CPI’s 3.3% Validated the Philippine Yield Curve; Continuing Loss of the Peso’s Purchasing and Magnified Volatility

II. Utilities Overstated the CPI, Headline CPI versus Bottom 30% CPI Translates to Broadening Inequality

III. Plummeting CORE CPI Amidst Record Consumer Bank Loans

IV. Slowing CPI Despite Record Streak in Public Spending and Modest Supply-Side Growth

V. Examining the Discrepancies in Employment Data and Consumer Demand

VI. Philippine Banking System’s Seismic Transformation: The Shift Towards Consumer Lending and its Developing Risks

VII. The Dynamics Behind Record High Consumer Borrowings: Inflation, Addiction and Refinancing

VIII. Surging Consumer NPLs as Driver of Falling Inflation

IX. Expect a Systemic Bailout: Pandemic 2.0 Template; a Third Wave of Inflation 

Weakening Consumers: Philippine August CPI fell to 3.3% as Q2 2024 Consumer Non-Performing Loans Accelerated

I. August CPI’s 3.3% Validated the Philippine Yield Curve; Continuing Loss of the Peso’s Purchasing and Magnified Volatility 

The recent decline in the Philippine CPI, which fell to 3.3% in August, is a symptom of strained consumers. Overleveraging has led to an acceleration in consumer loan NPLs in Q2. 

GMANews, September 5, 2024: The Philippines’ inflation rate eased in August, after an acceleration seen in the prior month, due to slower increases in food and transportation cost during the period, the Philippines Statistics Authority (PSA) reported on Thursday. At a press conference, National Statistician and PSA chief Claire Dennis Mapa said that inflation —which measures the rate of increase in the prices of goods and services— decelerated to 3.3% last month, slower than the 4.4% rate in July. This brought the year-to-date inflation print in the first eight months of 2024 to 3.6%, a slowdown from the 5.3% rate in the same period last year and still within the government’s ceiling of 2% to 4%. 

Quotes from previous posts… 

despite the 4.4% CPI bump in July (and Q2 6.3% GDP), the Philippine treasury market continues to defy inflationary expectations by maintaining a deep inversion of the curve’s belly, which again signals slower inflation, upcoming BSP cuts, and increased financial and economic uncertainty. (Prudent Investor, August 2024)

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Moreover, the curious take is that despite all the massive stimulus, the belly’s inversion in the Philippine treasury market has only deepened at the close of August. 

This does not suggest a build-up of price pressures or a strong rebound in the private sector. On the other hand, rising short-term rates indicate intensifying liquidity issues.  

In the end, while Marcos-nomics stimulus seems to have reaccelerated liquidity, a resurgence of inflation is likely to exacerbate "stagflationary" pressures and increase the likelihood of a bust in the Philippines’ credit bubble. (Prudent Investor, September 2024) 

Let us examine the data in relation to other relevant metrics.

First, the August Consumer Price Index (CPI) fundamentally confirmed the signals provided by the Philippine yield curve regarding the resumption of its downtrend. We will explore this in more detail later.

Figure 1

Second, a slowing CPI does not imply that prices are falling, as some officials have suggested. Rather, it indicates a deceleration in the rate of price increases for the average goods and services in the government’s CPI basket. That is to say, authorities continue to use the inflation channel as an indirect means of taxation. Even from the standpoint of the CPI, the Philippine peso has lost over 99% of its purchasing power since 1957. (Figure 1, topmost chart)

Third, the headline CPI has become increasingly volatile, as evidenced by its significant fluctuations: it surged from 3.7% in June to 4.4% in July, then decreased to 3.3% in August. The rate of change in the Month-on-Month (MoM) data illustrates this volatility. (Figure 1, middle image) 

Notably, with the largest weighting in the CPI basket, food is usually the culprit for this volatility. 

II. Utilities Overstated the CPI, Headline CPI versus Bottom 30% CPI Translates to Broadening Inequality 

Fourth, the upside spike in housing, water, gas, and other utilities inflated the headline CPI. Rent and utilities were the only categories that experienced an increase in August on a month-on-month (MoM) basis. (Figure 1, lowest graph) 

Without the impact of rent and utilities, the headline CPI would have been drastically lower. This category has a significant weighting in the CPI basket, with a 21.4% share.

Figure 2

Fifth, the decline in the rate of price increases, as indicated by the headline CPI of 3.3% in August, had minimal impact on the bottom 30% of households, who experienced a CPI of 4.7% (down from 5.8% in July). However, the disparity between these categories remains at 2018 levels. (Figure 2, topmost diagram) 

Even with its flawed measurement, the government’s CPI highlights the broadening inequality. 

III. Plummeting CORE CPI Amidst Record Consumer Bank Loans 

Sixth, the volatility of the headline CPI hasn’t been corroborated by the non-food, non-energy Core CPI, which continues to decline. 

Although the gap between the headline CPI and the Core CPI has narrowed, it remains substantial due to the relatively faster decline in the Core CPI. (Figure 2, middle graph) 

Seventh, the law of supply and demand dictates that if the supply of goods or services exceeds demand, prices will fall. Conversely, if demand outstrips supply, prices will rise. 

In the current context, the weakening of the Core CPI is a symptom of the sustained erosion of domestic demand. 

This is exemplified by the consistently diminishing rate of price increases in retail components such as furnishing household equipment and maintenance, clothing and footwear, and personal care and miscellaneous goods. (Figure 2, lowest chart)

Figure 3

Eighth, the growth of total universal-commercial bank loans remains on a remarkable streak, posting a 10.4% growth rate last July—its third consecutive month of 10% growth. (Figure 3, topmost window) 

Moreover, universal commercial bank household credit grew at an even faster pace of 24.3%, marking its twenty-third consecutive month of over 20% growth! (Figure 3, middle diagram) 

Given this explosive growth in consumer and overall bank credit, which should have theoretically stimulated demand, why hasn’t it boosted the CPI?

IV. Slowing CPI Despite Record Streak in Public Spending and Modest Supply-Side Growth 

Ninth, what has happened to the "Marcos-nomics stimulus" and the ramping up of Q2 record debt-financed public spending? Why have these measures not bolstered demand and the CPI? (Figure 3, lowest chart)

Figure 4

Tenth, the supply side has hardly been a factor in the CPI slowdown.

The slackening of imports, which were down 7.5% (in USD million) in June, was not an anomaly but a trend since peaking in August 2022.  (Figure 4, topmost pane) 

Domestic manufacturing has also not shown excessive growth. Manufacturing posted a 4.7% value growth and 5.25% volume growth last July, marking the third highest monthly growth since August 2023 (a year ago). (Figure 4, lower left chart) 

The headline S&P Global Philippines Manufacturing PMI reported an unchanged index of 51.2 in August, unchanged from July. (Figure 4, lower right chart) 

The PMI index has been consolidating with a downside bias, as demonstrated by the "rounding top." 

If the supply side had managed to grow at a minor to moderate rate in recent months, then demand represents the weak link behind the sliding CPI rate.  

The lack of significant supply-side expansion suggests that the primary driver of the CPI slowdown is the erosion of domestic demand. 

V. Examining the Discrepancies in Employment Data and Consumer Demand 

Why so?

The employment data is unlikely to provide a satisfactory explanation. 

Aside from the questionable nature of the statistics, the government attributed the swelling of July's employment rate to fresh graduates entering the workforce.

 

GMANews, September 6: The number of unemployed Filipinos increased in July as millions of young individuals, who graduated from college or senior high school and entered the labor force, did not land jobs during the period, the Philippines Statistics Authority (PSA) reported on Friday.

The decrease in the labor force participation rate from 66% in June to 63.5% in July likely underestimated the true number of unemployed individuals.

Figure 5

It's worth noting that a "rounding top" appears to be a persistent trend in the labor participation rate. (Figure 5, topmost diagram)

If this pattern continues, then for whatever reasons, it's likely that the labor force will shrink, which would negatively impact the employment population.

While most sectors reported decreases in employment (MoM) last July, the government (public administration and defense), finance, and IT sectors reported significant gains. The increase in government jobs is not surprising, given that they are one of the largest employers, particularly with the record high public spending in Q2. (Figure 5, middle image)

In any case, despite the second-highest employment rate in June, the rise in unemployment in July suggests that the substantial growth in bank credit has not been sufficient to create enough investments to absorb new graduates. 

The irony is that even if this data were close to accurate, the high employment rate demand story has been incongruous or inconsistent with the slowing consumer, the record high consumer bank credit levels, and the CPI. 

Another paradox is that the volatility in the labor data may be influenced by social mobility. In reality, the Philippine labor market has been beset by the byzantine nature of onerous labor regulations. 

VI. Philippine Banking System’s Seismic Transformation: The Shift Towards Consumer Lending and its Developing Risks 

Beyond that, the slope of the Philippine Treasury markets provides insights into economic conditions, inflation, and potential risks. 

Not only has it accurately predicted CPI dynamics, but it has also indicated the likelihood of increased economy-related risks. 

Consider this: Why has the CPI been on a temporary downtrend despite record levels of Universal Commercial bank consumer lending? This observation applies even to production loans, but our focus here is on consumer loans. 

The banking system’s total consumer loans, including real estate loans, surged to an all-time high of PHP 2.81 trillion in Q2 2024. This represents a record 21.75% of total bank lending, meaning that one-fifth of all Universal Commercial bank lending has been directed towards consumers.  (Figure 5, lowest graph) 

Four-fifths of these, which also demonstrates a declining share, represent lending to the supply side sector, primarily benefiting the elites.

Figure 6

This data represents evidence that Philippine banks have undergone a seismic transformation: a preference for consumers over producers. 

From a sectoral perspective, banks have also shifted their lending preferences toward high-risk, short-term lending—specifically credit cards and salary loans. 

Since 2017, the percentage share of credit cards relative to the total has surged to a milestone high, while the share of salary loans has also increased since 2021. Notably, the rapid growth of these segments has come at the expense of real estate and motor vehicle loans. (Figure 6, topmost image) 

Strikingly, the share of consumer real estate loans peaked at 45% in Q4 2021 and then nose-dived to 37% by Q2 2024. 

In a nutshell, banks have "backed up their trucks" to rapidly leverage Philippine consumers. 

VII. The Dynamics Behind Record High Consumer Borrowings: Inflation, Addiction and Refinancing 

The all-time high in consumer lending did not emerge in a vacuum. 

Primarily, consumers have turned to credit cards and salary loans to compensate for the loss of purchasing power due to inflation. 

Secondly, this trend has deepened consumers' reliance on credit cards and salary loans. 

Thirdly, the extended leveraging of consumers' balance sheets necessitates further credit to refinance or roll over existing debt. Some individuals use multiple credit cards, while others may tap into salary loans or borrow from the supply side for the refinancing of existing debt. 

It is important to note that the consumer credit data reveals an escalation in concentration risks. 

The surge in consumer lending indicates that only a small segment of the population has access to formal credit systems. 

The BSP’s Q2 2023 Financial Inclusion data reveals that consumer credit, including credit cards, salary loans, and other forms of bank credit, is limited to a minority segment of the Philippine population. (Figure 6, middle table)

Not only in finances, this group—primarily from the high-income sector—has been capturing a significant portion of the nation’s resources funded by credit. They are the primary beneficiaries of the BSP’s inflation policies. 

However, they also represent the most fragile source of a potential crisis. 

Conversely, the low level of participation in formal banking does not equate to a low level of leverage for the unbanked population. Instead, this larger segment relies on informal sources for credit. 

However, they also represent the most fragile source of a potential crisis.

Lastly, having reached their borrowing limits, some consumers have begun to default. 

VIII. Surging Consumer NPLs as Driver of Falling Inflation

Have the media or mainstream experts addressed this issue? 

Not when financial services are being marketed or deposits solicited; discussing conflicts of interest remains a taboo.

Despite subsidies and relief measures, the Non-Performing Loans (NPL) in consumer lending have been rising, driven primarily by credit cards and salary loans. (Figure 6, lowest chart)

Figure 7

Again, the all-time high in credit card and salary loans has led to a surge in NPLs. According to the BSP’s various measures, the NPLs for credit cards and salary loans relative to total NPLs in the Total Loan Portfolio (TLP) have been intensifying since 2021 (for salary loans) and 2023 (for credit card loans). (Figure 7, topmost, second to the highest and lowest-left and right graphs)

Despite the massive BSP support, the fastest-growing segments for banks are also the primary sources of their weaknesses. 

Published banking and financial data may be understated due to these relief measures and other factors. 

Why are banks significantly borrowing (focusing on short-term loans), competing with San Miguel, both listed and unlisted non-financials, financials, and the government? 

So, there you have it. The slowing inflation in the face of rampant credit growth is a symptom of the mounting balance sheet problems faced by consumers. 

Borrowings are not only used for spending but are increasingly being utilized to recycle loans—the Minsky Ponzi syndrome process is in motion. 

Extending balance sheet leveraging has not only weighed on consumer spending but has also caused a rise in credit delinquency. 

It also exposes the façade of a 6.3% Q2 GDP. 

The lesson is: current conditions reveal not only the fragile state of consumers but, more importantly, exposes the vulnerability of Philippine banks. 

The treasury markets have been signaling these concerns. 

IX. Expect a Systemic Bailout: Pandemic 2.0 Template; a Third Wave of Inflation 

But it doesn’t end here. 

Do you think the government would allow GDP to sink, which would deprive them of financing for their boondoggles? 

Naturally, no. So, authorities have embarked on a tacit "Marcos-nomics stimulus" to prevent cross-cascading defaults, initially marked by a resurgence of illiquidity. 

With the upcoming elections, public spending has surged, leading to increased monetary growth, as indicated by the most liquid measure, M1 money supply. 

Yes, this exposes the artificiality of a so-called "restrictive" or "tightening" regime.

Needless to say, this process will only foster more economic imbalances, which will manifest through the enlarged “twin deficits.”

Economic maladjustments will become evident in the growing mismatch between demand and supply, as well as between savings and investment (record savings-investment gap), leading to increased fragility in the banking system’s balance sheet. 

This, in turn, will prompt more easing policies from the BSP and accelerated interventions and liquidity injections from the tandem of financial institutions (led by banks) and the BSP. 

We should expect the BSP to expand and extend its relief measures to the banking system in an effort to buy time.

Or, the BSP’s strategy to address an escalating debt problem is to facilitate accelerated debt absorption. Amazing! 

As such, we should expect a third wave of inflation, in the fullness of time, which will exacerbate the leveraging of the economic system and worsen the current predicament. 

The political path dependency is driven primarily by perceived "free lunches" (or throwing money into the system). 

The promised bull market will not be in Philippine assets but in debt, leveraging, and its attendant risks. 

So, despite the Philippine peso floating along with its regional peers, benefiting from the perceived "Powell Pivot," the USD/PHP exchange rate should eventually reflect the developing economic and financial strains. 

Until a critical disorder surfaces, a reversal in this political direction is unlikely.

Eventually, the treasury curve will indicate when this reversal might occur. 

The point is that even when distorted by interventions, markets are reliable indicators of future events. 

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References 

Prudent Investor, The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk August 12, 2024

Prudent Investor, Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing September 1, 2024

 

Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll! PSE’s Q2 Retail Activities Validates Ongoing Consumer Weakness

 

The lesson of history, then, is that even as institutions and policy makers improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be― Carmen M. Reinhart

In this issue 

Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll! PSE’s Q2 Retail Activities Validates Ongoing Consumer Weakness 

I. Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll!

II. Slowing Retail GDP Validated by Topline Performance of PSE’s Retail Chains

III. Marcos-nomics Rate Cut(s) Designed to Rescue the Banking System; Banks Bolstered the PSEi 30’s Stagnant Q2 Net Income

IV. Marcos-nomics Rate Cut(s): Reduce Debt Servicing Costs to Accommodate MORE Debt!

V. BSP Rate Cut Validates the Price Signals of the Philippine Treasury Market

VI. Summary and Conclusion: Watch for the Third and Fourth Phase of the Marcos-Stimulus (Pandemic Rescue Template 2.0) 

Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll! PSE’s Q2 Retail Activities Validates Ongoing Consumer Weakness

The BSP opened its series of monetary easing with a rate cut last week validating our thesis that the unannounced "Marcos-nomics stimulus" is on a roll!

I. Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll!

Bullseye!

In its second phase of the unannounced Marcos-nomics stimulus, the BSP (Bangko Sentral ng Pilipinas) began its campaign to formally ease financial conditions with its first rate cut.

The fact that the "Marcos-nomics stimulus" is on a roll means that widening fiscal deficits, which should also reverberate into "trade deficits" and expand the "twin deficits," should escalate public debt levels and, correspondingly, increase the debt burden. 

With fiscal deficits likely to bulge ahead, prompting more borrowings, the logical sequence would be for the BSP to cut rates to ease the onus of debt servicing.

And that’s only the argument for Philippine government debt. 

The BSP’s case for rate cuts will also involve private sector’s mounting debt burden or systemic debt in general. And that excludes shadow banking or informal finance. 

Therefore, BSP rate cuts represent the next phase of the "Marcos-nomics stimulus." (Prudent Investor, July 2024; bold original) 

GMA News, August, 15, 2024: The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) on Thursday decided to reduce policy rates by 25 basis points, the first cut in nearly four years and the first adjustment since the off-cycle hike in October 2023. 

Why would the BSP start a series of rate cuts with a Q2 headline GDP of 6.3% (6% for the 1H GDP)? 

Yet, the BSP continues to confuse the public by hedging its position with a "rinse and repeat" stance: We will cut, we will not cut, we will cut, we will not cut... to thy kingdom come. 

Just a day before, a business media outlet even cited the BSP as having ""more room to stay tight" after better-than-expected gross domestic product (GDP) growth in the second quarter." 

Stay tight, then cut rates? Incredible. 

For a supposedly data-driven institution, why fixate on interest rates while ignoring the financial and monetary developments despite their actions?

Figure 1

For instance, the BSP’s report on total financial resources (TFR) rocketed by 10.54% to a record Php 32.332 trillion last June, with the banking system, led by the Universal and Commercial banks, surging by 12.3%. (Figure 1, upper window)

Aggregate TFR and bank FR amounted to 128% and 107% of GDP, respectively. 

That is to say, not only have growth rates been accelerating, but banks have also been deepening their stranglehold over the nation’s financial resources—which alternatively translates to an escalation of concentration risk. (Figure 1, middle graph) 

Needless to ask, why would TFR and bank assets skyrocket if rates have been "tight?" Or, why the crescendo of systemic leverage? 

Amazing. 

II. Slowing Retail GDP Validated by Topline Performance of PSE’s Retail Chains 

Getting back to the essence of the Marcos-nomics, despite the Orwellian language, why the cut rates? 

To gauge the heartbeat of consumers, we use the PSE’s Quarterly Report (17Q) to analyze the quarterly activities of the major non-construction retail chains listed on the stock exchange (SM Retail, Puregold, Robinsons Retail, Philippine Seven, SSI Group, and Metro Retail Group). 

The growth rate of BIG 6 retail chains bounced marginally from the Q1 low of 5.13% to 7.22% in Q2.  However, since peaking in Q3 2022, its growth rate has been slowing—exhibited by the downtrend. (Figure 1, lowest image) 

On the other hand, since hitting a low of 10.6% in Q3 2023, the nominal retail GDP has improved in the last three quarters—with Q2 posting a 12.8% growth.  The revenues of the BIG 6 accounted for an estimated 24.6% share of the Philippine retail market, based on the retail GDP. 

The huge variance in growth rates between the revenues of the BIG 6 tell us that either the NON-listed retail chains OUTPERFORMED, or that the retail GDP has been exaggerated. 

The thing is, the growth rate may differ, but the trends resonated. 

Real consumer GDP also corroborated the slowdown. 

In the first two quarters of 2024, real consumer spending grew by 4.6%. 

The slowdown in consumer spending is just one aspect of the complex chain of people’s actions.

Figure 2

While consumer spending has slowed, loans of the BIG 5 retail chains (excluding SM Retail) hit an all-time high in Q2. (Figure 2, topmost graph) 

As banks continue to shift their portfolios toward consumers—with the gap in favor of consumer lending reaching its highest-level last June—credit card and salary loan non-performing loans (NPLs) have accelerated in Q1 2024. (Figure 2, middle and lowest charts)

Figure 3 

This represents a breathtaking structural transformation anchored on Keynesian ideology that the consumer drives the economy. (Figure 3, topmost graph)

Unfortunately, despite the unprecedented metamorphosis, increased leveraging has only resulted in the material slackening of consumer spending.

Essentially, the consensus comprised of media, experts and officials has overlooked the importance of balance sheet conditions and productivity!

III. Marcos-nomics Rate Cut(s) Designed to Rescue the Banking System; Banks Bolstered the PSEi 30’s Stagnant Q2 Net Income

But there’s more.

The BSP wasn’t transparent enough to reveal that despite the seismic transformation of its business model and the all-time highs in credit expansion within the Philippine banking system, the industry has experienced an erosion of profit growth since Q2 2022—coinciding with rising rates. (Figure 3, middle diagram)

From a low of 2.95% in Q1, bank profits increased by 4.1% in Q2 2024. The data exhibit the sustained corrosion of bank liquidity despite the three-year streak in profit growth.  Bank’s cash-to-deposit and liquid asset-to-deposits on an 11-year downtrend.  (Figure 3, lowest chart)

In my humble opinion, these bank profits represent accounting profits because they conceal massive losses through Held-to-Maturity (HTM) holdings, opaqueness in capital conditions, and unpublished NPLs due to subsidies and various relief measures.

Figure 4

In any case, the big three PSEi banks saved the PSEi 30's Q2 net income activities from outright stagnation.

Net income by the non-financial members of the PSEi slightly contracted by 0.13%. However, the 13.71% net income growth of the PSEi 30 banks boosted the aggregate net income growth to 2.35%. (Figure 4, upper table)

Meanwhile, despite disinflationary forces, revenue growth increased by 9.14% in Q2, pushing the first semester’s topline up by 8.71% (to be discussed in another post).

In brief, it’s not just consumers; the overall slowing of the economy has been evident in the topline and bottom-line performance of the PSEi 30. We will omit the debt conditions of the PSEi 30’s non-financials from this discussion.

As a side note, why then the PSEi 30 pump?

Think of it this way: why the slowdown in the PSE’s performance despite record bank lending and the soaring expansion of systemic leverage (exhibited by members of the PSEi 30)?

Consumer spending per capita GDP peaked in Q1 2021 and has turned south in the face of historic levels of systemic leverage—comprising the formal credit (bank credit plus public debt) system, which accounted for 112% of the annualized 2024 GDP! (Figure 4, lower graph)

Figure 5

As it stands, this monumental build-up in systemic leverage translates to escalating hidden financial skeletons in the form of balance sheet mismatches—which have yet to be revealed. UC bank and public debt accounted for 108% of the annualized 2024 GDP. (Figure 5, topmost chart)

Incredible.

In a nutshell, the Marcos-nomics stimulus via the BSP’s rate cut also represents the RESCUE of the banking system (Pandemic Bailout Template 2.0).

IV. Marcos-nomics Rate Cut(s): Reduce Debt Servicing Costs to Accommodate MORE Debt! 

With the slowing of the real economy, the government has stepped up the tempo of its spending to boost the statistical economy, GDP.

This represents the opening salvo of Marcos-nomics. Besides, the torrent of spending is all about politics: pre-election funding, the subtle pivot to a war economy, the deepening administrative (infrastructure and bureaucracy) and the welfare state.

Record Q2 spending bolstered the Q2 budget deficit and accounted for a direct 27.4% share of the Q2 GDP, the second largest in GDP’s history (as previously explained). (Figure 5, middle chart)

Since debt has financed the Marcos-nomics stimulus, the rising but flawed debt-to-GDP metrics should increase further. With it, the debt servicing-to-GDP ratio should also rise.

If anything, both debt-to-GDP and debt-servicing-to-GDP ratios have now exceeded pre-Asian crisis levels. (Figure 5, lowest image)

This signifies the primary reason why the BSP cut rates.

Its recourse to deficit spending means more debt, so the BSP must reduce its cost of servicing to allow for or accommodate more debt!

Anyway, according to the government officials, there is "Nothing to worry about PH debt." Debt won’t matter until it does. Alternatively, this could also mean "never believe anything in politics until it has been officially denied." 

Furthermore, as with the pandemic template, liquidity injections should represent the third phase of the Marcos-nomics stimulus. 

Figure 6

The BSP's net claims on the Central Government (NCoCG) remain adrift at near record levels— indicating near-record holdings of government debt by the BSP. What tightening? Where? (Figure 6, topmost chart)

The all-time highs in public spending and bank lending should translate into HIGHER liquidity growth. The growth of BSP’s currency issuance has been accelerating since April 2024, rising by 7.4%—its highest since December 2022!

Should public spending, bank lending, and bank (NCoCG) fail to deliver the various government headline targets, expect the BSP's NCoCG to explode higher.

The fourth and final phase of the Marcos stimulus would involve expanding subsidies and widening the coverage of various relief measures for the banking system. 

Again, this would mirror the Pandemic Bailout Template 2.0. 

All these said, the rebound in liquidity growth should manifest in higher inflation and reinforce the uptrend of the USD-Philippine peso exchange rate. (Figure 6, middle and lowest graphs) 

Moreover, the Fed has long been used by the BSP as a pretext for keeping its stance, unfortunately, waiting for the FED seemed like "Waiting for Godot," so the BSP relented and eased ahead of the Fed.  This should provide further fuel to the bull market of the USDPHP over time. 

V. BSP Rate Cut Validates the Price Signals of the Philippine Treasury Market

Lastly, the BSP rate cuts validated the Philippine treasury markets.  

The curve’s transition from a steepening to a bullish flattening to an inversion in the belly (2-7 years yield) highlights disinflation, rising uncertainties and the growing slack in the real economy (rising risk of recession). 

Figure 7

The belly’s inversion only deepened right after the BSP’s rate cut (as of August 16th) 

And don’t just take it from me, a chart from the BSP’s 2023 Financial Stability Report expresses this. (p.13) 

VI. Summary and Conclusion: Watch for the Third and Fourth Phase of the Marcos-Stimulus (Pandemic Rescue Template 2.0) 

So, there you have it. 

Last week’s BSP rate cut validated our thesis of a "Marcos-nomics stimulus."

It represents the second phase of the tacit bailout of the deficit-spending-driven GDP, the banking system, and the firms of elites. The other objectives are the financing of the growing domain of various political agendas—mostly pre-election spending, the warfare state, infrastructure, and the bureaucratic state. 

One can expect the liquidity injections via the BSP and the banking system to account for the third phase of the stimulus program. 

To complete the fourth and final phase of the Pandemic Bailout Template 2.0, various subsidies and relief measures will be implemented to support the banking system. 

Despite the interim disinflation phase, the sustained bailout means the re-emergence of the third wave of inflation and the strengthening of the USD-Philippine peso bull market. 

The real tightening is about to come. 

Good luck to those who believe in the illusion that manipulated stock market pumps will translate into economic prosperity. 

___

References:

Prudent Investor, Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 2024 Public Spending Hits All-Time High! BSP Rate Cuts Next? July 28,2024 

Other post on Marcos-nomics: 

Prudent Investor, Philippines' Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus, June 2024 Philippine Employment Rates—A Statistical Pump August 11, 2024 

Prudent Investor, Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth July 14, 2024 

Prudent Investor, Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending? June 30, 2024

 

The Jump in February’s Philippine Employment Rate was all about Part-Time Jobs! BSP’s Consumer Sentiment: Stagflation Ahoy!

 By contrast, in an inflationary environment, whether it’s 10-15% (the real number in the US right now), or 100% per year as in countries like Venezuela and Zimbabwe, or the 2% the Fed advocates, currency debasement discourages people from saving. And if you don’t save, you can’t build capital. And if you don’t build capital, you can’t make investments and you can’t improve the standard of living—Doug Casey

 

In this issue

The Jump in February’s Philippine Employment Rate was all about Part-Time Jobs! BSP’s Consumer Sentiment: Stagflation Ahoy!

I. BSP Consumer Survey: Inflation Adversely Impacts the Middle- and Lower-Class

II. Consumers Magnify Balance Sheet Leverage in February; Bank Total Loans Bounced

III. Consumer Sentiment: "Stagflation Ahoy!"

IV. Part-Time Jobs! The Jump in February’s Philippine Employment Rate was all about Part-Time Jobs!

 

The Jump in February’s Philippine Employment Rate was all about Part-Time Jobs! BSP’s Consumer Sentiment: Stagflation Ahoy!

The BSP's survey exposes the weakening of Filipino consumers from inflation, as part-time jobs constituted the 'strong' growth of the Philippine labor market last February.

 

I. BSP Survey: Inflation Adversely Impacts Middle- and Lower-Class Consumers

Figure 1

 

The latest BSP survey on consumer sentiment suggests an improvement in Q1 2024 "brought about by their expectations of: (a) additional and higher income, (b) availability of more jobs and permanent employment, and (c) additional working family members."

 

But consumers were "less optimistic for Q2 2024 and the next 12 months...in anticipation of: (a) faster increase in the prices of goods, (b) fewer available jobs, and (c) lower income."

 

The other notes included: (bold original)

 

-Consumers are less hesitant about buying big-ticket items in Q1 2024 and the next 12 months.

 

-The percentage of households with loans and savings increases in Q1 2024. The Q1 2024 survey results showed that 24.9 percent of households availed of a loan in the last 12 months, higher than the 22.9 percent recorded in Q4 2023…

 

-Consumers expect higher interest, inflation and unemployment rates, and a weaker peso in Q1 and Q2 2024.  

 

First, the BSP survey reveals that since peaking in the 1H 2022, consumer expectations have been eroding, with sporadic bounces in the interim. (Figure 1, topmost image)

 

Next, fascinatingly, the results of the BSP's survey were drawn from a distribution across the population, with the high-income group (Php 30,000 and above) comprising 38.1% of the sample size, the middle-income group (Php 10,000-29,999) comprising 38%, and the low-income group (below Php 10,000) comprising 23.8%. (Figure 1, middle diagram)

 

Does this distribution accurately represent the Philippine population, or does it skew towards favoring the views of the high-income group?

 

Third, does this also mean that, despite prospects like higher inflation, interest rates, and unemployment rates, consumers would further increase their balance sheet leverage to purchase big-ticket items?

 

In any case, 13% of the surveyed population perceived it as a 'good time to buy' a motor vehicle, higher than the 8.5% reported in Q1 2023 and 9.4% in Q4 2023.

 

But motor vehicle sales rose by 19% from 60,404 in the first two months of 2023 to 72,132 in 2024. This growth was supported by a 19% surge in Universal Commercial Bank auto loans last February.  (Table 6)

 

Since the CAMPI motor vehicle sales data includes trucks for business purposes, it doesn't distinguish the extent of consumer spending specifically on automobiles. 

Nonetheless, loan activities help reveal the extent of demonstrated preferences by consumers.

 

In any event, motor vehicle sales appear to be plagued by a bearish "rising wedge." (Figure 1, lowest chart)

 

II. Consumers Magnify Balance Sheet Leverage in February; Bank Total Loans Bounced

Figure 2

 

Banks continue to fuel consumer spending, which has been on a fiery streak.

 

Aside from auto loans, Universal Commercial Bank credit card loans remain brisk, up by 30.11% in February—representing the seventh consecutive month of over 30% growth—to a record Php 738 billion. (Figure 2, topmost chart)

 

Salary loans also reached an all-time high of Php 141.9 billion, with their growth rate increasing by 16% last February. The growth of salary loans year-over-year has closely tracked fluctuations in the Consumer Price Index (CPI). (Figure 2, middle window)

 

The key segments of consumer lending etched record highs last February. (Figure 2, lowest graph)

Figure 3

Although the production side of Universal Commercial Bank's loan portfolio accelerated last February, consumers remain the focal point for bank lending.

 

The pace of industry loan growth increased from 5.85% in January 2024 to 6.85% in February. After consumer loans amounting to Php 262.2 billion, lending to the real estate sector, totaling Php 246.4 billion, registered the largest peso growth year-over-year. (Figure 3, topmost image)

 

The upturn in the credit portfolio of the production side appears to coincide with the increased optimism of the business sector in Q2 2024, according to the BSP.

 

Nonetheless, the portion of consumer loans (excluding real estate consumer lending) continues to swell to 11.6% relative to the diminishing share of industry loans. (Figure 3, middle pane)

 

The banking system's lending bias towards consumption further solidifies the structural aspect of inflation. In other words, a minority of consumers—with access to the formal credit system—continue to amplify their leverage to bridge the gap resulting from the reduced purchasing power of their income and savings.

 

Balance sheet leveraging is likely also occurring for low-end consumers through the informal credit system.

 

As a result, consumers are gambling with their balance sheets despite the heightened risks of higher inflation, interest rates, and increased unemployment.

 

III. Consumer Sentiment: "Stagflation Ahoy!"

 

The BSP and economic authorities say that rising rates or tightening are having an effect on the economy. If so, why is systemic leverage accelerating? 

 

Total bank loans (UC, thrift, digital and rural banks plus public debt) grew by 9.94% in February to an all-time high of Php 27.413 trillion or about 113% of the Nominal GDP.  And this excludes debt from the bond markets, FDI flows, shadow banks, and informal finance. (Figure 3, lowest graph)

Figure 4

 

Coincidentally, while the number of people in the Philippines who said they'd increase their allocations to savings improved in Q1 2024 to 31.8%, it represented a bounce from Q4 2023's 28.6%—the lowest since 2019—with the lowest income segment suffering the most (Table 10). Savers are being penalized as household balance sheets expand. (Figure 4: topmost table)

 

Interestingly, consumers acted as 'analysts' in anticipation of a 'weaker peso.'

 

Or could this sentiment be attributed to a bias resulting from extensive household exposure to Overseas Filipino Workers (OFWs)? The BSP survey noted that 94.7% of households received remittances from OFWs, with OFWs in the households accounting for 6.6% of the sampled population (Tables 13 and 14).

 

The scourge of inflation has clearly been adversely impacting consumers, particularly those in the middle-and lower-income classes, even with a survey biased in favor of the higher-income class.

 

The high GDP rates conceal the redistribution effects of inflation, which favor the political class and the elites while diminishing the standard of living of the average citizenry.

 

In essence, consumers are saying "Stagflation Ahoy!"

IV. Part-Time Jobs! The Jump in February’s Philippine Employment Rate was all about Part-Time Jobs!

 

Inquirer.net, April 11, 2024: The number of jobless Filipinos went down in February to 1.8 million, from 2.15 million in January, the Philippine Statistics Authority reported Thursday. That brought the country’s unemployment rate to 3.5 percent, lower than the 4.5 percent in the preceding month.  At the same time, 6.08 million Filipinos were underemployed in February, representing those who sought additional jobs or working hours to augment their income. That was lower than the 6.39 million underemployed persons in January.

 

The government perceives the labor force as operating similarly to the stock market, characterized by sharp volatility.

 

It appears that employers can hire and fire with diminished influence from labor regulations.

Following a record employment rate in December and its sharp drop in January, the employment rate surged from 95.5% to 96.5% in February.

 

This marked the second-steepest monthly employment gain since August 2023, aided by a bounce in the labor participation rate from 61.1% in January to 64.8% in February. (Figure 4: middle graph)

 

Alternatively, the gains stemmed from the plunge in the non-labor force population. (Figure 4: lowest image)

 

On a month-on-month basis:

 

-The population contracted by 348,000

-The labor force surged by 2.65 million

-The non-labor force population shrunk by 3 million

 

As a result, the employed population grew by 3 million.

 

According to the Philippine Statistics Authority, persons not in the labor force are 'Persons 15 years old and over who are neither employed nor unemployed according to the definitions mentioned. Those not in the labor force are persons who are not looking for work because of reasons such as housekeeping, schooling, and permanent disability. Examples are housewives, students, persons with disabilities, or retired persons.'

 

By this definition, with the population slightly down, students, housewives, persons with disabilities, and retirees suddenly trooped into the labor force to secure jobs.

 

That's right. Like a switch, jobs are turned on and off based on surveys.

Figure 5

 

But there’s more.

 

While this data will serve as the foundation for GDP, it also reveals that a significant portion of February's job gains came from part-time jobs.

 

Part-time jobs jumped 25% MoM, increasing their share of the market from 27.8% in January to 32.6% in February. (Figure 5, upper chart)

 

On the other hand, full-time jobs slipped by 1.36% MoM, reducing their share of the employed population from 71.84% in January to 66.51% in February.

 

Bluntly, full-time jobs contracted by 450,000 while part-time jobs expanded by a whopping 3.19 million!

 

This distortion is evident even when looking at the PSA's spreadsheet! (Figure 5, lowest table)

 

So hidden beneath the headline is the fact that the shift from the non-labor force to the labor force was all about 'part-time' jobs!

 

Ironically, a media headline labeled this as 'better job quality.'

 

The government was not even transparent about it in their press releases.

 

Amazing.

 

It was a broad-based growth for the 'part-time' labor force.

Figure 6

The sectors with the largest labor force—agriculture (626K) and trade (1.6 million)—posted the most job gains.  (Figure 6, upper chart)

 

Other job-sensitive sectors like hotel & food services (325K), construction (231K), transportation (206K), and manufacturing (152K) also contributed to the growth in part-time jobs. (Figure 6, lower graph)

 

So, there you have it. The significance of 'part-time' jobs in contributing to consumption and GDP remains in the hands of statisticians.

 

Statistical accounts will likely depart from reality.

 

In turn, upside job volatility can turn into a downside gush.

 

That is, even the high-end consumers (in the BSP survey) seem to sense the fragility in the foundations of the incumbent job market.

 

___

references

Bangko Sentral ng Pilipinas, CONSUMER EXPECTATIONS SURVEY REPORT 1st Quarter 2024 report, April 12, 2024 bsp.gov.ph