Three Markets, One Signal: How the PSEi, Peso and BVAL Priced Suppression in October

 

Price controls take some time for their flaws and distortions to develop: for the longer they last, the more do their controlled prices diverge from the prices that would be obtaining on the free market—Murray N. Rothbard 

In this issue: 

Three Markets, One Signal: How the PSEi, Peso and BVAL Priced Suppression in October

I. The PSEi’s “Rotation” Is the Cover Story

II. A Floor Is a Price Control

III. GCASH: The IPO With a Subsidy Bid Underneath

IV. “Don’t Panic” Is a Policy

V. The Yield Curve Takes No Orders

VI. Whac-a-Mole Economics

VII. Periphery to Core

VIII. What October Priced: The Cost of Suppressing Adjustment

VIII. Conclusion: October’s Cost of Suppressing Adjustment 

Three Markets, One Signal: How the PSEi, Peso and BVAL Priced Suppression in October 

Every intervention bought stability in one market and billed another. In October, the bill is showing up in bond yields and FX reserves as global liquidity drains from the outside 

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I. The PSEi’s “Rotation” Is the Cover Story

Figure 1

The PSEi 30 ended October almost unchanged month on month (-0.02%). It is still down 6.16% year to date and 4.2% year on year. The headline hides a redistribution of index leadership. (Figure 1, table) 

ICTSI, the largest heavyweight, surrendered 89.54 gross points (-5.84%). The next four largest names (SM +7.84%, BDO +4.42%, BPI +1.08%, SMPH +10.34%) contributed 91.23 points and more than offset it. Breadth tilted positive at 18 advancers against 12 decliners. Yet heavier losses in SCC, DMC and CNPF dragged the simple average change across the 30 members to -0.66%. (Figure 1, middle image) 

The gap between -0.02% and -0.66% comes from free-float market-cap weighting. A handful of names decide the headline. After ICTSI’s drop, the five largest still command 55.24% of the index. (Figure 1, lowest graph) 

Figure 2 

The wider PSE tells the real story. 

Breadth was 1,811 advancers against 2,113 decliners, which extends broad-market selling to eight of the first ten months of 2026. (Figure 2, topmost pane) 

Main Board volume (MBV) rose 20.4% year on year to Php 129.67 billion, but cross transactions took 27.71% of it. (Figure 2, middle diagram) SM’s Php 8.736 billion block alone was about 24% of the month’s cross volume. 

ICTSI’s share of Main Board volume (MBV) climbed from 19% in September to 23.75% in October, while foreigners net sold about Php 1.3 billion of the stock as it fell. Local institutional buying absorbed the selling. (Figure 2, lowest chart) 

The index’s “stability” rests on an engineered domestic support for a heavyweight under foreign liquidation. 

II. A Floor Is a Price Control

Figure 3 

The top 10 brokers averaged 66.8% of daily MBV, and the top 10 issues averaged 72%. That concentration put an implicit floor near 5,600 under the PSEi all month. (Figure 3, topmost visual) 

A floor held by a few brokers and a few issues is a price control, whatever name it goes by. 

The PSEi is a free float market capitalization-weighted benchmark. It does not measure the breadth or health of the equity market. The media and the establishment treat it as if it did, though five issues decide most daily outcomes. Confusing the two is how benchmarkism disguises concentration as stability. 

Leadership rotated in October, but concentration did not go away. It only changed where the support was pointed. Extreme trading concentration, persistent negative breadth and thinning liquidity are the symptoms, and the distorted price signals they produce misallocate capital. 

Ironically, almost no one comments on it—as if it is a taboo. 

III. GCASH: The IPO With a Subsidy Bid Underneath 

The GCash listing offered another illustration of the market's dependence on concentrated liquidity. 

GCASH’s weekly share of Main Board volume fell from 34.9% to 9.22%. The stock swung -5% on the week of October 23 and +5.42% the following week. It closed at Php 6.61, a hair above the Php 6.60 offer price. The price is where it is because someone is buying it. (Figure 3, middle image) 

UBS, the sole stabilizing agent, bought 786.57 million shares at an average of Php 6.571 in the week ending October 23. That cost about Php 5.17 billion and used up 65% of its maximum stabilization buying capacity in the first trading week. The budget is the 1.204 billion overallotment shares, worth Php 7.95 billion at the offer price. That leaves about 417.5 million shares, roughly Php 2.75 billion. The support window runs about 30 days from the October 20 listing. There is no update on this as of October 30th. 

The mechanism is simple. The agent sells the overallotment shares short at the offer price, then buys them back in the open market to defend it. A bid sits just under Php 6.60 until the money runs out. It is the PSEi’s floor in miniature: a price held by a dedicated buyer and not by savings. 

An IPO can generate enormous turnover and retail participation without leaving behind durable secondary-market liquidity. The question is what happens when the support expires. 

IV. “Don’t Panic” Is a Policy 

The peso is the second signal. 

The peso touched Php 64.17 per dollar on October 27. That was its 33rd record low of 2026, the eighth in October, and the fifth consecutive record session from October 21 to 27. The President then said, “Don’t panic...we have defenses,” and USDPHP retreated to Php 63.74 by the week’s close. 

No leader makes that statement without his agencies behind it. It signals that the political leadership will do what it takes to “stabilize” the peso. The motive is to look stable. The policy is intervention. The effects arrive later… or in other prices. 

A managed retreat does not touch the cause, which is the savings-investment gap. Free-lunch politics and the policies behind it sustain spending beyond what the economy can finance from its own production. 

The USDPHP rose 1.76% in October, taking its gain to 8.42% year to date and 8.31% year on year. That was the second biggest monthly rise of 2026 after March’s 5.35% (from February's 57.665 to March's 60.748). (Figure 3, lowest diagram) 

The external side of the gap is tightening. OFW remittances, tourism, FDI and portfolio inflows have all weakened. BPO and AI-linked electronics exports help but cannot close the gap, and they carry their own exposure. 

A reversal in AI capital spending would move from global markets into Philippine export receipts and widen the deficit. 

Administered prices, regulatory relief, FX management and accommodative monetary measures have postponed the recognition of the imbalance. Postponement is not resolution. The pressure surfaces through other prices, balance sheets and markets. 

With the balance of payments (BoP) under record pressure and reserves falling, the BSP’s quasi-soft peg has given way to a low-volume, low-volatility crawl. The string of records is that adjustment showing up. 

The BSP still has “tools,” but none is free. It can run down reserves, lever up through repos and derivatives, monetize part of its gold, borrow more (via the National Governnment) or turn to trade and price controls. These extend the process, but none creates dollars, domestic savings or productive resources. 

September shows the cost. Gross international reserves fell from $104.846 billion to $99.494 billion, a $5.352 billion drop to a three-year low. 

Figure 4 

The BSP attributes it mainly to its net foreign exchange operations. The composition is the tell. Other Reserve Assets, the bucket that holds net derivative positions, repo assets and investment pools, fell from $15.471 billion to $9.985 billion, about $5.5 billion and 35% in one month. That is larger than the entire decline. Gold valuation took off another $1.287 billion. Total currency and deposits rose about $1.54 billion. The drain came from the derivative and repo positions behind the peso defense, not from the plain securities and deposits the headline suggests. (Figure 4, topmost image) 

The September BOP deficit was a record $3.144 billion, taking the year-to-date deficit to a historic $9.087 billion—which is just a hairline short of the DBCC’s revised 2026 target of US$9.2 billion (1.8 percent of GDP) with a quarter to go. Borrowed support can defer the adjustment. It cannot remove the financing constraint. (Figure 4, middle chart) 

V. The Yield Curve Takes No Orders 

The sovereign bond market supplied the third signal. 

The public watches the PSEi and the peso. It pays little attention to government bonds, and that is where the cost of financing the state shows up. 

More than anything else, these pressures are most clearly reflected in the interest rate environment, as evidenced by the Philippine Treasury's BVAL yield curve. 

The yield curve shifted upward across all tenors in October compared with September, with positive spreads and the largest increases concentrated in the belly of the curve—a bulge. (Figure 4, lowest chart) 

More importantly, from the one-year tenor onward, yields are at or near multi-year highs. Rising yields are the market’s way of repricing inflation, duration risk and the cost of financing the state. 

The fiscal connection is direct. Government borrowing competes with private investment for finite pools of savings. As financing needs rise, the state’s demand for funds presses against the resources available to businesses (and even banks) seeking capital for production and expansion. 

This is the crowding out effect—and it does not require a textbook interest-rate shock to operate. 

Financial repression adds another channel. Directed credit, captive institutional demand and policies that steer savings toward government or favored borrowers can suppress the visible cost of financing while displacing alternative uses of capital. The allocation changes even when the headline rate does not fully reveal the pressure. 

The result is a distorted investment process: financing follows political and institutional priorities rather than the unrestrained signals of market prices, risk and expected returns. 

The rising yield curve is the market pushing back against that arrangement. Government can influence the terms under which savings are mobilized. It cannot command away scarcity.

Figure 5 

Equities hide the weakness through benchmark concentration. The peso absorbs external pressure through intervention. Bonds reprice the cost of the state. As evidence, the Philippine 10-year Treasury yield has climbed to multi-year highs even as the PSEi tests its 2025 lows (Figure 5, topmost window) 

Three markets, one imbalance. 

VI. Whac-a-Mole Economics 

This is the intervention spiral I call Whac-a-Mole Economics. Support the PSEi and the pressure moves to the peso and bonds. Lean on the peso and the valve opens in equities and bonds. Suppress one price and the imbalance resurfaces in another. 

The mechanism is not mysterious. Prices coordinate competing claims over scarce resources. Interfering with their adjustment does not remove the scarcity. It changes where the pressure builds, who absorbs it and when the cost becomes visible. 

The price signal is not the disease. It is the information that reveals scarcity. Suppress the signal and the distortion grows while its symptoms migrate across markets and time. 

VII. Periphery to Core 

The Philippines is not alone in this. 

The magnified paroxysm across several equity benchmarks—the Indonesian JKSE, Korea’s AI-heavy KOSPI, and, more recently, Brazil’s Bovespa—exhibits a common denominator.  (Figure 5, middle visual) 

As an aside, in Brazil, Lula's reelection triggered a rout in Brazilian stocks, deepening an already prolonged contraction in Latin America's equity-fund industry, where more than 400 equity funds have disappeared and IPO activity has stalled. (Figure 5, lowest image) 

Yet each crash has a local headline, whether politics or AI, but they share the global liquidity cycle. 

The crashes did not need to arrive on the same day to demonstrate this. Peaks came at different points in the year, and the common condition is liquidity withdrawal. 

I call this periphery-to-core transmission. 

Withdrawal first exposes the weakest links: the markets, sectors, and balance sheets most dependent on cheap financing, leverage, and steady inflows. Rising yields then collide with accumulated malinvestments and balance-sheet mismatches. The war economy, supply disruptions, incumbent monetary policies, and fiscal conditions add further pressure.

Figure 6 

Even gold has become an ATM for liquidity-strapped investors. Its sharp declines alongside Bitcoin reflect forced liquidation and the demand for cash, not a change in its long-term monetary role. (Figure 6, upper chart) 

The core is now under pressure. This week’s AI dumpfest hit the Nasdaq Composite with a 2.0% weekly loss, its third consecutive weekly decline, and a 7.04% slide over three weeks. Friday’s 2.9% drop was its largest one-day percentage decline since June 5, following disappointing results from Intel and Amazon. 

Meanwhile, hyperscalers are financing build-outs in debt markets, adding leverage to an already capital-intensive cycle. AI off balance sheet commitments hits $4.1 trillion: Up 1 trillion in 90 days.  (Figure 6, lower graph) 

When the cost of capital rises, the expected returns on long-duration investments become harder to justify. What starts as an equity repricing can migrate into corporate credit, debt servicing, and investment spending. 

The danger is contagion: falling asset prices, tighter financing, forced deleveraging, and contracting credit. A global recession is the risk embedded in this process, and a broader debt crisis is becoming highly probable. 

The periphery is not insulated from the core, and the core is not immune to the financing constraints already visible at the periphery. 

VIII. Conclusion: October’s Cost of Suppressing Adjustment 

Free lunch politics is NEVER FREE. 

The PSEi is held up by the five biggest market caps, a persistent concentrated broker bid and a stabilizing agent for GCASH. 

The peso crawls to records while the BSP burns reserves and the President says don’t panic.

Yields rise from the one-year tenor outward to multi-year highs. 

The motive behind each intervention is the same: to show stability before the financing gap is closed. The policy is price support, administered relief and reserve burn. The effect is that pressure moves to the next price. Postponement has a cost, and the cost compounds. 

Almost everyone has been programmed to believe that spending drives the economy. Spending is the visible half. Before anyone can spend, someone has to have made something others want: a harvest, a service, a product, an export. A fisherman buys rice with the fish he sold. Money is the claim ticket, and the claim is worth only what stands behind it. What you can buy is set by what you or others produced. Or imagine booking a vacation at a resort on the Moon. There may be demand, but there is no supply. 

So printed money, borrowed money and extended credit can raise spending today. They cannot create the rice, or the dollars, that the spending needs to meet. They only change who gets the existing output and push the bill onto future output. 

That is why the pressure shows up where it does. Dollars come from selling something to the world. Savings come from producing more than you consume. When spending commitments outrun both, the gap appears as a record BOP deficit, a weaker peso and higher yields, because savings are scarce and the state is bidding for them. 

A stock, a peso and a bond are all claims on real output and real savings. A floor can hold a quote, but it cannot create the output behind the claim. Indices, GDP and gross savings add up claims into one number and hide who actually produces and who just holds paper. That is the difference between accounting stability and economic resilience. 

The three markets are not telling three different stories. In October, they converged on one signal: the growing cost of suppressing adjustment. Support the PSEi and the pressure shows up in the peso. Lean on the peso and it shows up in the bond curve. 

Close one valve in a system under rising pressure and the pressure does not disappear. It finds the weakest seam. In October, the seams were the PSE’s market internals, the peso and the bond curve. 

The next one may not be in Philippines’ hands at all. Global liquidity is draining, and the pressure is now being fed from outside.

Adding to the SWS Mangahas’ Critique of Trickle-Down Economics: The Philippine Banking System’s Intrinsic Bias Against SMEs

  

The man in whose power it might be to find out the means of alleviating the sufferings of the poor would have done a far greater deed than the one who contents himself solely with knowing the exact numbers of poor and wealthy people in society—Vilfredo Pareto 

In this issue

Adding to the SWS Mangahas’ Critique of Trickle-Down Economics: The Philippine Banking System’s Intrinsic Bias Against SMEs

I. The Disconnect Between Economic Data and Public Sentiment: Adding to the SWS Mangahas’ Critique of Trickle-Down Economics

II. The Trickle-down Policy: The Philippine Banking System’s Intrinsic Bias Against SMEs

III. Banks' Preference for Government Securities Crowds Out the SMEs

IV. How Trickle-Down Policies Gutted the Magna Carta for MSMEs and Stunted Philippine Capital Market Growth

V. How Trickle-Down Policies Amplify Concentration and Contagion Risks

VI. Trickle-Down Policies: How HTMs Exacerbate Balance Sheet Mismatches

VII. Rising Non-Performing Loans: Moving from the Periphery to the Core?

VIII. More Crowding Out: Banks Magnify Borrowing from Savers Focusing on Short-Term Bills

IX. More Impact of the Trickle-Down Effect on Banks: Mark-to-Market Losses

Adding to the SWS Mangahas’ Critique of Trickle-Down Economics: The Philippine Banking System’s Intrinsic Bias Against SMEs

SWS’ Dr. Mahar Mangahas recently highlighted the failure of trickle-down economics by pointing to the disconnect between government data and public sentiment. Bank data on MSME lending reinforces his position. 

I. The Disconnect Between Economic Data and Public Sentiment: Adding to the SWS Mangahas’ Critique of Trickle-Down Economics

Figure 1 

I believe in rating economic progress by listening to what the people as a whole say about their own progress, rather than by listening to the international banks, big business, politicians, the diplomatic corps, and all others who point to how the aggregate value of production is growing. Counting the number of people who have gotten better off, and comparing it with the number who have gotten worse off, is the oldest survey question in the book. It has now been surveyed 152 times at the national level: annually in 1983-85, semi-annually in 1986-91, and then quarterly since 1992. The finding of more losers than gainers in 126 of those 152 surveys—despite persistent growth in real gross national product per person, coupled with stagnation of real wages—is the clearest proof of the failure of trickle-down economics in the last four decades. (Mangahas, 2024) [Figure 1, topmost quote]

While most don’t realize it, this quote offers a striking opposition or critique of the nation’s adaptive "trickle-down" political-economic framework. Given its dissenting nature, this theme should be unpopular among the establishment.

For starters, we are skeptical of surveys because they are susceptible to manipulation, social desirability bias, or social signaling, rather than reflecting genuine (demonstrated/revealed) preferences. Interestingly, surveys form the basis of much government data.

To illustrate why the CPI is considered the MOST politicized economic data, consider the following example—from the Philippine Statistics Authority (PSA) (bold mine).

CPI allows individuals, businesses, and policymakers to understand inflation trends, make economic decisions, and adjust financial plans accordingly. The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures in the calculation of the gross domestic product.  Moreover, it serves as a basis to adjust the wages in labor management contracts, as well as pensions and retirement benefits. Increases in wages through collective bargaining agreements use the CPI as one of their bases. (PSA, FAQ)

In short, the CPI is the basis where economic policymakers…make economic decisions…and adjust financial plans…calculate the GDP…adjust wages in labor-management contracts…in CBA (or minimum wages) …and influence the calculation of pensions (mainly SSS and GSIS) and retirement benefits (also other welfare programs as Philhealth, Pagibigm, etc).

And so, the lowering of the CPI (e.g., by rebasing it from 2006 to 2012 to 2018) bloats the GDP, minimizes payouts for pensions and retirements, and distorts labor-management contracts. Most of all, it helps the government access cheaper savings from the public.

Yet, the (quality-of-life) survey referenced by the author reflects public sentiment rather than a discourse on economic theories or statistics.

The crux of the matter is that public sentiment contradicts the landscape authorities aim to achieve, which is far from its desired state. 

Ironically, this occurs despite the daily onslaught or barrage of news promoting rosy concepts like achieving "upper middle-class status," a "sound" banking system, "reasonable" inflation, a jump in FDIs, and more. 

It demonstrates the blatant disconnect of political economic metrics such as per capita GNP and GDP from grassroots perceptions. 

Simply put, GDP does not equate to the economy. A 

The disparity between the government figures and sentiment reflects the inequality of economic outcomes. 

Or, as much as the CPI does not represent the inflation of the average Juan or Maria, neither does the GDP. Yet, who benefits from it? Cui bono? 

Though we opine a different perspective from the author, the question is, why should government spending be considered a cornerstone of prosperity when it diverts and limits the private sector from fulfilling its primary role of satisfying consumer needs and wants? 

Does historical (public and private) leveraging and near-record deficit spending, which redistributes income and wealth opportunities to the government and the politically connected, contribute to the goal of achieving "upper middle-class status?"   

Based on 2023 (annualized) data, to what extent can the economy sustain this level of debt buildup under the savings-investment gap paradigm? Won't the sheer burden of debt, beyond interest rates, stifle the real economy?  What if interest rates rise along with the debt burden? Debt servicing-to-GDP and debt-to-GDP have been way above the 1997-98 Asian Financial Crisis levels. (Figure 1, middle charts and lowest graph)

Is this economic paradigm pursued because it is driven by the "trickle-down" ideology, which posits that (indiscriminate) spending drives the economy, or because it favors the centralization of the economy, benefiting a few? 

Yes, the article confirms my priors, but it also suggests that there are others who, in their own ways, share similar perspectives. 

On the other hand, although the author's motivations are unclear, it is uncertain whether they are driven by a political bias. 

Still, given the harsh realities of the prevailing censorship and disinformation in the incumbent political environment, it is unlikely that "analytical independence" could persist. 

II. The Trickle-down Policy: The Philippine Banking System’s Intrinsic Bias Against SMEs

The dispersion of bank credit expansion serves as a prime example of the inefficiencies inherent in the 'trickle-down' economics. 

The government's bank lending data provides valuable insights into the reasons behind its flaws.

Businessworld, June 14, 2024: PHILIPPINE BANKS failed to meet the mandated quota for small business loans in the first quarter, data from the Bangko Sentral ng Pilipinas (BSP) showed. Loans extended by the banking industry to micro-, small-, and medium-sized enterprises (MSMEs) amounted to P474.922 billion as of end-March. This made up only 4.41% of their total loan portfolio of P10.77 trillion, well-below the mandated 10% quota. Under Republic Act No. 6977 or the Magna Carta for MSMEs, banks are required to allocate 10% of their total loan portfolio for small businesses. Of this, 8% of loans should be allocated for micro and small enterprises, while 2% should go to medium-sized enterprises. However, banks have long opted to incur penalties for noncompliance instead of taking on the risks associated with lending to small businesses. (bold mine)

How can the government achieve its "upper middle-class status" goal when the backbone of the economy – small and medium-sized enterprises (SMEs) – has diminished access to lower-priced formal credit?

Figure 2 

SMEs dominate the economy. 

As noted by the DTI in 2022: "The 2022 List of Establishments (LE) of the Philippine Statistics Authority (PSA) recorded a total of 1,109,684 business enterprises operating in the country. Of these, 1,105,143 (99.59%) are MSMEs and 4,541 (0.41%) are large enterprises. Micro enterprises constitute 90.49% (1,004,195) of total establishments, followed by small enterprises at 8.69% (96,464) and medium enterprises at 0.40% (4,484)." (Figure 2, topmost pane) 

SMEs also have the largest share of employment. 

Again, the DTI stated: "MSMEs generated a total of 5,607,748 jobs or 65.10% of the country’s total employment. Micro enterprises produced the biggest share (32.69%), closely followed by small enterprises (25.35%), while medium enterprises lagged behind at 7.06%. Meanwhile, large enterprises generated a total of 3,006,821 jobs or 34.90% of the country’s overall employment." (Figure 2, middle image)  

The lack of access to formal credit leads to informal or shadow lenders, such as family, friends, local money lenders, NGOs, loan sharks, or '5-6' entities, filling the void. This inefficient means of financing results in higher costs for businesses, which in turn reduces the competitiveness of SMEs compared to large firms. 

The former president initially campaigned to ban '5-6' lending, which would have further stifled SMEs. Since the policy failed to gain traction, it can be inferred an undeclared policy failure.

The uneven effects of inflation via the Cantillon Effect—that the first recipient of the new supply of money has an arbitrage opportunity of being able to spend money before prices have increased—also pose an obstacle to MSMEs.(river.com). (Figure 2, lowest diagram)

In other words, the Bangko Sentral ng Pilipinas' (BSP) inflation targeting policy benefits large firms because they have access to new money from bank credit before prices increase, while SMEs are disadvantaged (as price takers): a reverse Robin Hood syndrome.

The lack of access to formal credit and the Cantillon Effect forge a 'protective moat' that favors large firms over SMEs.

This explains the innate inequality expressed by public sentiment.

It also weighs on the BSP’s other ambition to expand financial inclusion—a politically correct goal or a euphemism for the "war on cash."

Naturally, why would the SME universe enroll, when the formal financial system constrains their access to livelihood credit?

Figure 3

Yes, there may be improvements in many metrics of financial inclusion, but they remain distant from reaching upper middle-class levels. 

Participation rates in the banking system by the general populace remain dismal (BSP, Financial Inclusion) (Figure 3, topmost table) 

See the inequality at play? 

III. Banks' Preference for Government Securities Crowds Out the SMEs

Moreover, why would the formal financial system prefer to follow the BSP's policies rather than repricing credit higher to accommodate the higher risks associated with grassroots collections?

Repricing credit would likely raise the cost of financing government debt. Banks function as intermediaries in raising funds for the government, which represents the bulk of the bond markets. 

With a higher cost base, any institutional outlier would risk losing market share in the formal credit market. 

Intuitively, the formal financial system would rather pay the penalties associated with missing the 10% government quota than invest in a system that would reflect the higher cost of risks and transactions with SMEs. 

The spread between the average bank lending rate and the BSP's overnight repo rate (ON RRP) dropped to its lowest level in February 2023 and has barely bounced back from there. (Figure 3, middle chart) 

Therefore, there is hardly any motivation by the formal financial institutions to "go outside the box" or defy the convention. 

See how this perpetuates inequality? 

IV. How Trickle-Down Policies Gutted the Magna Carta for MSMEs and Stunted Philippine Capital Market Growth

Since banks have failed to adhere to the law and have resorted to a workaround, this translates to the fiasco of the Magna Carta legislation in its entirety. 

The restricted constellation of the formal credit system can also be found in the limited exposure to the insurance industry and capital markets. Insurance premiums signify a paltry 1.7% of the GDP. (Figure 3, lowest table) 

Figure 4 

It is barely understood that it is not the trading platform (G-stocks or other touted online alternatives) that constrains the PSE's volume, but rather the lack of savings or increases in disposable income. 

The PSE’s volume woes are equally reflected in the banking system’s cascading cash-to-deposit ratio, which eroded further last April to multi-year lows. (Figure 4, topmost chart) 

Why is this the case? 

Because the inflationary "trickle-down" policies pose a financial barrier to the general public, they also drain savings and redistribute resources to cronies and the government. 

Consequently, the paucity of penetration levels in formal institutions has also been reflected in the capital markets (fixed income and stocks). The lack of volume and breadth also characterizes the Philippine bond market, which is one of the most underdeveloped in Asia. (Figure 4, middle image) 

As previously discussed, the BSP seems misguided in thinking that the exclusion of the Philippines from the global market has been due to "foreigners don’t like us." 

Everything starts organically: rather, it’s the lack of local depth, which is a function of the failure of "trickle-down" policies. 

See how it magnifies the mechanisms of inequality? 

V. How Trickle-Down Policies Amplify Concentration and Contagion Risks

But there’s more. 

If banks have jettisoned the SMEs, then this means that they’ve been amassing intensive loan exposure on economic agents at the upper hierarchy.

As a result, this has led to an unprecedented buildup of concentration risks.  

While the mainstream views the record Total Financial Resource (TFR) and its growth positively, there is little understanding that this asset growth has primarily accrued in universal banks.

Despite April’s TFR slipping from historic March levels, it remains at an all-time high, even as the BSP’s official rates stay at a 17-year high. The rapid expansion of universal bank assets, which now constitute 78.2% of the TFR, has propelled the banking system’s aggregate share to 83.4%. Both their % shares declined in April from the unparalleled levels of March. (Figure 4, lowest graph) 

The banking system's exposure to heavily leveraged non-financial firms, such as San Miguel Corporation [PSE: SMC], is concerning. SMC's debt have reached a staggering record high of Php 1.44 trillion in Q1 2024, accounting for a significant 4.6% of the TFR in the same period.

The extent of this exposure raises questions about the potential risks to the financial system. Specifically, how much of the banking system's assets are tied up in SMC's debt? What happens within SMC will affect SMC alone? Really? 

VI. Trickle-Down Policies: How HTMs Exacerbate Balance Sheet Mismatches 

Figure 5

Banks have been funding the government through net claims on central government (NCoCG), much of which has been concentrated in Held-to-Maturity (HTM) assets. 

Once again, the BSP has acknowledged the liquidity-constraining effects of HTMs. 

The HTM component continues to be significant. Financial assets classified as HTM continued to increase in 2023. From 45.6 percent of financial assets at the beginning of 2021, its share is now nearly 58.8 percent as of November 2023 data. Taken at face value, this suggests that the banks remain defensive against potential MTM losses created by the higher market yields. Invariably, however, the threat of MTM losses can be mitigated by holding the tradable security to maturity. This though comes at the expense of liquidity. (bold original, italics mine) [BSP, FSR 2023] 

HTMs accounted for 55.56% of financial assets last April and 15.7% of the banking system’s total assets. (Figure 5, topmost chart)

Strikingly, the BSP highlighted further concerns in the 2023 Financial Stability Report (FSR), citing the US banking crisis as an example where HTMs created a false illusion of profits while significantly understating risks. 

A case to be highlighted is the phenomenon during the pandemic when the sizable allocation to HTM securities buoyed profits but had a significant impact on some banks’ liquidity during the reversal of interest rates, e.g., the case of SVB. While government securities (GS) are indeed High-Quality Liquid Assets, their liquidity can be further qualified depending on the RORO regime. A Risk-Off environment – when there are significant uncertainties and/or with sharp interest rate hikes – can freeze GS trading as banks would prefer safety. Yet, the difficulties may become too acute that they have to liquidate securities, even those classified as being held to their original maturity. There must be a way to assess the market value of the HTM assets during these periods. (italics mine) [BSP, 2023]

The extent of these maladjustments, partly revealed by balance sheet mismatches, determines the level of volatility.

Although the BSP aims to address this issue, they are hindered by the "knowledge problem," which is precisely why such imbalances exist in the first place—resulting from the policies they implement. 

Simply, if the BSP can do what it wishes to do, then markets won’t be required—a haughty pipe dream. 

VII. Rising Non-Performing Loans: Moving from the Periphery to the Core? 

Next, historic credit expansion suggests that credit delinquencies may arise due to excess exposure to unproductive debt. 

As previously noted, non-performing loans (NPLs) from credit cards and salary loans have not only increased but accelerated in Q1 2024. The relatively stable performance of motor vehicle and real estate loans has slowed down the overall growth of NPLs in consumer loans. 

The total banking sector's fixation with financing unproductive consumer spending opens a Pandora's Box of credit risks. The % shares of consumer loans and production loans are at historic opposite poles! (Figure 5, middle graph) 

Yet, problems are mounting at the periphery of the banking system. 

Net NPLs have increased significantly in government and commercial banks through April 2024. (Figure 5, lowest graph) 

One possible explanation is that government bank lending has been less prudent due to political objectives, which differs from those of the private sector. 

Notably, NPLs at commercial banks, the smallest segment, have also been increasing. Foreign banks have also seen a gradual increase in NPLs. However, there was a slight decrease in NPLs at foreign banks in April. 

A presumption here is that for these sectors to stay afloat against their largest competitors, the universal banks, commercial and foreign banks lent aggressively, and now the chicken has come home to roost. 

What happens when this reaches critical mass? 

Could this indicate signs of risks transitioning from the periphery to the core? 

VIII. More Crowding Out: Banks Magnify Borrowing from Savers Focusing on Short-Term Bills

As deposit growth has been insufficient to cover the liquidity shortfall from HTMs and NPLs, the Philippine banking system has increased its borrowings from local savers. 

Figure 6

Further signs of mounting liquidity deficiency include banks increasingly borrowing from the more expensive capital markets. (Figure 6, topmost chart) 

The focus of their financing has been on short-term securities, as evidenced by significant increases in bills payables. (Figure 6, second to the highest image)

So far, though aggregate bank borrowings have risen to near-record highs, the banking system's share of liabilities remains on the lower spectrum. 

However, increasing competition among banks, the government, and non-financial firms is likely to put upward pressure on interest rates. 

As the giants scramble for financing, this crowding out comes at the expense of SMEs. 

Do you see why the inequality persists?

IX. More Impact of the Trickle-Down Effect on Banks: Mark-to-Market Losses 

Finally, HTMs, NPLs, and the crowding out are not only the growing sources of the bank's liquidity deficits; mark-to-market losses will compound their problems as well. 

In addition to dwindling cash reserves, banks have relied on investments and the revival and acceleration of lending to bolster their assets. (Figure 6, second to the lowest chart) 

However, even when 10-year bond yields have been turned sideways, banks' mark-to-market losses have escalated. (Figure 6, lowest diagram) 

Therefore, mainstream banks are likely to conserve their resources at the expense of small and medium-sized enterprises (SMEs). 

There you have it: a litany of reasons why the Magna Carta for MSMEs failed and the reasons behind the divergence between public sentiment and mainstream statistics. 

In essence, when it comes to the interests of the Philippine version of Wall Street versus Main Street, policymakers tend to favor rescuing big money.

The infamous fugitive Willie Sutton famously explained why he robbed banks, "Because that's where the money is."

In the local context, "trickle-down" policies manifest the stark realities of political-economic inequalities, perpetuating income disparities and social exclusion. 

____

References: 

Mahar Mangahas, Independence from GNP Inquirer.net, June 16, 2024

Philippine Statistics Authority, Frequently Asked Questions, PSA.gov.ph

River Learn, Cantillon Effect, river.com

Bangko Sentral ng Pilipinas, Financial Inclusion in the Philippines Dashboard As of Third Quarter 2023, bsp.gov.ph

FINANCIAL STABILITY COORDINATION COUNCIL, 2023 FINANCIAL STABILITY REPORT, December 2023, (pp. 29 and 31), bsp.gov.ph

How Market Manipulation in the Philippine PSE Magnifies the Risks of a "Black Swan" Event

  

Dubious practices, fraud and embezzlement are common during financial bubbles, which are usually created by central banks’ loose monetary policies and by a poor supervision of the financial sector—Dr. Marc Faber

 

In this issue

How Market Manipulation in the Philippine PSE Magnifies the Risks of a "Black Swan" Event

I. BSP Chief: Black Swans from Risky Investments Based on the Rosy Scenario

II. Parabolic ICT as the Single Benefactor of the March 21st Massive End-Session Pumps!

III. The Rotational Pump from ICT to the Financial Sector

IV. How Market Manipulation Amplifies Systemic Fragility

V. January-February 2024: PSEi 30’s Returns Outperform as Volume Slumped!

VI. Negative Market Breadth, Rising Risks of a Black Swan Event from Sustained Capital Consumption

 

How Market Manipulation in the Philippine PSE Magnifies the Risks of a "Black Swan" Event

 

The BSP Chief recently warned about "Black Swan" events resulting from the market's risky behavior. However, frequent pumps and dumps at the PSE could be examples of such events.

 

I. BSP Chief: Black Swans from Risky Investments Based on the Rosy Scenario

 

We'll open with an excerpt from a recent speech of the BSP Governor covering the publication of the 2023 Financial Stability Report (FSR) [bold added],

 

You have heard of "black swans" indicating highly unlikely surprises or "the butterfly effect" to describe how small things can lead to far-reaching consequences. These are the things we worry about. Indeed, financial market participants often make risky investments based on rosy scenarios. The more widely shared the scenario, the more dangerous it is. When something goes wrong in these scenarios, it sometimes leads to mass panic. There is a rush for the exits, causing massive investments to collapse… We remember the crisis, but we often forget the rosy scenario that led to it.  (Eli Remolona, 2023)

 

The default or mechanical response of almost every political authority or expert is to blame economic volatility on the marketplace.  But they hardly reveal the source of funding and incentives of market participants that lead to such 'market failures.'

 

Besides, abstract attributions like "make risky investments based on rosy scenarios" don't cause boom-bust cycles.  

 

Instead, the fountainhead of increased economic and financial fragility stems from a deepening of the politicization of the economy, channeled through policies that lead to the excesses in the aggregation of many variables like systemic overindebtedness, a massive misallocation of resources, intensive mispricing of markets, and hyperbolizing economic and financial conditions via inflated statistics.

 

If so, have authorities not been a focal point in this "rosy scenario" that breeds "black swan" events?

 

II. Parabolic ICT as the Single Benefactor of the March 21st Massive End-Session Pumps!

 

Let us help in identifying one avenue for a potential "contagion."

 

Though fragrantly evident to the public, the establishment remains remarkably taciturn to the relentless "rigging" of the Philippine equity benchmark, the PSEi 30.

Figure 1

 

An example is the dominance of pre-closing dumps and pumps (Marking the Close—MtC) in three of the week's five trading sessions. (Figure 1, topmost graph)

 

The aggregate volatility from these MtCs totaled about 1.95% of the weekly close of March 15th.  That's about double the .87% advance posted by the PSEi 30 this week (March 22nd).

 

To achieve their end-session target for the PSEi 30, the collaboration by index managers typically involves bidding up/selling down several top-tier issues (at least 5).

 

But Thursday (March 21st) signified a historical event.  The cabal of index managers directed their actions to the share prices of a single firm, ICTSI [PSE: ICT].

 

ICT segued into the 5-minute pre-closing float period up by 2.16%—only to reopen during the runoff-closing period with a shocking spike of 9.28%—a massive pump equivalent to 7.12%! (Figure 1, middle pane)

 

Ironically, there were only 119 trades conducted during the runoff period, with a single institutional broker accounting for 68% of the total!  Only about 16 brokers participated in the massive bid-up, some of which were retail. 

 

In short, a few participants "forced up" ICT share prices in the closing period!

 

Consequently, ICT's free float share of the market cap stunningly flew to an all-time high (ATH) of 9.22% last Thursday!  ICT toppled SMPH for the third-largest PSEi 30 firm! (Figure 1, lowest chart)

 

Because of the intensity of the ICT's advance, PSEi 30 resonated with it: it jumped by .9% to close the session by 1.55%! Incredible.

 

III. The Rotational Pump from ICT to the Financial Sector

 

The next day, though ICT gave up all Thursday's MtC gain and more, index managers rotated their support of the PSEi 30 by propping the financial components, which cushioned the PSEi 30s decline to only 1.17%.

Figure 2

 

The financial index not only gained by 3.34% WoW, but the "full" market share of the big three PSEi 30 banks surged to an unprecedented 18.5% last Friday! (Figure 2, topmost and middle diagrams)

 

As of March 21st, the top 5 market cap heavyweights (SM, BDO, ICT, SMPH, and BPI) accounted for a staggering record 50.98% share! (Figure 2, lowest image)

 

When accounting for the next five largest market caps, their cumulative share of the market increases to 73%!

 

That's right.  Only five to ten components drive the PSEi 30!

 

Beyond that, the mounting concentration of gains not only reflects the intention to artificially prop up the index, it also indicates INCREASED CONCENTRATION RISKS.

 

IV. How Market Manipulation Amplifies Systemic Fragility

 

Further, political policies fuel the distortive effects of market manipulation, as noted back in 2017: (bold original)

 

These growing incidences of vertical price movements have not been isolated from the progressing entropic developments at the PSEi as a result of massive manipulations.

 

Most will be rationalized from a demand shock—new information that alludes to G-R-O-W-T-H regardless of the validity of its premises.

 

In reality, both market manipulation and vertical prices are symptoms of the mortal sins of unabated credit expansion or currency debasement. (Prudent Investor, 2017)

 

Because only a few issues have fueled the upside performance of the headline index, the sustained shortfall in volume points to the unsustainability of its momentum. 

 

Yet, without an increase in disposable incomes or "real" savings, this requires a sustained and intensified increase in inflows from foreign savers.

 

As fund manager John Hussman explained, (bold mine)

 

All securities are essentially a way to trade current saving for a claim on future output. The value of all the securities in the economy derives from the claim on future output that this stock of real and intellectual capital can generate over time. During speculative bubbles and periods of malinvestment, saving is invested in unproductive projects that essentially result in unintended consumption rather than accumulation of productive assets. This means that the stock of outstanding securities is essentially “backed” by a smaller stock of productive capital to service those securities over time. (John Hussman, 2015)

Figure 3

 

Volume spikes rather than sustained increases have characterized the PSEi 30's race to 7,000. Ironically, the pesos’ mainboard volume remains below the Q3 levels! (Figure 3, upper chart)

 

Furthermore, market breadth has barely supported the .87% weekly advance by the PSEi 30 as the advance-decline distribution has been almost neutral for the PSE (490-491) and the PSEi components (15-14 and one unchanged).

 

Though the character of the 'rosy scenario' presented by the upswing of the PSEi 30 has been starkly different from a generalized boom phase of a full-fledged credit bubble as exemplified by India's case, this imperative to force upon a bull market cosmetically and inorganically shares a similar outcome: capital consumption that leads to a bubble bust. (Figure 3, lower visuals)

To sum it up, the intensifying vertical price actions of a few PSEi 30 heavyweights, backed by rotational pumps, are likely indications of mounting desperation to foster a bull market.  However, its inability to sustain such momentum could indicate buyer exhaustion and a potential (secular) reversal.

 

V. January-February 2024: PSEi 30’s Returns Outperform as Volume Slumped!

 

To expand our insights on the local market structure, let's analyze the first two months of PSE/PSEi 30's performance in 2024.

Figure 4

 

Sure enough, it's impressive that the PSEi 30 reached 6,900 in February, but the gross volume, which includes block trades and cross sales, tumbled to levels last seen in 2011!  (Figure 4, upper chart)

 

Put another way, while the PSEi 30 vaulted by 7.7% from end-December through February 2024 to shatter the decaying returns over the long term, this occurred in the face of sputtering volume.  That is, the PSE's gross volume plummeted 26.4% YoY! Amazing! (Figure 4, lower graph)

Figure 5

That's a measure of the general performance.  As a share of the total, the first two months saw a rebound in the volume of the holdings (2 years) and the property sector (from last year) compared to the slowing Financials (YoY).  (Figure 5, topmost diagram)

 

In contrast, the peso volume of industrials and services, which include the "Fly Me to the Moon" ICT, resumed their downward trek (in the last 2 and 3 years respectively).  Remarkable. (Figure 5, middle image)

 

The pecking order of peso volume by sector share in the first two months of 2024: Holdings, Industrials, Financials, Property, and Services. (Figure 5, lowest window)

Figure 6

 

Paradoxically, the financial index, which stormed towards its 2018 All-time high (ATH), saw its peso volume contract by 30.5% YoY! (Figure 6, upper chart)

 

Since the BSP's unprecedented rescue of the banking system in 2020, Financials have outperformed.

 

Specifically, the PSEi 30 banks have been responsible for most of the gains in the Financial Index. Apart from the ICT sector, rotational pumps into PSEi banks have contributed significantly to the PSEi 30's advances.

 

VI. Negative Market Breadth, Rising Risks of a Black Swan Event from Sustained Capital Consumption

 

It is not just volume but market breadth remains in stagnation.  Despite marginal improvements (from 2020), the advance-decline spread remained negative. (Figure 6, lower image)

 

The volume slump and poor market breadth reveal the lack of participation from the general public.

 

The genuine bull market climaxed or culminated in 2013, after which the rest of the index performance was primarily characterized by strategic maneuvers.

Figure 7

 

Let us unpack this.

 

The deficiency of the PSE’s trading volume didn't emerge out of a vacuum. These can be traced back to the diminishing liquidity in the banking system (expressed by the cash-to-deposits downtrend), which has, in part, been exacerbated by the swelling of the government’s deficit spending.  (Figure 7, top and middle graphs)

 

Bluntly put, diminishing volume is a symptom of capital consumption.

 

In the end, what have the authorities done to decrease the odds of an outbreak of (future) economic volatility or a "black swan" event resulting from (today's) market manipulation or "risky investments based on rosy scenarios?"

 

What will they do to diminish its impact?  

 

Do they even know? Have they been "asleep at the wheel?"

 

Or have 'risky investments' become too politically entrenched to perpetuate their refinancing and credit expansion to fund malinvestments, which have been peddled to the public under a statistically 'rosy scenario'? (Figure 7, lowest chart)

 

"Market failure," really?

___

References

 

Eli M Remolona, Governor of Bangko Sentral ng Pilipinas:  Message during the release of the 2023 Financial Stability Report, 13 February 2024, Bank of the International Settlements, March 22, 2024

 

Prudent Investor Newsletter, BW-SSO Price Actions and Market Manipulations Signify as Twin Symptoms of the Raging Credit Bubble! February 13, 2017

 

John P. Hussman, Ph.D Stock-Flow Accounting and the Coming $10 Trillion Loss in Paper Wealth Hussman Funds, April 6, 2015