Inflation was created by
the wrong monetary policy, and incorrect central bank measures may have lasting
negative impacts on the economy. The first effect is evident: governments
continue to crowd out the real economy, and families and businesses suffer the
entire burden of rate hikes. Maybe the objective was always to increase the
size of the public sector at any cost and implement a gradual nationalization
of the economy—Daniel Lacalle
In this issue
PSEi 30's Weak 9-Month
and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and
Financial Repression
I. Clarifying Our
Analytics of the PSEi 30 Data
II. 9-Month 2024 PSEi 30
Performance: Broad-based Slowdown, Sustained Dependence on Borrowing to
Generate Growth
III. Dissecting the PSEi
30’s Performance by Category: Debt, Income, Revenues and Cash
IV. Analysis by Sector:
Financials and Holding Firms Dominate Growth
V. Analysis by PSEi 30
Member Firms (9-Month)
VI. Conclusion:
Underwhelming Performance as Symptoms of Crowding-Out Syndrome, Financial
Repression, and Statist Policies
PSEi 30's Weak 9-Month
and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and
Financial Repression
The PSEi 30’s lackluster fundamental
performance validated the mainstream’s unexpected decline in Q3 GDP,
highlighting the persistent effects of crowding out and financial repression.
I. Clarifying Our
Analytics of the PSEi 30 Data
Two factors must be explained before delving
into the 9-month and third-quarter analysis of the performance of PSEi 30
constituent firms.
First, the definition of
data is crucial.
-Data from the same reporting coverage
provides a more accurate comparison, as it reflects the PSEi members during the
relevant period. This is referred to here as 1A data.
-Data from a different reporting coverage/period
results in an apples-to-oranges comparison due to two factors: periodic updates
to PSEi constituents and the exclusion of past data revisions. This is referred
to as 1B data.
-Aggregates may be overstated, as they
include not only holding companies but also their subsidiaries.
Q3 PSEi 30’s Financial
Activities: Defining the Operating Conditions
Next, it is essential to define the operating
conditions of the third quarter.
Figure 1The Philippine Q3
2024 GDP unexpectedly slipped to 5.2%, its lowest level since
Q2 2023’s 4.3%, despite systemic leverage hitting an all-time
high. (Figure 1, upper graph)
Public
debt and bank
credit expansion grew by 11.4%, marking its fastest pace
since Q4 2022.
The Bangko Sentral ng Pilipinas (BSP)
initiated its "easing cycle" with a 25-basis point rate cut in
August, which helped fuel this growth.
Despite reaching the near all-time high employment
rate, both headline and core inflation rates fell to 3.2% and 2.6%,
respectively, the lowest since Q1 2022. (Figure 1, lower graph)
Figure 2Marcos-nomics stimulus, channeled through its
fiscal
aspect, remained vibrant, with public spending growing by 6.4% in
Q3, reaching its third-highest level. (Figure 2, upper image)
Once again, despite record leverage, money
supply growth, measured by M3, stumbled to its lowest level since Q3
2022.
It was an active period for fiscal and
liquidity operations by the banking system and the BSP. As a ratio to GDP,
banks' net claims on the central government (NCoCG) reached the third-highest
level on record, while the BSP's counterpart
dipped to its lowest level since Q3 2022—but still near Q4 2022 record. (Figure
2, lower diagram)
In contrast to the establishment’s "restrictive"
narrative, Q3 indicated loose financial conditions, which were further
bolstered by the BSP’s rate cut and sustained increases in systemic leverage,
supported by BSP and bank liquidity, as well as fiscal operations.
The notion that the BSP’s easing would
provide support to the economy not only failed to materialize; consumption
fell, as evidenced by the declining trend in the Consumer Price Index (CPI)
and the money supply—ironically occurring despite strong liquidity
injections.
II. 9-Month 2024 PSEi 30
Performance: Broad-based Slowdown, Sustained Dependence on Borrowing to
Generate Growth
These macroeconomic conditions were reflected
in the 9-month Key Performance Indicators (KPIs) of the PSEi 30 (1A):
Figure 3 One. The aggregate non-financial debt
increased by Php 208 billion, marking the lowest increase since 2020.
This figure excludes borrowings of the three largest banks (Figure 3, topmost
table)
Two. The cumulative net income growth of Php
47.17 billion was also the smallest since 2021.
Three. Revenue expansion, totaling Php 395
billion, was the second lowest since 2021.
Four. The PSEi 30’s cash reserves shrank by Php
5.27 billion for the second consecutive year, but at a more minimal
scale compared to last year.
These figures indicate that all segments
exhibited a slowdown, with net income experiencing the most pronounced
decline.
There’s more.
Because the non-financial debt-to-net income
ratio in 2024 represented the second highest level since 2022, it
indicates that corporations borrowed more to generate income (Php 4.4 debt
for every peso of net income). (Figure 3, middle graph)
Additionally, they borrowed to address their
liquidity shortfall.
However, this data understates the
full picture, as it excludes the borrowings of the three largest banks. These
banks reported an increase of Php 491 billion in bills payments alone!
III. Dissecting the PSEi
30’s Performance by Category: Debt, Income, Revenues and Cash
Nota Bene: While we rely on the accuracy of
these reports, it is worth noting the potential for discrepancies. Past
instances, such as PLDT’s 4-year "budget overrun," demonstrate
that reporting errors often go overlooked or ignored by both the PSE and
government agencies.
Such regulatory lapses could create
conditions that encourage misreporting, exemplifying the moral hazard syndrome.
We suspect that some companies may be
understating the extent of their leverage by reclassifying it under other
liability categories
Debt: In nominal terms,
non-financial debt rose by 3.9%, increasing from Php 5.31 trillion to Php
5.52 trillion. This resulted in a slower debt-to-NGDP ratio, which
declined from 30.8% in 2023 to 29.25% in 2024 (1B). Again, this excludes
bank debt. (Figure 3, lowest window)
Net Income: Published net income
expanded by 7.2%, rising from Php 691.2 billion to a record Php 740.93
billion. However, this represented the lowest growth rate since
2021.
Revenues: Despite historic
increases in systemic leverage, near full employment and the third-largest
public spending on record, revenue grew by an unimpressive 9.4%, reaching a
record Php 5.265 trillion.
This also translates to a PSEi 30
revenue-to-NGDP share of 27.9%—the second highest after 2022—indicating
that these elite firms contribute more than a quarter of the estimated Nominal
GDP. If we include all 284 listed firms, this figure would
likely account for approximately two-fifths of NGDP.
This manifests the trickle-down structure
of the Philippine political economy, where the prevailing approach prioritizes
consolidating wealth and power among politically connected entities through
centralization, rather than fostering genuine "inclusiveness" via
grassroots entrepreneurship (such as SMEs) or a bottom-up framework.
Lastly, the government reported a headline
GDP of 5.2% based on the NGDP of 8.5%. However, revenues of the PSEi 30 grew by
only 6.8% suggesting a significant overstatement of the statistical economy.
IV. Analysis by Sector:
Financials and Holding Firms Dominate Growth
Figure 4Although the holding firms sector
posted the smallest percentage growth, it experienced the largest
increase in debt, amounting to Php 104.21 billion, followed by the real estate
sector with Php 38.62 billion. (Figure 4, upper table)
The financials and holding firm
sectors recorded the highest net income growth, with increases of Php
20.327 billion and Php 13.35 billion, respectively, accounting for 43% and
28.3% of the total.
The sector with the highest revenue growth
was the holding firm sector, which generated Php 196.653 billion,
followed by financials with Php 86.44 billion, representing 49.8% and 22% of
the total, respectively.
Meanwhile, the services sector led in
cash growth, reporting an increase of Php 21.24 billion. Conversely, the industrial
sector experienced the largest cash outflows.
In Q3, holding firms and financials
reported the highest net incomes of Php 16.84 billion and Php 7.8 billion,
respectively. (Figure 4, lower table)
These two sectors also delivered the strongest
revenue growth, with increases of Php 43.36 billion and Php 25.26 billion.
In summary, during the nine-month period and
in Q3, the financials and holding sectors dominated net income and revenue
growth, while other sectors struggled to keep pace.
V. Analysis by PSEi 30
Member Firms (9-Month)
Figure 5Broken down into individual categorical activities:
The top firms contributing to non-financial
debt increases were San Miguel Corporation (SMC) and Ayala
Corporation with increases of Php 63.9 billion and Php 57.6 billion,
respectively.
Out of the 27 firms analyzed, 15 posted
debt expansion during the period, with SMC accounting for 30% of the
total debt growth in pesos.
In the net income growth segment of
the PSEi 30, International Container Terminal Services, Inc. (ICT) and
the Bank of the Philippine Islands (BPI) were the top performers with
Php 9.85 billion and Php 9.441 billion, correspondingly.
On the other hand, DMCI Holdings (DMC)
posted the largest decline among the eight firms that reported a
decrease in net income growth.
SMC and BPI also led the revenue
growth segment. Conversely, DMC reported the largest revenue decrease
among the seven firms that experienced revenue declines during the period.
Notably, SMC accounted for 30% of total revenue growth in peso terms.
Finally, ICT emerged as the leader in cash
reserves growth, while Aboitiz Equity Ventures (AEV) headed
the minority of ten issues that saw reductions in cash flows.
Once again, even among the elite firms, only
a select few tend to dominate in terms of performance.
Notably, financial giants such as BPI and BDO
emerged as some of the most prominent gainers, while non-consumer sectors,
including ICT and SMC, led in the net income and revenue segments,
respectively.
Interestingly, the underwhelming
performance of consumer-focused firms like SM Investments and Ayala
Corporation—arguably the most exposed to the local consumer market—highlights
the underlying fragility of the sector
VI. Conclusion:
Underwhelming Performance as Symptoms of Crowding-Out Syndrome, Financial
Repression, and Statist Policies
The Bottom Line: Despite the "Marcos-nomics
stimulus," near-record employment levels, and loose financial conditions,
the conspicuous signs of weakness among the PSEi 30 member firms not only align
with the GDP slowdown observed in Q3 but may also indicate much slower
overall growth.
Moreover, this underbelly has exposed the
firms’ increasing vulnerability to extensive leveraging.
What is particularly notable is that many of
these PSEi 30 firms are linked to political projects that should have enhanced
their performance.
Instead, their underwhelming performance
could be indicative of the detrimental effects of the crowding-out syndrome—a
phenomenon that gradually erodes economic productivity over time—compounded
by financial repression and other forms of government interventions (such
as the subtle shift to a war economy, increasing centralization and more).
