The BSP Extends Credit Card Interest Rate Cap Amidst Another "Aggressive" Hike in Policy Rates

The BSP extended the interest rate caps on credit cards until the end of the year, while hiking policy rates by another 75 bps. How serious are they in trying to curb inflation (via demand)? 

Businessworld, November 16: THE BANGKO SENTRAL ng Pilipinas (BSP) said it will review the current cap on interest rates and other charges imposed by credit card companies in January. This after the Monetary Board agreed last week to maintain the existing ceiling on credit card interest rates and other charges until end of 2022. The BSP kept the maximum interest rate or finance charge on an unpaid outstanding balance of a credit cardholder at 2% per month or 24% a year. It also set the maximum monthly add-on rate on credit card installment loans at 1%. A maximum processing fee of P200 per credit card cash advances was also maintained. 

The BSP's unprecedented response to curb the surge in the CPI has been to hike rates drastically.  This week, it increased policy rates by another 75 bps to 5%, for an aggregate increase of 300 bps (3%) in seven months! 

 

Topping the acme of 4.75% in 2019, the present level of official rates is at a 13-year high! 

 

But keeping the interest rate cap on the credit cards essentially fosters a mismatch between policy rates and the price caps. 

 

The Crowding Out and the Ratchet Effect 

Figure 1 

Aside from filling the chasm from the loss of purchasing power of the peso, the magnified consumer credit card growth represents a textbook response to interest rate caps. (Figure 1, topmost window) 

 

While there have been no supply shortages (yet), its spiking growth rate has vastly increased its share of total outstanding loans in the banking system, "crowding out" production loans. (Figure 1, middle pane)  

 

Universal and commercial bank credit card loans zoomed by 23.84% in Q3 to lift nominal loans to a record. (Figure 1, lowest pane) 

 

The outgrowth of consumption over production lending translates to what mainstream calls "demand pull" inflation.  

 

Yet, such "crowding out" represents another sign that locals are consuming more than they are producing—paid for by credit. 

 

Naturally, the price ceiling induces "excess demand" for credit card use, which, aside from amplifying inflation, reinforces the GDP and tax collections.  

 

Hence, keeping the price caps became a convenient political issue. 

 

The BSP price caps (subsidy) demonstrate how crisis intervention measures embed and skew political benefits to vested interest groups and why emergency mandates become an extended, if not a permanent element, of existing policies.  The great Austrian Economist Robert Higgs described this phenomenon as the "Ratchet effect."  

 

As such, the sustained appeals for the extensions of such price caps. 

 

The Unseen Costs of the BSP’s Price Caps 

 

But the surge in credit cards aggravates the balance sheet leverage of consumers, which in the face of rising rates, means higher delinquency rates moving forward. 

Figure 2 

Non-Performing credit card loans ascended as treasury yields rose in 2018 in response to the escalation of the CPI. (Figure 2, topmost pane)    

 

As a caveat, the prevailing assortment of "relief measures" of the BSP on the banking system have camouflaged bank NPLs, including credit card loans, hence the opacity of NPL data. (The BSP has yet to update its consumer loans data)  

 

Not just the deterioration in credit conditions of consumers but the mismatch between market rates and the price caps translates to an intensifying squeeze in interest rate spreads (margins) for banks.  

With consumer loans representing less than 5% of the outstanding, perhaps the BSP bets that any imbalances from such caps would not be sizeable enough to debilitate the industry. 

 

They seem to have forgotten that rising rates have not only dismantled the pandemic subsidies granted to banks through the deposit expense channel. (Figure 2, middle pane) It should also swell bank funding costs similar to 2018.  (Figure 2, lowest window) 

 

Hence, the mismatches from price controls are likely to aggravate maladjustments in the financial system and the economy.  

 

To ram the point home, the ramifications of massive consumer borrowing from the future to juice up the GDP (and tax collections) should eventually translate to sustained price pressures, lower demand or economic growth, higher credit risks for consumers, and expanded risks to the banking and financial system. 

 

Nevertheless, such interest rate controls should accelerate "excess demand" in Q4, which again should temporarily help boost the GDP and taxes.  It should also abet price pressures in the economy. 

 

Q1 2022 Non-Financial PSEi 30 Debt Growth Surpasses 2021 Annual Debt! Deteriorating Liquidity: A Stalled Presidential Honeymoon for the PSE?

 

Note that the likely economic slump is because of the increase in the prices of goods and assets coupled with the weakening in the pool of real savings. The increase in prices is expected to weaken the monetary liquidity thereby setting in motion the selling of goods and assets thus depressing the goods and asset prices momentum. Observe that the trigger to all this is past strong increases in money supply—Dr. Frank Shostak 

 

In this issue 

Q1 2022 Non-Financial PSEi 30 Debt Growth Surpasses 2021 Annual Debt! Deteriorating Liquidity: A Stalled Presidential Honeymoon for the PSE?   

I. Q1 2022 Non-Financial PSEi 30 Debt Growth Surpasses 2021 Annual Debt! 

II. The Money Illusion: The Case of Meralco 

III Massive PSE Debt Translates to Escalating Concentration Risks, SMC Debt Rockets to Php 1.3 TRILLION! 

IV. Are Households Using Credit Cards and Drawing from Bank Savings to Augment Consumption? 

VI. Deteriorating Liquidity: A Stalled Presidential Honeymoon for the PSE?   

 

Q1 2022 Non-Financial PSEi 30 Debt Growth Surpasses 2021 Annual Debt! Deteriorating Liquidity: A Stalled Presidential Honeymoon for the PSE?   

 

I. Q1 2022 Non-Financial PSEi 30 Debt Growth Surpasses 2021 Annual Debt! 

 

Non-Financial PSEi 30 firms continue to gorge on debt insatiably!   

 

Figure/Table 1 

 

Net debt uptake in Q1 2022 amounted to Php 401.111 billion YoY to Php 5.03 trillion, trouncing the annual 2021 net growth of Php 336.5 billion! (Figure 1) 

  

In Q1 2022, this net debt expansion eclipsed the Php 14.889 billion net income growth of the 30 member firms. Strikingly, revenue growth accounted for only Php 231.6 billion. Revenues reached Php 1.322 trillion in Q1 2022. (Figure 2, top window) 

 

That is to say, peso debt growth represented 26.9x net income and 1.73x revenues! 

 

Incredible, isn’t it? 

 

As an aside, the Non-Financial PSEi data comprise members of the given period and does not include restatements. 

  

Again, unless one believes in financial unicorns, the rapid accumulation of debt will hinder growth. More importantly, it increases systemic risks. 

  

This debt cycle appears to be a manifestation of the hastening transitional shift toward a state of Ponzi finance, where the roll-over of existing debt requires either intensified absorption of debt or the sale of assets. For instance, PLDT announced the completion of the sale of its 3,000 tower assets for Php 39.2 billion. 

  

By sector, while the service industry accounted for the highest percentage growth, the holding firm sector posted the most debt gains in peso.  

  

And while the holding sector and industrials registered the fastest revenue growth, services delivered the most net income in percentage and nominal peso value.  

 

II. The Money Illusion: The Case of Meralco 

 

By firm, energy sales of San Miguel, Meralco, and Aboitiz delivered what the public would construe as "growth." In essence, "growth" emerged from the energy sector. Or, the growth aspect of these firms was about inflation!  

 

 

Figure 2 

As exhibited by Meralco, its 33% YoY revenue gain fundamentally signify a function of the money illusion.  

 

Yes, revenues soared alright, but it came at the expense of a slowdown in volume (in gigawatts or GWh), which means Meralco consumers paid more for less electricity consumption. (Figure 2, lower window) 

 

Meralco's money illusion is an example of how monetary inflation reduces the purchasing power of consumers. 

 

The asymmetry of electricity prices and volume also showcases the overstatement of the GDP. The GDP captures the spending but not the actual electricity usage. 

  

And it is less likely that the slowdown in electricity consumption represented gains in efficiency. How exactly do the disruptions from the pandemic policies improve efficiency? Further, according to Jevon’s paradox, increased demand offsets gains attained from energy efficiencies. 

 

In the meantime, telcos giants Globe and PLDT, aside from retail giant SM, contributed most to the net income gains. 

 

III Massive PSE Debt Translates to Escalating Concentration Risks, SMC Debt Rockets to Php 1.3 TRILLION! 

 

But debt is where the pickle is.  

 

Figure 3 

 

In Q1 2022, San Miguel Corporation was the hands-down winner. SM Investments and its property subsidiary, SM Prime, came in as runner-ups. 

 

But here is the thing, the outstanding debt of San Miguel surged to Php 1.033 TRILLION from Php 1.004 TRILLION in December 2021.  TRILLION! (Figure 3, top pane) 

See San Miguel’s Debt Breached an Unprecedented Php 1 TRILLION in 2021! May 01, 2022 

Its nominal peso debt YoY soared by Php 119.4 billion! 

 

Because SMC's debt represents around 4% of the domestic financial resources, it has implicitly morphed into a "too big to fail" enterprise.   

 

That's not all.   

 

SMC's debt comprises part of the 26 Non-Financials firms, which means that the cumulative outstanding debt of this group now accounts for 19.36% of the financial resources of the Philippines! (Figure 3, middle window) 

 

Or, the debt load of listed firms of the wealthiest families accounts for almost a fifth of financial resources. (Figure 3, lowest window) 

 

Of course, like other stats, their contribution has been partially magnified by reporting duplications (holding firms and their subsidiaries).  

 

The point shown is the mounting concentration risks in the financial system. 

 

As an aside, this discourse excludes the debt acquired by the banking system. 

 

IV. Are Households Using Credit Cards and Drawing from Bank Savings to Augment Consumption? 

 

And the aggregate data of the PSEi 30 member firms reinforces the supposed consumption-driven statistical mirage presented last week. 

 

Q1 2022 Consumer Spending Boom? Revenue Performances of PSE Listed Food and Retail Diverges from GDP! May 29, 2022 

 

And yet credit appears to have driven the so-called consumption growth here and abroad. 

 

LONDON, May 31 (Reuters) - Credit card borrowing in Britain rose last month at the fastest annual rate since 2005, possibly reflecting a worsening cost-of-living squeeze that may now be starting to slow the housing market, Bank of England data suggested on Tuesday. 

 

CNBC, May 10: To keep up with rising prices, many consumers are leaning on their credit cards. Credit card balances rose year over year, reaching $841 billion in the first three months of 2022, according to data released Tuesday from the Federal Reserve Bank of New York. 

 

Domestic inflation may not be as high as in the US or UK, but households may be accelerating their use of credit cards to augment their lost purchasing power. The credit card portfolio of the universal and commercial banks topped the peso high reached in January 2020. Credit card growth surged 16.02% YoY last April from 12.06% and 8.03% in March and February, respectively.  

 

Figure 4 

So households are leveraging up their balance sheets as yields or interest rates rise!  

 

And as interest rates rise, how is pulling forward consumption via credit cards at the expense of the future supposed to be bullish for the economy? (Figure 4, upper and middle pane)  

 

And are households also drawing from their bank savings account to fund consumption? (Figure 4, lowest pane)  The growth of bank savings accounts dropped to its lowest level since January 2020! 

 

So while the consensus interprets growth in bank loans as positive, they are likely overlooking the impact of escalating price pressures on the behavior of consumers. 

 

VI. Deteriorating Liquidity: A Stalled Presidential Honeymoon for the PSE?   

 

 

Figure 5 

 

After a two-month slowdown, the growth rate of banking lending to the financial sector bounced in April.   

  

This downshift appears to have influenced the ongoing weakness of the PSEi 30 and the PSE. Of course, it must be more than a correlation. Instead, it suggests that bank credit funded the margin trades of banks and other financial institutions. Its slowdown, thus, resulted in the volume slack or diminished liquidity and the predominance of sellers. (Figure 5, upmost window) 

 

And despite the higher rate of bank credit expansion in April, outside cash, the benchmark of monetary liquidity, M3 continues to decelerate, which again is a symptom of decreasing liquidity transposed into fumbling volume of trades at the PSE. (Figure 5, middle pane) 

 

And yes, while the PSEi 30 was up by .23% this week, the volatile benchmark has drifted in a tight range in the last two weeks. But board volume nearly doubled over the week, mainly due to enormous 'window dressing' trades of select issues by the top 6 brokers, which accounted for about 60% of the total transactions on May 31st. That’s 'window dressing' for a few but significant accounts. 

  

And rising rates may be instrumental in affecting credit expansion in the financial industry. 

  

Following the landslide win by President Duterte in 2016, surging treasury yields in 2016-18 stalled the PSEi 30 honeymoon, which peaked in January 2018. (Figure 5, lowest pane)   

  

Is a rerun of 2016 to 2018 happening? Or will it be worst? 

 

Yours in liberty, 

 

The Prudent Investor Newsletters