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

 

…the deficit may be financed by selling bonds to the banking system. If that occurs, the banks create new money by creating new bank deposits and using them to buy the bonds. The new money, in the form of bank deposits, is then spent by the Treasury, and thereby enters permanently into the spending stream of the economy, raising prices and causing inflation. By a complex process, the Federal Reserve enables the banks to create the new money by generating bank reserves of one-tenth that amount…In short, the government and the banking system it controls in effect “print” new money to pay for the federal deficit. Thus, deficits are inflationary to the extent that they are financed by the banking system; they are not inflationary to the extent they are underwritten by the public—Murray N. Rothbard

In this issue:

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

I. Bullseye! Q2 2024 Public Spending Hits All-Time High, Partially Affirming Marcos-nomics Stimulus! 

II. The Crowding Out Effect: Q2 2024 Revenue Spike Equals Lower GDP?

III. The 2024 Public Spending Surge: Pre-Election Expenditures via LGUs and COMELEC; Defense, and Infrastructure Budgets

IV. 6-Months Debt Servicing Costs Hit Another All-Time High! 

V. Marcos-Nomics Stimulus: Mounting Debt Servicing Burden Points to the Coming BSP Rate Cuts 

VI. The Inflationary Aspect of Deficit Spending: More Fuel to the Rising USDPHP; Conclusion 

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

The acceleration of June and Q2 2024 spending affirmed the emergence of the "Marcos-nomics stimulus." With debt burdens soaring, a rising public debt stock, and fiscal deficits widening, the BSP may soon cut interest rates.

I. Bullseye! Q2 2024 Public Spending Hits All-Time High, Partially Affirming Marcos-nomics Stimulus! 

Businessworld, July 25, 2024: THE NATIONAL Government’s (NG) budget deficit narrowed by 7.24% year on year in June, as revenue collection grew at a faster clip than spending, the Bureau of the Treasury (BTr) said on Wednesday.  Treasury data showed the budget gap shrank to P209.1 billion in June from P225.4 billion a year ago. Month on month, the budget deficit widened by 19.54% from P174.9 billion in May. In June alone, revenue collections jumped by 10.93% to P296.5 billion from P267.3 billion in the same month last year…On the other hand, state spending increased by 2.62% year on year to P505.6 billion in June. “The increase was mostly attributed to the implementation of capital outlay projects of the Department of Public Works and Highways, and the Department of National Defense under its Revised AFP Modernization Program, the preparatory activities of the Commission on Elections for the 2025 National and Local Elections, and the higher National Tax Allotment shares of local government units (LGUs),” the Treasury said. (bold added)

Defense spending. Domestic elections spending (direct and indirect).

Figure 1

Statistical base effects have played a large part in the government and media’s "smoke and mirrors" narrative of fiscal performance last June.  (Figure 1, topmost image)

That is, the lower public spending growth rate was entirely a function of its comparison from a higher base a year ago.

In contrast, distortions from the base effect magnified the revenue growth rate calculated from a lower base last year.

The devil is always in the details.

Yet here are the most important factors that were withheld from the public: 

-June 2024’s public spending was the sixth highest on record. (Figure 1, middle chart)

-Excluding public spending for December, June 2024 represented the third highest after May 2024 and June 2023.

-May and June represented the third-highest two-month public spending.

-Q2 2024 public spending was at an all-time high! (Figure 3, lowest graph)

Figure 2

-June’s deficit was the highest this year. (Figure 2 topmost chart)

-The gap between the 1H 2024 deficit and 2023 widened and was 14.3% and 8.95% below the 2022 and the 2021 historic high. Please take note that the latter two represented a fiscal stimulus in response to the pandemic recession. (Figure 2 middle window) 

Yet, June data was a bullseye for us! 

Authorities admitted that aside from infrastructure, defense, and pre-election spending accounted for its outgrowth. 

That, in essence, is our Marcos-nomics stimulus.

VII. "Marcosnomics" Stimulus: Expanded Spending on Pre-Election, Defense Related and Infrastructure? 

…

Meanwhile, infrastructure, public defense-related projects, pre-election expenditures, and bureaucratic spending were likely funded by the national government, which saw a 22.3% spike in disbursements in May.

This contributed to a 14.8% surge in national government spending over the first 5 months, reaching an all-time high nominal level of Php 1.443 trillion! 

So if we are not mistaken, "Marcosnomics" will be heavy on political expenditures but sold to the public as a "stimulus." (Prudent Investor, 2024)

In his third State of the Nation Address (SONA), the Philippine President advocated for numerous public spending programs, including "Walang Gutom 2027," a war on poverty measure aimed at feeding one million food-poor citizens by February 2027. He also proposed a nationwide "Free Wi-Fi Program" and promoted "green-lane certified" investments, amounting to approximately Php 3 trillion in business projects (PPPs?) related to renewable energy, digital infrastructure, food security, and manufacturing. He also addressed tourism infrastructure, water projects, and more.

"Marcos-nomics" is on a roll, with more free lunches ahead!

II. The Crowding Out Effect: Q2 2024 Revenue Spike Equals Lower GDP? 

What was the contribution of public revenues to the June and Q2 deficit?

Although aggregate collections reportedly grew by 10.93% in June, non-tax revenues, which experienced a remarkable 81.4% growth rate, comprised the bulk of these gains.

Further, Q2 2024 revenues soared by 16.74%.

This is because, after the April growth surge in collections by the Bureau of Internal Revenue (12.7%) and the Bureau of Customs (19.5%), the subsequent monthly performance almost ground to a halt: both tax agencies registered paltry gains in the following months—BIR grew by 2.8% and 4.7% in May and June, respectively, while the BoC was 4.3% and 0.7% higher over the same period.

Despite this growth, revenue year-on-year (YoY) growth spikes have historically accompanied a GDP slowdown, except for one occasion in 2014. This anomaly aside, revenue growth has typically preceded a slowdown in GDP growth.

The crowding-out effect could be a possible reason for this phenomenon.

Figure 3

So far, revenues from the private sector, which have been involved in government projects, bank lending expansion, and inflation (e.g. CORE CPI), have driven the aggregate performance of public revenues. (Figure 3, topmost and second to the highest diagrams)

Notwithstanding historic public spending, record revenues have also kept the fiscal deficit from spiraling out of control. For now. (Figure 3, second to the lowest chart)

But what if the law of diminishing returns on these factors worsens the current economic conditions?

III. The 2024 Public Spending Surge: Pre-Election Expenditures via LGUs and COMELEC; Defense, and Infrastructure Budgets

In the meantime, after providing a crucial perspective on the aggregates in public spending, we will delve into more details. (Figure 3, lowest graph)

Due to base effects, LGU allocations were up by only 2.6%, a decline from 8.54% in May. However, their share of total expenditures rose from 14.6% in May to 16.6% in June.

Firstly, the Mandanas ruling has also been instrumental in driving this uptrend. The previous spike in LGU collections occurred in the second half of 2021, prior to the 2022 national elections. The collections decreased in late 2022 (post-elections), which extended through most of 2023.

Implemented in 2022, the Mandanas ruling (EO 138) decrees an increased share of revenue allocation from the national government to 40%, which includes collections from the Bureau of Customs.

The second wave of increased allocations to the LGU appears to have emerged since Q1 2024 as the 2025 national elections approach.

Another pillar supporting this is the programmed annual increases in budget allocations.

Increased LGU allocations likely include budgets to market or improve the electoral chances of administration candidates in the 2025 general elections.

Also due to base effects, the National Government’s disbursement grew by 8.6% YoY, though this was substantially lower than 22.32% in May. Nonetheless, its share of the aggregate also declined from 72.5% in May to 69.2% in June.

These increases reflected direct election spending via the Comelec, indirect spending via LGUs, as well as infrastructure and defense allotments.

IV. 6-Months Debt Servicing Costs Hit Another All-Time High!

The thing is, the media has omitted a very critical factor: interest payments. On the other hand, the Bureau of Treasury glossed over the discussion of overall debt servicing costs.

Figure 4

Though interest payments increased by only 5.22% in June, down from 47.8% last May due to base effects, their share of the total rose slightly from 10.97% to 11.01%. (Figure 4, topmost image)

However, total debt servicing in the first semester of 2024 vaulted by 41.3% YoY. It hit an UNPRECEDENTED high of Php 1.283 trillion compared to its semestral predecessors and is down by only 20% relative to last year's annual or the 2023 data. (Figure 4, middle and lowest charts)

Again, compared to 2023, the gap has been closing dramatically: June amortization was only 7.16% lower, and interest payments were down by 39.96%.

Figure 5

Importantly, since 2019, authorities have minimized foreign debt servicing, but this trend appears to have reversed in 2024. (Figure 5, topmost diagram)

Nevertheless, it is incredible to see the media put a spin on the lower monthly external debt-servicing ratio (at the end of April) as 'good news' while ignoring the fact that the external debt-service burden spiked in 2023.  The recent decline likely represents a hiatus. (Figure 5, middle window)

Most of all, the surge in the external debt servicing burden has pulled down the GIR-to-debt service ratio, implying reduced liquidity for debt servicing and other domestic FX requirements. (Figure 5, lowest graph)

And one shouldn’t forget that the Philippine GIR also consists of external debt and derivatives or "borrowed reserves."

V. Marcos-Nomics Stimulus: Mounting Debt Servicing Burden Points to the Coming BSP Rate Cuts

Statistics are about the past. They signify historical data predicated on a limited set of assumptions and barely evince or explain the complex causal relationships that led to these captured outcomes.

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.

Figure 6

Yet, the current spending dynamics also imply that the Bureau of Treasury’s declining cash position in the face of higher deficits translates to a coming reversal in the recent downdraft in the BoTr’s financing (borrowing), which ironically has been celebrated recently by some quarters. (Figure 6, topmost visual)

Above all, such transfers should worsen the strain on public savings and diminish the amount available for investments.  Rising deficits have coincided with slower growth of bank deposit liabilities. (Figure 6, middle chart)

Therefore, BSP rate cuts represent the next phase of the "Marcos-nomics stimulus."

VI. The Inflationary Aspect of Deficit Spending: More Fuel to the Rising USDPHP; Conclusion

With insufficient taxes and borrowings, the government would have to produce more currency to fund it: this translates to higher inflation ahead.

While the government is yet to publish June’s debt burden—slated for next week—banks and other financial institutions have been a primary source of financing for the public debt-financed record deficit and the conduit of unparalleled financial liquidity. (Figure 6, lowest graph)

Banks and financial institutions will be loaded with increasingly riskier government debt.

Figure 7

Furthermore, the BSP’s net claim on the central government (NCoCG), which has shadowed the uptrend in public spending, has fed into the CPI. It will continue to do so. (Figure 7, topmost and middle graphs)

In conclusion, the mounting imbalances from the trickle-down policies manifested by the historic savings-investment gap, supported by an ever-growing dependence on fiscal deficits and asset bubbles to bloat the GDP, translate not only to higher demand for the USD-Philippine peso (USDPHP) but also signify signs of rising systemic risks. (Figure 7, lowest chart)

Inflationary government policies, rather than symptoms like trade deficits and real FX rates, are the root cause of the weak peso. The BSP's interventions may delay or defer its effects, but ultimately, they cannot forestall the inevitable.

Good luck to those who see this as a free lunch for the economy and "bullish" for financial investments.

____

References:

Murray N. Rothbard, Ten Great Economic Myths, September 9, 2023, Mises.org 

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

 

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

2023 Philippine Deficit Spending: Surging Debt and Debt Servicing and the Widening Impact of the Crowding Out Effect; December’s Unreported Historic Data!

 

Deficit spending is printing money, and it erodes the purchasing power of the currency while destroying the opportunities for the private sector to invest. The entire burden of higher taxes and inflation falls on the middle class and small businesses—Daniel Lacalle

 

In this issue

2023 Philippine Deficit Spending: Surging Debt and Debt Servicing and the Widening Impact of the Crowding Out Effect; December’s Unreported Historic Data!

I.  Unreported by Media: December 2023’s Record Public Spending and Historic Deficit

II. Statistical Charade? Expenditure Boom: The Soaring Share of Interest Payments on Debt

III. Above 1997 Asian Crisis Levels: Near Record 2023 Debt-to-GDP and Debt Servicing-to-GDP approaching 2011 Highs

IV. The Pandora’s Box of Risks: Increasing Dependency on Monetary Liquidity

V. Twin Deficits: The Bigger the Government, The Larger the Crowding Out Effect

VI. Crowding Out of Local Savings Means Increased Dependency on Foreign Money

VII. Crowding Out Effect: Historic Deficit Spending Equals Reduced Private Consumption

 

2023 Philippine Deficit Spending: Surging Debt and Debt Servicing and the Widening Impact of the Crowding Out Effect; December’s Unreported Historic Data!

In 2023, Philippine deficit spending remains in a "stimulus mode."  Yet risks continue to mount as the adverse impact from rising debt, debt servicing, and the crowding effect spreads. 

I.  Unreported by Media: December 2023’s Record Public Spending and Historic Deficit

 

Inquirer.net, March 1 2024: The government’s budget deficit hit P1.512 trillion in 2023, 6.32 percent smaller than the shortfall recorded in 2022 but overshot the target of P1.499 trillion, according to data released on Thursday by the Bureau of the Treasury. This meant that last year’s fiscal gap, as a share of the country’s gross domestic product, stood at 6.2 percent, significantly narrower than the 7.3-percent ratio in 2022, but slightly above the Marcos administration’s deficit cap of 6.1 percent for 2023…Explaining the latest outturn, the Treasury said the smaller year-on-year deficit demonstrates “progress of fiscal consolidation.”

 

Here is what the media didn't say (other media outlets also silent on this). 

 

Though they cited the 2023 outcome relative to the targets, they missed explaining how the deficit breached the government's goals.

Figure 1

 

Pointedly, public spending and fiscal deficit (in peso) hit all-time highs in December!   All. Time.  Highs. (Figure 1, topmost chart)

 

In percentage, public spending numbers looked unimpressive.  It grew by only 2.24% in December, 1.71% in Q4, and 3.42% in 2023.  But statistics can be deceiving.  The reason for this is the "high" base effects!  This year's December record expenditures of Php 661 billion took the tiara from December 2022’s Php 646.6 billion.

 

But how about revenues?

 

Revenues contributed less to the 2023 deficit.  

 

Revenue growth contracted by 3.03% in December, grew by 11.05% in Q4, and 7.9% in 2023 to a record Php 3.824 trillion. (Figure 1, middle window)

 

Briefly, public spending has become the primary determinant of the balance sheet health of the Philippine government!  

 

Its relentless growth brings to the fore some burning questions:

 

-Is the Philippine economy in trouble to require an acceleration of "fiscal stabilizers?"

 

-How could Treasury officials describe this as "fiscal consolidation" when the deficit-to-GDP remains in highly accommodative "stimulus" mode? (Figure 1, lowest graph)

 

Figure 2

 

-Why does the BSP call its actions "tightening" when public debt skyrocketed to a fresh record of Php 14.79 trillion in January 2024? (Figure 2, topmost diagram)

 

-Or is it just the addiction to free lunch politics for the government?

 

II. Statistical Charade? Expenditure Boom: The Soaring Share of Interest Payments on Debt

 

The share of government expenditures (ex-construction) to the NGDP was at 14.2% in 2023.

 

However, using the same Bureau of Treasury (BoTr) data to get the 6.2% debt-to-NGDP, public spending-to-NGDP jumped to 22% in 2023! 

 

So, which is accurate, the PSA's GDP data or the BoTr? Or is the government using an apples-to-oranges comparison to sugarcoat actual conditions?

 

Yet the mainstream impulse has been to ignore or discount the cost of government deficit spending to the (real) economy.

 

With its growing role, the carrying cost of the mounting debt levels represents a major negative factor. 

 

The thing is, an expansive government, the higher the debt load.  Higher debt levels, which weigh on the economy, increase various risk factors covering a wide swath of society (economic, financial, social, and political).

 

In 2023, aside from national expenditures, whose % share expanded from 63.5% to 66.7%, interest payments also soared from 9.75% to 11.8%. (Figure 2, middle pane)

 

While the BoTr data apportions interest payments in the expenditure data, it does not specify its treatment on amortizations. 

 

Nevertheless, total public debt reached a record Php 14.62 trillion in 2023, while debt servicing (interest + amortization) costs surged to an unprecedented Php 1.603 trillion.  (Figure 2, lowest graph)

Figure 3

 

The share of debt servicing has been rising in the context of the budget, viz., revenues (45%) and expenditures (30%) in 2023. (Figure 3, topmost chart)

 

Since bottoming in 2019, the debt onus has started to climb and accelerated in 2023.

 

III. Above 1997 Asian Crisis Levels: Near Record 2023 Debt-to-GDP and Debt Servicing-to-GDP approaching 2011 Highs

 

That's not all. 

 

"This time is different." So they say.

 

While we are no fan of comparing public debt to GDP because of its crucial flaws, after a historic 62.6% in 2021, debt-to-GDP in 2023 was at 60.2%—the third highest! 

 

In the meantime, debt servicing to GDP has swiftly been closing to its 2011 highs!

 

Please note that both variables are HIGHER than the pre-1997 Asian Crisis levels—where debt and debt servicing to GDP exploded when the denominator (GDP) shrank. (Figure 3, middle graph)

 

While debt levels have been constantly rising, a sudden or precipitate slowdown in the GDP (or a recession) would push these ratios to unseen levels!

 

Add to this conditions that debt-financed public spending accounts for about a fifth to a quarter of the GDP—which excludes private sector resources and finances committed to public projects—meaning the economy has transformed into increasing dependence on big government.

 

This fact disputes all purported actions intended supposedly to liberalize the economy, e.g. economic cha-cha.

 

Yet, the debt amortizations—possibly including the unsustainable military pensions—continue to grab a larger share of overall debt payments. But most of the time, public’s attention has been directed towards interest payments alone.

 

That's right. 

 

Statistical opacity may have disguised the actual leveraged conditions of the Philippine balance sheet.   The widening gap between Philippine debt levels and public spending exhibits this likely anomaly. 

 

Yes, the rolling over of public debt may be one of the contributors, but this does not account for the black hole in amortizations.

 

2023 reinforced the uptrend in the share of amortization and the downtrend in interest payments, which accounted for a 60:40 distribution ratio. (Figure 3, lowest diagram)

 

IV. The Pandora’s Box of Risks: Increasing Dependency on Monetary Liquidity

 

Unlike mainstream wisdom, debt levels don't melt away.  Everything is interconnected.  Public debt is entwined with the financial system and the political economy.

 

The previous decline in public debt to GDP (2009-2019) was a function of financial juggling. 

 

While public spending rose marginally (compared to the present), bank credit substituted for economic financing.  Or, growth financed by bank credit expansion filled the Philippine treasury's coffers. 

 

In 2020, the government shifted from relying on bank credit expansion to public spending to support the GDP.   The pandemic recession amplified this shift, where public debt financing reasserted its dominance.

Figure 4

 

Overall, systemic leveraging (public and Universal and Commercial bank credit) has been cumulative and accounted for a staggering 109% of the GDP in 2023! (Figure 4, topmost graph) The numbers exclude informal debt. 

 

Except for the slowdown in 2009-2010 and 2012-2014, which represented noise, the uptrend in systemic leverage exploded in 2020. 

 

The ramification of the collaboration to inject liquidity by the BSP and its banking cartel was a massive expansion in leverage.

 

The concerted efforts of the BSP and the banks (as well as other financial institutions) resulted in the unparalleled monetization of public debt (net claims on central government or NCoCG) intended to keep the system afloat in liquidity and support collateral values that backed the financial industry's leverage or loans.  (Figure 4, middle chart)

 

Aside from repos, the BSP recently included "BSP Securities" (short-term bills) to augment bank liquidity operations.  Bank credit expansion and these combined operations boosted the money supply levels to historic proportions.

 

As further proof, money supply growth from the BSP and the banking system has entirely financed the record deficits (and debt amortization).  

 

M3-to-GDP rocketed to an all-time high of 79% in 2021, and despite the recent slide, it still accounted for a whopping 72% in 2023! (Figure 4, lowest window)

 

As a stand-alone metric, debt-to-GDP doesn't capture such interrelationships and its attendant risks.

 

Behind the buoyant GDP and other macro indicators lies a Pandora's Box of disguised risks.

 

As Austrian economist Peter St. Onge recently tweeted, "Statistics aren't designed to inform, they're designed to hide the truth."

 

V. Twin Deficits: The Bigger the Government, The Larger the Crowding Out Effect

 

There is also the crowding out effect. 

 

The government doesn't create wealth.  It is funded by taxing its constituents.  Or, since the government taxes, borrows (future taxes), or resorts to inflation to fund its consumption, this constrains the finances and resources of the private sector—the crowding out effect. 

 

Yes, the government sells some of its consumption activities as "investments," even though they limit the role of the marketplace, which distorts "returns" and increases economic misallocations.

 

Besides, because there is no market price for government functions, such as police, etc., economic calculation barely exists.

 

What's more, popular themes and implicit agendas of the political leaders determine political actions and policies rather than P/L statements.

 

A reduction in production is a repercussion of the "crowding out effect," or when the government competes with the private sector for resources, which leads to increasing dependence on imports.

 

A colossal transformation in the banking system has augmented this structural shift towards record deficit spending: the metamorphosis towards consumer credit. 

 

It is no surprise that record trade deficits have accommodated these monumental developments.

Figure 5

 

The TWIN DEFICITS translate to a splurge in spending or overspending to boost the GDP funded by household savings and external borrowing.  (Figure 5, topmost graph)

 

The Philippine economic model embodies the Keynesian framework of (indiscriminate debt funded) spending to achieve prosperity.

 

VI. Crowding Out of Local Savings Means Increased Dependency on Foreign Money

 

Instead of utopia, we witnessing a boom-bust cycle in motion.

 

Another consequence of the increasing dependence on the leviathan is the crowding out of liquidity—as the government competes with the financial industry and non-financial enterprises for access to household savings. 

 

The banking system's decaying cash-to-deposits have corresponded with the swelling of the fiscal deficits.  The deteriorating ratio is a function of decreasing cash and deposit growth rate. (Figure 5, middle image)

 

The drain in household savings translates to reduced investment capacity from local investors.  This shortfall extrapolates to increasing dependence on FDIs, meaning the domestic economy becomes more sensitive to global developments.

 

However, debt flows have comprised the majority of Philippine FDIs, which comprised an average of 68.5% from January to November 2023, which could mean bridge financing than new investments. (Figure 5, lowest chart)

Figure 6

 

As evidence of savings shortfall, the deteriorating peso volume of the PSE correlates with the enlarged budget deficit. (Figure 6, topmost illustration)

 

The BSP’s external debt levels have also risen in tandem with the deficit-to-GDP ratio, which underscores the increasing dependence on foreign savers. (Figure 6, middle graph)

 

Remember, someone has to fund such spending binges!

VII. Crowding Out Effect: Historic Deficit Spending Equals Reduced Private Consumption

 

Finally, with the government reducing savings and investments, it would be natural to expect a decline in the private sector's household sector's consumption. (Figure 6, lowest diagram)

 

At present, the supposed interim trend "recovery" in per capita household spending reflects the outsized growth in bank consumer loans rather than productivity growth.  

Figure 7

 

Mounting leverage of one's balance sheet also pulls forward future consumption.  The spike in public debt per capita also led to reduced (private sector) liquidity and diminished consumption—as more resources are diverted to debt servicing. (Figure 7, topmost visual)

 

Declining production, increasing dependence on imports (contributes to the weakening peso), and record liquidity expansion have combined to push higher demand, therefore, the uptrend in the CPI (inflation) cycle, which also contributes to the decrease of the consumer's purchasing power. (Figure 7, middle image)

 

So even with the employment rates reportedly hitting a record high last December, consumers have reported reduced spending growth rates!  Ironic, right?

VIII. The BSP as the Keyman Role for Deficit Financing, The Erosion of Fiscal Latitude

 

Government spending also redistributes financial and economic resources to those allied, affiliated, popular demands of the moment, logrolling, underhanded deals, by coercion, or to preferred political subjects (patronage politics). 

 

Once again, this means increased misallocations, concealed losses, and the erosion of productivity, which result in a massive pileup of deficits, exacerbating corrosion in savings and purchasing power and the increased use of leveraging to disguise risks.

 

Widening inequality is a consequence of such political redistribution—favoring political agents and politically connected entities at the expense of the population.

 

Of course, the BSP assumes a principal role in the massive growth in the imbalances in fiscal, trade resource allocation, and credit buildup.

 

Despite the growth in public debt, the BSP’s low rates regime accommodated the decline in general debt servicing costs (2008-2019). (Figure 7, lowest chart)

 

Yet, rising rates have failed to contain the massive debt growth, which, along with its increasing stock, has caused debt servicing costs to spike to record levels in 2023.

 

Could a third wave of inflation translate to a "game over" for the addiction to financial and monetary leveraging?

 

Not only private sector credit bubbles, the BSP's easy money regime feeds on political boondoggles—responsible for the present and upcoming intensifying growth in twin deficits and their associated risks in the financial system, political economy, and social order.

 

In summary, unlike the US, which has been privileged with the "exorbitant privilege" or the de facto reserve currency of the world, the Philippines can't afford to print its way to prosperity.

 

If the Philippine government continues to use its fiscal tool to bolster the GDP at the present pace, it could lose its latitude to unleash policy "stabilizers" when the "sturm and drang" emerge—unless it decides to play with the Russian Roulette of hyperinflation.

 

Good luck to those who believe in the perpetuation of free lunches.