September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso

 

A failure to correct unsustainable fiscal trajectories poses major risks to growth, inflation and financial stability—Agustín Carstens, General Manager, Bank for International Settlements 

In this issue

September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso

I. September Deficit Highlights Three of the Five Phases of Marcos-nomics Stimulus

II. Untold Aspects of Fiscal Health: How the Shift in Monthly Revenue Reports Impact Quarterly Performance

III. Revealing Hidden Dynamics: How Quarterly Expenditures Shape Fiscal Outcomes

IV. September Debt-Servicing Costs Hits an All-Time High Relative to Historical Annualized Data!

V. How Deficit Spending Drives a WEAKER Philippine Peso; the USD-PHP V-Shape Recovery!

VI. All Time High in Interest Payment as Share of Expenditures Soar to 2009 High!

VII. Pre-Election Spending? All Time High in 9-Month Government Disbursements, Second Highest LGU spending

VIII. The Inflation Tax: BSP and Banking System’s QE

IX. Conclusion: Big Government Comes at The Expense of a Healthy Market Economy

September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso

There seems to be little recognition that September's deficit was a milestone of a kind; it actually highlights "Marcos-nomics" in action. With a quarter to go, debt servicing costs hit an all-time high as the USD-Peso mounts a ferocious recovery.

I. September Deficit Highlights Three of the Five Phases of Marcos-nomics Stimulus

Everyone has been conditioned to believe that current economic conditions are "normal."

To reinforce this notion, media narratives often highlight selective aspects of growth while ignoring other salient parts and related data.

That’s right: when the public’s dependence on "political interventions"—referred to as ‘stimulus’—becomes entrenched, this deepening addiction becomes the norm.

As the great Nobel Laureate Milton Friedman presciently stated, "Nothing is so permanent as a temporary government program."

But have you heard any expert mention this? You might read piecemeal allusions; for example, the BSP's rate-cutting cycle is expected to boost household spending and business activity.

Nonetheless, the public hardly understands the interconnectedness of what are sold as disparate policies.

As previously discussed, we identify the five phases of the "Marcos-nomics stimulus," subtly operating under the Pandemic Bailout Template (PBT).

The first phase involves record-setting public spending, contributing to a significant deficit.

The second phase highlights the BSP’s monetary policy, characterized by the latest round of interest rate cuts.

The third phase signifies the BSP and bank injections, partially fulfilled by the recent reduction in the banking system’s Reserve Requirement Ratio.

The fourth and fifth phases encompass various subsidies, such as the current credit card interest rate ceiling, along with pandemic relief measures.

The National Government and the BSP have yet to expand their coverage in this area, but it is expected to happen soon.

This step-by-step approach underlines the structure of the stimulus, which subtly mirrors the Pandemic Bailout Template.

September’s deficit highlights its first phase.

II. Untold Aspects of Fiscal Health: How the Shift in Monthly Revenue Reports Impact Quarterly Performance

Inquirer.net, October 25, 2024: The country’s budget deficit widened by 8.9 percent to P273.3 billion in September from P250.9 billion in the same month last year, as the increase in revenues was not enough to cover the hike in expenses, the Bureau of the Treasury reported on Thursday. Revenue collections increased by 17.32 percent to P299.7 billion last month, from P255.4 billion last year, while state expenditures also grew by 13.15 percent to P572.9 billion. But for the first nine months, the budget deficit narrowed by 1.35 percent to P970.2 billion from the P983.5-billion budget gap a year ago.

While the Bureau of the Treasury (BuTr) issues a monthly report, recent changes in tax revenue reporting and end-of-quarter budget compliance targets make quarterly reports far more significant.

In fact, monthly reports can be considered largely meaningless without considering the quarterly performance.

For instance, the latest BuTr report sheds light on the reasons behind recent revenue surges.

The increase in VAT collections in 2024 is partly due to the impact of the change in payment schedule introduced by the TRAIN law provision which allows the tax filers to shift from monthly to quarterly filing of VAT return [bold mine] (Bureau of Treasury, October 2024) 

Distortions brought about by changes in the BuTr’s reporting methods pose a crucial factor in analyzing the fiscal health of the Philippines. 

This brings us to September’s performance. 

Indeed, public revenue in September grew by 17.3%, but this increase is primarily due to base effects. 

Additionally, administrative policy changes and one-off charges contributed to the month’s revenue growth.         

This is attributed to higher personal income tax (PIT) particularly on withholding on wages due to the release of salary differentials of civilian government personnel pursuant to Executive Order No. 64, series of 20242 , which updated from the Salary Standardization Law (SSL) of 2019… 

Non-tax revenues surged to P46.2 billion in September, more than twice the level attained a year ago primarily due to the one-off windfall from the Public-Private Partnership (PPP) concession agreement…the higher outturn for the period was attributed to the P30.0 billion remittance from the Manila International Airport Authority (MIAA), representing the upfront payment for the MIAA-Ninoy Aquino International Airport (NAIA) PPP Project [bold added] (Bureau of Treasury, October 2024) 

Importantly, aside from the factors mentioned above, as noted by the BuTr, the shift in VAT payment timing played a crucial role in boosting 2024 revenues.

Figure 1

That is to say, since VAT payments are made at the end of each quarter but recorded in the first month of the following quarter, this quarterly revenue cycle inflates reported revenues for January, April, July and October, often resulting in a narrowed deficit or even a surplus for these months. (Figure 1, topmost chart) 

Therefore, we should anticipate either a surplus or a narrower deficit this October.

In any case, Q3 2024 revenues increased by 16.95%—the highest growth rate since Q3 2022, which was a record in nominal terms for Q3 historically. However, this was also the second-highest quarterly revenue in pesos after Q2 2024. (Figure 1, middle image)

What might collections look like if we consider only “core” operations? Would deficits be larger without these reporting distortions? Or could the government be “padding” its revenue reports? 

III. Revealing Hidden Dynamics: How Quarterly Expenditures Shape Fiscal Outcomes 

The mainstream media and their expert cohorts rarely mention the most critical segment: historic public (deficit) spending. 

Although public spending rose by only 13.2% in September due to a high base effect, it marked the largest non-December outlay on record. It was also the third-largest overall, trailing only the year-end budget expenditures of December 2023 and December 2022. (Figure 1, lowest graph) 

Notably, 2024 has already seen three months of spending exceeding Php 500 billion—even before the year-end budget allocations. This pattern isn’t an anomaly but rather a path-dependent trajectory of political decisions. 

Figure 2

In the context of quarterly performance, Q3 spending grew by 6.4% year-over-year, also constrained by high base effects. Still, this represents the third-highest quarterly outlay on record, following Q2 2024 and Q4 2023, and a milestone high when compared with previous Q3 performances. (Figure 2, topmost diagram)

Similarly, the monthly deficit resulting from September’s historic expenditure constituted the second largest non-December monthly deficit, following the pandemic recession in April 2020, which saw a deficit of Php 273.9 billion. This was the sixth largest deficit when including the year-end closing budget.

Furthermore, the pressure to meet quarterly compliance targets push the burden of expenditures to the closing month of each period; thus, the largest deficits occur at the end of each quarter (March, June, September, and December). (Figure 2, middle pane) 

Simply put, this new schedule has introduced significant distortions in the Bureau of Treasury’s (BuTr) fiscal balance reporting. 

Revenues at the start of each quarter are likely to close the gap with expenditures in October, potentially leading to a surplus or a narrowed deficit. In contrast, end-of-month spending for each quarter should boost expenditures and consequently increase deficits. 

However, for now, the alteration in BuTr reporting has artificially inflated the government’s fiscal health. 

Still, it goes without saying that the year-end expenditure target will likely push December 2024’s fiscal deficit to a fresh milestone! 

From a quarterly perspective, revenues remain above their polynomial trendline, while spending hovers slightly below it, reflecting revenue outperformance in comparison to trend-aligned spending. (Figure 2, lower graph) 

Meanwhile, the widening gap between the deficit and its trendline may signal increased volatility ahead. 

IV. September Debt-Servicing Costs Hits an All-Time High Relative to Historical Annualized Data!

Despite the potential embellishment of budget statistics through inflated revenues or understated deficits, it remains essential to recognize that this spending requires funding. 

Some mainstream experts have attributed the recent decline in Bureau of Treasury (BuTr) financing to prudent “rationalization” by budget overseers. 

However, we have consistently argued that this perspective is grotesquely misguided; it is the government’s default action to indulge in a spending binge. 

This behavior serves not only to advance its political agenda of centralizing the economy and promoting its interests in the upcoming elections but also because such fiscal transfers create a temporary illusion of economic boom. 

For a spending-based GDP, ramping up expenditures is necessary to increase tax revenue and, more importantly, to depress interest rates, which allows the government to access public savings cheaply to fund its expenditures. 

True, revenue expansion in August reduced that month’s deficit, which led to an improvement in the 9-month deficit, dropping from last year’s level. However, we suspect this improvement may be short-lived, as December 2024’s massive spending is likely to push the deficit above last year’s figures. 

Still, it is noteworthy that the 9-month deficit for 2024 remains the fourth largest since the pandemic bailout template (PBT) measures began in 2020. 

Any improvement in the deficit has been inconsequential, as the post-PBT deficits have remained in an “emergency” mode. 

It only takes a substantial downturn in GDP for this deficit to set a new high—which is likely what its polynomial trendline suggests.

Figure 3

Despite improvements in the 9-month deficit, financing reversed its downward trend, rising 12.6% year-over-year to Php 1.875 trillion. (Figure 3, topmost chart)

This trend reversal means not only an increase in the public debt stock—recently improved due to the peso’s substantial gains against the USD—but also higher costs of servicing public debt.

The BuTr will report on September’s public debt figures next week, but with the substantial V-shaped recovery of the USD, October is expected to yield interesting data.

Nevertheless, the 9-month cost of servicing public debt has reached an ALL-TIME HIGH relative to annual historical data, with a full quarter left to go! (Figure 3, middle graph)

Interestingly, amortizations have exceeded the annual 2023 data by 8.7%, while interest payments remain just 7.2% below this benchmark.

Signs of normal times?

V. How Deficit Spending Drives a WEAKER Philippine Peso; the USD-PHP V-Shape Recovery!

Although the 9-month growth rate for debt servicing slowed to 17.4% due to base effects, it set a record in peso terms.

More importantly, the share of external financing has been increasing, which not only indicates rising credit levels in the local currency but also amplifies external borrowing, effectively exacerbating "USD shorts" (implied short positions on the USD). (Figure 3, lowest window)

Borrowings ultimately need repayment. However, if organic USD revenue sources prove insufficient to meet debt obligations and refinance existing loans, the government will need to take on more debt to cover existing obligations—essentially, a recycling of debt, or what is known as Ponzi finance.

Figure 4 

Compounding these challenges, debt-financed government spending, a preference for easy-money conditions, and domestic banks’ bias toward consumer lending all contribute to a widening savings-investment gap, fueling the country’s "twin deficits." This combination of factors will likely increase reliance on external financing, leading to a structural depreciation of the peso. 

The crux of the matter is this: the widening fiscal deficit results in a weaker Philippine peso, raising external credit risks. (Figure 4, upper image) 

Oddly enough, some media outlets and pseudo-experts have recently attributed the recent V-shape recovery of the USDPHP exchange rate to a “Trump presidency!” 

Huh? Are they suggesting that a Harris administration would result in a strong peso? 

As I recently posted on x.com: During the Trump 1.0 presidency 1/20/17 (49.92) -1/20/21 (48.054), the USDPHP fell by 3.74%! How about Biden? So far, at 58.32, the USDPHP is up 21.4% (as of October 25, 2024)! 

Certainly, the recent strength of the dollar has played a role, contributing to a broad-based rebound of Asian currencies this week. While the USD Index (DXY) rose by 0.8%, the Philippine peso fell by 1.39%. 

In the context of the USD-Philippine USDPHP reclaiming its old trendline, this represents a "signal," while the peso’s recent bounce signifies "noise" or an anomaly. (Figure 4, lower chart) 

On the other hand, the DXY remains below its immediate broken trendline. 

So, is the USDPHP market suggesting a retest of 59 soon? 

This partially illustrates the "exorbitant privilege" of the US dollar standard, where global central banks rely on building up their USD reserves, to "back" or "anchor" their domestic monetary or currency operations that fund their economies and imports. 

In any case, over the long term, the relative performance of a currency against regional peers vis-à-vis the USD might signal developing vulnerabilities within that currency.

This inability to recognize causality represents the heuristic of attribution bias— giving credit to endogenous activities while attributing deficiencies to exogenous forces.

VI. All Time High in Interest Payment as Share of Expenditures Soar to 2009 High!

Circling back to debt servicing, it's important to note that amortizations are not included in the published budget. As the government defines it, this represents "a financing transaction rather than an expenditure" (Ombudsman, 2012). 

Consequently, this aspect has barely been addressed by the headlines or the experts.

Figure 5

Despite attempts to downplay discussions around interest payments, the nine-month interest payments have surged to an all-time high, with their share of disbursements climbing to 13.7%—the highest level since 2009! (Figure 5, topmost diagram)

The growing debt burden from deficit spending, amid elevated rates, translates into an even larger cost of servicing, impacting both the budget’s allocated expenditures and its mandatory cash flows.

How’s that for "prudential" debt management or "rationalizing" the budget?

VII. Pre-Election Spending? All Time High in 9-Month Government Disbursements, Second Highest LGU spending

Aside from interest payments, what might be the other major spending items? 

The nine-month central government’s disbursement growth surged by 11.64% to an all-time high of Php 2.78 trillion, which, according to the Bureau of the Treasury (BuTr), signifies "the implementation of capital outlay projects by the Department of Public Works and Highways and larger personnel services expenditures due to the implementation of the first tranche of salary adjustments." (Figure 5, middle window)

It is worth noting that, aside from aiming for GDP targets, this spending appears to be tactically timed for pre-election purposes.

Meanwhile, local government spending growth rebounded sharply from a 16.6% contraction in 2023 to 8.8% this year, reaching the second highest level in 2024. (Figure 5, lowest image)

A crucial segment of this substantial recovery may involve direct and indirect financing of local pre-election campaign activities.

The nine-month share of national disbursement was 65.24%, slightly higher than 2023’s 65.2%, while the share of local government unit (LGU) spending declined from 18.2% in 2023 to 17.72% in 2024.

In any event, given the embedded accelerated trajectory in deficit spending for socio-political (pre-elections, war economy, infrastructure-led GDP) and financing goals in the face of volatile economically sensitive revenues or collections, what could go wrong?

VIII. The Inflation Tax: BSP and Banking System’s QE

Direct taxation and debt have not only served as the primary sources of financing for the increasing scale of spending and deficits; the inflation tax has also taken on a more significant role in funding deficit spending.

It's important to remember that the Bangko Sentral ng Pilipinas (BSP) operates under an "inflation targeting" regime.

The unstated objective is not to "eliminate" inflation—since that is never the goal—but rather to contain the inflation "genie" within manageable limits.

The BSP aims to utilize the inflation tax alongside direct taxes and borrowing, while carefully controlling it to prevent social discord.

Consequently, attributing the current inflationary episode solely to supply-side factors has proven to be a convenient way to deflect blame from the BSP to the broader market economy, often framing it as “greedflation.”

Given this context, it’s hardly surprising that none of the establishment experts anticipated the surge in inflation, despite our repeated warnings about the inflation cycle.

Figure 6

When authorities began ramping up spending even before the pandemic in 2019, the BSP’s net claims on the central government (NCoCG)—essentially a local version of quantitative easing—started to escalate and has remained on an upward trajectory ever since. (Figure 6, topmost chart)

Even as mainstream narratives tout the aspiration of achieving "upper middle-income status," little has changed in the BSP’s NCoCG since their historic Php 2.3 trillion bailout of the banking system during 2020-2021.

The same holds true for the Philippine banking system’s NCoCG, which continues to be a vital source of financing for public debt. (Figure 6, middle window)

As of last August, the banking system’s holdings of government securities were just shy of the all-time high reached in July.

Although bank holdings of held-to-maturity (HTM) assets dipped in August, they remained tantalizingly close to the record high set in December 2023. Philippine NCoCG are entwined with HTMs. (Figure 6, lowest chart)

When have these been signs of "normal?"

IX. Conclusion: Big Government Comes at The Expense of a Healthy Market Economy

Figure 7

We shouldn’t overlook the fact that the accelerating surge in the nominal value of public debt has diverged from the rising trajectory of public spending, suggesting a potential understatement of the fiscal deficit. (Figure 7, topmost graph)

The establishment often emphasizes the importance of public spending, claiming it has a ‘multiplier effect.’ However, from the perspective of the banking system, the reality appears to be the opposite: instead of stimulating growth, increased public spending has led to a diminishment of savings, as evidenced by the declining growth of peso deposits. (Figure 7, middle chart)

The impact of diminishing savings is also evident in the capital markets, with trading volumes on the Philippine Stock Exchange (PSE) declining further due to the surge in pandemic-era deficits. Yes, PSEi 30 have risen on the backdrop of declining volumes. Amazing! (Figure 7, lowest diagram)

In short, the greater the centralization of the economy— through: (1) intensifying public spending, (2) increasing political control over the economy—such as Public-Private Partnerships (PPPs), which can be viewed as a neo-fascist or crony capitalist model, (3) the expansion of the bureaucratic state due to welfare and warfare sectors, and (4) the increasing reliance on the inflation tax, the lower the productivity.

Simply put, a big government comes at the expense of a healthy market economy.

Given these circumstances, could this scenario catalyze a third wave of inflation?

When has the Philippine economy truly returned to a pre-pandemic "normal?"

___

References:

Bureau of Treasury September 2024 Budget Deficit at P273.3 Billion Nine-Month Deficit Narrowed to P970.2 Billion, October 24, 2024 Treasury.gov.ph

Office of the Ombudsman, I. Basic Concepts in Budgeting, December 2012, www.ombudsman.gov.ph

 

Marcos-Nomics Stimulus Update: August Budget Deficit Narrows, Strong Peso Reduces Public Debt, and Amortization Payments Reach All-Time High!

 

Lowering rates is a tool to rescue the government, but it will also make the Treasury add more debt in the next few months. If you make it easy for governments to borrow, they will gladly do it and continue printing currency, leading to the currency’s slow decline—Daniel Lacalle 

In this issue

Marcos-Nomics Stimulus Update: August Budget Deficit Narrows, Strong Peso Reduces Public Debt, and Amortization Payments Reach All-Time High!

I. A Growing Dependence on Non-Tax Revenue Growth? Or, Padding the Government’s Top line?

II. August’s Decline in Public Spending Due to Technicalities, Robust Pre-Election LGU Spending

III. Eight-Month Amortization Payments Hit All Time, Debt Servicing Cost at Annual 2023 Levels!

IV. Mounting Neo-Corporatism/Fascism Policies: Privatize Profits, Socialize Costs

V. Strong Peso Resulted in Lower Public Debt Last August

VI. Conclusion

Marcos-Nomics Stimulus Update: August Budget Deficit Narrows, Strong Peso Reduces Public Debt, and Amortization Payments Reach All-Time High! 

The "Marcos-nomics Stimulus" remains intact. Though deficit spending "narrowed" and public debt fell in August, technicalities and political agenda like pre-election spending points to the government’s deferred actions. 

GMA News, September 25, 1965: The Philippine government yielded a narrower fiscal shortfall in August amid growth in state collections and contraction in expenditures during the period. Data released by the Bureau of the Treasury on Wednesday showed the national government’s budget deficit stood at P54.2 billon last month, lower by 59.25% than the P133-billion fiscal gap seen in August 2023. “The lower deficit was brought about by the 24.40% growth in government receipts alongside a minimal 0.68% contraction in government expenditures,” the Treasury said. August’s fiscal balance brought the year-to-date budget shortfall to P697 billion, down 4.86% from the P732.5-billion deficit in the same period last year. 

Since the government has shifted VAT collections to an end-of-quarter basis, and given that the majority of public spending is typically programmed for the end of the quarter, the essence of the government’s balance sheet scorecard will be most relevant at the end of each quarterly period. 

In any case, we’ll do a short analysis. 

I. A Growing Dependence on Non-Tax Revenue Growth? Or, Padding the Government’s Top line?

Figure 1 

Although it is true that the fiscal deficit improved in August—largely due to a combination of decreased expenditures (-0.7% YoY and -9.4% MoM) amidst a mixed performance in revenues (+24.4% YoY and -15.5% MoM)—the most significant aspect is that the year-to-August deficit dropped from the third highest to the fourth highest in the Treasury's records. 

Nonetheless, nominal figures suggest that August's performance aligns with the exponential trendline for both variables. Additionally, the general uptrends in revenues and spending remain intact. (Figure 1, topmost pane) 

As such, since peaking in 2020, 8-month financing by the Bureau of Treasury has slowed compared to last year. The Treasury remains liquid, with approximately Php 504 billion in cash, marginally lower than Php 509 billion last year. (Figure 1, second to the highest chart) 

But the thing is, non-tax revenues have anchored a substantial segment of the progress in revenue collections. Non-tax revenues rocketed 252% year-over-year last August and soared 58.9% year-to-date compared to the same period in 2023. This growth spike pushed up the segment’s share of revenue to 17.12%—its sixth consecutive month of double-digit representation. In the eight months of 2024, the non-tax revenue pie swelled to 14.53%—the highest since 2015 (Figure 1, second to the lowest and lowest graphs) 

According to the Bureau of Treasury: Income collected and generated by the Bureau of the Treasury (BTr) rose to P16.5 billion in August, more than twice its collections in the same period a year ago. The increase was primarily driven by PSALM’s P10.0 billion settlement of guarantee fee arrears, alongside increased PAGCOR income. Compared with January-August 2023’s actual collections of P150.1 billion, BTr’s YTD income for the current year has similarly improved by 33.46% (P50.2 billion) to P200.3 billion, largely due to higher dividend remittances, interest on advances from GOCCs, guarantee fee collections, and the NG share from PAGCOR income. Collections of other offices (other non-tax, including privatization proceeds, fees and charges, and grants) in August surged to P49.6 billion, nearly quadrupling last year’s outturn. (BTR, September 2024) [bold mine] 

Has the government been padding their revenue numbers partly by inflating the non-tax revenue component? Or are they becoming dependent on it? Unlike previous episodes where non-tax revenues spiked in a month or two, this marks the first time the share of this segment has been in double digits for six consecutive months 

II. August’s Decline in Public Spending Due to Technicalities, Robust Pre-Election LGU Spending 

The next item is expenditure.

Figure 2

Although decreases of .68% year-over-year (YoY) and 9.4% month-over-month (MoM) and year-over-year (YoY) were recorded in August, the expenditure for the first eight months grew by 11% YoY to a record Php 3.69 trillion. (Figure 2, topmost window)

The decline in August was primarily due to a -3.7% YoY and -4.1% MoM contraction in the National Government’s disbursement, even though spending by local government units (LGUs) remained vigorous at +9.34% YoY and -4.3% MoM.

But authorities explained the reasons behind this.

Again from the BTR: This can be partly attributed to the lower total subsidy releases to government corporations, and the sizeable outstanding checks recorded in various departments, such as the Department of Public Works and Highways (DPWH), the Department of Social Welfare and Development (DSWD), and the Department of Health (DOH), during the period. Outstanding checks represent payments made by line departments for the delivery of goods/services but are not yet presented for encashment at the banks by the concerned contractors or payees. These remain under the accounts of spending agencies in authorized government depository banks and are not yet considered as actual disbursements in the Cash Operations Report. [bold mine]

In short, the most recent uncashed disbursements from the National Government will be reflected in upcoming data.

As it stands, the brisk growth of spending by local government units (LGUs) likely signifies the pre-election (mid-term) spending.  The cumulative data for the first eight months (+9.65% YoY) reached its second highest level since the record set in 2022, which, coincidentally, was the year of the Presidential Elections. (Figure 2, lower window)

This trend is expected to be sustained as we approach the 2025 elections.

III. Eight-Month Amortization Payments Hit All Time, Debt Servicing Cost at Annual 2023 Levels!

Lower interest payments accounted for yet another reason behind the decrease in expenditures last August.

Interest payments fell by 33.6% month-over-month (MoM) but surged by 23.7% year-over-year (YoY).

Despite this, the cumulative interest outlays for the first eight months increased by 31.1% YoY, reaching an all-time high of Php 509.44 billion. Its share of allotment rose from 11.72% in 2023 to 13.81% in August, representing the highest level since 2009! (Figure 2, lowest chart)

That’s not all.

Figure 3

In peso terms, the amortization expenditures from January to August surpassed last year’s high, setting a new record! (Figure 3, topmost image) 

Strikingly, amortization expenditures for 2024 amounted to Php 1.041 trillion, which is 6.7% above the 2023 annual total of Php 975.3 billion.

While interest and amortization levels (in peso terms) reached milestone highs, the cumulative debt servicing costs for the first eight months amounted to Php 1.55 trillion—just 0.33% (Php 53.432 billion) lower than last year’s annual debt servicing cost of Php 1.604 trillion! (Figure 3, middle diagram)

Despite this data being publicly available, there has been little coverage by the mainstream media or commentary from the establishment.

More than anything else, do you see the reason driving the Bangko Sentral ng Pilipinas (BSP) to cut interest rates and reserve requirements (RRR)?

It’s all about an implicit government bailout through the provision of liquidity support and the lowering of debt servicing costs!

Net claims on the central government (NCoCG) by universal-commercial banks have risen in tandem with public debt. (Figure 3, lowest image)

Figure 4

These measures are part of the 2020 pandemic rescue template, which includes various regulatory accommodations (such as relief measures and subsidies) as well as direct interventions (liquidity injections) from the Bangko Sentral ng Pilipinas (BSP).

Even now, the BSP’s net claims on the central government (NCoCG) have mirrored the monthly oscillations in public spending. (Figure 4, upper visual)

Furthermore, considering the political economy's structure derived from trickle-down policies, these rescue efforts are not only designed to benefit the government; they also serve the interests of politically connected elites.

Fundamentally, the BSP provides elite-owned banks with benefits through favorable policies and implicit bailouts. In return, these primary financial institutions partially complying with capital requirement rules provide liquidity to the Philippine treasury markets.

Has the narrowed deficit been engineered to address this? We argue that it has not.

IV. Mounting Neo-Corporatism/Fascism Policies: Privatize Profits, Socialize Costs

Haven’t you noticed that this administration has been gradually appointing members of the elite circle to higher echelons of political power?

While the intention may be to create a "business-friendly" environment, this situation reeks of "pro-big business" rent-seeking cronyism.

How will MSMEs thrive in the face of the onslaught of inflation, taxes, and regulations being imposed?

For instance, due to mandates and new taxes, major online eCommerce platforms have required SME sellers to register with the government, comply with new regulations, and pay new taxes.

In response, an influx of aspiring online entrepreneurs has led to a significant surge in business registrations, which both the media and the government are celebrating as a boom!

But how many of these businesses will survive the sustained rise in inflation and the increase in compliance and transaction costs?

How many of these hopeful entrepreneurs—whether driven by necessity due to a lack of jobs or insufficient income—will be able to employ people, especially with recent increases in minimum wages?

Yet, who benefits from the reduction of competition? SMEs or the elites?

We read that some elites have partnered with the government to embark on initiatives to promote MSMEs.

While partnerships like these may seem ideal, how do raising barriers to entry actually promote entrepreneurship?

These initiatives, which the public perceives as beneficial political "do something" actions, are, in fact, a display (smack) of hypocrisy largely intended for election-related public relations.

Moreover, some proponents have advocated for the privatization of certain infrastructure institutions.

While this may seem beneficial in "simple" theory, without competition, tax relief, and the easing of regulatory and administrative obstacles, such privatization is likely to result in the privatization of costs while socializing losses, or could deepen the embrace of neo-fascism, corporatism, or crony capitalism.

V. Strong Peso Resulted in Lower Public Debt Last August 

Apart from inflation, the surge in debt servicing costs represents a secondary symptom of deficit spending, with the direct effect manifested through public debt.

From the Bureau of Treasury (BTR): National Government’s (NG) total outstanding debt stood at P15.55 trillion as of the end of August 2024, reflecting a 0.9% or P139.79 billion decrease from the end July 2024 level…Meanwhile, NG external debt amounted to P4.76 trillion, a decrease of 3.6% or P178.25 billion compared with the end of July 2024 level. The decline was brought about mainly by peso appreciation, which trimmed P194.90 billion, as well as net repayments of P4.17 billion, although stronger third-currencies added P20.82 billion in valuation effects (BTR, October 2024) [bold added]

As the BTR admitted, the revaluation effects stemming from a rare 3.9% appreciation spike in the Philippine peso, based on their data, contributed to a marginal reduction in Philippine debt. 

Breaking down the data: external debt decreased by 3.6% month-over-month (MoM) but rose by 4.4% year-over-year (YoY). Meanwhile, domestic debt increased by 0.4% MoM and 10.22% YoY. (Figure 4, middle image) 

As a result, the spike in the Philippine peso pulled down the percentage share of external debt relative to the total, which has been rising since its trough in March 2021. 

Although the narrowing of the budget deficit from July to August, driven by a slowdown in public spending, may alleviate some pressure to increase borrowings, it is likely that the government has merely deferred its spending pressures to the end of the quarter and the end of the year.  (Figure 4, lowest image) 

Second, the government announced that it raised USD 2.5 billion last August. 

Figure 5

This addition will contribute to the external debt stock, which reached an all-time high in Q2 2024 and is expected to increase further in Q3. (Figure 5, topmost graph)

External debt has now surpassed the Gross International Reserves (GIR), even though part of these borrowings is counted as part of the GIR. For instance, when the National Government raised USD 2 billion last May, the proceeds were incorporated into the June GIR: "The month-on-month increase in the GIR level reflected mainly the National Government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds." (bold added) (Figure 5, second to the highest chart) 

Make no mistake: borrowed reserves require payment, and treating them as retained earnings or savings misrepresents actual reserves. 

Third, it is doubtful that the recent appreciation of the Philippine peso is sustainable. 

In contrast, the rising trend of the USD-Peso exchange rate partly reflects the "twin deficits" as a consequence of the government’s deep embrace of Keynesian policies that posit spending will lead to economic prosperity. (Figure 5, second to the lowest and lowest graph) 

These deficit spending policies, which depend on an easy money regime favoring the elite, have led to a record savings-investment gap that must be funded by a domestic population constrained by low savings, making it increasingly reliant on overseas savings. 

In summary, the widening savings-investment gap—partially expressed through the BSP-Banking system's funding of historic deficit spending via record-high public debt—has contributed to the weakness of the Philippine peso.

Therefore, the current decline in public debt due to the peso appreciation represents an anomaly (a bug, not a feature) rather than a trend. 

With this context in mind, one must ask: who will bear the rising costs of ever-increasing public debt and its servicing—through higher taxes and inflation? 

Is it the elites, with their army of accountants and tax lawyers, shielding themselves from their direct obligations? Is it the elites who employ financial experts and, indirectly, the government, which allocates resources to benefit from inflationary policies? 

Or is it the average Mario and Juan, who have little means for protection? 

VI. Conclusion

The "Marcos-nomics stimulus" measures remain intact.

The recent cut in the official interest rate, along with an expected series of further cuts and adjustments to reserve requirements, indicates a sustained trend of deficit spending, point to an expansion of monetary easing aimed at jolting the private sector economy and achieving political agendas through spending on pre-election, the war economy, infrastructure, welfare, bureaucratic expansion and etc., in addition to boosting GDP for financing purposes.

____

References 

Bureau of Treasury, August 2024 NG Budget Deficit Down to P54.2 Billion, treasury.gov.ph, September 25,2024

 

Bureau of Treasury, National Government Debt Recorded at P15.55 Trillion as of End-August 2024, treasury.gov.ph, October 1, 2024

BSP Reduces Banks' Reserve Requirement Ratio (RRR), Fed's 50-bps Rate Cut Sends Philippine Yield Curve into Full Inversion!

 

The short end of the UST curve is highly influenced by the Federal Reserve’s monetary policies while the long end clarifies those policies through the prism of risk/return. A steep yield curve…is one that suggests a low rate, accommodative monetary policy that is likely to work over time. This accounts for the curve’s steepness. A flat and inverted curve is the opposite. Whatever monetary policy is being conducted, the long end is interpreting that policy as well as other conditions as being highly suspect—Jeffrey P Snider 

In this issue:

BSP Reduces Banks' Reserve Requirement Ratio (RRR), Fed's 50-bps Rate Cut Sends Philippine Yield Curve into Full Inversion!

I. 2024 Reserve Requirement Ratio Cuts to Designed to Plug the Banking System’s Worsening Illiquidity

II. Bank Liquidity Drain from Held to Maturity (HTM) and Growing Non-Performing Loans (NPL)

III. Philippine Yield Curve Shifts from an Inverted Belly to a Full Inversion!

IV. Was San Miguel’s September 20th Pre-Closing Dump Related to the Liquidity Strained Yield-Curve Inversion? 

BSP Reduces Banks' Reserve Requirement Ratio (RRR), Fed's 50-bps Rate Cut Sends Philippine Yield Curve into Full Inversion! 

The Philippine yield curve inverts as the BSP significantly reduces the Bank RRR, while the US Fed embarks on a "Not in Crisis" 50-bps rate cut. 

The BSP has been telegraphing cuts to the banking system’s Reserve Requirement Ratio (RRR) since its last reduction in June 2023. 

For instance, Philstar.com, May 18, 2024: The Bangko Sentral ng Pilipinas (BSP) is looking at a significant reduction in the level of deposits banks are required to keep with the central bank after it starts cutting interest rates this year, its top official said. BSP Governor Eli Remolona Jr. said the Monetary Board is planning to cut the reserve requirement ratio (RRR) of universal and commercial banks by 450 basis points to five percent from the existing 9.5 percent, the highest in the region. 

Four months later. 

GMANews.com, September 18, 2024: The Bangko Sentral ng Pilipinas (BSP) is looking to cut the reserve requirement ratio, the amount of cash a bank must hold in its reserves against deposits, “substantially” this year and reduce it further in 2025. BSP Governor Eli Remolona Jr. said on Wednesday that the cut in the reserve requirement is being considered, with the timing being discussed. He earlier said this can be reduced to 5% from the present 9.5% for big banks. 

Two days after. 

ABSCBNNews.com, September 20, 2024: The Bangko Sentral ng Pilipinas is reducing the reserve requirement ratio (RRR) for universal and commercial banks by 250 basis points (bps).  This RRR reduction will also apply to non-bank financial institutions with quasi-banking functions, the BSP said… The reduction shall bring the RRRs of universal and commercial banks to 7 percent; digital banks to 4 percent; thrift banks to 1 percent; and rural and cooperative banks to zero percent, the central bank said. The new ratios take effect on October 25 and shall apply to the local currency deposits and deposit substitute liabilities of banks and NBQBs. (bold mine) 

I. 2024 Reserve Requirement Ratio Cuts to Designed to Plug the Banking System’s Worsening Illiquidity 

Bank lending growth has been accelerating, while broad economic liquidity measures have been rising, so why would the BSP opt to inject more liquidity through Reserve Requirement Ratio (RRR) cuts? 

The following data set may provide some answers.

Figure 1

Although lending by Universal and Commercial Banks is at a record high in nominal peso terms, the growth rate remains far below pre-pandemic levels. (Figure 1, topmost image) 

The RRR cuts from 2018 to 2020 appeared to have worked, as the loans-to-deposit ratio rose to an all-time high in February 2020 but the pandemic-induced recession eroded these gains. (Figure 1, middle graph) 

It took a combination of historic BSP policies—record rate cuts, an unprecedented Php 2.3 trillion liquidity injection, and extraordinary relief measures—to reignite the loans-to-deposits ratio. Nonetheless, it still falls short of the 2020 highs. 

A likely, though unpublished, explanation is that bank liquidity continues to decline. 

As of July, the cash and due-to-bank deposits ratio was at its lowest level since at least 2013. The BSP policies of 2020 and subsequent RRR cuts bumped up this ratio from 2020-21, but it resumed its downtrend, which has recently worsened. (Figure 1, lowest chart)

Figure 2

After a brief recovery from the RRR cuts of 2018-2020—further aided by the BSP’s historic rescue measures in 2020—the liquid assets-to-deposits ratio has started to deteriorate again. (Figure 2, topmost pane) 

Additionally, Q2 2024 total bank profit growth has receded to its second-lowest level since Q2 2021. (Figure 2, middle diagram) 

From this perspective, liquidity boost from increased bank lending, RRR cuts, and reported profit growth has been inadequate to stem the cascading trend of cash and liquid assets. 

Furthermore, despite subsidies, relief measures, and a slowing CPI, Non-Performing Loans (NPLs) and distressed assets appear to have bottomed out in the current cycle. (Figure 3, lowest visual) 

Increasing NPLs in the face of a slowing CPI is indicative of demand. Refinancing has taken a greater role in the latest bank credit expansion. 

To wit, rising NPLs contribute significantly to the ongoing drain on the banking system’s liquidity. 

II. Bank Liquidity Drain from Held to Maturity (HTM) and Growing Non-Performing Loans (NPL)

Figure 3

A primary source of the downtrend in the cash-to-deposits ratio has been the banking system's Held-to-Maturity (HTM) securities. (Figure 3 upper image)

Once again, the BSP has acknowledged this. 

Banks face marked-to-market (MtM) losses from rising interest rates. Higher market rates affect trading since existing holders of tradable securities are taking MtM losses as a result. While some banks have resorted to reclassifying their available-for-sale (AFS) securities into held-to-maturity (HTM), some PHP845.8 billion in AFS (as of end-March 2018) are still subject to MtM losses. Furthermore, the shift to HTM would take away market liquidity since these securities could no longer be traded prior to their maturity. [BSP, 2018] (bold mine) 

Even though rates have dropped, HTM (Held-to-Maturity) assets remain at record levels but appear to be plateauing. Falling rates in 2019-2020 barely made a dent in the elevated HTM levels at the time. 

Yet, a principal source of HTMs continues to be the bank's net claims on central government (NCoCG). (Figure 3, lower graph) 

That is, banks continue to finance a substantial portion of the government's deficit spending, which has represented an elementary and major contributor to the deterioration in bank liquidity. 

Why has the BSP been doing the same thing over and over again, expecting different results? Some call this "insanity." 

If the goal is to remove distortions—however ambiguously defined—why not eliminate the RRR entirely? 

It seems the BSP is merely buying time, hoping for a magical transformation of unproductive loans into productive lending. Besides, a complete phase-out of the RRR would leave the BSP with fewer "tools," or bluntly speaking, strip them of excuses. 

Thus, they’d rather have banks continue to accumulate unproductive loans in their portfolios and gradually subsidize them with relief from RRR cuts, rate cuts, various subsidies, and later direct injections—a palliative/band-aid treatment. 

III. Philippine Yield Curve Shifts from an Inverted Belly to a Full Inversion! 

Figure 4

Rather than steepening, the Fed's "not in a crisis" panic 50-basis-point cut also helped push the Philippine Treasury yield curve from an "inverted belly" to a "full inversion" on September 20! (Figure 4, tweet)

Figure 5

While yields across the entire curve plunged over the week, T-bill yields declined by a lesser degree relative to medium- and long-term Treasuries. (Figure 5, topmost window)

As a result, yields on Philippine notes and bonds have now fallen below T-bills!

Although one day doesn’t make a trend, this current inversion is the culmination of a process that began with a steep slope, then an inverted belly, and now a full inversion since June 2024. (Figure 5, middle chart)

The spreads between the 10-year bonds and their short-term counterparts are at the lowest level since March 2019! (Figure 5, lowest graph) 

And an inverted curve could serve as a warning signal/alarm bell for the economy.

From Investopedia: 

>An inverted yield curve forms when short-term debt instruments have higher yields than long-term instruments of the same credit risk profile.

>The inverted curve reflects bond investors’ expectations for a decline in longer-term interest rates, a view typically associated with recessions.

Further, it is a sign of tight liquidity: short-term borrowing costs rise or remain elevated, leading to higher yields on short-term debt instruments compared to long-term yields.

Moreover, expectations of slowing growth or economic recessions can also lead to decreased demand for riskier assets and increased demand for safer long-term bonds.

Again, the inverted curve must have resulted from the BSP’s announcement of a sharp reduction in the RRR in October, along with the Fed’s 50-basis point rate cuts.

Bottom line: cuts in the banks’ RRR were meant to address the banking system’s liquidity challenges as manifested in the Philippine treasury markets. The Fed’s 50-bps rate cut has exacerbated these distortions.

IV. Was San Miguel’s September 20th Pre-Closing Dump Related to the Liquidity Strained Yield-Curve Inversion?

Figure 6

Finally, it is interesting to observe that following the PSEi 30's intraday push above 7,300 last Friday, September 20, foreigners sold off or "dumped" SMC’s shares by 5% during the pre-closing five-minute float, contributing to the sharp decline in SMC’s share price and diminishing gains for the PSEi 30. (Figure 6, tweet) 

While we can’t directly attribute this to the inversion of the Philippine term structure of interest rates (yield curve), SMC’s intensifying liquidity challenges—evidenced by deteriorating cash reserves relative to soaring short-term debt in Q2 2024—should eventually influence its slope. (Figure 6, lower chart) 

In sum, as a "too big to fail" institution, SMC’s difficulties will inevitably reflect on the government’s fiscal and monetary health as well as the banks and the economy. 

____

references

FINANCIAL STABILITY COORDINATION COUNCIL, 2017 FINANCIAL STABILITY REPORT, p. 24 June 2018, bsp.gov.ph