US Dollar-Philippine Peso Retests Its All-Time High of 59, the BSP’s "Maginot Line": It’s Not About the Strong Dollar

  

interventionism destroys the purchasing power of the local currency by breaking all the rules of prudent monetary policy and financing an ever-increasing government size printing a constantly devalued currency—Daniel Lacalle

US Dollar-Philippine Peso Retests Its All-Time High of 59, the BSP’s "Maginot Line": It’s Not About the Strong Dollar 

Last week, the USD-Philippine peso retested its all-time high of 59, or the BSP's "Maginot Line," which they misleadingly attribute to the "strong USD." The historic savings-investment gaps translate into a case for a weaker peso. 

I. The USDPHP Retest the 59 ALL Time High Level; The "Strong Dollar" Strawman 

The US dollar-Philippine peso exchange rate $USDPHP hit the 59-level last Thursday, November 21st—a two-year high and the upper band of the BSP’s so-called "Maginot Line" for its quasi-soft peg. The Bangko Sentral ng Pilipinas (BSP) attributed this development to the strength of the US dollar, explaining: "The recent depreciation of the peso against the dollar reflects a strong US dollar narrative driven by rising geopolitical tensions…The peso has traded in line with the regional currencies we benchmark against."

Figure 1 

To validate this claim, we first examine the weekly performance of Asia's currencies. While the US Dollar Index $DXY surged by 0.8% this week, most of the gains were driven by the euro's weakness.  (Figure 1, upper window) 

Among Bloomberg’s quote of Asian currencies, 8 out of 10 saw declines; however, the Thai baht bucked the trend and rallied strongly, while the Malaysian ringgit also closed the week slightly higher. (Figure 1, lower graph) 

The US Dollar averaged a 0.4% increase against Asian currencies this week. 

However, the strength of the Thai baht and Malaysian ringgit contradicts or disproves the idea that all regional currencies have weakened against the USD.

Figure 2 

A second test of the claim that a "strong dollar is weighing on everyone else, therefore not a weak peso" is to exclude the US dollar and instead compare the Philippine peso against the currencies of our regional peers: the Thai baht $THBPHP, Malaysian ringgit $MYRPHP, Indonesian rupiah $IDRPHP, and Vietnamese dong $VNDPHP. (Figure 2) 

From a one-year perspective, the Philippine peso has weakened against all four of these currencies, providing clear evidence that its decline was not limited to the US dollar but extended to its ASEAN neighbors as well. 

Ironically, the same ASEAN majors have recently joined the BRICS. Have you seen any reports from the local media on this? 

The $USDPHP ascent to 59 has been accompanied by a notable decline in traded volume and volatility, suggesting that the BSP has been "pulling out all stops" to prevent further escalation. 

This includes propagating to the public the "strong US dollar" strawman. 

II. BSP’s Interventions and the Case for a Weaker Peso: Record Savings-Investment Gap 

Figure 3

Since the BSP is among the most aggressive central banks engaged in foreign exchange intervention (FXI), it can surely buy some time before the USDPHP breaks through this upper band and tests the 60-level. (Figure 3) 

We have long been bullish on the $USDPHP for the simple reason that the historic credit-financed savings-investment gap (SIG), manifested primarily through its "twin deficits" (spending more than producing), translates to diminished local savings. 

This, in turn, means more borrowing from the savings of other nations to fund excessive domestic consumption. 

Accordingly, the SIG is inherently inflationary, which results in the debasement of the purchasing power of the peso—an indirect consumption of the public's savings. 

In any case, the USD Philippine Peso exchange rate ($USDPHP) should be one of its best barometers and hedge against inflation (Prudent Investor, April 2024) 

In other words, since there is no free lunch, someone will have to pay for the nation’s extravagance.

Figure 4

The Philippine external debt's streak of record highs coincides with the pandemic-era deficit spending levels. Apparently, this stimulus suffers from diminishing returns as well. 

This is apart from the BSP’s financial repression policies or the inflation tax, which redistributes the public’s savings to the government and the elites. 

Such capital-consuming "trickle-down" policies combine to strengthen the case for a weak peso. 

Yet, the continued rise in external debt indicates that the Philippines has insufficient organic US dollar resources (revenues and holdings), despite the BSP’s claims through its Gross International Reserves (GIR). 

To keep this shorter, we will skip dealing with the BSP’s GIR and balance sheet. 

Nonetheless, rising external debt compounds the government’s predicament, as the lack of revenues necessitates repeated cycles of increased borrowing to fund gaps in the BSP-Banking system’s maturity transformation, creating a "synthetic US dollar short." (Snider, 2018) 

As a result, the country becomes more vulnerable to a dollar squeeze. 

Hence, the BSP hopes that, aside from cheap credit, loose monetary conditions will prevail, allowing them to easily access cheap external funding. 

However, by geopolitically aligning with the West against the Sino-Russian-led BRICS, the Philippines increases the risks of reduced access to the world’s savings. 

As an aside, the Philippines attempts to mimic the United States. However, because the US has the deepest capital markets and functions as the world’s de facto currency reserve, it has funded its "twin deficits" by absorbing the world’s "surpluses"—the "exorbitant privilege." 

Unfortunately, not even the US dollar standard, operating under present conditions, will last forever, as it fosters both geopolitical and trade tensions. 

III. USDPHP: Quant Models and the Lindy Effect

Figure 5

We are not fans of analytics based on exchange rate quantitative models such as the Deviation from Behavioral Equilibrium Exchange Rate (DBEER), the Fundamental Equilibrium Exchange Rate (FEER), and Purchasing Power Parity (PPP), but a chart from Deutsche Bank indicates that the Philippine peso is among the most expensive world currencies. 

Needless to say, all we need is to understand the repercussions of free-lunch policies. 

People have barely learned from past lessons. The USDPHP remains on a 54-year long-term uptrend, even after enduring episodic bouts of financial crises—such as the 1983-84 Philippine debt restructuring and the 1997-98 Asian crisis. 

The sins of the past have been resurrected under the alleged auspices of "this time is different; we are doing better." 

Following the Asian Crisis, a relatively cleansed balance sheet allowed the peso to stage a multi-year rally from 2005 to 2013. 

Unfortunately, we have since relapsed into the old ways. 

Because the elites benefit from the trickle-down policies, there is little incentive for radical reform. 

The "strong US dollar" only exposes the internal fragilities of a currency. 

Therefore, trends in motion tend to stay in motion until a crisis occurs. 

The USD-PHP seems to exemplify the Lindy effect: the longer a phenomenon has survived, the longer its remaining life expectancy. 

___

References

Prudent Investor, Navigating the Risks of the Record Philippines’ Savings-Investment Gap, February Public Debt Hits All-Time High and March CPI Reinforces the Deficit-CPI Cycle Tango April 8, 2024

Jeffrey P Snider, The Aid of TIC In Sorting Shorts and Shortages, October 17, 2018

PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression

 

Inflation was created by the wrong monetary policy, and incorrect central bank measures may have lasting negative impacts on the economy. The first effect is evident: governments continue to crowd out the real economy, and families and businesses suffer the entire burden of rate hikes. Maybe the objective was always to increase the size of the public sector at any cost and implement a gradual nationalization of the economy—Daniel Lacalle 

In this issue

PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression

I. Clarifying Our Analytics of the PSEi 30 Data

II. 9-Month 2024 PSEi 30 Performance: Broad-based Slowdown, Sustained Dependence on Borrowing to Generate Growth

III. Dissecting the PSEi 30’s Performance by Category: Debt, Income, Revenues and Cash

IV. Analysis by Sector: Financials and Holding Firms Dominate Growth

V. Analysis by PSEi 30 Member Firms (9-Month)

VI. Conclusion: Underwhelming Performance as Symptoms of Crowding-Out Syndrome, Financial Repression, and Statist Policies

PSEi 30's Weak 9-Month and Q3 Performance Highlights GDP Decline: Symptoms of Crowding-Out and Financial Repression 

The PSEi 30’s lackluster fundamental performance validated the mainstream’s unexpected decline in Q3 GDP, highlighting the persistent effects of crowding out and financial repression. 

I. Clarifying Our Analytics of the PSEi 30 Data 

Two factors must be explained before delving into the 9-month and third-quarter analysis of the performance of PSEi 30 constituent firms. 

First, the definition of data is crucial.  

-Data from the same reporting coverage provides a more accurate comparison, as it reflects the PSEi members during the relevant period. This is referred to here as 1A data.

-Data from a different reporting coverage/period results in an apples-to-oranges comparison due to two factors: periodic updates to PSEi constituents and the exclusion of past data revisions. This is referred to as 1B data.

-Aggregates may be overstated, as they include not only holding companies but also their subsidiaries.

Q3 PSEi 30’s Financial Activities: Defining the Operating Conditions

Next, it is essential to define the operating conditions of the third quarter.

Figure 1

The Philippine Q3 2024 GDP unexpectedly slipped to 5.2%, its lowest level since Q2 2023’s 4.3%, despite systemic leverage hitting an all-time high.  (Figure 1, upper graph)

Public debt and bank credit expansion grew by 11.4%, marking its fastest pace since Q4 2022.

The Bangko Sentral ng Pilipinas (BSP) initiated its "easing cycle" with a 25-basis point rate cut in August, which helped fuel this growth.

Despite reaching the near all-time high employment rate, both headline and core inflation rates fell to 3.2% and 2.6%, respectively, the lowest since Q1 2022. (Figure 1, lower graph)

Figure 2

Marcos-nomics stimulus, channeled through its fiscal aspect, remained vibrant, with public spending growing by 6.4% in Q3, reaching its third-highest level. (Figure 2, upper image)

Once again, despite record leverage, money supply growth, measured by M3, stumbled to its lowest level since Q3 2022.

It was an active period for fiscal and liquidity operations by the banking system and the BSP. As a ratio to GDP, banks' net claims on the central government (NCoCG) reached the third-highest level on record, while the BSP's counterpart dipped to its lowest level since Q3 2022—but still near Q4 2022 record. (Figure 2, lower diagram)

In contrast to the establishment’s "restrictive" narrative, Q3 indicated loose financial conditions, which were further bolstered by the BSP’s rate cut and sustained increases in systemic leverage, supported by BSP and bank liquidity, as well as fiscal operations.

The notion that the BSP’s easing would provide support to the economy not only failed to materialize; consumption fell, as evidenced by the declining trend in the Consumer Price Index (CPI) and the money supply—ironically occurring despite strong liquidity injections.

II. 9-Month 2024 PSEi 30 Performance: Broad-based Slowdown, Sustained Dependence on Borrowing to Generate Growth

These macroeconomic conditions were reflected in the 9-month Key Performance Indicators (KPIs) of the PSEi 30 (1A):

Figure 3

One. The aggregate non-financial debt increased by Php 208 billion, marking the lowest increase since 2020. This figure excludes borrowings of the three largest banks (Figure 3, topmost table) 

Two. The cumulative net income growth of Php 47.17 billion was also the smallest since 2021. 

Three. Revenue expansion, totaling Php 395 billion, was the second lowest since 2021. 

Four. The PSEi 30’s cash reserves shrank by Php 5.27 billion for the second consecutive year, but at a more minimal scale compared to last year. 

These figures indicate that all segments exhibited a slowdown, with net income experiencing the most pronounced decline. 

There’s more. 

Because the non-financial debt-to-net income ratio in 2024 represented the second highest level since 2022, it indicates that corporations borrowed more to generate income (Php 4.4 debt for every peso of net income). (Figure 3, middle graph)

Additionally, they borrowed to address their liquidity shortfall.

However, this data understates the full picture, as it excludes the borrowings of the three largest banks. These banks reported an increase of Php 491 billion in bills payments alone!

III. Dissecting the PSEi 30’s Performance by Category: Debt, Income, Revenues and Cash

Nota Bene: While we rely on the accuracy of these reports, it is worth noting the potential for discrepancies. Past instances, such as PLDT’s 4-year "budget overrun," demonstrate that reporting errors often go overlooked or ignored by both the PSE and government agencies.

Such regulatory lapses could create conditions that encourage misreporting, exemplifying the moral hazard syndrome.

We suspect that some companies may be understating the extent of their leverage by reclassifying it under other liability categories

Debt: In nominal terms, non-financial debt rose by 3.9%, increasing from Php 5.31 trillion to Php 5.52 trillion. This resulted in a slower debt-to-NGDP ratio, which declined from 30.8% in 2023 to 29.25% in 2024 (1B). Again, this excludes bank debt. (Figure 3, lowest window)

Net Income: Published net income expanded by 7.2%, rising from Php 691.2 billion to a record Php 740.93 billion. However, this represented the lowest growth rate since 2021.

Revenues: Despite historic increases in systemic leverage, near full employment and the third-largest public spending on record, revenue grew by an unimpressive 9.4%, reaching a record Php 5.265 trillion.

This also translates to a PSEi 30 revenue-to-NGDP share of 27.9%—the second highest after 2022—indicating that these elite firms contribute more than a quarter of the estimated Nominal GDP. If we include all 284 listed firms, this figure would likely account for approximately two-fifths of NGDP.

This manifests the trickle-down structure of the Philippine political economy, where the prevailing approach prioritizes consolidating wealth and power among politically connected entities through centralization, rather than fostering genuine "inclusiveness" via grassroots entrepreneurship (such as SMEs) or a bottom-up framework.

Lastly, the government reported a headline GDP of 5.2% based on the NGDP of 8.5%. However, revenues of the PSEi 30 grew by only 6.8% suggesting a significant overstatement of the statistical economy. 

IV. Analysis by Sector: Financials and Holding Firms Dominate Growth

Figure 4

Although the holding firms sector posted the smallest percentage growth, it experienced the largest increase in debt, amounting to Php 104.21 billion, followed by the real estate sector with Php 38.62 billion. (Figure 4, upper table)

The financials and holding firm sectors recorded the highest net income growth, with increases of Php 20.327 billion and Php 13.35 billion, respectively, accounting for 43% and 28.3% of the total.

The sector with the highest revenue growth was the holding firm sector, which generated Php 196.653 billion, followed by financials with Php 86.44 billion, representing 49.8% and 22% of the total, respectively.

Meanwhile, the services sector led in cash growth, reporting an increase of Php 21.24 billion. Conversely, the industrial sector experienced the largest cash outflows.

In Q3, holding firms and financials reported the highest net incomes of Php 16.84 billion and Php 7.8 billion, respectively. (Figure 4, lower table)

These two sectors also delivered the strongest revenue growth, with increases of Php 43.36 billion and Php 25.26 billion.

In summary, during the nine-month period and in Q3, the financials and holding sectors dominated net income and revenue growth, while other sectors struggled to keep pace.

V. Analysis by PSEi 30 Member Firms (9-Month)

Figure 5

Broken down into individual categorical activities:

The top firms contributing to non-financial debt increases were San Miguel Corporation (SMC) and Ayala Corporation with increases of Php 63.9 billion and Php 57.6 billion, respectively.

Out of the 27 firms analyzed, 15 posted debt expansion during the period, with SMC accounting for 30% of the total debt growth in pesos.

In the net income growth segment of the PSEi 30, International Container Terminal Services, Inc. (ICT) and the Bank of the Philippine Islands (BPI) were the top performers with Php 9.85 billion and Php 9.441 billion, correspondingly.

On the other hand, DMCI Holdings (DMC) posted the largest decline among the eight firms that reported a decrease in net income growth.

SMC and BPI also led the revenue growth segment. Conversely, DMC reported the largest revenue decrease among the seven firms that experienced revenue declines during the period. Notably, SMC accounted for 30% of total revenue growth in peso terms.

Finally, ICT emerged as the leader in cash reserves growth, while Aboitiz Equity Ventures (AEV) headed the minority of ten issues that saw reductions in cash flows.

Once again, even among the elite firms, only a select few tend to dominate in terms of performance.

Notably, financial giants such as BPI and BDO emerged as some of the most prominent gainers, while non-consumer sectors, including ICT and SMC, led in the net income and revenue segments, respectively.

Interestingly, the underwhelming performance of consumer-focused firms like SM Investments and Ayala Corporation—arguably the most exposed to the local consumer market—highlights the underlying fragility of the sector

VI. Conclusion: Underwhelming Performance as Symptoms of Crowding-Out Syndrome, Financial Repression, and Statist Policies

The Bottom Line: Despite the "Marcos-nomics stimulus," near-record employment levels, and loose financial conditions, the conspicuous signs of weakness among the PSEi 30 member firms not only align with the GDP slowdown observed in Q3 but may also indicate much slower overall growth.

Moreover, this underbelly has exposed the firms’ increasing vulnerability to extensive leveraging.

What is particularly notable is that many of these PSEi 30 firms are linked to political projects that should have enhanced their performance.

Instead, their underwhelming performance could be indicative of the detrimental effects of the crowding-out syndrome—a phenomenon that gradually erodes economic productivity over time—compounded by financial repression and other forms of government interventions (such as the subtle shift to a war economy, increasing centralization and more).

 

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

 

Why the BSP will be Slashing its Policy Interest Rates Soon

 

Every inflation must eventually be ended by government or it must "self‑destruct"—but not until after it has done untold harm—Henry Hazlitt 

 

In this short issue 

Why the BSP will be Slashing its Policy Interest Rates Soon 

I. Led by T-Bills, Yields of Treasury Curve Crashed: "Bullish Steepener" 

II. BVAL Treasure Rates Below the BSP’s Policy Rates; The Erosion of Inflation Tax 

III. BSP’s Asymmetric Monetary Policies 

IV. BSP’s Possible Rationalizations: Expected US Fed Rate Cuts and Escalating Streak of Global Central Bank Easing 

V. BSP’s Zero Bound Policies and the PSEi 30’s Diminishing Returns 

 

Why the BSP will be Slashing its Policy Interest Rates Soon 

 

The recent crash in the yields of the Philippine treasury curve has strongly signaled the BSP’s coming rate cuts.  

 

I. Led by T-Bills, Yields of Treasury Curve Crashed: "Bullish Steepener" 

 

Will the streak of BSP rate cuts start this December or early 2024?  Why? Because these have been communicated to the public by the local treasury market.  

  

Figure 1 

 

The reliable but unheralded treasury traders—via demonstrated preference (action speaks louder than words)—have been on a Treasury panic buying spree that sent yields collapsing across the curve. (Figure 1, upper window) 

  

Treasury traders appear to be expecting a (possibly a "surprise") sharp decline in inflation. If so, a disinflationary environment entails a weaker private sector economic performance this Q4.  

  

Since its peak last November 16th, the recent tailspin of the 1-month T-bill yield hallmarked the performance of various Treasury maturities across the curve.  

 

Yet, the scale of the decline (1- and 3-month T-bills) has been substantially deeper compared to the Q2 2019 episode when the BSP began its credit easing campaign. (Figure 1, lower graph)   

 

And this may be pressing enough to force the BSP to act. 

 

Figure 2 

 

Furthermore, since yields of short-term or T-bills have plunged the most, this reshaped the slope into a "Bullish Steepener"—frequently pointing to rate cuts. 

 

Treasury curve abruptly steepened from a relatively "flat" slope last September and October. (Figure 2, upper chart) 

 

II. BVAL Treasure Rates Below the BSP’s Policy Rates; The Erosion of Inflation Tax 

 

What’s more, the across-the-curve plunge in treasury yields has resulted in a sharp tightening—BSP overnight interbank rates have become HIGHER than treasuries! (Figure 2, lower graph)  

 

Figure 3 

 

On top of this, BSP rates have been higher than the CPI and the headline GDP, reinforcing this financial "tightening" phase on an economy heavily dependent on leverage and liquidity. 

 

Crucially, higher BSP rates than the CPI—theoretically—translate to positive "real" rates, which implies that this has eroded the government's seignorage fee or the inflation tax.  

 

The BSP embarked on rate cuts when "real" rates turned positive in Q2 2019.    (Figure 3, upper graph) 

 

III. BSP’s Asymmetric Monetary Policies 

 

But, of course, monetary authorities have recently engaged in asymmetric policies.   

  

Sure enough, it has raised headline rates to multi-decade highs, which reduced credit transaction growth mainly to the supply side.  

  

But its interest rate cap on credit cards or subsidies to consumer credit has also resulted in a textbook response of fueling excess demand for consumer credit.  (Figure 3, lower chart)   

  

Such extensive build-up of leverage in the consumer's balance sheets has driven the indulgent demand for vehicles, luxury-related spending activities, and magnified property speculations. 

  

The other ramification is the transformation of bank lending operations towards consumers at the expense of industry. 

 

Other behind-the-scene operations have marked the BSP's liquidity operations.  

  

Banks and non-bank financials have been directly financing the National Government’s deficit spending via Net claims on the Central Government (NCoCG) or indirect QE—injecting liquidity into the government and the financial system.  

  

These off-kilter operations afforded the BSP to raise headline rates and paint an impression of a "sound" macro-environment. 

 

IV. BSP’s Possible Rationalizations: Expected US Fed Rate Cuts and Escalating Streak of Global Central Bank Easing 

Figure 4 

 

Aside from inflation, the BSP could rationalize its actions with the widely expected rate cuts by the US Federal Reserve in early 2024 and use the appeal to the majority—the growing streak of rate cuts by global central banks. (Figure 4, upper chart) 

 

 

Figure 5 

 

Previously, changes in the BSP policy rates have coincided with the gyrations in the yield differentials of the Philippines and the US (proxied by the 10-year).   BSP rate cuts in 2019 narrowed the spread between the 10-year Philippines and the US. (Figure 4, lower diagram) 

 

Today, since the US Fed has adopted a more hawkish stance than the dithering BSP, this broke the previous correlations—the rate spread has compressed even as the BSP held on its rates at multi-decade highs.  

 

Put this way, domestic developments determine the BSP policies.  

  

Of course, since current developments in the treasury markets have anchored our anticipation of the possible changes in the BSP's policy stance, this is also conditional on the sustainment of this unfolding trend. 

 

V. BSP’s Zero Bound Policies and the PSEi 30’s Diminishing Returns 

 

Finally, the establishment experts have been whetting the speculative impulses of the disenchanted public starved of easy money gains with the prospects of a stock market boom from "rate cuts."    

 

True, "rate cuts" have had ephemeral amplifying effects on the YoY returns from 2009-2018, but this relationship broke in 2019 (pre-pandemic).  (Figure 5, top chart) 

 

But "rate cuts" had to be bolstered with the BSP's historic Php 2 trillion liquidity injections to spur a momentary rally in 2H 2020 to 1H 2021. 

  

Worst, the BSP’s zero bound (ZIRP) policies have been associated with the PSEi 30’s diminishing monthly long-term returns. 

  

It is no coincidence that the rate cuts have fueled spikes in the CPI and contributed to the attenuation of the Philippine peso, which are all interrelated with the PSEi 30’s return. (Figure 5, lower graph) 

  

Artificial speculative booms from free-lunch monetary policies only induce capital consumption and a lower standard of living.