Christmas is a time when kids tell Santa what they want and adults pay for it. Deficits are when adults tell the government what they want and their kids pay for it—Richard Lamm
In this issue
Why Deficit-to-GDP May Reach 3.5% in 2018; November BIR and BoC Revenues Plunge on the Economic and Credit Weakness; Public and Bank Debt Hit Php 15.06 Trillion!
-2018 Deficit Will Likely Exceed the 3% Target: From Underspending to Overspending
-2018 Deficit Will Likely Exceed the 3% Target: A Possible Revenue Miss as November BIR and BOC Collection Plunges!
-Poor Revenues from Economic Headwind: Plunging Growth in Industrial Production, Consumer Loans and External Trade
-2018 Deficit-To-GDP May Surge to 3.5% or MORE!
-BSP Financed 46% of 11-month Record Fiscal Deficit; Public Plus Private Bank Debt Reach Php 15.06 Trillion or 98% of GDP in November!
-2019 Opened with Exceedingly Panglossian Expectations; Expect the Unexpected in 2019
Why Deficit-to-GDP May Reach a Record 3.5% in 2018; November BIR and BoC Revenues Plunge on the Economic and Credit Weakness; Public and Bank Debt Hit Php 15.06 Trillion!
2018 Deficit Will Likely Exceed the 3% Target: From Underspending to Overspending
November 2018’s fiscal deficit, as reported by the Bureau of Treasury, sprinted to a fresh record at Php 477.217 billion. That’s 36.1% or Php 126.6 billion higher than the full year deficit of 2017! And that’s only Php 46.4 billion shy from the 2018 target of 3% to GDP at Php 523.6 billion! (see figure 1, upper window)
The Department of Budget and Management (DBM) also projects a 3% to GDP in 2019 and 2020. That would amount to Php 575.6 billion and Php 633.7 billion, respectively, according to the DBM Proposed People’s Budget (see figure 1, lower window)
There hardly seems any discussion of the consequences of a possible overreach of the 3% deficit-to-GDP target. And there barely seems any inquiry on the likely misses in the fiscal targets of revenues and the possible excess on spending as contributors to the monster deficit.
Let us look at expenditures first.
Figure 1
With the 11-month expenditure at Php 3,095 billion; the annual (2018) target of Php 3,364.1 billion is just Php 269.1 billion away.
2018’s 11-month spending growth clip of 24.15% exceeds significantly last year’s annual growth rate of 10.05% and will likely surpass the projected 19.3% annual target for 2018.
And attaining the expenditure target would be a cinch since unmet targets for outlays are usually spent on the last month of the year. That said, the largest monthly outlays of any year have mostly occurred in December.
The present regime has instituted an extravagant budget to implement its profligate neo-socialist spending programs.
The previous record deficits of 2016 and 2017 culminated with December expenditures of Php 283.555 billion and Php 330.240 billion, respectively. Its two-year average: Php 306.9 billion
National Government’s budget secretary Mr. Benjamin Diokno asserted last week that underspending in 2018 will be zero as infrastructure spending-to-GDP ratio for 2018 have been expected to hit 6.2%, nearly triple the 2-percent average between 1986 and 2016.
That being the case, December 2018’s expenditure will find a base of at least Php 330 billion!
2018 Deficit Will Likely Exceed the 3% Target: A Possible Revenue Miss as November BIR and BOC Collection Plunges!
Political spending is hardly the issue since it is programmed, what matters is the revenue component of the deficit target.
For the 11-months of 2018, NG revenues have grown at the rate of 16.35% which fulfills the annual growth rate objective (16.3%).
The 11-month revenue has reached Php 2,618 billion or Php 222.5 billion distant from the annual revenue goal of Php 2,840.5 billion. If collections would hit its monthly average for the year of Php 238 billion, then yes, this goal would be met.
However, revenue collection in December of 2016 was at Php 165.326 billion and in 2017 Php 223.092 or for a two year average of Php 194.209 billion.
Revenues are principally dependent on economic conditions, and secondarily, the NG’s tax administration efforts. While the December 2017’s collection of Php 223.092 may function as a likely base for December 2018, that would not be assured.
Figure 2
Higher revenues from increases in consumption taxes applied against broader tax base have signified the objective of the newly instituted RA 10963 or Tax Reform for Acceleration and Inclusion (TRAIN)
While it may be true that TRAIN initially did goose up revenue collections early on, the NG’s providence appears to be running dry.
BIR collection growth has been trending south since TRAIN’s implementation. The growth magic from Bureau of Custom’s (BoC) collections appears to have peaked in April. (figure 2, upper window)
In 11-months, collections from the BoC and Non-Tax revenues have offset the subpar performance of the BIR. (figure 2, middle window)
As a share of total collections the BIR account for 68.8%, the BoC 20.6%, and Non-Tax 9.9% in November.
And a tinge of uncertainty may have been elicited from the November data.
NG Total Revenues grew by a paltry 6.66% based on Tax Revenue growth of 6.12% and non-tax revenue growth of 14.73%. BIR collections delivered another anemic 7.01% growth, while BoC collection growth stunningly crashed to a mere 3%!
BIR collections registered a 15.68% growth in October and -7.68% growth in September. The BoC, on the other hand, posted a 30.38% and 26.86% over the same period.
Poor Revenues from Economic Headwind: Plunging Growth in Industrial Production, Consumer Loans and External Trade
Why the slowdown in collections?
Figure 3
Has the tightening financial conditions, partly from the BSP rate hikes, weighed on domestic demand? Recall of the CPI’s tumble to 6% in November from October’s 6.7%? Has the NG’s tax revenues been weighed down by the sharp downturn in domestic liquidity growth?
The downdraft in total bank lending has resonated with tax revenue collection growth. Total bank lending growth slowed significantly to 16.89% in November from 18.36% a month ago. Bank loan growth has turned steeply lower since July or three months after the BSP began its series of five hikes. (figure 2, lowest window)
Tax revenue growth tumbled to 6.12% in November from October’s 19.17%.
Last week, the National Government published pertinent economic data that chimed with tax revenue conditions.
Industrial production growth slumped by over half to 2.1% in November from October’s 4.9% and September’s 6.4%, according to the Philippine Statistics Authority (PSA). So November tax performance reverberates not only with bank lending and domestic liquidity but also industrial production.(figure 3, upper pane)
The sharp downdraft in the Bureau of Custom’s (BoC) November collections showcased the sharp slowdown not only in imports but also in exports. From the PSA: “The country’s total external trade in goods in November 2018 reached $15.04 billion,reflecting an increase of 4.1 percent from $14.45 billion recorded value during the same month of the previous year. The total exports were valued at $5.57 billion in November 2018, representing a decrease of 0.3 percent, from $5.58 billion in November 2017. On the other hand, total imports rose to $9.47 billion in November 2018, from $8.86 billion in November 2017 or a growth rate of 6.8 percent. Furthermore, the country’s balance of trade in goods (BoT-G) increased to a $3.90 billion deficit in November 2018, from $3.28 billion deficit in November 2017.” (italics added)
October and September import growth registered at 21.44% and 26.05%, respectively. On the other hand, export growth for the same period clocked in at 5.51% and .75%, thereby the total trade growth recorded at 14.92% and 15.02%, respectively. (figure 3, lower middle and lowest panes)
If industrial production and external trade had been down, what about consumer spending?
Figure 4
Consumer loan growth slowed to 13.82% in November from 14.64% in October and 18.19% in September. The components were all down. Credit card growth fell to 20.2%, from 21.69% and 22.19%. Auto loans registered more declines, 13.13% from 14.23% and 21.91%. Salary or payroll loans shriveled by -1.71% from -.86%, and -1.21% over the same period.
M1 or currency in circulation or cash (plus demand deposit) improved slightly to 9.46% in November from 9.03% in October but was significantly lower than 11.04% in September.
So with slowing cash and credit growth, how will these wobbly growth numbers justify strong consumer spending?
From the expenditure side of the GDP, a weak consumer and external trade would mean either capital formation or the government picks up the slack.
The record deficit suggests that only government spending will provide the boost to 4Q GDP.
Or, if the substantial pullback BIR and BoC collection growth in November had been a result of a slowing economy, then 4Q GDP could decline substantially.
Seen from the lens of the fiscal gap, unless considerable improvements in the financials and the economy occurred in December, the fiscal gap will likely register a blowout or an unexpected widening.
Pieces of the jigsaw puzzle have been falling into their respective places.
2018 Deficit-To-GDP May Surge to 3.5% or MORE!
How will the revenues, spending and the deficit look at the end of 2018?
Should both annual revenues and spending targets be attained, then December deficit should register Php 46.4 billion only. But that would be out of the league with recent history.
In 2016 and 2017 where the fiscal deficit reached respective records of Php 353.422 billion and Php 350.637 billion, registered deficits of December were at Php 118.229 billion and Php 107.15 billion, respectively. December’s share of the annual deficit was at 33.45% in 2016 and 30.56% in 2017.
However, if spending in December 2018 would be on the same level with 2017 at Php 330.24 billion, and if the revenue target of Php 222.525 billion would be achieved, then December 2018’s deficit would reach Php 107.715 billion for a year-end total of a whopping Php 584.932 billion! That’s Php 61.322 billion or 11.7% more than the target! That’s 3.5% of the 9-month annualized real GDP!
The assumption here is that revenues hit its target. But what if it doesn’t?
The other assumption is for the rate of the 9-month GDP to be sustained through 4Q, thereby 2018. But what if 4Q GDP slides anew? And what if the 4Q fall will drag the annual (2018) GDP lower? The deficit-to-GDP could even be higher!
And under the reach-the-target case, the December 2018 deficit will only account for 18.42% share of the annual deficit in contrast to the 33.45% share in 2016 and 30.56% in 2017. So one might expect a significantly higher December expenditure than 2017’s Php 330 billion!
Yes, the base rate of 2018’s deficit-to-GDP will likely be at 3.5% or even much higher!
BSP Financed 46% of 11-month Record Fiscal Deficit; Public Plus Private Bank Debt Reach Php 15.06 Trillion or 98% of GDP in November!
Hardly anybody asks how financing works for such monster deficits.
Since there is no such thing as free lunch, there will always be (direct and indirect) trade-offs on these.
Such deficit will have to be funded by debt or by monetization or a combination of both.
First, funding from the capital markets.
Figure 5
Domestic debt jumped 11.9% year on year to Php 4.708 trillion last November. Foreign debt also vaulted 11.57% to Php 2.487 trillion while total public debt advanced by 11.77%. (Figure 5, upper and lower windows)
As an aside, foreign debt has mainly been used to provide forex funding of public and private institutions.
Next, BSP monetization.
Net claims on central government by the Bangko Sentral ng Pilipinas, on the other hand, vaulted by 12.16%. From the BSP’s November Domestic Liquidity report: “net claims on the central government grew by 12.1 percent in November, faster than the 11.2-percent (revised) growth in the previous month.” (Figure 5, upper window)
Through 11-months the BSP printed money worth Php 220.377 billion to finance 46.17% of the NG’s record deficit of Php 477.217 billion.
Meanwhile, the NG used the capital markets to fund 55.89% or Php 266.727 billion of the monster deficit through debt securities.
Of course, BSP money printing and Bureau of Treasury debt issuance signify direct funding of the NG’s spending spree.
Indirectly, through credit expansion, the banking system also helped finance the NG’s tax revenues.
In the previous administration, the buildup in systemic leverage had mainly been in the private sector.
The present administration has mobilized leveraging to grow in two fronts: the private sector and the public sector.
Thus, the combined credit expansion from the private sector banking bubble (Php 7.86 trillion) with the public sector bubble (Php 7.195 trillion) has accrued to Php 15.06 trillion or a stunning debt-to-GDP (annualized 9-month) of 98.8%! Total debt growth jumped by 14.38% in November from 14.32% a month ago, principally from contributions of public debt.
Unfortunately, the public spending boom has been crowding out the private sector in various ways; namely, street inflation (relative prices), production structure (resource allocation favoring areas benefiting credit most), liquidity (expressed via treasury yields), and credit distribution (financial flows favoring the government).
And symptoms of the crowding out effect have become more apparent in the economic landscape.
2019 Opened with Exceedingly Panglossian Expectations; Expect the Unexpected in 2019
Since we are in a halfway through January, financial markets appear to be blinded by extreme Panglossian expectations.
The establishment may be forcibly painting a scenario that grotesquely overestimates fiscal conditions and the economic outcome of the 4Q and the calendar year of 2018.
Remember, tax revenues, credit growth, industrial production, merchandise trade, and consumer spending experienced a waterfall in the first two months of the 4Q.
And if there has been an unexpected surge in the deficit, from the toxic mix of lethargic collections and excessive spending in December, the BSP may have shouldered the bulk of the financing that has helped yields domestic treasury notes and bonds slide. That’s aside from lower inflation expectations. Otherwise, public debt growth would accelerate. And reliance on public debt would intensify the worsening liquidity imbroglio in the system.
Not only has the NG has begun to implement TRAIN 2.0 and SIN taxes, but it has opened the year with foreign borrowings (USD 1.5 billion).
And because of the shortfall in tax collections from increases SIN Taxes, more taxes will be slapped on it.
Curiously, the NG seems caught in an intractable economic contradiction. From the Inquirer: “The finance chief earlier said that the government really wanted sugar-sweetened beverages as well as “sin” products such as cigarettes and alcoholic drinks to become more expensive so that there would be less consumption and, in turn, improve the health of Filipinos.”
If they expected less consumption from higher prices, why carp over the deficiencies in collections?
From the same article: “As excise tax collections from sugary drinks fell below target, the Department of Finance (DOF) has ordered the Bureau of Internal Revenue (BIR) to check if manufacturers were paying the correct rates. In a statement Thursday, the DOF said that the excise tax take from sugar-sweetened beverages from January to October last year amounted to only P29.9 billion, lower than the P40-billion goal for the 10-month period. The DOF quoted Finance Undersecretary Karl Kendrick T. Chua as saying that the collection goal was not achieved “possibly because sugar-sweetened beverage manufacturers might not be paying the correct taxes.””
If you tax something, you get less of it. Or, if you tax something, economic activities shift underground.
Will the NG achieve something it has failed to accomplish over the last year? Will more tax increases deliver more revenues?
If the economy slows materially, with policies at ICU mode (record low rates, historic BSP monetization, uncharted fiscal stimulus), what would be left for the NG to boost the GDP?
Here’s a guess, print, print, print the peso!
As said earlier, expect the unexpected in 2019.
