July’s Phenomenal Fiscal Deficit Pushes Government Size to Historic Highs as Debt Servicing Rockets!

Interventionism aims at confiscating the "surplus" of one part of the population and at giving it to the other part. Once this surplus is exhausted by total confiscation, a further continuation of this policy is impossible—Ludwig von Mises

In this issue

July’s Phenomenal Fiscal Deficit Pushes Government Size to Historic Highs as Debt Servicing Rockets!

-Bullseye! July’s Record Deficit Sends Government Size to a Record, Affirms the Socialization of the Philippine Economy!

-Breakneck Speed in Public Spending and Revenues Pushes July and 7-Month Deficit to Historic Levels

-July Public Debt Servicing Soars

July’s Phenomenal Fiscal Deficit Pushes Government Size to Historic Highs as Debt Servicing Rockets!

Bullseye! July’s Record Deficit Sends Government Share of GDP to a Record, Affirms the Socialization of the Philippine Economy!

The multiple records shattered by July’s fiscal deficit have led to a rocketing of the National Government’s expenditure to (nominal) GDP ratio, the largest since 1998

Lo and behold! The most earthshaking chart representing the political economic transformation of the Philippines: A Bull Market in Government!

Figure 1

As of July 2018, the public spending to GDP ratio hit 20.1%, 12.4% more than 2017’s 17.87%, and 17.4% above the 17.12% average ratio since 1998. 

Public expenditures are supposed to represent recorded real activities, whereas econometric models which inputs are derived mostly from surveys constitute the statistical economy or the GDP. That being the case, an inflated GDP would understate the real contribution of the government on the economy. Or, the public spending or government share of the economy could significantly be more!

Besides, the public spending to GDP ratio represents a direct measure of the size of the government. This ratiodoesn't capture the indirect participation of the government.  For instance, in many of Public-Private Partnership (PPP) projects, it is the private sector that spends on political projects.  The $3.7 billion Makati subway project is an example.

Political interventions affect the economy in many ways. These interventions may impact prices, operations, distributions, and output.

For instance, the National Government (NG) restricts supply of the Transport Network Vehicle Services (TNVS) industry, as well as, imposes demand control through the price channel or the ability of these firms to set prices.

Having been stripped of entrepreneurial role through repressive and intrusive regulations, firms of the industry transform into quasi-managers or department heads of National Government. In essence, the NG directs the operating spectrum of these privately owned firms as extensions of its tentacles.  The result of which is to weigh down the industry’s contribution to uplifting consumer welfare and generally on the economy.

The record deficit spending, which in part increases bureaucratic involvement (through the expansion of manpower, logistics and enforcement capabilities), has reduced output, employment, and capital accumulation for the TNVS industry.

At the end of the day, an increase in the share of the statistical GDP pie by the government translates to a proportional decrease in the participation of the private sector. A larger government entails a smaller private sector.

And because there is no free lunch, not only will the trend of record deficits supported by massive interventions shrink the productive sectors of the economy, it embeds higher taxes into the future, weakens spending power (inflation), underwrites the erosion of the domestic currency and upsizes economic and financial risks.

That said, the transformation towards the socialization of the political economy has now manifested itself in government’s statistics.

What I have been predicting all along has been validated!

And economic opportunities will increasingly involve establishing ties with the government at the expense of the marketplace. One has to be an insider or connected with the insiders.

Exemplified by the transition towards a centrally planned and centrally directed economy have been experiences of the PPP and TNVS industries.

What more if the proposed bill on the imposition of the 14-month pay to employees of the private sector, which has now been in the Senate’s third reading, be ratified? Would that not constitute the troika of rigorous labor mandates that would penalize the economy following higher minimum wages and anti-endo practices?

Sutton’s Law becomes increasingly plays a relevant role in crafting financial strategy.

According to Wikipedia, The law is named after the bank robber Willie Sutton, who reputedly replied to a reporter's inquiry as to why he robbed banks by saying "because that's where the money is."

The government is where the money is!

Breakneck Speed in Public Spending and Revenues Pushes July and 7-Month Deficit to Historic Levels

Let us dig down on the booming government bubble.

July’s fiscal conditions produced a stunning set of records.

Figure 2

July’s deficit of Php 84.4 billion was the largest in at least 11 years.  A breakthrough pace in revenue and expenditure growth of 24.21% and 33.9%, respectively, crafted the July record, unmatched since 2009 at the very least. (see figure 2)

July’s phenomenal fiscal expansion helped set landmarks in spending and revenue activities over a 7-month period

Figure 3

At breakneck speed, revenue growth dashed at 20.52% while expenditure growth sprinted at a faster 22.57%. (upper window figure 3)

The outcome: the seven-month deficit bolted to a milestone Php 279 billion! The 7-month deficit represents 80% of 2017’s full-year Php 350.64 billion with 5 months to go!  (lower window figure 3) Another deficit in the scale of July or March (Php 110.7 billion) would wipe off the gap in a month!

The National Government set a target deficit of 3% of the GDP or about Php 530 billion.

The 7-month deficit has accounted for about 3.3% of the first semester nominal GDP. At the current pace, the government’s programs seem on track to reach its objective. 

 

Figure 4

And if the NG hits its deficit target, the spending share of GDP could be expected to rise by even more!

To emphasize, while nominal expenditures are about to break beyond the recent highs, revenues are currently being bolstered by the expanded tax base from TRAIN 1.0. (figure 4 upper window)

Or, authorities have programmed public expenditures in contrast to revenues which depend on economic performance as well as administrative efficiency on collections. More pointedly, expenditures are fixed, revenues are variable. A slowdown in the economy will blow the deficits through the roof.

The rate of current and proposed spending indicates that TRAIN 2.0, which should add to the expansion of the tax base, as noted before, will have to be enacted.

July Public Debt Servicing Soars

Since fiscal deficits are no free lunches, how was the July record financed? Has it been through debt or the BSP’s monetization or a combo?

The BSP and the Bureau of Treasury has yet to publish the relevant statistics

So far, the debt service data from the Bureau of Treasury provides a clue. (lower window, figure 4)

And the numbers are just phenomenal!

The 7-month debt service at Php 463.11 billion has accrued to about 94% of the annual Php 490.31 billion of interest payments and amortization spent in 2017.  

Debt service as a share of total government revenues, which was at 28.03% in July, appears to have reversed its downtrend.

The debt service to revenue ratio hit a low of 19.83% in 2017.  In June 2018, public domestic debt grew by 9.34%. The burden of debt servicing must have increased by the recent acquisitions of debt

At the current pace, the annual debt service for 2018 will likely approach Php 800 billion, Php 54.4 billion shy of the record established in 2006.

With rising interest rates and with record deficit spending in part financed by debt, the National Government’s debt service should be expected to increase significantly.

And rising financing costs will not only add to the deficits it will compound on the National Government’s competition with the private sector for access to people’s savings. Expanded debt and debt servicing should magnify the crowding out syndrome.

The repercussion would be to amplify upside pressures on interest rates!

And not only will the government’s broadening role in the economy require significant amounts of financing, it will bring about substantial rearrangement in the economy’s production and distribution structure that should affect earnings and the GDP.

Until it becomes evident, current statistics will hardly capture such changes.

Instead, what has been conspicuous has been the fast-expanding role of the government in the economy as noted above.

Nevertheless, government policies set the directions.

The monumental shift in the nation’s tax regime from income tax to a broad-based consumption tax is a depiction of such pivotal change.

The goal, as declared by officials of the Department of Finance, is to become investment-led.

As the record fiscal deficit and public expenditure to GDP shows, a government ‘investment led’ economy it is, to be precise.  

Bereft of market prices and economic calculation, what the government sees as an investment is in reality consumption

Attachments area

Did the BSP Drain December Domestic Liquidity To Neutralize TRAIN’s Price Hikes???

Latest government data sheds light on the incumbent policy directions

The Bangko Sentral ng Pilipinas (BSP) withdrew Php 17.4 billion from its Net Claims from the National Government account.

Though the account remains at a record high, the rate of growth has been steeply dropping.

In 2017, the QE account grew by only Php 35.73 billion compared to 2016’s explosive Php 341.355 billion. The record budget deficit of Php 353.4 billion was financed mainly by the BSP’s stealth QE.

M3 significantly decelerated last December, posting a growth rate of only 11.95% compared to November’s 13.95% or a drop of 200 basis points.

Aside from the BSP’s reduction of NG claims, M3’s reduced rate had been a product of the dwindling speed the banking system’s consumer loan portfolio as the production loan portfolio remained the same. Consumer loans expanded by 17.17% in December compared to 20.63% in November, the slowest growth rate since May 2016. Production loans were at the same 18.50%

 

 

The awesome decline in the growth momentum of 17.52% in December compared to 26.39% in November and 32.58% in October, revealed by the banking system’s consumer loan portfolio, exhibits the eroding conditions of consumers

The contrasting pictures presented between sales and its financing accounts for the bizarre angle from the data

Or, the sharp deceleration in December auto loans came with December auto sales, which spiked 33.4%, largely in response to price increases from the new tax regime.

The gaping chasm in growth rate data either must have been filled by cash sales or that one of those numbers must have been inaccurate.

Back to consumer loans. And while credit card growth accelerated (20.37% in December, 19.83% in November), the payroll loan portfolio trend continued its southbound trek (+8.87% in December, 9.44% in November).

The quickening credit card growth has been inadequate to offset the slack in the rate of change of banking system’s auto loan portfolio.  Credit card and auto loans have an equal 42% share of the total consumer loan portfolio.

Interestingly, M1 (currency and peso demand deposits) dropped substantially (15.88%) in December (compared to November’s 17.23%).

Applied to retail finance, the M1 data suggests that cash sales have been considerably down. And only part of the slack in cash sales may have been substituted by credit card sales.

Could these be signs of consumer woes in December?

 

The National Government Debt data of the Bureau of Treasury has been the most revealing

It is unusual that the updated government debt numbers have been published ahead while the fiscal balance remains dated November.

Moreover, the publication of the fiscal balance has usually been in the third or fourth of week of every month. December’s data has been substantially delayed. The question is why???

As one would note, domestic debt soared by a whopping 12.89% in December pushing total debt growth to 9.23%. On a month-to-month basis, the NG issued an astounding Php 233 billion worth of debt, which constituted 41.5% of total debt growth in 2017 (Php 562.17 billion)!!

These numbers indicate of the likely scale of the budget deficit in 2017. Since November’s deficit was at a record Php 243.5 billion, a Php 200 billion deficit in December would tally to Php 443 billion or Php 90 billion higher than 2016’s record Php 353 billion!

Yet, exploding deficits reinforces the transition of the nation’s political-economic structure.

Here’s the rub. The reduction of BSP’s claims on NG, the slowdown consumer loans and the explosion in debt issuance by the National Government has been interlinked.

These factors had a role in the diminishing rate of change in domestic liquidity

The “crowding out” effect comes into the picture. Bank lending had been crowded out or displaced by the surge in government debt.

Consumers bore the yoke of the transition.

HB 10963 (Tax Reform for Acceleration and Inclusion) is the other key factor.

I suspect that the BSP has anticipated the price dislocations from the new tax regime.

To counteract these, it reduced its claims on NG liability and allowed the National Government to raise funding from the marketplace, knowing that these would contribute to the siphoning of liquidity from the system.

In this way, the reduced “demand” from diminished liquidity would partly neutralize price disruptions from the new tax regime

And if my suspicion is accurate, the BSP action comes at the cost of earnings of the private sector, mostly in the retail industry.

In that context, December’s fall in M3 fueled the rally of the peso.

Alternatively, I suspect that the BSP may have reactivated its QE in January to have recharged the USD-Php.

Since every action has consequences, expect the intensifying interventions in the economy to have unintended consequences.

Fiscal Report Card: Seasonal August Surplus; The BSP’s Emergency Measures Have Been Losing Their Traction; 85% Debt to GDP!

The Philippine government’s Bureau of Treasury released its fiscal balance (national cash operations) report the other week and debt report last week.

 

The good news was that the NG’s August report card posted a Php 28.8 billion surplus.

But such surplus had likely been influenced by seasonal factors. With the exception of 2009, August was a month of surpluses since 2008.

Although the surplus of this year was the third largest, it did little to diminish the eight-month deficit, which at Php 176.2 billion represented the third largest since 2008.

 

The next propitious news was that government revenues had been up 9.94% which comprised BIR’s 9.01%, Bureau of Custom’s 15.74% and non-tax revenues at 2.91%. For two consecutive months, the average growth rate had been (in the same pecking order), 12.13%, 13.29%, 14.36% and +.99%, respectively.

Tax revenues in the first two months of the 3Q performed generally better compared to the 2Q. However, seen in the context from eight months (January to August), has substantially underperformed the previous years. (upper window)

To consider, present subsidies provided by the BSP’s emergency measures through historic low rates and through unprecedented QE have hardly transformed into BETTER tax revenues. Moreover, the enormous fiscal deficits appear to have delivered LESS for the government than expected.

The August breakout of M3 (15.4%) and of total banking loans (+19.75%) from their previous highs have only produced a downshift in monthly growth rate in revenues from July’s 14.31% to August 9.94%. The BSP’s emergency measures have been losing their traction.

As pointed out earlier, the product of the BSP’s emergency measures has been to dramatically increase systemic leverage as indications of overcapacity mounts.

 

And it has not just been private sector debt. Since the constant use of QE would expose the charade, the NG has complimented the BSP by been revving up its debt engine. 

While domestic debt grew by Php 5.345 billion, the falling peso pushed up foreign debt by 8.76% to Php 41.035 billion in August.

But there will be more debt-financed public spending ahead. The NG was recently provided by China-led Asian Infrastructure Investment Bank (AIIB) and by the World Bank loans worth $207.6-million each for a $500 million flood management project.  Such grand flood project means additional “US dollar shorts”.

The banking system’s total debt portfolio (production + consumer) was at Php 6.374 trillion as of August. The national government’s outstanding debt (local and foreign) was at 6.432 trillion. Add the two figures we get Php 12.806 trillion. Yet that number excludes debt from the corporate bond market, from FDIs, from shadow banking in various forms or from other unreported sources. Nominal GDP during the 1H was Php 7.522 trillion. Annualized, we get something like Php 15.044 trillion NGDP for 2017.

As of August, debt to GDP stood at approximately at 85%!

Now that would be a WOW!