Truth is only one of many things demanders [of ideas] want from ideas. And sometimes truth has nothing to do with it. Often, demanders in the market for ideas want magical thinking. By “magical thinking” I mean an argument with one or more steps that require something impossible. Unfortunately, experts often have an incentive to engage in magical thinking—Roger Koppl
In this issue
The Duterte Regime’s Three Economic Rescue Policies: Provide Assurance, Extend Relief and Throw Money into the System
1. Introduction
2. The Economic Damage Control Campaign: Devious Statistics and Promises of Recovery
3. Will Padding Statistics Be Enough to Conceal Mounting Real Estate NPLs in the Banking System?
4. Extending Relief: Will a Price Cap on Credit Card Rates Be a Boon or Bane to the Consumers?
5. Throwing Money via QE and the Public Spending Binge (Though Spending was Down in August)
6. Throwing Money Won’t Save Insolvencies, But Transfers Resources to the Elites
The Duterte Regime’s Three Economic Rescue Policies: Provide Assurance, Extend Relief and Throw Money into the System
1. Introduction
The most important lesson, aside from the moving goalpost, has been that the NG subjected the population to a repressive social “health” policy when they were either clueless of its economic implications or had an unstated different agenda in mind.
The Failure of the Centrally Planned ECQ Health Policy, Statistical Charades, and 1Q Real Estate Divergences July 12, 2020
Having transformed the nation into a guinea pig for its grand Medical gulag experiment, shocked at the consequences, drastic remedial measures have been undertaken by desperate authorities to mitigate the unintended repercussions of their previous actions.
So aside from gradually relaxing repressive socio-economic policies, the policies by by the National Government, along with the Bangko Sentral ng Pilipinas, can be condensed as:
1 provide assurances that the damage to the economy has been minimal or that the government is in control of the situation
2 extend financial or monetary relief, and
3 throw money into the system.
Adding these together, the tactical measures, focusing mostly on short-term alleviation, barely have any considerations of future consequences.
As the great proto-Austrian French economist, Frédéric Bastiat, in his splendid masterpiece, “That Which is Seen, and That Which is Not Seen”, reminds us:
Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, — at the risk of a small present evil.
Let us deal with these.
2. The Economic Damage Control Campaign: Devious Statistics and Promises of Recovery
As part of the campaign to instill into the mindsets of the public that the damage from their policies has been minimal, media publishes, day-in and day-out, statistics and announcements released by different government agencies stating of the contained economic losses, as well as repeated promises that the ‘worst is over’ and that a silver lining awaits the nation with a strong recovery ahead.
For instance, permanent job losses from the start of GCQ tallied only more than 200k jobs, said the Department of Labor and Employment (DOLE), while only 6% of firms remain closed through September, reported the Department of Trade (DTI).
And one would think of the authenticity of a business headline “Japan chamber bullish as Philippines allows full business operations”. Except that the details matter. From the ABS-CBN (October 2): Nobuo Fujii, the group's vice president, said the new government policy is viewed as a positive development, but he cautioned that certain challenges remain which could prevent Japanese businesses from operating at full capacity. "It's good news... But the transportation matter is the problem," Fujii told Kyodo News, citing public transportation as a deterrent in restoring business activities and transactions to a level seen before the pandemic. In Metro Manila, public transportation such as in-city buses and railway trains was forced to cut a significant number of passengers per trip, owing to minimum health standards requiring commuters to maintain an acceptable level of physical distancing. Public routes for jeepneys, another popular and affordable mode of public transportation, have also yet to be restored to pre-pandemic levels as transportation authorities opted for a gradual easing of restrictions. Despite the challenge, Fujii is hopeful that the chamber's more than 650 Japanese member companies could recoup some of the losses this year or the next with the new government policy.
We understand that saying direct "no" is barely ingrained in the Japanese culture. So the Japanese tend to couch their language in a positive light. The remarkable thing is that the supposed source of bullishness is to be able to “recoup some of the losses this year or the next”. It is like saying that government policies providing some bread crumbs would be better than no crumbs at all! Good for them that they have sufficient buffer to ride out the storm. But, of course, the Japanese business group won’t like to share a similar fate like Facebook.
3. Will Padding Statistics Be Enough to Conceal Mounting Real Estate NPLs in the Banking System?
I might add that part of the campaign to show that the authorities are in control may include misrepresenting or embellishing the state of the economy. For instance, despite the economic meltdown in the 2Q, we’ve been told that property prices have been raging.
Though we’ve dealt with this, the BSP provides a new twist.
Figure 1
Back in August, we anticipated that the BSP would be bragging about this.
Property Boom amidst a Recession? 2Q Property GDP, PSE Property Firms Revenues, Sales and Income Crash! BSP Bailouts Bank-Real Estate Sector August 30, 2020
From the BSP (September 25): Residential real estate prices of various types of new housing units in the Philippines rose by 27.1 percent year-on-year (y-o-y) in Q2 2020 based on the Residential Real Estate Price Index (RREPI) (Figure 1). This is the highest y-o-y growth rate recorded since the start of the series in Q1 2016. Banks cited the following reasons for the uptick in real estate prices in Q2 2020: a) higher demand for high-end projects, which drove the average price per square meter (sqm) upwards; and b) rising prices of construction materials, labor costs and other indirect costs, e.g., higher marketing costs of appraised premium properties.1 Further, in terms of area and type of housing unit, the highest contributors to the increase in housing prices were loans for the purchase of condominium units (particularly those in NCR) and single attached/detached houses. Low base effects also contributed to the price growth…
Curiously, the BSP added: “In Q2 2020, the number of RRELs granted for all types of new housing units declined by 55.2 percent y-o-y and 54.9 percent q-o-q. Similarly, declines in RRELs were also observed in both NCR and AONCR”.
The BSP produced the charts, not only of the supposed real estate boom but also the plummeting loans.
From the statistical point of view, the BSP showed that property prices and loans are disconnected. Hence, record prices came even as the growth rate of real estate loans plunged.
But economic logic supported by other evidence shows that this can’t be true.
Purchases of big-ticket items are typically funded by credit. So, if loans crashed, how was the reported boom financed? By savings? Whose savings?
Additionally, how can a boom occur when real estate sales of PSE’s real estate index and the four components of the PSEi more than halved YoY during the 2Q!
More importantly, how can a boom transpire when the growth rate of the share of non-performing consumer real estate loans to the total loan portfolio rocketed by 99.55%, or faster than the supposed booming prices? If NPLs transform into foreclosures, wouldn’t this represent additional supply?
The point being, with the apparent collapse in demand and financing, in the face of excess capacity, how and what made possible the surge in property prices?
Or, how can property prices boom when its main funding source, income, and credit, have collapsed?
Here is what I wrote last August (bold original)
The BSP’s lifeline to the property sector shows how the real estate industry has become "too big to fail" or a systemically important industry.
Let me surmise why such statistics came about. The fastest-growing NPLs emanates from the property sector. The banking system’s collateral base emanates mainly from real estate assets.
So aside from extending a bailout by increasing the banking system’s lending limits, the BSP has to convince the public of an ongoing boom so as not to incite cross-cascading defaults that would debilitate the banking system, hence the likely recourse of publishing a statistical charade.
After all, the BSP believes in the Keynesian elixir, where animal spirits or investor confidence, aside from demand management, represent the main factors of investment and economic success.
The Medical Gulag Experiment: PSYEi Revenue and Income Crashed in 2Q as Debt Zoomed! COVID-19 Death Toll Mounts! Say’s Law In Action August 23, 2020
Yet, no amount of misinformation or even market manipulation would alter the fragilities embedded in the balance sheets of the banking system and their borrowers. The markets will eventually expose the economic distortions caused by monetary and political interventions.
4. Extending Relief: Will a Price Cap on Credit Card Rates Be a Boon or Bane to the Consumers?
Forbearance is the next method used by the authorities to mitigate the adverse impact of their policies supposedly. The general idea is to reduce the overhead expenditures of consumers/businesses/voters by waiving all fees and interest payments, as well as defer principal on debts or mortgages and property rentals.
Here’s the latest, a cap on interest rates of credit cards.
Figure 2
From the Manila Times (September 24): THE Bangko Sentral ng Pilipinas (BSP) has set a ceiling on the annual interest rate on all credit card transactions in the country. In a press briefing on Thursday, BSP Governor Benjamin Diokno announced that the Monetary Board approved the 24 percent cap, which will take effect on November 3 and shall be subject to review every six months.
Don’t blame COVID-19 and the ECQ, but Nonperforming Credit Card loans, which represent .23% of the banking system’s Total Loan Portfolio (TLP), as of June 2020 has been rising since it bottomed in September 2016.
The use of credit cards has surged along with delinquency or non-performing credit card receivables since 2016. Credit card growth climaxed at 57.04% last February and decelerated to 24.2% in August.
BCcampus Open Textbooks explains the economic effect of a credit card interest cap: “The demand and supply model predicts that at the lower price ceiling interest rate, the quantity demanded of credit card debt will increase from its original level of Q0 to Qd; however, the quantity supplied of credit card debt will decrease from the original Q0 to Qs. At the price ceiling (Rc), quantity demanded will exceed quantity supplied. Consequently, a number of people who want to have credit cards and are willing to pay the prevailing interest rate will find that companies are unwilling to issue cards to them. The result will be a credit shortage.”
By disallowing the supply of credit to adjust prices to reflect higher delinquency rates, imbalances between supply and demand will mount. That is, there will be increased demand for mandated low-priced credit vis-à-vis higher losses absorbed by the credit suppliers. The accruing losses will incentivize suppliers to decrease the availability of the supply of credit. Economics 101.
Though captive banks of the BSP agree that such a cap is required to supposedly “ease the burden of Filipinos”, a dissenting voice, which didn’t get much publication, from the Credit Card Association tells of a different story.
From ABS-CBN News (September 28): The cap on credit card interest rate to 2 percent per month has "unintended" consequences for card holders in the long run as banks are likely to cut some costs to offset foregone revenue, the Credit Card Association of the Philippines said Monday. Banks are likely to cut down on added costs such as freebies, reward points and rebates in the long run, Credit Card association of the Philippines executive director Alex Ilagan told ANC. "In the long run it will be detrimental also for consumers, the banks will try to cut down on their added costs," Ilagan said. Ilagan said banks could also become "more selective" and could deny credit to the riskier sector, which is the lower income groups, once credit card interest rates are capped. Existing card holders may also be curtailed in terms of credit card lines and may be forced to borrow from informal lenders, he said.
So do you see the demand and supply curve afflicted by the credit card cap in motion? Aren’t these: More selective, deny credit to riskier sector, and curtailment of credit card lines: equal to “companies are unwilling to issue cards to them”?
That said, which will benefit the consumers: significantly reduced access to credit, or to allow market rates to ration credit according to those who can afford it? Which will bring about an increase in credit risk to the financial system, a price cap that induces more subprime borrowers, or market-based pricing?
Short-term or Band-Aid fixes, moored on the supposed supremacy of political response, will most likely bring about unforeseen consequences to the mainstream.
And this is supposed to constitute an effective policy?
5. Throwing Money via QE and the Public Spending Binge (Though Spending was Down in August)
Throwing money into the system has signified the most popular of the political fixes.
Figure 3
From the Manila Standard (October 2): The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, said Friday it approved the request of the government for a fresh provisional advance of P540 billion to be used for deficit financing amid the coronavirus pandemic. “The Monetary Board approved today the national government’s request for a new tranche of provisional advances in the amount of P540 billion [$11.1 billion], pursuant to Section 89 of Republic Act 7653, as amended,” BSP Governor Benjamin Diokno said in a message to reporters. Diokno said the approval came following the Bureau of the Treasury’s full settlement on Sept. 29, 2020 of the previous repurchase agreement with the BSP wherein the Treasury borrowed P300 billion from the BSP at zero interest rate.
Because collections of BIR, the Bureau of Customs, and Non-Tax Revenues dropped 10.94%, 8.6%, and 17.2% YoY in August, Total Revenues posted a 13.05% contraction.
Meanwhile, because the main components, particularly, the National Government and the Allotment to the Local Government Units slowed to 6.64% and 19.64% in August, almost half of July’s 12.4% and 19.64%, respectively, public spending growth was surprisingly flat in August (+.38%).
Hence, August’s Php 40.074 billion deficit, which in the 8-month aggregate soared to a record Php 740.692 billion, still half of the initial deficit target of Php 1.56 trillion or 8.1% of the GDP for 2020. The Department of Budget and Management (DBM-DBCC) increased its most recent deficit target to 9.6% of the GDP.
The DBM expects GDP to post a 3.4% to 5.5% contraction. That is, the National Government’s target for its deficit is from Php 1.77 trillion or Php 1.81 trillion at the year’s end.
Meanwhile, public financing in August rocketed to an unprecedented Php 582.72 billion, bringing the cumulative to 8-month financing to Php 2.264 trillion or more than double the aggregate deficit.
Figure 4
In the context of official public sector liabilities, the aggregate official public debt spiked by 21.11% YoY to Php 9.615 trillion. Though foreign borrowing hugged the headlines, the national government’s domestic debt registered the most increase, vaulting by 27.33% YoY to Php 6.713 trillion last August. As % of GDP, August’s public debt amounts to 51% of the projected GDP (-3.4%) or 52.13% (-5.5%).
Year-to-date, official domestic debt soared by Php 1.585 trillion. Combined with the Php 840 billion QE funding from the BSP, total deficit financing would amount to Php 2.425 trillion! That’s 34% more than the top estimates of the projected deficit.
And yet, more than Php 400 billion of domestic and foreign loans are in the pipeline headed to the close of 2020 as programmed borrowing would reach at least Php 10 trillion.
If in the 2H, an improved GDP is expected, why is the National Government and BSP raising so much financing? Why the recourse to extensive monetary inflationism?
6. Throwing Money Won’t Save Insolvencies, But Transfers Resources to the Elites
What has the BSP’s debt monetization or QE done in the past?
It injected cash into the banking system, which diffused into the growth of the money supply.
The torrent of liquidity initially pushed down rates. The declining rates relative to the statistical inflation (CPI) or negative real rates meant public debt had been partly financed by the inflation tax and financial repression.
The declining rates relative to the statistical inflation (CPI) or negative real rates meant that the inflation tax and financial repression partly financed public debt.
Before 2019, an upsurge in QE has accompanied the rise of the USD, partly channeled through higher inflation.
Figure 5
It has also magnified the misallocation of resources, which resulted in increased maladjustments in the economy that has been manifested by the continued surge in the financial system’s leverage. Public debt and banking system loans now account for 97.5% or 99.7% of the NG’s projected GDP. And these exclude capital market debt and other forms of non-bank debt.
Despite the last few years of injections, which have been supported by cuts in policy rates and reserve requirements, the banking system’s credit expansion continues with its southbound path.
An article characterized the financial system as swimming in cheap funds, but with low appetite, so bank credit expansion fumbled to a fifth straight month of ennui.
Production loans slowed further to 4.16% in August from 5.91% a month ago, while consumer loans grew by 12.96% from July’s 17.25%. Given that regulatory and operational relief has been extended to the banks by the BSP, the numbers disclosed can’t be relied on as anywhere accurate.
You can lead a horse to the water, but you cannot make it drink.
Why? Because mounting bad debts have plagued the banking system.
It is proof that infusing a tsunami of liquidity won’t solve insolvency issues; it worsens them instead.
The still positive growth rate of bank lending, more or less, signifies borrowing by the firms owned by the elites. Most of the biggest banks, incidentally, are owned by the same elites.
Hence, while the role of QE is implicitly to bail out banks, which are owned mostly by the elites, as well as implement negative real rates (Financial Repression) to reduce the systemic debt burden, where the government and firms owned by the elites are the biggest debtors, the other ramifications are to increase risks to the currency, the banking and financial system, either through the reemergence of street inflation and or from waves of defaults from bank borrowers.
So how can a policy of throwing money rescue a system that has been skewed disproportionately towards the banks, elite firms, and the government?
More importantly, how would a policy of inflationism solve the problem of insolvencies?
