In this issue
Nothing is What it Seems: Media Screams Construction Boom; Statistics Asks Where? More Fun at the PSE!
-Headline Construction Boom versus Construction GDP and Banking System’s Construction Loans
-Construction Permits: Except for Build, Build and Build, Where’s the Boom?
-Opposing Price Signals of Cement and Construction Materials; Cost Overruns as Obstacles to Construction Projects
-More Fun at the PSE!
Nothing is What it Seems: Media Screams Construction Boom; Statistics Asks Where? More Fun at the PSE!
Nothing is what it seems.
On the 3Q GDP, some mainstream commentators said that the Philippine economy was “firing on all engines”.
However, the supreme irony was the major cog in the statistical economy, the consumers, had been nowhere in sight in three straight quarters.
Moreover, 1Q, 2Q and 3Q GDP was mainly about the government’s spending.
The same dynamic holds with the construction sector.
Popular wisdom holds that there has been a construction boom.
These headlines provide some examples.
Headline Construction Boom versus Construction GDP and Banking System’s Construction Loans
Now please go and take a look at the above chart from the GDP data. Yes, the data is from the government’s Philippine Statistics Authority which can be found here.
It may be true that the public sector construction has bounced in the 2Q (+12.1% real) and 3Q (+12.56% real) from the lows of the Q1 2017 (+1.9% real), but this has remained significantly way off the astronomical highs of the 2H of 2015 and 1H of 2016 [Q3 2015 +54.2%, Q4 2015 +36.39%, Q1 2016 +38.54% and Q2 33.52%]. From the peak Q3 2015, public sector construction declined until the 1Q of 2017.
As a matter of GDP statistics, “build, build and build” or the much touted public sector infrastructure construction boom occurred in 2015-2016. Current activities have hardly been a shadow of the former.
And it has even been worse for the private sector. The private sector contributes about 80% of the total value added construction In the 2Q and 3Q of 2017, real construction activities registered 5.12% and .56% ONLY! Just how are these numbers supposed to signify a construction boom????
A boom in popular narratives only?
The broader picture even gives a gloomier perspective: Private construction GDP has been in a consistent DOWNTREND since Q1 2013! Check out the red trend line on the upper chart
There were occasional bounces alright. On a peak-to-peak basis, the government’s own data, sorry to say, points to, not of a prospective boom, but a coming STAGNATION! That is in the strict condition that the 5-year trend holds.
As I have been saying, the BSP is terrified to let go of its implicit subsidies to the government, as well as to the borrowers of the banking system and the capital markets (mostly the elites). They kept policy rates at HISTORIC lows even as the US Federal Reserve raised policy rates by a quarter percentage point to a target range of 1.25% to 1.5%. The US Fed also confirmed that it would step up the monthly pace of shrinking its balance sheet, as scheduled, to $20 billion beginning in January from $10 billion.
Despite the BSP’s free money policy, this has done little to arrest the critical downshift in the banking system’s loan portfolio to the construction sector.
True, 3Q construction loans bounced off the lows of the 2Q. But in resonance with the GDP, the current rate of construction loans has been eclipsed by the blazing rates of 45% to 50% in the whole of 2013 to the 1H of 2014. Since, the banking system’s construction loan growth has steadily cascaded.
The banking system’s real estate loans seem to have also turned the corner. But I would not rely on the integrity of this data. As a way to go around the BSP’s regulatory cap (BSP circular 600), it is almost a certainty that there has been a significant diversion of these loans through other channels
Credit is mostly responsible for the frantic buying of properties which has been expressed by surging prices. Changes in M3 have dovetailed with property prices with a short time lag.
Data on Philippine property prices have been from the BSP and from the private sector (most likely Colliers Jardine) as published by the Bank for International Settlements.
Moreover, property companies fund their sales, projects and their inventory buildup mostly through credit. And a key reason why the PSEi 30’s debt intake has dwarfed its earnings has mainly been from activities of the property firms.
Another possible channel to circumvent or go around the BSP’s statutory limits would be Foreign Direct Investments (FDIs).
Debt has constituted a growing share (71% share as of the 3Q) at the expense of equity. The BSP and the PSA say that one of the biggest industry recipients of FDI has been the real estate sector.
So going back to the construction boom. Since money flows have reverberated with the GDP this hardly exhibits any construction boom. For now.
Construction Permits: Except for Build, Build and Build, Where’s the Boom?
And there have been little signs of immediate FUTURE construction improvements if based on the activities of construction permits.
Construction permits represent the early phase of the construction process. Compared to the 2Q meltdown, the PSA’s 3Q data showed slight improvements. The improvements have been more about alleviation rather than a strong recovery
The Total number of permits popped to a positive +1.1% from 2Q’s -9.21%. Total floor area remained down -6.45%, but a lot better than 2Q’s -24.58%. Total Value also shrunk by -6.55% but was much less depressed than 2Q’s -35.12%.
From the residential side, improvements in single houses, the largest component (number +1.97%, floor area +3.4% and value +7.41%) of the residential sector, partly mitigated sharp declines in apartment (-23.42%, -24.57% and -14.78%) and residential condo construction (+18.18%, -32.81% and -29.6%).
The massive declines in residential condo construction permits hardly square with the announced CAPEX component of listed property firms.
From the non-residential aspect, it was the booster from “build, build and build” through institutional buildings (+.73%, +24.43% and +21.06%) that mitigated the downside.
The Institutional building permit is defined by the PSA as “buildings which primarily engaged in providing educational instructions and hospital/health care; ports, airports and other government buildings; i.e. school, museums, libraries, sanitaria, churches, hospitals.”
Nevertheless, the dominant trend matters. After the culmination in Q3 2014, construction permit growth has been descending steadily.
The downturn in the growth of construction permits has reinforced the declines in the construction GDP and banking loans.
Except in the newspapers, there hardly had been a construction boom.
Opposing Price Signals of Cement and Construction Materials; Cost Overruns as Obstacles to Construction Projects
Here’s more.
According to the government’s construction material wholesale ‘build, build and build’ price data for November, cement prices continued to significantly contract (-4.15%) but at a slower rate (-5.01%) from October.
The continued contraction in cement prices translates to greater supply relative to demand. And ironically, cement manufacturing has only been spiraling higher. In other words, the race to build supply must have been partly responsible for the depressed prices of cement
The newspaper’s construction boom must have amplified expectations of a robust demand, hence cement producers responded by accelerating production. Or, producers have trusted the newspaper boom than the market price indicative of the actual conditions.
So cost overruns will plague “build, build and build” projects!
Ballooning costs overruns will compound on the fiscal and trade deficits, as well as raise debt or BSP financing! Great economic stuff.
And not only that, such price escalation has likely percolated into construction material retail prices (private sector construction) which have also seen a lift (+1.72% in November from 1.42% in October).
So the private sector should likewise see problems from cost overruns. And amplified price volatility reduces the incentives for pursuing construction projects as this entails increased financing and or reduced profits.
And please do notice that M3 has undulated suavely with the government’s construction materials data. It implies that “build, build and build” has been financed by the banking system or by the BSP.
And a tightening monetary condition WILL affect public and the private sector’s build, build and build projects.
China’s current experience should serve as an example.
China increasingly is taking a scalpel to infrastructure projects that local governments cannot afford, pulling permission for nearly 1,000 public-private partnerships this year as the one-party state pivots away from economic stimulus.
A 30 billion yuan ($4.55 billion) subway project in Baotou, a city in the Inner Mongolia autonomous region, was canceled by the central government in August, Chinese news outlets reported this month. Beijing had raised alarm, noting that the city collects only 27 billion yuan in annual gross receipts. Even a senior Baotou official acknowledged the "significant risk."
Subway and expressway projects in Hohhot, the capital of Inner Mongolia, also are reportedly at a standstill…
But China's central leadership also is tightening oversight of public-private partnerships. The Finance Ministry has withdrawn authorization for 973 such projects this year through September, with two-thirds of those coming since July.
More than a few of these projects dwarf the local government's annual revenue, and they also guarantee debt for contracting companies. Even more projects have no prospect of profitability, which could deepen the financial burden on localities.
What you see, hear and read in media isn’t what you get in reality
More Fun at the PSE!
Nothing is what it seems.
As one would observe, it has been MORE FUN at the Philippine Stock Exchange! The only stock exchange in the world which features the implicit practice of marking the close.
The cumulative (mostly) pumps and (one) dump contributed to a startling 1.03% of this week’s .39% gain!
Put differently, had it not been from such concerted pumps, the PSEi 30 would have declined. But declines have not been permitted. The Phisix has to do a bitcoin.
So some people would do anything, by any means, just to lift the index. This is a manifestation how free lunches have become an obsession.
Such is an important revelation that prices of the PSEi 30 hardly reflects a normally functioning market, but one of contrivances, manipulations, and trickery.
And of course, like in Sodom and Gomorrah, malevolence was considered a virtue.
This reminds me of German Nazi politician and Reich Minister of Propaganda of Nazi Germany Joseph Goebbels who once wrote
Intellectual activity is a danger to the building of character.
The rank and file are usually much more primitive than we imagine. Propaganda must therefore always be essentially simple and repetitive. In the long run basic results in influencing public opinion will be achieved only by the man who is able to reduce problems to the simplest terms and who has the courage to keep forever repeating them in this simplified form, despite the objections of the intellectuals.
What you want in a media system is ostensible diversity that conceals an actual uniformity.
Nothing is what it seems.
