Religions die hard. It takes an orgy of evidence to change a person’s mind on a subject that is integral to their moral and ethical structure—Tom Luongo
In this issue
The Diokno-Led BSP: The Weak Peso is a Net Win, Don’t Fight the BSP, Buy the USD-Php!
-The Duterte Administration Embeds into the BSP
-Diokno: Weak Peso is a Net Win!
-Diokno’s Many Statistics Equals Economics Myths; Is the BSP Governor an MMTer?
-Mr. Diokno’s Penchant for the INFLATION TAX!
-The Diokno Led BSP will EASE SOON: Don’t Fight the BSP, Buy the USD-Php! The BSP Independence Myth
The Diokno-Led BSP: The Weak Peso is a Net Win, Don’t Fight the BSP, Buy the USD-Php!
The Duterte Administration Embeds into the BSP
From last week: (bold original)
Needless to say, given that the political economy has been dependent on these twin bubbles (race to build supply and the neo-socialist bubbles) politicians will pressure the monetary authorities to accommodate them.
And such is the reason that the BSP’s remarkable restraint should prove to be fleeting.
January Quantitative Tightening: The BSP Withdraws Record Funding to the National Government, March 3, 2019
The appointment of former Budget Secretary, Benjamin Diokno, as the Governor of the Bangko Sentral ng Pilipinas (BSP) came as a surprise to the public.
The BSP's capture by the administration has been anticipated by us in the above.
While the BSP hierarchy, some business groups, and bankers welcomed the appointment, some external analysts see this development as heightening the risks of politicization and the potential loss of independence of the central bank. Naturally, theadministration denies this.
The diametric reactions have been intuitive.
For the banking system, with the BSP poised to exercise increased control of the industry through the new BSP law, who would dare question such an appointment?
Not content with the BSP law, the central bank even desires to expand its regulatory dragnet over the parent or holding firms of banks! So any expressed opposition from the industry would likely be met by vindictive responses by the regulator! These economic agents would not desire to lose their franchises or be taxed to extinction, or face the risks of nationalization. As such, singing hallelujahs and fawning over the actions of the administration would be the natural response.
In contrast, with fewer risk exposure to domestic politics, some external commentators had the mettle to call a spade a spade (even benignly).
Diokno: The Weak Peso is a Net Win!
What exactly is central bank independence (sometimes referred to as autonomy) and why is it important? Independence means just that, independence from the dictates of government, the freedom to conduct monetary policy as central bankers (and not politicians) wish. Why does it matter whether a central bank is independent or not?
From the ABS-CBN: (March 5, 2019) "Price stability is one goal of BSP. Financial stability is the other one. But it's more than that," Diokno said in a text message reply to ABS-CBN News. "BSP’s role is to ensure steady, strong growth. In order to achieve this, monetary policy has to be in sync with fiscal policy," he said
Merriam Webster’s definition of “in sync”: “in a state in which two or more people or things agree with or match one another and work together properly”
This Nikkei Asian Review article describes fittingly what Mr. Diokno wishes to impart: “A rate cut would help reduce financing costs of Duterte's "Build, build, build" program, which aims to spend over 8 trillion pesos on roads, bridges and airports by 2022.”
The BSP’s Objective: “The BSP’s primary objective is to maintain price stability conducive to a balanced and sustainable economic growth. The BSP also aims to promote and preserve monetary stability and the convertibility of the national currency.”
Last year, the erstwhile budget secretary as a rah-rah boy for the weak peso: (Philstar July 10 2018): [bold added] The weakening of the Philippine peso, one of Asia’s worst performing currencies so far this year, is a “net win” for the country, Budget Secretary Benjamin Diokno said Tuesday amid concerns over the local currency’s slump. According to Diokno, the depreciation of the peso is expected to benefit overseas Filipino workers, the business process outsourcing industry and the country’s exports.”
The BSP Chief wants a weak peso!
Diokno’s Many Statistics Equals Economics Myths; Is the BSP Governor an MMTer?
WHERE in the BSP objectives does it state that monetary policies need to be in sync with fiscal policies?
Figure 1
What happens if fiscal policy contravenes or clashes with price stability? The surging fiscal deficit has been accompanied bysoaring CPI for the past two years. (figure 1, upper window)
Which will Mr. Diokno take as THE BSP’s priority in the case of the present conflict?
And has easy money policies reduced the debt burden supporting “build, build and build” and the record fiscal deficit?
Bureau of Treasury’s debt servicing data shows that this claim has been unfounded. It is true that reduced interest rates lower financing costs, on the surface. But there are second-order consequences. That is, lower financing costs raises the stock of debt. In this case, the government has used lower rates to expand debt financing. Total annual debt service (interest plus amortization) surged from Php 490.36 billion in 2017 to Php 776 billion in 2018 or by 58.18% to reach the second highest level over the past 23 years! (figure 1, lower window)
Figure 2
As to the claim that the weak peso boosts OFWs, service or goods exports where is the empirical proof?
Wouldn’t price instability and the consequential loss of purchasing power overwhelm the supposed advantages provided by these?
The trend of OFW remittances continues to sink as the peso fell. OFW remittance growth rate peaked in early 2014 then headed south in the succeeding years. Such downtrend as accurately predicted here, signified OFW’s diminishing marginal returns. So the weak peso hasn’t boosted OFWs as alleged. (figure 2, upper window)
The weak peso has neither boosted goods export nor services export as so claimed. (figure 2, lower window)
Not only have these assertions been grounded on fallacious theories and assumption, but more importantly, the evidence does not support them.
The great Austrian Economist Ludwig von Mises presciently identified the ideology behind this: [The Causes of Economic Crisis, p.194] (bold added)
Credit expansion not only brings about an inextricable tendency for commodity prices and wage rates to rise it also affects the market rate of interest. As it represents an additional quantity of money offered for loans, it generates a tendency for interest rates to drop below the height they would have reached on a loan market not manipulated by credit expansion. It owes its popularity with quacks and cranks not only to the inflationary rise in prices and wage rates which itengenders, but no less to its short-run effect of lowering interest rates. It is today the main tool of policies aiming at cheap or easy money.
Yet, the new BSP chief subscribes to it.
Dyed in the wool money cranks have been reincarnated today through the Modern Monetary Theory (MMT) which believes that fiscal deficits can be funded freely by the printing press with hardly any costs. And socialist ideologues in the US have used MMTto justify their programs.
Harvard professor Kenneth Rogoff wrote recently at the Project Syndicate to push back on this: “Powell is absolutely right about the deficit idea, which is just nuts. The US is lucky that it can issue debt in dollars, but the printing press is not a panacea. If investors become more reluctant to hold a country’s debt, they probably will not be too thrilled about holding its currency, either. If that country tries to dump a lot of it on the market, inflation will result. Even moving to a centrally planned economy (perhaps the goal for some MMT supporters) would not solve this problem.” (bold mine)
Has the BSP embraced an MMTer as Governor?
Boy, do I miss Mr. Espenilla and Mr. Tetangco! Mr. Diokno’s presence makes his predecessors look like hard money (gold) bugs!
Mr. Diokno’s Penchant for the INFLATION TAX!
At the outset, Mr. Diokno’s inaugural proposition has been to raise the Reserve Requirement Ratio on the banking system. The prospect of the availability of more money triggered a buying orgy on bank stocks. The financial index zoomed by 4.6% to lift the headline index by 2.03% this week.
To fulfill the desire for a regime based on cheap money, Mr. Diokno pushed further for interest rate cuts.
But perhaps due to pressures from some groups, Mr. Diokno reportedly moderated his push for an outright easing stating that he would rather “wait for fresh data to confirm that the inflation rate is indeed on a downtrend before pushing for a reduction in interest rates or bank reserve requirements”
Figure 3
The National Government and the BSP reported February CPI at 3.8%. Statistical inflation peaked in September 2018 at 6.7% and dropped by almost half in February in 5 straight months of decline. Curiously, headline inflation has plunged below the core inflation of 3.9%. (see figure 3, upper window) The growth rate of food and energy prices have dropped faster and far more than the other items in the consumer basket. Have Filipinos been backing off consuming basic goods to spend more on other items?
Though I would doubt the accuracy of the statistical CPI, what has been telling has been that inflation is being weighed down by intensifying tightening of financial conditions. (see figure 3, lower window)
The CPI won’t be the reason for the BSP Governor’s coming action.
Mr. Diokno doesn’t say that the inflation from record public spending represents an INDIRECT TAX.
So he would want to increase such transfers to the political regime.
Hence, Mr. Diokno’s push for cheap money should expedite the financing and resource transfers to from you and me to the Mr. Duterte, his allies, cronies and to Mr. Diokno’s relatives who, reportedly, have been benefiting from the build, build and build.
It’s free lunch for him….at our costs.
The Diokno Led BSP will EASE SOON: Don’t Fight the BSP, Buy the USD-Php! The BSP Independence Myth
Figure 4
With real rates in the POSITIVE, subsidies to the NG has ceased. Money has been tightening. The yield of 1-year treasury notes (PDS) has been higher than the CPI for FOUR straight months through February! (figure 4, upper window)
And tight money wouldn’t be allowed to jeopardize or hamper this regime’s spending and centralization goals. So one can expect that the new BSP governor to undertake easing measures soon!
Free lunch MUST continue for them!
Unfortunately, profound problems in the banking sector will pose an obstacle. The humped or partial inverted curve of BVAL ratesare manifestations of the industry’s dilemma. (figure 4, middle window)
Though yields have come down across the curve, the decline has been uneven. While inflation expectations have influenced the longer end that has resulted to bigger decreases in yields, however, the shorter end has been marginally off the recent multi-year highs. The short-end should respond to Mr. Diokno’s call for rate cuts.
But it hasn’t.
Yet.
It might not.
In fairness, the BSP has been conducting fiscal operations even prior to this administration. (figure 4, lower window)
The share of BSP monetization to the GDP has been rising since 2015. Such operations have only accelerated in the present administration. The spike in 2013 signifies the BSP’s response to Ben Bernanke’s Taper Tantrum.
Monetization of the NG’s expenditures debunks the notion of the BSP’s independence. The BSP's conduct of fiscal policy through monetization has entwined the central bank with the NG.
To rescue the banking system, the BSP triggered this nuclear option in 2015.
The appointment of Mr. Diokno had been most likely designed to ensure that the Duterte government would have unfettered access to the peso printing press!
Mr. Diokno’s helm should help the administration centralize the financial industry.
Federalism anyone?
Yet, with emergency stimulus policies all in (interest rates, QE and fiscal stimulus), what would be left for the BSP and the NG to use once the economy falters?
Mr. Diokno’s dogma provides us a clue. Print the peso away!
Says Mr. Diokno, the weak peso is a NET WIN!
Don’t fight the FED BSP!
Buy the USD-Php!
P.S. The BSP will cut the Reserve Requirements Ratio first. That’s my past and present prediction. But that’s hardly about easing. Rather, such would be about releasing regulatory constrained funds to the liquidity-starved banking system…
