Showing posts with label monetary policies. Show all posts
Showing posts with label monetary policies. Show all posts

Sunday, October 06, 2024

Marcos-Nomics Stimulus Update: August Budget Deficit Narrows, Strong Peso Reduces Public Debt, and Amortization Payments Reach All-Time High!

 

Lowering rates is a tool to rescue the government, but it will also make the Treasury add more debt in the next few months. If you make it easy for governments to borrow, they will gladly do it and continue printing currency, leading to the currency’s slow decline—Daniel Lacalle 

In this issue

Marcos-Nomics Stimulus Update: August Budget Deficit Narrows, Strong Peso Reduces Public Debt, and Amortization Payments Reach All-Time High!

I. A Growing Dependence on Non-Tax Revenue Growth? Or, Padding the Government’s Top line?

II. August’s Decline in Public Spending Due to Technicalities, Robust Pre-Election LGU Spending

III. Eight-Month Amortization Payments Hit All Time, Debt Servicing Cost at Annual 2023 Levels!

IV. Mounting Neo-Corporatism/Fascism Policies: Privatize Profits, Socialize Costs

V. Strong Peso Resulted in Lower Public Debt Last August

VI. Conclusion

Marcos-Nomics Stimulus Update: August Budget Deficit Narrows, Strong Peso Reduces Public Debt, and Amortization Payments Reach All-Time High! 

The "Marcos-nomics Stimulus" remains intact. Though deficit spending "narrowed" and public debt fell in August, technicalities and political agenda like pre-election spending points to the government’s deferred actions. 

GMA News, September 25, 1965: The Philippine government yielded a narrower fiscal shortfall in August amid growth in state collections and contraction in expenditures during the period. Data released by the Bureau of the Treasury on Wednesday showed the national government’s budget deficit stood at P54.2 billon last month, lower by 59.25% than the P133-billion fiscal gap seen in August 2023. “The lower deficit was brought about by the 24.40% growth in government receipts alongside a minimal 0.68% contraction in government expenditures,” the Treasury said. August’s fiscal balance brought the year-to-date budget shortfall to P697 billion, down 4.86% from the P732.5-billion deficit in the same period last year. 

Since the government has shifted VAT collections to an end-of-quarter basis, and given that the majority of public spending is typically programmed for the end of the quarter, the essence of the government’s balance sheet scorecard will be most relevant at the end of each quarterly period. 

In any case, we’ll do a short analysis. 

I. A Growing Dependence on Non-Tax Revenue Growth? Or, Padding the Government’s Top line?

Figure 1 

Although it is true that the fiscal deficit improved in August—largely due to a combination of decreased expenditures (-0.7% YoY and -9.4% MoM) amidst a mixed performance in revenues (+24.4% YoY and -15.5% MoM)—the most significant aspect is that the year-to-August deficit dropped from the third highest to the fourth highest in the Treasury's records. 

Nonetheless, nominal figures suggest that August's performance aligns with the exponential trendline for both variables. Additionally, the general uptrends in revenues and spending remain intact. (Figure 1, topmost pane) 

As such, since peaking in 2020, 8-month financing by the Bureau of Treasury has slowed compared to last year. The Treasury remains liquid, with approximately Php 504 billion in cash, marginally lower than Php 509 billion last year. (Figure 1, second to the highest chart) 

But the thing is, non-tax revenues have anchored a substantial segment of the progress in revenue collections. Non-tax revenues rocketed 252% year-over-year last August and soared 58.9% year-to-date compared to the same period in 2023. This growth spike pushed up the segment’s share of revenue to 17.12%—its sixth consecutive month of double-digit representation. In the eight months of 2024, the non-tax revenue pie swelled to 14.53%—the highest since 2015 (Figure 1, second to the lowest and lowest graphs) 

According to the Bureau of Treasury: Income collected and generated by the Bureau of the Treasury (BTr) rose to P16.5 billion in August, more than twice its collections in the same period a year ago. The increase was primarily driven by PSALM’s P10.0 billion settlement of guarantee fee arrears, alongside increased PAGCOR income. Compared with January-August 2023’s actual collections of P150.1 billion, BTr’s YTD income for the current year has similarly improved by 33.46% (P50.2 billion) to P200.3 billion, largely due to higher dividend remittances, interest on advances from GOCCs, guarantee fee collections, and the NG share from PAGCOR income. Collections of other offices (other non-tax, including privatization proceeds, fees and charges, and grants) in August surged to P49.6 billion, nearly quadrupling last year’s outturn. (BTR, September 2024) [bold mine] 

Has the government been padding their revenue numbers partly by inflating the non-tax revenue component? Or are they becoming dependent on it? Unlike previous episodes where non-tax revenues spiked in a month or two, this marks the first time the share of this segment has been in double digits for six consecutive months 

II. August’s Decline in Public Spending Due to Technicalities, Robust Pre-Election LGU Spending 

The next item is expenditure.

Figure 2

Although decreases of .68% year-over-year (YoY) and 9.4% month-over-month (MoM) and year-over-year (YoY) were recorded in August, the expenditure for the first eight months grew by 11% YoY to a record Php 3.69 trillion. (Figure 2, topmost window)

The decline in August was primarily due to a -3.7% YoY and -4.1% MoM contraction in the National Government’s disbursement, even though spending by local government units (LGUs) remained vigorous at +9.34% YoY and -4.3% MoM.

But authorities explained the reasons behind this.

Again from the BTR: This can be partly attributed to the lower total subsidy releases to government corporations, and the sizeable outstanding checks recorded in various departments, such as the Department of Public Works and Highways (DPWH), the Department of Social Welfare and Development (DSWD), and the Department of Health (DOH), during the period. Outstanding checks represent payments made by line departments for the delivery of goods/services but are not yet presented for encashment at the banks by the concerned contractors or payees. These remain under the accounts of spending agencies in authorized government depository banks and are not yet considered as actual disbursements in the Cash Operations Report. [bold mine]

In short, the most recent uncashed disbursements from the National Government will be reflected in upcoming data.

As it stands, the brisk growth of spending by local government units (LGUs) likely signifies the pre-election (mid-term) spending.  The cumulative data for the first eight months (+9.65% YoY) reached its second highest level since the record set in 2022, which, coincidentally, was the year of the Presidential Elections. (Figure 2, lower window)

This trend is expected to be sustained as we approach the 2025 elections.

III. Eight-Month Amortization Payments Hit All Time, Debt Servicing Cost at Annual 2023 Levels!

Lower interest payments accounted for yet another reason behind the decrease in expenditures last August.

Interest payments fell by 33.6% month-over-month (MoM) but surged by 23.7% year-over-year (YoY).

Despite this, the cumulative interest outlays for the first eight months increased by 31.1% YoY, reaching an all-time high of Php 509.44 billion. Its share of allotment rose from 11.72% in 2023 to 13.81% in August, representing the highest level since 2009! (Figure 2, lowest chart)

That’s not all.

Figure 3

In peso terms, the amortization expenditures from January to August surpassed last year’s high, setting a new record! (Figure 3, topmost image) 

Strikingly, amortization expenditures for 2024 amounted to Php 1.041 trillion, which is 6.7% above the 2023 annual total of Php 975.3 billion.

While interest and amortization levels (in peso terms) reached milestone highs, the cumulative debt servicing costs for the first eight months amounted to Php 1.55 trillion—just 0.33% (Php 53.432 billion) lower than last year’s annual debt servicing cost of Php 1.604 trillion! (Figure 3, middle diagram)

Despite this data being publicly available, there has been little coverage by the mainstream media or commentary from the establishment.

More than anything else, do you see the reason driving the Bangko Sentral ng Pilipinas (BSP) to cut interest rates and reserve requirements (RRR)?

It’s all about an implicit government bailout through the provision of liquidity support and the lowering of debt servicing costs!

Net claims on the central government (NCoCG) by universal-commercial banks have risen in tandem with public debt. (Figure 3, lowest image)

Figure 4

These measures are part of the 2020 pandemic rescue template, which includes various regulatory accommodations (such as relief measures and subsidies) as well as direct interventions (liquidity injections) from the Bangko Sentral ng Pilipinas (BSP).

Even now, the BSP’s net claims on the central government (NCoCG) have mirrored the monthly oscillations in public spending. (Figure 4, upper visual)

Furthermore, considering the political economy's structure derived from trickle-down policies, these rescue efforts are not only designed to benefit the government; they also serve the interests of politically connected elites.

Fundamentally, the BSP provides elite-owned banks with benefits through favorable policies and implicit bailouts. In return, these primary financial institutions partially complying with capital requirement rules provide liquidity to the Philippine treasury markets.

Has the narrowed deficit been engineered to address this? We argue that it has not.

IV. Mounting Neo-Corporatism/Fascism Policies: Privatize Profits, Socialize Costs

Haven’t you noticed that this administration has been gradually appointing members of the elite circle to higher echelons of political power?

While the intention may be to create a "business-friendly" environment, this situation reeks of "pro-big business" rent-seeking cronyism.

How will MSMEs thrive in the face of the onslaught of inflation, taxes, and regulations being imposed?

For instance, due to mandates and new taxes, major online eCommerce platforms have required SME sellers to register with the government, comply with new regulations, and pay new taxes.

In response, an influx of aspiring online entrepreneurs has led to a significant surge in business registrations, which both the media and the government are celebrating as a boom!

But how many of these businesses will survive the sustained rise in inflation and the increase in compliance and transaction costs?

How many of these hopeful entrepreneurs—whether driven by necessity due to a lack of jobs or insufficient income—will be able to employ people, especially with recent increases in minimum wages?

Yet, who benefits from the reduction of competition? SMEs or the elites?

We read that some elites have partnered with the government to embark on initiatives to promote MSMEs.

While partnerships like these may seem ideal, how do raising barriers to entry actually promote entrepreneurship?

These initiatives, which the public perceives as beneficial political "do something" actions, are, in fact, a display (smack) of hypocrisy largely intended for election-related public relations.

Moreover, some proponents have advocated for the privatization of certain infrastructure institutions.

While this may seem beneficial in "simple" theory, without competition, tax relief, and the easing of regulatory and administrative obstacles, such privatization is likely to result in the privatization of costs while socializing losses, or could deepen the embrace of neo-fascism, corporatism, or crony capitalism.

V. Strong Peso Resulted in Lower Public Debt Last August 

Apart from inflation, the surge in debt servicing costs represents a secondary symptom of deficit spending, with the direct effect manifested through public debt.

From the Bureau of Treasury (BTR): National Government’s (NG) total outstanding debt stood at P15.55 trillion as of the end of August 2024, reflecting a 0.9% or P139.79 billion decrease from the end July 2024 level…Meanwhile, NG external debt amounted to P4.76 trillion, a decrease of 3.6% or P178.25 billion compared with the end of July 2024 level. The decline was brought about mainly by peso appreciation, which trimmed P194.90 billion, as well as net repayments of P4.17 billion, although stronger third-currencies added P20.82 billion in valuation effects (BTR, October 2024) [bold added]

As the BTR admitted, the revaluation effects stemming from a rare 3.9% appreciation spike in the Philippine peso, based on their data, contributed to a marginal reduction in Philippine debt. 

Breaking down the data: external debt decreased by 3.6% month-over-month (MoM) but rose by 4.4% year-over-year (YoY). Meanwhile, domestic debt increased by 0.4% MoM and 10.22% YoY. (Figure 4, middle image) 

As a result, the spike in the Philippine peso pulled down the percentage share of external debt relative to the total, which has been rising since its trough in March 2021. 

Although the narrowing of the budget deficit from July to August, driven by a slowdown in public spending, may alleviate some pressure to increase borrowings, it is likely that the government has merely deferred its spending pressures to the end of the quarter and the end of the year.  (Figure 4, lowest image) 

Second, the government announced that it raised USD 2.5 billion last August

Figure 5

This addition will contribute to the external debt stock, which reached an all-time high in Q2 2024 and is expected to increase further in Q3. (Figure 5, topmost graph)

External debt has now surpassed the Gross International Reserves (GIR), even though part of these borrowings is counted as part of the GIR. For instance, when the National Government raised USD 2 billion last May, the proceeds were incorporated into the June GIR: "The month-on-month increase in the GIR level reflected mainly the National Government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds." (bold added) (Figure 5, second to the highest chart) 

Make no mistake: borrowed reserves require payment, and treating them as retained earnings or savings misrepresents actual reserves

Third, it is doubtful that the recent appreciation of the Philippine peso is sustainable. 

In contrast, the rising trend of the USD-Peso exchange rate partly reflects the "twin deficits" as a consequence of the government’s deep embrace of Keynesian policies that posit spending will lead to economic prosperity. (Figure 5, second to the lowest and lowest graph) 

These deficit spending policies, which depend on an easy money regime favoring the elite, have led to a record savings-investment gap that must be funded by a domestic population constrained by low savings, making it increasingly reliant on overseas savings. 

In summary, the widening savings-investment gap—partially expressed through the BSP-Banking system's funding of historic deficit spending via record-high public debt—has contributed to the weakness of the Philippine peso.

Therefore, the current decline in public debt due to the peso appreciation represents an anomaly (a bug, not a feature) rather than a trend

With this context in mind, one must ask: who will bear the rising costs of ever-increasing public debt and its servicing—through higher taxes and inflation? 

Is it the elites, with their army of accountants and tax lawyers, shielding themselves from their direct obligations? Is it the elites who employ financial experts and, indirectly, the government, which allocates resources to benefit from inflationary policies? 

Or is it the average Mario and Juan, who have little means for protection? 

VI. Conclusion

The "Marcos-nomics stimulus" measures remain intact.

The recent cut in the official interest rate, along with an expected series of further cuts and adjustments to reserve requirements, indicates a sustained trend of deficit spending, point to an expansion of monetary easing aimed at jolting the private sector economy and achieving political agendas through spending on pre-election, the war economy, infrastructure, welfare, bureaucratic expansion and etc., in addition to boosting GDP for financing purposes.

____

References 

Bureau of Treasury, August 2024 NG Budget Deficit Down to P54.2 Billion, treasury.gov.ph, September 25,2024

 

Bureau of Treasury, National Government Debt Recorded at P15.55 Trillion as of End-August 2024, treasury.gov.ph, October 1, 2024

Sunday, December 03, 2023

Why the BSP will be Slashing its Policy Interest Rates Soon

 

Every inflation must eventually be ended by government or it must "self‑destruct"—but not until after it has done untold harm—Henry Hazlitt 

 

In this short issue 


Why the BSP will be Slashing its Policy Interest Rates Soon 

I. Led by T-Bills, Yields of Treasury Curve Crashed: "Bullish Steepener" 

II. BVAL Treasure Rates Below the BSP’s Policy Rates; The Erosion of Inflation Tax 

III. BSP’s Asymmetric Monetary Policies 

IV. BSP’s Possible Rationalizations: Expected US Fed Rate Cuts and Escalating Streak of Global Central Bank Easing 

V. BSP’s Zero Bound Policies and the PSEi 30’s Diminishing Returns 

 

Why the BSP will be Slashing its Policy Interest Rates Soon 

 

The recent crash in the yields of the Philippine treasury curve has strongly signaled the BSP’s coming rate cuts.  

 

I. Led by T-Bills, Yields of Treasury Curve Crashed: "Bullish Steepener" 

 

Will the streak of BSP rate cuts start this December or early 2024?  Why? Because these have been communicated to the public by the local treasury market.  

  


Figure 1 

 

The reliable but unheralded treasury traders—via demonstrated preference (action speaks louder than words)—have been on a Treasury panic buying spree that sent yields collapsing across the curve. (Figure 1, upper window) 

  

Treasury traders appear to be expecting a (possibly a "surprise") sharp decline in inflation. If so, a disinflationary environment entails a weaker private sector economic performance this Q4.  

  

Since its peak last November 16th, the recent tailspin of the 1-month T-bill yield hallmarked the performance of various Treasury maturities across the curve.  

 

Yet, the scale of the decline (1- and 3-month T-bills) has been substantially deeper compared to the Q2 2019 episode when the BSP began its credit easing campaign. (Figure 1, lower graph)   

 

And this may be pressing enough to force the BSP to act. 

 


Figure 2 

 

Furthermore, since yields of short-term or T-bills have plunged the most, this reshaped the slope into a "Bullish Steepener"—frequently pointing to rate cuts. 

 

Treasury curve abruptly steepened from a relatively "flat" slope last September and October. (Figure 2, upper chart) 

 

II. BVAL Treasure Rates Below the BSP’s Policy Rates; The Erosion of Inflation Tax 

 

What’s more, the across-the-curve plunge in treasury yields has resulted in a sharp tightening—BSP overnight interbank rates have become HIGHER than treasuries! (Figure 2, lower graph)  

 

Figure 3 

 

On top of this, BSP rates have been higher than the CPI and the headline GDP, reinforcing this financial "tightening" phase on an economy heavily dependent on leverage and liquidity. 

 

Crucially, higher BSP rates than the CPI—theoretically—translate to positive "real" rates, which implies that this has eroded the government's seignorage fee or the inflation tax.  

 

The BSP embarked on rate cuts when "real" rates turned positive in Q2 2019.    (Figure 3, upper graph) 

 

III. BSP’s Asymmetric Monetary Policies 

 

But, of course, monetary authorities have recently engaged in asymmetric policies.   

  

Sure enough, it has raised headline rates to multi-decade highs, which reduced credit transaction growth mainly to the supply side.  

  

But its interest rate cap on credit cards or subsidies to consumer credit has also resulted in a textbook response of fueling excess demand for consumer credit.  (Figure 3, lower chart)   

  

Such extensive build-up of leverage in the consumer's balance sheets has driven the indulgent demand for vehicles, luxury-related spending activities, and magnified property speculations. 

  

The other ramification is the transformation of bank lending operations towards consumers at the expense of industry. 

 

Other behind-the-scene operations have marked the BSP's liquidity operations.  

  

Banks and non-bank financials have been directly financing the National Government’s deficit spending via Net claims on the Central Government (NCoCG) or indirect QE—injecting liquidity into the government and the financial system.  

  

These off-kilter operations afforded the BSP to raise headline rates and paint an impression of a "sound" macro-environment. 

 

IV. BSP’s Possible Rationalizations: Expected US Fed Rate Cuts and Escalating Streak of Global Central Bank Easing 

Figure 4 

 

Aside from inflation, the BSP could rationalize its actions with the widely expected rate cuts by the US Federal Reserve in early 2024 and use the appeal to the majority—the growing streak of rate cuts by global central banks. (Figure 4, upper chart) 

 

 

Figure 5 

 

Previously, changes in the BSP policy rates have coincided with the gyrations in the yield differentials of the Philippines and the US (proxied by the 10-year).   BSP rate cuts in 2019 narrowed the spread between the 10-year Philippines and the US. (Figure 4, lower diagram) 

 

Today, since the US Fed has adopted a more hawkish stance than the dithering BSP, this broke the previous correlations—the rate spread has compressed even as the BSP held on its rates at multi-decade highs.  

 

Put this way, domestic developments determine the BSP policies.  

  

Of course, since current developments in the treasury markets have anchored our anticipation of the possible changes in the BSP's policy stance, this is also conditional on the sustainment of this unfolding trend. 

 

V. BSP’s Zero Bound Policies and the PSEi 30’s Diminishing Returns 

 

Finally, the establishment experts have been whetting the speculative impulses of the disenchanted public starved of easy money gains with the prospects of a stock market boom from "rate cuts."    

 

True, "rate cuts" have had ephemeral amplifying effects on the YoY returns from 2009-2018, but this relationship broke in 2019 (pre-pandemic).  (Figure 5, top chart) 

 

But "rate cuts" had to be bolstered with the BSP's historic Php 2 trillion liquidity injections to spur a momentary rally in 2H 2020 to 1H 2021. 

  

Worst, the BSP’s zero bound (ZIRP) policies have been associated with the PSEi 30’s diminishing monthly long-term returns. 

  

It is no coincidence that the rate cuts have fueled spikes in the CPI and contributed to the attenuation of the Philippine peso, which are all interrelated with the PSEi 30’s return. (Figure 5, lower graph) 

  

Artificial speculative booms from free-lunch monetary policies only induce capital consumption and a lower standard of living.