Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024!

If people really could formulate all their knowledge in algorithmic terms and calculate as economic theory assumes, there would be no need for real-life markets. The virtue of the real market is precisely that it calls forth knowledge that people cannot explain, justify, or defend intellectually—Stephan Marglin 

In this Issue

Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024!

I. Are Filipinos Really Spending More On Non-Essentials?

II. How the BSP Controls the Inflation Narrative

III. Widening Wealth Gap: While May CPI Inflation Rate Climbed to 3.9%, the Bottom 30% Struggle with Higher Prices

IV. Has the May CPI Peaked? Stagnating Monthly CPI Rate Changes and the Bullish Flattening Treasury Curve

V. Peak CPI? Manufacturing and Import Weakness Signals Demand Slump

VI. Bank Credit Expansion’s Diminishing Returns as Credit Card and Salary Loans NPLs Spiked in Q1 2024!

VII. Peak CPI? Labor Conditions Worsen in April as Unemployment, Underemployment and Part-Time Jobs Swell

VIII. Peak CPI? Restrained Public Spending May Ease on Supply Constraints

IX. Stagflation Ahoy! Economic and Financial Rescue Measures to Power the USD-Philippine Peso

Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024!

May CPI reached 3.9%, but could this be the peak? Signs from various parts of the financial economy, including a spike in credit card and salary loan non-performing loans (NPLs), indicate so. Have Filipinos been unaffected by inflation?

I. Are Filipinos Really Spending More On Non-Essentials?

Inquirer.net, May 31, 2024: Filipino consumers are now spending less on essential goods and services, and consuming more of nonessential items—a shift that’s not surprising at all as the Philippines moves closer to “upper-middle income” economy status, HSBC Global Research said. (bold added)

Figure 1

A closer examination of the data raises questions about the validity of this claim. (Figure 1, topmost image)

First, let's ask some crucial questions:

-Is the Philippines the subject of the study? 

-Has the generalization been anchored on an ideological slant of advocating spending one’s way to prosperity? 

-Have vested interest groups commissioned this study?

-Or has it been designed to ingratiate with incumbent political agencies promoting their supposed "upper-middle income" agenda? 

The most striking feature of that news quip is the adverb "now."

It assumes that, having been awash with savings, Philippine residents have broadly leveled up their spending patterns from the physiological needs (Maslow’s Hierarchy) towards the myriad wants (safety, social, esteem, and self-actualization). To repeat, broadly. 

By inference, it should also mean that Filipinos have been spending more than enough on essentials while in the transition to an upgrade. 

Ironically, the study didn’t point out how and what financed this shift to "consuming more of nonessential items." 

But, as previously explained, the consumer spending share of GDP relative to the government spending peaked in 2013 and has been southbound since.

That is to say, government spending has risen at the cost of consumers. (Figure 1, middle window) 

Are they saying that the current weakness in consumer spending growth will reverse with more deficit spending or more implicit transfers favoring the government and its cronies? Or how will increasing this reverse the current trend? 

Importantly, as earlier elaborated, despite the historic bank consumer credit boom, revenue growth of retail (non-construction) chains, retail construction chains, and food chains have been on a downside drift through Q1 2024. 

In contrast, consumer loans (including real estate) hit a historic Php 2.7 trillion pesos, while its % share of Total Loan Portfolio soared to an unprecedented 21.4% in Q1 2024. Consumers continue to gobble up a larger share of the banking industry’s loans. (Figure 1, lowest graph) 

So, why has the growth of retail sales been slowing despite unprecedented consumer lending by banks? 

Notwithstanding, their next assertion starkly contradicts such blissful assumptions: "While the decline in household furnishing was expected amid a high-interest rate environment that ruined Filipinos’ renovation plans, which are typically funded by credit, HSBC said the weaker demand for food and clothing was “surprising.”"

So, did this wonderful transition stop at the doorstep of household renovation? Or, has persistent real estate vacancies been the source of the slowdown in the demand for household furnishing? 

And if armed with savings, why should local consumers be vulnerable to higher rates? Won’t higher rates—which increase their interest income—increase their spending capacity? 

Figure 2

But having peaked in 2013, the bank's peso deposit growth rates continue to dwindle through April 2024. (Figure 2, topmost visual) 

It didn’t take long for another article to negate this presupposed shift to "consuming more of nonessential items." 

Inquirer.net, June 4, 2024: Universal Robina Corp. (URC) saw brisk sales in its low-priced food products, including snacks and instant coffee, as consumers looked for cheap alternatives to deal with inflation hurting the power of their wallets.  

From this factual perspective, is the decline in spending on essentials due to reduced spending on non-essential items or diminished real income, forcing individuals to cut back on essentials?  

Is this study based on a "false dichotomy?"  

Needless to say, how would higher inflation or the ‘loss of purchasing power of the peso’ bring about this alleged magnificent transformation to an "upper-middle income" economy? 

Has the study even incorporated the sentiments from polls showing the persistence of high levels of self-rated poverty and hunger among a high portion of the population? 

Alas, is the path to an "upper-middle income" economy increasingly dependent on the buildup of leverage in the balance sheets of the government, supply-side, and consumers than a productivity-driven one?

II. How the BSP Controls the Inflation Narrative 

Reuters, June 5, 2024: Philippine annual inflation quickened for a fourth straight month in May due largely to the faster pace of increases in housing, utility and transport costs, the statistics agency said on Wednesday. The consumer price index rose 3.9% in May from 3.8% the previous month, marking the fastest rise since November 2023, bringing the five-month average inflation to 3.5%, well inside the central bank's 2.0%-4.0% target for the year. Economists in a Reuters poll had forecast annual inflation at 4.0%.  

Here's how the pin-the-tail-on-the-donkey inflation prediction game is played: 

1. The Bangko Sentral ng Pilipinas (BSP) initially offers its inflation projection for a given month through a range (usually covering 90 basis points), typically a few days before its announcement. While the BSP has its own department to calculate this, it can also coordinate with the Philippine Statistics Authority (PSA) on the latter’s preliminary tabulation using its survey inputs. 

2. Then, the mainstream experts typically choose a number from the BSP’s range to use for their individual "forecast." 

3. The media then calculates the "median" from this consensus. 

4. Subsequently, the PSA announces the CPI figure, and the media depicts the difference between the consensus forecast and the actual PSA result. 

All of this reinforces the public’s (mis)perception about the BSP’s definition of inflation. 

For instance, the BSP’s extrapolation of the May’s CPI (May 31, 2024):"The latest inflation outturn is consistent with the BSP’s projections that inflation is likely to exceed the target range temporarily due to the possible impact of adverse weather conditions on domestic agricultural output as well as positive base effects. Nonetheless, the BSP expects full-year average inflation to settle within the target range for 2024 and 2025." 

For them, the attribution of inflation is always to the supply side, which leads to an inflation narrative that focuses primarily on statistics. The irony is that they use their monetary tools (rate hikes or cuts) to "anchor or un-anchor" the public's "inflation expectations"—a strategy that is fundamentally at odds with their supply-side diagnosis. 

In essence, they blame the supply side for inflation, but use demand-side instruments to manage it. This disconnect is often lost on the lay public, who are unfamiliar with the technical details surrounding the mechanics of inflation. 

The general idea is that distortions from the supply side are seen as representing market failure, namely greed, and that the BSP is considered immaculate, foolproof, and practices Bentham's utilitarianism (for the greater good) when it comes to its demand-side policies. Therefore, it would be easier to sell more interventions when the authorities are perceived as saints. 

Ironically, the BSP has been advocating for the "trickle-down theory" in its policies: subsidize demand while controlling or restricting supply (Kling,2016)

More importantly, the public is unaware of the entrenched "principal agent syndrome" in action: the BSP regulates these mainstream institutions. As such, the BSP indirectly controls the narratives or dissemination of information on inflation. 

In doing so, any institutions will run the risk of regulatory discrimination or lose commercial intercourse when dealing with it or the national government, or even their financial colleagues. 

The CPI as defined by the PSA (bold added): "The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures in the calculation of the gross domestic product.  Moreover, it serves as a basis to adjust the wages in labor management contracts, as well as pensions and retirement benefits. Increases in wages through collective bargaining agreements use the CPI as one of their bases." (PSA, FAQ) 

To put it bluntly, the CPI is the most politically sensitive statistic, making it prone to political manipulation aimed at advancing the interests of political leaders and the bureaucracy. 

In any case, the realities of human action—not statistics—eventually shape economic and financial outcomes. 

III. Widening Wealth Gap: While May CPI Inflation Rate Climbed to 3.9%, the Bottom 30% Struggle with Higher Prices 

The Philippine government reported that their Consumer Price Index (CPI) inched higher to 3.9% in May. In contrast, core inflation (non-food and energy) slipped to 3.1%. This divergence showcased that the increases were centered around food and energy.  (Figure 2, middle chart) 

While food inflation contributed significantly, it slowed down in May, decreasing from 6% in April to 5.8%. The transport CPI, however, saw the largest jump, increasing by 90 basis points, from 2.6% in April to 3.5% in May.  (Figure 2, lowest diagram) 

Interestingly, this surge occurred despite the decline in international prices of oil, which typically has a significant impact on it. West Texas Intermediate (WTI) prices fell by 5.2% month-on-month from USD 81.7 per barrel in April to USD 77.44 in May. 

As it stands, widening wealth inequality continues to be exposed even in the government's statistical inflation or CPI. 

Figure 3

Despite easing from the 5.8-year high last April, the gap between the headline CPI and the bottom 30% income remained barely changed. (Figure 3, topmost chart) 

According to the PSA (bold added), "The CPI for the bottom 30% income households is compiled by the PSA to measure the changes of prices of commodities commonly purchased by the families that belong to the bottom 30% income decile.  The process of price collection and CPI computation is the same as that of the CPI for all income households.  However, there is a separate market basket and weights for the CPI for the bottom 30% income households." (PSA, FAQ) 

This signifies one of the many pieces of evidence illustrating why the CPI is highly flawed: the individual is not the community, the community is not the region, and the regions are not the nation. The CPI of billionaires is not the same as that of the bottom dwellers. 

This disparity is evident in the fact that people from the bottom 30% still buy goods at the same prices from the same stores, yet changes in the CPI's basket and weights lead to stark differences. 

Of course, the weights are determined by assumptions made by the PSA, which do not align with individual circumstances. 

The thing is, in contrast to the 2018 episode where the CPI of both the headline and the bottom 30% were synchronized to the downside, today, the downtrend in the CPI has only amplified the bottom 30% CPI. 

The reality is that the bottom 30% has experienced a sharper decline in their purchasing power. 

And this phenomenon is not an anomaly, but rather a 4.8-year trend, as evident from the PSA's data, representing a consistent pattern in the CPI's performance over this period. 

Moreover, this trend represents a "boiling frog" phenomenon, where the erosion of the middle class is gradually but inexorably occurring. It's essential to acknowledge this reality rather than ignoring it. 

On the other hand, the Cantillon effects of money/credit/liquidity expansion imply that the primary beneficiaries are those who have direct access to its creation: the government and elites (Thornton, 2022) 

This is a stark reminder of the widening wealth gap from the redistributionist "trickle-down" policies embraced by the Philippine government. 

IV. Has the May CPI Peaked? Stagnating Monthly CPI Rate Changes and the Bullish Flattening Treasury Curve 

But May's CPI may have exhibited signs of reaching an interim "zenith." 

First, from the perspective of the PSA's data, although the year-on-year CPI increased for the third consecutive month, its month-on-month (MoM) change continues to languish. Successive increases in the MoM rate have accompanied previous surges in the CPI, which have been absent in the current uptrend. (Figure 3, middle image) 

Second, following a sharp bearish steepening, the Philippine treasury curve has partially shifted to a bullish flattening. Yields from last week's close have slightly dipped below those of May 31st and sharply against the end-of-April highs. Are treasury traders sensing a slowdown in inflation and GDP? (Figure 3, lowest chart) 

We should observe how this evolves by month-end. 

Figure 4

Third, despite the growth in lending, we are not yet seeing a significant impact on the broader economy or even the CPI. 

Or while banking loans continue to surge higher, unfortunately, they appear to be suffering from the law of diminishing returns. 

Universal commercial (UC) bank loans increased by 9.6% last April, the highest rate in a year, reaching a record Php 11.56 trillion, supported by a 7.8% increase in production loans and a scorching 25.3% growth in consumer loans. (Figure 4, topmost and middle charts) 

Conversely, as evidence of slowing demand, Jollibee recently announced price reductions for their bestsellers. 

V. Peak CPI? Manufacturing and Import Weakness Signals Demand Slump 

Let us examine the supply side. 

First, the manufacturing sector. 

Following the February spike to 5.9% YoY, UC manufacturing loan growth slowed to 4% in April. Interestingly, the Producer Price Index (PPI or factory gate prices) remained in a deflationary phase, with a -0.8% decline in the last two months. (Figure 4, lowest graph) 

Although the deflationary trend has been easing, the PPI's sustained decline suggests that the increase in output has not been supported by demand. 

According to PSA's manufacturing data, the sector reported a value and volume growth of 5.9% and 6.7% in April, respectively. However, on a year-to-date basis, the sector has stagnated, with zero growth in both value and volume sales. 

Reported value and volume sales also increased by 6.4% and 7.2%, correspondingly, but due to sharp declines in two of the last four months, year-to-date growth also slackened. 

Again, the sustained decline in the PPI (factory gate prices) suggests that the increase in output has barely been supported by demand. The improvement in April’s sales has yet to translate into higher prices. 

Next, let's consider imports.

Figure 5

March imports in USD plunged by 19.95%, while imports for the first quarter of 2024 decreased by 3.23%. In pesos, March imports plummeted by 18.42%, while first-quarter 2024 imports fell by 5.7%. (Figure 5, topmost diagram) 

Consumer goods imports were a significant contributor to this decline, with YoY and MoM figures of -19.11% and +4.15%, respectively. Cumulatively, consumer goods imports remained unchanged year-to-date. (Figure 5, middle graph) 

Consumer goods imports contributed significantly to this trend: year-on-year -19.11%, month-on-month +4.15%, with cumulative year-to-date unchanged. 

In terms of percentage of total imports, consumer goods accounted for 19.6% in March and 19.5% in Q1 2024. 

In summary, the notion of a supply-side driven inflation is hardly supported by PSA's manufacturing and imports data. 

Instead, the evidence suggests that supply-side strains are indicative of ongoing weakness in demand. 

VI. Bank Credit Expansion’s Diminishing Returns as Credit Card and Salary Loans NPLs Spiked in Q1 2024! 

Furthermore, surging non-performing loans (NPLs) in banking loans represents a concern. 

That record upside streak for credit card and salary loans doesn’t come for free. Unless supported by proportional income growth, the increased leveraging of balance sheets will eventually come home to roost. 

In Q1 2024, credit card NPLs raced to levels last seen in Q4 2021, while salary loans hit an all-time high! (Figure 5, lowest window) 

That is to say, many individuals, corporations, or institutions have been borrowing more, which has inflated the bank loan data and has been misinterpreted as "growth." However, they are likely borrowing for liquidity purposes or to refinance themselves to stay afloat. 

This refinancing dynamic has been evident even among listed companies on the Philippine Stock Exchange (PSE). For instance, SM Prime Holdings recently had a Php 100 billion bond offering. 

From the Inquirer.net, May 23, 2024 (bold added): Net proceeds from the offer could reach P24.72 billion, assuming the overallotment option is fully exercised. The funds will be used to refinance the listed company’s debt and expand its property portfolio. 

Therefore, refinancing has been used by the banking system to conceal the mounting liquidity and solvency issues that are plaguing it. 

We are oblivious to the actual numbers of "zombie" institutions, which survive by constantly rolling over debt and remaining afloat solely through the accumulation of debt. 

Aside from relief measures and regulatory subsidies, the banking system continues to accumulate imbalances, exacerbated by the BSP's pseudo "tightening" policies, which are actually easy money policies. 

In reality, the BSP cannot afford to "tighten" as it did in 2018, as it would risk triggering a domino effect or contagion due to the growing liquidity and solvency issues. 

The Philippine economy and financial system have been gradually devolving into a Ponzi finance-economy. 

VII. Peak CPI? Labor Conditions Worsen in April as Unemployment, Underemployment and Part-Time Jobs Swell

On top of the above, we find a considerable deterioration in jobs and job quality.

Inquirer.net, June 7, 2024: The widespread drought caused by the El Niño weather phenomenon since the start of the year forced many farmers out of work, raising the country’s unemployment rate in April to 4 percent from 3.9 percent the previous month, the Philippine Statistics Authority (PSA) reported on Thursday. This translated to 2.04 million unemployed Filipinos, higher than the 2 million who were jobless in March. Preliminary results of the statistics agency’s Labor Force Survey (LFS) for April showed the unemployment rate was the highest in three months, but lower than the 4.5 percent in April 2023 and January this year.

An amazing extrapolation based on a skewed version of the presented data. 

Although we are a hard-core skeptic of government data, we use it to understand the mainstream and public perception.

Figure 6

Firstly, unemployment rates did increase in April, but so did the non-labor population or the decline of the labor force. In other words, the upturn in non-labor population camouflaged the increase in the unemployment rate. (Figure 6, topmost chart) 

Secondly, the underemployment rate surged from 11% to 14.6% month-on-month. This was supported by the fact that the share of part-time jobs soared from 30.5% in March to 32.6% in April. (Figure 6, second to the topmost graph)

Sure, among the largest employers, agricultural jobs declined, but so did trade jobs (602,000 MoM). Manufacturing and Finance also shed 284,000 and 111,000 jobs respectively. (Figure 6, second to the lowest chart) 

As a side note, despite the reported 684,000 month-on-month job losses in agriculture due to El Niño, fishing jobs saw an unexpected surge of 413,000. Using available bias and post-hoc logic, one might wonder if job creations signify a consequence of the mounting standoff between the Philippines and China? Ironically, the defense industry and government reportedly shed about 466,000 jobs.

Has China and the Philippines reached a deal involving the fishing industry? 

The data reveals that job retrenchment affected the biggest employers. Have record heat temperatures contributed to these job losses? 

But there’s the rub. Despite the record unemployment last December 2023, part-time jobs have consisted of about a third of the workforce. Instead of increased spending, this led to unprecedented growth in salary loans and credit card loans.

While escalating non-performing salary loans and credit card loans may be attributed to job decreases, credit delinquencies occur when the ability to service liabilities grows faster than income. 

In summary, slower employment growth should contribute to a decline in demand, and the upsurge in credit delinquencies should accelerate it. 

VIII. Peak CPI? Restrained Public Spending May Ease on Supply Constraints 

Then, there’s government spending. 

Rocketing public debt servicing may be stalling the government’s appetite for spending, but this reprieve may not last. 

What the government spends, it takes from the private sector. This leaves little room for the latter to increase production to meet domestic consumption needs. 

Reduced production, coupled with demand subsidies by the BSP, leads to economic imbalances that manifest in prices. 

As such, the nominal growth in public spending has resonated with the general trend of the CPI. (Figure 6, lowest image) 

Figure 7

Moreover, insufficient production has led to an increasing dependence on imports and subsequently, the 'twin deficits.' 

The slowdown in public spending has been reflected in the net claims on the central government (NCoCG) of the banking system and the BSP. This tapering has escalated the liquidity drought in the banking system, where cash-to-deposits reached new multi-year lows in April, and liquid assets-to-deposits also declined sharply. (Figure 7, topmost chart) 

The combination of disguised bank credit delinquencies and record levels of held-to-maturity (HTM) assets has worsened liquidity conditions, which will likely be exacerbated by escalating consumer non-performing loans (NPLs). (Figure 7, middle diagram) 

Additionally, rising public debt servicing is expected to further exacerbate these conditions. 

IX. Stagflation Ahoy! Economic and Financial Rescue Measures to Power the USD-Philippine Peso 

Such conditions are the perfect recipe for a slowdown in the Consumer Price Index (CPI) and the Gross Domestic Product (GDP). 

However, officials are unlikely to permit this scenario to unfold. Therefore, this would provide the impetus for officials to increase their desire for the Bangko Sentral ng Pilipinas (BSP) to cut interest rates, which the latter would eventually oblige. 

And if the GDP does slow, it would prompt the government to unleash all sorts of stimulus (fiscal and monetary)—using the pandemic template. 

However, this would likely fuel more energy to the US dollar (USD). 

Should the $USDPHP breakout, this would partly offset the deflationary forces—leading to stagflation. (Figure 7, lowest chart) 

We have been asserting that the BSP’s Gross International Reserves (GIR) have been stuffed by "borrowed reserves" such as external debt and Other Reserve Assets (ORA). 

The BSP has recently confirmed our views that it is adding to its position on US shorts: "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, and net income from the BSP's investments abroad. (BSP, 2024) 

The national government raised USD 2 billion last May, which it deposited with the BSP and included in its GIR. However, "borrowed" means it needs to be repaid. 

The ensuing USD-based "asset-liability mismatch" represents the "short position."

____

references 

Philippine Statistics Authority, Frequently Asked Questions

Arnold Kling, Once Again, Subsidize Demand and Restrict Supply, September 22, 2016, Arnoldkling.com

Mark Thornton, Cantillon Effects: Why Inflation Helps Some and Hurts Others, March 11, 2022, Mises.org 

Bangko Sentral ng Pilipinas, End-May 2024 GIR Level Rises to US$104.48 Billion, June 7, 2024 bsp.gov.ph 

  

2023 Philippine Deficit Spending: Surging Debt and Debt Servicing and the Widening Impact of the Crowding Out Effect; December’s Unreported Historic Data!

 

Deficit spending is printing money, and it erodes the purchasing power of the currency while destroying the opportunities for the private sector to invest. The entire burden of higher taxes and inflation falls on the middle class and small businesses—Daniel Lacalle

 

In this issue

2023 Philippine Deficit Spending: Surging Debt and Debt Servicing and the Widening Impact of the Crowding Out Effect; December’s Unreported Historic Data!

I.  Unreported by Media: December 2023’s Record Public Spending and Historic Deficit

II. Statistical Charade? Expenditure Boom: The Soaring Share of Interest Payments on Debt

III. Above 1997 Asian Crisis Levels: Near Record 2023 Debt-to-GDP and Debt Servicing-to-GDP approaching 2011 Highs

IV. The Pandora’s Box of Risks: Increasing Dependency on Monetary Liquidity

V. Twin Deficits: The Bigger the Government, The Larger the Crowding Out Effect

VI. Crowding Out of Local Savings Means Increased Dependency on Foreign Money

VII. Crowding Out Effect: Historic Deficit Spending Equals Reduced Private Consumption

 

2023 Philippine Deficit Spending: Surging Debt and Debt Servicing and the Widening Impact of the Crowding Out Effect; December’s Unreported Historic Data!

In 2023, Philippine deficit spending remains in a "stimulus mode."  Yet risks continue to mount as the adverse impact from rising debt, debt servicing, and the crowding effect spreads. 

I.  Unreported by Media: December 2023’s Record Public Spending and Historic Deficit

 

Inquirer.net, March 1 2024: The government’s budget deficit hit P1.512 trillion in 2023, 6.32 percent smaller than the shortfall recorded in 2022 but overshot the target of P1.499 trillion, according to data released on Thursday by the Bureau of the Treasury. This meant that last year’s fiscal gap, as a share of the country’s gross domestic product, stood at 6.2 percent, significantly narrower than the 7.3-percent ratio in 2022, but slightly above the Marcos administration’s deficit cap of 6.1 percent for 2023…Explaining the latest outturn, the Treasury said the smaller year-on-year deficit demonstrates “progress of fiscal consolidation.”

 

Here is what the media didn't say (other media outlets also silent on this). 

 

Though they cited the 2023 outcome relative to the targets, they missed explaining how the deficit breached the government's goals.

Figure 1

 

Pointedly, public spending and fiscal deficit (in peso) hit all-time highs in December!   All. Time.  Highs. (Figure 1, topmost chart)

 

In percentage, public spending numbers looked unimpressive.  It grew by only 2.24% in December, 1.71% in Q4, and 3.42% in 2023.  But statistics can be deceiving.  The reason for this is the "high" base effects!  This year's December record expenditures of Php 661 billion took the tiara from December 2022’s Php 646.6 billion.

 

But how about revenues?

 

Revenues contributed less to the 2023 deficit.  

 

Revenue growth contracted by 3.03% in December, grew by 11.05% in Q4, and 7.9% in 2023 to a record Php 3.824 trillion. (Figure 1, middle window)

 

Briefly, public spending has become the primary determinant of the balance sheet health of the Philippine government!  

 

Its relentless growth brings to the fore some burning questions:

 

-Is the Philippine economy in trouble to require an acceleration of "fiscal stabilizers?"

 

-How could Treasury officials describe this as "fiscal consolidation" when the deficit-to-GDP remains in highly accommodative "stimulus" mode? (Figure 1, lowest graph)

 

Figure 2

 

-Why does the BSP call its actions "tightening" when public debt skyrocketed to a fresh record of Php 14.79 trillion in January 2024? (Figure 2, topmost diagram)

 

-Or is it just the addiction to free lunch politics for the government?

 

II. Statistical Charade? Expenditure Boom: The Soaring Share of Interest Payments on Debt

 

The share of government expenditures (ex-construction) to the NGDP was at 14.2% in 2023.

 

However, using the same Bureau of Treasury (BoTr) data to get the 6.2% debt-to-NGDP, public spending-to-NGDP jumped to 22% in 2023! 

 

So, which is accurate, the PSA's GDP data or the BoTr? Or is the government using an apples-to-oranges comparison to sugarcoat actual conditions?

 

Yet the mainstream impulse has been to ignore or discount the cost of government deficit spending to the (real) economy.

 

With its growing role, the carrying cost of the mounting debt levels represents a major negative factor. 

 

The thing is, an expansive government, the higher the debt load.  Higher debt levels, which weigh on the economy, increase various risk factors covering a wide swath of society (economic, financial, social, and political).

 

In 2023, aside from national expenditures, whose % share expanded from 63.5% to 66.7%, interest payments also soared from 9.75% to 11.8%. (Figure 2, middle pane)

 

While the BoTr data apportions interest payments in the expenditure data, it does not specify its treatment on amortizations. 

 

Nevertheless, total public debt reached a record Php 14.62 trillion in 2023, while debt servicing (interest + amortization) costs surged to an unprecedented Php 1.603 trillion.  (Figure 2, lowest graph)

Figure 3

 

The share of debt servicing has been rising in the context of the budget, viz., revenues (45%) and expenditures (30%) in 2023. (Figure 3, topmost chart)

 

Since bottoming in 2019, the debt onus has started to climb and accelerated in 2023.

 

III. Above 1997 Asian Crisis Levels: Near Record 2023 Debt-to-GDP and Debt Servicing-to-GDP approaching 2011 Highs

 

That's not all. 

 

"This time is different." So they say.

 

While we are no fan of comparing public debt to GDP because of its crucial flaws, after a historic 62.6% in 2021, debt-to-GDP in 2023 was at 60.2%—the third highest! 

 

In the meantime, debt servicing to GDP has swiftly been closing to its 2011 highs!

 

Please note that both variables are HIGHER than the pre-1997 Asian Crisis levels—where debt and debt servicing to GDP exploded when the denominator (GDP) shrank. (Figure 3, middle graph)

 

While debt levels have been constantly rising, a sudden or precipitate slowdown in the GDP (or a recession) would push these ratios to unseen levels!

 

Add to this conditions that debt-financed public spending accounts for about a fifth to a quarter of the GDP—which excludes private sector resources and finances committed to public projects—meaning the economy has transformed into increasing dependence on big government.

 

This fact disputes all purported actions intended supposedly to liberalize the economy, e.g. economic cha-cha.

 

Yet, the debt amortizations—possibly including the unsustainable military pensions—continue to grab a larger share of overall debt payments. But most of the time, public’s attention has been directed towards interest payments alone.

 

That's right. 

 

Statistical opacity may have disguised the actual leveraged conditions of the Philippine balance sheet.   The widening gap between Philippine debt levels and public spending exhibits this likely anomaly. 

 

Yes, the rolling over of public debt may be one of the contributors, but this does not account for the black hole in amortizations.

 

2023 reinforced the uptrend in the share of amortization and the downtrend in interest payments, which accounted for a 60:40 distribution ratio. (Figure 3, lowest diagram)

 

IV. The Pandora’s Box of Risks: Increasing Dependency on Monetary Liquidity

 

Unlike mainstream wisdom, debt levels don't melt away.  Everything is interconnected.  Public debt is entwined with the financial system and the political economy.

 

The previous decline in public debt to GDP (2009-2019) was a function of financial juggling. 

 

While public spending rose marginally (compared to the present), bank credit substituted for economic financing.  Or, growth financed by bank credit expansion filled the Philippine treasury's coffers. 

 

In 2020, the government shifted from relying on bank credit expansion to public spending to support the GDP.   The pandemic recession amplified this shift, where public debt financing reasserted its dominance.

Figure 4

 

Overall, systemic leveraging (public and Universal and Commercial bank credit) has been cumulative and accounted for a staggering 109% of the GDP in 2023! (Figure 4, topmost graph) The numbers exclude informal debt. 

 

Except for the slowdown in 2009-2010 and 2012-2014, which represented noise, the uptrend in systemic leverage exploded in 2020. 

 

The ramification of the collaboration to inject liquidity by the BSP and its banking cartel was a massive expansion in leverage.

 

The concerted efforts of the BSP and the banks (as well as other financial institutions) resulted in the unparalleled monetization of public debt (net claims on central government or NCoCG) intended to keep the system afloat in liquidity and support collateral values that backed the financial industry's leverage or loans.  (Figure 4, middle chart)

 

Aside from repos, the BSP recently included "BSP Securities" (short-term bills) to augment bank liquidity operations.  Bank credit expansion and these combined operations boosted the money supply levels to historic proportions.

 

As further proof, money supply growth from the BSP and the banking system has entirely financed the record deficits (and debt amortization).  

 

M3-to-GDP rocketed to an all-time high of 79% in 2021, and despite the recent slide, it still accounted for a whopping 72% in 2023! (Figure 4, lowest window)

 

As a stand-alone metric, debt-to-GDP doesn't capture such interrelationships and its attendant risks.

 

Behind the buoyant GDP and other macro indicators lies a Pandora's Box of disguised risks.

 

As Austrian economist Peter St. Onge recently tweeted, "Statistics aren't designed to inform, they're designed to hide the truth."

 

V. Twin Deficits: The Bigger the Government, The Larger the Crowding Out Effect

 

There is also the crowding out effect. 

 

The government doesn't create wealth.  It is funded by taxing its constituents.  Or, since the government taxes, borrows (future taxes), or resorts to inflation to fund its consumption, this constrains the finances and resources of the private sector—the crowding out effect. 

 

Yes, the government sells some of its consumption activities as "investments," even though they limit the role of the marketplace, which distorts "returns" and increases economic misallocations.

 

Besides, because there is no market price for government functions, such as police, etc., economic calculation barely exists.

 

What's more, popular themes and implicit agendas of the political leaders determine political actions and policies rather than P/L statements.

 

A reduction in production is a repercussion of the "crowding out effect," or when the government competes with the private sector for resources, which leads to increasing dependence on imports.

 

A colossal transformation in the banking system has augmented this structural shift towards record deficit spending: the metamorphosis towards consumer credit. 

 

It is no surprise that record trade deficits have accommodated these monumental developments.

Figure 5

 

The TWIN DEFICITS translate to a splurge in spending or overspending to boost the GDP funded by household savings and external borrowing.  (Figure 5, topmost graph)

 

The Philippine economic model embodies the Keynesian framework of (indiscriminate debt funded) spending to achieve prosperity.

 

VI. Crowding Out of Local Savings Means Increased Dependency on Foreign Money

 

Instead of utopia, we witnessing a boom-bust cycle in motion.

 

Another consequence of the increasing dependence on the leviathan is the crowding out of liquidity—as the government competes with the financial industry and non-financial enterprises for access to household savings. 

 

The banking system's decaying cash-to-deposits have corresponded with the swelling of the fiscal deficits.  The deteriorating ratio is a function of decreasing cash and deposit growth rate. (Figure 5, middle image)

 

The drain in household savings translates to reduced investment capacity from local investors.  This shortfall extrapolates to increasing dependence on FDIs, meaning the domestic economy becomes more sensitive to global developments.

 

However, debt flows have comprised the majority of Philippine FDIs, which comprised an average of 68.5% from January to November 2023, which could mean bridge financing than new investments. (Figure 5, lowest chart)

Figure 6

 

As evidence of savings shortfall, the deteriorating peso volume of the PSE correlates with the enlarged budget deficit. (Figure 6, topmost illustration)

 

The BSP’s external debt levels have also risen in tandem with the deficit-to-GDP ratio, which underscores the increasing dependence on foreign savers. (Figure 6, middle graph)

 

Remember, someone has to fund such spending binges!

VII. Crowding Out Effect: Historic Deficit Spending Equals Reduced Private Consumption

 

Finally, with the government reducing savings and investments, it would be natural to expect a decline in the private sector's household sector's consumption. (Figure 6, lowest diagram)

 

At present, the supposed interim trend "recovery" in per capita household spending reflects the outsized growth in bank consumer loans rather than productivity growth.  

Figure 7

 

Mounting leverage of one's balance sheet also pulls forward future consumption.  The spike in public debt per capita also led to reduced (private sector) liquidity and diminished consumption—as more resources are diverted to debt servicing. (Figure 7, topmost visual)

 

Declining production, increasing dependence on imports (contributes to the weakening peso), and record liquidity expansion have combined to push higher demand, therefore, the uptrend in the CPI (inflation) cycle, which also contributes to the decrease of the consumer's purchasing power. (Figure 7, middle image)

 

So even with the employment rates reportedly hitting a record high last December, consumers have reported reduced spending growth rates!  Ironic, right?

VIII. The BSP as the Keyman Role for Deficit Financing, The Erosion of Fiscal Latitude

 

Government spending also redistributes financial and economic resources to those allied, affiliated, popular demands of the moment, logrolling, underhanded deals, by coercion, or to preferred political subjects (patronage politics). 

 

Once again, this means increased misallocations, concealed losses, and the erosion of productivity, which result in a massive pileup of deficits, exacerbating corrosion in savings and purchasing power and the increased use of leveraging to disguise risks.

 

Widening inequality is a consequence of such political redistribution—favoring political agents and politically connected entities at the expense of the population.

 

Of course, the BSP assumes a principal role in the massive growth in the imbalances in fiscal, trade resource allocation, and credit buildup.

 

Despite the growth in public debt, the BSP’s low rates regime accommodated the decline in general debt servicing costs (2008-2019). (Figure 7, lowest chart)

 

Yet, rising rates have failed to contain the massive debt growth, which, along with its increasing stock, has caused debt servicing costs to spike to record levels in 2023.

 

Could a third wave of inflation translate to a "game over" for the addiction to financial and monetary leveraging?

 

Not only private sector credit bubbles, the BSP's easy money regime feeds on political boondoggles—responsible for the present and upcoming intensifying growth in twin deficits and their associated risks in the financial system, political economy, and social order.

 

In summary, unlike the US, which has been privileged with the "exorbitant privilege" or the de facto reserve currency of the world, the Philippines can't afford to print its way to prosperity.

 

If the Philippine government continues to use its fiscal tool to bolster the GDP at the present pace, it could lose its latitude to unleash policy "stabilizers" when the "sturm and drang" emerge—unless it decides to play with the Russian Roulette of hyperinflation.

 

Good luck to those who believe in the perpetuation of free lunches.