Low Prioritization in the Banking System: The Magna Carta for MSMEs as a ‟Symbolic Law‟

 

An ever-weaker private sector, weak real wages, declining productivity growth, and the currency’s diminishing purchasing power all indicate the unsustainability of debt levels. It becomes increasingly difficult for families and small businesses to make ends meet and pay for essential goods and services, while those who already have access to debt and the public sector smile in contentment. Why? Because the accumulation of public debt is printing money artificially—Daniel Lacalle 

Nota Bene: Unless some interesting developments turn up, this blog may be the last for 2024. 

In this issue 

Low Prioritization in the Banking System: The Magna Carta for MSMEs as a ‟Symbolic Law‟

I. MSMEs: The Key to Inclusive Growth

II. The Politicization of MSME Lending

III. Bank's MSME Loans: Low Compliance Rate as a Symptom of the BSP’s Prioritization of Banking Interests

IV. Suppressed MSME Lending and Thriving Shadow Banks: It’s Not About Risk Aversion, but Politics

V. Deepening Thrust Towards Banking Monopolization: Rising Risks to Financial System Stability  

VI. How PSEi 30's Debt Dynamics Affect MSME Struggles

VII. The Impact of Bank Borrowings and Government Debt Financing on MSMEs’ Challenges 

VIII. How Trickle-Down Economics and the Crowding Out Effect Stifle MSME Growth 

IX. Conclusion: The Magna Carta for MSMEs Represents a "Symbolic Law," Possible Solutions to Promote Inclusive MSME Growth 

Low Prioritization in the Banking System: The Magna Carta for MSMEs as a ‟Symbolic Law‟ 

Despite government mandates, bank lending to MSMEs reached its third-lowest rate in Q3 2024, reflecting the priorities of both the government and the BSP. This highlights why the Magna Carta is a symbolic law.

I. MSMEs: The Key to Inclusive Growth 

Inquirer.net December 10, 2024 (bold added): Local banks ramped up their lending to micro, small and medium enterprises (MSMEs) in the third quarter, but it remained below the prescribed credit allocation for the industry deemed as the backbone of the Philippine economy. Latest data from the Bangko Sentral ng Pilipinas (BSP) showed total loans of the Philippine banking sector to MSMEs amounted to P500.81 billion in the three months through September, up by 3 percent on a quarter-on-quarter basis. But that amount of loans only accounted for 4.6 percent of the industry’s P11-trillion lending portfolio as of end-September, well below the prescribed credit quota of 10 percent for MSMEs. Under the law, banks must set aside 10 percent of their total loan book as credit that can be extended to MSMEs. Of this mandated ratio, banks must allocate 8 percent of their lending portfolio for micro and small businesses, while 2 percent must be extended to medium-sized enterprises. But many banks have not been compliant and just opted to pay the penalties instead of assuming the risks that typically come with lending to MSMEs. 

Bank lending to the MSME sector, in my view, is one of the most critical indicators of economic development. After all, as quoted by the media, it is "deemed as the backbone of the Philippine economy." 

Why is it considered the backbone?

Figure 1

According to the Department of Trade and Industry (DTI), citing data from the Philippine Statistics Authority, in 2023, there were "1,246,373 business enterprises operating in the country. Of these, 1,241,733 (99.63%) are MSMEs and 4,640 (0.37%) are large enterprises. Micro enterprises constitute 90.43% (1,127,058) of total establishments, followed by small enterprises at 8.82% (109,912) and medium enterprises at 0.38% (4,763)." (Figure 1 upper chart) 

In terms of employment, the DTI noted that "MSMEs generated a total of 6,351,466 jobs or 66.97% of the country’s total employment. Micro enterprises produced the biggest share (33.95%), closely followed by small enterprises (26.26%), while medium enterprises lagged behind at 6.77%. Meanwhile, large enterprises generated a total of 3,132,499 jobs or 33.03% of the country’s overall employment." (Figure 1, lower graph) 

Long story short, MSMEs represent the "inclusive" dimension of economic progress or the grassroots economy—accounting for 99% of the nation’s entrepreneurs, and providing the vast majority of jobs. 

The prospective flourishing of MSMEs signifies that the genuine pathway toward an "upper middle-income" status is not solely through statistical benchmarks, such as the KPI-driven categorization of Gross National Income (GNI), but through grassroots-level economic empowerment. 

Except for a few occasions where certain MSMEs are featured for their products or services, or when bureaucrats use them to build political capital to enhance the administration’s image, mainstream media provides little coverage of their importance.

Why?

Media coverage, instead, tends to focus disproportionately on the elite.

Perhaps this is due to survivorship bias, where importance is equated with scale, or mostly due to principal-agent dynamics. That is, media organizations may prioritize advancing the interests of elite firms to secure advertising revenues, and or, maintain reporting privileges granted by the government or politically connected private institutions. 

II. The Politicization of MSME Lending 

Yet, bank lending to the sector remains subject to political directives—politicized through regulation. 

Even so, banks have essentially defied a public mandate, opting to pay a paltry penalty: "The Bangko Sentral ng Pilipinas shall impose administrative sanctions and other penalties on lending institutions for non-compliance with provisions of this Act, including a fine of not less than five hundred thousand pesos (P500,000.00)." (RA 9501, 2010)

Figure 2 

With total bank lending amounting to Php 10.99 trillion (net of exclusions) at the end of Q3, the compliance rate—or the share of bank lending to MSMEs—fell to 4.557%, effectively the third lowest on record after Q1’s 4.4%. (Figure 2, upper window) 

That’s primarily due to growth differentials in pesos and percentages. For instance, in Q3, the Total Loan Portfolio (net of exclusions) expanded by 9.4% YoY, compared to the MSME loan growth of 6.5%—a deeply entrenched trend.(Figure 2, lower image) 

Interestingly, "The Magna Carta for Micro, Small and Medium Enterprises (MSMEs)" was enacted in 1991 (RA 6977), amended in 1997 (RA 8289), and again in 2008 (RA 9501). The crux is that, as the statute ages, industry compliance has diminished 

Most notably, banks operate under cartel-like conditions. They are supervised by comprehensive regulations, with the BSP influencing interest rates through various channels—including policy rates, reserve requirement ratios (RRR), open market operations, inflation targeting, discount window lending, interest rate caps, and signaling channels or forward guidance. 

In a nutshell, despite stringent regulations, the cartelized industry is able to elude the goal of promoting MSMEs. 

III. Bank's MSME Loans: Low Compliance Rate as a Symptom of the BSP’s Prioritization of Banking Interests 

Yet, the record-low compliance rate with the Magna Carta for MSMEs points to several underlying factors: 

First, banks appear to exploit regulatory technicalities or loopholes to circumvent compliance—such as opting to pay negligible penalties—which highlights potential conflicts of interest. 

Though not a fan of arbitrary regulations, such lapses arguably demonstrate the essence of regulatory capture, as defined by Investopedia.com, "process by which regulatory agencies may come to be dominated by the industries or interests they are charged with regulating" 

A compelling indication of this is the revolving-door relationship between banks and the BSP, with recent appointments of top banking executives to the BSP’s monetary board. 

Revolving door politics, according to Investopedia.com, involves the "movement of high-level employees from public-sector jobs to private-sector jobs and vice versa" 

The gist: The persistently low compliance rate suggests that the BSP has prioritized safeguarding the banking sector's interests over promoting the political-economic objectives of the Magna Carta legislation for MSMEs.

IV. Suppressed MSME Lending and Thriving Shadow Banks: It’s Not About Risk Aversion, but Politics

Two, with its reduced lending to MSMEs, banks purportedly refrain from taking risk. 

But that’s hardly the truth.

Even with little direct access to formal or bank credit, MSME’s are still borrowers, but they source it from the informal sector. 

Due to the difficulty of accessing bank loans, MSMEs in the Philippines are borrowing from informal sources such as the so-called 5-6 money lending scheme. According to an estimate, 5-6 money lending is now a Php 30 billion industry in the Philippines. These lenders charge at least 20% monthly interest rate, well above the 2.5% rate of the government’s MSME credit program. The same study by Flaminiano and Francisco (2019) showed that 47% of small and medium sized enterprises in their sample obtained loans from informal sources. 

...

An estimate by the International finance Corporation (2017) showed that MSMEs in the Philippines are facing a financing gap of USD 221.8 billion. This figure is equivalent to 76% of the country’s GDP, the largest gap among the 128 countries surveyed in the IFC report. (Nomura, 2020)

The informal lenders don’t print money, that’s the role of the banks, and the BSP.

Simply, the Nomura study didn’t say where creditors of the informal market obtained their resources: Our supposition: aside from personal savings, 5-6 operators and their ilk may be engaged in credit arbitrage or borrow (low interest) from the banking system, and lend (high interest) to the MSMEs—virtually a bank business model—except that they don’t take in deposits.

The fact that despite the intensive policy challenges, a thriving MSME translates a resilient informal credit arbitrage market—yes, these are part of the shadow banking system.

As an aside, uncollateralized 5-6 lending is indeed a very risky business: collections from borrowers through staggered payments occur daily, accompanied by high default rates, which explains the elevated interest rates.

Figure 3

That is to say, the shadow banks or black markets in credit, fill the vacuum or the humungous financing gap posed by the inadequacy of the formal financial sector. (Figure 3, upper diagram)

The financing gap may be smaller today—partly due to digitalization of transactional platforms—but it still remains significant. 

This also indicates that published leverage understates the actual leverage in both the financial system and the economy. 

Intriguingly, unlike the pre-2019 era, there has been barely any media coverage of the shadow banking system—as if it no longer exists.

As a caveat, shadow banking "involves financial activities, mainly lending, undertaken by non-banks and entities not regulated by the BSP," which implies that even formal institutions may be engaged in "unregulated activities." 

Remember when the former President expressed his desire to crack down on 5-6 lending, vowing to "kill the loan sharks," in 2019? 

If such a crackdown had succeeded, it could have collapsed the economy. So, it’s no surprise that the attempt to crush the informal economy eventually faded into oblivion. 

The fact that informal credit survived and has grown despite the unfavorable political circumstances indicates that the suppressed lending to MSMEs has barely been about the trade-off between risk and reward. 

It wasn’t risk that has stymied bank lending to MSMEs, but politics (for example, the artificial suppression of interest rates to reflect risk profiles). 

More below. 

Has the media and its experts informed you about this?

Still, this highlights the chronic distributional flaws of GDP: it doesn’t reflect the average experience but is instead skewed toward those who benefit from the skewed political policies. 

In any case, mainstream media and its experts tend to focus on benchmarks like GDP rather than reporting on the deeper structural dynamics of the economy.

V. Deepening Thrust Towards Banking Monopolization: Rising Risks to Financial System Stability

Three, if banks have lent less to MSMEs, then who constituted the core of borrowers?

Naturally, these were the firms of elites (including bank borrowings), the consumers from the "banked" middle and upper classes, and the government.

Total Financial Resources (TFR) reached an all-time high of Php 32.8 trillion as of October, accounting for about 147% and 123% of the estimated real and headline GDP for 2024, respectively. (Figure 3, lower pane)

TFR represents gross assets based on the Financial Reporting Package (FRP) of banking and non-bank financial institutions, which includes their loan portfolios.

The banking system’s share of TFR stood at 83.2% last October, marking the second-highest level, slightly below September’s record of 83.3%. Meanwhile, Universal-Commercial banks accounted for 77.8% of the banking system’s share in October, marginally down from their record 78% in September.

These figures reveal that the banking system has been outpacing the asset growth of the non-banking sector, thereby increasing its share and deepening its concentration.

Simultaneously, Universal-Commercial banks have been driving the banking system’s growing dominance in TFR. 

The significance of this lies in the current supply-side dynamic, which points towards a trajectory of virtual monopolization within the financial system. As a result, this trend also magnifies concentration risk. 

VI. How PSEi 30's Debt Dynamics Affect MSME Struggles

From the demand side, the 9-month debt of the non-financial components of the PSEi 30 reached Php 5.52 trillion, the second-highest level, trailing only the all-time high in 2022. However, its share of TFR and nominal GDP has declined from 17.7% and 30.8% in 2023 to 16.7% and 29.3% in 2024.

Figure 4

Over the past two years, the PSEi 30's share of debt relative to TFR and nominal GDP has steadily decreased. (Figure 4, upper chart) 

It is worth noting that the 9-month PSEi 30 revenues-to-nominal GDP ratio remained nearly unchanged from 2023 at 27.9%, representing the second-highest level since at least 2020. (Figure 4, lower image) 

Thus, the activities of PSEi 30 composite members alone account for a substantial share of economic and financial activity, a figure that would be further amplified by the broader universe of listed stocks on the PSE. 

Nevertheless, their declining share, alongside rising TFR, indicates an increase in credit absorption by ex-PSEi and unlisted firms. 

VII. The Impact of Bank Borrowings and Government Debt Financing on MSMEs’ Challenges

Figure 5

On the other hand, bank borrowings declined from a record high of Php 1.7 trillion (49.7% YoY) in September to Php 1.6 trillion (41.34% YoY) in October. Due to liquidity concerns, most of these borrowings have been concentrated in T-bills. (Figure 5, topmost visual) 

As it happens, Philippine lenders, as borrowers, also compete with their clients for the public’s savings. 

Meanwhile, the banking system’s net claims on the central government (NCoCG) expanded by 8.3% to Php 5.13 trillion as of October. 

The BSP defines Net Claims on Central Government as including "domestic securities issued by and loans and advances extended to the CG, net of liabilities to the CG such as deposits." 

In October, the banks' NCoCG accounted for approximately 23% of nominal GDP (NGDP), 18% of headline GDP, and 15.6% of the period’s TFR. 

Furthermore, bank consumer lending, including real estate loans, reached a record high of Php 2.92 trillion in Q3, supported by an unprecedented 22% share of the sector’s record loan portfolio, which totaled Php 13.24 trillion. (Figure 4, middle graph) 

Concomitantly, the banking system’s Held-to-Maturity (HTM) assets stood at nearly Php 3.99 trillion in October, just shy of the all-time high of Php 4.02 trillion recorded in December 2023. Notably, NCoCG accounted for 128.6% of HTM assets. HTM assets also represented 15.1% of the banking system’s total asset base of Php 26.41 trillion. (Figure 4, bottom chart) 

This means the bank’s portfolio has been brimming with loans to the government, which have been concealed through their HTM holdings.

Figure 6

Alongside non-performing loans (NPLs), these factors have contributed to the draining of the industry’s liquidity.  Despite the June 2023 RRR cuts and the 2024 easing cycle (interest rate cuts), the BSP's measures of liquidity—cash-to-deposits and liquid assets-to-deposits—remain on a downward trend. (Figure 6, upper window)

VIII. How Trickle-Down Economics and the Crowding Out Effect Stifle MSME Growth 

It is not just the banking system; the government has also been absorbing financial resources from non-banking institutions (Other Financial Corporations), which amounted to Php 2.34 trillion in Q2 (+11.1% YoY)—the second highest on record. (Figure 6, lower graph)

These figures reveal a fundamental political dimension behind the lagging bank lending performance to MSMEs: the "trickle-down" theory of economic development and the "crowding-out" syndrome affecting credit distribution. 

The banking industry not only lends heavily to the government—reducing credit availability for MSMEs—but also allocates massive amounts of financial resources to institutions closely tied to the government. 

This is evident by capital market borrowings by the banking system, as well as bank lending and capital market financing and bank borrowings by PSE firms. 

A clear example is San Miguel Corporation's staggering Q3 2024 debt of Php 1.477 trillion, where it is reasonable to assume that local banks hold a significant portion of the credit exposure. 

The repercussions, as noted, are significant: 

Its opportunity costs translate into either productive lending to the broader economy or financing competitiveness among SMEs (Prudent Investor, December 2024)

Finally, in addition to the above, MSMEs face further challenges from the "inflation tax," an increasing number of administrative regulations (such as minimum wage policies that disproportionately disadvantage MSMEs while favoring elites), and burdensome (direct) taxes.

IX. Conclusion: The Magna Carta for MSMEs Represents a "Symbolic Law," Possible Solutions to Promote Inclusive MSME Growth 

Ultimately, the ideology-driven "trickle-down" theory has underpinned the political-economic framework, where government spending, in tandem with elite interests, anchors economic development. 

Within this context, the Magna Carta for MSMEs stands as a "Symbolic Law" or "Unenforced Law"—where legislation "exists primarily for symbolic purposes, with little to no intention of actual enforcement." 

Politically, a likely short-term populist response would be to demand substantial increases in penalty rates for non-compliance (to punitive levels, perhaps tied to a fraction of total bank assets). However, this approach would likely trigger numerous unintended consequences, including heightened corruption, reduced transparency, higher lending rates, and more. 

Moreover, with the top hierarchy of the BSP populated by banking officials, this scenario is unlikely to materialize. There will be no demand for such measures because only a few are aware of the underlying issues. 

While the solution to this problem is undoubtedly complex, we suggest the following:

1 Reduce government spending: Roll back government expenditures to pre-pandemic levels and ensure minimal growth in spending.

2 Let markets set interest rates: Allow interest rates to reflect actual risks rather than artificially suppressing them.

3 Address the debt overhang through market mechanisms: Let markets resolve the current debt burden instead of propping it up with unsustainable liquidity injections and credit expansions by both the banking system and the BSP.

4 Liberalize the economy: Enable greater economic and market liberalization to reflect true economic conditions.

5 Adopt a combination of the above approaches.

The mainstream approach to resolving the current economic dilemma, however, remains rooted in a consequentialist political scheme—where "the end justifies the means."

This mindset often prioritizes benchmarks and virtue signaling in the supposed pursuit of MSME welfare. For example, the establishment of a credit risk database for MSMEs is presently touted as a solution.

While such measures may yield marginal gains, they are unlikely to address the root issues for the reasons outlined above.

_____

References 

Republic Act 5901: Guide to the Magna Carta for Micro, Small and Medium Enterprises (RA 6977, as amended by RA 8289, and further amended by RA 9501), p.17 SME Finance Forum 

Margarito Teves and Griselda Santos, MSME Financing in the Philippines: Status, Challenges and Opportunities, 2020 p.16 Nomura Foundation 

Prudent Investor, Is San Miguel’s Ever-Growing Debt the "Sword of Damocles" Hanging over the Philippine Economy and the PSE? December 02, 2024

 

 

Central Banks Recruit from Wall Street, Wall Street Runs Central Banks

Central banks have been captured by Wall Street through revolving door politics: (Wikipedia) movement of personnel between roles as legislators and regulators and the industries affected by the legislation and regulation

From the Bloomberg:

Wall Street is again leading to the corridors of central banks.

From Minneapolis to Paris, investors and financiers are increasingly being hired to help set monetary policy less than a decade since the banking crisis roiled the world economy and chilled their public-sector employment prospects.

Academic studies of historical voting records at central banks suggest the new trend may mean an increased bias towards tighter monetary policy.

Last week’s appointment of Neel Kashkari to run the Federal Reserve Bank of Minneapolis as of January means a third of the Fed’s 12 district banks will soon be run by officials with past ties to Goldman Sachs Group Inc.

Kashkari also worked for Pacific Investment Management Co. and managed the U.S. Treasury’s $700 billion rescue of banks during the financial crisis.

The New York Fed’s William Dudley was Goldman’s chief U.S. economist for almost a decade before joining the central bank in 2007, while recently appointed Dallas Fed President Robert Steven Kaplan spent 22 years at Goldman and rose to become its vice chairman of investment banking.

Although Patrick Harker joined the Philadelphia Fed from the University of Delaware he also served as an independent trustee of Goldman Sachs Trust.

It’s not just the Fed. Bank of England Governor Mark Carney and European Central Bank President Mario Draghi both famously worked for Goldman before entering central banking, yet they have recently been joined by others with financial backgrounds.

The new head of the Bank of France, Francois Villeroy de Galhau, spent 12 years at BNP Paribas SA, becoming its chief operating officer in 2011. Meanwhile, in September, Gertjan Vlieghe joined the BOE’s Monetary Policy Committee from hedge fund Brevan Howard having also previously worked for Deutsche Bank AG.

Even if one argues that these officials have noble intentions and have not been tacitly supporting the interests of Wall Street, their policies will most likely be based from perspectives that have been shaped by their previous work experiences. What you see depends on where you stand. In other words, instituted policies will likely manifest on the official's path dependency—FT Lexicon—idea that decisions we are faced with depend on past knowledge trajectory and decisions made, and are thus limited by the current competence base.

So the more recruits from Wall Street, the larger the tendency for policies to be biased in favor of Wall Street.

In the past I enumerated how the FED promotes its interest through underhanded—conflict of interest—ways

1. Self-publication or by influencing the materials that are published in mainstream Journals 

Cato’s Steve Hanke writes, ``One of the reasons the Federal Reserve gets so much good press is that it’s publishing most of it itself” (italics mine)... 

2. Outsource jobs and offer privileges 

Aside from having a say on the articles published on mainstream economic journals, Ryan Grim of the Huffington Post says that the US Federal Reserve has outsourced many of its work to the academia and has equally bestowed intangible benefits and privileges to them... 

3. Influencing public policies through the mainstream networks

One of the advantages of the Fed’s employment of a large external network is to be able to put pressure on public policies that favors its interests.

Huffington Post’s Mr. Grim addresses such conflict of interest issues by citing anew Robert Auerbach work, ``Auerbach concludes that the "problems associated with the Fed's employing or contracting with large numbers of economists "arise"when these economists testify as witnesses at legislative hearings or as experts at judicial proceedings, and when they publish their research and views on Fed policies, including in Fed publications."(all bold emphasis mine)...

Why stop at just self-promotion, outsourcing or influencing mainstream networks?

Why not recruit directly from Wall Street and from academia? (ex-Fed chair Ben Bernanke was a Princeton University professor)

This makes the fourth factor:

To reinforce or strengthen these dynamics, leaders of the central banks have to be recruited from the mainstream financial institutions (Wall Street)/ academia.

At the end of the day, all these converge to point out why central bank policies have been biased towards Wall Street.

Video: Special Interest Groups and Not Voters Influence Political Landscape in America

The following video, originally entitled “Corruption is Legal in America” by represent.us, trenchantly describes not only how corruption is legal in the US, but more importantly, how corruption has endemically been embedded into the system from which corruption became legal.

It is also interesting to see how the popular concept of representative government (seen from academic theory) works in complete departure from reality where voters have little influence on the legal landscape. Instead, the current political economic environment has been dominated by special interest groups via public choice, regulatory capture and revolving door politics.

Because of the enormous windfalls or colossal return of investments when political mandates have been enacted on their favor, many corporations resort to them.

The lesson here shouldn’t be seen only in the frame of US politics but also applies to other representative governments as the Philippines.

(hat tip Gary North/LewRockwell.com)

Phisix: The Showbiz Political Economy and the Showbiz Financial Markets

Nothing can now be believed which is seen in a newspaper. Truth itself becomes suspicious by being put into that polluted vehicle. The real extent of this state of misinformation is known only to those who are in situations to confront facts within their knowledge with the lies of the day. I really look with commiseration over the great body of my fellow citizens, who, reading newspapers, live & die in the belief, that they have known something of what has been passing in the world in their time; whereas the accounts they have read in newspapers are just as true a history of any other period of the world as of the present, except that the real names of the day are affixed to their fables. –Thomas Jefferson

In this issue:

Phisix: The Showbiz Political Economy and the Showbiz Financial Markets

-The Philippine Showbiz Political Economy

-Mainstream Media as Kingmakers

-Showbiz News#1: Government Infrastructure Spending will Boost The Economy

-Showbiz News#2: Improving Competitiveness and Economic Freedom

Phisix: The Showbiz Political Economy and the Showbiz Financial Markets

In the world of politics, various vested interest groups will always work to “capture” political or legal institutions to advance their interests.

The Philippine Showbiz Political Economy

And a manifestation of such dynamic would be the movements of authorities and the people from the industry affected by the legislation and regulation, otherwise known as revolving door[1].

In the US, revolving door relationships between regulators and the regulated has mostly been evident between the bureaucracy[2] and Wall Street and also in the defence industry[3].

To cite some examples, former Federal Reserve chairman Alan Greenspan has reportedly taken advisory roles in PIMCO, Deutsche Bank and hedge fund Paulson & Co[4]. Former US Secretary Tim Geithner has reportedly assumed presidency of a Wall Street private equity firm[5]. Mr. Geithner’s predecessor Henry ‘Hank’ Paulson served as Chairman and CEO of the influential Goldman Sachs before assuming the Treasury post[6]. Former Harvard President and Eight Director of the National Economic Council under President Obama, has reportedly been employed with a hedge fund, also a special adviser to a venture capital firm and has joined the board of P2P lending company[7]

The regulated become regulators, or vice versa, the regulators become the regulated. There are many reasons why for instance former regulators join the industry after their term, it can be about expertise, reputation, insider network/connection, and as lobby force. This applies to the opposite as well—industry people becoming regulators.

The essence of the revolving door politics, aside from the capture aspect, is that such are hallmarks of the axis of power politics.

In the Philippines, revolving door has been conspicuous not in the bureaucracy but rather in elective positions. Many from mainstream media, usually celebrities, end up with positions from almost all levels of the political spectrum through direct participation in electoral politics. When some of the celebrity politicians retire, some go back to media. Aside, some politicians marry media celebrities where the latter become partners in their political careers. Some politicians contract celebrities during campaign period.

Such dynamic reveals that in the Philippines, the corridors of power politics have significantly been influenced by mainstream media through populism.

Mainstream Media as Kingmakers

Yet mainstream media’s role as the “fourth estate” or as “kingmakers” in Philippine politics has largely been unrecognized by the public.

Such role is important because what mainstream media airs or writes reflect on their self-interests. Although these have been framed to convey interests of the public, in reality they have not.

Take for instance certain media programs sell Orwellian themes as entertainment, collectivist slogans have been part of daily rituals for certain variety shows, and worst, people’s personal lives have become part of reality programs where personal relationships are now subject to audience lynching.

Such media activities, which appear like implicit indoctrination of the subjugation of the individual in favor of the state, helps shape the populist legal and political system. Today, mainstream media seemingly determines what is legally and politically correct and what is not.

Mainstream media’s deepening role as seeming agents for political interests groups reminds me of Niccolo Machiavelli, who because of his masterpiece “The Prince”, has earned disrepute or notoriety as advocate of evil and immorality via “Machiavellism”[8]. To the contrary, what Machiavelli did was to expose on the how devious real politics work. The reason Mr. Machiavelli wrote was in order show “the real truth of things than an imaginary view of them”[9] Apparently people prefer the imaginary and the romanticized view of politics.

Machiavelli says further that for politicians to rule they would need to have “have the good will of its inhabitants”[10]. And such goodwill should be propped up by praiseworthy qualities portrayed of a leader through generosity, compassionateness, faithfulness, courageousness, courteousness, chasteness/purity, simplicity, strong, decisive, religiousness and more. Sounds familiar?

Hasn’t it been a regular fare where media try to promote ‘political chasteness’ by rewarding or praising people who return lost valuable items? Yet while such actions are indeed commendable, returning lost valuables are vastly distinct actions from political decisions to distribute other people’s money. If government bureaucrat Z take property from C, to give to A rather than B (political distribution), how will this be the same as any average citizen returning to C his inadvertently misplaced property? But that’s the way media packages them.

And according to Machiavelli these traits are necessary for appearance, even if they are not attainable, “it would be most laudable for a Prince to be endowed with all of the above qualities that are reckoned good; but since it is impossible for him to possess or constantly practise them all, the conditions of human nature not allowing it, he must be discreet enough to know how to avoid the infamy of those vices that would deprive him of his government”. The bottom line is that to justify political distribution of resources via the barrel of the gun would extrapolate to a world of smoke and mirrors, something which media sells.

Nonetheless while mainstream media aggressively instil upon society of what it deems as righteous, the government resorts to shame campaigns against the informal sectors in order to collect taxes to feed on the insatiable spending appetite of politicians, the government also institutes edicts that curtail economic activities (see below), intervene with household affairs, media also cheers on the government’s bubble blowing policies, as well as, other forms of political redistribution be it infrastructure and or other welfare spending supposedly to promote growth. 

The mechanical solution by media and their experts on social ills can be reduced the following premises: replace personalities in question (personality based politics), throw money at the problem, and or prohibit, tax and or regulate those whom have been publicly denounced by media as politically incorrect.

Yet all these signify as simplistic short term knee jerk responses with unforeseen long consequences. Such is the great French economist Bastiat’s distinction between the bad and good economist, where the former focuses on what is seen and the latter on what is unseen.

As I said before, media’s perception of economic growth can be analogized as one minus one EQUALS two.

And acts to restrain economic activities means acts to inhibit civil liberties.

Yet in the world of politics, freedom is a right perceived to be applicable only to oneself, but not to the others. In the Philippine context, freedom is a privilege when you are part of the political class or the politically connected.

Showbiz News#1: Government Infrastructure Spending will Boost The Economy

What has this got to do with the stock market and financial markets? Everything.

Philippine financial markets are inclusive segments of the political economy, thus evolving political trends plays a significant role in ascertaining how resources will be distributed. Such factors will be reflected in prices of non-financial and financial markets. Contra media, all human action is interconnected.

Last Holy Thursday one media outlet raved about how a massive government spending program estimated at Php 113 billion pesos (US 2.5 billion) would “make economic growth inclusive and lift millions out of poverty”. I pointed out that this has been part of the monumental pivot by the Bangko Sentral ng Pilipinas (BSP) to promote domestic demand via bubble blowing policies and fiscal policies that came at the expense of many other industries including external trade.

And opposite to the interpretation by the BSP chief of Bastiat’s distinction between the bad and the good economist, public works is one major aspect which the great French economist frowned on.

Mainstream media only sees the supposed benefits from government spending on infrastructure, but hardly the costs. Yet media and political authorities fail to demonstrate how government spending would “make economic growth inclusive and lift millions out of poverty” except to assume in a post hoc fashion that all spending equals growth.

The fundamental reason why Bastiat argued against the age old economic myth is that resources used by the government will always have to be taken away from somewhere: particularly resources (savings) or output (income) of non-political economic agents. The result will be a NET transfer of resources from productive agents to unproductive agents[11]. Costs are not benefits.

Public choice theorists would further expand on Bastiat’s opposition, noting that “costs are diffused, while benefits are concentrated”[12].

A bridge that will be built anywhere within the national geographical borders will likely benefit mostly residents of the area. Even for people living within the vicinity of the project, the benefits will not be the same. This means that some residents will benefit more than the others. But the costs are shared by people who even won’t be using the bridge. And because such political projects are not determined by profits and losses, but by political choice/s, we will never know if these projects ever deliver their alleged utility. Thus the benefits are assumed as true, but the costs are disregarded. Yet again, costs are not benefits.

But for the public choice theorist, most of the windfall from public works accrues to the political spectrum—the special interest groups.

Because a great segment of society has been oriented towards looking at the visible, the primary beneficiary will be the politician who would be seen as “doing something”, thus reinforcing the chances of a re-election.

Meanwhile, the invisible beneficiaries are those politically connected who will likely have significant economic interests in such projects. These may include the private sector side of Private Public Partnership (if the project is opened for private sector project management), the sub-contractors (if these are government operated projects), and or direct and indirect suppliers of equipment, materials and labor for such projects. The domestic property speculator who wishes to see increased value on his properties may also lobby to have a bridge built within the proximity of their properties.

You see, media will never disclose whether their companies or associated companies have direct or indirect exposure on such government projects. Besides truth telling would mean political pressures to reduce expenditures which may translate to a vastly reduced government. Since media plays kingmaker such perspective defeats their interests.

And there is a third major unseen cost from the government infrastructure spending.

Since the Philippine government has been running a budget deficit as I showed last week, the massive infrastructure would mean bigger deficits which extrapolate to either bigger debt or more inflation. All these imply of greater systemic risks.

Yet not all deficit spending are inflationary. If such deficits are funded by issuing bonds from which people and institutions simply draw down their bank deposits to pay for the bonds, there is no money created. No inflationary pressures

But this would be a different issue if such deficit will be financed by selling banks to the banking system. Banks will create new money by creating new deposits from which will be used to acquire the bonds. The new money is then spent by the government which enters permanently into the spending stream of the economy thereby affecting prices and causing inflation[13]

And if we look at the BSP’s data on money supply aggregates, which in February posted the eight successive month of 30++%% growth, the banking sector’s claim on the central government accounts for 16.5% of February M3. So if we assume that the national government will source their financing of such spending via loans from the banking sector then we will have a trifecta force of the BSP’s unleashing of the inflation monster through a higher money supply growth rate from the current mid 30% levels.

As a refresher, the first major force has been the domestic bubble or the credit financed spending spree by the property and property related sectors (trade, hotels and financial intermediation). Aside from the Cantillon effects of the quantity theory of money, the Peso will likely be affected by the widening of trade deficits from the sudden surge of credit financed demand from bubble sectors which will most likely strain domestic supplies and thus impel for more imports relative to exports. And a weaker peso means higher prices for imported goods which should add to price inflation pressures. The first and second forces will continue to reinforce each other for as long as the BSP doesn’t materially tighten, and for as long as, artificial profits from the intertemporal price spreads as a result of such inflationary dynamics exists.

Bank financed government infrastructure spending will compound on and complete the BSP’s inflation trifecta.

I am reminded of a scene in which Greek mythological god Zeus commands his brother Hades “to release the Kraken” from Clash of the Titans here. I imagine the same conversational scene except that instead Zeus and Hades this is between the Philippine chief executive ordering the BSP top honcho to release the inflation Kraken.

But I suspect aside from the inflation trifecta another scenario may be at work. It is possible that the massive government infrastructure spending may be meant as a contingent or an “automatic stabilization” measure. Perhaps the BSP may be considering the imposition of more superficial tightening. And in realization that a pullback in banking credit risks a slowdown of aggregate specific demand, which subsequently will be transmitted to a downshift in statistical GDP, the BSP hopes that government’s spending will substitute or offset for such slowdown.

As side note, next week will be the schedule for the release of banking loan and liquidity condition data. We will see if the 30++%% growth will make 9 straight months.

But if the second scenario is true, there are still huge gaps with such assumptions. Any retrenchment in the rate of money supply growth will expose on the diversion of resources from wealth producers to speculative capital consuming agents. With bubble activities getting less support from money supply growth, trouble is in the horizon. And trouble will not be a statistical but a real economic issue, because this will imply bursting bubbles (debt deflation) and or real economic contraction.

Demand, which has artificially been inflated by temporary profits, celestially priced assets, inflated incomes, and corporate capex from supply side credit funded growth, will contract when such easy money conditions reverse. Such will prompt for the chain link of unprofitable heavily indebted enterprises into a liquidation mode as they struggle to raise cash for debt repayment.

Besides, the proposed spending will hardly be as significant relative to the risks from the private sector. Based on M3, banking claims on the private sector accounts for 68% which is about thrice the government share. In addition, despite the proposed government spending, unless the government will arbitrarily suspend property rights of property owners, via eminent domain, in order to rapidly build these projects, there will likely be mountains of legal obstacles that may cause delays.

Finally media and their experts hardly ever try to examine from history empirical evidences of the alleged miracle of public works.

I have previously pointed out how Japan in the 1990s spent 100 trillion yen through 10 fiscal ‘public work’ stimulus programs to fight off the lost decade[14], yet until today which is 24 years after the bubble bust of 1990, Japan remains hooked to the stimulus machine even as credit risks continue to mount. As example of credit risks, the markets for Japanese Government Bonds (JGB) have become so illiquid, such that there have been occasions where JGBs have not been traded in 24 hours[15]. These are JGBs not emerging market bonds.

And the lack of liquidity has prompted for rare accounts of negative rates. Japanese bond traders have reportedly been afraid to short JGBs due to lack of liquidity, but reckon that such conditions are not sustainable. Taking away liquidity means limiting shorts for JGBs. So Abenomics has not only created more risks in the banking and financial, it has mangled the price discovery. Such only increases the risks of Japan’s potential Black Swan scenario[16].

As one would note monetary interventions—zero bound rates and QEs—have all been designed by governments for continued open access to the credit markets. Financial repression signifies the means to achieve such ends.

And yet bubbles, which are offspring of financial repression, are simply the belief of attaining “something for nothing”. Governments through money and credit inflation hope to achieve “something for nothing”. In the process they put their respective societies at greater risks of a “something for nothing” backfire: a bubble bust or hyperinflation.

Yet bubble worshippers worldwide, mainly seen through the lens and manuscripts of mainstream media, fail to reckon that there are natural economic and political limits to bubble blowing.

How about China? China has engaged in a whopping US$586 billion in public investment stimulus in 2008 in order to avoid the US centric based global crisis. Today, China has been grappling with a horrific debt burden that has become a clear and present danger for a black swan scenario[17]. 

One should probably realize that China’s supposed investment “public works” spree has led to massive ghost projects that been financed through massive credit creation. Now the proverbial debt chicken has been coming to roost.

I was especially stunned when I read US political insider Philippa Malmgren claim “China’s shadow banking system seems to have grown by the size of the entire US financial system in last year alone”[18]. If true then this shows even deeper fragility of China’s financial and economic conditions.

Yet many in the mainstream media tend to discount China’s risks and who put a lot of faith in the Chinese government. Ironically, China’s central bank, the PBoC, whom are supposed to be on top of the money and debt situation, can even hardly come to grips with how to calculate her money supply statistics[19]. If they can’t get even the numbers right for measurement, how do you expect the Chinese authorities to deal with millions of moving parts in her political economy?

The bottom line is that economic logic tells us that the fanciful claim that government infrastructure spending will “make economic growth inclusive and lift millions out of poverty” represents no more than wishful thinking.

That’s entirely Showbiz!

Showbiz News#2: Improving Competitiveness and Economic Freedom

Another showbiz claim is that the Philippines have become more economically free and competitive.

Institutions like the Heritage Foundation have fallen for the charm of publicity stunt of so-called anti-corruption campaign and boom time statistics while being remiss of how bubbles have been intensely inflated. Such is an example of being misled by looking at the ‘form’ rather than a comprehensive understanding of the ‘substance’.

Yet Pork barrel scandals signify a smidgen to the proportion of immorality of inflation or how inflationism corrupts society. This has been signified by 8 months of 30++% money supply growth.

Even the chief promoter of the inflation dogma recognized of its deadly potentials

Writes John Maynard Keynes[20] (bold mine)

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

The global swelling of interest over Thomas Picketty’s controversial book on wealth and inequality “Capital in the 21st Century” represents a symptom of the political wedge “the object of the hatred of the bourgeoisie”, brought about by inflationism “whom the inflationism has impoverished” caused by global central banking policies. Without knowing it, Thomas Picketty’s own chart attests to this dynamic[21]. Ever since the world has gotten off the Bretton Wood gold exchange standard, bubble blowing policies has increasingly been transferring wealth from society to the politically connected asset owning elite. 

I have previously pointed out how the same “Reverse Robin Hood” dynamic hounds the Philippines today[22]. Yet if this 30++% money supply growth will be sustained for a longer period, the same contentious class division politics will likely envelop domestic politics. The problem is when violence takes on the upper hand.

When Keynes noted that “the process of wealth-getting degenerates into a gamble and a lottery”, one can see how this is being transposed into real time activities via frenzied speculation in the Philippine Stock Exchange.

The above table represents that Price Earnings Ratio (PER) and Price Book Value (PBV) ratios of the pre-Asian Crisis[23].

As of Friday’s close, the 30-member Phisix PBV based on 2013 is 3.53 while against the four year 2010-2013 average is 3.89. Also as of Friday’s close PE Ratio of the blue chip benchmark is at 22.92 based on 2013 and 26.31 based on the average eps during the last 4 years. In comparison with 1995-6, what we can see is that current valuations have been priced ABOVE or BEYOND the pre-Asian (1995-96) crisis levels.

The 1993-1996 PER PBV story can be seen through a chart that I have posted before.[24]

Here’s a synopsis. In 1993 the Phisix posted a spectacular 154% nominal returns. This led to a 5.2 PBV and 38.8 PER. For the next two years, or 1994-95, the Phisix attempted to correct. The Phisix encountered 3 and a half bear market strikes (20% declines) during the said period. By the end of 1995 the Phisix lost 32% from the January 1994 peak, a half baked bear market. This has partly been reflected on the reduced PER and PBV.

Yet in 1996 until March 1997, the Phisix erased all the bear market losses and returned 48%. But the bull uprising failed to breakout to a new high. The failed breakout eventually led to a stunning collapse accompanied by the advent of the Asian Crisis. The Phisix fell by a harrowing 69% loss in 19 months. Again current values are very much dearer than the 1995-1996 levels. The implication is that the Phisix has not been just excessively OVERVALUED and outrageously MISPRICED, but such are signals of heightened financial fragility or susceptibility to instability. Such are evidence of valuations brought about by BUBBLE CONDITIONS.

A caveat. The composition of the Phisix has been different then from today. Second, I don’t know how the averaged had been attained. Was 1994-97 a rising tide lifts all boats phenomenon? Or has it been like today, where high flying high PER- high PBV stocks pulled up the index while low returning and equally low PER and low PBV dragged the index? The problem with looking at the average is that we tend to omit how real actions have taken place.

And pls remember I noted in the past that Indonesia’s PBV ratio has been the highest among ASEAN peers[25].

Here are more signs of the how the Philippine economic process has been “degenerating into a gamble and lottery”.

The former value investor and the most successful stock market investor, Warren Buffett in article at Fortune in 2001 wrote that for him the “best single measure of where valuations stand at any given moment[26]” has been the market capitalization to GDP.

He explains that reality when looking at the Market Cap to GDP ratio the mainstream stock market hokum “growth story” has been out of touch with reality. Why? Because “for investors to gain wealth at a rate that exceeds the growth of U.S. business, the percentage relationship line on the chart must keep going up and up. If GNP is going to grow 5% a year and you want market values to go up 10%, then you need to have the line go straight off the top of the chart. That won't happen.”

In short for a normally functioning market it is not mathematically possible for wealth from asset prices to vastly outstrip economic growth over the long run. Then Mr. Buffett wasn’t aware of the Greenspan-Bernanke-Yellen PUT, but even with additional lift from central bank actions, I believe that Mr. Buffett’s rule still holds true.

How does this apply to ASEAN stock markets?

Well surprise, Mr. Buffett’s warnings in 2001 would resonate with ASEAN financial showbiz stock markets today!

As of 2012, based on World Bank data, market cap to gdp would be as follows: Philippines 105.6, Thailand 104.7, Malaysia 156.2 and Indonesia 45.2. You can see the chart here. Given the rallies of 2013 and today, such data should be a lot higher now

Note: The threshold tolerance levels for each country’s market cap to gdp have been distinct.

The Philippines has surpassed the 1997 highs at over 100! Thailand is at 1997 highs. Each time Indonesia reached the 40+% market cap to gdp watershed, the succeeding returns have been negative. Malaysia, on the other hand, has been approaching the 2000 and 2007 levels but remains distant from the 1997 levels, where the latter seems like an outlier.

Three of the four ASEAN stock market bellwethers are at cyclical tops suggesting massive overvaluations. Again, these are signs of looming trouble.

In the Philippine Stock Exchange, current sentiment remains entrenched in a frenetic mania.

Despite some correction this week, the Phisix remains in a ‘one way’ upside trade. The consensus has taken stock in the belief that there is no way for Philippine stocks to go but up up and away (!)—in spite of the headwinds of the falling peso and growing interest rate risks.

Notice again that stock market participants have been so wildly bullish on the stock market. Daily trade churning has even surpassed the May 2013 highs when the Phisix was at 7,400 (left window). This aggressive churning can be seen as powering not only blue chips via the Phisix but also the broader market—second and third tier issues (right window)—also above the May 2013 highs. Yet trading volume has been far from May 2013 levels. Such have been signs of desperation to bring back the salad days.

One way trades signifies as very delicate and perilous position. Except for me and the very few observers of the bubble cycles, the reversal of the one way trade of the Chinese yuan has caught the mainstream by surprise. I’ve been saying that the yuan’s fall represents capital flight from a growing recognition of the China’s credit risks[27]. Yet losses from the yuan’s one way trade via the Targeted Redemption Forwards (TRF) have been estimated at $4.8 billion and counting according to the Zero Hedge[28].

The point is expect big surprises on one way trades.

Yet like the Austrian economists, Mr. Keynes was well aware that inflationism “while the process impoverishes many, it actually enriches some.” He just didn’t explain how transmission mechanism worked in the above quote.

Let me show you a recent example

A week back one of the major blue chip holding company issued $300 million worth of equity linked bonds at a staggering 5 year .5% interest rate paid semi annually[29] as part of her proposed CAPEX financing.

The company offered the option to exchange bonds with equity shares of a property subsidiary priced at a fantastic premium equivalent to 8.14 PBV and 46.77 PER! The bonds were offered to investors outside the US and “to qualified institutional investors within the Philippines”. [Note: I refrained from citing the name of company in order to focus on the issue, details can be seen in the footnotes]

In my view this represents an incredible subsidy by the retail depositors whose funds have been pooled into “qualified institutional investors”. These highly paid yield chasing managers fund managers have taken unnecessary risks due to the “one way trade” outlook. Yet the subsidy comes in not only in the form of extremely low interest rates but importantly a TRANSFER of risks from the borrower to the lender/new equity holder. This seems like a magnificent lose-lose proposition for the poor depositors enrolled to these “qualified institutional investors”.

And the above validates the ideas of the great Austrian economist Ludwig von Mises who explained one of the two social consequences of inflationism as “all deferred payments is altered to the advantage of the debtors and to the disadvantage of the creditors”[30]

And in my view, this seems like a wonderful real time example of the movie Wolf of Wall Street.

When the market reverses (soon), these “qualified institutional investors” will be left holding the empty bag whether we talk of bond or equity. Nevertheless the institutional fund managers will point to the knowledge problem to justify their present actions. They are likely to adapt a John Maynard Keynes “appeal to the majority” or “comfort of the crowd” as escape hatch. (bold mine)

A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him."

Ever wonder why the mainstream cannot see bubbles? And ever wonder why Wolves of Wall Street have been a commonplace but less elaborate than the one portrayed in the movie?

So aside from how inflationism “impoverishes many”, and “enriches some” this is another shining example of how the “wealth-getting” process “degenerates into a gamble and a lottery”. Showbiz financial markets! 

And this does not touch on the domestic bond market whom have been in a record convergence trade or narrowing of the yields relative to the US treasury counterparts.

My point is that a country cannot attain improvement in competitiveness and raise economic freedom levels when their governments adapt rampant inflationism. Remember inflationism is a system wide issue. And importantly inflationism signifies only one part of the grand scheme of Financial Repression policies which includes many other forms of interventionism such as price controls and capital controls and more. So it will be a folly to look at cursory or minor regulatory enhancements[31] to rationalize assessments of competitiveness or economic freedom.

As a good example, the following data shows why the BSP will resort to capital controls.

Despite mainstream cheerleading of current improvements of the recent improvement of portfolio flows and Foreign Direct Investment (FDI), the World Bank points at many deeply rooted structural problems with the Philippine economy. 

The fundamental problem which limits Foreign Direct Investment (FDI) flows to the Philippines has been that the Philippine government prefers to remain a closed economy through a suffocating web of regulations via a nationalist Foreign Ownership Restrictions (FOR)[32] [bold mine]

Compared to other major ASEAN economies, the Philippines attracts relatively little FDI. Between 1970 and 2012, FDI inflows averaged less than US$500 million per year (figure 18). The country’s long history of political and macroeconomic instability, its weak institutions, poor infrastructure, and stringent FORs explain the low FDI. Since 2009, the Philippines exhibited macroeconomic stability, but many other constraints remain unresolved. In particular, as discussed, de-jure FORs are the second most stringent in the region (after Thailand), while the Philippines ranks last among 77 countries in de-facto restrictions on FDI in services. Restrictions on foreign landownership also pervasively discourage investment.

A complex legal framework imposes FORs. The 1987 Constitution explicitly restricts ownership and management in a number of sectors. For natural resources, public utilities, and nonsectarian educational institutions, corporations must be at least 60 percent owned by Filipinos. Advertising is restricted to corporations 70 percent owned by Filipinos, while mass media and all professions are generally reserved for Filipinos. In addition to the constitutional restrictions, the Foreign Investment Act gives the president of the country the authority to impose FORs in other sectors through a biannual Foreign Investment Negative List. The latest order, in October 2012, expanded the number of restricted sectors and activities. Since 2000, only large retailers and casinos have experienced reductions in FORs.

In addition to de-jure restrictions, various de-facto restrictions create barriers to FDI. Investment requirements and promotion schemes are not standardized across sectors. This, and the lack of a central body to coordinate investment promotion agencies, creates confusion for prospective investors. Investors face complex procedures in acquiring permits and licenses, with some investment promotion agencies characterized by red tape, a lack of transparency in guidelines and procedures, slow processing, and allegations of corruption. Existing enterprises also face high costs of doing business, owing to poor infrastructure, the high cost and irregular supply of power, insecure property rights, inconsistent tariff and nontariff barriers, and policy inconsistency.

Instead of opening the economy, the present administration “expanded the number of restricted sectors”. This is hardly about improving competitiveness and economic freedom. Moreover the sectors recently opened (since 2000) has been large retailers and casinos which essentially accomodates today’s bubbles.

Yet the above represents a huge problem, which won’t be seen by the mainsream statisticians cum economists.

Why? Because this shows that 2009 BSP pivot to a bubble blowing economy[33] has essentially placed the Philippine formal economy in a ONE way trade or that the BSP policies has put ALL the formal economy eggs into a single basket, in the hope of a winner take all payoff.

The BSP has taken the flexibility option off the table by redirecting most of the efforts and resources of the formal economy to pump the bubble, which the Philippine government and the BSP now prays for its perpetuity.

You see, while today’s external accounts would look “strong” they are very susceptible to a dramatic deterioration. Why? Because the Philippine populist nationalist politics has erected ‘natural barriers’ to forces that may cushion any external account deterioration. Such barriers as noted above has intensified. The Philippine government thinks that domestic bubble blowing will shield her from external influences. [Well that’s what’s been said, the reality for domestic bubbles has been access to credit] So they have been closing the economy to the benefit of special interest groups. Piketty Philippine version, anyone?

Said differently, Philippine regulations have tilted the economic playing field towards foreign short term speculative money flows rather than to long term Foreign Direct Investments. This makes the Philippines highly vulnerable to a precipitate shift in sentiment—whether internally or externally sourced.

Isn’t showbiz all about short term? See the harm that the showbiz populist political economy can do?

Even from current conditions, external account balances are due for weakening.

Increasing inflation risks from 30+% money supply growth in a feedback loop with the weak peso may be compounded by foreign money efflux. Portfolio money have always been fickle. A change in sentiment for any reasons like escalation of the Ukraine standff or more signs of China’s economic and financial woes or a sustained US technology stocks selloff or others—may instantaneously reverse portfolio flows. A sudden reversal of sentiment would force the BSP to drain her forex reserves to support the peso or use the least appealable option of tightening which the BSP knows would expose the façade of credit financed growth.

Yet sustained outflows from the unraveling of domestic imbalances could mean the BSP would both tigthen and deplete forex reserves simultaneously. Such would be the equivalent of nightmare on elm street for the BSP. So the BSP’s likely nuclear option response will be to impose capital controls. The World Bank report clearly shows how the Philippine government has been severely been limiting her options that would lead to a protectionist response.

And such protectionist response seem as being signalled by media in terms of instilling and conditioning the acceptability of draconian political and economic repression. Here I hope that I am wrong or at least such trend will reverse.

Yet these are signs of improving competitiveness and economic freedom?

As for the showbiz political economy and showbiz financial markets, unfortunately all shows come to an end.

---

[1] Wikipedia.org Revolving door (politics)

[2] See Chart of the Day: More Crony Capitalism December 18, 2011

[3] See Video: Revolving Door Relations Between Pentagon and Defense Contractors December 4, 2012

[4] Wikipedia.org Alan Greenspan After the Federal Reserve

[5] Wikipedia.org Timothy Geithner

[6] Wikipedia.org Henry Paulson Career after public service

[7] Wikipedia.org Lawrence Summers Post-NEC career

[8] Wikipedia.org Niccolò Machiavelli

[9] Niccolo Machiavelli. The Prince. Chapter 15 verse 2 The Harvard Classics. 1909-14 Bartleby.com

[10] Niccolo Machiavelli op. cit Chapter 3 verse 1

[11] See Frédéric Bastiat on the Philippine Government’s Massive Infrastructure Spending Program April 17, 2014

[12] Wikipedia.org Public Choice Special interests

[13] Murray Rothbard, Ten Great Economic Myths Chapter 2, Making Economic Sense Mises.org

[14] See Abenomics Fails to Spur Business Spending May 21, 2013

[15] See How Abenomics distorts the JGB markets April 15, 2014

[16] See Japan’s Ticking Black Swan February 24, 2014

[17] See Will China Trigger the Black Swan Event in 2014? January 20, 2014

[18] K. PHILIPPA MALMGREN China Under Attack International-Economy.com

[19] See Central Planning Failure: China’s PBOC Edition April 26, 2014

[20] John Maynard Keynes The Economic Consequences of the Peace (1919) p.235 (Google Book) (PBS.org)

[21] See Video: Peter Klein on the Fundamental Flaws of Thomas Piketty’s view of Inequality April 26, 2014

[22] See The Atlantic on Philippine Economic Boom: Looks Great on Paper, May 8, 2013

[23] Urbi Garay The Asian Financial Crisis of 1997 - 1998 and the Behavior of Asian Stock Markets, University of West Georgia

[24] See Phisix: Scrutinizing the Property Inspired Rally February 24, 2014

[25] See Phisix: A Deeper Look at the Philippine and Indonesian Stock Market Mania March 17, 2014

[26] Warren Buffett; Carol Loomis Warren Buffett On The Stock Market December 10, 2001 CNN Money Fortune

[27] See China’s Shanghai Index drops 5% in 4 days as the Yuan sinks February 25, 2014

[28] Zero Hedge Someone Is Betting That The Chinese Currency Collapses By The End Of 2014? April 26, 2014

[29] Businessworldonline Ayala raises $300M, sets ‘record’ capex April 12, 2014, Businessmirror.com Ayala offers $300-million bonds to fund power, infrastructure projects April 3, 2014

[30] Ludwig von Mises 1. Inflation III. INFLATION AND CREDIT EXPANSION Intervention An Economic Analysis Mises.org

[31] See Philippine Economy: The Unseen Factors behind the “Doing Business” improvements October 30, 2013

[32] World Bank Preserving Stability and Promoting Growth WORLD BANK EAST ASIA PACIFIC ECONOMIC UPDATE APRIL 2014 p.75

[33] See Phisix: In 2009, the BSP Engineered a Crucial Pivot to a Bubble Economy April 14, 2014