True, governments can
reduce the rate of interest in the short run. They can issue additional paper
money. They can open the way to credit expansion by the banks. They can thus
create an artificial boom and the appearance of prosperity. But such a boom is
bound to collapse sooner or later and to bring about a depression—Ludwig von
Mises
In this issue:
Q2 2024 6.3% GDP?
Stagnation in PSEi 30’s Q2 and 1H 2024 Performance as Debt-to-Income Ratio
Soared to an All-Time High!
I. Introduction: The
Growing Disconnect Between PSEi 30 Fundamentals, Prices, and the GDP
II. 1H 2024: PSEi 30
Firms Insatiably Gorge on Debt: More Borrowing, More Trouble?
III. PSEi 30: The Mirage
of Profit Gains Amidst Explosive Rise in Debt
IV. PSEi 30: Caveats in Corporate
Reporting and Governance: The PLDT 4-Year Budget Overrun Example
V. BSP’s Inflationism: The
Slowing Growth of PSEi 30 Revenues and Its Implications
VI. Impact of BSP’s
Inflationism: PSEi 30’s Deepening Signs of Illiquidity
VII.
San Miguel’s Intensifying Debt and Cash Crunch: Implications for Financial
Stability
VIII. Analyzing the
PSEi’s Impact on Financial Liquidity: The Surge in PSEi and Bank Borrowings
Increases Financial Fragility
IX. PSEi 30 1H Analysis:
A Concise Industry Overview
X. Q2 GDP Growth of 6.3%
Highlights a Two Speed Economy: Stagnation in PSEi 30 Revenues and Net Income
XI. The PSEi 30 Nears
7,000: The Widening Discrepancy Between Prices and Fundamentals
Q2 2024 6.3% GDP?
Stagnation in PSEi 30’s Q2 and 1H 2024 Performance as Debt-to-Income Ratio
Soared to an All-Time High!
In a detailed analysis, we highlight the growing disconnect between PSEi 30 fundamentals (for Q2 and 1H 2024), PSEi 30 prices, and GDP.
I. Introduction: The
Growing Disconnect Between PSEi 30 Fundamentals, Prices, and the GDP
The PSEi 30 soared by 7.03% in Q1 2024,
plummeted 7.12% in Q2, or was almost flat with a slight decrease of 0.6% in the
first half of the year.
However, two months into Q3, the PSEi 30 has
fully recovered its Q2 losses and was up 7.94% YTD as of August 22nd.
Despite the fragile consumer conditions,
owing to the "Marcos-nomics stimulus" channeled via record deficit
spending, Q2 GDP rose to 6.3%.
Nevertheless, the dynamics in motion in Q1
extended through Q2 2024 and in the first half of the year.
In our conclusion last May,
In the end, the loosening of
financial conditions has led to an increasing divergence between corporate
share prices and fundamentals.
Furthermore, the
PSEi 30’s Q1 2024 financial performance demonstrates a two-speed economy: a
private sector slowdown, which has even affected the elites, translating to
further hardship for the middle and lower classes, and a booming government. (Prudent
Investor, May 2024)
Let's compare the debt conditions of the
non-financial members of the PSEi 30 with its entire constituents.
However, there are some caveats regarding the
presented statistics.
Nota bene:
-Older data,
representing PSEi members of the specified Q2 end-of-period, presents an
apples-to-oranges scenario. The PSEi periodically updates its constituents,
which we labeled as 1A data.
-The older data also
excludes data revisions.
-Current or 2023-2024
Q2 data provides a more accurate comparison as it reflects present members,
labeled here as 1B data.
-The aggregates are
overstated due to holding companies incorporating subsidiaries.
II. 1H 2024: PSEi 30
Firms Insatiably Gorge on Debt: More Borrowing, More Trouble?
Figure 1
The table presented is an example of 1B data.
It compares the recently published first half (1H) of 2024 numbers with the
first half of 2023 figures of PSEi firms. (Figure 1, top table)
The 2023 headlines and the rest of the historical
data are referred to as 1A.
Despite coming from a high base, the debt of
non-bank PSEi 30 members increased by 5.9% or Php 308.5 billion to Php 5.535
trillion, which is the second highest on record, following last year's Php 5.6
trillion (1A). (Figure 1, middle graph)
The net debt increase of Php 308.5 billion
was the fourth highest, after 2022, 2020, and 2023 (1A).
While fifteen of the 27 non-bank PSEi 30
firms posted increases in debt (1B), San Miguel’s eye-popping PHP 147
trillion accounted for 53% of the total.
The other top borrowers were Ayala Corp (Php
46.3 billion), Ayala Energy subsidiary ACEN Corporation (Php 34.5 billion), and
Aboitiz Equity (Php 26.85 billion).
It's important to note that this discussion
does not include the borrowings of PSEi 30 banks.
The good news is that despite the massive
debt increase, soaring bank assets have led to a reduced PSEi 30 Debt-to-Total
Financial Resources ratio, which has dropped below 2019 levels. (Figure 1,
lowest image)
But here's the caveat: while bank assets
outgrew the PSEi 30’s non-bank debt—partly due to the non-inclusion of bank
debt data—banks still represent a substantial source of lending to PSEi
firms.
Furthermore, the outperformance of bank
assets has been driven by the steep growth in consumer credit exposure
and holdings in Philippine government debt.
Additionally, some companies may have tucked
away debt through other classifications (e.g., lease liabilities) or via
off-balance sheet arrangements, which may result in an understated actual debt
position.
Figure 2For instance, while Wilcon Depot has no
published debt, interest expenses (from lease liabilities) have been on an
uptrend. (Figure 2, topmost chart)
In this way, understanding the mechanics
behind the statistics can help strip away the façade of good news based on
headline metrics.
III. PSEi 30: The Mirage
of Profit Gains Amidst Explosive Rise in Debt
Second, media headlines captivate their
audiences by focusing on the percentage gains in revenues and income of the
most prominent members of this elite group.
However, they rarely mention that these gains
largely stem from the illusion of the low-base effects.
In reality, these exciting profit gains
represent only a small fraction of the increases in debt.
In the first semester, the published net
income of the PSEi 30 rose by a modest 4.36%, or Php 20.4 billion, reaching the second-highest level of Php 487.12 billion.
Yet, this growth rate marks the slowest
increase since 2021. (Figure 2, middle image)
Net income of non-financial companies grew by
2.03%, with one-third of these companies experiencing a decline in profits.
Meanwhile, the headline performance was
primarily driven by the big three banks, whose profit growth of 15.4%
significantly boosted the overall.
In context, the non-bank debt growth of 5.9%
eclipsed the PSEi 30’s net income growth of 4.36%.
Crucially, the net debt growth of Php 308.5
billion represents a staggering 15.2 times the net profit increase of Php
20.4 billion! Fifteen times! An all-time High! (Figure 2, lowest pane)
Strikingly, as a proportion of income, the net
debt growth of Php 308.5 billion accounted for 63% of the aggregate net income
of Php 487 billion in the first semester!
Essentially, this demonstrates the law
of diminishing returns in action: while debt used to be a significant
contributor to (demand) revenue and income growth, malinvestments have resulted in corrosive
effects.
Worse yet, unbeknownst to the public, this
marks a substantial buildup in credit risks, channeled through balance
sheet mismatches of the nation’s largest firms.
Amazing.
IV. PSEi 30: Caveats in
Corporate Reporting and Governance: The PLDT 4-Year Budget Overrun Example
Another cautionary note is that elite
firms may be prone to exaggerating their top and bottom lines to convincingly
portray their financial viability to the public.
Furthermore, "errors" could also be
a factor, reminiscent of the PLDT's 4-year
"budget overrun" debacle. Local authorities drew a veil over the
reporting fiasco of the largest telecommunications company and allowed them to
escape unscathed, despite the company settling with plaintiffs of a class
action suit for a paltry sum of USD 3
million.
In our humble opinion, the PLDT case exemplifies the decay of
corporate governance, where elite companies can evade accountability for
misdeclarations
(whether accidental or intentional).
Instead of being transparent, they may choose
to pay small fines, raising the question: what would prevent other elite
companies from following suit?
V. BSP’s Inflationism: The
Slowing Growth of PSEi 30 Revenues and Its Implications
Figure 3
Meanwhile, corporate revenues grew by 8.71%
in the first semester (1B). Non-bank PSEi 30 expanded by 7.4% while bank revenue
growth of 24.2% delivered the gist of the PSEi 30’s semestral expansion. (Figure
3, table)
Twenty-three of the 30 constituents posted
positive YoY growth while seven saw a contraction. In pesos, San Miguel was the
leader with an increase of Php 103.8 billion followed by JGS with Php 24.8 billion,
BDO and BPI with Php 24.1 billion and Php 23.1 billion respectively.
1H revenue growth of 8.71% resonated with its
equivalent in (nominal) GDP of 9.5%. If
the GDP numbers are close to accurate then PSEi 30’s share of revenues amounted
to 27.8% of the NGDP.
Yes, 30 firms accounted for over a
quarter of the statistical economy in 2024.
And that's only the 30 firms—a hallmark of
the trickle-down, plutocratic political-economic structure.
The slowing NGDP and PSEi 30’s revenue growth
are symptoms and manifestations of the corrosive nature of the BSP’s
inflationism, expressed through over-indebtedness and price instability,
which negatively impact profits and liquidity.
Importantly, because this increases the
public’s time preferences or short-term orientation, the public
becomes inclined toward activities that cater to instant gratification, such as
speculation and gambling.
This inclination also permeates into
the political spectrum, raising the public’s desire for more interventions
and resulting in the deepening politicization of the socio-economic sphere.
VI. Impact of BSP’s
Inflationism: PSEi 30’s Deepening Signs of Illiquidity
This leads us to the fourth component: cash.
It is no surprise that the mounting imbalance
between profits and debt has resulted in deepening signs of illiquidity, as the
cash reserves of the PSEi 30 constituent firms continue to decline. (Figure 3,
lower visual)
In addition to borrowing, PSEi 30
corporations have partially used their cash reserves to bridge the liquidity
gap in their financing operations.
Yet, despite the massive borrowings, the
aggregate cash reserves (1A) have fallen to their lowest level since 2021, with
14 of the 30 firms posting cash contractions.
Aboitiz Equity and gaming company Bloomberry
recorded the largest cash decreases, while Meralco and LTG registered the most
significant gains.
VII. San
Miguel’s Intensifying Debt and Cash Crunch: Implications for Financial
Stability
San Miguel’s situation
appears to be a poster child for the entropic process leading to illiquidity
and insolvency.
Despite the astonishing Php
147 billion surge in borrowing from the first semester of 2023 to 2024, and a
published net income of Php 13.6 billion, SMC’s cash reserves fell by Php 8.31
billion to Php 253.9 billion—its lowest level since 2018. (And that’s assuming
that the reported cash reserves are accurate)
Why wouldn’t it?
Figure 4Short-term debt skyrocketed
from Php 363.8 billion in 1H 2023 to Php 533.67 billion in 1H 2024, an increase
of Php 169 billion! (Figure 4, topmost chart)
Both the level of
short-term debt and the annual increase in short-term debt are all-time highs!
More importantly, SMC’s
short-term debt now exceeds 100% of its cash reserves!
Additionally, interest
payments, which amounted to Php 24.12 billion and counting, have
not been included in this analysis.
In context, SMC’s Php
1.484 trillion in debt represents about 4.6% of the Php 32.33 trillion in
total financial resources and 5.9% of the 2024 annualized Php 25.2 trillion
NGDP! (Figure 4, middle and lowest charts)
Incredible.
In simple terms, SMC needs
to generate funds to pay or refinance both its massive short-term and
long-term obligations.
Rising interest payments
will further erode its profits.
With vastly insufficient
profits and cash flows, SMC will naturally have to draw on its most liquid
reserves: cash.
The company may also need to
increase its borrowing rate or resort to selling assets or dilute its equity to
meet its operational liquidity requirements.
Keynesian economist Hyman
Minsky theorized the transition from financing stability to instability
phenomenon as "Ponzi Finance."
Borrowing
to pay interest or selling assets to pay interest (and even dividends) on
common stock lowers the equity of a unit, even as it increases
liabilities and the prior commitment of future incomes. A unit that Ponzi
finances lowers the margin of safety that it offers the holders of its debts.
(Minsky 1992)
Regardless of interest
rates, SMC’s debt stock has reached a fragile state, increasingly vulnerable to
a bout of perilous illiquidity.
If SMC cannot raise the
required amount, it may exhaust all its cash or, alternatively, embark on a
selling spree of its assets or dilute its equity.
New ventures like the Bulacan-based New Manila International Airport (NMIA) project are unlikely to
generate sufficient cash flows to meet its skyrocketing obligations.
However, in our humble opinion, the company must convince the public that it is viable enough to continue with its borrowing orgy.
Yet, what happens at SMC
will not stay at SMC. A "tail event" for San Miguel could send
shockwaves through the banking system, financial markets, and the broader
economy—which relies on elite firms for GDP growth.
Of course, we would expect
the BSP or the government to mount a bailout. However, doing so could
accelerate other negative feedback loops in the financial system.
VIII. Analyzing the
PSEi’s Impact on Financial Liquidity: The Surge in PSEi and Bank Borrowings Increases
Financial Fragility
The PSEi’s mounting liquidity shortage has
been mirrored in the banking system.
Figure 5In the first semester, cash growth among
listed banks increased by a mere 1.82% year-over-year (boosted by the big three
of the PSEi 30 at 3.36%), while bills payable soared by 39.2% across all banks,
driven higher by a 68.12% surge from the PSEi 30’s big three. (Figure 5, table)
Nota Bene: BPI categorizes its
borrowing under "Other borrowed funds," making the time element of
its debt distribution ambiguous and therefore not included in our data.
In any case, universal-commercial
(UC) banks have ramped up their borrowing activities, with bills and bonds
payable growing at accelerated rates of 40.62% and 11.78%, respectively,
resulting in a total increase of 27.8% as of June. (Figure 5, middle graph)
UC bank borrowings in pesos reached an
all-time high of Php 1.401 trillion last June!
UC banks have not only increased their
borrowing but have also shifted focus to short-term debt, reflecting the
industry’s deteriorating liquidity conditions.
The long-term decline in cash-to-deposits and
liquid assets-to-deposits ratios continued in June. (Figure 5, lowest diagram)
Bank client issues are also reflected in the
banks' health reflecting on liquidity conditions—despite the accounting charade
surrounding Held-to-Maturity (HTM) assets and various relief measures that have
obscured the actual conditions of Non-Performing Loans (NPL).
If banks are as profitable as claimed, why is
financial liquidity deteriorating and why are borrowings at record levels?
IX. PSEi 30 1H Analysis:
A Concise Industry Overview
Figure 6By industry, debt grew the most in the
holding sector, while the property sector came in a distant second in the first
semester. (Figure 6, top table)
The holding sector accounted for the largest
share representing 74%, while the property sector 11%.
Similarly, banks generated the most
significant net income gains, followed by the service sector.
Banks' net income comprised 61.6% of the total
or the PSEi 30’s net income, while services had a 28% share.
The holding sector dominated revenue growth,
with a share of 54.7%, while banks accounted for 21.9%.
Cash increased the most in the industrial
sector, with banks in second place.
X. Q2 GDP Growth of 6.3%
Highlights a Two Speed Economy: Stagnation in PSEi 30 Revenues and Net Income
Moving to the second quarter,
"Marcos-nomics" powered the GDP growth of 6.3%.
The poor top-line
performance of several PSE-listed firms, which have reported their Q2 2024
results, underscores this issue.
…
Fifth and finally,
the PSE-GDP data indicate that there is confusion in associating a high GDP
with the performance of the PSEi 30, which is currently in a bear market. (Prudent
Investor 2024)
This context is further validated by
examining the revenues and net income of the 30 elite companies in the PSEi 30,
some of which are even involved in government projects.
Whereas Q2 NGDP grew from 9.1% in Q2 2023 to
10.1% in Q2 2024, the PSEi 30’s gross revenues climbed from 8.24% to 9.14% over
the same period, despite the significant increase in debt. (Figure 6, lower graph)
Similar to the first half of the year, Q2
revenues of the elite firms, amounting to Php 1.799 trillion, signified 28%
of the Q2 NGDP, which stood at Php 6.486 trillion—once more, the trickle-down,
plutocratic political economy.
Revenues grew, but there is a catch.
The net income of the PSEi 30’s non-bank
firms showed a slight decline of 0.13% year-over-year.
However, the bank's net income, which
expanded by 13.7%, boosted the aggregate net income growth to 2.35%. This
figure represents gross net income.
Figure 7
Alternatively, the real net income for the
PSEi 30 stagnated or even contracted by -1.45% in Q2 2024! That’s right; net
income shrank. (Figure 7 top and bottom tables)
Outside the banking and property sectors,
there was hardly any increase in net income in real terms.
Net income for thirteen of the PSEi 30 firms
(43%) decreased in Q2. Semirara, DMC Holdings, GT Capital, JG Summit, and
Bloomberry led this decline.
Conversely, Ayala Corp, SM Investments, ICT,
and Meralco led the gainers.
In the meantime, SMC and Meralco posted the
most significant revenue gains, while DMC and Semirara experienced revenue
contraction.
XI. The PSEi 30 Nears
7,000: The Widening Discrepancy Between Prices and Fundamentals
In line with global stocks, the PSEi 30’s
relentless climb toward the 7,000 level has been primarily driven by the local
version of the "national team" and supported by foreign funds, thanks
to the "Powell Pivot" towards easier monetary conditions.
While this surge has largely been driven by price-multiple
expansion or speculation, it has overlooked critical concerns that have
been festering beneath the surface.
Or, stocks have departed from the ongoing
stagnation in fundamentals.
However, if higher interest rates did not put
a brake to the government's and the PSEi 30's insatiable debt absorption and
immersion, easier money conditions will surely intensify it.
What could possibly go wrong?
___
References:
Ludwig von Mises, OMNIPOTENT GOVERNMENT
THE RISE OF THE TOTAL STATE AND TOTAL WAR, p.251; 1944 & 2010, Mises
Institute, Mises.org
Prudent Investor Newsletter, Despite the PSEi 30
FOMO, Q1 2024 PSEi 30 Financial Performance Unveiled a Two-Speed Economy, May 19,2024
Hyman P. Minsky, The Financial Instability Hypothesis, p.7 Levy Economics
Institute, May 1992, levyinstitute.org
Prudent Investor, Philippines' Q2 GDP Growth of
6.3%: Unpacking the "Marcos-nomics" Stimulus, June 2024 Philippine
Employment Rates—A Statistical Pump August 11, 2024
