PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade

Bulls of 1929 like their 1990s counterparts had their eyes glued on improving profits and stock valuations. Not a thought was given to the fact that the rising tide of money deluging the stock market came from financial leverage and not from savings—Dr. Kurt Richebächer 

In this issue 

PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade

I. PSEi 30: Has BBM’s SONA Cycle Climaxed? 

II. The Health of the Pre-SONA Pump: July’s Index Spike on Sluggish Volume 

III. The Impact of the "National Team:" Rising Concentration Risks in the Financial Spectrum 

IV. The Impact of the "National Team:" Rising Concentration Risks in the Economy 

V. How Media Shapes the Overton Window: Focus on "Ghost Month" while Ignoring Geopolitical Risks from South China Sea 

VI. How the Unwinding Carry Trade from the Japanese Yen’s Massive Rally May Aggravate the PSEi 30’s post SONA Dump 

PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade 

Has BBM’s SONA Cycle Peaked? While the headline index has shown resilience in July, market internals reveal structural weaknesses. The unraveling of the Yen-Yuan carry-trade increases global contagion risks. 

I. PSEi 30: Has BBM’s SONA Cycle Climaxed? 

The following post is a follow-up on my July 21st, “The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects” 

Since its interim peak on July 19th, the PSEi 30 has dropped 2.97%—as of the week ending August 2nd—supported by this week’s decrease of 1.79%, marking its second consecutive decline. 

The major Philippine benchmark fell in 5 of the last 9 trading days. 

Interestingly, this week’s larger decrease came as the Philippine government is expected to announce the Q2 GDP—which has been widely projected to outperform—and June’s labor force survey. 

The authorities are also set to release July's CPI print, which the BSP expects to show a bounce from last month.

And it's also earnings season, where the consensus expects Q2 earnings to exceed expectations. 

Meanwhile, the establishment and media have been peddling the idea of the “ghost” month affecting the stock market’s performance, earnings, and the economy. 

II. The Health of the Pre-SONA Pump: July’s Index Spike on Sluggish Volume 

First, let's examine the performance of the Philippine Stock Exchange last July*. 

*Nota Bene:

-The base reference matters. In my perspective, the 2013 starting point represents the real peak of the PSEi 30 based on volume and market internals.

*Annual returns of the PSEi 30 partially represent an apples-to-oranges comparison due to marginal changes in its membership.

*The data indicated reflects nominal returns and not CPI-adjusted or real returns.

Figure 1

Thanks to the pre-SONA pump, the PSEi 30 jumped 3.23%—representing its second-best monthly performance in 2024 and the biggest July returns since 2018. (Figure 1, topmost image)

It was also the largest of the BBM's pre-SONA pumps over the last three years.

On a year-to-date basis, the PSEi 30's meager 2.62% returns signified its best showing since 2019, which highlights the ongoing bear market.  (Figure 1, middle graph)

Despite this, diminishing returns continue to be a scourge on the PSEi 30.

But how about the volume?

Though July's gross turnover was up 11.3% from a year ago, in peso terms, its depressed level, which was almost equal to 2021, reinforced the downtrend since 2015. (Figure 1, lowest chart)

Figure 2 

Gross volume includes the published special block sales and the undeclared substantial share of cross-trades.

In the first 7 months of 2024, gross volume fell by 8.4% year-over-year (YoY) to Php 865.5 billion, marking a third consecutive annual decline. (Figure 2, highest window)

This means that the paltry improvement last July has not been significant enough to cover this year's volume deficit.

The 7-month main board volume likewise dropped 3.69% to Php 702.7 billion, which signified levels below 2018. (Figure 2, middle visual)

Resonating with the gross volume levels in peso, it has been a downhill for the main board volume since peaking likely in 2013.

Amazing.

The more than a decade-long depression in the PSE's gross and main board volume represents the decadent conditions of capital or savings.

It must be emphasized that these volumes have been inflated by foreign trade, pumps by the "national team," and intra-day dealer trades.

In the first 7 months of 2024, the share of foreign participation has risen from 45.44% in 2023 to 48.8% this year. (Figure 2, lowest diagram)

Foreign investors remained marginal sellers, posting Php 27 billion in outflows, their fifth consecutive year of net selling.

III. The Impact of the "National Team:" Rising Concentration Risks in the Financial Spectrum 

As for the "national team," the Other Financial Corporations (OFC) could be part of this cabal engaged by authorities to prop up the index.

Clue?

The BSP on the OFC’s activities in Q1 2024: The BSP on the OFC’s activities in Q1 2024: “The QoQ growth in the other financial corporations’ domestic claims was attributable to the increase in its claims on the other sectors, the central government, and the depository corporations. The other financial corporations’ claims on the other sectors grew as its investments in equity shares issued by other nonfinancial corporations and loans extended to households increased. Likewise, the sector’s claims on the central government rose as its holdings of government-issued debt securities expanded. Moreover, the sector’s claims on the depository corporations rose amid the increase in its deposits with the banks and holdings of bank-issued equity shares. (bold added) [BSP 2024]

Figure 3

The growth of OFC’s claims on the private sector slipped from 9.5% in Q4 2023 to 8.5% in Q1 2024, which was also reflected in the claims on depository institutions, whose growth rate decreased from 20% to 13.9%. 

Nevertheless, both claims surged to record highs in nominal peso levels, reflecting the returns of the PSEi 30 amounting to 7% and the Financial Index to 17% in Q1 2024. (Figure 3, upper and middle charts) 

OFCs have not just been funding the government; they have also been propping up the PSE! 

To emphasize, the percentage share of the free float capitalization of the top three banks reached an unprecedented 22.7% of the PSEi 30 last May! (Figure 3, lowest image) 

Though it has slipped, it has remained within a stone's throw of 21.85% as of the week of August 2nd. 

The same banking heavyweights command a whopping 89% of the overall Financial Index pie, which is stunningly higher than the 79% share in the week of July 16, 2023.  

This outgrowth partially reflects the decrease in the number of members from 9 to 7, due to the exclusion of Rizal Commercial Bank and Union Bank. 

The only non-bank member of the index is the Philippine Stock Exchange [PSE:PSE].

Figure 4

The Financial Index has not only starkly outperformed, alongside ICT, electrifying the gains of the PSEi 30, but it has also been absorbing a greater share of the depressed volume of the PSE. (Figure 4, topmost graph)

That is, the uptrend in the Financial Index has climbed along with its estimated volume share of the PSEi 30, comprising 18.15% last June. (Figure 4, middle image)

As such, the concentration of gains in the index has also resonated in the context of gross volume.

To wit, the rising concentration risk comes amidst a declining trend in profit growth of the banking system, where a bulk of it represents accounting profits. For instance, mark-to-market losses are concealed via record Held-to-Maturity (HTM) assets, and BSP relief measures that understate NPLs, etc.

IV. The Impact of the "National Team:" Rising Concentration Risks in the Economy

And it is not just banks.

While year-to-date (YTD) gains of the PSEi 30 members have been evenly distributed (as of August 2), the returns of the top five issues have defined the index's performance rather than the overall breadth. (Figure 4, lowest pane)

For instance, the traded volume of the top 20 most active issues increased by 40% this July compared to a year ago and was up by 2.17% YTD 2024 from the previous year.

In the same vein, the volume of the Sy Group soared 46.6% last July from the same month in 2023 and was up 7.3% YTD 2024 compared to a year ago. 

This indicates that the heavy index pumping last July by the Philippine version of the “National Team” amplified the percentage share of the top 20 issues and the Sy Group in the context of volume. 

Meanwhile, the average share of the top 10 brokers increased from 56.98% in July 2023 to 57.6% last month. 

Aside from the sluggish volume, the PSEi 30’s SONA gains have barely been reflected in the PSE’s constellation. 

The advance-decline spread last July 2024 was -150 compared to -166 in the same month a year ago. Again, the PSEi was up 3.23%.

Figure 5

This divergence reverberated in the YTD performance: although negative breadth has become less negative—or price declines have been less intense—a positive sign, they are still declining.  Again, the PSEi was up 2.62% YTD. (Figure 5, topmost diagram) 

Lethargic volume (a symptom of capital consumption), rising risks from the concentration of activities in trading volume (reflecting maladjustment in balance sheet exposure), select stock prices (inflation of mini-price bubbles), broker exposure (increased balance sheet leveraging?), as well as low levels of retail trades (low savings), and rising dependence on foreign trade (increasing reliance on global capital flows) translate to magnified risks of significant downside volatility or simply—a meltdown. 

A stock market meltdown leads to a decrease in collateral values that underpin bank lending, which magnifies balance sheet mismatches, increases illiquidity, and heightens the risk of insolvency within the industry and among its borrowers. It also weakens the balance sheets of investment, pension, and insurance funds (such as the government’s SSS and GSIS), potentially leading to increased capital deficits and further heightening the risk of illiquidity and insolvencies. 

The BSP would likely bail some of these out at the expense of the peso. 

During the stock market meltdown in March 2020, the Finance Chief called on the SSS and GSIS to boost or "rescue" the stock market. The BSP followed this up with record cuts in official rates, historic liquidity injections, and the implementation of various relief measures. The rest is history. 

The BSP implemented ex-Fed chairman Ben Bernanke advise, 

History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse (Bernanke, 2009) 

The Philippine version of the national team likely exists for these reasons. 

V. How Media Shapes the Overton Window: Focus on "Ghost Month" while Ignoring Geopolitical Risks from South China Sea 

Incredibly, the establishment and media continue to entertain and mislead the public with the alleged influence of the so-called "Ghost Month" on stocks or the economy.

Because "Ghost Month" is a superstition rooted in Chinese tradition (religion), the media and establishment's embrace of it assumes that the markets and the economy are driven by Chinese culture, even when the Philippines is predominantly a Catholic population. (Figure 5 middle window)

For example, some BSP literatures cite the "Ghost Month" to rationalize the unexplainable. The BSP should address accusations of their having 'ghost employees' instead. 

The repetitive references to the so-called "Ghost Month" also assume that foreign participation in the financial markets and the economy is influenced by Chinese tradition.

Or, are investors or market participants in the PSE and the economy predominantly of Chinese descent or a practitioner of Chinese traditions?

Some PSE facts regarding the alleged misfortunes of the Ghost Month:

Since the PSEi uptrend from 2003 through 2023, August has closed lower in 14 of the 21 years, or 67% of the time, with an average change of -0.72%. Yet, August 2021 delivered a majestic 9.33% return, the highest since 2000. August 2022 also produced a 4.24% return, the highest since 2008. (Figure 5, lowest graph)

So, what happened to the "Ghosts" of 2021 and 2022? Did the PSEi call upon the movie comedians known as the "Ghostbusters" to foil the rut? Or, have these rallies been a product of the BSP's easy money campaign?

Ironically, the same media and establishment experts have been unanimously silent about the June 17th Ayungin Shoal incident, which involved a standoff between the Philippine and Chinese Coast Guard.

The incident could have triggered World War III—had the US agreed with the Philippines' interpretation, activating the 1951 Mutual Defense Treaty. Unfortunately, the US implicitly gave a cold shoulder to the Philippines, forcing the latter to negotiate and deal with Chinese authorities over the South China Sea. Naturally, the US is opposed to this.

The same echo chamber has been observed ignoring the ongoing shift to a war economy through its embrace of war socialism.

Superstitions are given precedence over facts that matter, translating to the brazen hoodwinking of the public that fomenting war is good for the economy while Ghosts will scare the wits out of investments. 

Won't a war lead to a partial transformation of the living population into ghosts? 

Yet, who would invest in a country on the brink of war? Who would like to see their investment ownership evaporate when enemy drones start wreaking havoc on crucial social, economic, and political edifices, exacting a heavy toll on life and disrupting the division of labor?

But don't worry, stocks and real estate will boom! 

Sorry, but that’s an absolutely stunning imbecilic logic. 

VI. How the Unwinding Carry Trade from the Japanese Yen’s Massive Rally May Aggravate the PSEi 30’s post SONA Dump

The scarcity of local volume translates to amplified vulnerability to volatile foreign sentiment, mercurial fund positioning, and flows. 

Proof?

The massive +4.7% rally by the Japanese yen $USDJPY stole this week’s thunder.

It smashed what the consensus called the “unstoppable” force, a speculative mania. 

To amplify its policy, the Bank of Japan (BOJ) reportedly timed its $36 billion intervention in July to coincide with softening signs in the US economy.

Furthermore, the Chinese yuan $CNY also rebounded by 1.1% week-over-week (WoW). The US dollar index fell by 1.1%. 

The unraveling of the yen and yuan carry trades unleashed a wave of de-risking and deleveraging that rippled across the globe.

Figure 6 

Asian currencies posted substantial gains. (Figure 6, topmost graph) 

The Philippine peso rallied by 0.46%, with the $USDPHP closing at 58.08 and looking poised to fall below the 58 levels and retest the 57.5 area this coming week.

The Philippines led the rally in ASEAN bonds. (Figure 6, middle window) The sharp fall in the 10-year Philippine bond yields strengthens the view that the BSP is about to cut rates.

Furthermore, as signs of mounting strains in the economy emerge, the "belly" of the Philippine treasury curve has also inverted—meaning yields of 2-to-7 year notes have dropped below the 1-year note and partly below the 6-month T-bills. (Figure 6, lowest chart)

Philippine treasuries appear to be defying the BSP’s projected increase in inflation.

Figure 7

The unwinding of the carry trades sent the Japanese stocks crashing.  The yen’s massive rally coincided with the Nikkei 225’s 5.81% nosedive last Friday, to register its 2nd largest one-day decline after the Black Monday crash of October 1987.  The Nikkei was down 4.6% WoW. (Figure 7, topmost and middle charts)

Asian stock markets closed mostly lower. Eleven of the nineteen bellwethers posted deficits, with an average decline of 0.47%. Aside from Japan, the most significant weekly declines were led by Taiwan and the Philippines.(Figure 7, lowest graph)

All of this indicates the magnified contagion risks associated with asset booms driven by financial leverage.

Figure 8 

Risks in the ‘periphery’ have reached the ‘core.’ 

The race to a series of record highs by the S&P 500 $SPX has echoed the PSEi 30’s muted rally in 2024. With the SPX down, the PSEi 30's SONA pump has started to wobble. (Figure 8, highest image)

Foreign outflows of Php 1.6 billion this week have partly resulted in the PSEi 30’s 1.79% decline.

In the backdrop of lethargic volume, concentrated activities, and a rising share of foreign participation, a continuation of global de-risking and deleveraging translates to more liquidations here and abroad, which could expose many skeletons in the closet of the Philippine financial system.

The SONA pumps of 2022 and 2023 not only surrendered all their gains; more importantly, the PSEi 30 closed lower than its base at the start of the pumps. (Figure 8, middle graph)

If history rhymes, the PSEi 30 could fall below its June 21st low of 6,158 during this SONA cycle (post-SONA dump).

Further, when the Philippine peso rallied in 2018 (USD PHP trended lower), it marked the onset of the PSE’s bear market. Will history repeat? (Figure 8, lowest chart)

Importantly, weren't we repeatedly told that easy money would fuel the embers for the rocketing of asset gains?

___

References

Prudent Investor, The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects, July, 21, 2024

Bangko Sentral ng Pilipinas, Q1 2024 Domestic Claims of Other Financial Corporations Rise by 2.8 Percent QoQ and 12.9 Percent YoY, July 31, 2024

Ben S. Bernanke, A Crash Course for Central Bankers, ForeignPolicy.com, November 20, 2009

  

The PSEi 30 6,500 Enigma: A Closer Look at the Widening Gap Between PSEi 30 and Market Internals

 The house of delusions is cheap to build but drafty to live in, and ready at any instant to fall—A. E. Housman

The PSEi 30 6,500 Enigma:  A Closer Look at the Widening Gap Between PSEi 30 and Market Internals

Along with the rise in global risk appetite, the Philippine PSEi reached 6,500 but its market internals told a different tale. 

The prospect of easy money has whetted the speculative appetite of the global financial markets.

With the US dollar index down by 0.92% this week, it spurred a rally in the currencies and stock markets of the Asia-Pacific region.

Figure 1

Five of the nine ex-Japan Asian currencies rose, led by the Thai baht (THB), Indonesian rupiah (IDR), and the Singapore dollar (SGD). The Philippine peso  (PHP) increased by 0.14%. The heightened speculative fervor was apparent in the region's stock markets. (Figure 1, upper window)

Seventeen of the 19 national bourses in the Asia-Pacific region jumped by an average of 1.43%. China's SSEC and Sri Lanka's Colombo were the only laggards. (Figure 1, lower chart)

Meanwhile, five of the national bourses set fresh all-time highs for the week: Japan, India, Taiwan, Mongolia, and Pakistan.

Simultaneously, the Philippine PSEi 30 marked a second straight weekly gain. 

However, there is an idiosyncratic story behind the PSEi 30’s surge.

Figure 2

This week's advance brought the PSEi 30 back into positive territory year-to-date (+0.66%). 

But gainers were in the minority, with 14 of the 30 members closing higher. Four of the five biggest market cap issues were the focal point of this week's advance. (Figure 2, topmost pane)

Ironically, the average weekly return was only 0.12%, indicating that on an equal-weighted basis, the overall performance was subdued due to balanced upside and downside returns from its members. 

Market breadth in the PSE was slightly negative, with decliners leading advancers for the second consecutive week. (Figure 2, second to the highest image)

Though mainboard volume fell by 23.1% to Php 3.69 billion, the top 10 brokers still controlled a significant majority, averaging 57% of it. (Figure 2, second to the lowest diagram) 

Further, the top 20 traded issues represented 86.1% of the mainboard transactions. (Figure 2, lowest chart) 

All this illustrates the skewed nature of trading activities where institutional players have been propping up the headline index. 

Figure 3

This week’s pump led by ICTSI (+2.92%) has elevated its free float market cap to its highest level. (Figure 3, topmost chart) 

Pumps in BDO (+8.3%) and SM (+2.35%) have also boosted the top 5's free float cap to 50.5%.  BDO ranked third after SM and ICT in terms of free float market cap. 

The share of the top 5’s free float market cap jumped to 50.5%. 

Incidentally, end-session pumps and dumps were comparatively insignificant compared to previous weeks.

Figure 4

In any case, however one slice or dice it, the slack in volume remains the principal factor behind the nearly decade-long drought in returns.

June's gross volume reached a low not seen since 2010, while the first semester's gross volume plummeted to 2011 levels. (Figure 4, topmost and middle charts) 

It is no coincidence that the declining PSE volume has coincided with the banking system's liquidity metric: cash-to-deposit ratio. (Figure 4, lowest graph)

Despite all the constant yelling by the mainstream of statistical hypes, which have been labeled as G-R-O-W-T-H, the PSEi 30 remains one of the region's laggards, which are likely symptoms of capital and savings consumption.

And notwithstanding the perpetual cheerleading, the echo chamber has still been silent about the mounting risks from debt, leveraging, inflation, and various forms of misallocations and malinvestments. They’ve been reticent about the mounting risks of war too! 

Aside from the distortion from the BSP's policies, institutional pumping remains a significant factor behind this bear market. 

Or, the result of such organized pumps is to magnify pricing imbalance by inflating their share prices relative to their natural income streams and distorting capital prices, resulting in the amplification of the misallocation of resources in the real economy.

Figure 5

In the end, besides political objectives (e.g. rising stocks = resilient economy = good governance), another reason could be to prevent the PSEi 30 from sliding into a death cross, potentially prompting further and deeper scale of foreign selling (as in the past). Figure 5

It's worth noting that despite the obvious shift to a wartime economy, which comes at the expense of the market economy, authorities and the mainstream prefers the general public to remain complacent, assuming that everything will remain hunky dory or stable. 

In doing so, authorities can continue accessing public savings to fund their militant political projects (boondoggle) and exercise centralized control over the economy, with institutional cronies acting as their facilitators.  

Bubbles eventually burst. 

Philippine Q1 2024 5.7% GDP: Net Exports as Key Driver, The Road to Financialization and Escalating Consumer Weakness

 

GDP is the most common out-of-context stat used by governments to convince the citizenry that all is well. It is yet another stat that is entirely manipulated by inflation. It is also manipulated by the way in which modern governments define "economic activity"—Brandon Smith

 

In this issue:

Philippine Q1 2024 5.7% GDP: Net Exports as Key Driver, The Road to Financialization and Escalating Consumer Weakness

I. As Predicted, Q1 2024 5.7% GDP Retreated and Reinforced the Secondary Trendline

II. Why the GDP is Not the Economy

III. Net Exports as Key Driver of Q1 2024 GDP

IV. The Money Illusion: Net Exports Increased Due to the Peso’s Devaluation

V. Despite Record Low Unemployment Rates, Entropy in Consumers’ Spending Capacity

VI. Weakening Consumers: Aggressive Consumer Borrowing and Drawdown in Savings

VII. Consumer Entropy: The Lagged Crowding Out Effects of Fiscal Deficit Spending

VIII. Export Boom? Manufacturing Bounced in Q1 2024, But Finance Industry Dominated the Field

IX. Q1 2024 Outperformance Led by Construction, Accommodation and Service Sectors

X. Trade and Real Estate Malinvestments: Supply Side Expands even as Demand Sputters

XI. Summary and Conclusion

 

Philippine Q1 2024 5.7% GDP: Net Exports as Key Driver, The Road to Financialization

The 5.7% GDP growth in Q1 2024 highlights net exports as the primary driver, alongside the trend toward financialization and a significant deceleration in consumer spending.

 

I. As Predicted, Q1 2024 5.7% GDP Retreated and Reinforced the Secondary Trendline

 

Reuters, May 9, 2024: The Philippine economy accelerated less than expected in the first quarter as weaker consumer spending restrained growth, reinforcing expectations that the central bank will leave interest rates unchanged next week, despite rising inflation. Gross domestic product grew 5.7% in the first three months from the same period last year, the statistics agency said on Thursday, up from the previous quarter's 5.5% but below the 5.9% forecast in a Reuters poll.

 

Let us begin this analysis by examining the GDP trend.

Figure 1 

After the Q4 seasonal breach, Q1’24 GDP dropped back to the exponential trendline support level, reinforcing it. (Figure 1, upper chart)

 

Originating from the pandemic recession in 2020, the secondary trend indicates that GDP growth will be significantly slower than in the pre-pandemic era.

 

Q1 GDP’s confirmation of this trendline validates our analysis from last November:

 

Regardless of consensus opinion, the coming GDPs will likely bounce within the range of the second trendline marked by the ceiling (exponential trend) and the floor (trend support).  The percentage change will be a function of base effects. (Prudent Investor 2023) [bold original]

 

It also implies that any pompous projections that disregard this trendline are likely to deviate.

 

Additionally, given the fragility of the nascent trendline and considering the evolving internal conditions, the likelihood leans towards a downside break rather than an upside.

 

Of course, since expenditures underpin GDP, authorities could induce another breach through monetary easing—essentially flooding the economy with currency—similar to the 2020 episode. However, this would result in a surge of inflation, which should offset the initial effects.

 

Or, incidences of an upside break could be "transitory" or unsustainable.

 

As a side note, the Philippine Statistics Authority (PSA) revised the national accounts data from Q1 2022. 

 

II. Why the GDP is Not the Economy

 

The GDP is a statistical construct of the economy, calculated based on technical assumptions embedded in its model. This model presupposes a perspective that the economy is centrally or top-down driven, making GDP a political statistic susceptible to biases and subject to the stratagem of incumbent political authorities, without any (independent) auditing process.

 

For example, the headline GDP can be inflated by understating inflation. While inflation increases the top-line or nominal numbers, a suppressed inflation rate widens the gap—the real or headline GDP. (Figure 1, lower graph)

 

One of the primary purposes of "painting the GDP tape " is to provide the government with easy access to the public’s income and savings by justifying taxes and borrowings, while another is to rationalize the exercise of political control over its subjects.

 

Furthermore, news headlines may portray a different economic landscape than that presented by the statistical economy

 

Here are some of the latest:

 

-Businessworld, March factory output falls, steepest in almost 2 years, May 9, 2024

-Inquirer.net, Over 5,000 PH garment factory workers lose jobs May 7, 2024

-ABS-CBN News, SM Investments Q1 net income up 6 percent at P18.4 billion but retail slips, May 8, 2024

-Manila Standard, Trade deficit narrowed to $3.2b as exports, imports fell in March, May 8,2024

-Inquirer.net, SWS: Families who suffer from hunger rises to over 14%; highest rate in NCR, May 01,2024

-GMA News, NCR office space rental prices seen to drop as vacancy levels increase — JLL, April 25, 2024

-GMA News, SWS poll: 46% of Filipino families consider themselves poor, April 25, 2024

 

Even if we somehow reckon that the GDP numbers reflect reality, who benefits from it? Cui bono? These headlines suggest it was not the average Filipinos.

Yet, why is there a difference in the presented number and the headlines?

 

Moreover, if the weighted average of the inflation rates of billionaires and the street poor can be considered as apples-to-oranges, wouldn’t calculating a similar weighted average growth for software design fees and palay harvesting result in a similarly flawed representation of the economy?

 

III. Net Exports as Key Driver of Q1 2024 GDP

Let us examine the expenditure side of the GDP.

Figure 2

 

Consumers were visibly scrimping while the government was also in a penny-pinching mode. Their real GDPs were up by only 4.6% and 1.7% in Q1 2024, respectively. (Figure 2, topmost image)

 

However, government spending excludes government construction and other capex expenditures.

 

Meanwhile, stagnation also affected gross capital formation, and imports, which grew by 1.3% and 2.3%, correspondingly. (Figure 2, second to the highest diagram)

 

On the other hand, exports (goods and services) which surged by 7.5%, delivered the goodies—via the net export route (exports minus imports).

 

In essence, exports signified the cornerstone of Q1 2024’s growth.

 

IV. The Money Illusion: Net Exports Increased Due to the Peso’s Devaluation

 

But other data on merchandise trade from the Philippine Statistics Authority presents a different perspective.

 

Exports in USD shrank by 7.6%. But due to peso devaluation, they rose by 6.9% when calculated using the average peso for the period. (Figure 2, second to the lowest left graph)

 

Semiconductor exports, which accounted for 46% share last March, contracted by .18% after a sizzling 32% growth last February. Though semicon exports (in million USD) bounced in March, it has been on a downtrend since its zenith in October 2022. (Figure 2, second to the lowest right chart)

 

The export slump partially explains the labor retrenchment in garment factories and the two-year drop in factory output.

 

The cited export data pertains solely to goods exports, which, in the context of the GDP, accounted for 46% of the total. Services represented the majority.

 

On the other hand, since the pinnacle in 2022, stagnation has also affected imports of capital and consumer goods (in millions USD).

 

Although consumer imports increased by 6.6% last March, capital goods imports plunged by 14.8%—marking the third straight monthly drop and its largest decline since August 2023.

 

Importantly, since reaching its peak in 2022, global trade (in millions USD) has significantly slowed. (Figure 2, lowest window)

 

Could this be symptomatic of the intensifying geopolitical tensions and monetary disorders?

 

In summary, a substantial segment in the increase in the GDP can be attributed to the effects of peso devaluation! The money illusion!

 

That is to say, inflation presented as economic growth!

 

Incredible.

 

V. Despite Record Low Unemployment Rates, Entropy in Consumers’ Spending Capacity

 

But why the sustained slowdown of consumer spending?

Figure 3

 

Despite the labor force reaching the second-highest employment (or second-lowest unemployment) rates in Q1 2024, consumer per capita income tumbled to its lowest level since 2021! (Figure 3, topmost chart)

 

Why would more jobs lead to reduced consumption? Could it be that the public has increased their savings?

 

Interestingly, retail, government (public administration and defense), and financial sectors have spearheaded year-to-date (YTD) employment gains. (Figure 3, middle image)

 

Has the surge in defense jobs signified a partial transition to a war economy?

 

Despite a 6% drop in March, part-time jobs accounted for 30% of the employed population. (Figure 3, lowest diagram)

 

Part-time jobs comprised almost all of the job gains last February (Prudent Investor, 2024)

 

Could the employment numbers have been exaggerated to boost the GDP and the approval ratings of the administration, or were the increases in jobs primarily low-quality positions?

 

VI. Weakening Consumers: Aggressive Consumer Borrowing and Drawdown in Savings

 

Furthermore, bank lending, primarily through consumers, played a crucial role in driving household consumption and industry GDP.

Figure 4

 

Universal commercial banks saw a significant 9.45% increase in their lending portfolio in March/Q1 2024, marking the third consecutive quarterly growth and reaching its highest level since Q1 2023. (Figure 4, topmost graph)

 

Household borrowing surged at a rapid pace of 25.4%, marking the seventh consecutive quarter of over 20% growth and the highest rate since Q2 2020!

 

In the meantime, production loans also saw growth, rising by 7.7% for the third consecutive quarter, reaching the highest level since Q1 2023.

 

In other words, without the growth in bank credit, consumer GDP would have cratered, potentially causing the GDP to contract!

 

Alternatively, even with the magnified use of consumer credit, the downward trend in household spending growth persists.

 

What would the household GDP look like without it?

 

Nevertheless, this represents a symptom that credit has supported household expenditures rather than productivity growth.

 

In the face of high inflation, consumers resorted to borrowing from banks and financial institutions to sustain their lifestyles.

 

But that’s not all; they have also drawn from their savings.

 

Consequently, for the banked population, this resulted in a sharp slowdown in peso savings growth from 3.13% in February to 2.15% in March. (Figure 4, middle diagram)

 

As a result, total bank deposit growth inched up from 7.86% to 8% over the same period, primarily due to the jump in FX deposits from 22% in February to 24.7% in March in response to the peso’s devaluation.

 

Rising domestic interest rates have barely induced savings; it is the fall in the peso that has driven increases in FX deposits.

 

So, does this represent confidence in the Philippine economy?

 

The thing is, consumers have been aggressively borrowing from banks and drawing from savings to cover their lifestyle deficit caused by persistent inflation and malinvestments.

 

It is unsurprising that this has limited their purchasing capacity regardless of the actual conditions of the labor market, which authorities have declared to be near full employment.

 

Surveys indicating the rising prevalence of hunger and increased incidences of self-poverty can be explained by this phenomenon.

 

VII. Consumer Entropy: The Lagged Crowding Out Effects of Fiscal Deficit Spending

 

Moreover, all this occurs even as the government has slowed its deficit spending.

The deficit to GDP ratio dropped to 4.5%—the lowest since Q2 2020. (Figure 4, lowest image)

 

Yes, government spending was subdued in Q1, but that represented direct expenditures. Nonetheless, the government's share of GDP continues to rise, which simultaneously comes at the expense of consumers.

Figure 5

 

The share of Household GDP fell from 75.1% in Q4 2023 (75.3% in Q1 2023) to 74.5% in Q1 2024, while the share of government surged from 11.9% to 14.1% over the same period. (Figure 5, topmost graph)

Q1 2024 GDP reinforced its respective long-term trends.

 

The redistribution effects of deficit spending and malinvestments become increasingly apparent over time.

 

VIII. Export Boom? Manufacturing Bounced in Q1 2024, But Finance Industry Dominated the Field

 

Like balance sheets, the obverse side of the GDP’s expenditure side is the industry.

 

If exports were booming as so-indicated by the Expenditure GDP, then manufacturing must be outperforming.

 

At 20%, manufacturing has the largest share of the industry GDP, nonetheless, it posted a 4.5% GDP—below the headline GDP, but signified the highest since Q1 2022.

 

Labor retrenchment in parts of the sector and the March plunge in factory data contradicts the PSA’s national accounts data.

 

What sectors boomed in Q1 2024?

 

Financials emerged as one of the fastest-growing sectors, registering a real GDP growth rate of 10%. Notably, the sector's share of the total GDP reached an all-time high of 11.5%, making it the third-largest sector after manufacturing (20%) and retail (16.4%). (Figure 5, middle window)

 

Banks significantly outperformed their non-bank financial counterparts, expanding by 12.7% in Q1 2024 and increasing their share of the industry's pie from 49.3% in Q4 to a historic 61.1% in Q1 2024.

 

The share of banks relative to Total Financial Resources hit the second-highest level of 83.42% last February, indicating the increasing GDP's financialization orfinancialization of the GDP or characterized by intensifying gearing or leveraging.

 

However, despite banks' substantial contribution to the GDP, Q1 2024 profit growth was only 2.95%, marking its lowest level since the pandemic recession in 2020!  (Figure 5, lowest graph)

 

Crucially, profit growth has been on a downward trend since peaking in Q3 2022, largely impacted by sharp declines in non-interest income influenced by rising rates, as well as the decrease in interest income.

 

Rising GDP, falling (inflated) profits while increasing systemic credit risks via massive expansion in leverage.

 

Incredible.

 

Figure 6

 

As a side note, the BSP declared that the country should benefit from the deluge of equity FDI flows for the month of February, which "came from the Netherlands with investments directed mostly to the financial and insurance industry." Equity and investment funds growth rocketed by 480% to USD 830 million, which pushed higher total FDI flows by 29.3% to USD 1.364 billon. (Figure 6, topmost chart)

 

If true, this translates to more players entering a saturated industry. We shall soon see how this impacts the economy.

 

IX. Q1 2024 Outperformance Led by Construction, Accommodation and Service Sectors

 

The construction industry is another sector that outperformed in Q1 2024. Despite its real GDP growing by 7%, its share of the national accounts' pie fell from 7.2% to 6%.

 

Government construction registered the highest GDP growth at 12.4%, marking the third consecutive quarterly decline in growth. Meanwhile, financial and non-financial construction posted a real GDP growth of 6.7%, the highest in the last three quarters, but significantly lower rates than those observed from 2022 through Q2 2023. Government and private sector construction accounted for 26% and 43.4% of the industry, respectively. (Figure 6, middle image)

 

However, the industry's GDP doesn’t reveal the distribution of activities or what percentage are part of Public-Private Partnerships (PPPs).

 

Finally, even with a 2.7% share, accommodation and services posted the fastest GDP in Q1 2024 with 13.9%.  The sector has outperformed its contemporaries in the last four quarters. (Figure 6, lowest window)

 

Nevertheless, based on share of the GDP, the sector has fully recovered from the pandemic recession troughs.

Figure 7

 

The surge in "revenge travel " and staycations has propelled accommodation GDP growth to a brisk 18.4%, compared to food services at 11.9%. Nonetheless, food services retain the largest share of the industry at 68.3%.

 

Although the industry zoomed, during the reopening of the economy, the pace of growth has since diminished.

 

In the face of harried and leveraged domestic consumers, the Department of Tourism data suggests a likely peak in inbound visitors. April arrivals grew by 2.92% year-over-year but shrunk by 9.6% month-over-month (MoM) for the second straight month. (Figure 7, upper graph)

 

While investors pursue recent growth by expanding capacity, industry prospects could be poised for a reversal from the current boom.

 

X. Trade and Real Estate Malinvestments: Supply Side Expands even as Demand Sputters

 

How about the trade and the real estate sectors?

 

While consumers struggle, the trade industry GDP improved from 5.2% in Q4 2023 to 6.4% in Q1 2024, its largest since Q1 2023. (Figure 7, lowest chart)

 

Retail GDP substantially improved from 5.7% in Q4 2023 to 7.3% in Q1 2024 while wholesale GDP steadied at 2.3% over the same period.

 

Retail trade accounted for 81.5% of the sector’s GDP, up from 79% in Q4 2023.

 

This divergence suggests that trade investors, like accommodation and food services, have splurged on building capacity, against the backdrop of consumers' diminishing spending capability.

 

The sustained divergence would likely lead to financial pressures on many retail outlets including national retail chains.

 

Financial pressures on the retail segment of SM, an economic titan, showcases this challenge. (SM has yet to report its Q1 17Q)

Figure 8

 

Lastly, the real estate sector, one of the most popular or say the crowd’s favorite, saw its GDP slow considerably from 5.5% in Q4 2023 to 4.1% in Q1 2024. (Figure 8, upper chart)

 

However, its share of the GDP bounced from an all-time low of 5.1% in Q4 2023 to 5.6% in Q1 2024.

 

Despite this, the sector’s share of bank lending continues to mount, it reached 20.7% in Q4 2023 and slipping to 20.6% in Q1 2024.

 

That is to say, while the public have jumped on the bandwagon to chase gains from the industry, often funded by increasing leverage, its contribution to the national economic value continues to decline—a manifestation of malinvestments.

 

Even the mainstream has become aware of the escalating accounts of vacancies, which they see as increasing further due to supply outgrowing demand.

 

While all eyes are on the sector bearing a pipe dream of its revival, oddly, the professional and business services sector has slowly and steadily been outpacing the former. It posted a GDP of 7.5%—its highest rate since Q1 2023.  

 

Interestingly, the sector’s economic contribution—measured by its share of the total—has been steadily outpacing the real estate sector since Q2 2022.  It had a 5.8% share against the 5.6% of the latter in Q1 2024. (Figure 8, lower window)

 

The professional and business services sector encompass various types of services, including legal, photographic, engineering, architectural, veterinary, and all other scientific and technical fields.

 

While many of its services appear to be closely linked with core industry groups, we can infer that its growth contribution arises from a relatively low starting point.

 

Consequently, economic risks may be considerably lower compared to other sectors.

 

So, despite the widespread economic maladjustments, viable opportunities still exist.

 

XI. Summary and Conclusion

 

Q1 2024 GDP retreated and reinforced its second but slower trendline, magnifying the risk of a breakdown.

 

As a result of the peso’s devaluation, net exports contributed most to the Q1 2024 GDP expansion.

 

The risks of violating the downside of the GDP trendline appear supported by the substantial slowing of consumer expenditures, driven by massive bank leveraging and a drain of savings.

 

Furthermore, the "build and they will come" mantra remains a model embraced by popular industries like trade, accommodation and services, and retail, backed by financing from banks, thereby raising systemic risks.

 

Once again, when the economy slows substantially or recession risks mount, monetary authorities will likely resort to the 2020 pandemic playbook: substantially easing interest rates, infusing record amounts of liquidity, and deepening the imposition of relief measures. Alongside this, political authorities are likely to drive deficits to reach record levels.

___

 

 

References

 

Brandon Smith, Economic Earthquake Ahead? The Cracks Are Spreading Fast, March 7, 2024 Birchgold.com

 

Prudent Investor Newsletter, The “Surprise‟ Philippine 5.9% Q3 GDP Powered by Deficit-Spending and Bumped by a Statistical Facade November 12, 2023

 

Prudent Investor Newsletter, The Jump in February’s Philippine Employment Rate was all about Part-Time Jobs! BSP’s Consumer Sentiment: Stagflation Ahoy! April 14, 2024