Our whole monetary system is dishonest, as it is debt-based... We did not vote for it. It grew upon us gradually but markedly since 1971 when the commodity-based system was abandoned—Malcolm Sinclair (1948-) The 20th Earl of Caithness, in a speech to the House of Lords (1997-03-05). "Our Debt-Based Money System Will Break Us".
In this issue
San Miguel’s Debt Breached an Unprecedented Php 1 TRILLION in 2021!
I. The Pleasant News: The Impact from the Low-Base Effect on the Top and Bottom Line
II. SMC’s Business Model: The Shift to a Political Enterprise
III. SMC’s HISTORIC Php 1 Trillion DEBT!
IV. SMC and the Hyman Minsky’s Ponzi Finance Model
V. The BSP’s Trickle-Down Effects: the SMC Example
San Miguel’s Debt Breached an Unprecedented Php 1 TRILLION in 2021!
I. The Pleasant News: The Impact from the Low-Base Effect on the Top and Bottom Line
Whether dealing with the Philippine economy/stock markets, COVID-19 vaccinations, or the Ukraine war, the mainstream has programmed the public to read or see their narratives as undeniable facts.
The response to all other attempts to explain the contrary has been to de-platform or cancel voices of dissent.
Figure 1
CNN, March 10: The earnings of conglomerate San Miguel Corp. (SMC) registered a 120% growth in 2021, as its major businesses continued to post a robust performance. In a statement on Thursday, the group said its consolidated net income improved to ₱48.2 billion from ₱21.9 billion in 2020. Revenues last year also surged by 30% to ₱941.2 billion, while its consolidated operating income climbed 64% to ₱117.2 billion.
While this news covers the pleasant segment of the 2021 annual report, it eludes some critical developments in San Miguel Corporation’s (SMC) Financial Statement.
First, the low base effect has fundamentally anchored the sterling performance of SMC.
Yes, the published "V-shaped" top and bottom lines gains of 2021 brought back sales and income to 2018-2019 levels. (Figure 1, topmost pane)
In short, the reopening has materially narrowed the gap between the lockdown and the re-opening performance.
II. SMC’s Business Model: The Shift to a Political Enterprise
Next, SMC benefited from surging oil prices and public spending.
Because fuel sales from Petron soared by 53.2%, its share of total sales surged to 46.54% as the share of all other segments dwindled except cement and others!
Curiously, energy sales posted a 16.21% growth while its share dropped to 14.21% in 2021 from 15.85% a year ago.
Meanwhile, food sales expanded by 10.92%, but its share of the total also decreased to 32.91% from 38.5% in 2021.
Fuel, food, and energy sales comprised 81.6%, which increased relative to a year ago due to fuel sales but has trended lower since 2016. (Figure 1, middle and lower windows)
Figure 2
But here is the thing. The erosion of the core business has been due to the rising share of cement real estate and the other components.
Because 2021 cement and other sales growth spiked by 56.9%, its share of the total expanded to 6.3% from 5.21% a year ago. (Figure 2, upper pane)
According to Eagle Cements’ 2020 annual report: "About sixty-three percent (63%) of the country’s total cement demand come from Luzon region. ECC currently distributes its products in the following areas of the Luzon region: National Capital Region, Region I (Ilocos Norte, Ilocos Sur, La Union, Pangasinan), Region II (Batanes, Cagayan, Isabela, Nueva Vizcaya, and Quirino), Region III (Nueva Ecija, Bulacan, Pampanga, Tarlac, Bataan, Zambales), and Region IVA (Cavite, Laguna, Batangas, Rizal, and Quezon). As of 2020, NCR still serves as the center of construction and infrastructure activities in the country. ECC is considered as one of the leading players in areas with the highest economic activity in the Philippines with an estimated market share of 17% in NCR, Region III, and Region IVA, based on internal company data."
And though the growth of infrastructure sales jumped 35.2% in 2021, its share of the total increased incrementally to 2.09%.
Despite volatile economic prices, SMC’s gross margins barely changed in 2021. (Figure 2, lower pane)
As 2021 has shown, SMC benefited from the surge in oil prices, which transferred resources of the consumers and non-energy industries to them. It also benefited from the record public spending of the outgoing administration, paid for by taxpayers and the peso.
Because redistribution has anchored its business model, SMC increasingly depends on political developments or political distribution of economic opportunities. Such showcases the political-economic model of rent-seeking or "the competition for politically protected transfers of wealth." (Britannica)
III. SMC’s HISTORIC Php 1 Trillion DEBT!
Figure 3
But that is not all.
SMC debt conditions represent a historic corporate development unreported by the media.
The firm's published balance sheet debt astoundingly breached the Php 1 Trillion mark in 2021! (Php 1,004,744,000) (Figure 3, topmost window)
ONE TRILLION plus (and counting)!!!
It is the first Philippine listed company to reach that eye-popping threshold! Incredible!
Paraphrasing a quote attributed to the late US Senator Everett Dickson, "A trillion here, a trillion there pretty soon you're are talking about real money." The US Senator referred to the PUBLIC DEBT ceiling back then.
As the SMC investor presentation implicitly defended, Total Liabilities to Equity was 2.01x, Debt to Equity was 1.47x, EBITDA to Total Interest expense was 3.39x, while net debt to total equity was .9x. (Figure 3, middle window)
In addition, its debt level has risen above its aggregate annual sales and accounts for about three times SMC's market capitalization.
The interest coverage ratio dropped to its second-lowest in 2021. (Figure 3, lowest window)
It is unclear if SMC holds off-balance sheet debts.
While SMC reported an income of Php 48 billion, it borrowed a Php 97 billion, or twice the net income.
With the entry of the new administration in 2016, the firm's borrowing streak has only gained momentum since 2017.
Stunning.
Figure 4
SMC has consistently been borrowing above its published income for over a decade (except 2016) (Figure 4, topmost pane)
IV. SMC and the Hyman Minsky’s Ponzi Finance Model
Yet, the numbers barely elucidate how these got here.
Despite the streak in debt growth, interest expenses have essentially shadowed the BSP’s official policy rates.
That is, when the BSP rescued the markets by injecting an unprecedented amount of liquidity to the financial system partly by lowering rates in 2020, as a wholesale borrower, such policies had been instrumental in reducing SMC’s interest expense. (Figure 4, middle pane)
In this context, the BSP had played a critical role in the transformation of San Miguel from a food enterprise to a political enterprise. Cheap credit from the BSP financed its metamorphosis, even before the pandemic.
So with rates on a downtrend, SMC seems to have gotten bolder; it anted up the scale of its debt acquisition.
In my humble opinion, the company seems to epitomize the neo-Keynesian Hyman Minsky’s The Financial Instability Hypothesis (FIS), where the process of leveraging transitions from Hedge, Speculative to Ponzi financing. In the last phase or the Ponzi financing stage, cash flows from operations may not be sufficient to cover repayment of the principal and interests, so the company borrows more or sells its assets to pay creditors off.
It is unclear whether the published income of SMC represents accounting or actual profits. But the Php 64 trillion predicament is, why the accelerating scale of borrowing, which is unsupported by its Capex? What seems to be the case is that the acquisition of new debt has primarily been to finance the old debt.
On that score, SMC's debt demonstrates the mounting concentration risks of the financial system.
SMC's debt signifies about a record 3.8% of the total resources of the Philippine financial system! (Figure 4, lowest pane)
But in 2021, foreign-denominated debt comprised about 38.7% of the gross total or 43.43% of the net. This means that the duration risk of the company is not limited to changes in domestic rates but foreign rates too!
Figure 5
Yields of 10-year USTs have raced faster than the Philippine counterpart, which means higher cost of financing for all forex debt, including public debt and the BSP’s derivatives, which it uses to pad its GIRs. (Figure 5, upper pane)
While the public spending spree shielded SMC shares from rising USTs in 2017-18, with the current debt load, I doubt if SMC shares can generate the same magic. (Figure 5, lower pane)
And because the firm concentrates on the domestic economy, which means it hardly earns foreign exchange, its exposure to foreign debt translates to amplified sensitivity to currency risks.
Currency risks from the mounting FX debt exposure of the government and many firms have prompted the BSP to keep the peso from falling by leveraging up and using derivatives.
V. The BSP’s Trickle-Down Effects: the SMC Example
As mentioned above, aside from opportunities provided by increased politicization of the economy, the easy money policies of the BSP seem to have magnified the rent-seeking business model of SMC.
What are the opportunity costs of snowballing debts of SMC?
With such a humungous scale of borrowing, how many small and medium scale enterprises would have benefited instead?
To what extent of SMC debt-financed exposures signify malinvestments?
SMC has corralled a significant amount of finances which effectively demonstrates the trickle-down policies of monetary authorities. Yet, in this case, the so-called benefits have morphed into a cost: a too-big-too-fail risk!
How is this justifiable?
Should financial and liquidity tightening limit its access to cheap money; how would SMC cope or thrive with over a trillion in liabilities?
Or how fragile is SMC once the rising interest rates percolate into its balance sheet?
Most significantly, what will be its direct and indirect effects on the domestic financial system?
SMC’s escalating debt story is a symptom of a systemic malaise.
