HB 10963 TRAIN’s Initial Victim: Coca-Cola Will Be Laying Off Workers! The Back Shifting Effect of Excise Taxes Validated!

IN mid-January, I enumerated reasons why HB 10963 (Tax Reform for Acceleration and Inclusion Act) will fail. [See Four Reasons Why R.A. 10963 or the TRAIN (Tax Reform) Legislation Will Be Derailed January 15, 2018]

I wrote that since the government thinks in the context of statistics, it disregards the fundamental economic laws. I also noted since the tax reform operates on the supply side premise of having to tax consumption only, the government has scant understanding of how such policies would spawn material distortions and dislocations in the economic system

Coca-Cola’s predicament is a testament to these.

Coca-Cola Femsa Philippines Inc announced it would scale down on workers amid changes in the beverage industry and the business environment, calling it a “very difficult decision.” The decision emerged “after a careful assessment of various factors, such as operational efficiency, and the evolving regulatory environment” The estimated number of affected employees would be around 600, according to the Inquirer. [Inquirer.net Coca-Cola PH laying off workers February 6, 2018] (bold added)

The official statement was “In light of recent developments within the beverage industry and in the business landscape as a whole, the Coca-Cola System is undergoing an organizational structure assessment. This involved a comprehensive review of the roles and responsibilities within Coca-Cola FEMSA.” Furthermore, “This restructuring has been a very difficult decision. It was carried out only after an exhaustive and conscientiousassessment of the evolving regulatory environment, our operational efficiency, and consequent performance in the market.”

The Inquirer noted that the company “deferred from expounding beyond what the statement said”.

As an aside, this statement is proof of the political correctness of bubbles (credit bubble that has fostered a government bubble). To avoid from being excoriated or mob lynched or politically harassed or ostracized, evading the truth is the du jour comportment!

Back to Coca-Cola

Since the Train law imposes a P6/liter tax on beverages using caloric and noncaloric sweeteners and P12/liter on beverages using high fructose corn syrup (HFCS), industry sources previously told the Inquirer that this would hamper demand, especially since consumers would be shouldering the added cost.

The company had earlier announced of plans to invest around close to $1 billion in the country up to 2022. However, in an interview last year with Juan Lorenzo Tañada, company director for legal and corporate affairs, “a decrease in consumption rates would push the company toreevaluate its plan to have an additional investment in the country, warning that this was what any other business would do”.

To the mainstream, market prices have little relevance to the economy. That is, with the exception of real estate and the stock market. For them, tax hikes on consumption would simply be compensated by statistical GDP (whatever that means).

Coca-Cola’s dilemma validates the back-shifting effects of the excise tax. The great dean of the Austrian School of Economics, Murray N. Rothbard, I quote anew

[Murray N Rothbard, B. Partial Excise Taxes: Other Production Taxes, 4. Binary Intervention: Taxation > 3. The Incidence and Effects of Taxation Part...Power and Market: Government and the Economy Mises.org]

The general sales tax, of course, distorts market allocations insofar as government expenditures from the proceeds differ in structure from private demands in the absence of the tax. The excise tax has this effect, too, and, in addition, penalizes the particular industry taxed. The tax cannot be shifted forward, but tends to be shifted backward to the factors working in the industry. Now, however, the tax exerts pressure on nonspecific factors and entrepreneurs to leave the taxed industry and enter other, non-taxed industries. During the transition period, the tax may well be added to cost. As the price, however, cannot be directly increased, the marginal firms in this industry will be driven out of business and will seek better opportunities elsewhere. The exodus of nonspecific factors, and perhaps firms, from the taxed industry reduces the stock of the good that will be produced. This reduction in stock, or supply, will raise the market price of the good, given the consumers’ demand schedule. Thus, there is a sort of “indirect shifting” in the sense that the price of the good to consumers will ultimately increase. However, as we have stated, it is not appropriate to call this “shifting,” a term better reserved for an effortless, direct passing on of a tax in the price.

Since the consumer’s purchasing power is limited, Coca-Cola can hardly afford a price pass through. Hence, the primary effect of the excise tax is to raise the firm’s cost of production, thereby squeezing its profits.

The ramification of the excise tax on Coca-Cola is to force the streamlining of the company’s production structure, part of which is to cut down on their workforce, as well as, to “reevaluate its plan to have an additional investment”. Such measures effectively “reduce the stock of the good that will be produced”. Consequently, “the reduction in stock, or supply, will raise the market price”, “given the consumers’ demand schedule”.  That is to say, distortions from excise taxes are bound to spread.

If political circumstances compelled Coca-Cola to make a “very difficult decision”, how much more would such taxes affect the marginal firms or firms with lesser operational efficiencies in the industry? Will the marginal firms not be driven out of the business? And how will this impact the industry’s upstream and downstream supply chains? Would the natural course of action be an investment slowdown, as the Coca-Cola officialwarned, “this was what any other business would do”?

So Coca-Cola validates the back-shifting penalty theory from excise taxes.

That is not all.

Unless the laid-off workers find immediate replacements, there would be less consumption from them. Moreover, with higher prices in the economy*, the consumer’s purchasing power will diminish. So consumer will be faced with a perfect storm, lesser income**, and diminished consumption!

So the excise tax would be a double whammy: it will reduce investments and consumption.

When you tax something you get less of it.

Now some questions:

If investments and consumption decline, who will use the roads and the other forms of infrastructure that the government will build?

And with insufficient taxes, just how will these massive government expenditures (not limited to infrastructure) be funded? Will it be through debt or through inflation?

Grinding from higher prices, will there be enough spending power for consumers to satisfy the race the to-build supply of retail outlets, shopping malls, real estate projects and hotels?

Remember, the new economic paradigm: BYE BYE CONSUMERS, HELLO BIG GOVERNMENT! 

 

*The BSP reported January CPI at 4% which it attributed to the TRAIN:

Year-on-Year headline inflation increased to 4.0 percent in January from 3.3 percent in December. The higher inflation outturn was at thehigh end of the Government’s target range of 3.0 percent ± 1.0 percentage point for 2018. Likewise, core inflation—which excludes certain volatile food and energy items as a means to depict underlying price pressures—rose to 3.9 percent from 3.0 percent in the previous month. Month-on-month seasonally-adjusted headline inflation also increased to 0.7 percent in January from 0.3 percent in December.

The uptick in headline inflation for January was traced mainly to higher prices of food and non-alcoholic beverages, alcoholic beverages and tobacco items, and domestic petroleum products. Food inflation went up as most food commodities, particularly corn, meat, and milk, cheese, and eggs, posted higher prices during the month. Meanwhile, weather-related production disruptions pushed up prices of rice, fish, and vegetables in many regions. Similarly, non-alcoholic beverages and alcoholic beverages and tobacco inflation rose as a result of the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) Law. At the same time, transport inflation also increased due to adjustments in gasoline and diesel prices, largely influenced by higher international prices of crude oil and the excise tax on petroleum as prescribed by the TRAIN Law.

These numbers looked understated.

**More interesting data.

The Philippine Statistics Authority reported that “The national median monthly basic pay for 2016 was posted at P12,013, an increase of P257 (2.2%) from P11,756 in 2014”.

Since the annual CPI rates from 2014-2016 were at 4.1%, 1.4% and 1.8%, from the basic pay perspective, workers suffered NEGATIVE growth in real wages!  

Wow! If the PSA’s number is right then the race to build supply has been operating on negative wage growth! Why wouldn’t there be serious overcapacity issues?

Did the BSP Drain December Domestic Liquidity To Neutralize TRAIN’s Price Hikes???

Latest government data sheds light on the incumbent policy directions

The Bangko Sentral ng Pilipinas (BSP) withdrew Php 17.4 billion from its Net Claims from the National Government account.

Though the account remains at a record high, the rate of growth has been steeply dropping.

In 2017, the QE account grew by only Php 35.73 billion compared to 2016’s explosive Php 341.355 billion. The record budget deficit of Php 353.4 billion was financed mainly by the BSP’s stealth QE.

M3 significantly decelerated last December, posting a growth rate of only 11.95% compared to November’s 13.95% or a drop of 200 basis points.

Aside from the BSP’s reduction of NG claims, M3’s reduced rate had been a product of the dwindling speed the banking system’s consumer loan portfolio as the production loan portfolio remained the same. Consumer loans expanded by 17.17% in December compared to 20.63% in November, the slowest growth rate since May 2016. Production loans were at the same 18.50%

 

 

The awesome decline in the growth momentum of 17.52% in December compared to 26.39% in November and 32.58% in October, revealed by the banking system’s consumer loan portfolio, exhibits the eroding conditions of consumers

The contrasting pictures presented between sales and its financing accounts for the bizarre angle from the data

Or, the sharp deceleration in December auto loans came with December auto sales, which spiked 33.4%, largely in response to price increases from the new tax regime.

The gaping chasm in growth rate data either must have been filled by cash sales or that one of those numbers must have been inaccurate.

Back to consumer loans. And while credit card growth accelerated (20.37% in December, 19.83% in November), the payroll loan portfolio trend continued its southbound trek (+8.87% in December, 9.44% in November).

The quickening credit card growth has been inadequate to offset the slack in the rate of change of banking system’s auto loan portfolio.  Credit card and auto loans have an equal 42% share of the total consumer loan portfolio.

Interestingly, M1 (currency and peso demand deposits) dropped substantially (15.88%) in December (compared to November’s 17.23%).

Applied to retail finance, the M1 data suggests that cash sales have been considerably down. And only part of the slack in cash sales may have been substituted by credit card sales.

Could these be signs of consumer woes in December?

 

The National Government Debt data of the Bureau of Treasury has been the most revealing

It is unusual that the updated government debt numbers have been published ahead while the fiscal balance remains dated November.

Moreover, the publication of the fiscal balance has usually been in the third or fourth of week of every month. December’s data has been substantially delayed. The question is why???

As one would note, domestic debt soared by a whopping 12.89% in December pushing total debt growth to 9.23%. On a month-to-month basis, the NG issued an astounding Php 233 billion worth of debt, which constituted 41.5% of total debt growth in 2017 (Php 562.17 billion)!!

These numbers indicate of the likely scale of the budget deficit in 2017. Since November’s deficit was at a record Php 243.5 billion, a Php 200 billion deficit in December would tally to Php 443 billion or Php 90 billion higher than 2016’s record Php 353 billion!

Yet, exploding deficits reinforces the transition of the nation’s political-economic structure.

Here’s the rub. The reduction of BSP’s claims on NG, the slowdown consumer loans and the explosion in debt issuance by the National Government has been interlinked.

These factors had a role in the diminishing rate of change in domestic liquidity

The “crowding out” effect comes into the picture. Bank lending had been crowded out or displaced by the surge in government debt.

Consumers bore the yoke of the transition.

HB 10963 (Tax Reform for Acceleration and Inclusion) is the other key factor.

I suspect that the BSP has anticipated the price dislocations from the new tax regime.

To counteract these, it reduced its claims on NG liability and allowed the National Government to raise funding from the marketplace, knowing that these would contribute to the siphoning of liquidity from the system.

In this way, the reduced “demand” from diminished liquidity would partly neutralize price disruptions from the new tax regime

And if my suspicion is accurate, the BSP action comes at the cost of earnings of the private sector, mostly in the retail industry.

In that context, December’s fall in M3 fueled the rally of the peso.

Alternatively, I suspect that the BSP may have reactivated its QE in January to have recharged the USD-Php.

Since every action has consequences, expect the intensifying interventions in the economy to have unintended consequences.

BSP on the Peso: NO “Meltdown”! BSP’s Winner Take ALL Policies Magnifies the Risks of a Peso “Meltdown”!

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists—Ernest Hemingway, “Notes on the Next War: A Serious Topical Letter,” Esquire, Sept. 1935.

In this issue

BSP on the Peso: NO “Meltdown”! BSP’s Winner Take ALL Policies Magnifies the Risks of a Peso “Meltdown”!

-The BSP’s NO Meltdown Palaver

-No Peso Meltdown (Yet), BSP’s Massive Interventions

-More Tenuous Defense of the Peso

-Philippine Peso and Bonds: Asia’s Odd Man Out

-The BSP’s Inflation Targeting has Only Fostered Huge Imbalances

-The Biggest Currency Risk: BSP’s “Winner Take ALL” or “All or Nothing” Policies

BSP on the Peso: NO “Meltdown”! BSP’s Winner Take ALL Policies Magnifies the Risks of a Peso “Meltdown”!

The plunging peso has prompted the Bangko Sentral ng Pilipinas (BSP) to dismiss concerns over a “meltdown” in public

The BSP’s NO Meltdown Palaver

From the Philstar: [No peso meltdown despite 3-month low vs $, says BSP February 2, 2018] (bold added)

The Bangko Sentral ng Pilipinas (BSP) said the Philippines is far from any foreign exchange crisis, dismissing concerns of a peso meltdown as the local currency hit a fresh three-month low.

In a text message to reporters, BSP Governor Nestor Espenilla Jr. said a peso meltdown is not expected because the country’s underlying economic fundamentals are healthy.

“The peso is just fine. Demonstrating flexibility, reflecting day-to-day market conditions,” he said. Espenilla, however, said the global financial market conditions remain volatile. “There will be volatility, runs and corrections, and the public should plan accordingly and factor in exchange risk in their decisions. But the peso is not expected to melt down because the underlying economic fundamentals of the economy are healthy,” he said.

The BSP has denied strains exhibited by the struggling peso for the second time since 2Q of 2017

In August 2017, ABS-CBN reported: [Bangko Sentral assures public: No peso free fall August 13, 2017] (bold mine)

The peso will not "free fall" against the dollar despite breaching the P51-level last week, Bangko Sentral ng Pilipinas Governor Nestor Espenilla said Sunday, citing "very strong" economic fundamentals. Espenilla said the peso's fall was due to uncertainties in North Korea, whose leader, Kim Jong Un, had been trading threats of nuclear attacks with US President Donald Trump.

In announcing that it would openly intervene (Business Times August 21 and Malaya August 22), the BSP engaged in a signaling channel. The threat to intervene translated into action (Businessworld August 23)

These are media accounts. Yet, media’s coverage of the conduct of operations has been limited

No Peso Meltdown (Yet), BSP’s Massive Interventions

There are many ways to monitor the BSP’s actions of containing the peso’s fall.

Here are a few.

The BSP’s foreign exchange position in its Gross International Reserves surged to record highs in September 2017 and remains at such levels through the yearend. (lower chart) The BSP’s foreign exchange holdings consist of US dollar loans and derivatives (futures and swaps or forward book).

So the BSP borrowed enormous amounts of USD which it used to dump into the market. Ironically, borrowing USDs to defend the peso translates to increased short positions on the USD! To contain the peso’s fall today by increasing USD liabilities represents a tradeoff of the USD-PHP across time. Or the BSP has only been adding to the peso’s future strains. And even if these were hedged, there will be fees to pay for such positions. And the larger the exposure, the bigger the fees to bankroll these positions

There is no such thing as a free lunch. 

Moreover, the Philippine government’s holdings of US sovereign bonds, at US $ 35.8 billion in November, fell to 2014 lows, according to the US Treasury. (middle window below). The reduced holdings of USTs of the Philippine government have been consistent with the BSP’s foreign investments, which dropped to 2012 lows. The BSP’s December foreign investment position stood at $ 65.763 billion.

The USD Peso was about to test the August highs of 51.77 last Friday when a big buyer suddenly appeared at the closing session. The big buyer prompted for a furious rally of the peso. (middle chart). At 51.45, the USD Php closed the week up 1.2% and 3.04% year-to-date. Surprisingly, as of February 2, the year-to-date returns of the USD-PHP has bested the Phisix +2.95% due to the latter’s 2.55% decline this week

If there indeed has been little cause of concern for the peso, then why these massive interventions???

More Tenuous Defense of the Peso

The BSP also hardly defines or quantifies a free fall or a meltdown. Or, at what rate of decline would the peso be considered in a “meltdown”?

Won’t a peso meltdown be mechanically denied for the simple reason that will reflect on the BSP’s failure?

Next, for the BSP to publicly address the issue of a peso free fall or meltdown signifies concerns raised by certain quarters with political-economic clout. 

In such context, the peso’s accelerating descent appears to be fraying on the confidence level of these entities. Nevertheless, the nature of politics will mean that the BSP will intervene to show that it is doing something!

Furthermore, is the BSP setting up the segments of free markets as the fall guy?

From the Inquirer: “Periodic bouts of volatility in the peso-dollar exchange rate, more than what financial markets have been accustomed to in recent years, is expected to be the new norm under the laissez faire regulatory framework of Bangko Sentral ng Pilipinas Gov. Nestor Espenilla Jr.” [BSP says volatility is new norm as peso gyrates February 2, 2018]

Huh? Does deregulation equal a weak currency? Whatever happened to prices set by demand and supply?

Or are these signs of the coming reversal of BSP liberalization?

Or has media been mischaracterizing the BSP’s explanation?

Moreover, the BSP makes a logical contradiction about the causal linkage between the peso and the economic conditions: “the peso is not expected to melt down because the underlying economic fundamentals of the economy are healthy”

If the underlying economic fundamentals have been “healthy”, then there would be robust demand for the peso, thusly, the peso shouldn’t be falling. The peso significantly strengthened in 2008-2013 as the economy blossomed in response to the BSP’s accommodation.

In contrast, the feeble peso is a manifestation of lesser demand for the peso from residents compared to the demand for the USD.

The apparent question is WHY???? What makes residents prioritize the USD more than the peso?

 

Could it be because of a supply-side problem?

Hasn’t the BSP and the banking system been issuing more peso, which effectively debases the currency’s purchasing power and thus, the spurring DEMAND by residents to hold foreign exchange?

Hasn’t the BSP been funding the National Government aggressively in 2015-2016 to prevent risks of deflation, as well as, spruce the incumbent government’s performance? (upper window)

Or for the sake of simplicity, has the desire to preserve the purchasing power of their savings by residents prompted the increased demand for the USD?

As one would note from the BSP’s net claim on the national government chart, a slowdown in the BSP’s direct financing of NG liabilities has led to the November-December rally of the peso

Yet, have you noticed of the self-contradictions in the policies employed by the BSP?

On the one hand, to keep up with its inflation target, the BSP uses debt monetization to goose up prices in the real economy but this incites downside pressure on the peso.

On the other hand, to relieve the downside pressure on the peso, the BSP has resorted to an assortment of currency interventions.

Such is the circular reasoning behind the BSP’s policies

So the colliding goals and means to attain such goals will on itself create unintended consequences.

Philippine Peso and Bonds: Asia’s Odd Man Out

Another pretext that the BSP has used for the attenuated peso: external forces.

Or, the BSP annexed the involvement of exogenous forces “global financial market conditions remain volatile” as responsible for conditions of the peso

Volatility should be defined. Does volatility imply the conformity or the diversity of price actions?

On that note, curiously, instead of the conforming to the regional trend, the Philippine peso has been the odd man out.

The Philippine peso has not just been the weakest relative to its peers it has defied the region’s uptrend!

Yes, Asian currencies have in general rallied hard but the peso continues to fumble.

For instance, the USD has tumbled against the Malaysian ringgit and the Thai baht and has remained in a trading range relative to the Indonesian rupiah.

The kernel is the strong Asian currencies have mitigated the peso’s woes. And in a different light, should the US dollar rebound against Asian currencies, the peso will fall harder!

And the financial peculiarity hasn’t been limited to the currency sphere.

Philippine bonds have also been the worst performer in Asia!  As expanded risk appetite has prompted massive inflows towards emerging market bonds, the Philippines has not partaken of such 3-year high bonanza in 2017.

Or, rallying yields of contemporary bonds in advanced economies has only reverberated in the Philippines. So far.

Worst, Philippine ROP 10 year yields spiked to 6.21% last Friday, a 2012 high!

The yield of the 10-year US Treasury benchmark notes stormed to a 4-year high last Friday!

Interestingly, spiking yields in US Treasuries have percolated into US home mortgage rates!

The dramatic spikes in UST yields are likely to diffuse into the global bond markets in the coming days.

That is to say, convergence in bond markets will likely occur where the yields of Asian counterparts will resonate with US bonds! 

 

It stands to reason that spiraling yields of Philippine long-end ROPs will become pronounced!

ROPs and USTs have been rising almost in tandem.

What used to be a yield convergence through the narrowing of spreads in USTs and ROPs have now transformed into a yield divergence trade.

The widening yield spread between 10-year ROPs and USTs highlights such divergence (lower window)

An important message embedded in these.

Domestic bonds have been PRESSURING the BSP to raise its rates or to tighten the financial system. Otherwise, the pressure on the peso will intensify!

As the US FED continues to raise rates, their money supply will slow further. But if BSP insists on maintaining current policies, the domestic money supply will significantly outperform.

Thus, bigger price pressures in the Philippine economy will compound on the weakening of the peso.

Eventually, markets by itself will force the BSP’s hands

Haven’t you noticed the contradictions? While bonds and the peso have been sold, stocks have been bought! Which among them will be wrong???

The BSP’s Inflation Targeting has Only Fostered Huge Imbalances

From Governor Nestor A Espenilla, Jr in a speech last November 27, 2017: [Nestor A Espenilla, Jr: Why the Philippines speech at the Philippines Investment Forum, Euromoney Conferences 27 November 2017, BIS.org] (bold added)

To maintain price stability, the BSP adopted the Inflation Targeting framework in 2002. This has served us well. We continuously refine monetary policy conduct. The implementation of the interest rate corridor system in July 2016 is a manifestation of our commitment.  More refinements are coming.  These changes are enhancing the transmission channels of monetary policy.

IF the BSP tightens, the GDP will weaken as credit growth ebbs. The outcome will be capital flight which amplifies the exchange rate risks.

 

In 2012-2014, the financial markets underpriced inflation relative to financial instruments which signified negative real rates. Negative real rates, a tool of financial repression, represent an invisible transfer of money and resources to the government and to their political clients.

Yet, the salad days or the sweet spot of negative real rate is HISTORY.

In response to the money supply’s 10 successive months of an explosive 30%+++ growth rate in 2H 2013-1H 2014, the BSP was forced to partially tighten in the wake of a surge in headline inflation.

The outcome of which, positive real rates, led to a fall in credit expansion thus a decline in GDP, earnings and the surge in store vacancies in shopping malls in 2015

Though bank credit growth slowed in 2015 (+13.84% upper window), bank leverage as measured by credit intensity surged (the ratio of bank credit to NGDP: 2.54 lower window)

As an aside, in 2017, bank credit grew by 18.39% that’s twice the amount of Nominal Gross Domestic Product (NGDP). Or the Philippine economy borrows Php 2 for every Php 1 output it generates.

The statistics mislead though. Since only a few segment of the population has access to formal credit, the concentration of bank borrowings translates to larger systemic leverage 

 

Rewinding back to 2015, the positive real rates spurred deflation spiels from erstwhile BSP Governor Tetangco.

Eventually, speeches transformed into actions as the BSP undertook the emergency measure of monetizing NG’s liabilities in 2015.

Since debt monetization couldn’t be relied on permanently, as this will crush the peso, the BSP further slashed rates to historic lows in June 2016 under the camouflage of corridor system

The BSP effectively passed the baton to the Department of Finance to raise funding through the capital markets. Nevertheless, by keeping rates at historic lows, the depressed carrying costs of private and public debt signified as invisible subsidies. Thus, systemic debt accumulation, mostly in the private sector, exploded.

Low rates also represented an indirect subsidy to taxes. Low rates boost credit use which in turn magnifies “demand”. Credit distribution affects relative demand. Demand increase, relatively speaking, is transmitted to higher real economy prices. Since price increases impact nominal GDP or business gross revenues, such translates to higher taxes in favor of the government. Such embodies the transmission mechanism of negative rates.

That is aside from the depressed interest rates charged to public debt.

Today such invisible transfers through negative real rates have been limited.

In realization of these, the DOF instituted a new tax regime while the BSP has steadfastly been resisting to tighten.

The Biggest Currency Risk: BSP’s “Winner Take ALL” or “All or Nothing” Policies

But here’s the thing. The current monetary framework of the BSP represents “putting the pedal to the metal”! As it stands, the BSP operates with LITTLE or NO margin for error!

The spread between 1 year ROP notes and the CPI was a paltry -.395% in December. It was even a positive .111% in November.

The BSP can’t afford a deceleration in credit growth. Because this will likely dampen CPI, leading to positive real rates and its second order effects.

Additionally, consistent use of emergency measures presumes two things: a time consistency of the impact of such policies (or the effects will be the same) and the invulnerability of the Philippine economy.

Yet, should an economic slowdown or even a recession or a financial shock emerge, the BSP would have little or limited ammunition to use without destabilizing the peso!

Aggressive rate cuts and or the next series of stealth deployment of QE would tailspin the peso!  And a recession or a financial shock may be triggered by internal or exogenous forces. Capital flight will be a critical factor too.

HB 10963, for instance, could have unintended consequences which may significantly slow the economy.

The ING noted that the BSP suddenly raised inflation targets which go in contrast to the DOF’s expectations, “The central bank of the Philippines (BSP) expects January inflation at between 3.5% and 4%, the highest inflation forecast since November 2014, due to higher excise taxes.”

Is this the first among the many proverbial cockroaches to surface (Cockroach Theory)?

Moreover, the makeover to the corporatist-state capitalism paradigm will likely undermine the present structure, thus compounding possible strains within the system

As for external sources, there are many. Rising bond yields, divergent central bank policies, overvalued global financial markets, maladjusted economies and geopolitical strains could become triggers. Yes, rising yields in the face of a RECORD $233 trillion DEBT in 2017, which was $16 trillion higher than 2016, should be an interesting development for 2018

Carried to its logical conclusion, the USD-PHP stands to benefit from policy errors, arising from the entwined follies of overconfidence, fatal conceit and political hubris, presumptuous knowledge, addiction to credit-financed spending, excessive dependence on political solutions, manipulation of markets and falsification of prices, and the narrowing of society’s time orientation or increased preference for instant gratifications

While a currency crisis is neither imminent nor inevitable, the direction of policies ultimately determines the fate of the USD-PHP.Under the current fiscal and monetary regime, the odds of a peso “meltdown”, a “free fall” or a “tailspin” has only been increasing.

In a recent note to a foreign friend, I wrote, I expect the Philippine peso to fall big time!

Buy the USD-Php!