Historic Moment Unfolding in the Philippine Financial System; More Free Lunch Policies

Since the BSP released its June data on domestic liquidity and the banking system’s lending condition, then this would just be an extension of the previous discussion.  [See 2Q and 1H Fiscal Deficit Surges to 2010 Levels! The Risks and Possible Consequences of the Current Fiscal Trend July 30, 2017]

BREAKTHROUGH HISTORY IS IN THE MAKING!

We are on a cusp of history.  The unfolding of an unparalleled process in the Philippine financial system has been happening real time!

The Philippine political economy now faces a TWIN Deficit!

MILESTONE fiscal deficit has now been accompanied by nearly a RECORD trade deficit. The latter represents an offshoot of the former. But since both require financing, the government has dealt these through UNPRECEDENTED monetary policies! 

To bridge the ballooning financing gaps, the BSP has resorted to HISTORIC low-interest rates and the awesome MONUMENTAL program of National Government (NG) debt monetization!

And both these factors have now spurred credit expansion beyond the banking system to include the government. Borrowing for both sectors, namely the banking system and the government which again based on nominal terms are at UNPARALLELED levels!

Yes, BREAKTHROUGH HISTORY is happening, right here, right now!

The BSP absorbed some Php 66.9 billion in NG debt last June. The BSP’s actions practically erased the 5 month slack. Year to date, the BSP acquired some Php 9.8 billion of NG claims. These numbers, which are published by the BSP, is accessible to the public (you and everyone else):  June data here and complete data from BSP’s financial system’s accounts.

Because the BSP’s depository survey data have hardly been discussed in the public, this would seem esoteric. But such activities signify a critical segment of the BSP’s activities.

Current process seems to be the following: NG issues debt to the public (mostly banks and financial institutions) to finance growing fiscal deficit, but such activities drain on the system’s liquidity. At the same time, the BSP buys some of the previously issued papers from the public which offsets the previous liquidity depletion.

At the end of the day, the BSP maneuvered to maintain the incumbent easy money policy IN SPITE of the ongoing crowding out process.

Again, despite the establishment’s overwhelming rhetoric that the Philippines is in good shape, still why the accelerated use of these emergency measures?

Why has the BSP been playing with an inflationary fire?

M3 growth, which spiked to 13.2% in June from 11.3% in May seem as a jump-start response to the BSP’s debt buying in the same month. And perhaps, part of the BSP’s implicit funding of the government may have arrested the recent fall in real economy prices. July’s CPI rose to 2.8% from June’s 2.7%. I am merely using government’s statistics for interpretation and not assuming its accuracy.

The BSP’s reacceleration of the domestic version of Quantitative Easing (QE) appears to have juiced up industry loans which at +17.88% in June was marginally higher from 17.57% in May.

However, growth in consumer loans lurched lower to register 22.54% in June compared to 23.56% in May.

While credit card loans have been in a turbocharged mode (June +16.97% versus May’s +15.63%), car loans dropped (+28.52% in June as against in 30.37% in May). The slowdown in car loans has resonated with car sales over the same period.

Meanwhile, payroll loan growth crashed to 24.51% in June from 40.3% in May. After a reaching a zenith at 63.06%, payroll loan growth continues to fall. So June’s downturn was hardly an anomaly.

Has the lower income spectrum been tapped out? Have financial inclusion or the migration from the informal economy to the formal economy reached a tipping point? Or could part of the payroll loan market have been diverted to the use of credit card? Or has the previous payroll borrowers opted to withhold spending thereby increase savings rate? Savings rate have been reported at all-time highs. Or could it have been a combination of the above?

For credit card, double digit growth rates begun in October. With higher consumer prices, the huge increase in credit card usage could mean that spending at present income levels may have reached its climax for them to resort to credit to augment spending.

Nevertheless, the ramifications of government’s actions have been incrementally percolating into the real economy.

These are truly interesting times!

The Economic Aftermath of Free Tuition Fees

And here’s more.

In defiance of his economic ministers, Philippine President Duterte signed a bill which puts into law the granting of tuition-free education in all state universities and colleges (SUCs).

Since I said that I would refrain from talking politics*, I can only make a prediction: this will blow a gargantuan hole in the government’s budget.

The article notes of budget estimates at Php 20 billion to Php 43 billion to Php 100 billion. I’d say that these numbers will be surmounted over time.

Reason? Basic Economics!

AT ZERO PRICE, DEMAND WILL OVERWHELM SUPPLY SUCH THAT SHORTAGES WILL OCCUR!

From the Revision Guru: (see chart in the lower pane above)

Zero pricing is an extreme form of maximum pricing; the maximum price is zero!  This means that goods and services are provided free of charge. This shows that, at a price of zero, there will be a shortage (excess demand) equal to QD QS.  This shortage will remain unless the price is raised to the equilibrium of Pe.

*I wrote about these before: I Am Not Alone: Economic Cabinet Members REJECT the Free Tuition Program! February 12,2007 and Wow, BSP Chief Sees The Rise of Populist Politics/Retreat from Multilateralism as Scary Developments, Scary Stuff for 2017! December 18, 2016

Let me just give a hint that the impact from free tuition will diffuse not only into fiscal balances but likewise to sociology to the government’s bureaucratic structures to other forms of social welfare.

And pray that free education won’t transform into an education crisis ala Venezuela.

Since one thing leads to another, expect more free lunch policies to be advanced.

Yet free lunch policies only assure the strangulation of the economy!

Finally, the Philippine peso posted its biggest (+.81%) rally since the week of April 14 (+1.3%). The USD peso closed at 50.16 from the other week’s 50.57.

However, such rally would not assume away the deleterious effects of the BSP’s inflationary policies as well as the expanding the free lunch populist politics.

To my mind, the peso merely responded to the US dollar’s general weakness. In short, a countercyclical rally. The peso has already been weak even as the US dollar has fumbled globally.

What happens more once the USD regains part of its legs even for just a bounce?

Use the current US dollar weakness to take a long USD-Php.

The Phisix Jinx In Motion…; Media Censors BDO’s Earnings Drop; PSE 1Q EPS at CPI Rates!

The Phisix Jinx In Motion…

Again, PSE officials can’t help but indulge in a shindig even when the Phisix has YET to make a breakthrough into new records. When the Phisix hit 8,071.47 on July 28, the PSE’s press release noted correctly that this was a “one year high” and also that this was the “highest for the index since July 27, 2016, when the PSEi finished at 8,100.48”.

Intuitively, such eulogizing had been alluded by the PSE to “positive investor sentiment ahead of the release of second quarter earnings results”.

It is as if earnings had anything to do with the THIRD most expensive stock market in the world

PRICES are EVERYTHING!

And because of record price highs, PSE officials likewise feted SM Prime as “the first Philippine listed company to record a one trillion-peso market capitalization in the history of the Philippine stock market during a simple ceremony”.

Even after this week’s 2.86% retrenchment, SMPH’s PER (eps 2016) stands at a staggering 41.16!!! Here is SMPH’s quote page at the PSE’s website. Even if we apply the annualized 1Q 2017 PER, SMPH retains the mind-boggling obscene valuation of 37.12!

It has never been a concern how the Sy Group of companies had signified as the major beneficiaries of rampant pumping including marking-the-close

For PSE officials, instability is divinity. The end justifies the means.

All told, like 2015 and 2016 such institutional worship of asset bubbles seem to signal its culmination

Media Censors BDO’s Earnings Drop

Oh, more proof that the stock market has hardly been about G-R-O-W-T-H!

 

BDO was the first of PSEi 30 firm that presented its 2Q and 1H performance. Stunningly, when presented in media like this,this and this, everything was at least positive.

The focus was on the 1H aggregate… (Inquirer)

The country’s leading lender BDO Unibank chalked up P13.3 billion in net profit in the first six months, little changed from the same period last year on lower trading gains and one-off items from the acquisition and consolidation of subsidiaries.

Underneath the facade, there appears to have been a deliberate omission of many critical factors  

For instance, 2Q profits DROPPED by 4.12%!! Such drop in 2Q earnings led to the unchanged profits in the first semester. But again, such decline never seemed to have existed.

Even more, earnings per share DIVED in both 1H (-10.62%) and 2Q (-14.71%). That was mainly from the Php 60 billion stock rights offering (SRO) that was held in January.

Curiously this eps decline has duly been noted under the comprehensive income category of the BDO’s management and discussion:

“Basic earnings per share went down P 0.36 year on year to Php 3.03 for the first half on a larger number of common shares outstanding due to SRO

Though stock rights don’t affect income statement directly, the additional number of shares issued from SROs has a dilutive effect, which naturally reduces the eps!

But like the 2Q performance, BDO’s SRO seems to have happened in a vacuum!

In fact, BDO share prices soared by 2.0% this week to hit an all-time HIGH at Friday’s close! It has all been about prices.

Dilution, thus, has been NO MORE!

Perhaps BDO’s offering of Php 5 billion long-term negotiable certificates of deposit (LTNCD) could have impelled for the public sterilization of the firm’s financial conditions.

This offering essentially signifies FREE lunch for BDO.

BDO’s LTNCD has interest payments that are about CPI rates! The public thereby would be subsidizing BDO with free money, but would also bear the burden of the risks attendant to such long-term CDs!

So when financial performance has been bleak, there will be less enthusiasm to participate in such wealth transfer mechanism. Media, therefore, has to project only G-R-O-W-T-H!

This offering could likewise have served as the reason behind the push to record high prices of BDO shares: to signal to the public that everything has been hunky dory!

Eerily, such public raising of funds would account for the second (after the SRO and now LTNCD) this year!

Courtesy of the BSP, stock prices have now been used as a marketing tool for implicit wealth transfers!

1Q PSE and Listed Firms Performance at Par with CPI rates!

Let me further note that the PSE released the performance of listed firms in their June 2017 report.

The PSE noted that eps of PSEi 30 grew only by 3.9% while all listed firms registered a 2.5% growth. Ironically, these growth rates had almost been at par with the 1Q CPI rate of 3.2%, based on BSP data.

While the inflation rates did boost the top line, apparently, operating costs were adversely affected too. As I have noted here many times, an inflationary environment has hardly been helpful to corporate earnings.

Think of what would have happened if the BSP’s emergency measures were not in place.

As a side note, the PSE seemed to have arrived at these numbers, not from earnings, but from published profits computed from the average.

Yet the Phisix went berserk to surge by 6.9% while the all shares raked in 5.8% over the same period. In other words,returns effortlessly trounced earnings by 76% for the Phisix and by 132% for the ALL shares!

 

You see, share prices of listed firms have not been permitted to reflect on their actual earnings. Share prices have been aggressively bid or have vastly outperformed their respective earnings performance. Thus, earnings essentially have a smidgen of relevance to their pricing.

Even more, the almost daily brazen pumps and dumps have certainly added to mounting imbalances in pricing, values and capital deployment in the real economy.

And as a function of causality, the metastasizing of the stock market into a loaded casino has been the primary reason why the Phisix has become the MOST expensive in Asia and the third MOST expensive in the world!

And as a function of causality, the primary reason why the Phisix has morphed into the MOST expensive in Asia and the third priciest bourse in the world has mainly been from metastasizing of the stock market into a loaded casino!

While many believe in free lunches, the paradox is, we live in a world of scarcity.

Something will have to give.