The house of delusions is cheap to build, but draughty to live in, and ready at any instant to fall—Alfred Edward Housman
In this issue
Vaccines Equal Socio-Economic Miracles??? The BSP Owns the Stock Market Bubble!
I. What are the Magical Effects of Vaccines? The FDI Dilemma
II. Vaccine Politics: Privatize Profits, Socialize its Unintended Consequences?
III. Using the COVID Pandemic to Justify Bank Bailouts: Never Let a Crisis Go to Waste
IV. The BSP Owns the Stock Market Bubble! QE Shores Up Bank’s October Investment Returns
Vaccines Equal Socio-Economic Miracles??? The BSP Owns the Stock Market Bubble!
I. What are the Magical Effects of Vaccines? The FDI Dilemma
Aside from ideally reducing the infections and death rates, what does the introduction of vaccines accomplish?
Will it resurrect business closures brought about by the lockdown socialism?
Will it also replace capital destroyed or consumed by it?
Will it restore job losses and wage cuts endured by the working class?
Will it bring back savings consumed because of lost incomes and or wages?
Will it reestablish production flows and capacity following the closures, reductions, and shifts in resource allocations?
Will it reverse the forcible transformation of many businesses into the digital space?
Will it return demand for the in-person workplace at the expense of remote work?
Will brick and mortar retail operations regain their lost glory? How?
Will accelerating debt levels incurred by firms owned by the elites be backtracked?
Will the administration return all the debt it drastically acquired from local and international savers or creditors?
Will the BSP reverse all the policies it underwrote to save the banking system, and secondarily several segments of the economy?
Will the National Government ask for or demand the return of all the money spent as subsidies to bail-out the various sectors of the economy?
Will it reverse the growth of the size of the government relative to the economy?
Will it nullify the regulations, mandates and protocols imposed by authorities, including the recently extended “state of calamity”, during lockdown?
While there are many more questions to ask, the essence, will the vaccine restore the socio-political-economic environment to the pre-pandemic environment? And how?
Or, what are the magical effects that vaccines are supposed to deliver?
For instance, how will vaccines resolve the FDI dilemma?
Figure 1
From the Businessworld (December 11): FOREIGN DIRECT investments (FDI) to the Philippines slumped in September after four straight months of year-on-year growth, as uncertainty over the coronavirus disease pandemic weighed on investor sentiment. Bangko Sentral ng Pilipinas (BSP) data showed net inflows of FDI stood at $523 million in September, dropping by 12.3% from $596 million in the same month in 2019. This was also 17% lower than the $637 million in FDI net inflows logged in August.
September’s decline reinforces the FDI downtrend rooted from the peak of April 2016 or prior to the assumption of office by the current administration.
It was not just FDI flows; approved Foreign Investments, or future FDIs, also endured a significant contraction in the 3Q.
From the Philippine Statistics Authority (December 10): Total foreign investments (FI) approved in the third quarter of 2020 amounted to PhP 31.0 billion, 83.0 percent lower than in the same period in 2019. These investment pledges came from the six investment promotion agencies (IPAs), namely: Board of Investments (BOI), Clark Development Corporation (CDC), Philippine Economic Zone Authority (PEZA), Subic Bay Metropolitan Authority (SBMA), Authority of the Freeport Area of Bataan (AFAB), and Cagayan Economic Zone Authority (CEZA). No foreign investments were recorded for BOI-Bangsamoro Autonomous Region in Muslim Mindanao (BOI-BARMM) for the period.
And we are assuming here that the published data are accurate. What if it isn’t? What if the investment data have been overstated?
Aside from the impact of the global recession, falling local and foreign investments has adversely affected the performance of domestic manufacturing, imports, and exports.
From the Manila Bulletin (December 10): The gap in the trade balance, which is the difference between the value of export and import, reached $1.77 billion in October, down by 50 percent from $3.57 billion in the same month last year. Likewise, the latest trade deficit data is slightly smaller compared with $1.78 billion in the previous month. Exports declined by 2.2 percent to $6.2 billion from $6.34 billion a year ago, while imports reached $7.8 billion, also lower by 21 percent compared with $9.91 billion last year.
Like FDIs, the trend for exports and imports has been downhill for years! Export growth climaxed in January 2017 while import growth reached its pinnacle in May 2016.
The thing is, supply-side quandaries, entwined with the demand-side, have existed before the emergence of the pandemic.
From the GMA News (December 8): The Philippine economy will recover faster than projections in 2021 if vaccines against COVID-19 will be available, the World Bank said Tuesday. In its latest Philippine Economic Update, the Washington-based multilateral lender said the economy will likely experience a deeper contraction of 8.1% this year due to “multiple shocks” such as the COVID-19 health crisis, economic activities across the country frozen by quarantine measures, devastating typhoons in November, and the global recession. But the Philippine economy is expected to rebound gradually by 5.9% and 6.0% in 2021 and 2022, “driven by the return to more robust economic activities assuming the infection curve flattens domestically.”
The World Bank radically changed its projections several times this year. Following an initial 5.8% forecast for 2020, it downshifted its projection to a 1.9% contraction in June, then deepened its cut to 6.9% in September. Last week, it chopped its GDP expectations to 8.1% again but forecasting a pre-Covid number of 5.8% to 6.0% for 2021.
Mainstream institutions have been plucking numbers from the thin air! Incredible.
Here is the thing: Unless investments recover substantially, a meaningful economic recovery remains a desideratum.
Figure 2
Yet, where precisely will investments emanate from, outside FDIs? Even when seen from the mainstream’s statistical standpoint, the gross savings rate continues to fall. Data from CEIC indicates a bounce in the 3Q. [Figure 2, upmost window]
So, exactly what miracles will those vaccines deliver?
II. Vaccine Politics: Privatize Profits, Socialize its Unintended Consequences?
To be sure, vaccines will bring about a bonanza to some interest groups.
From the CNN (November 27): The Philippines secured around 2.6 million doses of COVID-19 vaccine from AstraZeneca through a ₱600-million donation from the private sector. Vaccine czar Carlito Galvez, Jr., and Presidential Adviser for Entrepreneurship and Go Negosyo founder Joey Concepcion led the ceremonial signing of the tripartite agreement on Friday, attended by some of the biggest names in business.
Then…
From the ABS-CBN News (December 7): COVID-19 "passports" to show peoples' inoculation and infection history will be "essential" when the Philippines opens up international travel, the head of the country's largest budget carrier said Monday…A single, global COVID passport will assure territories that travelers will not bring in the respiratory disease, said Lance Gokongwei, President and CEO of Cebu Pacific and JG Summit Holdings, Inc. However, without resolving confidence and safety fears through vaccination and herd immunity, "there’s nothing to be spoken about," he said. "That has to be the number one priority: to get vaccines in the hands in as much of the global population as possible, and then connecting this to a COVID passport," he said.
By forcing the populace to embrace vaccination through politics of pandemic "passports", would such donations not transform into a big business (directly and indirectly) for the donors? Yet, who should pay for any side-effects that may emerge from the policy of imposing rushed vaccines on everyone? A likely case of privatizing profits, socializing its unintended consequences?
Could the great French economist Frédéric Bastiat descriptions of political inequality be germane here?*
The prevailing illusion of our age is that it is possible to enrich all classes at the expense of one another—to make plunder universal under the pretext of organizing it. Now, legal plunder can be committed in an infinite number of ways; hence, there are an infinite number of plans for organizing it: tariffs, protection, bonuses, subsidies, incentives, the progressive income tax, free education, the right to employment, the right to profit, the right to wages, the right to relief, the right to the tools of production, interest-free credit, etc., etc. And it is the aggregate of all these plans, in respect to what they have in common, legal plunder, that goes under the name of socialism.
*Frédéric Bastiat Chapter 2, The Law, econlib.org
Also, how would reviving confidence fill the vacuum from the self-inflicted economic deprivation derived from socialist policies?
III. Using the COVID Pandemic to Justify Bank Bailouts: Never Let a Crisis Go to Waste
Even more amazing is that the attribution by the mainstream of the travails of the economy and finance, through the use of reductio ad absurdum, solely to the pandemic.
From the Inquirer (December 11): The Philippine banking industry will have to brace for lower revenues, narrower margins and higher credit costs in the next few years coming from this prolonged COVID-19 pandemic, veteran banker Eugene Acevedo said…“But I have to caution that the future remains uncertain,” he said at the Yuchengco Group of Companies conference on Thursday. For example, Acevedo said the new interest rate cap on credit card lending was already a major challenge that bankers had accepted. Consumer loans, which provide high margins for banks, are seen to grow slowly. “Customers, especially those whose incomes were adversely affected, have started to become more conservative, meaning they will probably save more and borrow less,” Acevedo said.
Because of the pandemic, thereby negative actions X, Y, Z, so on and so forth…
While it may be true that the consumer lending portfolio of universal and commercial banks, which peaked in January 2020, may have been adversely impacted by the growing risk aversion, these loans constitute only about 10% of the total credit portfolio of the industry.
In reality, the growth of the aggregate bank lending portfolio has been on a downtrend since its culmination in May 2018. The visible slowdown in the growth of production loans, which accounts for the largest segment (about 90%) of the industry’s credit portfolio, has pulled the aggregate growth rate lower.
The banking industry’s published Total Loan Portfolio (net of Repos and Interbank lending) grew by only 1.02% last October! Seen from the total, TLP (inclusive of RRPs and IBLs) posted a -.09% decrease in October, signifying a second consecutive month of contraction!!! [Figure 2 middle pane]
Credit deflation, a dynamic feared by ALL central bankers, virtually stares at the face of the domestic banking industry! Stunning!
No wonder the BSP announced the expansion of its QE last October.
Yet, imagine what the scenario would be like without the BSP’s measures. And should the trend persist, watch in awe the slew of other measures the BSP will undertake to stem this tide!
As an aside, slowing income growth must have prompted consumers to amplify the use of credit to augment entrenched spending habits. That said, since the underlying conditions of consumer credit growth have been unsustainable, consumer bank NPLs spiked in (1Q and 2Q) 2020, accelerating an upside dynamic that commenced in 2019.
See: Under Economic Reopening: BSP Declares Debt Subsidy to Borrowers as Consumer NPLs, led by Real Estate, Soars! September 20, 2020
Importantly, the pandemic only accelerated an EXISTING uptrend in bad debts (distressed assets, gross and net NPLs) that incepted in 2018/2019. [Figure 2, lowest pane]
Call it "aggravating circumstances" applied to finance.
Despite the unprecedented and massive bail-out measures instituted by the BSP, mainly through the Php 1.9 trillion of liquidity injections, the various published delinquent debt metrics continue to scale higher. And what of the undisclosed ones?
The BSP’s extensive liquidity injection program** includes rate cuts of the ON RRPs, RRRs, expansion of QE, the BSP’s remittance of dividends to the NG, expansion of the set of eligible instruments for lending including MSMEs, the extension of regulatory and operational relief measures, as well as provide financial relief to borrowers.
**Benjamin E Diokno: Accelerating digital transformation in the COVID-19 era digital transformation in the financial services Speech on November 10 2020, BIS.org
And once the debt moratorium is lifted, would these not accelerate credit delinquencies deepening the deleterious impact on the health of the industry? And wouldn’t rising rates from a prospective stagflationary environment undermine the intensifying increase of the leveraging of the system brought about by the current bail-out measures?
By extension, how would debt problems be solved by more debt? Would the BSP’s FIST be enough to stanch the coming wave of defaults?
Figure 3
The steady decrease in the banking system’s liquidity, most likely from growing delinquencies, impelled the BSP to initiate its first two 100 bps RRR cuts in March and June of 2018.[Figure 3: upmost window]
Furthermore, the diminishing growth of its deposit base has impelled the industry to access higher costs of funding its operations through the capital markets. It has been competing with the National Government and Non-Financials in borrowing savings from the public.
In fact, the share of bonds payable to total liabilities has vaulted by about sixfold from .59% (July to August 2017) to 4.45% in October 2020! [Figure 3: Middle pane]
Meanwhile, deposit liabilities growth slipped to 9.5% in October from 9.53% a month ago. Weakening growth of FX deposits in October (3.64% from 4.55% in September) offset the marginal increases in peso deposit growth (10.65% from 10.51% in September). The trend of deposit growth has been southbound since 2013! [Figure 3: lowest pane]
At present, aside from bonds, the BSP’s QE has supported the banking industry’s funding base.
Figure 4
However, despite the QE, the growth of the M1’s cash in circulation and cash reserves of the banking system appears to be rolling over, having decelerated for the past 3-months through October. [Figure 4: upmost pane]
So based on the industry’s data disclosures to the BSP, the embedded and growing fragility of the banking system has only been exposed further by the pandemic.
The pandemic was not the cause of the banking system’s plight. Like most of Covid fatalities, preexisting conditions, in particular, the business or credit cycle, has plagued the banking industry.
Remember the 2017 Financial Stability Report (p.27) published during the late BSP Governor Nestor Espenilla Jr’s tenure?
While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner.
Or, simply put, the pandemic has served as a convenient excuse or pretext to justify bail-outs of the industry on a historical scale.
The zeitgeist of current conditions as popularly captured by former White House Chief of Staff, an erstwhile member of the House of Representatives and Mayor of Chicago, Rahm Emanuel during the Great Recession:
You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before.
IV. The BSP Owns the Stock Market Bubble! QE Shores Up Bank’s October Investment Returns
The dot-com bust in 2000 triggered a short US recession. Back then, popular economist Paul Krugman, writing at the New York Times, asked officials to inflate another bubble in August 2002.
To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
Either the write-up encapsulated accurately or presciently the Federal Reserve’s path-dependent bias or it pursued Mr. Krugman’s policy prescription or recommendation. Indeed, the Fed’s recession fighting policies inflated a massive housing bubble that culminated with its collapse, paving the way for the next crisis, the Great Recession of 2008.
Since the policy of inflating bubbles has become ingrained in central banking dogma, the market economy’s adjustments against excesses through recessions are not to be permitted. Hence, the de facto activist central bank confronts any signs of economic weakness and or financial strains with policy rate cuts or the expansion of balance sheets, or a combination of these.
And the BSP must have been influenced by the spectacle of skyrocketing risk assets across the world to imbue it as a viable countermeasure against risk aversion that could revitalize bank credit inflation, subsequently, money supply growth, and consequently, the GDP.
Hence, this striking recommendation in the BSP-led FSCC’s latest Financial Stability Report:
Thus, the objective is to re-deploy the liquidity as part of a general strategy for the lending institutions to get more comfortable in taking more calibrated risks. There is now a need to enhance risk pricing and valuation in the capital market. The viability of any investment outlet depends on risk pricing (at initial issue) and valuation (in the secondary market). This ensures that risktakers are appropriately rewarded.
And as a testament to the engineering of a liquidity-powered bubble-blowing of risk assets, the seemingly triumphant BSP chief cited as their feat the surging stock market in a late October speech.
Major indicators suggest that financial markets are responding well to our policy responses. Yesterday, the PSEI reached 6,941.19.
Benjamin E Diokno: The Philippines beyond survival - becoming an economic outperformer post-pandemic, speech at the General Membership Meeting BMAP, 26 October 2020, BIS.org
The BSP now OWNs the stock market bubble!
From the Keynesian perspective, the be-all and end-all of economics is consumption. That is, inflate asset prices to spur consumption. (see Krugman quote)
With only a small number of people exposed to equity markets, Keynesians are banking on the trickle-down effect. To this end, valuations and balance sheets don’t matter. Hence the encouragement of magnifying leverage as a means to attain such an end. And for them, digging and putting back bottles can only be beneficial even when it throws the production structure in disarray.
Of course, the more important viewpoint is that with deflation staring at the banks, the effect of asset bubbles is to camouflage problems of insolvencies through bad debts.
Yes, asset bubbles do buy time. But because there is no such thing as a free lunch forever, the amplified misdirection of resources ensures a substantially greater cost to the economy.
For every (central bank directed) boom is a bust.
Furthermore, the policy of inflating asset bubbles is practically a bail-out of the elites, the majority owners of listed firms. From the lows of March, the BSP has provided a staggering Php 3.195 billion bail-out to them, based on a full market cap (as of December 11). [Figure 4 middle window]
Of course, with the implicit goal of pumping up the index, the distribution of gains have been slanted to issues with the largest market capitalizations.
Figure 5
And going back to the banking system, with core operations at the precipice of deflation, with deposit growth stumbling anew, the increasing reliance on the capital markets resulting to a higher cost of funding and the deepening dependency on political interventions for a systemic rescue, the BSP’s QE has spiked investments assets of the banking system last October. Net investments jumped 11.98% from 4.14% a month ago. [Figure 4, lowest pane]
The booming domestic equities have been instrumental in powering up returns of the bank’s financial assets, which jumped 14% in October, resonating with the steep ascent of the PSEi. [Figure 5, topmost pane]
The headline equity index posted a phenomenal 7.84% return in October, the highest since 2011, and also a scintillating 7.4% advance in November, the highest since 2001.
Spiking growth of Available for Sale (AFS) and Held for Trading (HFT) assets, which registered a fantastic 81.7% and 35.6% last October, were the prime drivers of investment gains. [Figure 5, middle pane]
As a result, cumulative investment profits spiked by an amazing 52%, or by Php 33.523 billion, which is slightly higher than 47.5% a month ago. [Figure 5, lowest pane]
The boost in the bank’s investments alongside gains by cash reserves overcame the fall of banking lending, thereby arresting the decline in asset growth. Bank assets jumped by 7.52% in October, from 5.9% in September but have been slightly up from 7.46% in August.
Echoing bank lending, the growth of assets of the banking system hit a pinnacle in May 2018 and cascaded downwards with interim bounces like October.
For the BSP, desperate times call for desperate measures. Forget the unforeseen ramifications over the longer term.
Again, words of wisdom on the business cycle from the great Austrian economist, Ludwig von Mises,
In a market economy the rate of interest has a tendency to correspond to the amount of this difference in the valuation of future goods and present goods. True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse sooner or later and to bring about a depression.
Ludwig von Mises, Omnipotent Government p 251
