Despots and democratic majorities are drunk with power. They must reluctantly admit that they are subject to the laws of nature. But they reject the very notion of economic law. Are they not supreme legislatures? Don’t they have the power to crush every opponent? No war lord is prone to acknowledge any limits other than those imposed on him by a superior armed force. Servile scribblers are always ready to foster such complacency by expounding the appropriate doctrines. They call their garbled presumptions “historical economics”. In fact, economic history is a long record of government policies that failed because they were designed with a bold disregard for the laws of economics—Ludwig von Mises, The Epistemological Problems
In this issue
Phisix 7,150: Bank Lending to the Manufacturing Sector Shrinks! Manufacturing in Recession?
-Self-Rated Poverty in the Face of the Bubbles in the Stock Market and in Properties
-Bank Lending to the Manufacturing Sector Shrinks! Manufacturing in Recession?
-September Real Estate and Construction Loans Jump! Hotel, Trade and Consumer Loans Slump!
-Why Soaring Makati Land Prices are Signs of the Terminal Phase of the Property Bubble
-Phisix 7,150: Gap Filled, Will 2013 Rhyme? USD-Asia Strengthens Anew!
Phisix 7,150: Bank Lending to the Manufacturing Sector Shrinks! Manufacturing in Recession?
Self-Rated Poverty in the Face of the Bubbles in the Stock Market and in Properties
With little improvement on self-poverty rating survey, an article excerpted stirring comments from select mainstream experts…[1] (bold mine)
Sought for comment, Ramon C. Casiple, executive director of the Institute for Political and Electoral Reforms, said the survey shows that “nothing much has changed” in Filipinos’ perception of poverty in the last five years. “Most of those who said they are poor, I think, didn’t feel the economic growth,” he said.
University of the Philippines political science professor Clarita R. Carlos said: “Perception is important for making decisions, so numbers are revealing.”
Nothing changed in the last FIVE years???!!!! Hello!! Have these experts been talking of a different country???!!!
Didn’t the interviewed or survey participants get the memo???? Nothing can ever go wrong in the Philippines!
You see everything has changed over the last 5 years!
And these have all been backed by credit rating upgrades, big number statistical GDP and economic numbers, as well as spikes in Philippine asset prices.
OFW dynamics has even been popularly interpreted as ‘economic boom’, when they are symptoms of the resident’s reaction to inadequate jobs and income growth! Yet all that matters is what media and the establishment says!
And just where have all these eye catching growth been directed to? Well, according to the CNN[2]
The growth has also been a boon for the country’s 50 wealthiest families.
According to the latest statistics from Forbes magazine, the collective wealth of the country’s richest grew by about 13% in 2014, standing at $74.2 billion – up from $65.8 billion in 2013.
That equates to an additional $8.45 billion in their coffers. It's a cliché, but the rich have gotten richer.
The "poorest" Filipino in Forbes’ 2013 list had a net worth of approximately $105 million.
In contrast, the "poorest" Filipino in the 2014 list has a net worth of about $170 million.
Here’s what’s interesting: The collective wealth of the country's 50 richest individuals in 2014 ($74.2 billion) accounts for 25.7% of the country's full year GDP for the same year ($288.7 billion).
They collectively earned $8.45 billion - that's equivalent to 51% of the GDP growth ($16.6 billion).
Have these not marked substantial changes over the past 5 years?
Well of course, media like the above fails to reckon that the Forbes wealthiest list has been calculated mostly based on stock market equity values. This means the equity bubble signifies as the main transmission channel for the elite’s ‘wealth inflation’ or the ‘exclusive’ growth (a.k.a. inequality). Backing stocks have been the real estate bubble.
And since the PSEi ballooned by 386% from 2009 or 237% from 2010, naturally, such tremendous returns in stocks, particularly for the biggest market caps, simply served as the admission ticket for many of the elite’s enrolment to the Forbes prestigious international list of the ‘haves’.
Don’t even bother mentioning about the sheer overpriced levels of the PSEi which today are at 1996 levels!
Let me add some numbers.
The consolidated revenues for the PSE universe (member firms), for the 1Q 2015, which just grew by a paltry 1.6%, represented 52% of the statistical GDP. There are major differences in those two numbers. The former represents accounting based on ‘field or street’ numbers. This more or less should reflect on real economic activities. The latter represents an aggregated survey of different industries rolled into GDP. And such surveys are vulnerable to significant statistical errors or even manipulations. This implies that the former’s contribution could likely be larger than official estimates.
As of Friday October 30, the PSEi (Phisix) accounted for 28.54% of the ALL shares index. But international firms, Manulife (13.3%) and Sunlilfe (8.5%) distort on the balance of the share distribution of the market cap based ALL shares index. Excluding them, PSEi’s share to the ALL share index bulges to 36.5%!
Of course, as repeatedly noted here, the PSEi have been principally a story of the top 10-15 issues. The rest are considered benchwarmers. The share of the top 5, 10 and 15 relative to the ALL share index (ex-MFC and SLF) were 11.65%, 23.4% and 28.9%, respectively, based on Friday’s close.
And from the market cap alone, these firms command a big slice of the PSE pie. Seen from a political angle, the stock market bubble, as noted above, has served as an important transmission channel for ‘exclusive’ growth or ‘inequality’.
Importantly, only 640,665 stock market accounts were reported by the PSE in 2014. The 2014 numbers accounted for only a 35% increase relative to 2009 even as the Phisix soared by 386%! One may add the likely 2-3 million of indirect accounts whom are exposed on equities via UITFs, mutual funds, and hybrid bank-insurance funds. This means less than 1% of the population have directly contributed, and about 2-3% of the population have indirectly participated in the mispricing of stocks which has enhanced the wealth profiles of these magnates.
Yet the lean number of participants makes the PSE sensitive to the market manipulation as seen via the frequent use of “marking the close”.
Of course, these politically connected tycoons have to thank the ‘responsible’ monetary policies of the BSP. Such policies enabled and facilitated the invisible ‘trickle down’ redistribution scheme, which the BSP chief himself unabashedly admits, through financial repression—negative real rate—policies.
Such policies have served as subsidies to the small number of bank debtors, the banking system, cronies and most importantly to the government (via lower rates on debt and via inflated taxes by crony firms)! No wonder the exclusive growth!
So sell ‘inclusive growth’ to attain ‘exclusive growth’! Wonderful dichotomy!
You see everything has changed during the past 5 years! Everything but the perception poverty! So the above observations from the two experts could be right. That’s if the conducted survey has more or less accurately been reflecting on the population’s sentiment.
But the surveys like these can sing different tunes depending on who pays for them.
The Social Weather Stations (SWS) recently crooned on a different music just a few months back. They sang about the proliferation of unicorns or tooth fairies! Last July, they reported an antipodal perspective to their self-rated poverty surveys. They said that 3 out of 10 people believe that the Philippines have evolved into ‘developed economy’!
So 30% of people think that the Philippines have attained ‘developed economy’ status while 30-35% of the families think that they are still ‘food-poor’!
Reconcile that!
Bank Lending to the Manufacturing Sector Shrinks! Manufacturing in Recession?
Last week, the BSP reported on the bank lending and liquidity conditions for September.
For banking system loans, the growth rate of loans for production activities was at 13% in September. This was down from 13.8% in August. The BSP mentioned that “Bank lending to other sectors likewise expanded during the month except for transportation and storage, and manufacturing, which declined by 0.1 percent and 2.1 percent, respectively.”[3]
The above chart shows of the rate of growth changes for various industries for August (blue) and September (red)
The BSP measures domestic liquidity in terms of mainly M3 as key benchmark. Yet M3 conditions are determined by credit conditions. This means that the relationship between credit conditions and domestic liquidity have been direct and causal but it comes with a time lag.
Notes the BSP: Preliminary data show that domestic liquidity (M3) grew by 8.5 percent year-on-year in September 2015 to reach P7.8 trillion. This was slightly slower than the 9.0-percent expansion recorded in August. On a month-on-month seasonally-adjusted basis, M3 increased by 0.1 percent. Money supply continued to expand due largely to sustained demand for credit. Domestic claims grew by 12.4 percent in September from 13.0 percent in August. Credits to the private sector increased at a slightly slower pace relative to the previous month. The bulk of bank loans during the month was channeled to key production sectors such as real estate activities; electricity, gas, steam and airconditioning supply; wholesale and retail trade, and repair of motor vehicles and motorcycles; and financial and insurance activities. Meanwhile, net public sector credit rose by 15.4 percent in September, faster than the 14.5-percent growth (revised) a month earlier[4].
This only means reduced credit growth leads to diminished money supply growth. And since domestic liquidity signifies money in circulation, diminished money in circulation has spread to affect aggregate demand. Languishing aggregate demand thereby leads to the slowing of CPI.
Yet it has been ironic for the establishment to adamantly insist or keep up with the incantation that consumer demand has been ‘strong’ even when CPI continues to fall!
The fact that CPI continues to fall means that the equilibrium between supply and demand has not been reached. Economics 101 tell us that falling prices are manifestations that supply has been GREATER than demand! So none the past 3 quarters of statistical GDP reflects on the accurate conditions of the Philippine economy.
But the BSP’s credit data exposes even more escalating fragilities of the Philippine real and statistical economy.
Remember I pointed out last December that the flattening yield curve signifies a sign of tightening credit conditions that would eventually reduce credit activities?[5]
Instead of an anomaly, the flattening of the yield curve is an indication of the business cycle in progress.
It has been a sign of monetary produced imbalances that has prompted credit markets to arbitrage on the asset liability mismatches via the spread differentials—whose windows have now been closing. It has been a sign of how credit expansion has engendered massive pricing distortions in the economy that has been demonstrated by inflationary pressures* which have now been reflected on the bond markets. And it has also been a sign that such credit expansion fueled boom has been backed by a lack of savings…
The flattening of the yield curve thereby signals the ongoing tightening of monetary conditions. Rising short term yields are symptoms of emergent strains in the Philippine financial system.
Well the effects from the tightening have partly arrived.
The BSP noted that bank credit growth on the manufacturing sector declined by 2.1% in September.
Well, it was not just a decline, it was a collapse!!!!
Nonetheless, from 1994 data, the rate of growth of bank loan portfolio to the manufacturing sector has already been on a downturn from its peak 4Q 2014 peak (right). The growth rate of loans to the sector had been at a range of 10-15% from 2H 2013 to 1H 2015.
Moreover, based on the 2009 PSIC data, the rate of growth of the banking system’s loan portfolio to manufacturing sector has shown a similar declining dynamic from June to September. The difference has been that the rate of growth in August at 5.83% abruptly downshifted to -2.13, thereby THE collapse! (right)
Even in nominal terms the decline has been conspicuous.
Understand the implications.
Based on 2Q statistical GDP, the manufacturing sector represents the largest sector in the industry based GDP pie. At constant prices, the manufacturing sector’s share to 2Q GDP was at 22.43%!
Based on banking loans, manufacturing share of the banking system’s loan portfolio signified the second largest at 16.6%, only next to the real estate with 19.6% share.
Again the BSP data shows that not only has loans to the sector stalled in September, it shrank!
In other words, manufacturing sector has not only stopped acquiring loans, they have instead been paying them off (or defaulting on them)!
Question now is how and where will the sector finance its working capital, capital replacement and or capital expansion?
The likely answers are that they might access non-banking credit, they could tap on their savings or retained capital or they may sell assets to finance operations or a combination of these factors.
The sharp reduction in credit activities on the manufacturing sectors dovetails with the collapse in manufacturing hiring jobs (as discussed last week), a sustained intermediate trend or a streak of contraction based on the survey of manufacturing activities—as exhibited by both the values of production (left) and sales (right) from the August data published by the Philippine Statistics Authority—and the string of declines in producers or input prices (For August: -8% year on year, -.1% month on month).
September’s credit collapse seems as harbinger of an even deeper downturn on the activities (hiring and output) and prices of the said sector.
Financial losses will be an issue too. The compression of manufacturing activities would most likely entail earnings declines or losses. They are likely to also affect the balance sheets of firms in the sector, as well as, credit profiles of firms and credit conditions of the industry.
Yet how many of PSE’s listed corporations have been suffering from a manufacturing downturn?
Now with manufacturing in an apparent drift to a recession, where will the government generate its 3Q GDP? Which sectors will offset or cover the likely losses or the void from the manifestly weak manufacturing sector? Will growth in BPOs and government spending be enough?
With income from this sector unlikely to support final spending, where will income come from to sustain the race to build supply on shopping malls, vertical real estate, hotel, come from?
Nonetheless, there is always the statistical Sadako to embellish an increasingly feeble statistical economy.
September Real Estate and Construction Loans Jump! Hotel, Trade and Consumer Loans Slump!
Going back to the general banking loans.
The average growth rate for BSP production loans for 2Q 2015 was at 14.54% and for 3Q 2015 was at 13.40%. I’d be very concern over banks who swagger on increasing market share by expanding loan portfolio by more than the industry’s averages. Such banks are likely to have lowered their credit standards as to grab any borrower regardless of their risk profile. These are banks that are more susceptible to credit problems during economic downturns
Because the values of the construction and hotel industries were carried over from the 1994 PSIC to the 2009 PSIC standards, the long term trends of these sectors can still be seen.
Bank loans to the construction sector have vaulted again during the last two months. Growth rate was at 32.5% last August and 34.2% last September. These used to be as high as 50-60% in 2013, but have now leveled off.
Has the resurgence in loans been due to government spending or from more bubble activities?
Yet growth rate of loans to the hotel (accommodation) and food services sector has also dived from 50.35% in August to just 19.97% in September.
Meanwhile real estate loans bristled in September. The industry’s growth rate jumped by 20.28% in September from 14.9%! Yet more speculative fever? And or has this been more about obtaining loans to payoff previous loans?
Bank lending to consumers has been on a freefall during the last four months (left)
Over the last two months, lending growth has sunk to merely 13.96% in August and to 12.02% in September. Current rate are nearly half from its peak at 22.94% in November 2014.
Meanwhile, bank lending via consumer credit cards have picked up over the last two months. Has the increasing slack in income growth been replaced by expanded credit card usage?
It’s the “Others” category that has pulled down consumer loan uptake. Others have been classified by the BSP as “the amortized cost of loans granted to individuals to finance other personal and household needs such as purchase of household appliances, furniture and fixtures and/or to pay taxes, hospital and educational bills.”[6]
Nonetheless, consumer real estate loans have not been part of the classification because according to the BSP “residential real estate loans are reported as part of loans for production”[7].
Perhaps the September surge in real estate loans may partly have reflected on consumer activities on the sector.
Ironically, this comes even as economy wide activities have been decelerating.
Like stocks, has sluggish income growth incited wilder speculative activities on real estates?
Why Soaring Makati Land Prices are Signs of the Terminal Phase of the Property Bubble
Last week, I questioned the barrage of media promotion on the real estate industry[8].
Intriguingly, why the sudden media blitz? Have there been strains in the industry to have prompted for this? Has there been an upsurge in skepticism for media to defend the industry by citing ‘experts’, or in reality, insider opinions? Or has sales been stalling?
The above represents the 17Q 3Q report from Santa Lucia Land as disclosed at the PSE last week.
For the first 9 months SLI posted a remarkable 29% growth in real estate sales (left). But this has been weighed by a 26% crash in 3Q sales activities (right)
The 3Q numbers may reflect on many things. They may affirm my suspicions. The numbers could also represent a smoothing out of a possible frontloading of sales during the previous quarters. They may be financial anomalies due to accounting or due to operational quirks.
My intention here has not been to target specific companies but to see if my suspicions on the overall conditions have been standing on firm grounds.
SLI doesn’t seem to be alone.
One of PSEi’s largest conglomerate Aboitiz Equity Ventures posted a 19% year on year slump on earnings.
One reason for the earnings decline was due to real estate: “Property arm AboitizLand Inc. (AboitizLand) saw a 56 percent year-on-year drop in its net income contribution for the nine-month period to P249 million. Lower sales in Lima Land industrial lots and higher manpower cost due to organizational expansion resulted in a 20 percent decrease in consolidated revenue amounting to P1.7 billion.”[9]
Again, this may or may not be representative of the industry as more data will be needed for confirmation.
Yet another reason for AEV’s earnings disappointment, the strong US dollar: “The conglomerate incurred a non-recurring loss of P623.2 million resulting from the revaluation of the dollar-denominated liabilities and placements of its power unit versus the gain of P379.6 million booked last year, the conglomerate disclosed to the Philippine Stock Exchange on Wednesday.
As predicted last June[10]:
the pesos’ weakness will likely impact the real economy through higher import prices and higher debt servicing costs on foreign debts by both government and by several big companies with substantial exposure on foreign debts.
The study includes property prices from Philippines covering 2008 until 2Q 2015, particularly prices of land (below) and residential commercial units (above) all based from the Makati CBD priced in the Philippine peso on a per sq meter. I superimposed nominal Philippine GDP current prices to show of its relative trends.
Both trends show of how property prices had practically spiked above GDP over the last two years.
The numbers can be seen better when computed for percentage returns (based on Q2 2015).
The above tells us that land and residential-commercial prices of Makati have steadily been rising since 2010. But the steep increases have only occurred in 2014 and 2015. This has been mostly evident on land prices. Land inflation outsprinted GDP by an astounding 306% over the last two years! (again based on Q2 2015).
Sorry property bulls, such outrageous price gains have nowhere been aligned with average or median income growth of residents!
Since land serves as foundations for future real estate projects, then the upsurge in land prices extrapolates to either higher prices for future inventories or that future projects would have to be designed to accommodate even more units (through higher floor levels) to recoup on the increased amounts of investments.
Said differently, if land buyers or property developers can’t attain the capitalization rates required to offset the increased acquisition costs, then these entities WILL LOSE MONEY!
So the recent high prices implies of more race to build supply. As the law of supply holds, an increase in price results in an increase in quantity supplied
GDP, land and property prices have all been underpinned by credit fueled money supply growth.
Soaring land and property prices only means that these sectors have been capturing a far larger share of resources from the economy.
The evidence can be seen in GDP and BSP’s bank lending data. Based on 2Q GDP real estate and construction accounts for 11.58% and 6.65% share of the industrial GDP. Based on September BSP banking loan data, the same sectors accounts for 19.6% and 3.6% of share.
Yet classifications can be rigid. For instance, some resident condos have been split with hotels or a building can be half hotel-half residential condo. So perhaps the sector’s bank debt and GDP share may even be larger than the reported or estimated data. Said differently, statistical numbers may have vastly understated their actual distribution share.
Besides, some of the other sector’s bank credit growth may have also been diverted to property and construction sectors. Once money is released from banks, there will be no control on where it flows.
So outperformance of these sectors comes at the expense of the other sectors. These are the crowding out and opportunity cost dynamics. A simple analogy: a cement block used by the construction industry implies the same cement block that will not be used for the agricultural sector.
The evidence of crowding out can be seen in falling prices almost everywhere (except property and stocks) based on government data; namely, CPI, producer’s prices, general retail and wholesale prices, and construction material retail and wholesale prices.
Aside from falling exports and job safety mandates, domestic manufacturing’s sharp downturn, as explained above, could partly be from such phenomenon.
These sectors have essentially been vacuuming resources from the other parts of the economy.
Yet the outgrowth of these sectors means increased economic and financial concentration risks.
Many firms from other sectors become dependent or heavily exposed on them. For instance, banks provide financing, some manufacturing and import firms supply the industry’s requirements, many malls, schools and so forth… rely on spending from income generated from these industries.
This means that a slowdown in property-construction sectors will have a spillover effect on enterprises from other sectors attached to them. And the linkages will not be limited to economic exchanges but should spread to financing, particularly through the credit channel.
Of course, those ridiculously high prices have emerged out of expectations that demand for the property sector will be greater than demand for the other industries.
Yet what has incentivized these outrageous bids on land prices and the sustained race to augment supply has been allure of inflated profits from a sustained easy money environment.
And an easy money regime has been thought as a perpetual free lunch. It isn’t and will never be.
The falling peso (below)/ flattening yield curve (above) have already been signifying manifestations of the coming reversal.
Though repeated furtive attempts to widen yield spreads have only increased volatility of Philippine bonds, the flattening dynamic continues to manifest itself on different spreads.
For instance, this week, the 10 year and 3 months spread narrowed to a one year low! Meanwhile, the USD peso, which official rates soared by .82% to 46.82, seems now in position to retest the 47 resistance anytime.
Well, a reversal of easy money will be punitive to unproductive debt
Yet debt should not be seen as a one size fits all.
Not only is there a difference between productive and non-productive debt, distribution matters. Only a small segment of society has been exposed to the formal economy banking debt and bonds. This means that again debt accumulation has been concentrated to mostly these sectors and their ancillaries.
The skewed distribution of debt creates the statistical illusion that Philippine debts are low. In reality, when debt is filtered on a ‘banked’ per capita (or those with access to the formal banking sector) basis, debt levels should be extraordinarily high. The recent IMF data on global housing loans which the Philippines topped in 1Q 2015 tells us so.
Yet the concentration of supply side activities (race to build supply) and its funding process (debt accumulation) only reveals how Philippine economy has accrued massive malinvestments. And since malinvestments are not sustainable, there will be a reckoning.
Hence, the greater the concentration of activities and funding of these sectors, which are symptoms of accrued the malinvestment, the bigger the scale of unwinding.
Signs of economic retribution have already surfaced.
Even statistical GDP has been slowing. GDP is an estimate of overall spending of goods and services within national borders given a specified time window. Since GDP projects on the economic conditions based principally on the spending perspective (expenditure or industry based), it should highlight on the role of spending as a function of income, savings or credit.
As a side note, since GDP signifies aggregated spending activities, the spending of domestic firms owned by moguls should lift the aggregate numbers relative to the average.
So a slower GDP extrapolates to the following: income generated are being saved (√), it could mean less use of credit to finance spending(√), it could also mean lesser income growth (√) or a combination of the three.
By √, I mean empirical evidences currently validating this, such as bank credit growth, OFW remittances and surging savings.
Meanwhile, prices are manifestations of the acts of exchanges, or particularly the economic coordination or discoordination process. With prices in the real economy, emitting signals of deflation as noted above, it is a sign that there has been insufficient demand to keep up with supply.
While I would assert that this signifies a natural offshoot to the ridiculous 10 consecutive months of 30%+++ money supply growth, and was partly influenced by the BSP’s tepid tightening response, regardless, it is a sign of a slowing economy.
Soaring property prices, which are symptoms of speculative juices oozing out of the short term quest to attain yield, is simply incompatible with an economic downturn.
This instead looks likely a sign of the terminal phase of the speculative bubble.
Phisix 7,150: Gap Filled, Will 2013 Rhyme? USD-Asia Strengthens Anew!
It would seem that the anesthetic effect from ‘bad news is good news’ have begun to fade.
Not only has the USD been firming against most Asian currencies, those electrifying big stock market run ups have shown signs of fissures, or that the rally seems to show signs of fatigue.
In my view, such Fed interjections would seem like jawboning that has been based on the repeated moving of the goalpost.
Yet contra mainstream perception that submerging a currency will lead to an export boom, Taiwan’s 3Q GDP have reportedly contracted. This prompted authorities to launch a (USD 123 million) stimulus which is a follow through to the cutting of interest rate last September.
So the hits from the strong USD, China’s ongoing economic slump and hissing domestic economic bubbles have begun to deepen and spread throughout East Asia.
This should weigh on Asia risk assets and heighten risks of a regional squall.
On the Phisix.
Following last week’s breakout, domestic stocks attempted a follow through with a 1.67% low volume ramp last Monday. After a largely neutral Tuesday, the momentum reversed.
For three consecutive days, the Phisix dropped. In aggregate, the three day loss of 3.08% erased the early gains to register a 1.41% loss for the week.
So the week’s decline pulled the headline index back to the negative zone. Year to date the Phisix has returned -1.33%.
With the other week’s runup and this week’s aborted momentum, the gap filling move from the August 24th crash appears to have been completed. The next question is will 2013 rhyme? Will the failed breakout, like 2013, lead to new lows?
Though the week’s decline was broad based, the service sector, led by PLDT -6.94%, suffered most. Mining and oil took second spot.
Of the 30 composite issues of the benchmark, 18 registered losses while 12 defied the dominant sentiment.
The broad markets remain steeply volatile. And volatility had been bidirectional.
On aggregate, losers dominated gainers by 64. For the week, based on daily performance, losers prevailed over gainers 4 days to 1.
Peso volume zoomed this week.
Peso volume soared 128% to a daily average (weekly) of Php 13.8 billion. That’s largely due to the Php 32.8 billion special block sales by JG Summit last Wednesday. Add to this Php 1.6 billion of special block sales of Ayala Corp.
Take away the combined block sales the average volume would have only been at a marginal increment of Php 6.924 billion.
With the USD peso hovering at resistance levels, will the Phisix follow on the inverse side?
