Just what has been troubling the new Bangko Sentral ng Pilipinas Governor?
TWO weeks back, the good Governor Mr. Nestor Espenilla, warned the public to prepare for the end of the global easy money. A global tightening of money, the governor said, would have “potentially far-reaching consequences since these could undermine our economic performance and disrupt our carefully-laid plans”. I discussed this last week Newly Inaugurated BSP Chief Warns On The End of Global Easy Money (July 9, 2017)
As a side note, outside the US FED, the Bank of Canada raised interest rates for the first time in seven yearslast week.
BSP Chief on Property and Credit Risk; Ignorance As Solution to Financial Stability
Mr. Espenilla has refocused his concerns towards domestic affairs.
In an interview with foreign media, the Governor raised the concerns of financial risks.
From CNBC (bold and underline added)
First on the property sector:
“The rapid pace of growth is sparking some concerns, but Bangko Sentral ng Pilipinas' governor Nestor Espenilla said the institution is watching.
"If we're talking about the formation of asset bubbles in real estate, that's certainly an area that we have been closely tracking, drawing from lessons from other countries and from the past," said Espenilla.
"The BSP has been quite vigilant in assessing the situation and deploying measures to deal with the situation," he said, citing the set-up of a stress test to monitor the property market.
Next on inequality:
"This government is very keen to bridge the inequalities that permeate our society. You cannot really characterize a society as stable if there are a lot of deep-seated inequalities that continue and which make things fundamentally unstable," said Espenilla.
Finally, on credit inflation:
“This comes as Espenilla told Reuters last month that the central bank was watching the rapid pace of domestic credit growth closely. Bank lending in the Southeast Asian country has been rising at adouble-pace for at least two years, Reuters calculations show. Most of the loans are going to real estate, manufacturing and information and communication, added the news agency.
“Espenilla told CNBC that, rather than reacting, the agency is looking at the quality of management of the credit.
"We always look as well at the underlying underwriting beneath that credit expansion — where is credit going and for what purpose," said Espenilla.
"We cannot simply react...The credit-to-GDP ratio of the Philippines is actually relatively low compared to the rest of the region. The economy, financial systems are developing and the credit markets are just on catch-up mode and deepening," he added.
“That does not, however, justify excessive credit growth, and the central bank has a protocol to assess the risk, he added.
Many relevant issues such as relative credit-to-GDP and the deepening exposure towards interest rate sensitive industries or concentration risks, I dwelt with last week. For instance, the Credit-to-GDP statistics is an INSUFFICIENT measure of system leveraging because CREDIT PENETRATION LEVELS differ from country-to-country.
Furthermore, DECLARED use against ACTUAL use of credit can hardly be measured by statistics accurately.
And while “looking at the quality of management of the credit” would project the BSP as in firm COMMAND of the situation, perhaps to allay the public’s concerns, in front of their peers, the monetary managers admit that this hasn’t entirely been the case.
Proof?
Once again from Mr. Johnny Noe E Ravalo, head of the newly created Office of Systemic Risk Management at BSP* (bold and underline mine)
“Even in the absence of a universal definition, we think of financial instability not just in terms of the size of the problem (in currency terms) but more so in terms of the breadth of its dislocation. Thatis, instability cuts across financial segments, thus leading to a breakdown of the cash, contingent and capital markets, including its clearing and settlement functions.
The paragraph represents an EXCELLENT description of the risk of interconnectedness inherent to the financial system.
Just a reminder, these quotes are from the BSP’s official communication channel published in a conference held in Malaysia, last October 16 to 18, which was hosted by the Bank for International Settlements (BIS). The BSP was one of the global central bank panelists in a discussion from which this position paper or “Panel Remarks” had been based.
More on Corporate leverage…
“The issue is that there are too many unknowns about the rise in credit. Since the specific features of the loan agreement are unknown except to the contracting parties themselves, it will not be evident to third-party analysts how corporates are using the loan proceeds by looking simply at financial statements. For example, the rise in debt and a fall in profitability may be explained by the deliberate decision to invest into long-gestating undertakings, sacrificing short-term carrying costs for an expected longer-term increase in productivity and profitability.
Awesome! More…
“Anecdotally, we do hear of such initiatives among Philippine corporates. This is so in light of the prolonged period of Philippine growth, favourable demographics and bright economic prospects. In our private discussions with various corporate executives, we also note their active management of debt, taking on a preference for fixed-rate local currency obligations while remaining open to foreign currency obligations when they see strategic value in line with their operations. On the face of it then,higher corporate debt may just be a response to an expanding economy. The debt levels must be monitored but they are neither automatically a financial stability concern nor are vulnerabilities necessarily imminent. Admittedly, there is opaqueness because the balance between benefits and costs will be unknown unless the loan terms are made public. That said, some precautionary interventions may already be warranted
On household leverage…
“Certainly, household finance is inherently difficult to monitor. Countries such as the Philippines do not have direct data on household finance except for infrequent surveys that do not track the same families over time. The informal financial market is likewise an important facet in emerging market economies – as a venue for funding and in the context of financial inclusion – and this is inherently difficult to capture in quantitative studies. Furthermore, demographic data confirm that there isgreat variability across Philippine families, so that the very concept of a “household” is not going to be consistent across geographical locations and across socio-economic classifications.
Just how can factors with “too many unknowns”, which have been “difficult to monitor” and fraught with individual distinctions which serve as statistical challenges that are “inherently difficult to capture in quantitative studies” be assumed, generalized or concluded as “neither a financial stability concern nor are vulnerabilities necessarily imminent”???
And if the financial system relationships (causal, epiphenomenal and feedback loops) are endemically complex for the authorities to understand, qualify and quantify in their econometric models, then just how will the system’s “quality of management of the credit” be ascertained or established??? As such, what would be the basis for stabilization policies in response to volatility from such imbalances???
Let us see: Despite the HUGE UNKNOWNs, PAST performance EQUALS FUTURE Outcome. Nice.
Hardly any of these inconsistencies are assuring which leaves blind faith on the authorities’ capability to address the conditions, which ironically, they hardly have a handle on.
Yet, there is something I am certain of: Ignorance CAN HARDLY function as a SOURCE of financial stability.
*Mr. Johnny Noe E Ravalo, Head of the newly created Office of Systemic Risk Management at BSP Credit build-up and financial stability issues: do we know enough to calibrate appropriate intervention? March 2017 p.177, Bank for International Settlements
Trickle-Down Policies ARE the Source of INEQUALITY
The BSP chief raises another crucial politically sensitive issue: INEQUALITY. Curiously, such should not be something ALIEN to him. His predecessor or his former superior, in fact, preached trickle-down ‘economic’ policies!
Examples:
“How do we enable a greater trickle-down effect so that opportunities and benefits of a healthy and growing economy are cascaded to the grassroots?” - Amando M. Tetangco, Jr. Tapping into our strengths - opportunities, threats and challenges for 2016 and beyond in the Philippines and Asia March 18, 2016, BIS.org
“While the trickle-down approach to spread the benefits of development is good, it is not enough; we want to be more proactive” - Amando M. Tetangco, Jr. Acting Together for Financial Inclusion May 20, 2015, BSP.gov.ph
What’s the trickle-down effect? Hasn’t it been to enhance the assets of the wealthy in the hope that these would spur spending that would trickle-down and spread to the general economy or the population???
Wouldn’t such monetary policies serve as the ROOT cause of INEQUALITY? Inflate prices real estate, stocks and bonds and hope that this would only have POSITIVE effects. Yet, the policy of inflationism signifies the redistribution of wealth to those with assets from those without.
The establishment’s most revered economic high priest forewarned of this: [PBS.com Excerpts from The Economic Consequences of the Peace by John Maynard Keynes, 1919. pp. 235-248.]
“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actuallyenriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
“Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As theinflation proceeds and the real value of the currency fluctuates wildly from month to month,all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process ofwealth-getting degenerates into a gamble and a lottery.
“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
Be reminded that the PROCESS of inflation here is directed NOT at the CPI or any government constructs of real economy prices but at MONETARY INFLATION or “the debauchment of the currency” via government debt monetization and credit inflation.
If the BSP is truly concerned about inequality, then subsidies to the government and to the elites MUST go.
But this scenario would hardly be realized. Just who will fund such audacious build build build infrastructure programs???
Has Moodys Triggered the BSP Chief’s Reactions?
So what exactly has prompted the BSP’s chief’s alarm? Has this been in reaction to Moody’s charge that the Philippines economy has emitted signs of “risk of overheating” which the Department of Finance officials vehemently denied?
I have a different view of overheating, which is apart from the mainstream’s perspective that rising prices have been brought about by “material capacity constraints”.
My view of overheating stems from money supply growth. Based on 10 consecutive months of 30%+++ M3 growth in the 2H of 2013 until the 1H of 2014, the bubble segments of the Philippine economy (shopping malls, real estate and hotels) reached their “material capacity constraints” during this period. This period marked their “peak capacity”. From here, OVERCAPACITY followed.
It is not necessarily TRUE that “overheating” or upward price pressures emerge as an outcome of “material capacity constraints”. Price surges can occur DESPITE overcapacity because of monetary disorder. In spite ofnumerous GHOST cities, China’s property market continues to sizzle (as of June). Authorities continue to dish out alarming amounts of credit through mainly state owned banks in order to prevent an all-out credit collapse.
1H Total Social Financing surged 14% y-o-y to a staggering US $1.65 TRILLION (US$3.3 TRILLION annualized)! Over the same period, Chinese banks have issued a whopping US$ 1.2 TRILLION of new yuan denominated lending! Great charts from Yardeni.com.
Money is NEVER static. Money flows into some assets or is spent on investments or used for consumption. At present times, a key symptom of massive inflationism has been RECORD global equity prices.
And central bankers are livid to the cleansing the system through genuine tightening. Proof? US stocks hit record as Ms. Yellen reversed course to turn dovish last week: "Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance," Yellen will tell Congress.” (bold added)
We have seen this applied here before. Ex-Governor Tetangco warned about excessive stocks and property speculation TWICE in August* and October 2014**. The Phisix was below 7,400 then. That was at the same time he implemented modest tightening.
*Phisix: As Mania Rages, BSP Chief Warns on “Complacency” and “Chasing the Market”!! August 24, 2014
**Phisix: 7,400 is not the Technical Hurdle, the BSP Governor Is October 6,2014
In 2015, he changed course. He oddly kept mum on stocks even when it raced to 8,000. But he also exculpated real estate from any claims of imbalances.
Though I hope that the new Governor would introduce discipline, as a matter of political expediency, I don’t think he would. But I’d be glad to be proven wrong. And I would support such moves to avert a cataclysmic outcome.
Go for authentic reforms Governor. Make it happen.
Oh by the way, even in the face of the BSP’s debt monetization and historic interest rates, the Philippine sovereign yield curve appears to be dramatically flattening. Even without the BSP’s actions, the market appears to be showing signs of substantial tightening.
