An insidious form of capital consumption takes place through government debt accumulation. A budget deficit means that the overall volume of national savings falls. Fewer savings imply that economic investment potential has become smaller. In the economic statistics, the expenditures — whether they are from the state or from the private side — count equally as a contribution to the national product. Yet while the spending benefits the current receivers of the government expenditures, the lower capital formation will later show up in weaker economic growth and punishes all—Antony P. Mueller
In this issue
The Deepening Inversion of the Philippine Yield Curve, National Government Signals GDP Slowdown, Liquidity Crunch Intensifies as Fiscal Deficit Reappears
-For Whom The GDP Bells Toll? Budget Deadlock?
-Budget Impasse? LGU Allotment Normalized in February, NG Disbursement Growth Slowed
-While January Fuel Excise Tax Hike Boosted Revenues, Underlying Dynamics Remains Anemic and Fragile
-The Late BSP Gov. Espenilla’s Warnings Reverberates: The Deflationary-Liquidity Crunch Intensifies!
-Deepening Yield Curve Inversion, PDS 1-Month Spreads Turn Negative as Rates of M3 and Bank Deposits Dives!
-Incredible Media Denial: Philippines is IMMUNE to its OWN Yield Curve Inversion?!
The Deepening Inversion of the Philippine Yield Curve, National Government Signals GDP Slowdown, Liquidity Crunch Intensifies as Fiscal Deficit Reappears
For Whom The GDP Bells Toll? Budget Deadlock?
For whom the GDP bells toll?
From the Inquirer “Brace for lower 2019 GDP growth due to budget delay, warns DOF chief”: (March 27, 2019) “Brace for weaker economic growth this year, no thanks to the delayed national government budget which just cleared a three-way impasse between the upper and lower chambers of Congress and the executive branch. Thus warned the head of the Duterte administration’s economic team who noted that the earliest that the fiscal stimulus can resume at full blast will be in the second half of 2019, after the end of the election spending ban. “It’s late. The election ban [comes into effect] two days from now,” Finance Secretary Carlos Dominguez III told reporters in Clark, Pampanga on Wednesday. “How can you award the contracts now?” He pointed out that, despite the reported end of the impasse, it will take an additional two weeks before the national budget could come into force because of the law requiring a 15-day phase in period for any law after it is published for the public’s consumption. Dominguez said that each day of delay in the passage of the national budget translates to P500 million less fiscal stimulus — money that was earmarked to be spent on the administration’s ‘Build, Build, Build’ infrastructure program. [bold added]
From the Businessworld: “Economists count budget delay’s Q1 cost” (March 28, 2019): ECONOMIC GROWTH this quarter couldhover close to last quarter’s pace but will be substantially slower than the year-ago clip when official data is reported on May 9, according to economists asked on Wednesday, citing primarily the impact of delayed enactment of the P3.757-trillion national budget for this year…Socioeconomic Planning Secretary Ernesto M. Pernia said on Tuesday that “Q1 growth rate [is] already likely to be trimmed” as a result of delayed budget enactment. The inter-agency Development Budget Coordination Committee the other week slashed its 2019 gross domestic product (GDP) growth forecast to 6-7% from 7-8% originally as the government operates on a reenacted budget, while the National Economic and Development Authority — which Mr. Pernia heads as director-general — has estimated separately that operating on a reenacted budget until April would cut full-year growth to 6.1-6.3%.[bold added]
The National Government (NG) has been now telegraphing to the public a slowdown in the GDP.
Political factors, mainly the budget impasse, have been attributed, by them, to the GDP deceleration. To them, the ‘delayed budget enactment’ translates to ‘less fiscal stimulus’.
With the evolution towards central planning or the neo-socialist state, the government’s spending has subtly been taking control of economic activities.
Government spending accounted for 19.56% of the GDP in 2018, way above the 32-year (1986-2017) average of 17.05%. And these numbers don’t include the private sector’s share of spending on political projects, which should magnify immensely the diversion of finances and resources to the NG.
And as the NG corrals more of the financing and resources for consumption, lesser financials and resources are made available to the marketplace for wealth generation.
Economic risks have become amplified, not only because of the increasing reliance on political undertakings constituting the principal factor of economic activities but, more importantly, because of the capital consumption from such transfers. Such signs have become evident in the banking system, yield curve, and money supply.
This being so, the underlying decay in productivity trends, as a ramification of political redistribution of economic resources, is being camouflaged by political intrigues.
Budget Impasse? LGU Allotment Normalized in February, NG Disbursement Growth Slowed
Figure 1
Remember the 1Q zero budget allocated to the Local Government Units (LGU), which the Bureau of Treasury (BTr) footnoted “No actual releases in January due to delay in the issuance of NCA due to deffered passage of 2019 GAA”? (spelling original)
Even when the budget has passed Congress (2H of March) and still awaits the signature of the political leadership as of this writing, the BTr has reported the reinstatement of the Php 97.328 billion budget for the two months, this February. (figure 1, upper window)
As such, public spending jumped 20.96% in February to push the two-month growth to 6.92%. Though the latter’s number has been substantially lower than two-month spending growth of 22.82% in 2018, it remains higher than 2017’s 4.0%. (figure 1, middle window) Naturally, with a higher number from 2018, the base effect also comes into play.
The budget imbroglio may partly have affected government spending plans.
Following an 18% growth in January, NG disbursements growth slumped to 8.78% in February. In the first two months, NG disbursement growth almost halved to 13.44% this year from 26.68% a year ago. (figure 1, lowest window) For the NG, the halving of this rate translates to diminished stimulus, thereby a lower GDP.
So part of the deceleration in NG disbursements has been neutralized by the restoration of the LGU earmarks, in spite of the budget stalemate.
While January Fuel Excise Tax Hike Boosted Revenues, Underlying Dynamics Remains Anemic and Fragile
Some of the effects of public spending may not be immediate.
With 2018’s record deficit predicated on record spending, if the Keynesian multiplier effect is true, then tax conditions should manifest such advancement.
Figure 2
NG revenue growth improved in February with a 13.19% jump from 7.47% in January. Revenue growth from the Bureau of Internal Revenues (BIR) spiked 16.36% from 5.4% a month ago. Bureau of Custom’s (BoC) collection growth plummeted to 1.1% from 18.48%. As such, February tax revenue growth spiraled upwards to 12.06% from 7.75% a month back. Non-tax revenue growth supported the BIR with a splendid 24.63% from 4.53% in January.
The hike in fuel excise taxes last January helped the sagging growth trend of the BIR. But like TRAIN 1.0, the effect of the boost has been immediate, but then, fades. The slump in BoC collections reflects on external trade conditions (exports), as well as, domestic demand (imports). (figure 2, upper window)
Even with the excise tax increases, 2019’s first two months have shown a material decline in tax revenue collections growth. Tax revenues grew by 9.6%, supported by the BIR’s 9.77% and BoC’s 9.5%. Well, here are 2018’s numbers, 17.71%, 15.4%, and 26.57%, respectively. And here are the 10-year averages, 11.26%, 11.1%, and 10.6%, correspondingly. (figure 2, middle window)
That said, the slack in public spending doesn’t explain the frail tax revenue collection performance in the first two months of 2019, rather, it exacerbates an extant condition.
Sure enough, the fuel tax hide has camouflaged tax revenues from deteriorating credit conditions. (figure 3, lowest window)
The tightening financial conditions have sent demand for bank credit last February plunging to the proximity of 2015 lows! (explained below)
And if public spending loses its magical powers, what happens to an economy that has been stripped of capital and productivity?
The Late BSP Gov. Espenilla’s Warnings Reverberates: The Deflationary-Liquidity Crunch Intensifies!
With a recharged public spending and with mediocre NG Revenue collections growth artificially bolstered by increases in fuel excise taxes, the fiscal deficit reemerged in February.
The NG posted a Php 76.373 billion deficit in February, which more than offset January’s Php 44.537 billion surplus that sent the two-month deficit to Php 31.836 billion.
The NG has raised the deficit target to Php 624.4 billion or 3.2% of the GDP in 2019!
Figure 3
Even before Ben Diokno’s appointment, quantitative easing has been brought back to life by the Bangko Sentral ng Pilipinas (BSP). From the BSP: “Growth in net claims on the central government likewise increased to 8.3 percent in February from 5.3 percent in the previous month.”
On a month-on-month basis, the BSP financed Php 105.17 billion worth of NG liabilities reversing about half of the Php 198.15 withdrawal made by them in January. In 2-months, BSP financing of the NG remains a negative Php 92.987 billion.
Meanwhile, the NG borrowed Php 159.06 billion from the capital markets, composed of Php 121.325 billion peso-denominated securities and Php 37.732 billion in foreign currency securities. In total (NG+BSP), for the first two months of the year, Php 66.07 billion was raised to finance Php 31.84 billion of deficits. (figure 3 upper window)
The BSP’s deficit financing comes amidst the striking pullback on credit growth by BOTH the public sector and the banking industry! (figure 3 middle window)
The year-on-year growth rate of external borrowings by the NG dropped to 6.8% in February from 12.59% a month back. Domestic borrowing growth rate recorded a slight decrement of 10.57% from 10.81% over the same period. As a result, the rate of total public loan growth retrenched to 9.42% in February from 11.42% a month ago.
Meanwhile, deflationary forces have been rapidly enveloping the banking system!
Production loan growth stumbled a whopping 12.48% from January’s 15.52% to February’s 13.63%! With credit card usage hitting a record 25.5%, consumer credit bounced from 13.22% in January to February’s 14.92%. (figure 3 lower window)
Despite this rebound, total bank credit growth fumbled to 13.74% in February from 15.33% a month ago.
It is interesting to note that the plunging rate of the banking system’s production and total loan growth has reached 2015 lows. The production and total loan growth rate in September 2015 registered a low of 13.22% and 13.18%, respectively. To recall, since the CPI plumbed to negative -.4% in September 2015, the BSP exercised the use of its nuclear arsenal, the printing press!
Today, crashing CPI rates have dovetailed with bank credit expansion and money supply growth. The NG will announce the March CPI next week. The BSP expects the CPI to fall within the range of 3.1% to 3.9%.
With stumbling bank credit transactions and diminished BSP support of NG spending, money supply growth floundered anew to 7.1% in February from 7.61% a month ago. M3’s February’s downward spiral has dropped below the 2015 lows to reach 2012 levels.
Stunning. Absolutely stunning.
We are witnessing a historic moment, a massive pullback in money supply and credit by banks and the NG/BSP.
This warning from the late Espenilla led Financial Stability Coordinating Council’s FSR reverberates:
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.
Deepening Yield Curve Inversion, PDS 1-Month Spreads Turn Negative as Rates of M3 and Bank Deposits Dives!
The escalating liquidity crunch is fast being played out in the credit markets.
Let me emphasize that the yield curve is NOT statistics. The curve represents yields from transactions of credit (Philippine treasury) securities channeled through the PDS platform.
These are FACTS.
And for the first time since at least 2000, the Philippine yield curve has turned negative or has completely INVERTED.
Figure 4
Based on BVAL Rates, the spread between the 3-month T-Bills through the 5-year notes compared to the 10-year bonds has turned negative. (figure 4, upper and middle window)
The 1-month T-Bill was just 1.7 bps away from negative!
The Bankers Association of the Philippines replaced the PDS rates as benchmark rates for Philippine Treasuries on October 29, 2018.
Figure 5
Nevertheless, because of the shortage of historical data, the PDS rates, which are published investing.com, remain very useful.
Of course, since BVAL rates are computed on actual transactions, it can’t be expected to diverge meaningfully from the PDS rates.
From the PDS perspective, 1-month T-Bill Rates, which continue to trek to multi-year highs, when faced with slumping yields especially by bonds, has resulted in NEGATIVE spreads!
As of March 29, the spread between the 5-year, 7-year, 10-year, and 20-year yield and the 1-month yield were negative by 10, 7.8, 5.7 and 4.6 bps! (see figure 5, upper window)
The collapsing yield curve has coincided with the plunging rates of M3, and most importantly, falling rates of bank deposit liabilities! (see figure 5, lower window)
These are SYMPTOMS of an underlying problem: the bursting financial asset and big government bubble.
Incredible Media Denial: Philippines is IMMUNE to its OWN Yield Curve Inversion?!
Watch in this news video of how a BSP official, wearing the Dr. Jekyll hat, cites the inverted yield curve in the US and Europe as raising the risk of a US-global recession. An establishment analyst, interviewed in the same show, accedes to the BSP’s view. The BSP official stunningly whistles past the graveyard to claim the Philippines have been “in a good position to overcome such threat”!
Really?
If an inverted yield raises the risk of recession overseas, why shouldn’t it be here?
Because an inverted yield curve doesn’t exist here? Because the public has to be kept blind from reality? Or because the Philippines is supposedly exempt from the laws of economics?
Given that the transmission of the negative yield curve will be through banks, which economy is more dependent on bank credit, the US or the Philippines?
It is shocking to see the brazenness of such denials.
Such audacious denials have also been evident in the stock market, which continues to tread in the opposite direction of the Treasury markets.
Because one of them operates on gross misperceptions, one will be proven decidedly wrong.
And those charts point out that the collapsing yield curve, M3 rates, bank, and public credit expansion, didn’t occur overnight. Neither has such taken root only in 2019. The budget predicament, being alluded to by the NG as the causing a GDP slowdown, signify as secondary causes.
There is no such thing as a free lunch. The political-economic sins of the past have returned to lay claim of a reckoning.
We can expect the BSP to act, forcefully. Not only are they to free bank reserves to plug the cash drains of the banking system, they likely are to chop rates back towards the 2016 level of 3%. And they are going to accelerate the use of the printing press!
But since current actions principally were from the BSP’s previous actions, the Philippine miracle has culminated and is about to reverse.
Buy the USD-php!
