1Q 2019 GDP Falls to 4-Year Lows: Which to Blame: Tight Liquidity or Sluggish Public Spending from Political Impasse? Have Consumers Recovered?

We are not in a GDP factory. As the share of GDP devoted to health care and education goes up and the share devoted to manufacturing goes down, we are giving more weight to a sector where real output and the quality of labor input are extremely difficult to measure.—Arnold Kling

In this issue:

1Q 2019 GDP Falls to 4-Year Lows: Which to Blame: Tight Liquidity or Sluggish Public Spending from Political Impasse? Have Consumers Recovered?

-5.6% 1Q GDP 2019: Which to Blame: Tight Liquidity or Political Impasse?

-While Public Spending Share of the GDP Continues to Grow, The Marketplace Remains a Significant Component

-1Q19 5.6% GDP’s Theme: Consumer Recovery in the Face of Public Spending and General Economy Weakness

-The Sharp Deterioration in Credit Conditions is Inconsistent with a Strong Consumer

-5.6% 1Q 2019 GDP: Fiscal Stimulus Has Been Tied to Monetary Policies

1Q 2019 GDP Falls to 4-Year Lows: Which to Blame: Tight Liquidity or Sluggish Public Spending from Political Impasse? Have Consumers Recovered?

5.6% 1Q GDP 2019: Which to Blame: Tight Liquidity or Political Impasse?

First a few excerpts extracted from last week’s articles. (all bold mine)

From the Inquirer (May 7): The BSP chief earlier acknowledged that banks had been complaining to him of tight liquidity in the financial markets – an offshoot of the 175-basis point increase in interest rates last year to fight off inflation – but added that some central bank officials remain unconvinced that monetary policy should be eased at this point.

From the Inquirer (May 9): The central bank on Thursday cut its key interest rates by 25 basis points and, thus, formally began unwinding the tight monetary policy regime it implemented last year to fight high inflation. Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno – came into office last March vowing to bring down the cost of money – cited the recent declines in the inflation rate for the decision of the Monetary Board, which came on the same day the government announced a weaker-than-expected growth for the local economy in the first quarter.

From the Inquirer (May 12): President Rodrigo Duterte said the country’s gross domestic product for the first quarter of the yearwas affected by Congress’ bickering over the budget that led to underspending. But now that the P3.7 trillion budget for 2019 has been signed and funds are available, the President said these would be given to all regions, regardless of political affiliations, he said in a speech in Davao City on Friday evening.

It was a week filled with data disclosures ranging from 1Q GDP, Bureau of Treasury’s Public Debt, Philippine Statistic Authority and Bangko Sentral ng Pilipinas’ Consumer Price Index, select PSE 1Q Financial Statements and more…

Though the excerpts have been about the 1Q 2019 GDP, the attributions seem as coming from directions.  Do you notice of the inconsistencies?

The first two relates to financial conditions, in particular, the banking system’s “tight liquidity” conditions, and the subsequent policy response to the GDP, or the BSP Monetary Board’s relenting to their Governor's wish (since March), for the first rate cut (among the many coming).

But are these concerns that different?

Many in media have focused on the latter than the former. (See Bloomberg Tweet figure 1)

While Public Spending Share of the GDP Continues to Grow, The Marketplace Remains a Significant Component

With 1Q GDP rate at 5.6% dropping below Q2 2015 level, in the realm of politics, wouldn’t it be politically convenient for some entities to take the blame for the GDP's underperformance?

Figure 1

Public spending has indeed been taking the lead role in the nation’s political economy.

Through its aggressive public spending projects, the nation’s financials and resources have increasingly been corralled or captured by the National Government (NG). Such deepening control of the finances and resources highlights the pivotal shift to a neo-socialist/fascist/state capitalist economic model.

In 2018, public expenditure as a ratio of GDP hit a milestone high of 19.56%. As such, the NG’s fiscal deficit soared to an unprecedented Php 558 billion or 3.2% of the GDP. (figure 1, middle window)

Incidentally, the ramping up of public expenditure driven record deficits have coincided with the declining trend of the headline GDP.

And these statistics cover only DIRECT exposure of the government. How about the indirect exposures such as Private Public Partnerships (PPPs) and private sector sub-contractors of public works and the bureaucracy?

With such massive diversion of financing and resources from potentially productive uses by entrepreneurs to politically determined consumption activities, would it not be natural for the real economy to lose momentum from capital erosion?

Assuming the accuracy of GDP as the nation’s health temperature, would not the falling GDP be associated with higher deficit-to-GDP ratio (from sharp increases in public spending), as had been the case from 2016 to the present? (figure 1, lower window)

Even with the growing direct role of public spending, and even if we account for the private sector’s implicit role in political projects, a significant but the declining share of the economy remains in the hands of the marketplace.

1Q19 5.6% GDP’s Theme: Consumer Recovery in the Face of Public Spending and General Economy Weakness

Figure 2

The kernel of the 1Q GDP: Recovering consumers rescued the GDP as Public spending, investments and external trade slowed!

There may be some truth to the story presented by the 1Q 2019 GDP that the plunge in public spending GDP may have been from budget impasse. Public spending GDP plunged to 7.4% from 12.6% in December 2018 and from 13.6% 1Q 2018.

But let us dive into the other GDP data first.

From the expenditure GDP, the bounce in durable goods GDP (6.8% 1Q 2019 vis-à-vis 4.9% 4Q 2018, 10.3% 1Q 2018) partly offset the plunge in construction GDP (5% 1Q19, 17.6% 4Q18, 10.8% 1Q18). [figure 2, upper pane]

Public construction GDP crashed by 8.6% in 1Q19 (19.3% 4Q18, 22.6% 1Q18) as private construction GDP slowed to 8.6% (19.3% 4Q18, 8.1% 1Q18) [figure 2, lower window]

Merchandise trade also tumbled. Export GDP (5.8% 1Q19, 14.4% 4Q18, 10.3% 1Q18) more than halved from the 4Q18 as Imports GDP slowed substantially (12.4%, 19.1%, 11.3%). 

The downturn in imports should reflect domestic demand and input for exports.

But the good news: The harried consumers supposedly saved the day! The GDP’s consumer’s construct: lower inflation (PCE deflator) boosted spending. Household Final Consumption GDP jumped 6.3% in 1Q19 from 5.3% in 4Q18 and 5.6% in 1Q18.

And because the obverse side of the Expenditure GDP is the Industrial Origin GDP (production side), the latter reflects basically on the same story as the former.

Figure 3

Of the three major categories, only services GDP (7% 1Q19, 6.8% 4Q18, 6.7% 1Q18) improved while Industry GDP (4.4% 1Q19, 6.6% 4Q18, 7.7 1Q18) and Agriculture GDP (+.8 1Q19, +1.8% 4Q18, 1.1% 1Q18) deteriorated. (figure 3, upper window)

In the services sector, strength in the GDPs of Trade (7.4% 1Q19, 6.7% 4Q18, 6.1% 1Q18), Transport (8.1%, 3.7%, 6.6%)and Finance (9.8%, 6.3% 7.8%) more than offset the stagnant Real Estate GDP (4.1%, 4.1%, 4.6%), and weakness in Public Administration (9.7%, 14.7% 13.2%) and Other Services (5.7%, 9.4% 7.0%) GDP. (figure 3 lower window)

In sum, in the face of weakness in public spending and slower industrial economic activities, the 1Q19 GDP was constructed on the premise of the recovery of consumers.

But would pinning the blame on public spending not function as a convenient way to say, that since politicking pulled the GDP lower, then the latter’s recovery depends on the resolution of the former? Therefore, such events imprint on the public's mindset that more public spending translates to the path of economic elixir!

Are we supposed to dismiss the ramifications of the unparalleled scale of public spending that spurred record fiscal deficits in the context of opportunity cost and the crowding out effect?

The Sharp Deterioration in Credit Conditions is Inconsistent with a Strong Consumer

It may be true that public spending which had been manifested in the NG’s budget deficit (Php 90.245 billion 1Q19, Php 180 billion 4Q18 and Php 152.2 billion 1Q18) and the deficit-to-GDP ratio (2.15%, 3.64% and 3.89%) materially slowed in the 1Q.

Figure 4

But here is another contradiction.

The NG claimed that GDP and fiscal spending slowed in the 1Q 2019. If so, why the staggering record Php 350.7 billion increase month on month on March’s public debt to add up to another record Php 509 billion in the 1Q 2019?  (figure 4, upper pane)

Aggregate public debt grew by 13.4% to a record Php 7.8 trillion in March! Annualized public debt-to-GDP in the 1Q19 increased to 46.4% from 44.65% at the end of 2018.

In 2018, the NG borrowed a record Php 650 billion to finance Php 558 billion worth of deficits. And that’s aside from the Php 268 billion funding from the BSP.

Why has the government raised such an enormous amount of money in 2018? Why the glaring mismatch between declared public spending and published public borrowings? For what reasons? Have these surplus funds been spent? Spent on what?

It can’t be about frontloading of future expenses. The NG borrowed substantially again (Php 510 billion) way beyond the published fiscal deficit (Php 90.25 billion) in the 1Q 2019.

Have these been about the diversion of money to backdoor channels to finance election spending?

And the GDP inconsistencies don’t stop there.

Since the 1Q19 GDP has been constructed to portray the reinvigoration of consumers, how exactly has such recovery been financed? Or, what was the source of the spending of consumers?

The BSP published March banking data to reveal that consumer credit contracted by 6%, the first time since at least 2003! If credit card growth halved and payroll lending contracted, what was the basis or source for the added firepower of consumers? (figure 4, middle window)

The growth rate of cash in circulation (M1 +3.87%) last March, as published by the BSP, also dived to levels last seen in December 2004. Despite this week’s elections, if the BSP’s data is accurate, financial liquidity has been rapidly dwindling rather than improving.  Or, cash transactions in the economy, according to this data, have been materially slowing. (figure 4, middle window)

And the credit slack hasn’t been solely about consumers.

The falling appetite for credit, which has stumbled to multi-year lows, for the production sector exhibits the inhibited economic activities that may have limited growth in investments, profits, jobs, and wages. How would these add to the consumer’s purchasing power?

And if the industrial sector has struggled and if cash transactions in the marketplace have diminished and if there has been a dramatic reduction in the use of consumer’s credit card, the only possible sources for the marginal growth in consumer spending could be from drawing of their savings, liquidation of assets and from the undeclared expenditures by the NG.

Has the declining rate in the increase of consumer goods truly added to the consumer’s purchasing power?

Or has the NG padded the GDP similar to 4Q 2018?

5.6% 1Q 2019 GDP: Fiscal Stimulus Has Been Tied to Monetary Policies

Better still, soaring public liabilities point to more economic and fragilities ahead.

The NG’s borrowings have partially offset the downshift in credit growth of the banking system’s portfolio.

However, the difference has been that unless financed by credit creation (banking system & or BSP), the massive borrowing by the NG amplifies the liquidity drain in the financial system.  For instance, bank deposits may have funded the Php 235.9 billion ofRetail Treasury Bonds issued last March by the NG.

Has the surge in government debt crowded out banking system to have spurred a yield curve collapse/ inversion?

The nation’s financial leverage stands at a stunning record Php 15.57 trillion (Php 7.77 trillion banking loans plus Php 7.8 trillion public debt) or 92.5% of annualized GDP. (figure 4, lower window)

So who should benefit from BSP Governor Diokno’s rate cut?

If there are significant skeletons in the closet on the balance sheet of the banking system, substantial additions to the banking system’s current loan portfolio will only increase the system’s vulnerability. Such would lead to more, not less liquidity constraints.

Additionally, this shows that the Philippine economy can’t stomach rates at 4.75% and above! Some sign of macro strength/resiliency, no? The Philippine political economy can’t wean away from its chronic addiction to emergency policies!

This leaves the NG as the direct main beneficiary of the rate cuts.

Recall that in the past, the BSP’s low rate interest rate regime served as an indirect subsidy to the NG’s tax collections intermediated through the credit creation from the banking system. Since credit expansion fueled the economic boom, tax collection zoomed along

Figure 5

At present, with positive real rates (1-year yield higher than CPI) signifying tight liquidity conditions, the NG has taken over the onus of credit issuance partly financed by the BSP. (figure 5, upper window)

With the escalation of financing and resources transferred to the NG through Fiscal Stimulus, the marketplace would have reduced access on these, thereby putting a constraint on the factors of productions. The result of which is to reduce output and increase prices. The eight-month plunge in April CPI has mostly been about food and beverage with core inflation falling much less.

Such pressures have become apparent with reduced bank credit, thereby M3, leading to the diminishing rate of growth for tax revenues (despite this year’s fuel tax hikes). [figure 5, middle window]

And the slowdown in credit and money supply has similarly been manifested on the recent retreat of the GDP. [figure 5, lower window]

This leads us back to the intro, has liquidity or government spending been the main driver of 1Q GDP?

Record deficits from record government spending depend on continued access to people’s savings (via present taxes) and or debt (via future taxes) and or the inflation tax. And the BSP’s monetary policy of inflation targeting has been designed to subsidize government spending through the tinkering of interest rates to either boost private credit demand or lower the NG’s credit cost and or to provide financing directly the NG. Therefore if liquidity pressures would be sustained and percolate to the economy then fiscal “underspending” may continue unless the BSP will adopt fully unfettered money printing, similar to advocacy of MMT.

The yield curve remains inverted despite the BSP’s rate cut.

And should the US-China trade war escalate, tightening of the external environment will exacerbate on domestic conditions.

The unfolding year of the pig's vicious cycle?

Interesting times, no?

Celebrating Another Record: May 8th’s Biggest “Rescue” Pump in the PSE’s History!

Celebrating Another Record: May 8th’s Biggest “Rescue” Pump in the PSE’s History!

People are awed by the spectacular. For this reason, in the stock market, record highs are glorified.

In the stock market, instead of the process, the ticker tape generates the attention of the audiences. Today, May 8th, a landmark feat in PSE’s history through the headline index, the PhiSYx, was attained.

The headline index closed the regular session and entered the market intervention phase down by 1.21%. But when trading resumed in the runoff phase, five minutes later, BOOM, the phiSYx was magically up by .2%! A phenomenal 1.41% RECORD pump transformed marvelously the index from deep red into green shoots!

Magical tricks also happen on the PSE!

The record mark-the-close pump was a culmination of the concerted pumping in the last hour of the day’s trading session.

Of course, it took an orchestrated move on several heavyweights to prop the index with such record intensity.

Four of the five firms with the largest market capitalization were among the most significant beneficiaries; which included, BDO and SM, of the Sy Group, where end session pumps produced 100% and 154% of their day’s gains of 1.79% and 2.94%, respectively.

JG Summit stole the thunder though. JGS entered the market intervention phase down by a whopping 3.28%, however, when the runoff bell rang, the firm’s price was suddenly up by an incredible 3.54% for a 6.82% pump!

BPI and URC were the other major beneficiaries from the index pump.

Even the buying sequence of brokers for these issues had been somewhat similar at the commencement of the runoff phase. Such entails the likelihood of access to the same brokers by one buyer or by a cabal of buyers operating on the rescue mission.

The advance-decline differentials which had been heavily skewed towards declines (133 to 46) reveal the general sentiment of the market as opposed to the index’s performance.

And the intensifying scale of pumps demonstrates the increasing desperation to sustain the general index on its current level. Do whatever it takes.

  

Most importantly, as a result of the blatant gaming of the PSE’s pricing system, equity securities have become immensely mispriced that which has been partially captured by the BSP led-Financial Stability Coordinating Council’s Financial Stability Report:

Stock market price-to-earnings ratios, on the other hand, have been persistently well past their textbook warning thresholds but there seems no evidence that investors believe the stock market to be overvalued. Whether this is a Minsky moment waiting to happen is certainly an important thought but the absence of clear-cut valuation measures for the market as a whole leaves the issue without an empirical resolution.

Sustained and brazen manipulations embed on the public’s mindsets such “no evidence that investors believe the stock market to be overvalued” belief.

And instead of allowing the market to discover, balance demand and supply and to clear maladjustments arising from economic interactions, sustained manipulations have led to the conveying of misinformation to the public prompting for a buildup of malinvestments (race-to-build supply).

At the end of the day, the buildup of economic imbalances resonates with and emerges from, the contortions in the stock market.

Thanks to the National Government and the PSE’s tolerance and the seeming implicit encouragement of market manipulation.

(charts courtesy of PSE, technistock and colfinance)

...

Denials Won’t Wash Away Reality; PSE’s Banks Confirms BSP Data, The Profit and Illiquidity Divergence: The PNB Example

During the Bubble, virtually everyone dismisses Bubble analysis, instead believing the boom is well-founded and sustainable. The pain on the downside is proportional to the excesses during the preceding boom. Tremendous damage is inflicted during the final “Terminal Phase” of excess—Doug Noland

Denials Won’t Wash Away Reality; PSE’s Banks Confirms BSP Data, The Profit and Illiquidity Divergence: The PNB Example

The Amazing Silence on the Collapse of Bank Lending and Money Supply Growth

The paucity in the content of media's coverage of the virtual collapse of bank lending and money supply growth signifies nothing short of astounding.

For those that did, they were merely a verbatim of the BSP’s press release (here, here, here and here.

Philstar’s “Credit growth eases to 9.9% in March, slowest in 8 years” wins the best title.

Among these reports, the Business Mirror has the closest to relevancy: “A growing cash supply is often beneficial for an expanding economy such as the Philippines, as it provides fuel to the productive sectors of the country.  However, an excessively slow growth in M3 could be detrimental to the country’s overall growth, especially if it is not enough to fuel the productive activities in the economy. An excessively high cash supply growth, meanwhile, could stoke inflationary pressures and pull prices upward for the economy.  An imbalanced growth of M3 is also an indicator that the economy is potentially overheating.” 

The relationship between money supply and economic performance and inflation, without stating the transmission and feedback mechanism has been assumed in such a report.

In general, underlying the presumption is that money supply growth is a necessity.

Under a sound money regime, such wouldn't be true. Aside from the medium of exchange function, money’s ultimate role is with its purchasing power or the number of specific goods or services it can acquire in exchange for a defined unit/s of money.

Under the conventional central bank’s paper money standard, money supply has always been inflated to accommodate political objectives. The cost of which has been to lower people’s living standard via boom-bust cycles and or the loss of purchasing power of the currency.

As the great Austrian economist Ludwig von Mises explained: (bold and underline added) “The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power. As the operation of the market tends to determine the final state of money's purchasing power at a height at which the supply of and the demand for money coincide, there can never be an excess or a deficiency of money. Each individual and all individuals together always enjoy fully the advantages which they can derive from indirect exchange and the use of money, no matter whether the total quantity of money is great or small. changes in money's purchasing power generate changes in the disposition of wealth among the various members of society. From the point of view of people eager to be enriched by such changes, the supply of money may be called insufficient or excessive, and the appetite for such gains may result in policies designed to bring about cash-induced alterations in purchasing power. However, the services which money renderscan be neither improved nor repaired by changing the supply of money. There may appear an excess or a deficiency of money in an individual's cash holding. But such a condition can be remedied by increasing or decreasing consumption or investment. (Of course, one must not fall prey to the popular confusion between the demand for money for cash holding and the appetite for more wealth.) The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.”

But news reports are intended to simplify the description of events.

Even more, the orthodoxy only sees statistical relationships from such phenomena.  As such, causal relationships have hardly been a subject for scrutiny. For instance, what has caused the decline in credit?

Why should a mere 175 basis points increase in policy rates even as Reserve Requirement Ratios had been cut twice by the BSP stunt credit and money supply growth?   Why not, for that matter, 200 or 300 or 400 or 500 bps?

Or why would an “excessively slow growth in M3 could be detrimental to the country’s overall growth”?

Or how about this: what is the causal relationship between bank credit expansion-money supply and the banking system’s balance sheet?

In 2018, Profits and Illiquidity Chimed, BSP data on Banks Validated by PSE Banks

In 2018, PSYEi banks delivered supposedly 6.84% net income growth in the face of falling interest margins. The 9-bank financial index posted a lower 5.17% net income growth. Interest margins fell 6.97% for PhiSYx banks and 8.39% for the Financial Index

In 2018, the banking system’s mounting illiquidity dilemma has become apparent in the PSEi banks (+.1) and in the financial index (-2.68%).  Banks liquid assets consist of cash, due from the Bangko Sentral and due from other banks.

And to reinforce falling liquidity conditions, the compression in the growth in deposit liabilities, the primary source of funding of the bank’s core lending operations, banks have tapped into other sources of more expensive funding (e.g. bonds and LTNCD). In 2018, deposit liabilities of PSEi banks grew 7.31% and the Financial Index 7.91%.

The BSP usually publishes bank FS during the third week after the month. It has almost been two weeks into May, with March data still undisclosed. Perhaps next week along with the 1Q GDP and April CPI.

PSE’s 2018 data now confirms the BSP’s aggregate data on the banking system.

Patent Inconsistency Between Profits Growth and Illiquidity: The PNB Example

In the meantime, four banks have reported big profit spikes in 1Q 2019: BDO 66.1%, PNB 29.6%, Asia United 38.12%, and Philippine Business Bank 35.51% even as gross interest margins continue to fall dramatically, 9%, 19.74%, 13.09%, and 19.5%, respectively.

Ironically, the four banks reported a bigger drop in liquidity reserves (-6.21%) compared to last year’s benchmark numbers.

Deposit liability grew by 7.24% during the period hardly any improvement from last year.

And we note that banks like Philippine National Bank has embarked on aggressive fundraising amidst supposedly raging profits growth.

PNB reported a 17.16% surge in net income to Php 9.56 billion profit in 2018. In the 1Q of 2019, the bank’s profits soared by29.6% to Php 1.9 billion.

Interestingly, even with such impressive rate of profit growth, PNB has been tapping aggressively unconventional sources of funding for its operations.

Last January, PNB announced that it would raise financing via a huge Php 100 bond program, from Philstar, “The Philippine National Bank (PNB) plans to raise up to P100 billion through the issuance of peso-denominated bonds and commercial papers. In a disclosure to the Philippine Stock Exchange (PSE), the Lucio Tan-led bank said its board of directors has approved the establishment of a peso bonds and commercial paper program amounting to P100 billion to be issued in one or more tranches.”

PNB raised funding via LTNCD in February, from the Businessworld: “PHILIPPINE NATIONAL Bank (PNB) issued P8.22 billion worth of long-term negotiable certificates of deposit (LTNCD), which will be used to extend the lender’s maturity profile.”

In April, PNB announced a stock rights offering, from the Inquirer: Tycoon Lucio Tan-led Philippine National Bank (PNB) plans to raise about P12 billion in fresh equity from the sale of new shares to existing shareholders. PNB’s board approved on Friday a stock rights offering to “strengthen its common equity tier 1 and enable the bank to sustain its asset growth.”

A few days ago, the Bank announced that it is open for a strategic partnership, from the Inquirer: “The group of tycoon Lucio Tan is willing to cede up to 25 percent of Philippine National Bank to a strategic partner and has received “serious” interest from three foreign institutions for a prospective buy-in deal.”

What’s PNB going to spend on that requires massive amounts of funding? A litany of reasons have been provided by media: extend the lender’s maturity profile, strengthen its common equity tier 1, comply with the required liquidity ratios mandated,et.al…

Or could we just be witnessing accounting profits amidst decaying balance sheets?

Despite such booming profits, the bank’s 1Q liquidity shrunk 7.5% more than 2018’s annual 2.16% contraction. Deposit liabilities grew by 13.16 in 1Q 2019 slower than 15.72%.

The yield curve inversion has been consistent with other mounting symptoms of illiquidity expressed as shrinking liquid reserves, panic fundraising, and in March, plunging growth of industrial credit growth, crashing in consumer credit and plummeting rate of money supply growth.

Denials won’t wash away reality.