You have to start with the truth. The truth is the only way that we can get anywhere. Because any decision making that is based upon lies and ignorance can’t lead to a good conclusion—Julian Assange
In this Issue
Was the Massive 4-Month Public Borrowing Meant to Drive Down Rates? Banking System’s April Cash Reserves Hit 2015 Lows
-Why the Massive 4-Month Public Borrowing when the Fiscal Deficit has been Way Off NG’s Target?
-Massive Public Borrowing Engineered to Drive Down Rates? Treasury Curve Steepens
-Treasury Boom Escalates Banking System April’s Cash Reserve Burn
-Bank Borrowing Accelerates as NPLs Increase Anew in April
Why the Massive 4-Month Public Borrowing when the Fiscal Deficit has been Way Off NG’s Target?
From the Inquirer (June 10, 2019): National Treasurer Rosalia V. de Leon told reporters that the National Treasury would likely sell a smaller volume of treasury bills and bonds in the third quarter of 2019. It sold P315 billion worth of T-bills and bonds in the second quarter of the year as underspending brought by a reenacted budget kept ample cash in government coffers.(bold added)
Figure 1
The National Government’s (NG) fiscal balance registered a Php 3.373 billion deficit in the first four months of 2019, thesmallest deficit since the assumption to the office by the incumbent political leadership.
A significant part of the near balanced 4-month budget comes from the surplus of Php 86.9 billion resulting from a stagnant increase in revenues (+.36%) and a plunge in public expenditure (-15.15%) last April, as discussed in early June. [BSP Mind Conditions the Public For Bailouts! April’s Fiscal Surplus Hits Record on Struggling Revenues and Plunging Public Spending! June 2, 2019]
From the Inquirer (June 15): Government spending on infrastructure fell by more than half to P28.3 billion in April,no thanks to the impasse in Congress on this year’s national budget coupled with the election ban. Public expenditure on infrastructure and other capital outlays in April slid 56.9 percent from P65.6 billion a year ago and by 52.7 percent from P59.7 billion a month ago, the latest Department of Budget and Management (DBM) data released on Friday showed. [bold added]
The supreme irony has been, despite the underspending from political underpinnings, why has the NG been borrowing from the people's savings through the capital markets at a record pace?
Total public debt surged at an unprecedented rate of 122.4% or Php 494.31 billion in four months. Domestic debt rocketed 544% to Php 428.513 billion, while foreign debt slumped 60.05% to Php 65.8 billion.
Even if we subtract the BSP’s pullback of direct financing (QE) to the NG amounting to Php 187.97 billion over the same period, the NG raised a total funding of Php 306.341 billion.
As an aside, in spite of the BSP’s pullback, net claims on central government remains at a milepost.
Did the NG raise Php 306.341 billion through treasury borrowings to fund rollovers and a meager Php 3.373 billion of deficit??
As an aside, the NG’s Department of Budget and Management (DBM) placed the 2019 deficit-to-GDP ratio target at 3.2% orPhp 631.5 billion. Such target will be missed by a mile unless the NG shoots at a pace double that of 2018!
Massive Public Borrowing Engineered to Drive Down Rates? Treasury Curve Steepens
Given the first news excerpt, a third perspective comes into the picture. The NG sopped up liquidity in the system that “kept ample cash in government coffers” to bring down interest rates!
In short order, while the BSP focused on managing the short end, the NG used its borrowing capacity to impose financial repression on the economy by forcing a transfer of the private sector’s resources to them. Ergo, with so much cash, treasury yields plunged!
From the Inquirer (June 11): The rate for the reissued 20-year Treasury bonds sold Tuesday fell by 155 basis points to 5.17 percent amid strong demand, thanks to easing inflation and more liquidity in the market. (bold added)
Figure 2
Official BVAL yields of 30, 60 and 90 month T-bills plummeted 30.6, 40 and 41 bps, respectively this week. Because T-bill yields dropped more than the bonds, signaling a bull steepener, the Philippine Treasury curve emitted of partial steepening. The inverted curve has flattened.
In my perspective, such a move, had been engineered, was a brilliant tactical one.
By forcing down rates artificially with massive injections to the NG’s balance sheet with cash, not only have interest expenditures of public debt been reduced but also of the credit-dependent industries.
A bullish steepening occurs when markets expect the central bank to lower rates to re-liquefy the economy and recombust inflation. The treasury markets must have complied with the BSP’s guidance.
Treasury Boom Escalates Banking System April’s Cash Reserve Burn
But of course, every benefit has an underlying cost/s.
Figure 3
The humongous transfers to the coffers of the National Government have only abetted the decline in the banking system’s cash reserves which reappeared in April.
The banking system burned Php 144.8 billion month-on-month and Php 121.67 billion or 4.89% year-on-year of cash for total reserves to fall to Php 2.366 trillion, a level seen last November 2015. (figure 3, upper window)
With deposit liabilities posting minor gains in April, the BSP’s cash and due banks to deposit ratio have once again plummeted to multi-year lows. (figure 3, middle window)
The banking system’s total deposit growth bounced marginally by 6.6% year-on-year from last month’s 6.11%. Peso deposit growth was higher by 6.7% yoy from 6.37% in March. Foreign currency deposits growth jumped 6.12% yoy from 4.87% the previous month. (figure 3, lower window)
Even the vaunted treasury boom has failed to buoy the BSP’s liquid assets to deposit ratio which retraced to 47.92% following a sharp rebound in March to 49%. (figure 3, middle window)
Figure 4
Interestingly, the banking system’s cash burning came amidst marginal improvements in total assets. (figure 4, upper window)
The banking system’s total asset growth crept higher to 11.12% yoy in April from 10.99% in March. Loan portfolio growth improved 12.52% yoy in April from 11.28% yoy a month ago. The Treasury boom lifted net investment growth to 20.03% from 19.29% over the same period.
Yet another paradox. While the Philippine fixed income boom has slowed the growth of Held to Maturity assets, it remains the fastest growth category. HTMs grew 26.5% yoy in April down from 27.37% in March, but Available for Sale (AFS) was up 12.43% from 9.91% while Held for Trading (HFT) assets climbed 19.73% from 19.06% over the same period. So HTMs continues to hold the most significant share of investment assets: 66.58% in April from 67.17% in March.
In spite of the treasury boom, the banking system continues to juggle its investment deficits through accounting maneuvers.
Bank Borrowing Accelerates as NPLs Increase Anew in April
And if deposit growth continues to lag the bank’s core operation of lending, how has the latter been financed?
Figure 5
The answer: Through more expensive bonds. Bills payable growth surged 55.1% yoy in April to Php 949.136 billion from 49.92% in March. Bonds payable skyrocketed 112.31% to Php 335.7 billion from 134.97% over the same period. (figure 5, upper window)
With banks focusing on bonds, the latter’s share of total liabilities continues to spiral upwards! (figure 5, middle window) The share of T-bills to liabilities has also been rising fast but not at the rate of bonds.
To that end, if the NG has used the public’s savings to drive down treasury yields, booming Philippine treasuries have artificially inflated growth of the banking system’s balance sheet. And even under such conditions, the banking system continues to burn cash and depend on more expensive sources of funds for operations.
And the borrowing binge continues. News reports from June.
From the June 13 press release of China Bank: China Banking Corporation (China Bank) is looking at raising at least P5 billion through its maiden peso fixed rate bonds issue. The public offer period is from June 10 to 28, 2019. The China Bank bonds carry an annual interest rate of 5.70% which will be paid on a monthly basis. The minimum investment is P100,000, with additional placements in increments of P50,000. The bonds have a tenor of 18 months, maturing in January 2021.
From the PDS: (June 4) Rizal Commercial Banking Corporation (RCBC) returns to the PDEx organized market for the second time this year for its PhP 8 billion Fixed Rate ASEAN Sustainability Bonds Due 2021, the first peso bond issuance in the Philippines under RCBC’s recently established Sustainable Finance Framework.
From Philstar (June 4): Security Bank Corp. has received the green light from the Bangko Sentral ng Pilipinas (BSP) to raise P20 billion via the issuance of long-term negotiable certificates of deposits (LTNCDs).
What more when such conditions reverse?
To consider, should the perceived easing of financial conditions and the release of the budget reinvigorate street inflation, wouldn’t these upset the current ease in liquidity flows towards the public treasury?
From the Inquirer (June 15): The Department of Budget and Management (DBM) has fast-tracked the release of funds from the 2019 national budget in May such that allotment releases amounted P2.61 trillion at the end of the first five months. But while the DBM already released 79.6 percent of the P3.276-trillion net spending program as of end-May, it was a slower pace compared to 88.5 percent, or P3.33 trillion of the P3.77-trillion 2018 appropriations during the first five months of last year.
The 64 trillion peso is: what continues to drain the banking system of its liquidity?
The BSP’s data provides a nugget: Non Performing Loans. Declared non-performing loans spiked anew in April to 1.12% of the Total Loan Portfolio following a slight retreat in March to 1.07%.(figure 5, lower window)
Is it any wonder why the BSP had been slated to chop RRRs in three consecutive months beginning May 31? Is it any wonder why the BSP chief continues to push for lower rates even after the first rate cut salvo that took effect in May 10?
From the BSP’s perspective, the resolution to the escalation of bad loans seems to be to encourage MORE lending! At the end of the day, it’s like solving the problem of alcoholism with more alcohol!
But this shouldn’t be a problem because the economy will keep growing said bank officials in a BSP survey.
Will they ever be forthright with the public when they are on a borrowing spree?
The inverted curve is a symptom of imbalances seeking an outlet valve. A steepening after an inversion typically unleashes these.
Could such be the unstated reasons why the political leadership declared regrets on having run for the nation’s top post?
Interesting times, yes?
