Observe that government cannot increase its spending without reducing the means of wealth generators — those who save. Once the ability of wealth generators to produce real savings is curtailed, economic growth follows suit and no amount of money that government pushes into the economy can make it grow—Dr. Frank Shostak
In this issue
Despite the BSP’s RRR and Policy Rate Cuts: September Savings Deposits Deflates Anew, Cash in Circulation Growth Stumbles, Bank Loan Growth Stagnates
-Despite 200 bps of RRR Cuts, September Savings Deposits Deflates Anew, Cash in Circulation Growth Stumbles
-Broad-Based Downturn in the Banking System’s Production Loans
-As Industry Loans Fumbles, Consumers Pile Up on Debt!
-As Peso Strengthens to 22-Month High, Has the BSP Jumpstarted QE 2.0 in September?
-Summary and Conclusion
Despite the BSP’s RRR and Policy Rate Cuts: September Savings Deposits Deflates Anew, Cash in Circulation Growth Stumbles, Bank Loan Growth Stagnates
From the Inquirer (October 31): “Filipinos may be choosing not to go home to their provinces for “Undas” to save up instead for the Christmas season. This was the reason cited by Araneta bus station general manager Ramon Legazpi on the fewer passenger turnout at the Cubao bus terminal, a day before Undas. “They may be choosing to go home to their province in December, considering their budget],” Legazpi said in an interview. “Probably because the Undas break is just a short occasion compared to Christmas in December. So they might be setting aside this budget for later when they travel to provinces,” he added. As of yesterday, the passengers in both the Araneta bus terminal and the bus port, where the non-airconditioned and airconditioned buses are stationed, respectively, reached only about 5,000, Legazpi said. This is 800 passengers short to the average of passengers recorded in the same period last year, he noted.”
If this anecdote is accurate and representative of the middle and lower-income earners does the 14% drop in transport services in a traditional holiday season supposedly bode well of the financial health conditions of domestic consumers?
Despite 200 bps of RRR Cuts, September Savings Deposits Deflates Anew, Cash in Circulation Growth Stumbles
The Bangko Sentral ng Pilipinas’ latest (September) data on money supply conditions provide the empirical data for this.
Figure 1
From the BSP’s press release: “Preliminary data show that domestic liquidity (M3) grew by 7.7 percent year-on-year to about ₱12.0 trillion in September 2019, faster than the 6.3-percent (revised) growth in August. On a month-on-month seasonally-adjusted basis, M3 increased by 1.5 percent. Demand for credit remained the principal driver of money supply growth. Domestic claims grew by 7.5 percent in September from 7.1 percent (revised) in the previous month due mainly to the sustained growth in credit to the private sector.”
The jump in in September’s money supply growth emanated principally from M1’s Transferable Deposits included in broad money, M2’s Time Deposit, and M3’s Securities Other Than Shares Included in Broad Money or Deposit Substitutes. (figure 1, lower pane)
Transferable Deposits Included in Broad Money, Other Resident Sector, I noted previously of the BSP’s definition, “refer to BSP's peso deposit holdings of its employees' provident and housing funds”. (bold mine)
However, in the context of liquidity aggregate, the BSP likewise defines this M1 component as “peso deposits subject to check of the monetary system”, which “includes "managers and cashiers' checks" as well as deposits automatically transferred from savings to demand deposits, but excludes demand deposits by the National Government and other depository corporations' holdings of "checks and other cash items."” (bold mine)
M3’s Securities Other Than Shares Included in Broad Money or Deposit Substitutes, according to the BSP’s Glossary, “are instruments used as an alternative form of obtaining funds from the public other than deposits through the issuance, endorsement or acceptance of debt instruments for the borrower's own account. These represent all types of money market borrowings by banks like promissory notes, repurchase agreements, commercial papers/securities and certificates of assignment/participation with recourse.” (bold mine)
Growth of Transferable Deposits advanced 10% in September in a follow-up to August’s 8% after growing by less than 5% in the first seven months of the year.
The financial system increased the use of manager/cashier’s checks, automatic transfers, and the BSP’s employment funds in the last two months.
Growth of Time Deposits surged 15% in September from 11.7% in August. Time Deposits have expanded by over 10% clip in the last 6-months.
Despite sputtering rates, some of the savings deposits may have moved to time deposits.
Meanwhile, Growth of Deposit Substitutes eased to a still blistering 34.1% in September from 38.4% in August. This M3 component has grown by a torrid over 30% rate since February 2019.
Soaring deposit substitutes are indicative of the deepening utilization of short-term leverage by the financial system.
In contrast, the growth of currency in circulation (or those outside DCs) moderated to 10.8% in September, an April 2017 low, from 12% in August. Since its growth apex of 19% in March 2018, the rate of growth of M1’s cash in circulation has been heading south. (figure 1, upper window)
The faltering growth of cash in circulation points to reduced transactions in the cash economy.
Along with faltering growth of cash, the rate of change of M2’s savings deposits component has succumbed to deflation in the three of the last four months. Savings deposit shrunk by .6% in September, 1.7% in August, and .6% in June. Since its pinnacle of 37.8% in April 2014, the savings deposit’s growth rate has steadily been headed downhill until it reached the deflationary zone. (figure 1, upper window)
Since most of the banking system’s operations have been funded principally by savings, as a scarce resource, its shrinkage has prompted the BSP to reduce Reserve Requirement Ratio (RRR) to release the industry’s reserves from regulatory reins. That is, after 200 bps RRR cuts from June to August 2019, aside from 2018’s 200 bps reduction, which has emancipated some Php 400 billion to the industry, the diminution of savings deposits persists.
In that context, the raison d'être for the RRR adjustments have been to rescue the banking system from a liquidity black hole consuming it.
Broad-Based Downturn in the Banking System’s Production Loans
Figure 2
And in conserving its eroding resources, the banking system slowed lending to the productive side of the economy, while ironically, loosening up lending to households.
From the BSP’s September report on the banking system’s loan portfolio: Loans for production activities—which comprised 87.4 percent of banks’ aggregate loan portfolio, net of RRPs—expanded at a steady rate of 9.0 percent in September, unchanged from the reported growth in August. The sustained increase in production loans was driven primarily by lending to the following sectors: real estate activities (18.3 percent); financial and insurance activities (17.6 percent); construction (36.2 percent); electricity, gas, steam and air conditioning supply (9.2 percent); and wholesale and retail trade, repair of motor vehicles and motorcycle (4.8 percent).
Bank lending to the real estate sector raced to its highest level since December 2017’s 19.6%. And of the five largest sectoral borrowers, bank lending to the real estate sector is the only one on an uptrend. (figure 2, middle window)
And because of this, the sector now commands a 20.5% share of the total bank lending.
Bank lending to the trade sector, which has a 14.9% share of the total, increased by 4.85% (YoT) in September higher than 3.7% a month ago, its first monthly increase. The bank’s trade portfolio has slumped from a high of 16.2% growth in January 2019 to the current less than 5% rate. The paradox is that while the bank lending to the supply side has stumbled, the demand side has risen to a record pace. (figure 2, lowest window)
Bank lending to the manufacturing sector, which has a 13.6% share of September’s lending, contracted .85% a second straight month after August’s decline of 1.19%. Manufacturing loan growth was at 15.34% in January 2019.
Curiously, aside from the manufacturing sector, bank lending deflation has engulfed another critical industry, the hotel, and the restaurant industry, which registered -1.3% in September.
And even more interesting, the sharp decline in the rate of bank credit transactions to the industry comes after 50 bps of policy rate cuts by the BSP.
The broad-based downturn in total bank lending has been portentous of another likely letdown of the headline GDP. (figure 3, upper window)
The PSA will announce 3Q GDP this week.
With bank lending pointing to lower economic activities, what would be its ramifications to the credit risks representing repayment, repricing, and refinancing?
Figure 3
As Industry Loans Fumbles, Consumers Pile Up on Debt!
Since the BSP recognizes that “Demand for credit remained the principal driver of money supply growth”, cash in circulation has recently been affected by the downshift in bank credit expansion.
With slowing growth, the cash economy has been feeling its brunt.
The news of the sharp drop in travel sales during Undas has signified evidence of this.
Intensifying strains in the production side of the economy may have impeded the consumer’s capacity to spend. In this regard, to expand current purchases, consumers used an increasing amounts of debt, thereby deepening the exposure to leverage of the household’s balance sheets.
Household credit growth zoomed to a record 26.2% in September to sustain its breakneck speed in the last three months. Household credit ballooned 25.36% in August and 23% in July. From February 2018 through June 2019, household credit expanded at 15% to 19%.
Credit card use of Households rocketed to a historic 27.2%! Credit card borrowing, the second-largest share of household credit at 42.3% in September, has been soaring at a record 24% and above clip since February 2019. Credit card growth used to drift at a 20% to 22% range in 2018. (figure 3, middle window)
Bank lending to the consumer’s auto loans sales portfolio swelled most by 29.5%, closing in on the 32.6% rate in October 2017. Growth in the household’s auto loan portfolio spiked to above 25% in the last three months, suggesting intense sales activities in the vehicle industry. (figure 3, lowest window)
But the loan rate hasn’t tallied with published sales announced by CAMPI. Except for July’s 13.36% (YoY), vehicle sales have been stagnant in September and August with 2.26% and -2.36%, respectively.
Has the borrowed money been redirected elsewhere? To the real estate sector perhaps?
Or, has the banking system been misreporting to the BSP?
Even payroll loans have picked up during the last three months. It rose by 7.14% in September, 7.7% in August, and 6.4% in July.
Auto and credit card loans comprise the largest share with 46.26% and 42.3% of the banking system’s household credit pie. The BSP data doesn’t include consumer’s exposure to the real estate sector.
On the retail side of bank credit, the rise in consumer loans (CL) has also been accompanied by an increasing level of non-performing loans (Figure 2.10). Since residential RE loans which comprise 40.5 percent of the CL portfolio of the banking system as of end-March 2019 have a direct impact on consumers, developments in the RE sector need to be monitored.
Perhaps, impairments in consumer loans would cover a broader scope.
As Peso Strengthens to 22-Month High, Has the BSP Jumpstarted QE 2.0 in September?
Pressures on the cash economy have likewise diffused to street disinflation, as well as the rice price skewed statistical inflation, the CPI. (figure 4, middle window)
On this note, October CPI will be announced by the Philippine Statistical Authority on November 5th.
Figure 4
Despite the 400 bps of RRR cuts, tightness in the financial system’s money supply conditions remains as evidenced by the faltering rate of growth in M1’s cash in circulation and the continued deflation of M2’s savings deposits.
Given the path dependency of the BSP to shun deflation, last month, I predicted the BSP may reactivate its silent rescue of the banking system through debt monetization or QE or direct financing of the NG’s liabilities.
With the stumble of M3’s savings deposits into deflation territory, the BSP will likely supercharge its QE, if the RRR cuts would prove to be ineffectual. Liquidity represents the primary risk, as admonished the BSP Governor Ben Diokno in their latest (2018) FSR, “If there are risk issues to raise, it will have to be the prospects of managing liquidity”.*
And history should rhyme. When the headline CPI dropped to deflation in September (-.4%) and October (-.2%) 2015, the BSP revved-up the direct funding (net claims) to the National Government that catapulted the CPI, the GDP and the USD-php.
While current conditions are different compared to 2015, the BSP would surely mount a rescue of the banking system.
From the BSP: Meanwhile, net claims on the central government grew by 6.0 percent in September from 2.4 percent (revised) in August, reflecting the increased borrowings by the National Government
September’s net claim on the central government hit a fresh record at Php 1.94 trillion surpassing December 2018’s Php 1.911 trillion. While one month doesn’t a trend make, the emergence of deflationary episodes in the domestic banking system will likely impel the BSP to undertake drastic action soon. September could be the start. (figure 4, upmost window)
Figure 5
Curiously, the domestic liquidity squeeze and NG amassment of cash backed regional or global bond boom has anchored the peso to rebound to January 2018 (22-month) highs. (figure 5, upper pane)
The bond boom in the face of a growth slowdown has prompted central banks to a panic chopping of policy interest rates have likewise fueled a rally in ASEAN currencies.
The USD peso closed at 50.74 October 31 for the peso to register a 3.5% return in 2019.
As an aside, the US Federal Reserve cut policy rates for the third time this year last week. Central banks of Saudi Arabia, Kuwait, Bahrain, UAE, Qatar, Jordan, Hong Kong, Macau and Brazil followed.
In October, the following central banks cut rates: Australia: 0.25%, Iceland: 0.25%, India: 0.25%, South Korea: 0.25%, Chile: 0.25%, Indonesia: 0.25%, Turkey: 2.50%, Russia: 0.50%, US: 0.25%, Saudi Arabia: 0.25%, UAE: 0.25%, Brazil: 0.50% and Macau and Hong Kong: 0.25%.
Rate cuts for 2019: Fed: -75 bps ECB: -10 bps Denmark: -10 bps Australia: -75 bps Brazil: -150 bps Russia: -125 bps India: -135 bps China: -11 bps Hong Kong: -75 bps Korea: -50 bps Mexico: - 50 bps Indonesia: -100 bps Philippines: -75 bps Chile: -100 bps Turkey: -1000 bps. A summary of global central actions can be seen above (table from Charlie Bilello). (figure 5 lower pane)
Up to what extent can the BSP hide the mounting malaise in the banking system to keep rates low? And if the jump in September’s net claims represents the start of the second leg of its QE, to what degree can the peso’s rally and the boom in the domestic treasury last? (figure 4, lowest window)
Summary and Conclusion
The BSP’s money supply benchmark, the M3, jumped to January 2019 high this September. But this improvement, mostly from technical factors and from the increasing use of short-term leveraging, concealed the deflationary impulses that continue to afflict the banking system and the economy ventilated by the ongoing deflation in M2’s savings deposits and dwindling growth in M1’s cash in circulation.
Despite the BSP’s 50 bps cuts in interest rates, another symptom of tightness in liquidity has been the broad-based downturn in bank lending to the industry, which functions as the immediate cause for the slowdown in money supply conditions.
Interestingly, as falling cash in circulation has hamstrung the cash economy, households have ramped up borrowing to augment spending or to fill the void from a shortfall in income.
Downward pressures on the prices in the real economy represent another symptom of tight money.
With incipient signs of credit deflation, the BSP may have reactivated its second leg of QE; net claims on the central government hit a fresh high last September!
Curiously, the peso rallied to a 22-month high from tight money, helped by global forces: The bond boom that has spurred a massive policy easing by global central banks, which has percolated into rallying ASEAN currencies.
How sustainable is the rebound of the peso and the domestic treasury market should the BSP persists in using its nuclear arsenal?
