Sometimes a story finds the storyteller. Not the other way around—TL Pierson, Neverwas (2005 film)
In this issue
Consumers Burned Cash from Savings; the September CPI Story; QE Becomes Main Source of Bank Funding!
I. September CPI: Even Demand for Basic Necessities have been Weak! Prices Rose on Politicized Sectors
II. As Consumers Drawdown Savings, Burn Cash To Spend, Where Will Investments Come From?
III. Banking System Increasingly Depends on BSP Injections for Funding!
IV. Are Massive Public Borrowings About the Bailout of the Banking System? (Not Just a Plug on Deficits)
V. An Insightful Perspective from a Top Ex-BSP Official
Consumers Burned Cash from Savings; the September CPI Story; QE Becomes Main Source of Bank Funding!
I. September CPI: Even Demand for Basic Necessities have been Weak! Prices Rose on Politicized Sectors
Prices in the economy have softened in September, authorities said.
From the BSP (October 6): Year-on-year headline inflation eased to 2.3 percent in September from 2.4 percent in the previous month and was within the BSP’s expected range of 1.8-2.6 percent for the month. The resulting year-to-date average inflation rate of 2.5 percent was within the Government’s target range of 3.0 percent ± 1.0 percentage point for the year. By contrast, core inflation—which excludes selected volatile food and energy items to measure underlying price pressures—rose to 3.2 percent year-on-year in September from 3.1 percent in August. Meanwhile, month-on-month seasonally-adjusted inflation was nil in September from -0.2 percent in the previous month. Overall inflation eased further due mainly to the deceleration in food and non-alcoholic beverages inflation. The lower food inflation can be traced to slower price increases of meat, milk, cheese, and eggs as well as the continued decline in vegetable prices in September. In addition, year-on-year inflation for alcoholic beverages and tobacco moderated but remained at double-digit rates. By contrast, non-food inflation increased in September owing to higher inflation for transport services and education.
Figure 1
The official statistical inflation backpedaled for the second straight month. It was down 2.32% from 2.41% in August and from the recent high of 2.75% in July despite the BSP's printing press running briskly.
The three major segments that pulled the CPI higher were food and non-alcoholic drinks, alcoholic beverages, and household furnishings and equipment. (Figure 1, upmost window)
Food and the non-alcoholic CPI, the largest share of the basket with 38.34%, tumbled to 1.5% in September from 1.8% in August.
Why?
Livestock and poultry output this year, according to the US Department of Agriculture-Foreign Agricultural Service (USDA-FAS), are expected to fall by 20 and 15 percent, respectively. Domestic supply disruptions from the Asian Swine Flu and Bird Flu outbreaks, aside from mobility limitations brought about by quarantine responses by the national government, are the major factors behind it. Still, food prices have barely kept pace with it.
For instance, the meat CPI climbed by only 2.9% YoY, despite fresh Asian Swine Flu outbreaks in July and August. The Meat CPI accounts for a 6.25% share of the basket.
The current state of the Food and non-alcoholic beverage CPI exhibits fading demand for necessities. Importantly, it has been a trend since the rice crisis peaked in the 2H 2018.
As it is, if the average Juan and Maria's income has been stripped to the bare minimum, affording expenditures mainly on the basics, then naturally, discretionary expenditures would fall.
Well, parts of the CPI statistics accounted for this dynamic.
The decline of the household furnishing and equipment CPI, representing a third straight month, as well as the deflation in the recreation CPI, representing the second consecutive month of negative price changes, corroborates the fall in discretionary spending. (Figure 1 middle pane)
However, like the NCR Restaurant CPI in April and May under ECQ/MECQ, the irony of statistics shows, the recreation CPI crashed, not during the ECQ/MECQ, but on the soft reopening of the economy!
So spending on recreational activities remained, as they were during pre-COVID days, even when the mandated health protocols forced people to quarantine at home.
And when authorities relaxed the rigorous health measures or granted partial reopening of the economy, recreational activities, as measured by consumer spending, tanked.
Strange assumptions deduced from such numbers.
The BSP categorizes Recreation and Culture CPI as consisting of Audio-visual, Photographic and Information Processing Equipment, Other Major Durables for Recreation and Culture, Other Recreational Items and Equipment, Gardens and Pets, Recreational and Cultural Services and Newspapers, Books and Stationery. The PSA has a broader definition here.
Aside from Food, Alcohol, Household furnishings, and Recreation, the other segments that posted lower m-o-m CPIs were clothing, health, and restaurants, which again validates weakness in consumer demand.
Despite the previous price controls imposed, whereby one can expect dislocations in the supply network to happen, perhaps over time, sluggish demand has apparently become an overwhelming force.
Nota Bene: We are only interpreting what the numbers depicted are suggesting. The accuracy of which is another concern.
On the other hand, transport CPI soared to its highest level since 2018. (Figure 1 lowest pane)
While the international price of oil had been a critical factor, the speedier increase of the transport CPI indicates domestic sources as another main contributor, i.e., the lack of supply from the quarantine policies designed to minimize mobility to curb the spread of the disease.
Increasing costs of transport likewise reduce the discretionary spending of consumers.
Figure 2
And aside from the transport CPI, other sectors like education, communication, rent, and utilities, where the hand of the government had been visible, registered marginal increases. (Figure 2, upmost pane) Though the increase in prices of these sectors have been more about recent activities than a trend.
So, in sectors where there had been substantial interventions by authorities, prices increased. However, prices fell in sectors which exposed the underlying conditions of consumers.
II. As Consumers Drawdown Savings, Burn Cash To Spend, Where Will Investments Come From?
The natural consequence of substantial losses in revenues and income, wages, profits, and earnings are enfeebled consumers.
Yet, the follow-up question is, how has the present spending by households been financed?
Certainly, the drop in credit card usage had been a factor [discussed last week].
On the other hand, the deluge of cash from the BSP’s QE barely alleviated the plight of distressed consumers. [Figure 2, middle pane]
The BSP reportedly injected Php 1.3 trillion last July.
An article from the Manila Times (September 28) provides a clue: “Fewer Filipino households set aside money for emergencies and other expenses, a nationwide survey conducted by the Bangko Sentral ng Pilipinas (BSP) at the third quarter of this year revealed. According to the central bank’s Consumer Expectations Survey, the percentage of households with savings in the July-September period shrank to 24.7 percent from 37.8 percent in the first quarter.”
So consumers withdrew cash from their savings.
Here is an extended excerpt from the BSP’s 3Q Consumer Expectations Survey (p.6): “For Q3 2020, the percentage of households with savings declined to 24.7 percent from 37.8 percent in Q1 2020. The decrease in the number of savers can be seen across income groups, particularly in the middle- and high-income groups, which registered all-time lows since Q1 2007. By geographical area, both the number of savers in NCR and AONCR declined…Among the households with savings, the majority or 71.1 percent of savers kept their money in a bank for Q3 2020, though this percentage was lower compared with 73.9 percent in Q1 2020. Banks remained to be the top savings institutions preferred by savers. Meanwhile, 61.8 percent kept their savings at home and 48.9 percent considered other institutions such as cooperatives, paluwagan, other credit/loan associations,9 or in investments (e.g., business, insurance, microfinance, and stocks). When asked if the household would set aside money for savings for Q3 2020, the percentage of respondents that answered affirmatively was at an all-time low of 27.6 percent. [Figure 2, lowest pane]
To put it more broadly, consumers burned cash from their savings, whether kept or stashed in banks or other institutions or at home.
Such depletion of savings dovetails with surging Non-Performing Consumer loans, depicting the rapid decumulation of capital.
As the great Austrian economist Ludwig von Mises wrote*,
Capital is not a free gift of God or of nature. It is the outcome of a provident restriction of consumption on the part of man. It is created and increased by saving and maintained by the abstention from dissaving. Neither have capital or capital goods in themselves the power to raise the productivity of natural resources and of human labor. Only if the fruits of saving are wisely employed or invested, do they increase the output per unit of the input of natural resources and of labor. If this is not the case, they are dissipated or wasted.
*Ludwig von Mises, The ANTI-CAPITALISTIC MENTALITY p 84-85
Figure 3
Even the Gross Savings Rate plunged to a record low of 6.6 % in Jun 2020, according to the CEICdata. [Figure 2, lowest pane] Gross Domestic Savings Rate is calculated as the Nominal GDP less Final Consumption Expenditure or the sum of Private and Government Consumption Expenditure, expressed in %.
Though I am no fan of figures predicated on the GDP, by CEIC’s calculation, Gross Domestic Savings has been in a gradual downtrend from its recent high in 2010, then plummeted in the 2Q 2020! Gradually. Then suddenly.
With the NG in a dissaving mode expressed by fiscal deficits, households and businesses are responsible for the accumulation of savings. That said, the falling gross savings rate entails a faster rate of dissaving than that of savings.
Guess what has been the cause of it? It is a four-letter word that has become a burden to the financial system.
The point being, when persistent restrictions on economic activities result in the dramatic depletion of savings, which compounds on the embedded malinvestments, how will there be sufficient investments to generate a real recovery, unless capital is imported?
By the overstated fiction of debt and QE-financed public spending? By escalating the misallocation of resources?
III. Banking System Increasingly Depends on BSP Injections for Funding!
Though banks registered an increase in the growth rates of peso deposits liabilities (12.05%) as of August, mostly from demand (23.86%) and savings (14.09%) deposits, these are likely the accounts related to the QE operations involving the BSP, the National Government, and the banking system. [Figure 3 middle window]
Interestingly, despite the huge borrowings undertaken by the National Government, FX deposits growth fell 3.43% from 6.19% in July.
And as evidence, even though the banking system’s main assets, its loan portfolio has plumbed to 3.32% in August, a 10-year low, savings deposits surged as cash reserves growth stalled. [Figure 2 lowest window]
With a breather from the BSP’s QE in August, the bank’s cash reserves fell fast, which demonstrates the ferocity of the cash draining effect of the mounting incidence of delinquent loans.
Importantly, while banks continue to depend on the capital markets for funding, bond payables growth has been slowing. Bond payables climbed 48.11% in August, down from 58.3% a month back, and from the triple-digit growth monthly rates throughout 2019.
So bank funding has evolved from equity, deposits and interbank lending to more expensive capital market borrowing and now to BSP interventions, mainly through the Reserve Requirement and the QE channel.
Adding all these together, banks have become dependent on injections from the BSP for its funding! Incredible!
From GMA News (October 9): “The BSP has injected approximately P1.9 trillion ( or $39.2 billion) in liquidity into the financial system,” BSP Governor Benjamin Diokno told reporters on Friday. “This is equivalent to 9.6% of GDP (gross domestic product,” Diokno said. The central bank chief earlier explained that the cut in reserve requirement — the amount of cash banks are required to hold in reserve — for universal and commercial banks of 200 basis points and interest rate reduction by 175 basis points has injected additional liquidity in the financial system. The BSP also slashed reserve requirements for thrift banks and rural banks by 100 basis points. “The amount [P1.9 trillion] includes the new provisional advance of P540 billion which is targeted to be released first week of October 2020,” Diokno said. The central bank, last week, approved the request for a P540-billion loan of the government, to budgetary support amid the deficits due to the COVID-19 pandemic.
And because the Monetary Board has allowed cuts of the Reserve Requirement ratio to expand up to a maximum of 400 bps in 2020, we should expect this tool to be used before the year expires.
That is, the BSP hopes that by inundating the system with a tsunami of liquidity, it would be able to drown insolvency issues at best, or at the very least, disguise these by kicking the proverbial can down the road. Hope, by the way, is not a viable strategy.
Again, restarted way back in the 2H of 2015, the BSP's use of the QE has only accelerated, confirming Nobel Prize winner Milton Friedman’s theory that “Nothing is so permanent as a temporary government program” and Austrian economist Robert Higgs' “ratchet effect” --where governments use a crisis as an opportunity to increase in size and scope but barely reduces them when such crisis dissipates.
Also, the following developments tell us why the BSP has fervidly been pushing for the ratification of the Financial Institutions Strategic Transfer Act (FIST BILL), which re-institutionalizes a toolkit used in the Asian crisis of allowing special-purpose acquisition vehicles to sanitize the balance sheet of banks by transferring the burden of bad loans to the taxpayers, or privatize profits, socialize losses.
IV. Are Massive Public Borrowings About the Bailout of the Banking System? (Not Just a Plug on Deficits)
Figure 4
And it is interesting to note that despite the unprecedented liquidity injections combined with various regulatory, and operational relief measures extended to banks, the various measures of credit delinquencies continue to soar.
The annual growth rates of key delinquency metrics, represented by the Distressed Assets, Gross NPLs, and Net NPLs surged by an incredible 34.8%, 29.9%, and 34.07%, respectively in August. [Figure 4, lower pane]
Again, these haven’t been a one-time event but has been representative of a trend that emerged way back in 2018-2019. Gradually. Suddenly.
Since the core operations of the banking system have been stymied by its reluctance to lend, to shore up its income, it has depended on non-core operations such as investments.
Figure 5
Interestingly, the share of Held-to-Maturity (HTM) investments, which once dominated the investment class that served as an accounting shock absorber for rising rates, has suddenly collapsed. Might a wave of expiring HTMs been representative of 2-year or less in maturities?
On the other hand, the share of Available-For-Sale (AFS) investments appears to be a mirror image of HTMs, it has exploded to the upside. Have banks used such regulatory bailouts to transform HTMs to AFS, and thus, trade them at a profit with the BSP?
The share of AFS relative to gross investments (net of amortization) has surged to a staggering 45.82%, nearly toppling the HTM’s share, which has crashed to only 45.94% in August. [Figure 5 top pane]
In eight months, AFS assets have ballooned by a remarkable Php 705.7 billion, whereas HTMs shriveled by a whopping Php 570.4 billion!
Ever since the announcement of Php 300 billion QE operations in 2020, accumulated market investment gains of the banking system have been rocketing. But the roots of this dynamic was shaped in 2018 when HTMs peaked and the AFS bottomed, or during the transformation in the use of banks on these assets.
Accumulated investment gains registered a 37.92% increase in August. Such gains or profits help banks attain 'liquidity', thus partially ease the ongoing strains from mounting delinquencies.
Unfortunately, gains are temporal as it is dependent on the continuity of BSP’s interventions.
In any case, is the National Government borrowing immensely, not only to fund burgeoning fiscal deficits but importantly, to create sovereign debt securities that serve as either collateral or assets for the banking system, which would be used for the BSP’s QE operations? Or is the public borrowing spree been about the bailout of the banking system?
Finally, today’s unparalleled monetary measures have barely attained the implicit goal of financial repression through the inflation tax expressed by negative real rates. [Figure 5 lowest pane]
That is, inflating the debt away has barely been achieved by current monetary policies even as the National Government underwrites more liabilities.
So with a hole not big enough, both the NG and the BSP keep on digging deeper.
V. An Insightful Perspective from a Top Ex-BSP Official
Writing at the BusinessWorld here are the discerning comments of the former BSP Deputy Governor Diwa C. Guinigundo on the economy (excerpted and my corresponding comments) [bold and underline mine]
“the BSP’s heavy lifting did not seem to address persistently weak domestic demand. At best, however, it assured that market liquidity supply is more than sufficient.”
Wow, such represents a striking admission of the failure of the BSP’s monetary policies!
But what if weak domestic demand had been a byproduct of the massive disruptions in production?
“Easy monetary policy has distributional consequences. Retired individuals and fixed income earners suffer from reduced income because interest rates have dropped sharply.
“Nobel Laureate Joseph Stiglitz (The Price of Inequality, 2013) argues that cheap money is a hidden subsidy to the banks.
“For some, lower interest rates could dampen consumer spending, instead of pushing it up. People about to retire, or those saving for the future — probably because they are more economically and financially literate — would decide to save rather than to consume more. Those who feel they could be retrenched save more given uncertainty and lower deposit and investment income. In the last few months, higher bank deposits, lower loans-to-deposit ratios, and lower credit growth prove this point.
As agents of the BSP, under normal circumstances, banks are responsible for the allocation of credit. That said, as a long-time official, does he only come into the realization that zero bound policies bear not only costs but ‘distributional consequences’?
Does the BSP see their policies as a one-size-fits-all?
Or are they a tacit believer of the trickle-down effect, benefiting the elites, as so espoused by their former Governor Amando Tetangco Jr.? For example from a March 2016 speech by Gov. Tetangco: “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?” (My comment: The grassroots is different from the economy???)
From an oversimplified viewpoint, low rates are supposed to encourage borrowing. But there is such a thing called balance sheet. For instance, how will zero lower bound (or even negative rate policies) affect the borrowing appetite of overleveraged borrowers, as well as the banks? Have bank lending been exploding in developed economies? Why have statistical inflation in advanced economies fail to live up with the expectations of central bankers for at least a decade? Why has the BSP not absorbed such lessons?
And are we supposed to believe that as agents, who function as a conduit of the BSP’s policies, the banking system wouldn’t benefit from such measures? Since promoting and maintaining monetary stability represents one of the main objectives, wouldn’t the BSP prioritize the health of banks, who are their quasi-agents, relative to the general economy? As George Orwell wrote in the Animal Farm, “all animals are equal, but some animals are more equal than others”.
Now the awesome array of statistics on the economic damage from COVID and the corresponding policies, today.
In numbers, this means four out of 10 companies temporarily suspended operations in July, either voluntarily or by government mandate. Some 15% permanently shut down. Only 45% reopened. Of this, only 5% are at full capacity. This breakdown of economic activities was felt most heavily in the NCR, Calabarzon, Central Luzon, and Cebu.
What we are seeing from these numbers is very bleak. First, hours of operations and jobs were reduced. This explains sustained high unemployment and underemployment. And second, wages have been reduced. This explains the sharp drop in sales. Nearly in all stores that are open, we see discounts of 50% to 70% offered by establishments selling appliances, clothes, shoes, and other consumer items. What is most discouraging is that their premises remain virtually empty.
This state of things is not static; it’s bound to affect future decisions in investment and employment. As the World Bank pointed out, “business activities are expected to stay subdued for an extended period.”
It is uncertainty that drives the decision to go full blast in business operations or in half-hearted engagement or shut downs. Uncertainty fuels business decisions to avoid risks and higher exposure.
Why did the BSP fail to foresee the ramifications of the National Government’s actions on COVID? Because they trusted health over the economy, not seeing that one is the same thing as the other? Because statistical outputs of econometrics are the essence of the economy than from human activities?
Has it been the pandemic alone that triggered uncertainty, or have anti-business conditions emanated primarily from stringent policies (government mandates) embraced by the authorities?
Would entrepreneurs invest in an environment where entrepreneurs benefit marginally relative to amplified risks as a consequence of the rigorous political barriers erected?
And doesn’t the above say that weak demand via “hours of operations and jobs were reduced” and “wages have been reduced” resulted from “suspended operations”? That is to say, Say’s Law, we produce in order to consume, in motion?
And what’s so discouraging with big discounts or price deflation? Wouldn’t lower prices translate to more purchasing power for the consumers or more real wealth for the population?
Both average actual headline and core inflation rates are comparable with their average levels in 2019 when real GDP expanded by 6%. It is difficult to sustain the meaning of “benign inflation” in the context of economic contraction. This means that the unprecedented monetary easing did not yield the desired support for output growth. Instead, it motivated last year’s price momentum in a period of lost output, lost jobs and diminution of wages. The fiscal space should have been maximized, rather than having monetary policy doing the heavier lifting.
Aside from the admission of monetary impotence, the subtle shift of blame to the National Government signifies another stunning remark.
Yet, does the good erstwhile BSP official not realize that by the deepening the use of QE by the BSP, the National government has entrenched its intrusions into their monetary domain? In other words, by adopting QE, the BSP has corroded its supposed “independence”? What stops the NG now from perpetuating the use of QE? Self-discipline?
So what else do central banks know except to keep inflating, either via deficit spending or bank credit expansion?
The official ends with a morose forecast.
The new epidemiologic-macroeconomic literature in various simulations for the UK indicates that risk aversion and physical distancing, whether voluntary or mandated, have cut down both consumption expenditure and labor supply. This is also happening in the Philippines and portends the long and winding road to recovery to higher levels, and not necessarily, to pre-COVID-19 levels. Out of economic wounds, scars could be permanent, a lasting testimony to uncertainty. The pandemic has altered human behavior.
This is hysteresis. This sets the stage for perhaps more survey results of increased poverty incidence. Would our authorities tolerate what Mahatma Gandhi would refer to as the worst form of violence?
After all, the economy is about humans.
Thank you, sir.
